Investment Licencing Pty Ltd v Base Metals Exploration Nl
[2001] QSC 315
•29 August 2001
SUPREME COURT OF QUEENSLAND
CITATION: Investment Licencing Pty Ltd v Base Metals Exploration NL [2001] QSC 315 PARTIES: INVESTMENT LICENCING PTY LTD (ABN 88 072 428 794)
(Plaintiff)
v
BASE METALS EXPLORATION NL (ACN 081 009 181)
(Defendant)FILE NO: SC No 10234 of 2000 DIVISION: Trial Division DELIVERED ON: 29 August 2001 DELIVERED AT: Brisbane HEARING DATE: 9 August 2001, 10 August 2001 JUDGE: Helman J CATCHWORDS: CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – plaintiff claimed money owing to it by defendant as commission on units sold in managed investment scheme – terms of contract as to payment of commission COUNSEL: MD Martin for plaintiff
RM Lilley with A Greinke for defendantSOLICITORS: McCullough Robertson Lawyers for plaintiff
Deacons Lawyers for defendant
HELMAN J: The plaintiff in its further amended statement of claim alleges that the sum of $1,761,375 is due and owing to it by the defendant, a company incorporated on 10 December 1997, as commission on units sold in a managed investment scheme called the ‘Base Metals Exploration and Prospecting’ project. The defendant denies that there is any money owing by it to the plaintiff.
The defendant and a company called Explorers and Prospectors Finance Limited, incorporated on 28 January 1998, issued a prospectus for the project on 11 February 1998: exhibit 2. The prospectus was to expire on 10 February 1999. Gold, silver, platinum, lead, copper, zinc, ‘and any other associated economic minerals’ were to be explored and prospected for ‘initially in New South Wales and New Caledonia’. The prospectus showed that the plaintiff, the holder of a security dealer’s licence, would undertake all promotion and marketing of the project. On offer were 10,000 ‘participations . . . to take up exploration and prospecting opportunities, under management’. The manager of the project was to be the defendant. Each participation ‘contemplates’, it was said in the prospectus, that a contract explorer and prospector would commit to the payment of management fees of $12,000, paid in advance for the first year of the project, and that in return ‘they’ would ‘collectively receive an 80% share in up to 40% of income earned from the exploration and the prospecting work carried out’. Continuing management fees equivalent to twenty per cent. of the forty per cent. of income were to be paid out of income ‘arising’ as a result of exploration and prospecting works carried out after the first year.
Explorers and Prospectors Finance’s part in the project was as financier of those who wished to borrow the funds necessary to enable them to participate. On p. 7 of the prospectus, under the heading ‘3.HOW A PARTICIPATION IS FUNDED’ , the following appeared:
Participants can be funded in two ways:
3.1By the payment in full in advance of the year 1 Management Fee of $12,000 per participation to Base.
3.2By entering into a financing arrangement with EPF. Upon subscribing for 25 Ordinary Shares of $1.00 each in EPF, completing a loan application to EPF and completing an application for a participation, EPF will advance as a full recourse loan, up to $12,800 for each participation on the following terms:
3.2.1the loan will be interest bearing for year 1 then interest free, repayable from income proceeds at any time during the management agreement;
3.2.2the borrower will be required to make a one off principal reduction of $4,025 per single participation by 1998 or;
3.2.3a single payment of $34,100 per ten (10) participations at the time of application, with each additional participation above 10, carrying a payment of $3,410;
3.2.4the borrower will assign 50% of the income from their participations to EPF to repay the balance of their loan.
(‘Base’ is of course the defendant and ‘EPF’ is Explorers and Prospectors Finance.) The participants in the project all chose to borrow from Explorers and Prospectors Finance with the one-off principal reduction of $4,025. The term of the loan in each case was to be eight years with provision for extension of up to another two years and six months. The loan was to be repaid in full on or by the end of the term, and the initial repayment of $4,025 per participation was to be paid not later than the 30 September following the commencement of business.
Paragraphs 4.2.3 and 9.6 of the prospectus are relevant to the issues in this case. Paragraph 4.2.3 provided:
4.2.3EPF will borrow from independent sources or sources associated with BMF, loans sufficient to fund the full payment of management fees at the commencement of a participant’s exploring and prospecting business. It is contemplated that interest will be charged by BMF at 6.5% per annum for the term of the advance for this facility and participants will pay interest to EPF for this borrowing.
(‘BMF’ is a company called Base Metals Finance Pty Ltd which was associated with Mr Brian Hooker, chairman of ‘the entities participating in the Project’ and a director of the plaintiff.)
Paragraph 9.6 was as follows:
9.6 Commissions and Brokerage
No amount has been paid or is payable as commission or brokerage for subscribing or agreeing to subscribe or procuring or agreeing to procure subscriptions to licensed representatives or Security Dealers, for arranging the participation of explorers and prospectors into the Project, other than a commission of up to 3.1% of the total funds raised to commence business being $375 per participation. An associated company, Investment Licencing Pty Ltd, holds Security Dealers Licence No. 160599 and will undertake all promotion and marketing of the shares and prescribed interests, the subject of this Prospectus. Investment Licencing Pty Ltd will receive an expense allowance of up to 2.28% of all amounts raised to commence business.
Under some circumstances, some Investment intermediaries will receive a proportion of this expense allowance for promotional costs, marketing and administration in the conduct of their business as holders of proper authority or investment advisors. Additionally, some investment advisors are prepared to rebate to their clients part or all of the commission and any additional expense allowance they receive from the Manager. The Manager does not waive or rebate the commission and has no policy in relation to investment intermediaries rebating or waiving commissions or brokerage.
The Manager has agreed to meet in full all costs of commission or brokerage payable as a result of participations under this Prospectus.
Supplementary prospectuses were issued on 19 June 1998 and 19 February 1999.
It was common ground on the pleadings that ‘as at 22 November 2000’ 9,974 participation units in the project had been sold, but the evidence of Mr Hooker, who was called for the defendant, was that fifteen more than that had been sold, making 9,989: 6,939 in 1998, and 3,050 in 1999 (see exhibit 21). (The pleadings have of course eliminated the question of the number of units sold as an issue in this proceeding.) It was also common ground on the pleadings that between 5 August 1998 and 28 May 1999 the defendant paid to the plaintiff the sum of $3,263,550 in respect of 5,013 units, and between 19 August 1999 and 25 November 1999 a further $1,768,275 in respect of 2,362.5 units – a total of 7,375.5 units. That leaves 2,598.5 units sold in respect of which no commission has been paid.
There was further common ground that on 23 May 2000 the plaintiff demanded that the defendant pay $519,225 in respect of 687.5 units (see also exhibit 3), and that the defendant had not paid that sum. In a letter dated 13 June 2000 (exhibit 4) to the directors of the plaintiff and signed by Mr Hooker on behalf of the defendant it was asserted that the sum was not due and payable. The letter continued:
We would remind you that commissions are only payable to Investment Licencing Pty Ltd, who must then on-forward to Holders of Proper Authority their commissions and marketing allowance, only when participants have paid IN FULL their loan reduction payments in the amount of $4025 per unit, which were due and payable by 30 September 1999.
. . .
When, and only when, a participant makes their final loan repayment, will commissions and marketing allowances be paid to Investment Licencing. You are also aware that some commissions and marketing allowances have been paid direct to SecurInvest in view of the non-payment by Investment Licencing of commissions and marketing allowances to SecureInvest and/or their Holders of Property [sic] Authority.
(The significance of the reference to SecurInvest will appear later.) The plaintiff’s pleaded claim is for the $519,225 together with $1,242,150 in respect of another 1,911 units; but in the course of addressing me Mr Martin, for the plaintiff, conceded that the $519,225 should be $515,625 (687.5 units at $750 each), and so the plaintiff’s claim should be reduced to $1,757,775.
It was not in issue at the hearing that the commission payable to the plaintiff for units sold in 1998 was $650 per unit and, for those sold in 1999, $750.
The plaintiff’s case rests on the assertion that on 26 November 1997 - before the defendant was incorporated - there was an oral agreement entered into at a meeting in Surfers’ Paradise attended by Mr Hooker and Messrs Barry Silver and Terence O’Leary. Mr Silver is a director of the plaintiff, and Mr O’Leary of ‘the O’Leary group’ was the person who, as Mr Silver said in evidence, ‘came up with the concept of the Base Metals’. The meeting was at the O’Leary office on the fifth floor at 33 Elkhorn Avenue. Commission rates were discussed and $650 in respect of each unit sold agreed upon; but, according to Mr Silver, there was no agreement between him and Mr Hooker at the meeting, or at any other time prior to the issue of the prospectus, that the plaintiff’s commission would not be payable until an investor had made a full repayment to the financier of the project.
The $650 rate was later varied, as I have indicated, to $750. On 11 December 1998, on behalf of the plaintiff, Mr Silver sent a letter by way of facsimile transmission to Mr. Hooker referring to that variation: exhibit 5. The parts of the facsimile transmission relevant to this case are these:
Confirmation of the commission rates payable to Investment Licencing Pty Ltd (by the respective Project Manager) during the 1998/99 financial year, in respect to the following Projects, as discussed in our recent telephone conversation, are as follows:-
1. Pacific Tea Tree Project
Prospectus expires 24/12/98. Product ruling not provided.
Per participation
With Shares $750
Without Shares $750
2. Base Metals Exploration and Prospecting Project
Prospectus expires 10/2/99. Product ruling not provided.
For each participation $750
. . .
Brian, could you please confirm that these commission rates (as stated above) are correct and that payment of commission to Investment Licencing Pty Ltd will be in accordance with the procedures used over the past 2 years.
Would be pleased to discuss any aspect of this facsimile with you, if required.
The reference to the Pacific Tea Tree project - or to give it its full name, the Pacific Tea Tree Plantations project - is important. That project and two others, the Northern Rivers and the Oils of Nature projects, had been promoted and marketed by the plaintiff and were associated with companies of which Mr Hooker was a director. The prospectus for the Base Metals Exploration and Prospecting project recorded that Mr Hooker was a director of Tea Tree Management Services Pty Ltd, a company which provided management services to the Northern Rivers, Oils of Nature, and Pacific Tea Tree Plantations projects, and, it continued, ‘will provide like services to the project Project [sic]’. The plaintiff was incorporated on 11 January 1996 to promote and market those managed investment schemes. The plaintiff sold interests in the Northern Rivers, Oils of Nature and Pacific Tea Trees Plantation projects from 1996. Commissions were not paid or payable to the plaintiff in connexion with those three projects until participants had made a repayment in full to the financier or a payment to the manager.
It could not have been otherwise for the three projects I have just referred to because no actual money was lent by the financier to the participants, the loans being effected by round-robins of promissory notes. Paragraph 4.2.3 of the prospectus might suggest that the Base Metals Exploration and Prospecting project was different from the others in that the financier would borrow from independent sources or sources associated with Base Metals Finance, but in reality there were still only paper transactions with Laton Corporate Pty Limited. A round-robin was again employed, and the loan repayments by participants were the only sources of funds to give the defendant the means to carry on the project. Because the only actual money available to the defendant came from the participants I conclude that it is unlikely that the defendant would have agreed to the payment of commissions before the participants had paid.
Mr Silver’s reference in the facsimile transmission of 11 December 1998 to ‘the procedures used over the past 2 years’ supports that conclusion, as do commission statements which show that commissions were paid by the defendant to the plaintiff after payments had been made by participants, but were withheld or adjusted following the dishonour of participants’ cheques. Exhibits 6, 10, and 24, showing payments made on 7, 14, and 21 August 1998 and 8, 11, and 18 September 1998 and 2 October 1998, are typical of commission statements sent to the plaintiff by the defendant, and, significantly, are headed ‘BASE Commissions Due’. Furthermore, in paragraph 3(D) of a memorandum dated 15 July 1999 from Mr Hooker to the directors of the plaintiff (exhibit 7) there was reference to an agreement ‘subject to Board approval’ that inter alia commissions would be paid ‘from the Base and Pacific Projects as loan repayments are received under customary schedules . . .’ (my emphasis). Mr Silver gave evidence that he did object at the time of his receipt of the commission statements about the treatment of the dishonoured cheques, but did not do so in writing. Apart from that, however, there is no evidence that he made any complaint to the defendant about the procedure adopted for the payment of commissions at or soon after the receipt of the statements. Mr Silver agreed that he did not object to the passage in paragraph 3(D) of the memorandum of 15 July 1999 when it was received.
Taking the whole history of the relationships between the plaintiff and the projects with which it had been associated into account and bearing in mind the central roles played in those relationships by Messrs Silver and Hooker, I conclude that the agreement as to the time at which commission payments became due was as was contended on behalf of the defendant. The presence of paragraph 4.2.3 in the prospectus with its reference to independent sources of finance is, I find, of no assistance in establishing the plaintiff’s case in the light of the true character of the ‘borrowing’. Similarly, the absence of any express reference to the time of payment contended for by the defendant in clause 9.6 does not further the plaintiff’s case: the clause is simply silent on that detail, which is not in the least surprising.
I should add that I did not find Mr Hooker a convincing witness on the subject of the term of the contract as to the time when the commission would be payable. His account of an express oral agreement on 26 November 1997 that commissions would be payable when the defendant contended they would be was given first in cross-examination and was inconsistent with the
defendant’s pleaded case, which was that there was no agreement entered into by the parties on that day: amended defence filed by leave on 9 August 2001, paragraph 2.2.3. Mr Hooker’s evidence on that subject had every sign of being a recent invention.
The question then arises whether there is any commission owing to the plaintiff. Starting with the agreed figure for the number of units sold, 9,974, one must first deduct the number of units in respect of which full repayments to Explorers and Prospectors Finance were not made.
The evidence of Mr Hooker was to the effect that there were 2,465.5 units in that category. Of those, 1,755 were units purchased by investors who did not proceed: 970 purchased by Oils of Nature Management Limited, 775 purchased by Northern Rivers Plantation Management Limited, and ten purchased by Deglebrook Pty Ltd (see exhibits 15, 16, and 21). It should be noted that exhibit 15 shows the cancellation of promissory notes to the value of $3,904,250 (i.e. 970 units at $4,025 each) in connexion with the Oils of Nature Management purchase. Cancelled notes in the case of the Northern Rivers Plantation Management purchase were, however, only to the value of $1,619,375 (402 units at $4,025 each), thus leaving a discrepancy of 373 (775 less 402). The remaining 710.5 units of the 2,465.5 were, according to Mr Hooker, units not cancelled but in respect of which no repayments were made or in respect of which full repayments were not made: 137 in 1998 and 573.5 in 1999 (see exhibit 21). Deducting the 2,465.5 from 9,974 one arrives at 7,508.5. It is common ground that commission has been paid on 7,375.5 units. The remaining units would then be 133: 7,508.5 less 7,375.5.
The difficulty with Mr Hooker’s figure of 133 is that it is at odds with a figure which clearly enough was acted upon by the defendant in making funds available to a company now called Quadtel Limited, but previously known as Caledonian Pacific Minerals N.L., which held or controlled properties in New South Wales and New Caledonia. A document dated 7 June 2001 entitled ‘BASE METALS EXPLORATION & PROSPECTING PROJECT: NOTES TO RESOLUTION OF SPECIAL MEETING OF PARTICIPANTS’ issued by the defendant and containing recommendations by it (exhibit 20) reveals that to 30 June 2000 $14,340,600 was provided to Quadtel. Paragraph 9.4 of the project prospectus shows that $1,800 per unit was to be provided to Quadtel, so if one divides the $14,340,600 by $1,800 one should arrive at the number of units in respect of which the required repayments were made: 7,967. Subtracting the agreed figure of 7,375.5 from 7,967 one arrives at 591.5. Mr Hooker’s analysis is rendered closer to that figure if one adds to his 133 units the 373 units purchased by Northern Rivers Plantation Management and not accounted for by the cancellation of promissory notes. But at all events I conclude that the figure of 591.5 is, on the evidence before me that the participants’ repayments were the only source of real money for the project, more probably than not correct. If it were otherwise the defendant would have overpaid Quadtel by $1,064,700 (591.5 times $1,800), a circumstance not in the least likely.
It is not possible to determine which commission rate – $650 or $750 - applies to the 591.5 units, so I shall apply the lower rate: 591.5 at $650 per unit gives $384,475. But that is not the end of the matter because the defendant claims to be entitled to set off certain payments it asserts it made against any sum owing to the plaintiff.
Mr Hooker’s evidence, which I accept on this issue, was that the defendant has paid, by way of advance and commissions, $135,400 in addition to the admitted sums for the 7,375.5 units: $50,000 advanced to the plaintiff, $17,000 commission paid to Mr Hooker himself, and $68,400 commission paid to SecurInvest (see exhibit 21 and other exhibits to which I shall refer).
The $50,000 was advanced on 15 June 1998 by a company called Northern Rivers Finance Pty Ltd at the direction of the defendant on two conditions recorded in a letter dated 22 June 1998 from the defendant to the plaintiff: first, that it was solely for the purpose of pre-paying the commissions payable to the plaintiff, and secondly that the sum would be ‘reclaimed’ from the commissions payable on the first 500 units sold by deductions of $100 per unit (see exhibit 9). The second condition was applied to a payment of commission on 7 August 1998 in respect of the sale of sixty-one units when a deduction of $6,100 was made, but that deduction was reversed by a payment of $6,100 as part of the payment of $20,400 made on 21 August 1998 in respect of the sale of 22 units (22 units at $650 which gives $14,300 plus the $6,100, making $20,400): see exhibits 10 and 24. I am not satisfied that a facsimile transmission dated 10 October 1998 from Lyons Judge, chartered accountants, to Mr Silver concerning suggested journal adjustments (exhibit 23) provides, without more, a sufficient basis for concluding that the $50,000 has been repaid.
The $17,000 was paid to Mr Hooker as a holder of proper authority at the rate of $500 per unit on his sale of thirty-four units: twenty-seven to Deglebrook Pty Ltd, six he purchased himself, and one his wife purchased. Repayments were made in respect of all thirty-four units on 8 January 1999, as exhibit 16 shows. The remaining commission due went to the plaintiff.
SecurInvest, based in Western Australia, was another holder of proper authority entitled to commission on sales of units in the Base Metals Exploration and Prospecting project. It too was entitled to commission on sales of units: see exhibit 13.
It follows that the defendant owes the plaintiff $249,075 for commissions on sales: $384,475 less $135,400. There will accordingly be judgment for the plaintiff against the defendant for that sum.
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