Ioannou v Systemworx Pty Ltd and Graham

[2011] VCC 505

IN THE COUNTY COURT OF VICTORIA Revised

Not Restricted

AT MELBOURNE
CIVIL JURISDICTION
COMMERCIAL LIST

GENERAL DIVISION

Case No. CI-09-06165

RITA IOANNOU	Plaintiff
v
SYSTEMWORX PTY LTD	First Defendant
(ACN 119 166 675)
and
PAUL GRAHAM	Second Defendant
and
KATHRINE GRAHAM	Third Defendant

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JUDGE:	HIS HONOUR JUDGE SHELTON
WHERE HELD:	Melbourne
DATE OF HEARING:	17, 18 and 22 March 2011
DATE OF JUDGMENT:	18 April 2011
CASE MAY BE CITED AS:	Ioannou v Systemworx Pty Ltd and Graham
MEDIUM NEUTRAL CITATION:	[2011] VCC 505

REASONS FOR JUDGMENT
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Catchwords: Claim for monies under loan agreement – was it a loan to company or its directors personally? – forbearance to sue as consideration – intention to create legal relations – Equuscorp Pty Ltd v HGT Investments Pty Ltd (2004) 218 CLR 471 – Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 – Edwards v Skyways Ltd [1964] 1 WLR 349, at 355 – Maxwell & Anor v Moorabool Developments Pty Ltd & Anor [2004] VSC 392 – Scotson v Pegg (1861) 158 ER 121; New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr S C Smith	Thexton Lawyers
For the Defendants	Mr P K Kistler	Remington Wright & Co
HIS HONOUR:

1          This proceeding concerns a loan of $180,000 made by the plaintiff on 5 December 2007. It is not in issue that the loan was made nor that the interest rate was 12 per cent per annum, increasing to 15 per cent per annum from March 2008, and that the sum of $180,000, together with interest, is now repayable to the plaintiff.

2          The real issue is whether the loan is repayable by the first defendant of which the first and second defendants have been directors since 11 April 2006; alternatively, by Murray Graham Nominees Pty Ltd (“MGN Pty Ltd”) as trustee for Murray Graham Franchise Trust (“MGF Trust”) of which the second and third defendants were directors from 11 April 2006 until the company went into liquidation on 17 March 2009; or alternatively, by the second and third defendants personally.

Background

3          In November 2007, the plaintiff had been deserted by her husband, leaving her with four children aged eighteen, sixteen, ten and five. She had been involved in two serious car accidents, one at age six and one at age twenty, and had received substantial sums by way of damages. She was advised to invest these funds in real estate and then mortgage these properties. The rentals obtained from the investment properties were then supposed to provide income to her since she was unable to work on account of looking after her four children.

4          In November 2007, apart from her home at Donvale, she owned investment properties at Lower Templestowe, Doncaster and Docklands. The method used to provide the plaintiff with income was not successful and by November 2007, she was in debt in the sum of over $800,000.

5          To improve her financial position the plaintiff decided to sell the Docklands property. In this she had the assistance of a real estate advocate, Michael Brown. He facilitated the sale of the Docklands property. He visited the plaintiff at her Donvale home on 29 October 2007. He had arranged a purchaser for the Docklands property. On 29 October 2007, the plaintiff entered into a contract of sale for the Docklands property. The sale price was $580,000, with settlement arranged for one month later, on 29 November 2007.

6          Brown brought the second defendant to the meeting. The second defendant was an acquaintance of his and the third defendant, who married the third defendant earlier in the month of October 2007, worked for him. This was the first occasion on which the plaintiff had met the second defendant. Brown gave evidence that he introduced the second defendant to the plaintiff since he had been told that the second defendant had expertise in consolidating debts and he thought he might be able to help the plaintiff with her debt problem and help her to budget. Brown told the plaintiff that the second defendant was a member of Planet Shakers City Church, of which she was also a member.

7          The plaintiff was to receive $180,000 net from the sale of the Docklands property. The plaintiff stated that about a week prior to settlement, on or about 22 November 2007, she had a phone call from the second defendant indicating that he had a proposal which would benefit both of them. The plaintiff stated that the second defendant arrived at her home about half an hour later and suggested that she lend him $80,000, on which interest would be paid at the rate of 12 per cent per annum. The second defendant stated that he wanted to pay the monies to one Ruth Plummer. She stated that she was somewhat hesitant and confused at the suggestion since she was wanting to use the $180,000 to reduce her debt. However, she states that the defendant pleaded with her to proceed as suggested and that she felt pressured, and that because of their involvement in the same church, he told her that he was “a true brother” and that she could rely on him. The second defendant denied that he told the plaintiff he was “a true brother”. The plaintiff stated that the second defendant was “desperately pleading me for money”.

8          Although the plaintiff owned four properties and had owned other properties in the past, she appeared to me to be somewhat naïve in business matters.

9          At this meeting, the plaintiff states that the second defendant gave her the account number of Ruth Plummer which she wrote on a piece of scrap paper, but then advised the plaintiff rather to pay the sum of $80,000 into another account.

10        MGN Pty Ltd was a franchisee of an organisation known as Power Loans which acted as a mortgage broker, arranging loans for prospective borrowers. It also had clients which loaned monies to it without security being provided, for which regular interest payments were made. Ruth Plummer was one such client. In either case, MGN Pty Ltd received trailing commissions which were from Power Loans, which was its source of income. On the scrap of paper to which I have referred, the second defendant wrote “P Graham + K Murray”. Murray was the third defendant’s maiden name. The third defendant gave evidence that at the time and still, the second and third defendants had a joint personal account with the ANZ Bank in this name. She stated that the plaintiff said that the bank account details referred to this account. The defendant stated that he could not remember why he had written “P Graham + K Murray”. I find this somewhat disingenuous. It was common ground that there was no mention of the first defendant at this meeting.

11        The plaintiff states that shortly thereafter she was telephoned by the second defendant suggesting that she should lend a further $100,000, making a total sum of $180,000. She stated that the second defendant had promised to pay the $80,000 back within two months and that the $100,000 would be repaid on one month’s notice and no later than after eleven months.

12        On 5 December 2007, the second defendant attended on the plaintiff at her Donvale home at about 7.00 pm. He brought with him an eight-page document entitled ‘Loan agreement’. The plaintiff and the second defendant signed the last page of the agreement (“the first agreement”). A copy of the first agreement is Annexure A to this judgment. It is not in issue that the second defendant filled in page 7, which stated the plaintiff’s name as lender, her address and that the loan amount was $180,000. The plaintiff states that she was in a hurry to go out and that she did not read the first six pages of the agreement. She stated that the second defendant told her that she could trust him and that there was no need to read these pages. The second defendant denies this, stating that he went through each page of the agreement and explained it to the plaintiff. The second defendant stated that at this meeting he showed the plaintiff trailing commission statements from Power Loans addressed to the MGF Trust. The plaintiff denied this.

13        The first agreement was drafted by the Adelaide office of Minter Ellison, Lawyers. The second and third defendant established their franchising business in South Australia and Minter Ellison were their lawyers there. The third defendant gave evidence that the first agreement was prepared from a proforma agreement prepared by Minter Ellison.

14        The plaintiff states that at all times she understood that she was entering into the first agreement with the second and third defendants.

15        The sum of $180,000 was paid into the plaintiff’s ANZ account, being proceeds from the sale of the Docklands property on 29 November 2007. On 5 December 2007, the sum of $180,000 was paid to the credit of an account in the name “Murray Graham Nominees Pty Ltd as trustee for Murray Graham Franchise Trust”. A bank deposit slip signed by the plaintiff requires the payment of the deposit into that account. The third defendant stated that she requested the plaintiff to pay the money into that account. On 5 December 2007, $100,000 was paid, not to Ruth Plummer but to Susan Daly, another client of the second and third defendants, and $80,000 was paid to Greg Anderson, another client of the second and third defendants.

16        The plaintiff stated that in February 2008, she requested the second defendant to repay the sum of $80,000 which she understood was repayable after two months. The second defendant denied that it was repayable after two months. The third defendant indicated that she understood why the plaintiff thought the sum of $80,000 was repayable about February 2008 since Anderson had indicated that he was likely to want to reinvest the sum of $80,000 about then - $80,000 of the sum of $180,000 advanced by the plaintiff on 5 December 2007 had been used to pay out his investment of this sum. The plaintiff stated that the second defendant indicated that he was not in a position to pay out the sum of $80,000 then. As mentioned, however, it was agreed that the interest rate payable on the sum of $180,000 was to be increased from 12 per cent per annum to 15 per cent per annum. The third defendant indicated at this meeting, the plaintiff stated that she still did not have sufficient cash flow. The third defendant indicated that 15 per cent per annum interest was being paid to other investors involved with the second and third defendants. Thereafter, the monthly interest which was paid was increased from $1,800 per month to $2,250 per month.

17        Over succeeding months, the plaintiff indicated that she was naturally concerned about the payment of the loan.

18        Matters came to a head in September 2008. On 25 September 2008, the second and third defendants called upon the plaintiff at her Donvale home. She states that they indicated to her that they would be unable to pay the sum of $180,000 when it fell due in November 2008. They stated that they were in financial difficulties on account of the franchisor of Power Loans failing to pay them trailing commissions. They stated that they would continue to pay the monthly interest calculated at 15 per cent per annum. The third defendant stated that the plaintiff indicated that she wanted something in writing. The plaintiff stated that a few days later, the third defendant telephoned her, stating that she would prepare an agreement for signing by the parties which would show that the defendants were prepared to honour their obligations.

19        On 30 September 2008, the plaintiff received from the defendants by email a draft of an agreement. The third defendant indicated that she drew this in consultation with the second defendant. The second defendant agreed with this. The plaintiff stated that she promptly indicated to the second and third defendants that the agreement was acceptable to her. That evening, a meeting of a local support group of attendees at the Planet Shakers City Church was held at a member’s house at Ringwood. Both the plaintiff and the second and third defendants were members of this group. After the meeting, they signed the agreement (“the second agreement”). A copy of the second agreement is annexed to this judgment as Annexure B.

20        The witness to the second agreement, Wendy Short, was a leader of the support group. It was only at this meeting that the plaintiff received a copy of the first agreement from the second and third defendants. The third defendant never signed the first agreement although there was provision for her to do so.

21        The plaintiff stated that a few days later, the third defendant telephoned her, indicating that she and the second defendant would not be able to honour the second agreement. The second and third defendants had obtained alternate employment when the Power Loans franchisor ceased paying trailing commissions to them. As a result of the Global Financial Crisis, they had both lost their jobs.

22        On 19 October 2008, following a service of Planet Shakers City Church at Festival Hall, at which it was estimated five thousand people were present, a meeting was held at which were present the plaintiff, the second and third defendants, a friend of the plaintiff, Andrew Michaels, a pastor from Planet Shakers City Church, referred to as Pastor Ben, Wendy Short and her husband. The plaintiff read from a document she had prepared which set out her position. She stated that she “was going to confront issues without being intimidated”. The third defendant stated that the plaintiff appeared angry. The plaintiff stated that the second and the third defendants assured her that they would repay the borrowed funds. It is not in issue that the third defendant was upset and tearful at the meeting. According to the plaintiff, the meeting ended in “hugs and kisses” and a further meeting was scheduled two weeks ahead. This meeting occurred on 2 November 2008 after a church meeting at Dallas Brookes Hall. The same people were present and according to the plaintiff, the second and third defendants indicated that they were presently unemployed but that when they found employment they would endeavour to repay the borrowed funds. The plaintiff states that at the end of the meeting, Pastor Ben suggested that the plaintiff should engage a lawyer.

23        The sum of $180,000 has not been repaid. The last interest payment was made in October 2008.

Discussion

24        At trial, the plaintiff contended that the first agreement was with the second and third defendants. She did not contend that her agreement was with the first defendant. The only connection with the first defendant was the presence of its ACN number on the first agreement. The second and third defendants contended that the first agreement was with MGN Pty Ltd, a company now in liquidation. They never contended that it was with the first defendant.

25        There are difficulties in determining with whom the plaintiff made the first agreement. The cover page states that the borrower is the MGF Trust. On page 3, the ACN number indicated is that of the first defendant. Recital A states that the Borrower is the trustee of the Trust. The Trustee of the MGF Trust is MGN Pty Ltd. No reference is made to this company on this page. Mr Smith submitted that so far as the plaintiff was concerned, the Trustee of the Trust may well have been the second and third defendants. There is provision for the name of the borrower to be stated but this had not occurred.

26        There are other unusual aspects of the first agreement.

27        In Clause 1, “Business Day” is defined as:

“a day on which banks are open for business in Adelaide.”

28        Clause 5(a)(3)(A) is left blank as to when the first instalment of interest is to be paid.

29        Clause 10 provides:

“Governing Law

The laws of South Australia govern this Agreement. The parties submit to the jurisdiction of the courts of South Australia and agree to issue any proceedings relating to this Agreement in those courts.”

30        The fact that the sum of $180,000 was paid by the plaintiff on 5 December 2007 to the credit of an account in the name “Murray Graham Nominees Pty Ltd as trustee for Murray Graham Franchise Trust” and that this was on a bank deposit slip signed by the plaintiff is not, in my view, of great significance since the payment was made at the direction of the third defendant. The fact that interest payments to the plaintiff were made from the MGF Trust account is not, in my view, of any significance since the second and third defendants were entitled to make payments from whatever source they chose. Further, the plaintiff’s bank statements do not indicate that interest payments were made by the MGF Trust. Rather, they indicate payments from “Murray Graham” which suggests payment personally by the second and third defendants.

31        There was considerable focus throughout the evidence and in final submissions upon whether the first agreement was made with the second and third defendants or with MGN Pty Ltd. There is however no need for me to determine this issue on account of the wording of the second agreement, although I note that the second agreement clearly refers to “$180,000 previously lent to Paul and Kathrine Graham in November 2007”. Further, there is no mention in the second agreement of MGN Pty Ltd or the MGF Trust.

32        The second agreement states:

“The original agreement signed is now void and this is the new

agreement.”

33        The only reasonable interpretation of this provision, in my view, is that the second agreement supersedes the first agreement, whomever with. The second and third paragraphs of the second agreement state, in essence, that the second and third defendants will repay the plaintiff the sum of $180,000 together with interest on the balance outstanding at the rate of 15 per cent per annum.

34        Mr Kistler, who appeared for the defendants, submitted that the second agreement “was a promissory, honorary type situation that they felt from moral or religious reasons or both to come to some agreement” and that the second agreement “was only intended to reflect a moral and religious document as such” and that “it was not intended to have legal effect”.

35        The second defendant stated, with respect to the second agreement:

“Our intention was to express that we would do whatever we could to help, having our business taken from us, there was nothing there. We wanted to do something so morally we felt obliged to do something, yet we didn’t have the grounds or means at that time.

Q:	Was it your intention to create a new legal relationship with Mrs Ioannou or not?---
A:	No, no, not a new legal relationship, no.”

36        The third defendant stated the following, with respect to the second agreement:

“It wasn’t about not caring. It was an agreement between just Rita and ourselves to say we were going to do everything we could, we were going to endeavour to try to do something with God’s help. We prayed with her to – to agree on that.”

37        In Equuscorp Pty Ltd v HGT Investments Pty Ltd (2004) 218 CLR 471, at 483, the Court stated:

“The respondents each having executed a loan agreement, each is bound by it. Having executed the document, and not having been induced to do so by fraud, mistake, or misrepresentation, the respondents cannot now be heard to say that they are not bound by the agreement recorded in it. The parol evidence rule, the limited operation of the defence of non est factum and the development of the equitable remedy of rectification, all proceed from the premise that a party executing a written agreement is bound by it. … .”

(my emphasis)

38        To similar effect, in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, at 182, the Court stated:

“Legal instruments of various kinds take their efficacy from signature or execution. Such instruments are often signed by people who have not read and understood all their terms, but who are nevertheless committed to those terms by the act of signature or execution. It is that commitment which enables third parties to assume the legal efficacy of the instrument. To undermine that assumption would cause serious mischief.”

39        At page 183, the Court referred to:

“… the significance attached by the law to the presence of the signature and also to the absence of any grounds, such as a plea of non est factum, which at common law would render the contract void and of any grounds, such as misrepresentation, which might attract equitable relief … .”

40        The onus is on the defendant to show that there was no intention to create a legally enforceable agreement. This onus is a heavy one. In Edwards v Skyways Ltd [1964] 1 WLR 349, at 355, Megaw J stated:

“In the present case, the subject-matter of agreement is business relations, not social or domestic matters. There was a meeting of minds – an intention to agree. There was, admittedly, consideration for the company’s promise. I accept the propositions of counsel for the plaintiff that in a case of this nature the onus is on the party who asserts that no legal effect was intended, and the onus is a heavy one.”

41        In Maxwell & Anor v Moorabool Developments Pty Ltd & Anor [2004] VSC 392, at paragraph 258, Habersberger J followed Megaw J and confirmed that a heavy onus was placed on a party contending that there was no intention to create a legally enforceable agreement.

42        The thrust of the evidence of the second and third defendants with respect to the second agreement is, in my view, to accept liability for repayment of the loan and interest but acknowledging that they faced real difficulties in doing so financially. The fact that the second defendant stated that there was no intention to create a new legal relationship with the plaintiff is quite inconsistent with the second agreement which has been signed by the second and third defendants.

43        I have reservations as to the credibility of the second defendant.

44        As mentioned, the second defendant was introduced to the plaintiff to assist her with her financial problems. Instead, he turned the introduction to his advantage. Whereas the sum of $180,000 was invested in real estate, now it was loaned without security. Further, although MGF Trust and/or the second and third defendants were paying 15 per cent interest per annum to other investors, the second defendant, reprehensibly, only offered the plaintiff 12 per cent per annum interest. He clearly put his own interests before those of the plaintiff which casts doubts upon his honesty and integrity.

45        Mr Kistler relied upon an affidavit sworn by the plaintiff in this proceeding on 22 December 2009 in which she states, in paragraph 2, that on 5 December 20007, she agreed to loan the sum of $180,000 to the first defendant. As indicated, none of the parties submitted that the first agreement was with the first defendant. Reliance was also placed upon the fact that the plaintiff is shown as a creditor in the sum of $180,000 in the liquidation of MGN Pty Ltd. She stated however that she could not recall lodging a proof of debt. A proof of debt signed by her was not tendered in evidence.

46        Mr Kistler also relied upon a letter from McCracken & McCracken, lawyers acting on behalf of the plaintiff, addressed to:

“Murray Graham Franchise Trust
Paul Graham.”

seeking repayment of the sum of $180,000 plus interest and costs. The plaintiff explained that to keep costs to a minimum she, in essence, gave instructions to the McCracken & McCracken over the telephone, suggesting that the lawyers did not examine closely against what party the claim should be made. This is highlighted by the fact that the letter does not even refer to the second agreement.

47        These matters, at best, go to the credit of the plaintiff. In the face of the clear wording of the second agreement, this is of little relevance.

48        True it is that the second agreement has strong religious overtones, but this is quite consistent with it intending to create legal relations.

49        In all the circumstances, I conclude that the second and third defendants have not discharged the heavy onus placed upon them to satisfy me that the second agreement signed by them is not legally enforceable.

50        Mr Kistler further submitted that there was no consideration for the second agreement. In fact, I raised with the parties whether there was good consideration for the second agreement and was referred to cases such as Scotson v Pegg (1861) 158 ER 121 and New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154. These cases are concerned rather with whether performing an existing contractual duty for a third party is good consideration. Here, consideration is provided by the forbearance of the plaintiff to sue MGN Pty Ltd and/or the second and third defendants for monies due on 5 November 2007 under the first agreement and allowing further time for repayment of the outstanding loan and interest. Forbearance to sue is regarded as good consideration – see Cheshire & Fifoot ‘Law of Contract’ (9th Australian edition) paragraph 4.24.

Conclusion

51        The second agreement is a legally enforceable agreement against the second and third defendants.

52        There will be judgment for the plaintiff against the second and third defendants in the sum of $180,000 (One Hundred and Eighty Thousand Dollars), together with interest. I will hear from the parties as to the appropriate sum to be awarded for interest and also as to the question of costs.

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ANNEXURE A

ANNEXURE B