McCarthy, Ronald Ian v McIntyre, Neville

[1998] FCA 1350

FEDERAL COURT OF AUSTRALIA

Corporations Law – whether financial assistance given in connection with acquisition of shares – whether “related” transaction.

Corporations Law – ss 205, 206

RONALD IAN MCCARTHY, MAXWELL MCCARTHY AND EDLAN NO. 54 PTY LIMITED V NEVILLE MCINTYRE, AURO ROMANO MCINTYRE AND NEVITORO INVESTMENTS PTY LIMITED

NG 672 OF 1996

JUDGE:         BEAUMONT J.
PLACE:         SYDNEY
DATE:           11 SEPTEMBER 1998

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

NG 672 of 1996

BETWEEN:

RONALD IAN MCCARTHY
FIRST APPLICANT

MAXWELL MCCARTHY
SECOND APPLICANT

EDLAN NO. 54 PTY LIMITED
THIRD APPLICANT

AND:

NEVILLE MCINTYRE
FIRST RESPONDENT

AURO ROMANO MCINTYRE
SECOND RESPONDENT

NEVITORO INVESTMENTS PTY LIMITED
THIRD RESPONDENT

AND BETWEEN:

NEVILLE MCINTYRE
FIRST CROSS-CLAIMANT

AURO ROMANO MCINTYRE
SECOND CROSS-CLAIMANT

NEVITORO INVESTMENTS PTY LIMITED
THIRD CROSS-CLAIMANT

AND:

RONALD IAN MCCARTHY
FIRST CROSS-RESPONDENT

MAXWELL MCCARTHY
SECOND CROSS-RESPONDENT

EDLAN NO. 54 PTY LIMITED
THIRD CROSS-RESPONDENT

JUDGE:

BEAUMONT J.

DATE OF ORDER:

11 SEPTEMBER 1998

WHERE MADE:

SYDNEY

ORDERS:

1. On the “Riverview Lodge” claim order that Mr Auro McIntyre pay Edlan No. 54 Pty Limited the sum of $505,476.43.  Liberty to Edlan No. 54 Pty Limited to apply for interest.  Application otherwise dismissed.

1. On the cross-claim, order that Edlan No. 54 Pty Limited pay Nevitoro Investments Pty Limited the sum of $360,000 together with interest in accordance with the terms of the contract.

1. Costs reserved.  Liberty to file written submissions.

1. Suspend the operation of these orders for 60 days.

1. Extend time for filing and serving notice of appeal up to and including 2 December 1998.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 672 of 1996

BETWEEN:

RONALD IAN MCCARTHY
FIRST APPLICANT

MAXWELL MCCARTHY
SECOND APPLICANT

EDLAN NO. 54 PTY LIMITED
THIRD APPLICANT

AND:

NEVILLE MCINTYRE
FIRST RESPONDENT

AURO ROMANO MCINTYRE
SECOND RESPONDENT

NEVITORO INVESTMENTS PTY LIMITED
THIRD APPLICANT

AND BETWEEN:

NEVILLE MCINTYRE
FIRST CROSS- CLAIMANT

AURO ROMANO MCINTYRE
SECOND CROSS- CLAIMANT

NEVITORO INVESTMENTS PTY LIMITED
THIRD CROSS- CLAIMANT

AND:

RONALD IAN MCCARTHY
FIRST CROSS-RESPONDENT

MAXWELL MCCARTHY
SECOND CROSS- RESPONDENT

EDLAN NO. 54 PTY LIMITED
THIRD CROSS-RESPONDENT

JUDGE:

BEAUMONT J.

DATE:

11 SEPTEMBER 1998

PLACE:

SYDNEY

REASONS FOR JUDGMENT (NO. 2) (ON THE CROSS-CLAIM AND ON THE “RIVERVIEW LODGE” CLAIM BY THE APPLICANTS)

BEAUMONT J:

These reasons should be read in conjunction with my reasons dated 19 May 1998.  I will deal with both the cross-claim, and the “Riverview Lodge” claim.

The cross-claim pleaded
By their cross-claim, as pleaded, the cross-claimants sue the cross-respondents upon the deed dated 17 August 1993 (“the Deed of Settlement”).  Specifically, the cross-claimants claim damages in the sum of $360,000 said to arise out of the alleged failure of the cross-respondents to repay an advance made by Nevitoro in that amount.  This claim is mentioned in my earlier reasons  at pp 2 and 18.

The parties to the Deed of Settlement included the cross-claimants and the cross-respondents.  The Deed recited the following:  that of Edlan’s issued capital of 5,002 shares of $1 each, one share was registered in the name of Mr Jack McCarthy and the balance (5,001) were registered in the name of Mr Auro McIntyre;  that Mr Auro McIntyre had agreed with Messrs McCarthy for the sale of 2,501 shares (“the Edlan Share Sale Agreement”);  that a dispute existed between Mr Auro McIntyre and Mr Jack McCarthy as to the ownership of the other 2,500 shares;  that in settlement of the dispute, Mr Auro McIntyre had agreed to transfer the disputed shares to Mr McCarthy;  and that Nevitoro operated the Macquarie Arms Hotel under leasehold.

The Deed contained, inter alia, provisions to the following effect:

• The parties acknowledged the interdependence of the Deed and the Edlan Share Sale Agreement (cl 3.2).

• Mr Jack McCarthy and Mr Max McCarthy agreed to pay Nevitoro $150,000.

• On or prior to the completion date of the Edlan Share Sale Agreement, Nevitoro agreed to advance to Edlan the sum of $360,000 at 13% interest, repayable in three years, secured by a charge by way of equitable mortgage over Edlan’s assets.  Nevitoro further agreed to advance to Messrs McCarthy the sum of $100,000 at various interest rates, repayable in six months, secured by a real property mortgage to be granted by Mr Jack McCarthy (cll 6.1, 6.2, 6.3).

• Mr Maxwell McCarthy agreed to charge his shares in Edlan to Nevitoro until repayment of both the above advances (cl 6.6).

• Nevitoro released Mr Jack McCarthy from repayment of an advance of $90,000 by it to him (cl 9.1).

• Mr Jack McCarthy released Nevitoro from liability, if any, for the repayment of an alleged advance of $300,000 by him to it (cl 9.2).

• The McIntyre interests, including Nevitoro, released Edlan and Messrs McCarthy, who mutually released the McIntyre interests from any claim etc. whatsoever and indemnified them against all actions etc. which had arisen, or may thereafter arise, from the ownership of the share capital of Edlan, other than claims arising out of the Edlan Share Sale Agreement (cl 12).  (This is a summary only of this provision.  It will be necessary later to consider its actual language, since there is a dispute about its meaning.)

The issues arising in the cross-claim

Relevantly, notwithstanding the apparently complex character of this litigation, the following main issues only appear now to arise on the pleadings:

• The cross-claimants allege that, pursuant to cl 6 of the Deed of Settlement, Nevitoro advanced the sum of $360,000 to Edlan by way of a loan.  (This loan is denied by the cross-respondents, who contend that, if any monies were advanced by Nevitoro, they were advanced in order to discharge a personal obligation of Mr Jack McCarthy and Mr Auro McIntyre to the Commonwealth Bank).

• The cross-claimants allege that, in breach of cl 6 of the Deed of Settlement, the advance of $360,000 has not been repaid.  (The cross-respondents deny any breach of the Deed, but admit that Edlan has not paid Nevitoro $360,000.)

• By way of special defence to the cross-claim, raised very late indeed by the cross-respondents (after the question was mentioned in my earlier reasons (p 18)), the cross-respondents contend that:

(i)In 1990 Edlan gave what amounted to “financial assistance” within the meaning of s 205(1) of the Corporations Law (the terms of which provision will be described below) to Mr Auro McIntyre and Mr Jack McCarthy in connection with their acquisition of shares in Edlan, by reason of the following:

(a)Edlan then granted an equitable mortgage to the Commonwealth Bank to secure a loan to Mr Auro McIntyre and Mr Jack McCarthy, which loan was used to discharge their obligations to Mr and Mrs Edwards as vendors of the shares in Edlan;  or, alternatively,

(b)Mr Auro McIntyre and Mr Jack McCarthy obtained a loan from the Commonwealth Bank, the proceeds of which were deposited into Edlan’s bank account and used to discharge the above obligations.

(ii)In 1993 Edlan repaid, or contributed to the repayment of, the Commonwealth Bank loan, employing funds provided by Nevitoro.

(iii)Further, and alternatively to (ii), the advance of monies by Nevitoro to Edlan pursuant to the Deed of Settlement, and any obligation by Edlan to repay any such advance pursuant to this Deed, were respectively a transaction and a contract made or engaged in as a consequence of, or in relation to, the “financial assistance” alleged in (i) or (ii), and thus, within the meaning of s 206(14) of the Corporations Law, was deemed a related contract or transaction;  that is, the cross-respondents say, any monies advanced by Nevitoro to Edlan in 1993 were advanced for the purpose of replacing the security provided by Edlan (or, alternatively, refinancing the debt incurred by Edlan) when it provided the financial assistance in 1990 or, alternatively, for the purpose of providing the financial assistance in 1993 alleged in (ii), above.

(iv)On 24 June 1998 (the day before the hearing of the cross-claim) Edlan, pursuant to s 206(2) of the Corporations Law, purported to avoid any liability it had to Nevitoro in respect of the Deed of Settlement.

Shortly stated, the determination of the main issues between the parties in the cross-claim thus appears to turn on (1) the true character of the advance by Nevitoro;  and (2) whether unlawful financial assistance was granted;  and if so, its consequences.

The issues arising on the applicants’ “Riverview Lodge” transaction claim

In my earlier reasons dated 19 May 1998, I dealt with what the parties described as the applicants’ claim on the “1993 transaction” (see p 2 of those reasons).  The applicants initially sued upon three claims, including the “1993 transaction”.  One such claim (for the recovery of an alleged loan of $85,895 said to be made by Edlan to Mr Neville McIntyre) is now no longer pressed by the applicants.  The only applicants’ claim still outstanding remaining to be dealt with is their claim said to arise from the “Riverview Lodge” transaction.  By the consent of the parties, which has now been given to this course, I am able to deal with this claim and with the cross-claim together, upon the agreed footing that evidence in one is also to be treated as evidence in the other. 

The applicants pleaded the “Riverview Lodge” transaction claim in their second further amended statement of claim as follows:

• On 19 August 1990, Edlan was the beneficial owner of the property known as “Riverview Lodge” (“the Lodge”).

• As at 25 July 1990, Edlan owed Westpac a debt of $914,838.75, which liability was secured upon the Lodge.

• On 20 August 1990, Mr Jack McCarthy and Mr Auro McIntyre negotiated with Mr and Mrs Edwards, as vendors, for the sale of the Edwards’ shares in Edlan.

• In August 1990, Mr Jack McCarthy, on behalf of Edlan, entered into an oral collateral Agreement with Mr Auro McIntyre (“the Agreement”) that –

-     at the time of completion of the sale, the Lodge should not be an asset of Edlan, nor should the Westpac debt be a liability of Edlan.

-     Mr Auro McIntyre would receive a transfer of the Lodge and in consideration of the transfer, would be responsible for the repayment of the Westpac debt.

• As at 27 August 1990 the Westpac debt owed by Edlan, which was secured upon the Lodge, was $930,378.47.

• The sale of the shares in Edlan was completed on 31 August 1990, pursuant to a Deed of that date.

• On 31 August 1990, Edlan ratified Mr Jack McIntyre’s entry into the Agreement on its behalf.

• In breach of the Agreement, Mr Auro McIntyre failed to pay to Edlan or to Westpac the full amount then owed to Westpac since –

-     Edlan drew a cheque dated 4 September 1990 in the sum of $700,000 payable to itself.

-     Out of these proceeds, the sum of $505,476.43 was paid to Westpac in reduction of the debt owed to it.

-     Mr Auro McIntyre failed to repay such monies to Edlan or to Westpac.

• As a consequence of this breach, Edlan suffered loss and damage.

• Further, and alternatively, Mr Auro McIntyre was unjustly enriched as a consequence of the payment of Edlan’s funds (i.e. $505,476.43) to Westpac.

• Further, and in the alternative, Mr Auro McIntyre was a director of Edlan from 1990 until 1993. In the circumstances alleged, where the sum of $505,476.43 was contributed by Edlan towards the Westpac debt, Mr Auro McIntyre was in breach of his duty to Edlan under s 232(6) of the Corporations Law to ensure that he did not make improper use of his position as a director to gain an advantage;  and he was also in breach of his duty of care and diligence under s 232(4).

By his Statement of Facts, Issues and Contentions, Mr Auro McIntyre disputes that Edlan paid $505,476.43 to Westpac on 4 September 1990.  He says that, on this date, upon completion of the Share Sale Agreement dated 31 August 1990, a cheque was drawn upon a new account established by Edlan (as directed by Mr Edwards as vendor) in favour of Edlan for $700,000.  The cheque was signed by Mr Jack McCarthy and handed by him to Mr Edwards.  The transfer of the Lodge was executed by Mr Auro McIntyre at that time in the presence of Mr Jack McCarthy who witnessed its execution.  Mr Edwards directed payment of the monies paid to him, partly towards the discharge of the mortgage by arrangement with Mr Auro McIntyre.

Mr Auro McIntyre then contends:

• The transfer of the Lodge was in fulfilment of the Share Sale Agreement with Mr and Mrs Edwards dated 31 August 1990.

(It may be noted at this stage, that by that Agreement, made between Mr and Mrs Edwards as vendors and Mr Auro McIntyre and Mr Jack McCarthy as purchasers, the vendors gave warranties as to Edlan’s assets, but the following exception was made:

“1.The property described as Riverview Lodge was transferred to the Purchasers in consideration of the Purchasers assuming responsibility for the loan from Westpac.”

It may further be noted that although there is a reference in this provision to “purchasers”, it seems clear that the intention of the parties was that the transfer should be made in favour of Mr Auro McIntyre only, as subsequent events, to which I will later refer, show.)

• The payment of $700,000 to Edwards was in accordance with the approval of Edlan’s two directors and shareholders, being Mr Auro McIntyre and Mr Jack McCarthy.

• Any action for breach of contract arising from the Share Sale Agreement dated 31 August 1990 became statute-barred before the commencement of this action.  (However, this point was later abandoned by the respondents in the light of the allowance, over objection, of an amendment by the applicants of their statement of claim so as to plead this claim.)

• Any action for recovery pursuant to the Corporations Law was also statute-barred.  (A point likewise now abandoned.)

• Any claim is barred by the release expressed in cl 12 of the Deed of Settlement.

The applicant's chronology of events

Counsel for the applicants provided a chronology of the events which, as the applicants contend, actually happened and were the material events for present purposes.  I will set them out below as their contentions but I do so against the general background of the dealings between the McIntyre and McCarthy family interests mentioned in my earlier judgment.

It must, however, be again emphasised for present purposes, and constantly borne in mind, that any attempt to reduce into some formal shape in these reasons the full course of the dealings between these parties is, as I indicated in argument, difficult if not impossible;  and that any attempt to do so runs the real risk of being no more than an artificial reconstruction which is necessarily divorced from the realities and thus capable of misleading.  As I said in argument, I cannot and should not, attempt to re-write into formal shape the history of the quite informal series of dealings between these parties over many years.  The Court should not attempt to recreate order out of chaos, and in many respects the informal nature of the dealings between the parties bordered on this, especially in terms of the documentation they signed.  As I mentioned in my earlier reasons, the parties elected to transact much of their business in cash transactions.  Moreover, when professionals were involved, insufficient time and attention was given to important details in the instructions that were, or should have been given to them.  For these reasons, the documentation between the parties which is in evidence, must be approached with caution, and in some instances with scepticism. 

The applicant's chronology is to the following effect:

• On 26 June 1989, the "Riverview Lodge", a rural property, was transferred from Messrs J and G Murray to Edlan for a consideration of $710,000.  On the same date Edlan granted four mortgages over that property in favour of Westpac. 

• On 27 June 1989, Edlan's investment property loan account with Westpac (number 092655) is debited with the amount of $900,000.

• In June 1990, Edlan agrees to transfer Riverview Lodge to Mr Auro McIntyre in consideration of his assuming responsibility for the loan from Westpac. 

• At some time in 1990, Mr Neville McIntyre informs and advises Mr Jack McCarthy that monies need to be borrowed from the Commonwealth Bank to pay out Mr Edwards.

• On 20 August 1990, Riverview Lodge is transferred by Edlan to Mr Auro McIntyre for a stated consideration of $700,000.

• On 20 August 1990, the Westpac mortgages over Riverview Lodge were discharged.

• On 31 August 1990, the Share Sale Agreement in respect of the shares in Edlan were executed by Mr Jack McCarthy and Mr Auro McIntyre and Mr Edwards.  The provisions of clause 3(a) of this agreement dealing with Riverview Lodge have been set out above.

• In August 1990, share transfers were executed by Jennifer and Wayne Edwards in favour of Mr Jack McCarthy and Mr Auro McIntyre.

• On 4 September 1990, Mr Auro McIntyre and Mr Jack McCarthy borrowed from the Commonwealth Bank the sum of $1,002,862 through account number 2826-1000-7822.  On the same date, that sum is deposited into Edlan's Commonwealth Bank account number 2826-0030-4595.  On the same date, cheque number 13001 is drawn in favour of Edlan for $700,000 on Edlan's Commonwealth Bank account 2826-0030-4595. 

• On the same date, cheque number 13001 for $700,000 is deposited into various Westpac accounts held by Edlan.  $505,476 is deposited into the investment property loan account number 092655.

• On the same date, a separate deposit of $430,000 is made into Edlan's Westpac investment property loan account reducing the balance of that account to nil.

• On 14 September 1990 Edlan grants an equitable mortgage to the Commonwealth Bank to secure the borrowings of Mr Auro McIntyre and Mr Jack McCarthy.

• On 30 October 1990 Mr Auro McIntyre mortgages the Riverview Lodge property.

• On 10 September 1993 the Deed of Settlement, the Share Sale Agreement and company Charge are executed.

• On 14 September 1993 Nevitoro advances the sum of $405,136.25 to discharge the borrowings of Mr Auro McIntyre and Mr Jack McCarthy from the Commonwealth Bank.

• On 12 February 1998 in their Statement of Facts, Issues and Contentions the respondents claim that $700,000 from cheque number 13001 was paid to or at the direction of Mr Edwards.

• On 24 June 1998 a notice pursuant to s 206(2) of the Corporations Law was served by Edlan on Nevitoro.

The documentation relied on by the applicants

Subject always to the cautions previously expressed, and with the usual proviso that any document needs to be viewed in its proper context, including but not  limited to, any relevant discussions between the parties in that connection, reference should next be made to the documentation which is principally relied upon by the applicants.  This documentation is as follows:

• A memorandum of transfer by Mr J. H. Murray and Mr G. J. Murray in favour of Edlan dated 26 June 1989 for the transfer of Riverview Lodge for the consideration of $710,000 (part of exhibit X1).  There is no challenge to the authenticity of this document.

• A mortgage dated 26 June 1989 executed by Edlan in favour of Westpac over the Riverview Lodge property together with three other mortgages of the same date (part of exhibit X1).  There is no challenge to the authenticity of any of these documents.

• A bank statement issued by Westpac in respect of Edlan's investment property loan account number 092655.  The statement shows that on 27 June 1989 there was a debit of $900,000 to the account.  The bank statement is addressed to the secretary of the Tropicana Hotel at Wilberforce.  There is with this bank statement a later bank statement showing that on 4 September 1990 two amounts were credited to the account, one for a sum of $430,000, the other for an amount of $505,475.43.  The statement shows that prior to those deposits there was a debit balance in the account of $938,378.47 and that after interest of $5097.86 was debited on 4 September 1990 the balance in the account was nil.  This is part of exhibit X1.  There is no challenge to the authenticity of these documents.

• A memorandum of transfer of Riverview Lodge by Edlan in favour of Mr Auro McIntyre dated 20 August 1990 for a stated consideration of $700,000.  The document is executed under the common seal of Edlan by Mr Edwards as director and by Mrs Edwards as secretary.  It is also signed by Mr Auro McIntyre as transferee and his signature is witnessed by Mr Jack McCarthy.  This document is part of exhibit X1 and its authenticity is not challenged. 

• A discharge of mortgage by Westpac as mortgagee in favour of Edlan as mortgagor dated 20 August 1990 together with other similar discharges dealing in each case with the Riverview Lodge property.  These are part of exhibit X1 and there is no challenge to their authenticity.

• The Share Sale Agreement dated 31 August 1990.  The schedule to this agreement, the authenticity whereof is not challenged, shows Mr Wayne Edwards as the holder of 5001 shares and Mrs Jennifer Edwards as the holder of one share.  They are described as the vendors.  The purchasers are described as Mr Auro McIntyre in respect of 2501 shares and Mr Jack McCarthy as the purchaser of 2501 shares, showing a total number of shares purchased as 5002.  The document is executed by Mr and Mrs Edwards, by Mr Auro McIntyre and by Mr Jack McCarthy.  It also bears the handwriting of Mr Neville McIntyre.  This is also part of exhibit X1.  The exception in clause 3(a) of this agreement excepting the Riverview Lodge from the transaction has already been set out.  The signatures of each of the parties to the agreement appears on the bottom of page 2 of the agreement which happens to be where the exception mentioned appears in the document. 

• A company search of Edlan showing that Mr Auro McIntyre was appointed a director of the company on 3 September 1990 and ceased to be a director on 1 December 1993.  It shows his date of birth as 3 August 1955.  It may be noted at this stage that Mr Auro McIntyre has not given any evidence in the proceedings and no explanation was proffered as to why he was not called.  I therefore draw the usual inference that if he had been called his evidence would not have assisted the respondents.

• A letter from the Commonwealth Bank, Nelson Bay branch, (as earlier evidence shows this is the branch of that bank used by Mr Neville McIntyre at the time) dated 4 September 1990 addressed to Mr Jack McCarthy and Mr Auro McIntyre, care of The Macquarie Arms Hotel, Windsor.  The letter (which is exhibit X2 and no challenge arises as to its authenticity) confirms that the bank had drawn down a commercial bill for 182 days on 4 September 1990 to mature on 5 March 1991 on behalf of Messrs McCarthy and McIntyre.  The letter went on to state that the account of Messrs McCarthy and McIntyre, number 304-595 had been credited with the net proceeds of $1,002,862.51 on that day.

• A statement issued by the Commonwealth Bank at its Nelson Bay branch to the directors of the Tropicana Hotel and The Macquarie Arms at Windsor in respect of Edlan but referring to “the Tropicana" in respect of the cheque account number 282600304595.  The statement, the authenticity of which is not challenged and which is exhibit X3, shows that on 4 September 1990 cheque number 130001 in the sum of $700,000 was debited to this account but that on the same day the sum of $1,002,862.51 was credited to the account. 

• A diary note/memorandum dated 26 March 1993 of CBA  Financial Services, a branch of the Commonwealth Bank.  The note/memorandum deals with an application for refinance with the following heading:  “Commonwealth Mortgage Fund Loan LN 856 Tropicana Hotel (Edlan Number 54 Pty Limited T/as) Bal Dr  $1,000,000 matured 20 May 1992”.   (There is also a reference to interest and interest rates which need not be re-stated).  This is exhibit X4.  There is no reason to doubt its authenticity or accuracy as a business record.

By way of “Background” it states:

“The Tropicana Hotel was originally sold by current director A R McIntyre in 1984 after many years of operation at which time the Macquarie Arms at Windsor was purchased.  This Windsor hotel is still owned by the McIntyre family.

Purchasers of the Tropicana allowed the hotel to become so run down that the McIntyre family repurchased the hotel in December 1986.  Although the McIntyres regained control of the Tropicana it continued to be operated by W & J Edwards on their behalf.  Mr & Mrs Edwards had operated the hotel since its sale by the McIntyres in 1984.

CMF loan $1,000,000 was funded on 17 July 1988 for a period of three years on an interest only basis.  Loan was approved, in the main, to assist W & J Edwards purchase an interest in the Tropicana hotel from the McIntyres.

Surprise audits whilst the Edwards were managing the business had not been satisfactory, therefore, in 1990 Mr McIntyre paid out the Edwards the took over the running of the hotel himself.  At this time Mr R I McCarthy came in as a minor shareholder (1 share).

Sale of this hotel has never involved the sale of freehold but rather the share holding of Edlan No 54 Pty Limited  This latest sale necessitated a variation to CMF loan in that guarantee by Mr & Mrs Edwards were released and fresh guarantees by Mr McIntyre and Mr McCarthy taken.

Mr McIntyre has always been the major shareholder (currently 5001 shares to McCarthy’s 1 share) and responsible for the day-to-day running of the hotel.  The McIntyres’ expertise has always been highly regarded in the industry.

Full control of the hotel was only assumed 10 weeks prior to the end of the 1991 financial year.  Accounts were found to be in disarray with a number of suspect transactions through the books.

Mr McIntyre has been successful in turning around the financial position of the hotel.  However, he has decided to sell his holding once again as he has to live overseas for an extended period due to family matters.

Accounts had been sorted out and Mr McIntyre took steps to sell his share holding to Mr McCarthy (minority shareholder) and Mr McCarthy’s brother.  However, complications arose in finalising this sale.” 

The diary note/memorandum went on to describe the “Present position” as follows:

“As CMF loan’s maturity date of 20 May 1992 approached we were advised that settlement for the sale of share and consequently clearance of loan was eminent and therefore renegotiation was not required.  However, it would be necessary to carry loan in arrears for approximately 2-4 weeks.  This was agreed to subject to the interest rate of 14.0% pa continuing to apply.

Numerous factors protracted settlement to such an extent that a Letter of Demand was served on debtor on 9 September 1992.  This action in addition to the fact that purchaser, found it necessary to change banks and lodge fresh application for accommodation resulted in discussions being conducted with regards to refinance of CMF loan.

Application was virtually completed late 1992 however, an update of company search revealed that the Edwards were still registered as shareholders.  Accountants and solicitor for the company had not thought it important to attend to the registration of new shareholders in view of the company holding all necessary documentation regarding transfer of shares to McIntyre and McCarthy.

This situation was unacceptable and we advised that application would only be considered upon provision of evidence that current shareholders were registered with ASC.  This has now been provided by way of a copy of the company’s annual return and of the receipt for its lodgement with the ASC.  (attached).

It is still Mr McIntyre’s decision to sell the hotel and this refinance for a further 12 months will allow him the time to do so in an orderly fashion.”

The note/memorandum went on to state that $1,000,000 was “required to regularise arrears”.  It was stated:

“In view of difficulties encountered with settlement, we have been requested to consider a term of 12 months with a commitment not to apply an early repayment fee should settlement be effected prior to maturity date.”

With respect to security, the note/memorandum stated that the existing security was to remain in place for the new loan and, in this connection, reference was made to security held over the motel/hotel premises at Wilberforce.  It was stated that a bank valuation as at March 1993 showed a net figure of $2,720,172.  There is also reference to guarantees, unlimited as to amount, to be provided by Mr Jack McCarthy and Mr Auro McIntyre as directors of the company. 

In dealing with “Serviceability” the note/memorandum went on to say:

“Serviceability is evident and there is scope for principal reductions to commence in 12 months time, if required.

CBA’s BDF facility was approved 4/9/90 on an interest only basis for three years and whilst no indications have been given it is feasible that principal reductions will be required should facility be renegotiated at that time.

It is mentioned that this facility is in the directors name and was approved to assist payout the Edwards.  It is included in the company’s serviceability assessment as all interest payments are met by the company.

The McIntyre family connection conduct further facilities totalling $1,320,000 ($820,000 undrawn) with the CBA in a troublefree manner.  Credit funds held at Nelson Bay NSW Branch as at time of writing total $117,384.”

It may be noted at this stage that the statement in the memorandum that the facility was in the director's name but was “approved to assist payout [of] the Edwards” would appear to be information supplied by Mr Neville McIntyre who, the evidence shows, was in regular contact with the Nelson Bay branch of the Commonwealth Bank at the time.

Under the heading “General and Recommendation” the note/memorandum went on to say:

“Mr McIntyre and his family are experienced hoteliers with an impressive track record and highly regarded by CBA branch management.”

Approval of an advance of $1,000,000 to refinance the existing loan was recommended.  Notations on the memorandum, concluding with one dated 1 April 1993, show that the recommendation was approved.

In connection with the 1990 transactions, the applicants also rely upon the following documentation:

• An equitable mortgage dated 31 August 1990 by Edlan in favour of the Commonwealth Bank signed by Mr Jack McCarthy as director and Mr Auro McIntyre as secretary as witnesses of the affixation of the common seal of Edlan and signed also by these gentlemen personally as “debtors”.  The equitable mortgage is an “all monies” mortgage in the form of a fixed and floating charge.  This is part of exhibit Y1 and there is no reason to doubt its authenticity.

• Cheque number 130001 dated 4 September 1990 drawn by Edlan trading as the Tropicana Hotel/Motel in the sum of $700,000 and signed by M. Tweedie and Mr Jack McCarthy;  that cheque is drawn in favour of Edlan.  This is part of exhibit Y1 and there is no reason to doubt its authenticity. 

• A letter from Westpac written after the institution of these proceedings and dated 3 September 1997 responding to a request to trace several cheques drawn by Edlan and advising as follows:

“We refer to your request to trace three cheques drawn by Edlan No 54 Pty Ltd trading as Tropicana Hotel/Motel on CBA Nelson Bay & advise the following.

Cheque no 130001 for $700,000.00 payable to Edlan No 54 Pty Ltd was processed to the following accounts:

ACCOUNT DETAILS  AMOUNT OF DEPOSIT  ACCOUNT NAME
032274 341597              $188,003.74                 Edlan No 54 Pty Ltd

032274 340105                  $6,519.86                 Edlan No 54 Pty Ltd Farm A/C

732274 092655              $505,476.43                 Edlan No 54 Pty Ltd I.P.L.

Cheque no 130002 payable to Wayne Edwards was included in a deposit to 032274 951336 for $57,875.84 in the name of Wayne Edwards Transport Pty Ltd.

Cheque no 130005 payable to Edlan No 54 Pty Ltd cannot be traced as the trace details supplied are insufficient.”

Although written after the commencement of litigation, there is no reason to doubt the authenticity of this document or its information, so far as it goes. 

• A trial balance for Edlan prepared by Ms Pauline Barker, formerly exhibit F and now also part of exhibit Y1.  The balance is in respect of the period 3 September to 15 October 1990.  Two items should be mentioned under the heading “Capital” where there appears the following items:

“  $
Loan from Commonwealth Trading Bank  (1,002,862)
Edlan No. 54 Pty. Ltd.  700,000
  -do-  Repay Loan       93,037
Capital Investment (Nevitoro)  40,500”

• Cheque number 529993 dated 26 March 1991 drawn on Edlan cheque account with the Commonwealth Bank, Nelson Bay in favour of Wayne Edwards Transport Proprietary Limited for $465,321.65.  The cheque is signed by Ms Barker and "M. Tweedie".  It is endorsed by Mr Edwards in favour of Mr Auro McIntyre. 

• A bank deposit slip issued by the Commonwealth Bank, Nelson Bay branch, showing the deposit on 1 April 1991 of the sum of $465,321.59 into the Edlan account number 2826-0030-4595. 

• A bank statement issued by the Commonwealth Bank, Nelson Bay branch, in respect of Edlan account number 2826-0030-4595 showing that at 2 April 1991 the sum of $465,321.59 was credited to that account but that on the same date that same amount was also debited to that account by cheque 529993.  This bank statement is part of exhibit Y1.  There is no reason to doubt its authenticity.

• A document dated 26 March 1991 purportedly signed by Wayne Edwards in the following terms:

“I, WAYNE EDWARDS of Macquarie Arms Hotel, 99 George Street, Windsor NSW 2756 a director of Wayne Edwards Transport Pty Limited do hereby assign the debt of four hundred and sixty five thousand three hundred and twenty one dollars and fifty nine cents ($465,321.59) owing to Wayne Edwards Transport Pty Limited by Edlan 54 Pty Limited trading as Tropicana Hotel Motel of Rose Street, Wilberforce to Auro Romano McIntyre of 2 Caldy Place, Glenhaven NSW 2156 for the amount of one dollar ($1.00) and hereby acknowledge receipt of same in acknowledgment of the payment of the debt in full to Wayne Edwards Transport Pty Limited.”

This is exhibit Y3.  It is a curious document and one which I treat with caution and scepticism.  As has been noted, it purported to assign a debt said to be owing to Wayne Edwards Transport Pty Limited in the sum of $465,321.59 by Edlan for an amount of $1.  The assignment is in favour of Mr Auro McIntyre.

Mr Edwards was called to give evidence by the applicants.  In his evidence he indicated quite clearly that he had no real knowledge of any of the events now in question.  Certainly no attempt was made to call Mr Auro McIntyre as has already been noted.  There was no other serious attempt made on behalf of the respondents to justify this transaction.  I cannot accept it as having any commercial or other validity. 

• Draft unaudited accounts of Edlan for the period 1 July 1990 to 4 September 1990 prepared by Messrs Ghantous Wilmott and Co, Public Accountants, dated 26 June 1992.  The balance sheet in these draft accounts shows that in the period “this year” one of the receivables of Edlan was an amount owing under an advance made to Nevitoro in the sum of $700,000.  In respect of the period “last year” the comparable amount for that debt is shown as zero. 

  In his evidence Mr Neville McIntyre disputed the writing up of the amount of $700,000 as a receivable owing by Nevitoro but no real basis for disputing that item appears in the evidence, although, of course, the accounts were shown as draft and unaudited.  I accept that so far as Mr Ghantous and his firm were concerned, they made it clear by their disclaimer and by the nature of the accounts that they were not purporting to certify as to any final position.  Nonetheless, I would draw the inference that the material provided to them had as its source, either direct or indirect, Mr Neville McIntyre.

The balance sheet to these accounts as at 4 September 1990 also shows as a current liability a loan from Wayne Edwards Transport Pty Limited under the heading “this year” in the sum of $458,326.34.  In respect of the comparable period “last year” there is a nil entry.  I had already commented on this transaction.

The statutory prohibition against a company financing and dealing in its shares and its consequences

As I have earlier indicated, one of the issues in the cross-claim is whether the statutory prohibition against the company financing and dealing in its own shares is infringed in the present case. This prohibition and its consequences are dealt with by Division 4 of Part 2.4 of the Corporations Law (ss 201-206).  That Division deals with “Maintenance of capital”. 

The statutory prohibition is relevantly as follows: 

“… a company shall not, whether directly or indirectly, give any financial assistance for the purpose of, or in connection with, the acquisition or the proposed acquisition by any person (whether before, or at the same time as, the giving of financial assistance) of shares in the company [s 205(1)].”

The giving of “financial assistance” includes giving financial assistance by means of the making of a loan, the giving of a guarantee, the provision of security, the release of an obligation or the forgiving of a debt or otherwise (s205(2)). 

A company shall be taken to have given financial assistance for the purpose of an acquisition or proposed acquisition (the “relevant purpose”) if:  (a) the company gave the financial assistance for purposes that included the relevant purpose;  and (b) the relevant purpose was a substantial purpose of the giving of the  financial assistance (s 205(3)).

A company shall be taken to have given financial assistance in connection with an acquisition or a proposed acquisition, if when the financial assistance was given to a person, the company was aware that the financial assistance would financially assist the acquisition by a person of shares in the company (s 205(4)(a)).

There are, however, exclusions from the statutory prohibition.  They include the discharge by a company of a liability of the company that was incurred in good faith as the result of a transaction entered into on ordinary commercial terms (s 205(8)(c)).

The statutory consequences of a company financing dealings in its shares etc., are relevantly as follows:  

• Except as provided by s 206, the validity of a contract or transaction is not affected by a contravention of s 205(1)(a) (s 206(1)(a)).

• Where a company makes or performs a contract, or engages in a transaction, that would, but for s 206(1), be invalid by reason that: (a) the contract was made or performed, or the transaction was engaged in, in contravention of s 205; or (b) the contract or transaction is related to (i) a contract that was made or performed; or (ii) a transaction that it was engaged in - in contravention of s 205, then –

the first-mentioned contract or transaction is, subject to the following provisions of s 206, voidable at the option of the company by notice in writing given to each of the other parties to that contract or transaction (s 206(2)).

• Where (a) a company makes or performs a contract or engages in a transaction; (b) the contract is made or performed, or the transaction is engaged in, in contravention of s 205, or the contract or transaction is related to a contract that was made or performed, or to a transaction it was engaged in, in contravention of s 205 and; (c) the Court is satisfied, on the application of the company or of any other person, that the company or that other person has suffered, or is likely to suffer, loss or damage as a result of: (i) the making or performance of the contract or the engaging in of the transaction; or (ii) the making or performance of a related contract or the engaging in of a related transaction; or (iii) the contract or transaction being void by reason of s 205 or having become void, or becoming void, under s 206; or (iv) a related contract or transaction being void by reason of s 205 or having become void, or becoming void, under s 206, then –

the Court may make such order or orders as it thinks just and equitable (including, without limiting the generality of the foregoing, all or any of the orders in s 206(5) (see below) against any party to the contract or transaction or to the related contract or transaction, or against the company or against any person who aided, abetted, counselled or procured, or was, by act or omission in any way, directly or indirectly, knowingly concerned in or a party to the transaction (s 206(4)).

Examples of the orders that may be made under s 206(5) are:

(a)An order directing a person to refund money or return property to the company or to another person;

(b)An order directing a person to pay to the company or to any other person a specified amount not exceeding the amount of the loss or damage suffered by the company or other person;  and

(c)An order directing a person to indemnify the company or any other person against any loss or damage that the company or other person may suffer as a result of the contract or transaction or as a result of the contract or transaction being or having become void (s 206(5)).

The Court's power under s 1318 to relieve a person from liability extends to relief against an order that may be made under s 206(4) (s 206(13)).

If a company makes a contract or engages in a transaction under which it gives financial assistance as mentioned in s 205(1)(a), any contract or transaction made or engaged in as a result of, or by means of, or in relation to, that financial assistance, shall be deemed, for the purpose of s 206, to be related to the first-mentioned contract or transaction (s 206(14)).

Any rights or liabilities of a person under s 206 (including those under an order made by a Court under s 206) are in addition to and not in derogation of any rights or liabilities of that person apart from s 206 but, where there would be any inconsistency, the provisions of s 206, or of the Court order, prevail (s206(15)).

Conclusions on the cross-claim

As I have earlier indicated, the real issues on the cross-claim appear to turn on, first, the true character of the advance by Nevitoro.  On behalf of the applicant, it is submitted that this transaction should be viewed in a broader context and in truth it should be treated as no more than an arrangement between the parties with a view to discharging the personal joint obligations of Mr Jack McCarthy and Mr McIntyre to the Commonwealth Bank. 

I am certainly prepared to accept and, indeed, have previously observed that it is essential to bear in mind the full context of all and any of the arrangements between these parties.  But I cannot accept that there is any basis in any of the evidence for attributing to the parties an  intention that is in any way at variance with that expressed in clauses 6.1, 6.2 and 6.3 of the deed of settlement. 

It will be recalled that it was under those provisions that Nevitoro agreed to advance the sum of $360,000 and further agreed to advance to Mr McCarthy the sum of $100,000.  So far as the latter advance is concerned, although it may be viewed in a sense as a free standing transaction, it is of interest, at least, to note that it is common ground that Mr McCarthy had repaid that amount. 

I bear in mind also that at the time the deed of settlement was executed, that is in August 1993, the parties were well aware of the need to exercise some care and caution coupled with resort to professional advice on both sides of the record in the framing of the language of the deed of settlement.  The transaction in question, that is to say the agreement that Nevitoro would make an advance to Edlan, is simple and straightforward enough and I see no basis for inferring, certainly in the case of businessmen of the experience of these parties, that there could be any room for error as to the nature of the transaction.

In my opinion, clause 6 was intended to mean what it said and I conclude that its true character was as stated in those provisions. 

It was then said on behalf of the applicants that the Court should infer that even if there was an agreement to advance the monies to Edlan, they were not in fact advanced.  In this contention, the applicants must bear the usual burden of proof.  I see no reason to assume that the parties in this respect - and I acknowledge there are difficulties in other areas - were not able to give effect to their intention in the way their language clearly indicated.

I would not exclude the possibility, of course, given the myriad of transaction between these parties, including many of a cash character, that the parties may not have made arrangements for a payment to be made in a particular way or for there to be contra or set off amounts allowed.  Nevertheless I am satisfied that it was not only agreed that Nevitoro would advance Edlan the sum of $360,000, I am further satisfied that it was advanced in one form or another.  It is common ground that Edlan has not repaid that amount. 

The other matter of defence to the cross-claim arises out of the plea that this amounts to the giving of unlawful financial assistance.  As has been noted, the defence seeks to use as a platform in this area the 1990 transaction contending, as I had said, that the grant of the original equitable mortgage to the Commonwealth Bank by Edlan to secure the loan to Mr Auro McIntyre and Mr Jack McCarthy was used to discharge their obligations to Mr and Mrs Edwards. 

I am prepared to accept, at least for the purpose of the argument, that this transaction, that is to say, the provision of security by Edlan in this context, did amount to the grant of unlawful "financial assistance" within the meaning of s 205 with the consequences stipulated in s 206 that I have set out. But that transaction is not itself, of course, in issue in any immediate sense. The argument of the applicant is rather, as I have mentioned, that this transaction is used as a platform upon which to launch a challenge to the 1993 transaction.

For this purpose I am prepared to accept that there is some, although I think not substantial, connection between the two transactions.  The connection, as I see it, is purely historical. 

There is, as I have noted, a deeming provision in the Corporations Law which deems transactions to be "related" in the circumstances I have mentioned but, in my view, there is no substantial connection between the 1990 mortgage by Edlan to the Commonwealth Bank and the making of the advance of $360,000 by Nevitoro to Edlan pursuant to the deed of settlement.

It must follow, in my opinion, that the provisions of s 205 and s 206 of the Corporations Law provide no answer to the cross-claim.  I therefore order that Edlan pay Nevitoro the sum of $360,000, together with interest at the contractual rate there provided until the date of judgment. 

Conclusions on the Riverview Lodge claim

As has been noted, the real issues now remaining on this claim are whether the defences as raised by Mr Auro McIntyre in his amended statement of facts, issues and contentions are made out.  They are two in number.  The first is payment.  The evidence of payment was provided by the testimony of Mr Neville McIntyre.  As has been noted, Mr Auro McIntyre did not give evidence. 

In his testimony, Mr Neville McIntyre was unable to indicate the circumstances of the payment.  He said it was by cash or by cheque but no details could be provided.  I cannot accept this evidence on its face given by a party with such an obvious interest in the outcome of the proceeding. 

An attempt was made on behalf of the respondents to gain comfort in this connection from the circumstance that the trial balance prepared by Ms Barker to which I had referred contained a reference to a payment of $40,500 made to Edlan by cheque or cash either from Nevitoro or Mr Neville McIntyre in about October 1990.  But I agree with the submission of counsel for the applicants that this evidence is quite speculative and should be rejected.  An examination of that trial balance indicates that this amount was recorded as an asset or a payment by Edlan to Nevitoro rather than a payment by Nevitoro as alleged by Mr McIntyre. 

The second defence is a release, and that defence depends, as I have already indicated, upon the terms of clause 12 of the deed of settlement.  That clause is in the following terms and it is part of exhibit Y1:

“12.     MUTUAL RELEASES

12.1[Auro Romano McIntyre, Neville McIntyre, Cheryl Gai McIntyre, Itala McIntyre] and Nevitoro hereby releases Edlan, [Ronald Ian McCarthy] and [Maxwell McCarthy] to the full extent permitted by law from and against any claim, action, judgment, damages, loss, costs, expenses or liabilities whatsoever that [Auro Romano McIntyre, Neville McIntyre, Cheryl Gai McIntyre, Itala McIntyre] and Nevitoro might now and hereinafter maintain against Edlan, [Ronald Ian McCarthy] and [Maxwell McCarthy] and [Auro Romano McIntyre, Neville McIntyre, Cheryl Gai McIntyre, Itala McIntyre] and Nevitoro guarantee and agree to hold Edlan, [Ronald Ian McCarthy] and [Maxwell McCarthy] harmless and indemnified against and from all actions, suits, claims, demands, verdicts, judgments, costs and expenses, legal and otherwise and of any time which have arisen or may hereafter arise from the ownership of the entire issued share capital of Edlan other than claims, actions, judgments, damages, loss, costs, expenses or liabilities arising out of the Edlan No. 54 Pty Limited Share Sale Agreement referred to in clause 3.1 hereof.

12.2Edlan, [Ronald Ian McCarthy] and [Maxwell McCarthy] hereby release [Auro Romano McIntyre, Neville McIntyre, Cheryl Gai McIntyre, Itala McIntyre] and Nevitoro to the full extent permitted by law from and against any claim, action, judgment, damages, loss, costs, expenses or liabilities whatsoever that Edlan, [Ronald Ian McCarthy] and [Maxwell McCarthy] might now and hereinafter maintain against [Auro Romano McIntyre, Neville McIntyre, Cheryl Gai McIntyre, Itala McIntyre] and Nevitoro and Edlan, [Ronald Ian McCarthy and Maxwell McCarthy] guarantee and agree to hold [Auro Romano McIntyre, Cheryl Gai McIntyre, Neville McIntyre, Itala McIntyre] and Nevitoro harmless and indemnified against and from all action, suits, claims, demands, verdicts, judgments, costs and expenses legal and otherwise and at any time which have arisen or may hereafter arise from the ownership of the entire issued share capital of Edlan other than claims, actions, judgments, damages, loss, costs, expenses or liabilities arising out of the Edlan No. 54 Pty Limited Share Sale Agreement referred to in clause 3.1 hereof.”

The meaning of this provision may not be entirely beyond doubt or argument, but in my view its operation is qualified by the words “arise from the ownership of the entire issued share capital of Edlan”.  In my opinion, the present claim does not so arise;  rather, it arises out of the transfer of the Riverview Lodge property, something that was contemplated by clause 3(a) of the 1990 share sale agreement.  However, as a matter of characterisation, it is not a matter that arises from the ownership of those shares.  Rather, it should be characterised as a collateral transaction standing outside the sale of the shares.

The context of clause 3(a) of the share sale agreement will be recalled.  The exception there expressed was so expressed because in clause 3 a warranty was given as to the assets of the company as described in the balance sheet.  For that reason, the Riverview Lodge property was excepted on the footing there described. 

In my opinion Mr Auro McIntyre has failed to make out a defence to this claim by Edlan.

Orders

1. On the “Riverview Lodge” claim order that Mr Auro McIntyre pay Edlan No. 54 Pty Limited the sum of $505,476.43.  Liberty to Edlan No. 54 Pty Limited to apply for interest.  Application otherwise dismissed.

1. On the cross-claim, order that Edlan No. 54 Pty Limited pay Nevitoro Investments Pty Limited the sum of $360,000 together with interest in accordance with the terms of the contract.

1. Costs reserved.  Liberty to file written submissions.

1. Suspend the operation of these orders for 60 days.

1. Extend time for filing and serving notice of appeal up to and including 2 December 1998.

I certify that this and the preceding twenty-five (25) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Beaumont

Acting Associate:

Dated:             11 September 1998

Counsel for the Applicant:	Mr B Coles QC with Mr M Ashhurst
Solicitor for the Applicant:	Hunt Partners
Counsel for the Respondent:	Mr P Biscoe QC with Mr J Stephenson
Solicitor for the Respondent:	K A Garling
Date of Hearing:	25 and 26 June 1998 and 8, 9 and 10 July 1998
Date of Judgment:	11 September 1998