Milfoil Pty Ltd v Commonwealth Bank of Australia Ltd
[2019] VSC 504
•29 July 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
Commercial Court
COMMERCIAL LIST
S CI 2013 05109
| MILFOIL PTY LTD | Plaintiff |
| v | |
| COMMONWEALTH BANK OF AUSTRALIA LTD (ACN 123 123 124) | Defendant |
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JUDGE: | Lyons J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 12–16, 19–21 and 27 November 2018 |
FURTHER SUBMISSIONS: | 15 May 2019 |
DATE OF JUDGMENT: | 29 July 2019 |
CASE MAY BE CITED AS: | Milfoil Pty Ltd v Commonwealth Bank of Australia Ltd |
MEDIUM NEUTRAL CITATION: | [2019] VSC 504 |
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EQUITY – Trusts – Breach of trust – Knowing receipt – No liability if property received ‘ministerially‘ as agent
EQUITY – Trusts – Inconsistent dealing with trust property by agent – Requirement of knowledge – When knowledge acquired – Baden categories (iii) and (iv) sufficient
EQUITY – Unclean hands – Relevant conduct making allegations in proceeding not established – Whether depravity in legal and moral sense – Whether immediate and necessary connection to equity relied on – No unclean hands
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr C R Northrop | Goldsmiths Lawyers |
| For the Defendant | Mr P J Bick QC with Dr A P Trichardt | Clayton Utz |
TABLE OF CONTENTS
1... SUMMARY................................................................................................................................... 1
2... ISSUES FOR DETERMINATION............................................................................................ 5
3... EFFECT OF THE PASSAGE OF TIME.................................................................................... 7
4... MILFOIL AND MR REYNOLDS.............................................................................................. 7
5... THE CBA WITNESSES............................................................................................................ 12
5.1.... Mr Barbagallo..................................................................................................................... 12
5.2.... Ms Dunlop.......................................................................................................................... 13
6... FINANCIAL POSITION OF MERCURY BY MID 2009..................................................... 14
7... THE MILFOIL AGREEMENT................................................................................................. 16
7.1.... Background to the Milfoil agreement............................................................................ 16
7.2.... The 2 July meeting............................................................................................................. 17
7.3.... 3 July 2009........................................................................................................................... 22
7.4.... Conclusions on the Milfoil agreement........................................................................... 30
7.5.... Balance of July.................................................................................................................... 31
8... THE EVENTS OF 10 AUGUST 2009....................................................................................... 32
8.1.... Contemporaneous documents........................................................................................ 32
8.2.... Meetings at Mercury......................................................................................................... 34
8.2.1... Mr Reynolds’ evidence......................................................................................... 35
8.2.2... Ms Dunlop’s evidence......................................................................................... 39
8.2.3... Conclusions on the Mercury meetings............................................................... 43
8.3.... The 10 August conversation............................................................................................ 44
8.3.1... Mr Reynolds’ evidence......................................................................................... 44
8.3.2... Steven’s evidence................................................................................................... 52
8.3.3... Ms Dunlop’s evidence.......................................................................................... 53
8.3.4... Mr Barbagallo’s evidence..................................................................................... 54
8.3.5... Mr Vincent’s evidence.......................................................................................... 58
8.3.6... Other relevant evidence....................................................................................... 59
8.3.7... Conclusions on the 10 August conversation..................................................... 64
9... EVENTS IN AUGUST AFTER THE 10 AUGUST CONVERSATION............................ 69
9.1.... Milfoil communications................................................................................................... 69
9.2.... CBA enforcing security..................................................................................................... 71
10. EARLY SEPTEMBER................................................................................................................ 72
10.1.. Attempting to identify the Milfoil stock........................................................................ 72
10.2.. Early version of the RWP................................................................................................. 78
11. SEPTEMBER AND THE RWP................................................................................................ 80
11.1.. Administrators and receivers appointed....................................................................... 80
11.2.. Milfoil correspondence..................................................................................................... 81
10.3.. The RWP............................................................................................................................. 86
12. THE SALE AGREEMENT........................................................................................................ 90
12.1.. The Excluded Debts.......................................................................................................... 90
12.2.. Implementing the Sale Agreement................................................................................. 95
12.3.. Milfoil correspondence after the Sale Agreement........................................................ 97
13. PAYMENT OF THE MILFOIL STOCK................................................................................. 99
13.1.. Process undertaken by the CBA...................................................................................... 99
13.2.. The 5 and 7 October payments...................................................................................... 101
13.3.. Other amounts swept to AHT....................................................................................... 103
13.4.. Other Ed Harry amounts paid to AHT........................................................................ 104
14. EARLY OCTOBER TO DECEMBER 2009.......................................................................... 104
14.1.. The CBA letters................................................................................................................ 104
14.2.. Early October................................................................................................................... 105
14.3.. Disputes concerning Milfoil entitlement..................................................................... 107
15. FEDERAL COURT PROCEEDING...................................................................................... 112
16. THIS PROCEEDING............................................................................................................... 116
17. ISSUE 1....................................................................................................................................... 118
18. ISSUE 2....................................................................................................................................... 119
18.1.. The submissions.............................................................................................................. 119
18.2.. The law.............................................................................................................................. 121
18.3.. Analysis............................................................................................................................. 122
19. ISSUE 3....................................................................................................................................... 123
20. ISSUE 4....................................................................................................................................... 123
21. ISSUE 5....................................................................................................................................... 125
22. ISSUE 6....................................................................................................................................... 126
22.1.. The submissions.............................................................................................................. 126
22.2.1. Barnes v Addy...................................................................................................... 130
22.2.2. Receipt................................................................................................................... 132
22.2.3 Inconsistent dealing............................................................................................ 136
22.3.. Analysis: Were proceeds of sale of stock received by the CBA?............................. 140
22.3.1 Proceeds of sale of stock purchased with the Milfoil advance.................... 140
22.3.2 Proceeds of sale of stock in the RWP............................................................... 141
22.3.3 Liability for knowing receipt............................................................................ 143
22.4.. Analysis: Did the CBA knowingly sweep the RWP sale proceeds to AHT?......... 144
23. ISSUE 7....................................................................................................................................... 148
24. ISSUE 8....................................................................................................................................... 148
24.1.. The submissions.............................................................................................................. 148
24.2.. The law.............................................................................................................................. 149
24.3.. Analysis............................................................................................................................. 151
25. ISSUE 9....................................................................................................................................... 152
26. CONCLUSION......................................................................................................................... 153
HIS HONOUR:
1 SUMMARY
In mid-2009, the Mercury Group (‘Mercury’), which was in the business of importing and distributing clothing to major retailers, was in financial difficulty. Its principal banker, the defendant (‘CBA’), had been progressively reducing finance available to Mercury. Mercury was unable to obtain alternative finance. As a result, Mercury was unable to pay its overseas suppliers for stock it had ordered.
In early July 2009, the plaintiff (‘Milfoil’) agreed to advance approximately $500,000 to Mercury Brands Group Pty Ltd (‘MBG’)[1] in order for stock to be released from 13 of Mercury’s overseas suppliers. To ensure that Milfoil’s position was protected in light of Mercury’s financial position, it was agreed that:
[1]The parent company was Mercury Brands Ltd (‘MBL’). Its main subsidiary was MBG which was the trading company. In these reasons I will refer to MBL and MBG as ‘Mercury’ unless otherwise necessary.
(1) Milfoil would purchase the stock from the overseas suppliers with the advance: the stock would be invoiced to, and the property of, Milfoil;
(2) Mercury would then arrange for the stock to be kept separate and delivered to its retail customers, with the customers to make payments to Milfoil; and
(3) the proceeds of sale of the stock received by Milfoil would first be applied in repayment of the advance, interest and costs, with the balance of the proceeds and/or the remaining stock then released to Mercury.
In accordance with that agreement, on 3 July 2009, Milfoil paid $509,471.16 (including bank charges) (the ‘Milfoil advance’) to 13 of Mercury’s Chinese suppliers.
Two issues soon arose after that payment was made which have given rise to disputes from early August 2009 and which have led to this and other proceedings. First, the stock purchased with the Milfoil advance was not invoiced to Milfoil, and was not identified and kept separate by Mercury. Second, Mercury’s customers were not directed to make payments to Milfoil. The result was that Mercury received any proceeds of sale of the stock purchased with the Milfoil advance into accounts of Mercury with CBA.
As a result of its financial difficulties, the board of MBG appointed a voluntary administrator on 17 September 2009. The next day, the CBA appointed receivers and managers to MBG and MBL. Mercury’s business was then sold by the administrator to Australian Horizons Pty Ltd (‘AHT’) on 1 October 2009.
Other than interest payments for July and August 2009,[2] Milfoil only received $92,000 before the appointment of the administrator. It has only received $57,000 since that time. This was obtained after the administrator sought directions from the Federal Court as to whether Milfoil was entitled to some of the moneys received from Mercury’s customers (the ‘Federal Court proceeding’).[3]
[2]$3,888.73 on 30 July 2009 and $4,929.38 on 27 August 2009.
[3] As set out below, in the course of the Federal Court proceeding, findings were made which bind the parties in this proceeding.
This proceeding was issued in 2013. The claims made in the proceeding have changed over time. Originally, Milfoil’s claim was for the proceeds of sale of the stock purchased and recorded in a Reconciliation Working Paper (the ‘RWP’) in the sum of $606,896.66. The RWP was prepared and circulated in late September 2009 in an attempt to identify the stock purchased with the Milfoil advance. Its inaccuracies have bedevilled the parties since that time.
In 2015, Milfoil amended its claim to include additional stock allegedly purchased with the Milfoil advance with a wholesale value of at least $2,043,250[4] from the Chinese suppliers and with a retail value to Mercury of at least $3,090,538[5] (collectively the ‘2015 amendments’). The trial was conducted on that basis. However, in final address, Milfoil sought only to recover from the CBA the unpaid portion of the Milfoil advance.
[4]This sum was ultimately listed in Schedule A to the third amended statement of claim (‘Schedule A’).
[5]This sum was ultimately listed in Schedule B to the third amended statement of claim (‘Schedule B’).
The underlying basis of Milfoil’s claim has always been that the CBA received the proceeds of sale of the stock purchased with the Milfoil advance with knowledge of Milfoil’s interest in that stock. This was on the basis that the proceeds of sale of the stock purchased with the Milfoil advance were deposited into Mercury’s accounts with the CBA.
Milfoil alleges that the CBA first became aware of its interest in a conversation between Mr Terrence Reynolds (known as ‘Terry’) of Milfoil and Mr Salvatore Barbagallo (known as ‘Sam’) of the CBA on 10 August 2009. What was discussed during that conversation was the major factual dispute at the trial.
Milfoil also alleges that the CBA became aware of its interest in a series of communications in late September and early October 2009. At that time, the CBA, the administrator and the receivers were involved in negotiations for the sale of Mercury’s business to AHT. The sale agreement was executed on 1 October 2009 (the ‘Sale Agreement’). By this time, it is not disputed that the CBA was aware of the RWP.
Under the Sale Agreement, AHT purchased all of the assets of the business of MBG for an amount which ensured all the money Mercury owed to the CBA would be repaid (approximately $2.2 million). The assets sold included the debts owing by Mercury customers: but the amounts owed to Milfoil by Mercury customers were ‘Excluded Assets’ and remained the property of Milfoil. Milfoil submitted that, after the Sale Agreement, the CBA paid or ‘swept’ across the proceeds of sale of the stock purchased with the Milfoil advance to AHT.
The CBA relied upon a number of defences in response to the claims made by Milfoil as a result of the 2015 amendments. Many of the those defences have fallen away by reason of the nature of the limited claim pursued by Milfoil in final submissions. These included:
(1) Milfoil has not proved that the stock referred to in Schedule A that was not also in the RWP was the property of Milfoil or that any of the payments in Schedule B were the proceeds of sale of stock purchased with the Milfoil advance;
(2) claiming the stock referred to in Schedule A or the proceeds of sale in Schedule B was an unenforceable penalty; and
(3) claiming that Milfoil is estopped from alleging it is entitled to any stock other than that referred to in the RWP.
However, relevantly, the CBA has always maintained:
(1) it was not informed of Milfoil’s interest in the proceeds of sale of stock purchased with the Milfoil advance in Mr Reynolds’ conversation with Mr Barbagallo on 10 August 2009;
(2) while the CBA was aware of the RWP in late September and early October 2009, it disputes that the RWP gave it sufficient notice of Milfoil’s interest in any particular proceeds of sale the CBA received; and
(3) Milfoil has not established that the proceeds of sale of the stock purchased with the Milfoil advance as recorded in the RWP were received by or deposited with CBA, particularly that the CBA received these proceeds after the appointment of the administrator.
Further, the CBA contends in recent amendments that:
(1) Milfoil has ‘unclean hands’ by claiming the stock in Schedule A and the proceeds of sale of the stock in Schedule B (not pursued in final address), which should preclude any equitable relief; and
(2) the CBA should be excused from any liability for breach of trust (if established) pursuant to s 67 of the Trustee Act1958 (Vic) (the ‘Trustee Act’).
For the reasons that follow, I have concluded that:
(1) the CBA was informed that Milfoil had an interest in stock purchased with the Milfoil advance in Mr Reynolds’ conversation with Mr Barbagallo on 10 August 2009 but insufficient information was given to the CBA at that time to identify the proceeds of sale in any meaningful way;
(2) Milfoil has not established that all of the proceeds of the sale of the stock recorded in the RWP were received by, or deposited with, the CBA;
(3) the CBA did not ‘receive’ the proceeds of sale of stock purchased with the Milfoil advance recorded in the RWP for the purpose of a claim of knowing receipt;
(4) Milfoil has established that some of the proceeds of sale of stock purchased with the Milfoil advance recorded in the RWP in the sum of $31,432.78, were deposited with the CBA and that CBA swept those proceeds to AHT; and
(5) however, based upon the information available to the CBA at the time of that payment to AHT, Milfoil has not established that CBA made that payment ‘knowingly’, for the purposes of a claim for inconsistent dealing.
As a result, it is not necessary for me to determine whether Milfoil should be disentitled to relief based on the ‘unclean hands’ defence or whether the CBA should be relieved of any liability by reason of s 67 of the Trustee Act. However, for completeness, I have concluded that essential elements of the unclean hands defence have not been made out.
2 ISSUES FOR DETERMINATION
I asked the parties to confer about the list of issues or questions to be determined in this proceeding in light of the changes to the plaintiff’s case in the final address. The parties submitted two slightly different versions. I considered those two versions and concluded that the following issues are for determination:
1 In respect of the July agreement between MBG and Milfoil alleged in paragraph 8 of the current statement of claim:
(1) what were the terms found by Finkelstein J in the previous judgments in the Federal Court Proceeding? and
(2) which of the terms alleged in paragraph 9(a) to (e) and (g) of the current statement of claim have been established by the evidence?
2 Was the CBA aware of Milfoil’s interest in the stock purchased and/or released by the Milfoil advance, or the proceeds of sale thereof, on 10 August 2009? If so, was the CBA given sufficient information to identify that stock or the proceeds of sale thereof? 3 If yes to question 2:
(1) did the CBA receive those proceeds of sale?
(2) if so, is a constructive trust imposed on the CBA in respect of such proceeds and if so, did the CBA breach that trust by appropriating any and which of those proceeds for its own benefit?
4 Was CBA made aware of Milfoil’s interest in the stock purchased and/or released by the Milfoil advance or the proceeds of sale thereof in late September and/or early October 2009:
(1) by receipt by the CBA of the RWP made available in the negotiations of the Sale Agreement and/or of the letters dated 2 and 6 October 2009?
(2) by receipt by the administrator of the letters dated 23 September, 28 September and 30 September 2009 enclosing the RWP and otherwise by the RWP being made available in the negotiations of the Sale Agreement?
(3) by receipt by the receivers of the letters dated 29 September 2009, and dated 29 September but sent on 30 September 2009 enclosing the RWP and otherwise by the RWP being made available in the negotiations of the Sale Agreement?
5 If yes to question 4, was the CBA given sufficient information in the RWP to identify that stock or the proceeds of sale thereof? 6 If yes to question 5:
(1) did the CBA receive proceeds of sale of stock listed in the RWP?
(2) if so, is a constructive trust imposed on the CBA in respect of such proceeds and, if so, did the CBA breach that trust by appropriating any and which of those proceeds for its own benefit?
7 If yes to any part of questions 3(2) or 6(2), is Milfoil entitled to equitable compensation in the sum of $486,574.34 or any lesser sum plus any and what interest paid by Milfoil to the Westpac bank to fund the Milfoil advance? 8 Does Milfoil come to Court with ‘unclean hands’ as alleged in paragraph 47A of the current defence which would disentitle it to the equitable compensation referred to in question 7? 9 If yes to question 3(2) and/or 6(2), should the CBA be excused for any breach of trust pursuant to s 67 of the Trustee Act 1958 (Vic)?
The CBA sought to include an additional issue in relation its awareness referred to in issues 2 and 4. It sought to have addressed whether Milfoil pleaded, and/or was permitted to advance, a case of knowledge based on Baden[6] categories (ii) and (iv). I will deal with these matters as part of issues 2 and 6.
[6]Baden v SG Développement du Commerce SA [1992] 4 All ER 161 (‘Baden’).
Further as I set out in section 22 below, in the course of drafting these reasons, I noted a related basis of liability for knowing receipt, namely, liability of an agent who knowingly deals with trust property inconsistently with the terms of the trust. I sought further submissions from the parties about the basis of this liability and its application if any to the facts of this case. Those submissions were received on 15 May 2019. Although I have not altered the list of issues to be determined set out above, that related basis of liability is addressed in response to issue 6.
3 EFFECT OF THE PASSAGE OF TIME
Before I deal with the chronology and findings of fact, it is important to note, as is evident from the list of issues to be determined, that most of the relevant events took place almost 10 years ago. Indeed the content of conversations, and beliefs held, in the period between July and December 2009 were the subject of detailed cross-examination at trial. It is difficult to recall with any precision what someone said, what someone heard or what someone believed all that time ago. Common experience tells us that the more significant the issue is to a person, the more likely it is that he or she will recall the event, even after a long period of time.
However, it is important to acknowledge too that in such circumstances a person’s recollection can be coloured by emotion. That seems particularly true in this case. On the one hand, Mr Reynolds and his family are clearly emotionally involved in, and impacted by, the subject matter of these proceedings. On the other hand, the allegations affect the professional reputations of many of the CBA witnesses: indeed some have been interviewed by Victoria Police in relation to these events.
As a result, I have relied very much upon the contemporaneous documents in making my findings of fact and in deciding the likely contents of conversations or beliefs of the witnesses during this period.
4 MILFOIL AND MR REYNOLDS
Milfoil is controlled by Mr Reynolds. Milfoil is the trustee of the Reynolds Family Trust. The Reynolds family consists of Mr Reynolds, his wife Eleanor and their three children: Michael, Steven and Helen. Steven was employed by Mercury on about 20 May 2009.
Mr Reynolds is the driving force behind this proceeding. He holds a bachelor’s degree in Banking and Finance from Monash University. He is a Fellow and Honorary Life Member of the Financial Services Institute of Australasia, formally the Australasian Institute of Bankers.
Mr Reynolds commenced working for the Bank of New South Wales in 1961, aged 15. He continued to work with the Bank of New South Wales until 1980. From that time, he was employed by finance companies that were owned by the Bank of New South Wales which became Westpac in 1983. In 1980, he was appointed the State Manager, Trade Finance for AGC Ltd. In 1984, he was appointed the State Credit Manager of the Business Division of AGC Ltd. From 1985 to 1991, he was the Senior Corporate Manager of Bill Acceptance Corporation Ltd. For several years, Mr Reynolds was the first staff elected trustee of Westpac’s AGC/BAC staff super fund.
From 1991 until his retirement in 2002, he worked as a consultant in banking finance and politics. From about 2002 to about 2006, he worked as a lecturer and tutor in banking (money and capital markets) at Deakin University. In his career Mr Reynolds acquired knowledge of bank and finance facilities. He also became aware of how goods were imported into Australia from overseas.
Mr Reynolds gave evidence that he did not invest in the share market. His only investments, including those made through Milfoil, were a couple of houses which he managed.
Mr Reynolds was cross-examined over 4 days. His credit was severely attacked. He was shown documents from 2008 until 2016 relating to his involvement in the events which are the subject of this proceeding. It was put him that some of those documents were fabricated and that others contained statements that were knowingly false, all for the purposes of advancing Milfoil’s interests. It was put in substance that Mr Reynolds was a deluded man obsessed by the loss of the Milfoil advance who lied in order to succeed in this proceeding.
As a result of that cross-examination, I formed the following views about him. Mr Reynolds is an intelligent and proud man who values his knowledge of finance and commerce. He is confident in his own abilities. However, he overemphasizes his knowledge, his abilities and his importance.
This is sometimes to an alarming degree. For example, in his email to the Fraud Squad dated 19 January 2012, Mr Reynolds stated:
It was me alone that stopped the wholesale banking collapse in 1991 and gave us 20 great years of economic recovery. It was me who led Wayne Swan through what could have been another banking collapse in 2008 with the GFC.
In cross-examination, Mr Reynolds maintains this was true. I have no real evidence about the extent of Mr Reynolds involvement in events in 1991 and 2008. However, if it were true that he ‘alone’ stopped the wholesale banking collapse in 1991 or that he ‘led Wayne Swan‘ in relation to the GFC, it is something that is likely to be in the public domain. I have very much taken into account the fact that Mr Reynolds overemphasises his knowledge and his abilities, and his importance in forming a view about his evidence.
As I said, he is very much the driving force of this proceeding and of investigating the events giving rise to it. This is because he very much feels that he is the victim of an injustice by reason of being unable to recover the funds which Milfoil advanced to Mercury in July 2009. The advance was a significant amount of money to someone in the position of Mr Reynolds. He has only been repaid a small part of it. This is in circumstances where:
(1) Milfoil was unable to pursue Mercury which was placed into administration in September 2009, became subject to a deed of company arrangement in November 2009 and was placed into liquidation in April 2011;
(2) the CBA received all the debts it was owed by Mercury under the Sale Agreement;
(3) in the Federal Court proceeding, Milfoil obtained a judgment for the payment of approximately $295,000 plus costs on an indemnity basis but only received approximately $57,000.
In these circumstances, I can understand Mr Reynolds’ sense of injustice. However, in my view, his sense of injustice and his general nature led him to writing intemperate correspondence.
Further, it led him to making allegations against officers and employees of Mercury, the administrators and the CBA. From 2010, he insisted that the Fraud Squad of the Victoria Police investigate the circumstances giving rise to this proceeding and charge relevant officers of the CBA, in particular, Mr Barbagallo. This resulted in a number of the witnesses in this proceeding having to make statements to Victoria Police in the course of that investigation which lasted until 2016. No charges were ever laid.
The making of these complaints was the subject of much criticism of Mr Reynolds in cross-examination. Mr Reynolds wanted Victoria Police to investigate the circumstances giving rise to this proceeding because he believed, and still believes, that the CBA has in effect stolen the stock, or the price paid for that stock by customers, purchased with Milfoil funds. This is because he believes that by paying the $509,000, the Chinese suppliers released stock that had a value of in excess of about $2 million and was sold for about $3.5 million. However, on the evidence before me, there is a basis for Mr Reynolds to believe that the stock purchased with the Milfoil advance was worth more than $509,000: perhaps two or three times that amount. I will deal with that evidence further below.
Counsel for the CBA stated that Mr Reynolds made up evidence not only about his own achievements but also about aspects of this claim, both in documents prepared from 2009 and in the witness box. Counsel for the CBA referred to this politely as ‘gilding the lily’. I agree that Mr Reynolds has very much overstated his achievements and has exaggerated and overstated his or Milfoil’s position in order to obtain repayment of the Milfoil advance.
For example, in his letter to the administrator dated 28 September 2009 and the receivers dated 29 September 2009, Mr Reynolds stated ‘we hold copies of pro forma invoices for each transaction’ i.e. for each of the 13 Chinese suppliers paid with the Milfoil advance. Based on the evidence before me, that statement was not true in respect of most of the transactions. In cross-examination, Mr Reynolds acknowledged that this was the case and that this statement had the potential to mislead the administrator and the receivers. It is noteworthy that on this and other occasions Mr Reynolds was prepared to make admissions which appeared against his interests.
Notwithstanding that Mr Reynolds exaggerated and overstated the position at times, I do not consider that Mr Reynolds is a witness who cannot be believed at all. Rather, I think these statements and his evidence as a whole need to be viewed very carefully in light of these matters, which, in my view, resulted in part from his sense of grave injustice and of desperation as time went by in 2009 when he was not repaid the Milfoil advance. None of this should be read as accepting or condoning the exaggerations and overstatements made by Mr Reynolds during this period. However, they are factors to be taken into account in assessing his statements and evidence as a whole.
In short, I have been careful to assess and consider Mr Reynolds’ evidence in light of contemporaneous information and documents before accepting that evidence.
Further, in cross-examination, much was made of the fact that many of the factual matters contained in his witness statement in this proceeding about relevant events were not included in Mr Reynolds’ affidavit sworn 23 February 2010 in the Federal Court proceeding (the ‘23 February 2010 affidavit’). Again, it was suggested that some of the new matters raised were fabricated to support Milfoil’s claim in this proceeding, for example, the matters set out in [13]–[17] and [19] of his witness statement.Mr Reynolds disputed this.
It is true that the account of Mr Reynolds in his witness statement is more detailed than the account set out his 23 February 2010 affidavit. In oral evidence Mr Reynolds explained this was because his 23 February 2010 affidavit was prepared in haste given the time constraints imposed in the Federal Court proceeding. He said that the Federal Court proceeding was served in late December 2009 and he was unable to see a lawyer in January 2010. Mr Reynolds then fell unwell with the shingles. He said he prepared a 30 page affidavit in about three days which was then cut down by his counsel. I generally accept that explanation. I have also had regard to the different nature of this proceeding and the Federal Court proceeding.
In cross-examination, Mr Reynolds was asked whether he blamed everybody but himself for his failure to recover the Milfoil advance. He replied that in hindsight it looked like a foolish decision and that he was embarrassed by it. It was a candid and difficult admission for a proud man like Mr Reynolds.
5 THE CBA WITNESSES
As I said above, the allegations in this proceeding affect the professional reputations of many of the CBA witnesses: indeed some have been interviewed by Victoria Police in relation to these events. The CBA witnesses to the key conversations on 10 August 2009 were Mr Barbagallo and Ms Dunlop. It is appropriate I say something about their evidence at this stage.
5.1 Mr Barbagallo
Mr Barbagallo is and was at the relevant time a senior executive at the CBA. In his evidence, he set out his limited recollection of the relevant events in 2009. However, once again, he disputed many aspects of the version of events of Mr Reynolds. Some occasions when he did so were understandable, others less so.
For example, he maintained that he never heard of Milfoil (as opposed to Mr Reynolds) before he received a letter of complaint dated 26 October 2009. This is notwithstanding he received an email about Milfoil and its strategy the day after his ‘strange’ phone call with Mr Reynolds on 10 August 2009. Further it is notwithstanding that he oversaw the negotiations of the Sale Agreement which expressly provided that the debts owed to Milfoil were excluded from the assets assigned to AHT.
Mr Barbagallo was reluctant to make sensible admissions about his role. For example, he reluctantly agreed that, if he was aware of the Milfoil agreement, it would have adversely affected the CBA’s ability to recoup what was owing to it. Further, Mr Barbagallo sought in his evidence to convey that he took customers in the CBA Credit Structuring Group (including Mercury) ‘at face value’ if they said they were seeking refinance, stating ‘there was always a possibility it won’t happen but one works to towards hoping that it does’. I find his evidence in this respect implausible in the case of Mercury in early August 2009. There had been at that time a history of promises of refinance which had not been met and of the CBA reducing indebtedness.
5.2 Ms Dunlop
Ms Dunlop gave evidence that she had little recollection of key conversations. That is understandable given the passage of time. However, she went on to dispute that she would have made some statements attributed to her in Mr Reynolds’ statements and affidavits. In many cases, I consider that she took an unduly narrow view of the statements attributed to her and did not address that the substance of those statements may well be correct.
For example, as I set out below, Mr Reynolds stated that she informed him on a number of occasions that she would contact the Chinese suppliers to ensure that they were informed about Milfoil’s position. She denied these statements on the basis that it was not part of her role to contact Chinese suppliers. However she did not address the thrust of the evidence (which ultimately was not disputed) that contact would be made with the Chinese suppliers to ensure they were informed of Milfoil’s position. In my view, her approach to giving this evidence did Ms Dunlop no credit.
Further, Ms Dunlop was reluctant to make sensible concessions in response to questions. For example, she maintained that she had no view about the solvency of Mercury in mid-2009. I do not believe that, in her position as Financial Controller and as a Certified Public Accountant, she had no view about Mercury’s solvency at this time. Further, when questions were asked about particular facts which all indicated that Mercury was close to being insolvent, she was very reluctant to acknowledge this was so.
6 FINANCIAL POSITION OF MERCURY BY MID 2009
As noted above, Mercury was in the business of designing, importing and distributing clothing. Approximately 90% of the goods imported by Mercury were already pre-sold for each season to major retailers including Myer, David Jones, Kmart, Target and Harris Scarfe. Most of the overseas suppliers were located in China. Most suppliers required a 50% deposit on shipment of goods and the balance within 30 days. Stock was delivered to Mercury’s warehouse in Geelong. Most retailers would pay Mercury within 30 days of delivery. As a result, there was often a lag between payments to be made to suppliers and payments received from retailers. Out of season stock had little value and was sold through garment clearing houses.
The mark-up that MBG applied to stock purchased from overseas suppliers was about 35–50% of the ‘landed cost’. The landed cost for stock was usually 20–30% more than the price paid to the overseas supplier as it included the transport costs and customs duties.
The CBA was the primary bank used by Mercury. On 22 January 2003, the CBA registered a fixed and floating charge over the assets and undertakings of MBL, formerly Austin Group Limited (the 'MBL charge’). On or about 17 May 2004, the CBA registered a fixed and floating charge over the assets and undertakings of MBG, formerly Austin Bros Group Pty Ltd (the ‘MBG charge’).
From about late 2007, Mercury had a multi option facility which consisted of trade finance which was regularly used to pay overseas suppliers (the ‘CBA facility’) and an overdraft facility into which payments from customers were made before being transferred to the CBA facility. It also had business credit cards, a CBFC asset finance account and a foreign exchange hedge facility. There were two principal Mercury accounts:
(1) a business transaction account held by MBL being account number 06318810286557 (‘first CBA account’);
(2) an overdraft account held by MBL being account number 06350410312939 (‘second CBA account’).
Mercury was transferred to the CBA’s Group Credit Structuring Risk Management section in February 2008. This was the section of the CBA that dealt with customers who were experiencing financial difficulty by not meeting undertakings or showing signs of distress with poor financial results. At all relevant times, Mr Barbagallo was in charge of this section. From February 2008, he was aware of Mercury and supervised the management of Mercury’s file by Adam Vincent and Tom Brooks. Mr Barbagallo had a good working knowledge of the Mercury file and he was the ultimate decision-maker within the section of how CBA managed it.
Mercury was transferred to this section for monitoring because it was experiencing financial difficulty from at least 2007. In September 2007, Mercury’s CBA facility was reduced from $9 million to $3 million. This was achieved by MBL raising $6 million through Hawkeswood Investments Pty Ltd. Mr Barbagallo was aware that Hawkeswood Investments was connected with Opus Prime which collapsed in early 2008.
Mercury recorded a loss of $7.848 million for the year ended 30 June 2008 . In mid-to-late 2008, Mercury breached the terms of the CBA facility. In August 2008, its credit card limits were reduced from $200,000 to $40,000 and the CBA facility was reduced. There were discussions within the CBA for it to conduct an ‘orderly exit’ of the facility by the end of 2008. Despite attempts to arrange alternative finance, Mercury was unable to refinance the CBA facility in December 2008.
The impact of the global financial crisis in late 2008 and the depreciation of the Australian dollar also had a significant impact on Mercury’s business increasing the costs of stock imported. Indeed Mr Barbagallo conceded that from about this time the CBA needed to ‘get out of Mercury Brands on the best possible terms’.
Mercury unsuccessfully sought to obtain alternative finance throughout 2009 from Affiniti Business Finance Pty Ltd (‘Affiniti’) and Biron Capital. As a result, the CBA reduced the CBA facility progressively: from $3.5 million in April 2009 to $2.5 million in late June 2009, and then to $1.9 million in August 2009. Mr Barbagallo was aware that these measures had an adverse effect on Mercury’s ability to pay suppliers for new stock and was impacting cash flow and turnover. By July 2009, Mr Barbagallo’s task was to adopt an exit strategy for the CBA.
In fact, Mercury’s financial position was very serious. The papers for the Mercury board meeting on 21 May 2009 record that Mercury had sought professional advice from Mr Stan Traianedes as to whether Mercury was insolvent. They also recorded that key staff including Ron Luff, the General Manager Commercial Operations, and Jacki McAvenna had been terminated. The preliminary final report for the year ended 30 June 1990 recorded a loss of $11.369 million.
From late June 2009, Mercury was unable to pay suppliers for stock it had ordered. Mr Luff gave evidence that by May 2009:
(1) the stock held by MBG was mostly old stock;
(2) MBG was having real trouble paying suppliers and he was directed to find alternative suppliers who had no history of MBG’s poor payment record; and
(3) Mercury was ‘in crisis in terms of being able to supply stock to meet retailers’ orders’.
7 THE MILFOIL AGREEMENT
7.1 Background to the Milfoil agreement
It was in that context that Mercury approached Mr Reynolds in early July 2009. That approach came through his son Steven who started working for Mercury in about May 2009 in a sales position. Steven had had extensive experience in sales but not in the clothing industry. He was a good friend of Anthony Blumberg, Mercury’s Operations Manager. He was employed by Brendan Santamaria, Mercury’s Chief Executive Officer. Steven knew Mr Santamaria socially.
Not long after he started work at Mercury, Steven became aware that:
(1) Mercury was having trouble getting stock from overseas suppliers to fulfil orders; and
(2) if these orders could not be fulfilled, then Mercury would be at serious risk of losing its supply agreements with several major Australian retailers such as Kmart, Myer, David Jones and Target referred to as the ‘Majors’.
On 1 July 2009, Santamaria and Blumberg told Steven that Mercury had received orders from the Majors and that stock was waiting to be shipped to Australia subject to Chinese suppliers being paid. Mr Santamaria said that Mercury needed $500,000 to release the pre-sold stock. Mr Santamaria said that the CBA was restricting its funding and that Mercury needed to find another way to get those goods out of China. In the course of that conversation, Steven told them that his father was a retired banker and may be able to suggest a way of helping.
7.2 The 2 July meeting
As a result, a meeting was arranged with Mr Reynolds on 2 July 2009. The meeting took place at the Reynolds family home in Hampton. Mr Reynolds, his wife Eleanor, Steven, Mr Santamaria and Mr Blumberg attended the meeting. The only evidence of that meeting in this proceeding was given by Mr Reynolds and Steven. Mr Reynolds and Steven also gave evidence of this meeting in their affidavits filed in the Federal Court proceeding.
In his affidavits, witness statement and oral evidence, Mr Reynolds referred to his dealings as being with ‘MBL’ as he believed that he was dealing with representative of the publicly listed company. The communications and correspondence passing between the parties in July and August 2009 would contribute to that belief. However, Finkelstein J found in the Federal Court proceeding that the agreement was with MBG.[7] That finding binds the parties in this proceeding. As a result, for convenience, I will refer to MBL and MBG as ‘Mercury’ except where necessary.
[7]Traianedes in his capacity as Deed Administrator of Mercury Brands Group Pty Ltd (subject to Deed of Company Arrangement) v Mercury Brands Group Ltd [2010] FCA 583 (‘first Federal Court judgment’) [23].
In summary, Mr Reynolds’ account of the meeting, which I accept and which lasted about two hours, is as follows.
First, Mr Santamaria set out the nature of the difficulties being experienced by Mercury, in particular, that the CBA (which held a debenture charge) was limiting the finance available to Mercury with the result that Mercury could not pay for the release of new season stock from Chinese suppliers. Mr Santamaria also told him that the stock ordered was to be supplied to major retailers Kmart, Target, Myer and David Jones.
Second, Mr Reynolds made enquiries of the financial situation of Mercury. Mr Santamaria informed him that all creditor payments were in order and up-to-date and that Mercury was seeking to refinance with $3.5 million from Affiniti by 31 July 2009. Reference was also made later in the meeting to a potential capital injection by Biron Capital of $2 million.
Third, Mr Reynolds told Mr Blumberg and Mr Santamaria that it was unlikely that anyone would lend Mercury money because the CBA may crystallise its debenture. He explained that in order to get a third party to advance funds it was necessary:
(1) for the third party to advance funds to buy the stock from the Chinese suppliers directly invoiced to the third party;
(2) for Mercury to receive and deliver the stock to retailers as agent or trustee for the third-party; and
(3) for Mercury to issue an invoice to retailers in the name of the third party to ensure payment directly to the third party rather than Mercury or the CBA.
Mr Reynolds explained that the purpose of this arrangement was to ensure that the third party received payment of the funds advanced plus interest and that the CBA and/or any external administrator of Mercury would have no claim on the proceeds of sale of stock purchased with the third party funds. Mr Reynolds stated that this kind of arrangement could also be used by the CBA itself so that the CBA could assist clients by becoming the owners of the assets until repaid.
Fourth, Mr Santamaria stated that the arrangement outlined by Mr Reynolds was not one which Mercury had considered. In this context, Mr Blumberg asked whether Mr Reynolds would be interested in injecting $500,000 of share capital as he expected the shares in MBL to start to rise after the refinancing in late July 2009. Mr Reynolds said no: the only way he would be willing to proceed was if Milfoil was the third party in the arrangement he identified. He said that the only reason Milfoil would do so was because of Steven’s involvement in Mercury and because MBL was a publicly listed company.
Fifth, Mr Santamaria said that he was willing to accept $500,000 on that basis. He said this payment would ensure the release of stock to Milfoil worth well in excess of Milfoil’s advance. He said that the stock had a 40% mark up so that the amount invoiced to retailers would be significant and Milfoil would get its money back first within July 2009 and by 31 July 2009 at the latest.
Mr Santamaria said that if Milfoil were to purchase the stock in the manner discussed, Mercury could buy back stock from Milfoil on 31 July 2009 (as soon as the refinancing with Affinity was in place) or after the $2 million capital injection from Biron Capital or upon the sale of the business which could occur at any time as there were then on foot merger discussions with AHT.
Mr Reynolds replied that as soon as Milfoil was repaid, Mercury could keep the rest of the proceeds of sale of the stock purchased but that if Mercury failed to fulfil its side of the bargain, all stock would remain the property of Milfoil.
Sixth, Mr Santamaria advised that he had been authorised to negotiate an arrangement which included the payment of a fee of $70,000 by way of cash or fully paid MBL shares at 2.1 cents (6,250,000 shares). Mr Reynolds accepted this.
Seventh, Mr Reynolds told Mr Santamaria that, as Milfoil needed to borrow the $500,000 from an existing Westpac facility, it was necessary for Mercury to pay interest of 9.95% monthly in arrears on any outstanding balance of the Milfoil advance. Mr Santamaria agreed.
Eighth, Mr Reynolds questioned Mr Santamaria as to how the stock purchased by Milfoil could be identified. Mr Santamaria replied that the stock was all instantly electronically readable and identifiable. Mr Reynolds reiterated that invoices to retailers would need to be sent out in Milfoil’s name and that Steven who was working at Mercury was authorised to sign invoices on behalf of Milfoil.
Ninth, in his witness statement, Mr Reynolds stated that Mr Santamaria must explain the Milfoil arrangement to the CBA. This evidence was not contained in his 23 February 2010 affidavit. Indeed, in his witness statement, Mr Reynolds went on to state that as ‘a precondition’ to Milfoil being involved, it was agreed that Mercury first had to inform the CBA of what was proposed and to discuss if the CBA wanted to do future transactions themselves on the suggested basis. He stated that Mr Santamaria assured him he would personally advise the CBA on 3 July about the arrangement and also arrange for Mr Reynolds to meet and speak with the CBA. Mr Reynolds also referred to this precondition in his statement to Victoria Police.
In cross-examination, it was put to Mr Reynolds that evidence about notifying the CBA in this meeting on July 2 or 3 July was a recent invention in an attempt to give notice to the CBA. Mr Reynolds rejected that assertion, maintaining that he wanted the arrangement proposed to be raised with CBA to be used for future transactions.
In his oral evidence, Mr Reynolds made clear that he asked Mr Santamaria to go to the CBA bank to explain the strategy he had given to them and which he believed the CBA should have used to protect itself. This evidence is consistent with Mr Reynolds’ view of the benefits that would flow from the arrangement he had proposed more generally and his desire for the CBA to be aware of his role in devising it.
Whist I generally accept the evidence of Mr Reynolds about this meeting, I am not satisfied on the balance of probabilities that it was ‘a precondition’ that the CBA be notified. However, I have concluded that it is more likely than not that at the 2 July meeting Mr Reynolds insisted on the need to inform the CBA of the nature of the arrangement which Mr Reynolds proposed (including the arrangement agreed with Milfoil) and to discuss if the CBA wished to do future transactions on that basis. Mr Santamaria agreed to do so.
Steven’s recollection of this meeting is less clear, but consistent with his father’s. In his evidence, Steven stated that:
(1) Mr Santamaria and Mr Blumberg went through the company’s problems;
(2) his father suggested a way to fix this by buying the stock direct from Chinese companies via Milfoil so that it could be released to the Australian retailers;
(3) his father said that all proceeds from the Australian retailers were to go into Milfoil’s Westpac account;
(4) Mr Santamaria said that the retailers paid on 14 days;
(5) his father said he would take an upfront fee of $70,000 offered by Santamaria and that once Milfoil’s advance was recovered, plus interest and costs, the balance of stock and proceeds would go into Mercury’s account;
(6) if there was any delay with the payments into Milfoil account, Milfoil would get interest each month until paid; and
(7) Mr Santamaria said that if Milfoil failed to get its money back by the end of the month from refinancing or the possible sale of the business, the worst case would be that Milfoil owned the stock.
In his oral evidence, Steven said that his father rejected an offer to take shares in Mercury for his $500,000 investment. He also recalled that interest on the funds advanced was also discussed and recalled a reference to 9% or 9.1% compounding until the money was paid.
In order to make the Milfoil advance, Mr Reynolds increased the indebtedness on property owned by Milfoil (in which his son lived) under a facility with Westpac (the ’Westpac facility’). That facility has a limit of $870,000 and, after the Milfoil advance, about $600,000 was drawn down on it.
7.3 3 July 2009
On 3 July 2009, Steven met with Mr Santamaria at Mercury’s offices at about 8 am. Mr Santamaria gave Steven a letter addressed to Milfoil for consideration (the ‘3 July Mercury letter’). Steven delivered the letter to his father that morning.
The 3 July Mercury letter was on Mercury’s letterhead and was in the following terms:
Assignment of invoicing related to direct stock payments
Firstly, thank you for supplying the short term AUD $500,000 working capital facility to Mercury Brands Limited and I am pleased to confirm the following:
*Milfoil Pty Ltd will make payments to Mercury Brands Chinese suppliers directly up to a value of AUD $500,000 - such payments to be mutually agreed and made by Milfoil Proprietary limited
*Mercury Brands Limited will assign invoicing for $500,000 from the order(s) to Milfoil proprietary limited
*Mercury Brands Limited acknowledges that the invoices are the property of, and for the benefit of Milfoil Pty Limited and has no equitable interest in these invoices. Milfoil Pty Limited’s bank details are to be clearly displayed on the invoices as the payee and the beneficial owner. In the event that payment is paid to Mercury Brand [sic] Limited in error, Mercury Brands Limited agreed that the payment is held in trust for Milfoil Pty Limited and will pay the funds across immediately to Milfoil Pty Limited
*Mercury Brands will pay 9.95% per annum on the outstanding balance to be calculated on a month by month basis and invoiced by Milfoil Pty Ltd such invoice to be paid within seven days of issue
*In consideration of the facility; 6,250,000 share [sic] in Mercury Brand [sic] Limited [ASX:MCB] will be issued to Milfoil Pty Ltd with immediate affect [sic].
Mr Reynolds made handwritten notes on his copy of this letter. In relation to the working capital facility he wrote ‘no, not a facility’. Other annotations were made at the time or during the course of 3 July 2009. Some of those annotations included a tick. Mr Reynolds gave evidence that the tick should not be read as correct but just that it had been noted. He gave evidence that the percentage of 9.95% was approximately 2% more than he was being charged on the Westpac facility. He said this figure was suggested by Mr Santamaria.
After reading the letter, Mr Reynolds told Steven he wanted to speak to Mr Santamaria to clarify a few things with him. In that conversation, Mr Reynolds said he told Mr Santamaria that:
(1) Milfoil was buying stock from the overseas suppliers and Milfoil was selling the stock to Mercury’s customers: it was not providing any loan or working capital to Mercury;[8]
[8] This was consistent with the handwritten notes of Mr Reynolds made on the 3 July 2009 Mercury letter ‘NOT A FACILITY’.
(2) Mr Reynolds wanted an assurance that all transactions were not on Mercury’s balance sheet;
(3) any proceeds of sale that were inadvertently paid to Mercury would be held on trust for Milfoil;
(4) Mr Reynolds would need to see the invoices for the $500,000 to be remitted to Milfoil with each Chinese supplier’s name, address and full banking details, including account numbers;
(5) Mr Reynolds would be remitting funds to China as directed by Mercury so Mercury must ensure that Chinese suppliers were aware that Milfoil would be buying new stock available for immediate shipment; and
(6) the amounts which Milfoil was to pay were to be inclusive of insurance and freight costs.
Mr Santamaria said he understood and agreed.
In his 23 February 2010 affidavit and in his witness statement, Mr Reynolds referred to a conversation he had with Ms Dunlop after his conversation with Mr Santamaria. The purpose was to ensure Ms Dunlop understood the arrangement with Milfoil. He stated that:
(1)Ms Dunlop told him she was personally overseeing the matter and that she would send documentation and invoices with the details of the amounts to be paid to the Chinese suppliers;
(2)Ms Dunlop would ensure that the Chinese suppliers understood that Milfoil’s remittances were for new stock only, that the monies paid by Milfoil included CIF and that the invoices and other shipping documents were to be in the name of Milfoil;
(3)Ms Dunlop would immediately email the Chinese suppliers for confirmation of these arrangements;
(4)Ms Dunlop would ensure that Milfoil stock was clearly identifiable and marked as the property of Milfoil;
(5)Steven would sign the invoices to retailers in due course on behalf of Milfoil; and
(6)Milfoil would pass title to all residual stock to Mercury the moment Milfoil had recovered its outlay and the agreed fee.
Ms Dunlop first heard of Mr Reynolds and Milfoil in late June or early July 2009 when she was informed that Mr Reynolds could provide finance to Mercury to assist with purchasing stock from several Chinese suppliers. As I set out below, at that time she was aware that Mercury was in a desperate position to obtain funds to pay for stock to fulfil customer orders. She received a copy of the 3 July Mercury letter from Mr Santamaria at 10:46 am on 3 July 2009.
(2)other factors can always influence the exercise of the discretion: those factors include the injustice in permitting a defendant in breach of obligation to avoid an obligation to compensate the plaintiff; and
(3)in applying the unclean hands defence, it is necessary to identify what is the equity which the Court, absent the unclean hands, would be prepared to uphold.
[82][2002] NSWSC 1060 (‘Black’) [157].
The principles summarised in Black were referred to with apparent approval by the New South Wales Court of Appeal in Carantinos v Magafas.[83]
[83][2008] NSWCA 304 [51].
Finally, the rationale for the defence must be born in mind. As Young J said in FAI Insurances:
However, the more one examines the rule in its application in the cases, the more one can see that it is only if the right being sought to be vindicated by the plaintiff in a court of equity, is one which if protected, would mean the plaintiff was taking advantage of his own wrong, that the court will debar him from relief …[84]
24.3 Analysis
[84]FAI Insurances (n 75), 561.
I do not consider that the CBA has established that the conduct of Milfoil and Mr Reynolds set out in [558] above constitutes depravity in the legal as well as moral sense. In my view, Milfoil was entitled to raise a claim on the basis that the stock purchased with the Milfoil advance was not limited to the stock recorded in the RWP.
This is in circumstances where Finkelstein J accepted that the evidence disclosed that the stock in fact purchased with the Milfoil advance exceeded the value of that advance. It was a fundamental premise of the 2015 amendments. The significance of this fact was apparent to the Court of Appeal when they gave leave for Milfoil to pursue the 2015 amendments as set out at [428] above. Further, I have also accepted, on the evidence before me, that the stock in fact purchased with the Milfoil advance exceeded the value of that advance as set out at [109]–[110] above. In any event, it was clearly not an abuse of process to prosecute a claim on that basis. As a result, the decision not to pursue the 2015 amendments in closing submissions does not by itself mean that Milfoil engaged in legally and morally depraved conduct.
Further, as noted above, I do not consider that the CBA is entitled to rely upon the conduct raised in final submissions set out at [559] above. But, in the event that it was entitled to do so, I do not consider that conduct (which in essence relates to Mr Reynolds’ allegation that the CBA stole Milfoil’s money) constitutes depravity in the legal as well as moral sense. In essence, this is because I consider that Mr Reynolds had an honest belief in those matters. I refer to my comments set out at [232]–[239] above. While I did not conclude, on the balance of probabilities, that Milfoil established that Mr Barbagallo made those statements at the 10 August conversation which formed the basis of the complaints of theft, they may have been said: that is certainly Mr Reynolds’ view.
Further, I do not consider that either the conduct alleged in the defence or relied upon in final submissions has an immediate and necessary connection with the equity relied upon by Milfoil, in the sense that the equity now claimed was not brought into existence or induced by the conduct of Milfoil which the CBA now relies upon.
25 ISSUE 9
Issue 9 is:
If yes to question 3(2) and/or 6(2), should the defendant be excused for any breach of trust pursuant to section 67 of the Trustee Act 1958 (Vic)?
The CBA also amended its defence during trial to allege that, if it were found to liable to the plaintiff in any way, the CBA acted honestly and reasonably in receiving and dealing with those proceeds and ought fairly be excused under s 67 of the Trustee Act from liability. Given my findings that the CBA is not liable to Milfoil, it is not necessary for me to determine this issue. Further, I do not consider it appropriate to do so. This is because the applicability of this defence depends very much on the nature of the breach found to exist.
26 CONCLUSION
In light of these reasons, Milfoil has failed to establish its claim. I will hear from the parties on the issue of costs.
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