Narni Pty Ltd v National Australia Bank Ltd
[1998] VSC 146
•26 November 1998
SUPREME COURT OF VICTORIA
CAUSES JURISDICTION
Not Restricted
No. 6281 of 1992
NARNI PTY LTD Plaintiff v NATIONAL AUSTRALIA BANK LIMITED Defendant
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JUDGE: Byrne, J. WHERE HELD: Melbourne DATE OF HEARING: 12 - 15, 19 - 22, 25 - 29, 30 October, 5, 6 November 1998 DATE OF JUDGMENT: 26 November 1998 CASE MAY BE CITED AS: Narni Pty Ltd v National Australia Bank Ltd MEDIA NEUTRAL CITATION: [1998] VSC 146
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BANKING - Cheque Account - Overdraft - Agreement by conduct to extend overdraft limit - Implied term not to terminate agreement without notice - Breach - Damages - Loss of business.
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APPEARANCES: Counsel Solicitors For the Plaintiff Mr E. Fennessy Ebsworth & Ebsworth For the Defendant Mr G. Garde, QC Russell Kennedy with Mr M. Mulvany
HIS HONOUR:
In 1989 the plaintiff, Narni Pty Ltd (“Narni”), conducted a private nursing home at 440 Station Street, Carrum (“the Carrum Nursing Home”). On 8 June of that year the defendant, the National Australia Bank Ltd (“the Bank”), dishonoured a number of cheques drawn on the Narni No. 2 cheque account maintained at its Elwood branch. The consequence was that debenture securities were called upon and an agent for the mortgagee in possession was appointed on 22 June 1989. The agent sold the business on 17 August 1989. Narni sues the Bank for damages for wrongfully dishonouring the cheques.
There is no doubt that the approved overdraft limit on the account at all relevant times was $65,000 or that the honouring of the cheques which were said to total $40,000 would have taken the account beyond that limit. The issue in this case is whether the Bank was precluded from dishonouring the cheques because -
(a)
there was in existence an agreement between Narni and the Bank made in October 1988 that the Bank would provide finance to fund certain renovations to be carried out at the Carrum Nursing Home and that, pending the provision of this finance, the Bank would continue to honour cheques drawn on the account notwithstanding that this would take the balance beyond the $65,000 limit: statement of claim, para. 6, 8. I shall refer to this agreement as “the October Agreement”;
(b)
the parties, by their conduct, varied the approved overdraft agreement so that the limit was extended to “a limit of at least $100,000”: statement of claim, paras. 26C, 26D. I shall refer to this as “the Overdraft Extension”. The conduct referred to is the Bank’s honouring of cheques beyond the $65,000 limit between September 1988 and June 1989 and Narni’s drawing of such cheques: statement of claim para. 26A; or
(c)
the Bank was estopped from denying that it would not dishonour cheques drawn on the account within the limit of "at least $100,000" without first giving notice: statement of claim para 26H-26K. This I shall refer to as “the Estoppel Claim”.
The Facts
The bank account with which I am concerned is the Narni No 2 account, current account number 6214756, which was opened at the Elwood branch of the Bank on 30 December 1987 when Narni took over the Carrum Nursing Home. Its No 1 account which had been opened earlier for other purposes is of no present interest to me.
The moving spirit behind Narni was its director, Narni Bonita McCarthy, and, to a lesser extent in 1989, her sister, Norma Caringal. The two sisters came to Australia from the Philippines in 1969 and 1970 and become registered nurses in this country in 1973 and 1974. Through Narni, they purchased the Carrum Nursing Home, a 70 bed private nursing home, for $840,000 by contract of sale entered into on or about 3 August 1987 upon a deposit of $5,000 with the balance payable in October. The balance of the purchase price was to be provided by loans of $100,000 and $50,000 from the vendor and $690,000 from Visa Credit Corporation Pty Ltd. For some reason the vendor’s loans were not forthcoming. Moreover, Visa Credit granted a loan of $630,000 only. This was repayable over four years by monthly payments of $1,346.51 principal and interest at 18.5%. This loan was secured by directors’ guarantees, a mortgage debenture, a mortgage of the lease of the nursing home and a second mortgage provided by a friend, Suzie Lee.
A further loan of $50,000 was obtained by Mrs Caringal from the selling agent, Eccles Realty Pty Ltd, repayable by 36 monthly instalments of $1,847.22 principal and interest at 11%. This money was on-lent to Narni in whose accounts it was shown as a loan from Eccles.
Another loan of $75,000 was obtained from friends, Christine Siew Hing Hawes, and her husband, John George Hawes. To raise these funds, the Hawes borrowed $60,000 from Visa Credit upon a second mortgage over their home in Brooke Drive, Doncaster and later, $15,000 by a personal loan from Elwood branch of the Bank. The arrangement under which this money was provided was that the Hawes were given a 10% share in Narni which would itself repay the loans and interest in lieu of dividend. The Bank loan was repayable by 36 monthly instalments of $565.13. The instalments payable to Visa Credit under their loan were not disclosed. For some reason, the Visa Credit loan was in fact obtained for a short term of one month only, contrary to Mr Hawes’ expectation that it was borrowed and on-lent to Narni for seven years. A further puzzling feature of this Visa Credit loan was that it was not repaid at the end of the month and that Visa was content that it remain in place with no instalments being paid. Finally, the sum did not find its way into the balance sheet of Narni in the balance sheet of 29 February 1988 or thereafter as a loan from the Hawes. I was told, that, for some reason, it was treated as part of the Visa Credit loan to Narni, which appears in the balance sheet of 29 February 1988 as a non- current liability of $681,505.00. Notwithstanding this, Visa Credit saw the loan as one made to the Hawes and it sued them for it in 1989.
The balance of the purchase price was provided by loans from other friends and colleagues of the two sisters: from Ms Lee by loan to Mrs Caringal - $40,000 and a further $15,000; from Roy and Emmy Marcello by loan to Mrs Caringal - $10,000; and by personal loans obtained by each of the sisters from the Bank of $15,000 each. The $40,000 provided by Ms Lee was her brother’s money which he had entrusted to her to invest. The $15,000 was money she obtained by personal loan from the Elwood branch of the Bank. The arrangement between Mrs Caringal and Ms Lee was that Narni would look after the interest payable to the brother and the instalments payable to the Bank. According to Mrs McCarthy, Ms Lee also received a 10% share in the company. The Marcellos procured their funds by borrowing them from the Commonwealth Bank and made them available also on the basis that Narni would meet the repayment of obligations of $260.00 per month over five years. In each case the loans were shown in the accounts of Narni as direct loans from Ms Lee and from the Marcellos. The personal loan obtained from Mrs McCarthy was shown as a loan to Narni from her. There is no sign of Mrs Caringal’s loan in the Narni accounts.
Within months, the sisters decided to purchase a second nursing home at Hallam through another company, Narni Holdings Pty Ltd (“Narni Holdings”) which was incorporated on 18 March 1988. This they did by contract of sale dated 22 March 1988 for $850,000 payable as to $85,000 deposit with the balance due on settlement on 31 May 1988. The funding arrangements for the purchase of the Hallam Nursing Home were similar: from the selling agent, Eccles Realty Pty Ltd, a $100,000 loan to the sisters; from Kingdrake Pty Ltd, a company associated with Visa Credit, $690,000; and from friends Timoteo and Lilia Placido $85,000, a sum obtained by them on 29 September 1988 by loan from the Elwood branch of the Bank. This money was advanced by the Placidos to Narni Holdings on the same basis, that the company would meet their obligations to the Bank and that they received 10% of its share capital. The Eccles loan is of interest for my present purposes. It was made on 22 March 1988 and paid into the Narni No. 2 account, perhaps because the account for Narni Holdings had not yet been established. It appears in the balance sheet of Narni of 30 June 1988 and thereafter as a loan by Eccles to it with an associated loan by it to Narni Holdings of only $85,000.
Over this period the two sisters planned further expansions to their nursing home activities. On 28 June 1988 they agreed to purchase the freehold and the business of the Prestonia Nursing Home in Hotham Street, Preston for $400,000 and $660,000 respectively. These purchases were made by two fresh companies controlled by the sisters, Yannavale Pty Ltd for the business, and Baniqued Nominees Pty Ltd for the freehold. On 7 October 1988 Narni entered into a contract of sale to purchase the Toorak House Nursing Home in Toorak Road, Camberwell for $533,000. In addition, the two sisters placed deposits for the purchase of at least two further nursing homes: in October 1988 on a home in Cranbourne and in February 1989 on one called St Leeor whose whereabouts were not disclosed. None of these purchases was ever completed. These two deposits and one other were paid by Narni but were not brought into the balance sheet as loans by it to any other entity within the Narni Group.
Narni took possession of the Carrum Nursing Home about Christmas 1987 and thereafter conducted it under the management of the sisters until the Hallam Nursing Home was taken over in October 1988, and by Mrs McCarthy thereafter until the mortgagee’s agent was appointed on 22 June 1989. It traded at a loss of $22,165 in the first six months of its operation to 30 June 1988; in the second six months to 31 December 1988 it made a profit of $46,354. During this latter period, on 17 October 1988 the $40,000 from Ms Lee was repaid. On 30 September a further loan of $100,000 was obtained from other friends Juan Osilla Noveloso and his now deceased wife, Norma Igama Noveloso, which was placed on term deposit. The Novelosos raised the money by taking out a home equity loan with the Elwood branch of the Bank upon the security of a mortgage over their home in Vermont South. The proceeds of the term deposit were credited to the Narni No. 2 account on 18 October. The monthly repayments payable by the Novelosos were $1,539. As with the other investors, the arrangement with the Novelosos was that they would receive a 10% share in Narni by the transfer of shares from Ms Lee and that Narni would assume the responsibility for their payments to the Bank. Again their loan was shown as a loan to the company.
All of this meant that, by the end of 1988, the assets of Narni were almost wholly funded by loans, whether they be direct loans to it or indirect loans to its shareholders for which Narni assumed responsibility. These loans, are shown in the balance sheet of 31 December 1988 as totalling $896,165. The instalments for which Narni had assumed responsibility totalled some $66,718 per annum including repayments of principal.
In 1988 and 1989 the cash flow of a nursing home business such as that conducted by Narni at Carrum was unusual inasmuch as it received the majority of its income from one source, the Federal Department of Health and Community Services (DCS), and this at the beginning of each month in advance. Leaving to one side patient contributions, which in the calendar year 1988 amounted to less than $400,000 of a total income of $2.25M, 80% of the income of the Carrum Nursing Home came from the DCS at an average rate of $150,000 per month. Typically, the DCS made a substantial payment, called “an automatic payment” at the beginning of the month ranging from $90,000 to $124,000, and a second payment, called “a final payment” about two weeks later. Outgoings, on the other hand, tended to occur throughout the month and the most substantial of these, wages, which in 1988 totalled nearly $1.4M or 62% of expenses, were paid fortnightly. This meant that, in some months, there were three wages payments of about $40,000 each. Theoretically, therefore, the bank account should have been substantially in credit at the beginning of the month dwindling to nil at the month’s end. Mrs McCarthy said that at the beginning of 1988 she asked Clem Kealy, the manager of the Elwood branch of the Bank, for an overdraft but that he said she should wait and see how things developed. No overdraft facility was approved, at least until June 1988. Throughout the first half of the year a cyclical pattern emerged in the conduct of the bank account. I set out in the table below for each month the balance in the account at the beginning of the cycle, after the receipt of the automatic payment, the date in that month upon which the balance reduced to zero and the account balance at the end of the cycle. In each case the figure in brackets represents the date upon which this balance was recorded.
Month Start Balance Zero Balance End Balance Date
January 1988 $99,716.09 CR (5/1) 20 $24,669.34 DR (1/2) February 1988 $66,069.68 CR (2/2) 19 $47,512.02 DR (1/3) March 1988 $59,282.35 CR (2/3) 17 $69,168.08 DR (6/4) April 1988 $26,683.13 CR (7/4) 14 $94,162.28 DR (3/5) May 1988 $1,533.12 DR (4/5) 2 $87,897.80 DR (1/6) June 1988 $7,016.25 CR (2/6) 10 $71,675.53 DR (1/7)
A number of things appear from these figures and from the bank statements from which they are taken. First, the account was substantially overdrawn in every month. Second, its need for such a facility arose on an earlier date with each passing month. Third, the DCS payments were sometimes delayed.
The pattern in the next month, July 1988, presents an example of this last observation. The automatic payment of $109,608 was paid on 4 July taking the account to credit in the sum of $29,582. On 14 July a further substantial payment in the sum of $122,592 was received from the DCS. This was described in the DCS letter of August 1992 as the final payment for June but it is there said to have been an overpayment which was later brought to account. Four days later, the account which had been put into substantial credit by this payment was again overdrawn, this time by the drawing of a cheque for $85,000 which was placed on term deposit. The balance then pursued its familiar down-hill path till it was overdrawn $60,329 on 29 July. The adjustment for the overpayment in July was made by the DCS making no automatic payment in the first week of August. The consequence of this was that the debit balance at the beginning of August increased throughout that month until it peaked at $92,530 on 15 August. It was restored to a debit of only $1,375 by a deposit of $85,671 which I assume was the proceeds of the term deposit plus interest. The account, however, remained in debit until the receipt of the September automatic payment. The account was again overdrawn on 12 September and by the end of that month had achieved a record debit of $117,562.
The first remarkable feature of the pattern of this account which I have already mentioned, and one much relied upon by counsel for Narni, is the fact that these debit balances were permitted at a time when there was in place no approved overdraft. According to Mrs McCarthy, Mr Kealy repeatedly refused her requests to allow her a facility of $100,000 saying that he would support the account, presumably until some formal arrangement could be reached. It seems that he was content to do this because cheques continued to be honoured notwithstanding that the account was substantially overdrawn. At the same time, I was told by David John Riddiford, his assistant regional manager, that a branch manager had no authority to permit an account to exceed its approved limit. Although this period, from January to September 1988, pre-dates the making of the October agreement, the operation of the account and the conduct of those concerned with it at this time are relevant to the inferences I have been asked to draw as to the relationship between the customer and the Bank in the months leading to June 1989. I will therefore set out the evidence and my conclusions with respect to this earlier period.
Mr Kealy gave no evidence. This was because he has recently undergone serious surgery and was unable to do so. I therefore draw no O’Donnell v Reichard inference from his absence. His absence, however, does cause difficulties. His memoranda were in evidence but he was not able to enlarge upon them, to explain them or to be cross-examined upon them. To the extent that he was not called to give evidence of conversations with Mrs McCarthy or Mrs Caringal, their evidence of these is uncontradicted, except perhaps by the memoranda. I am not obliged, however, to accept the evidence of these two witnesses on the ground that they were not contradicted. I must weigh it against the totality of the evidence. A further difficulty is that counsel for Narni invited me to make findings that Mr Kealy permitted the account to be overdrawn in circumstances which may, on the evidence amount to a grave dereliction of his duty to the Bank. I am reluctant to make such an adverse finding about an non-party without seeing and assessing the witness myself.
The evidence of the operation of the bank account from Mr Kealy’s perspective is to be found in five documents which are in evidence and one missing document. The missing document is one which Mrs McCarthy and her sister told me they signed early in 1988. They described it as a blank form brought into existence in connection with an overdraft application. The document was not produced or further identified. On 25 March 1988, when the account had been in debit for four working days, it was overdrawn in the sum of $27,448. Mr Kealy’s note of that day records that he agreed to cover the account pending receipt of a DCS payment of $90,000 to $100,000 due in the first week of April. The account then plunged to $81,925 DR on 31 March and, following the receipt of $91,380 on 7 April was returned to credit in the sum of $26,683. On 10 June 1988 the Elwood branch generated a computer document called a Limit Enquiry. This document showed that in the quarter to 31 March 1988 the account was overdrawn on 41 days with an average debit balance on days in debit of $24,363. The next document, which is in Mr Kealy’s hand- writing, is a Limit of Credit Application dated 24 June 1988. According to his diary note of the same date the account was then under pressure because Narni was making loan repayments “on behalf of Norma Caringal for the past six months which amounts to approximately $48,000”. A guarantee of $65,000 was taken from the two sisters, presumably to support the facility. Mr Kealy’s assessment of the business carried on at the Carrum Nursing Home in the Limit of Credit Application is very positive and his assessment of Mrs McCarthy, perceptive:
Principal Director of Company is very demanding but previous dealings has proved reliable. A capable person but somewhat fearless in borrowings.
The Branch Limit Enquiry as at 7 November 1988 shows that the account was in debit on 67 days in the June quarter and 73 days in the September quarter with an average debit balance on days in debit of a little more than $50,000.
Mr Riddiford whose role it was to oversee the branch manager and approve any application for an advance beyond approved overdraft limits, made monthly visits to the Elwood branch and kept in touch with Mr Kealy by frequent telephone calls. I am satisfied that he was informed on a regular basis of the state of the Narni account. There is in evidence no memorandum from Mr Kealy or Mr Riddiford and no letter to the customer or note of any verbal conversation with Mrs McCarthy in the period to September 1988 which expressed any concern by the Bank about the manner of her operation of the account.
I conclude from this and from Mrs McCarthy’s evidence that Mr Kealy was content to permit the account to be overdrawn, even beyond the temporary limit he extended, and that his regional manager was likewise agreeable to this. Mrs McCarthy described Mr Kealy as “a lovely bank manager” who was sympathetic to her needs. She, for her part, was content to obtain as much credit as this bank manager was prepared to tolerate.
This is how things stood in October 1988 when the October agreement was allegedly made between Narni and the Bank.
The October Agreement Claim
When Narni purchased the Carrum nursing home in 1987 there was an unsatisfied State Health Department requirement that the premises be provided with a fully equipped pan room. It seems that this requirement was satisfied prior to the departmental inspection on 18 October 1988 because it is not referred to in the Health Department letter of 19 December 1988 listing a number of items seen as requiring attention upon that inspection. According to the analysis of the Narni cash book by Simon Wallace-Smith, the Bank’s consultant accountant, this work was carried out in September 1988 at a cost of about $7,500. The invoices produced in due course to the Bank show that the majority of this work was paid by two cheques drawn on 4 October and 14 October 1988 respectively.
On 1 October 1988 the sisters, through Narni Holdings, took possession of the Hallam Nursing Home. Mrs McCarthy said, too, that in October she had been pressing Mr Kealy for the Bank to formalise the Narni overdraft she had sought over the past nine months. The account was once again in a dire condition. After the receipt of the automatic payment from the DCS it was already in debit in the sum of $22,352. Undaunted, two cheques of $5,000 each were drawn upon it for the deposit on the purchase of the Toorak Nursing Home and the Cranbourne Nursing Home and one for $3,000 for a deposit on a Range Rover. The cheques for Toorak and the Range Rover were paid on 7 October, that for Cranbourne was never presented. On 17 October the $40,000 loan from Ms Lee was repaid by a cheque for $41,000 and on the following day the Noveloso loan of $100,000 was credited to the account. These latter two transactions, which provided nearly $60,000 working capital, took the account into credit in the sum of $2,802.
The October agreement was said to have been made in a conversation between Mrs McCarthy and Mr Kealy. Mrs McCarthy said that she was talking to him about the Health Department orders which required work to be done at the Carrum Nursing Home when she raised with him the need for funds to carry out these renovations. In her evidence in chief she described the conversation in these terms:
A:
Yes, I said to Mr Kealy if I could have renovation done ordered by the department, that I need more than, I need to do more than probably they require, because there is other things that they have not given me orders on but they are going to order me eventually; so if I can do all that as one and be done with it. And he says "How much is it?" So I said, "Well I don't know the cost, but between 40 to $80,000, I should think" I said, and that is that. And so he said, "All right. This one, I will give you a hundred per cent. Against this one I can finance you a hundred per cent". I said "Walk me to the door". That is all I remember very well. So I said "All right. I will go ahead then,” and he said "All right". But we didn't discuss how it is going to be funded. All I said to him is how can I go ahead and do it, thinking I can use the ---
Q: Don't tell us what you were thinking? --- A: The overdraft, the overdraft facilities, that is what I said to him. Q: Just tell us what you said to him, what did you say to him?--- A: I said "Can I use my overdraft facilities" - no, I didn't say that, sorry. All I
asked was for the renovation between 40 to $80,000. ---Q: Yes? --- A:
We didn't discuss the details, but we agreed it was - for some reason we agreed; okay, I will go ahead with the renovations. As soon as the renovations are over I will give him all receipts and then we will sit down and do a hire purchase or leasing agreement.
Q: Just tell us was that said or is that what you were thinking? --- A: No, that is what I asked, and then he said --- Q: And what was his response? --- A: And that is - he said, “This one I can give you a hundred per cent”, I said
“Walk me to the door”. That is all I can recall.
This conversation which she repeated with minor variations is said to amount to an agreement by the Bank to provide an overdraft facility of unlimited amount for the purposes of carrying out renovation works of an unspecified kind and, then on completion, to enter into an unidentified type of financing agreement on the Bank’s usual terms to fund the total agreed cost. It is further said that, until this refinancing had been put in place, the Bank agreed not to dishonour cheques drawn to the limit of the agreed facility.
This highly improbable, if comprehensible, agreement is not supported by Mrs McCarthy’s account of the conversation. It is not mentioned in any contemporaneous document. It is inconsistent with the objective facts. If the conversation took place before the Health Department inspection of 18 October, the then outstanding orders had been complied with and already paid for at a modest cost. If the departmental orders she referred to are those arising out of that inspection it does not appear that they were included in the renovations for which invoices were supplied later in March 1989. To this there is the possible exception of the replacement of floor tiles; an invoice for $1,974 for tiling was included in the March bundle of invoices. Other items in the October Health Department order do not appear to have been carried out. Indeed, Mrs McCarthy’s diary entries for 23 February 1989 and 29 May 1989 suggest that grab-rails were being provided or discussed by her on those dates.
In any event, I am unable to accept Mrs McCarthy’s evidence as to the agreement. Her credit was the subject of attack and to some effect. Her demeanour in the witness box did not inspire me with confidence in her reliability. Her conduct after the October agreement is not consistent with the agreement she asserts. The work carried out in the months after October 1988 involved, for the most part, the up- grading of the kitchen and the provision of items such as wardrobes, mobile phone, blankets and the like. To describe them as “renovations” is a distortion of the word. I prefer “upgrade”. In late 1988 she put in train an attempt to borrow $2.25M to refinance the nursing homes at Carrum and Hallam and two others, Toorak House and Prestonia. Had this been successful she would not have needed to refinance the upgrade at Carrum as was contemplated in the alleged October agreement. In the account of the October 1988 conversation which is set out in paragraph 17 of her affidavit in Proceeding No. 9948 of 1991 sworn on 13 November 1991, she says that the discussion of the cost of the upgrade took place in the context of her expressed wish to consolidate Narni’s debts and to restructure its finances. She confirmed in her oral evidence that this was indeed discussed and that Mr Kealy advised her to leave the restructure for a while. I accept that, in October 1988, in response to his criticisms of her overdraft position, she told him that she wanted the Bank to continue its support giving as a reason that she had capital expenses at Carrum to be met and that it was required for a short time only as she contemplated a major financial restructure. I accept that Mr Kealy agreed to this. I do not accept her evidence insofar as she would have him agree to anything more definite. In particular I reject her evidence that an agreement which I have referred to as the October agreement was entered into between Narni and the Bank.
The second step in this claim is the fixing of the cost of the upgrade at $140,000. Mrs McCarthy said that Mr Kealy was pressing her to give him the invoices in February 1989 so that he could put in place the agreed refinance arrangement with Custom Credit. He had told her earlier to have the invoices made out to Custom Credit but, for some reason, some only were so addressed. She said that, at his direction, she prepared a letter addressed to Kevin Hiney, the lending officer of Custom Credit, listing the invoices for which finance was sought which totalled about $115,000 and gave this, together with the invoices, to Mr Kealy for him to send on to Mr Hiney. She told Mr Kealy that there were some extra expenses incurred and suggested that the loan be rounded off at $140,000 for the purposes of financing. He replied “that much?” She said “Yes, $140,000” and they left if on that note. This was, in essence, the evidence of the fixing of the sum which had been agreed in principle in October. She said that Mr Kealy did not appear to be interested in the invoices and did not look at them. Leaving to one side the improbability of such a response and the fact that it is nowhere documented at the time, her evidence is inconsistent with another account that she made in her answer to interrogatory 7. It is at variance to her account given in cross-examination that she took the invoices to Mr Kealy but that he said she should take them herself to Mr Hiney and that she did so. If it were necessary for me to do so, I would reject each of her accounts as unreliable. It is, however, not necessary that I do so because her evidence on its face does not establish an agreement by Mr Kealy on behalf of the Bank or an acceptance by him of the figure of $140,000 as the amount to be the subject of refinance. What is clear is that the figure of $140,000 was never agreed to by the Bank. I therefore find that no agreement of the kind I have referred to as the October Agreement was entered into and, further, no agreement was reached between Narni and the Bank that the Bank or Custom Credit would provide finance in the sum of $140,000.
The Overdraft Extension Claim
The cyclical pattern of operation of the Narni account in the months following October 1988 is familiar.
Month Opening Balance Zero Balance End Balance Date
November 1988 $40,398 CR (3/11) 21 $68,934 CR (1/12) December 1988 $41,975 CR (2/12) 13 $47,470 DR (23/12) January 1989 $76,462 CR (24/12) 11 $96,378 DR (8/2) February 1989 $5,384 CR (1/2) 2 $127,464 DR (1/3) March 1989 $12,680 DR (2/3) - $173,961 DR (3/4) April 1989 $60,341 DR (4/4) - $128,287 DR (1/5) May 1989 $20,520 DR (2/5) - $174,568 DR (2/6)
It is apparent from Mr Kealy’s diary that he was in frequent contact with the two sisters during this period. His customer interview records show that he spoke with Mrs McCarthy about the need to contain the Narni account within limits on 4 January 1989, 27 January 1989, 31 March 1989 and, possibly on 1 February 1989. She said in evidence that she did not recall the conversations which he recorded in his notes. I was asked to reject these records on the basis that they were not sworn to and were not the subject of cross-examination. I have anxiously considered this and, having done so, am, nevertheless, comfortable in acting upon them as an accurate record. The dates on which the interviews are said to have taken place are confirmed in some cases by diary entries and by objective facts, such as the deposit of $120,000 in the account on 4 January 1989. The conversations recorded in the notes took place on dates when the overdraft was very much in excess of the approved limit. I accept that the conversations recorded in Mr Kealy’s notes took place and that the notes accurately record their substance.
Throughout the early months of 1989 Mrs McCarthy was making applications to a number of financial institutions including the Bank for a general financial restructure involving loans totalling $2.25M. These were unsuccessful. Meantime, perhaps at the suggestion of Mr Kealy, she sought a further $100,000 from Visa Credit. This company held her in high regard and had a debenture over the assets of Narni sufficient to support a further facility. Bernard George Keller, a director of Visa Credit told me that Mrs McCarthy produced to him a list of items of plant and equipment which had been purchased for about $120,000. Visa agreed to lend Narni $100,000 as an extension to its existing facility and the money was duly lodged in the account on 26 April at a time when it was overdrawn $191,907.
I pause in this account to remark upon a significant document produced from the Bank records. It is an Excess Report dated 14 April 1989 which is, for the most part, in Mr Kealy’s writing. It records that existing overdraft facilities were $65,000 at a time when the account was then overdrawn $106,712 and the cycle for April was only half run. It recites that an excess facility of a further $65,000 was sought pending the receipt of $100,000 from Visa Credit on 21 April to cover up-grade costs of $110,000. The document bears a grudging approval by Mr Riddiford with a stern warning to the branch that in no circumstances was the debt to be allowed above the extended limit of $130,000. The manager was instructed to report with the file on 24 April if the excess was not then fully cleared and, in any event, the account after 24 April was to be controlled within the approved limit of $65,000. These were the terms on which the extension was approved. Mrs McCarthy said that she was entirely unaware of this excess facility and of this document. She was overseas from 10 April to 17 April 1989. She agreed, however, that she told Mr Kealy about the money coming from Visa Credit but it is clear from her evidence that she neither sought nor was told of this temporary extension of her overdraft. Nor, it seems, was she advised of it by letter or in any formal manner.
What is even more surprising, given the terms of Mr Riddiford’s approval, is that after the injection of $100,000 from Visa Credit the account continued as before without any apparent regard to the approved limit of $65,000. It remained substantially over this limit until the May cycle commenced, and by 15 May it was $16,000 beyond the limit. It was permitted to operate up to $100,000 over this limit at the end of the May cycle. There was no evidence of any warning in writing or otherwise to the customer that the account was considered by the Bank to be out of order at this time. On 5 June the DCS automatic payment was received in the sum of $113,642, taking the account to $51,388DR barely within the approved limit. Apart from April 1989 this was the worst opening balance on any cycle, but it was held within the approved limit until 7 June when a number of salary cheques took the account to $89,616DR. These were some of the first cheques which were the subject of the dishonour which provoked this litigation. There was no evidence of any specific warning of dishonour after that recorded by the manager on 31 March.
This is the conduct of the Bank relied upon as giving rise to the overdraft extension. What is pleaded is that by honouring cheques at a time when the account was well in excess of $100,000 the Bank impliedly extended the overdraft facility to “a limit of at least $100,000” and further agreed not to dishonour a cheque drawn “within the limit” without first giving adequate notice: para 26C, 26D.
The course of conduct relied upon must be evaluated against the background of events prior to June 1989 as I have found them. In short, the significant events are that, at least since November 1988, the approved overdraft facility was $65,000 and no more. The dealings between the Bank and its customer appear to have been of a most informal kind with no communication in writing. The account was used to fund the operation of the Carrum Nursing Home and was in each month overdrawn very much in excess of the approved limit. Narni and the business had injected capital funds, but it was dependent for its cash flow upon the accommodation in excess of the agreed limit given by the Bank. I find that these facts were known, not only to Mrs McCarthy, but also to Mr Kealy and Mr Riddiford. It was they who permitted this state of affairs to exist. Warnings were given on the four dates I have mentioned but none since 31 March 1989. Mrs McCarthy described the warnings she received as regular but “very light warnings” by telephone from Mr Kealy that he would dishonour cheques unless she put the account in order. It is not clear from her evidence when these warnings were given and with what frequency. She said that there were none in the period from October 1998 to June 1989. This is probably incorrect given the manager's records. In any event, she said she did not take them seriously because he never carried out any threat. This, of course, may reflect an attitude on her part towards the Bank that she would gladly take whatever the Bank was not prepared to withhold from her.
It is well established that the contract between a banker and customer obliges the Bank to pay cheques only when there are available funds in the account to support the payment. Funds may be available in this sense where there is an agreement between the parties to permit the customer to overdraw to a specified limit and there are sufficient funds to meet the cheque without exceeding that limit. This is confirmed in the present case by the terms of the Authority to Transact Banking Business signed by the directors of Narni on 6 November 1987 when the account was opened. In this document Narni authorises the Bank -
"To sign, draw, make, accept, endorse, discount or make arrangements with you regarding cheques, withdrawals, bank cheques, periodical payment/debit authorities, bills of exchange, orders and other instruments and to overdraw the account/s to any extent permitted by the Bank."
This document provides also that should the said authority be terminated “we will give you immediate notice in writing" i.e. notice by the Bank. Although the authority does not contain any provision to this effect, it may be taken that the Bank and the customer agreed that the Bank might charge for performing these services, at least by charging interest: Re City and County Property Bank (1895) 21 VLR 405. It was not disputed, also, that a cheque drawn on an account which had insufficient available funds to meet it, is taken to be a request for a loan by the customer which the Bank may grant or refuse in its discretion by honouring or dishonouring the cheque: Cuthbert v. Robarts Lubbock & Co [1909] 2 Ch 226 at 233 per Cozens-Hardy, MR. Finally, the cases show that a debt constituted by an overdraft is, subject to contrary agreement, repayable on demand: William and Glynn's Bank Limited v. Barnes [1981] Com LR 205 at 210, per Gibson J, although the debtor must be given reasonable time to comply: Bunbury Foods Pty Ltd v. National Bank of Australasia Limited (1984) 153 CLR 491 at 502-3.
The evidence before me shows that the practice of the Bank in 1989 was to debit the account when cheques were received for payment. The fact of the debit did not amount to an honouring of the cheque. The cheque was then sent to the branch for a decision by the Bank to honour or dishonour. If the decision was to honour, the debit would remain in place. Where the decision was not to honour, whether it be by marking the dishonour advice to the customer "present again", "refer to drawer" or otherwise, this would be reflected in the bank statement by a reversal entry on the date of dishonour together with a dishonour fee. From the customer's point of view, then, silence by the Bank meant the cheques were being honoured and this would be reflected in the periodic bank statements and by the debiting of the appropriate charges and interest where the account was overdrawn.
In the leading case of Cumming v. Shand (1860) 157 ER 1114, the trial judge had left to the jury the question whether the course of dealing between the plaintiff and the Bank was such that the Bank was obliged to debit bills of exchange drawn on his account or whether the Bank was merely in the habit of indulging him by allowing him to overdraw his account. Pollock CB at 1116 was of opinion that the matter was properly left to the jury, saying this:
"No doubt, if a person has been accustomed to accept bills for the accommodation of another, he may refuse to do so any longer; for there is no tenancy of a man's credit which requires any time to put an end to it. But that is not the case where a course of dealing has prevailed, and value has been given for the accommodation. It makes no difference whether the one party is a factor or a banker, if the circumstances are such as to justify the other in drawing though he has not a cash credit, he is entitled to do so until he has notice that the accommodation is discontinued. The question then is, whether there was, between the plaintiff and the bank, a course of business which could not be put an end to without a reasonable notice."
In Weaver & Craigie, The law relating to Banker and Customer in Australia (2nd ed. 1990) [7,150], this case is cited as authority for the proposition that where a customer has been permitted to incur casual overdrafts from time to time within a certain ceiling, but without the Bank's formal approval, this may establish a course of dealing by which the Bank will be bound. The authors continue:
"In these circumstances the bank cannot safely cease to honour cheques within the amount established by the course of dealing unless it gives adequate notice."
The 11th edition of Paget's Law of Banking (1996) at p. 167 puts it this way:
"A banker is obliged to let his customer overdraw only if he has agreed to do so or such agreement can be inferred from a course of business; borrowing and lending are a matter of contract, express or implied.
An overdraft is repayable on demand and forms of charge over security invariably provide accordingly. Nevertheless the right to repayment on demand should be exercised so as not unduly to prejudice the borrower's interests, in the shape, for example, of outstanding cheques drawn in the belief that the facility was available, even if the limit of overdraft has already been reached. The difficulty is illustrated by the judgment of Ralph Gibson J in Williams and Glyn's Bank Ltd v Barnes ([1981] Com LR 205). The learned judge said:
'There is an obligation upon the bank to honour cheques drawn within the agreed limit of an overdraft facility and presented before any demand for payment or notice to terminate a facility has been given. That obligation, however, does not by itself require any period of notice beyond the simple demand. The bank may, by the contract, be required to honour cheques drawn within the agreed facility before the demand for repayment or notice to terminate but still be free to require payment by the customer of any sums previously lent, which will be increased by any further cheques which the bank must honour'."
It would seem, therefore, that the problem for my purposes should be addressed in two stages. First, was there on 7 June 1989 an arrangement between the Bank and Narni whereby the Bank was bound to meet cheques with the available funds including the approved facility of $65,000 were insufficient. I use the term "arrangement" in deference to the terminology adopted by the Bank itself in its form of authority. Second, whether the Bank was, as a matter of law, obliged to give reasonable notice determining that arrangement.
As to the first question, I am satisfied that the Bank and Narni conducted their business and arranged their affairs, at least from February 1989, on the basis that the approved overdraft of $65,000 was at best a nominal limit and that the Bank would tolerate surges well in excess of that limit in each monthly cycle. With the exception of the manager's note of 27 January 1989 there is no evidence as to the tolerable limit for these surges. I reject the contention put on behalf of Narni that the limit was to be determined by adding to the approved overdraft the sum of $140,000 being the agreed cost of the upgrade, or that aggregate sum less $100,000 after 27 April 1989 when the Visa Credit loan was extended. In the manager's note of the 27 January 1989 interview, Mr Kealy records a conversation in which he told her that he would tolerate her exceeding the $65,000 limit only when and to the extent that a government cheque was expected and that this cheque would be "sufficient to cover plus enough to cover for the following month". I accept that he told her this but I am satisfied that this was applied in a very flexible way in the following months. If it had been applied to the letter, it would have meant that on 7 June the Bank would permit the account to anticipate the receipt of the final BCS payment for May which was expected to be about $39,000. This would extend the overdraft limit to $104,000 on a surge basis. But my assessment of the operation of the account in the months preceding June is that it is reasonable to infer that the parties did not see themselves as so constrained. They operated and permitted the account to operate in a very flexible way so that these monthly surges far exceeded any such limit. I find, too, that Narni relied upon this attitude on the part of the Bank in the operation of its business, as the Bank officers knew. I find that the Bank itself also enjoyed a benefit from this arrangement from the receipt of interest and other fees and by the retention of a satisfied customer. I conclude that it was a term of this arrangement between the Bank and Narni that the Bank would not refuse to honour cheques drawn by it on the ground that the balance of the account exceeded the approved overdraft limit of $65,000.
As to the second question, I conclude that, as a matter of law, it was an implied term of the arrangement that the Bank could not terminate or vary it without giving the customer reasonable notice so as to allow time for it to arrange its affairs to comply. Furthermore, this time must have regard to the fact that cheques which had been previously drawn and delivered may have to be honoured under the pre-existing arrangement in place at the time they were drawn and delivered. The implication of such a term is an incident of the arrangement between the Bank and its customer because the Bank knew that Narni was dependent upon it.
There is no doubt that the Bank breached the terms of this arrangement. The statement shows that on 7 June 1988 cheques totalling $40,216.04 were presented for collection and debited to the account. On that day, $5,200.70 was deposited so that the balance which had stood at $54,600.70DR at the close of business on the preceding day became $89,616.04DR. The decision of the Elwood manager would then have to be made by 4.00 p.m. on 8 June to honour or not to honour these cheques.
On 7 June 1989 Mr Kealy advised Mrs McCarthy, according to his memorandum bearing that date, that "the time had come for the bank to take stronger action". The date of this memorandum is surprising for the evidence otherwise suggests that the conversation occurred on 8 June. In any event, in this conversation which took place in the morning, he informed her that he would dishonour Narni cheques, even wages cheques, where there were insufficient available funds in the account including the approved overdraft limit of $65,000. Mrs McCarthy was very distressed but her entreaties left the manager unmoved. She telephoned the acting regional manager, Stanley Joseph Norman, but to no avail. She was told that the cheques would not be honoured unless there were funds available to keep the account within the approved limit. She herself stopped one cheque for $15,450 payable to Visa Credit for an instalment, but this still left the account about $9,000 over the approved limit. The Bank dishonoured 19 of the remaining 58 cheques presented on 8 June with a total value of $19,495.68 and this sum was credited to the account on 9 June. In the meantime, on 8 June a further 23 cheques, all for wages, totalling $7,095.75 were debited to the account and six of these, totalling $3,163.33, were also dishonoured. As further cheques were presented for payment and some dishonoured cheques were re-presented, the Bank continued to dishonour some but not all of them. It was said by counsel on behalf of the Bank that these decisions were made on the material available to the manager on each day so as to retain the balance within the approved limit of $65,000. Mrs McCarthy said Mr Kealy told her that the selection of cheques for dishonour was made to ensure, as far as possible, that wages cheques were paid. It matters little. As a result of the Bank's program of dishonouring cheques, the account was restrained within a limit of about $80,000 in the period from 8 to 21 June. During that period the statement shows that 148 cheques totalling $70,353.10 were presented or re-presented and that of these $46,020.45 represented the value of 129 wages cheques and that, of these wages cheques, 39 cheques totalling $23,125.63 finally remained unpaid. If all of these cheques had been paid, the balance in the account at the end of business on 21 June 1989 would have stood at $110,324.91DR or thereabouts. And on the following day the delayed final DSC payment for May in the sum of $38,641.72 was paid into the account reducing the suppositious balance to $71,683.19DR. It remains that the summary dishonour of those cheques presents a breach of the arrangement which I find existed between Narni and the Bank.
The Estoppel Claim
The factual basis for the estoppel claim was essentially the same as that relied on for the overdraft extension claim. The plaintiff relied upon the conduct of the Bank in meeting the Narni cheques at a time when the account was not taken beyond $100,000DR. Notwithstanding that the account became overdrawn by "at least $100,000", Narni was led to believe that the Bank would not depart from this practice without first having given notice. It was said that Narni had conducted its business in reliance upon this practice and this belief and that it would be unconscionable for the Bank to be permitted to depart from the practice.
It was said on behalf of the Bank that this claim must fail for want of an underlying cause of action. It was put that Narni was seeking to use the doctrine of promissory estoppel as a cause of action which was not permitted by law: Waltons Stores (Interstate) Ltd v. Maher (1988) 164 CLR 387 at 400-1 per Mason CJ, Wilson J. To my mind, there is much force in this. This is not a case where Narni sets up a promise wanting consideration; the agreement to pay interest on the money lent provides sufficient consideration. Assuming the factual basis for the claim is made out, it is not necessary to call in aid the principle of promissory estoppel. If the representations as alleged were made they had in my view contractual effect and may be enforced as such. Given my conclusions on the overdraft extension claim, however, it is not necessary that I pursue this matter further.
Causation
The relevant loss alleged was the loss of the income potential of the business conducted by Narni at the Carrum Nursing Home. On 22 January 1989 in circumstances which will appear, Visa Credit, pursuant to its debenture appointed as its agent in possession William Bernard Abeyratne of Marquand & Co. The agent in possession of the business paid the outstanding wages and perhaps certain other expenses which were necessary to enable it to continue. He then put the business up for sale and on 17 August 1989 it was sold to Bogear Pty Ltd for $1.05m plus stock and valuation not to exceed $5,000. The proceeds of sale were applied in reduction of the Visa Credit debt. There was no surplus available to unsecured creditors or for Narni. Following completion of the sale, no income or profits, of course, accrued to Narni. Narni says that its loss of these profits into the future was caused by the breach by the Bank which I have found to exist.
It is necessary, in order to evaluate the competing submissions on causation, that I set out briefly the fact as I find them from 8 June 1989 to the date of sale on 17 August 1989. It is convenient to deal with them in two periods, before and after the appointment of the agent on 22 June 1989.
The first period of about two weeks was characterised by the dishonour by the Bank of the cheques which I have already summarised. 8 June 1989 was a Thursday. In the week that followed Mrs McCarthy obtained from Ms Lim a letter dated Saturday 10 June and addressed to Mrs Caringal in which Ms Lim indicated her readiness to give $100,000 to $150,000 to her and that this money would be available in Melbourne just before she left Malaysia for Melbourne on 26 June. It was in fact not available until "around July". It may be that this money was to be offered for the purchase of a share in the company but Ms Lim was not sure whether the money was for the Carrum Nursing Home or the Hallam Nursing Home. Mrs McCarthy said she took this letter to Mr Kealy, presumably in the week beginning 11 June and he said she should leave it to him, whatever that meant. A week then passed with the Bank continuing to dishonour cheques on 13, 14, 15 and 16 June.
Some time prior to 19 June the Placidos who had invested $85,000 in Narni Holdings and the Novelosos who had invested $100,000 in Narni some nine months previously, returned from holidays. They attended a meeting at the Placido home in Vermont with the two sisters. Mrs McCarthy said she told the investors she was taking her business from the Bank and that she wanted their security to be moved to Visa Credit. They signed two letters in identical terms directed to Mr Kealy and to Visa Credit confirming that they agreed to this course. Mrs McCarthy faxed the letters to Mr Kealy that same night, Monday, 19 June. Mr Noveloso said that in order to protect his investment in the Carrum Nursing Home he was prepared to invest further money. It was not clear from his evidence or from the letter how much he was prepared to invest or when. The evidence of Mr and Mrs Placido was no more informative on this matter. I was not told of Mr Kealy's reaction to this letter when he read it on arriving at work on Tuesday 20 June, as I suppose he did.
This day, Tuesday 20 June, was a further pay day at the two nursing homes. It seems, however, that no cheques were drawn for wages on this day. By this time the staff were becoming restive and those at Hallam had enlisted the aid of their union. There was a threat of strike if wages were not paid and the media, too, were becoming interested. Two meetings were then called on 21 and 22 June respectively at the office of the Health Department in Collins Street. Mr Keller represented Visa Credit at each meeting. The two sisters were also present. Minutes were taken and were put in evidence. The sisters were unable to give any assurance to the meeting that funds were available to ensure the viability of the two nursing homes and this meant that Visa Credit found itself obliged to step in to protect its security. Mr Abeyratne was appointed its agent in possession after the meeting on 22 June and the Bank was informed of the appointment at 4.16 p.m. on the same day.
It was said about the conduct of Narni in this first period that it was unable to raise funds in order to bring the account within the approved limit and, at the same time, to pay its way. This may not be correct. Mr Keller said that Visa Credit would have been prepared to make a $100,000 available but, for some reason, it was not asked to do so. He said, however, that this would have required some two weeks to put in place. No application for this assistance was made, at least until 21 June by which time it was too late. David Anthony Armstrong, Narni's accountant, who was present at the 22 June meeting confirmed this but said that once the cheques had been dishonoured it was not possible to retrieve the situation; the damage had been done. Accordingly, it was said that the dishonour of the cheques led to the ruination of the business and its sale to the detriment of Narni.
It is to my mind correct to say in a case such as this that the summary withdrawal of credit by the Bank, particularly as this was done by the dishonour of cheques for staff wages, was likely to cause the Health Department licence to be placed in jeopardy and to cause the debenture holder to take steps to protect its security. The Bank was at all times familiar with the nature of the business of the Carrum Nursing Home: it knew that Mrs McCarthy and her sister had no available assets to offer a prospective lender, assuming one could be found within the period of hours given to her by Mr Kealy and Mr Norman. Indeed, I accept the evidence of Mrs McCarthy and Mr Norman that the likely collapse of the business as a consequence of the proposed dishonour was discussed between them on 8 June. In these circumstances, I am satisfied that the causal requirements of the second limb of Hadley v. Baxendale have been satisfied: Kpohraror v. Woolwich Building Society [1996] 4 All ER 119 at 122, per Evans LJ. This, however, is not a case where Narni seeks damages for loss of business reputation as in the Woolwich Building Society case.
It was then put on behalf of the Bank that, even so, Narni failed to mitigate its loss by seeking to procure alternative finance after 8 June. Failure to mitigate was not pleaded and I shall say nothing further about it. I am satisfied that the appointment of the agent in possession and the subsequent sale of the Carrum Nursing Home was caused by the breach on the part of the Bank of the contractual arrangements in place between it and Narni on 8 June 1989.
Damages
In its further amended Particulars of Loss dated 20 July 1998 Narni claims $8,236,007 under ten headings. Items 3, 4 and 6 disappeared as independent items as the evidence unfolded. With respect to the others, it became plain that many were entirely misconceived: items 5, 7, 9 and 10 in truth represented losses of investors in Narni and not losses of Narni itself; item 8 represented losses of Mrs McCarthy as an employee of Narni and not losses of Narni itself. In essence, the claim, as it was finally presented, was for $8,031,058 as set out in Exhibit 24. This exhibit, in turn, represented a modification to the underlying claim document which was the report of Messrs Armstrong & Associates dated 15 July 1998 (Exhibit 19). The figure of $8,031,058 included items 8, 9 and 10 to which I have already referred. The true loss of Narni itself was alleged to total $6,410,159.
It is necessary to address at the outset an argument presented on behalf of the Bank that this claimed Narni loss was in itself misconceived. The claim comprised three components. The first two, broadly speaking, involved an analysis of the annual cash flow which the Carrum Nursing Home was capable of generating at the time it was taken over by the mortgagee's agent and then projecting that cash flow into the future for a period of the lease under which it was held, including options i.e until 15 January 2000 and beyond. In this way it was said Narni would receive compensation for the loss of income which it reasonably expected to receive throughout the life of the business. Since the concern of this calculation was with cash flow which the business was capable of generating, it was necessary to reconstruct the profit and loss accounts in order to arrive at what Mr Armstong described as a normalised cash flow from operations. To arrive at this figure, the expense figures in the profit and loss account were adjusted to replace depreciation with economic depreciation, to delete the cost of capital since the cash flow was assessed on an ungeared basis, to delete director related items, to delete one-off establishment costs, repairs and the like, and to standardise catering costs and insurance costs. Having calculated the normalised cash flow from operations for the past trading periods when the business was in operation, Mr Armstrong then projected this figure into the future for the trading periods from 23 January 1989, when the agent took possession, to 22 July 1998, which was the expected date of the trial, allowing for inflation plus one per cent per annum growth rate. The projected figures for each period were then converted to July 1998 figures by applying to each interest to that date at the statutory penalty interest rates. The figure achieved in this way which in Exhibit 24 amounted to $4,237,393 represents the present (i.e. 22 July 1998) value of nursing home cash flows lost by Narni from 22 June 1989 to 22 July 1998. This is the first component of the claim.
Since the business at the present date was likely to continue in the future, even beyond the term of the existing lease and options, Mr Armstrong added the present value of future cash flows by capitalising the assumed present normalised cash flow from operations at a rate of 22.6%, giving a figure of $1.755.M.
I place to one side for the moment the third component of the claim which is $417,766 for present value of increased costs and consequential expenses.
The Bank said of this method of assessing the loss, that it ignored the fact that the business had been sold on 17 August 1989. It was common ground that the price obtained was a fair price. Since Narni or its creditors had received the full value of the business upon sale and had brought the proceeds to account, it was said that no loss had been suffered by the plaintiff.
The fixed assets of the business as they appear in the balance sheet as at 31 December 1988 were as follows:
Office Equipment (WDV) $2,800 Nursing Home Equipment (WDV) $38,398 Total $41,198
The other substantial saleable asset of the business was goodwill which was valued at $811,584. I say that this is saleable because it represents the greater part of the value of the licence held by Narni which itself was the company’s principal asset.
The evidence before me showed that the conventional way of expressing the value of a Nursing Home is by fixing a value per registered bed. This reflects the fact that the licence to operate a number of beds has a value which may be sold. This value has regard to the valuer’s expectation of a supposed purchaser of the likely income which may be derived from possession of a licence to operate that bed. It may also reflect the value of the premises in which the bed is located or perhaps the particular keenness of the purchaser to acquire the licence. In these circumstances, it was said that the sale price represented or included the capitalised future income of the business and would therefore represent the measure of the loss flowing from the Bank's breach. In my opinion this is correct. The analysis of Mr Armstrong upon which Narni’s claim is based shows this to be so for a number of reasons.
First, in its initial manifestation his report entirely ignored the proceeds of sale of the business. In its final revision it seeks, to remedy this by reducing the cash flow for 1990/1991 by $650,000 being the net reduction of the Visa Credit debt upon sale. Leaving to one side the fact, that it is the wrong amount and the wrong year, the sale of the business means that no future cash flow is thereafter possible.
Second, the second component of the losses, present value of future cash flow, represents the capitalised value of future income as at July 1998. The inclusion of this figure shows that Narni is in truth seeking double compensation. If it is legitimate to value future income in this way as at July 1998 it must be so as at June 1989 when the breach occurred and when damages are, in accordance with principle, to be assessed. The matter may be tested by looking at the loss of Narni as at or shortly after that date. It would then be possible to assess future lost income in much the same way as Mr Armstrong calculated his second component. The calculation would then produce a sum about equal to the sale price achieved. If this represents the value in 1989 of future earnings of the business, it has been received.
Mr Armstrong's analysis was, in any event, subjected to criticism in its detail much of which was to my mind justified. I shall list briefly the more significant of these justified criticisms.
1.
The measure of damages in this case must be determined not as at the date of trial, as he has, but as at the date of breach. This is not one of those cases where assessment of date of judgment is appropriate.
2.
His cash flow analysis ignores the cost to Narni of borrowing funds and other costs which it incurred in running the business which costs were in excess of the normalised figure. To approach the calculation in this way is to exaggerate the likely income and the actual loss suffered. Taking interest cost as an example, the Carrum Nursing Home was very highly geared and therefore the income which Narni expected to receive must reflect the cost of this. Its loss of income claimed must do so likewise.
3.
The profit and loss figures for the periods 1st July 1988 to 30 April 1989 and 22 June 1989 to 30 March 1990 do not provide a reliable basis for Mr Armstrong's analysis. Those for the former period were shown to be incomplete and inaccurate and those for the second period in which the agent managed the business are not truly comparable since he was not obliged to pay all creditors as at the date of appointment.
4.
I agree with the opinion of Mr Wallace-Smith, the accountant retained by the Bank, that the probabilities were that the business was likely to fail in any event. Its outgoings were much in excess of its income. Its bank statements show this notwithstanding two substantial injections of capital in October 1988 and April 1989. It had a growing hard-core overdraft debt well in excess of what the Bank, at least from June 1989, was prepared to tolerate.
I turn now to the third component of the claim, $417,766 for the present value of increased costs and consequential expenses. This sum was, itself, composed of $217,766 for costs consequent upon the collapse and sale of the business and $200,000 which sum was not particularised. The first figure, which Mr Armstrong identified in paragraph 87 of his report represents $24,196 being the annual cost of conducting 12 proceedings in the Federal Court, this court and the Magistrates' Court in each of the nine years since 1989. Mr Armstrong says in his report that he saw no documentation supporting this annual sum. None was produced. In any event, there were no less than 14 proceedings, many of which were completed within the nine year period and many of which did not involve Narni. There is no substance in this item. The sum of $200,000 is described in Exhibit 24 as an estimate of "default interest et cetera". No witness said anything more about this item. Neither shall I. I reject both items of this third component of the Narni loss.
I conclude, therefore, that upon receipt of the proceeds of the sale of the business Narni received its full value which included the value of its future earnings and these were applied to reduce its debt to its secured creditor. It has, been shown to have suffered no further compensable loss.
Set Off
The Bank in its defence raised as a set off, but not as a counterclaim, the amount of the debt Narni owed to it on the number 2 account. The amount said to be owing is $80,082 as at 1st July 1998. Subject to one minor matter I accept this as the amount of the indebtedness of Narni to the Bank on that date. The matter to which I refer is the reversal charges made for the summary dishonouring of cheques which I have found ought not to have been so dishonoured. The total fees charged is $409 which sum is included in the opening balance in Exhibit 28. Applying the interest rate which the Bank has adopted in this Exhibit, this sum would grow to $1,391 as at 1st July 1998 which I round off at $1,400. In so far as it may be necessary to set off this debt I find that its amount is $78,682 as at 1st July 1998 and accruing at $23.17 per day for interest at 10.75%.
It follows, then, that there must be judgment for the defendant with costs.
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