Pomfret v Cumberland

[2000] NSWSC 229

CITATION:	POMFRET & ORS v. CUMBERLAND & ANOR [2000] NSWSC 229 revised - 19/04/2000
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 1108/00
HEARING DATE(S):	10-12/3/00
JUDGMENT DATE:	27 March 2000
PARTIES :	Philip Edward Pomfret - First Plaintiff Richard Highland - Second Plaintiff Julio Cesar Labraga - Third Plaintiff Two Lands Group Pty Ltd - Fourth Plaintiff Two Land Advertising Pty Ltd - Fifth Plaintiff Two Lands Services Pty Limited - Sixth Plaintiff Two Lands Property Pty Ltd - Seventh Plaintiff Two Lands Development Pty Ltd - Eighth Plaintiff Ronald James Cumberland - Defendant
JUDGMENT OF:	Bryson J at 1

COUNSEL :	Cotman SC and Priestley for Plaintiffs Robson for Defendant
SOLICITORS:	McCabes Lawyers for Plaintiffs Frank G. Kalyk for Defendant
CATCHWORDS:	CONTRACT - Indemnity - decision on facts of alleged oral arrangements among individuals who were principals in group of companies and raised capital by (unequal) loans from principals and by security over assets of individuals for company borrowings.
LEGISLATION CITED:	Corporations Law s233 (formerly s246AA)
CASES CITED:	Israel v. Foreshore Properties Pty Ltd (in liquidation) (1980) 54 ALJR 421 MacIntosh v. Dalwood (No. 4) (1930) 30 SR (NSW) 415 Re Dixon [1994] 1 Qd R 7
DECISION:	See para.60

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BRYSON J.

Monday 27 March 2000

1108/00 PHILIP EDWARD POMFRET & ORS v. RONALD JAMES CUMBERLAND & ANOR

JUDGMENT

1   HIS HONOUR: The three individual plaintiffs, Mr Pomfret, Mr Highland and Mr Labraga, with the first defendant, Mr Cumberland, established the business referred to as the Two Lands Group in a series of meetings from November 1995 and in the first part of 1996. These four men are the Principals. They planned to establish an advertising business and also to operate in property development and financial intermediation; it was expected that the advertising business would generate cash flow sufficient to sustain operations until the other businesses also contributed revenue. 2   Mr Cumberland and Mr Highland were experienced in advertising and Mr Pomfret and Mr Labraga were principally concerned with other aspects. Two Lands Group Pty Ltd (TLG), the fourth plaintiff, was formed on 13 March 1996. After a preliminary period of preparation, business operations commenced in June 1996. Four other companies were also formed; these are the fifth, sixth, seventh and eighth plaintiffs and they have always been wholly owned by TLG. Soon after formation the shareholdings in TLG were in four small equal portions, one held by each of the Principals, with only nominal subscribed capital. Under arrangements made late in 1996 and early in 1997 TLG became trustee of the Two Lands Unit Trust under a Trust Deed dated 19 February 1997 (which is not in evidence). The unit holders in the trust were four companies, each one controlled by one of the four Principals and referred to as trustee for his family trust. The trust companies became the share holders in TLG. They are not parties to these proceedings. 3   All affairs in the group were in fact controlled by the four Principals, who worked at the same office and met together frequently. They held long business planning meetings, usually several days long and referred to as Quadra Meetings, approximately every three or four months. Minutes were kept at their meetings. The meetings were not specifically directors’ meetings and the minutes were not formal; they were meetings of the Principals. At a number of places the relationships among the Principals was referred to as a partnership or by related expressions, although there was no partnership in the true sense. 4   Evidence of anything which might be thought of as a contractual arrangement among the Principals about their obligations towards each other does not ever speak in terms which purport to be an agreement or an engagement on behalf of or for the benefit of TLG or any of the companies; all expressions used in conversations and in minutes relate to arrangements among the Principals themselves. 5   These proceedings were commenced by Summons on 18 January 2000; the Summons was later amended. The first four claims in the Amended Summons are claims for:

(1) Judgment in debt against the First Defendant.
(2) Alternatively an order for the taking of accounts as between First, Second and Third Plaintiffs and the Defendant in relation to the affairs of the Fourth, Fifth, Sixth, Seventh and Eighth Plaintiffs.
(3) Interest.
(4) A declaration that by reason of an oral agreement made between the First, Second and Third Plaintiffs and the Fourth Defendant, the Defendant is liable to pay the First, Second and Third Plaintiffs 25% of the liabilities of the Fourth, Fifth, Sixth, Seventh and Eighth Plaintiffs as at the date he ceased to participate in the businesses of the Fourth, Fifth, Sixth, Seventh and Eighth Plaintiffs.

6 There are many other claims in the Amended Summons, including claims relating to Mareva orders. At the commencement of the proceedings the plaintiffs obtained Mareva orders, which have been extended from time to time. In a Cross-claim the first defendant has claimed winding-up and provisional liquidation of the incorporated plaintiffs, apparently on the just and equitable or related grounds. (The claim was made under s.246AA which related to oppression. That section has been repealed; see now s.233 of the Corporations Law.) 7 The principal claims for relief pursued in the proceedings concern only the first defendant, but consideration of Mareva orders led to the second defendant being added as a party. The second defendant is the purchaser of a house property in Chippendale and the first defendant proposed to apply the proceeds of sale of his house property in Paddington towards that purchase. The second defendant is bound by the Mareva Orders but he has not appeared in the proceedings and does not take a contentious position. 8 After a number of interlocutory applications the Court (Bergin J) on 2 March 2000 made a number of directions including:

“The plaintiffs and the first defendant are to file and serve a document setting out the issues for trial on contentions of fact and law by 12 noon 9 March 2000 …
The matter is listed for hearing on 13 March 2000 on the issues for trial set out in the document filed on 9 March 2000.”

9   When the hearing before me commenced on 13 March no such single document had been filed; the parties filed different documents. Soon after the hearing began I was told that the agreed issues were as follows:

1. Is there a presently binding agreement between the individual plaintiffs and/or the corporate plaintiffs and the defendant that, in the event that the defendant ceased to participate in the group business:

· he would provide by way of loan to the group business entity such sum of money as was necessary to provide, along with monies already contributed, 25% of the aggregate debt of that entity at that times; and

2. Whether any such agreement referred to above was overtaken by the Unit Holders’ Agreement made 19 February 1997.
3. Whether, in the circumstances, the Plaintiffs are entitled to the declaratory relief sought in paragraph 4 of the Amended Summons.
4. Should there be a reference to a referee of the question of what amount ought the defendant to contribute pursuant to the said agreement or such other agreement as the Court may find?

10 All parties asked the court to decide these issues, and contemplated a reference under Pt 72 of the (NSW) Supreme Court Rules 1970 to establish the amount of money which would be payable. As deciding the issues for trial could be determinative of significant aspects of the litigation I accepted this, and my orders will include an order for separate hearing of the agreed issues. Various figures and ways of calculating the amount of the plaintiffs’ claim were referred to; none of them was clear and none was demonstrated to be correct by evidence which could be relied on. 11 None of the evidence could support a finding that the first defendant agreed to provide money by way of loan to the group business entity. Notwithstanding the terms of the first issue the plaintiffs’ claim as presented at the hearing corresponded with claim (4) in the Amended Summons. It was claimed that the first defendant is liable to pay money calculated in the way referred to in claim (4) to the individual plaintiffs for their benefit, and not to lend to any of the companies. 12 An agreement for a loan would be ineffectual unless it contained some term which established when it was repayable; otherwise it would be repayable on demand, and an obligation to make the loan could not be effectually enforced. 13 It was not in dispute that the first defendant is indebted to the fourth plaintiff, TLG, for moneys paid by TLG for his benefit in the nature of advances. This account was variously referred to as the Loan Account and the Current Account. Claim 1 in the Amended Summons is based on this account and the amount claimed is $102,492.23 plus interest; the disputed items, grounds of dispute and claims for credit have not been identified by particulars. The parties asked that the amount due be established on a reference. 14 Conflicts and difficulties arise principally out of informality in establishing how the business was to be furnished with capital money for its establishment and working. A number of conversations and references in the minutes of meetings between the Principals deal with the subject, and with the need to put an arrangement in writing, but the arrangements were never formalised. The subscribed capital is only a token few dollars, and members have the benefit of limited liability. The four Principals did not bring in equal amounts, or pre-arranged amounts, of working capital as loans on establishment; financing arrangements were extemporised from time to time. The initial working capital was raised by loans from Mr Highland, using money of his own and money which he borrowed; later he also brought in, as a loan to TLG, $100,000 lent by his father. Mr Pomfret subsequently lent TLG significant sums. Mr Labraga did not lend TLG money, but he made available security furnished by his parents for borrowings of the company. Mr Cumberland made credit available to TLG by giving security to the Westpac Bank over his house at Paddington; this security supported an overdraft extended by Westpac to TLG, up to $190,000. The other three Principals supported this borrowing with their personal guarantees, as did Mr Cumberland, but they did not support it with security. 15 Mr Cumberland would be entitled to call on the other three Principals to contribute equally with him to any liability which actually fell on him or his security as a result of the guarantee and mortgage. I was told that all four Principals joined in guaranteeing the obligation of TLG under its lease of business premises; evidence does not deal with this but it was not disputed. Each of the Principals is therefore entitled to contribution should any liability in respect of the lease fall on him. Mr Pomfret and Mr Highland did not point to any written guarantee creating a joint obligation of the other Principals or supporting any right to contribution or indemnity if TLG should fail to repay their loans, but in my opinion they have a right, whether or not they establish any of the claims made in these proceedings, to contribution so that the other Principals would be liable to share any loss equally. This opinion is based on the law as stated in the judgment of Aickin J in Israel v. Foreshore Properties Pty Ltd (in liquidation) (1980) 54 ALJR 421 at 423-424. His Honour said:

The case may thus be regarded as one in which money was paid without consideration by Foreshore at the request and for the benefit of Mitta, Israel and the Carpenters, or as one in which Foreshore, at the request of Mitta, Israel and the Carpenters, undertook the obligation of a surety for them at their request. The obligation so undertaken was Foreshore’s promise to pay the McLaughlins $65,000 with interest incorporated in the instrument of mortgage, such payment being secured by mortgage of its land. A person who acts on such a request to pay, or who accepts the role of surety in that manner and who pays the debt, is entitled to an indemnity from those who made the request to pay or to act as surety. This is trite law as appears from Rowlatt on Principal and Surety (3rd ed, 1936) at pp.182-188, especially at p.184 and the cases there cited. As long ago as 1799 Lord Kenyon CJ said in Exall v. Partridge (1799), 8 TR 308, at p.310; 101 ER 1405, at p.1406:
“I admit that where one person is surety for another, and compellable to pay the whole debt, and he is called upon to pay, it is money paid to the use of the principal debtor, and may be recovered in an action against him for money paid, even though the surety did not pay the debt by the desire of the principal …”
The same general principle applies to a case of money paid by one party at the request and for the benefit of another.

16   The evidence shows that there in fact were arrangements to the effect that there would be equal contribution for losses by the Principals. In the case of Mr Highland’s advances they were express arrangements, although they were expressed informally. 17   Recurringly in earlier conversations expressions were used which showed that the Principals contemplated a letter of agreement or other written record of the arrangements under which they were obliged to contribute if Mr Highland’s loan was not repaid by TLG. However no letter of agreement or other document of this kind ever emerged. From the language used there is no reason to think that the obligations they undertook were conditional upon the emergence of a written record. In any event, they would have incurred obligations of that kind even if they had not expressly agreed to do so. 18   There are no particulars of the contract alleged in Claim (4) and the first issue which would form a guide through the mass of material in evidence when considering whether there was such a binding agreement. There is nothing to define the contract which is the object of proof showing when and how it was formed, whether oral or in writing, or identifying who in particular Mr Cumberland is said to be contractually bound to: whether the three plaintiff Principals, or TLG, or all the corporate plaintiffs, some group of plaintiffs jointly or each of them severally. Without such particulars it is not possible to address, in a clear way, questions essential to deciding whether there is an enforceable contract, such as the consideration for it, whether a corporate plaintiff was in existence when the contract was formed, and whether the contract took the form that Mr Cumberland promised to make a payment to the other Principals, or promised the other Principals that he would make a payment to TLG, or to some grouping of the companies. 19   There is deep ambiguity about the identity of the party to whom money was to be paid, illustrated in the difference between what is asserted by claim (4) in the Amended Summons and what is asserted as the first of the agreed issues for trial. In the first issue money is to be paid to “the group business entity” and the meaning of that expression is indeterminate. There is also obvious ambiguity about the character of the payment, whether it was to be by way of loan or for the benefit of the payee, and about what is alleged in relation to the way in which the amount to be paid was to be determined. 20   The course of evidence and argument made clear the high importance of establishing at what time money was to be paid. The theory of the plaintiffs’ case is that it is payable forthwith on Mr Cumberland’s leaving the business; it is not just to be allowed as a credit on some general resolution of his whole position, a process referred to in evidence as the “wash up”. According to the plaintiffs’ case money is immediately payable and it is not to be set-off against the value of the shares and units owned by Mr Cumberland’s trust company which could become payable by instalments at intervals over two years under the Unit Holders Agreement of 19 February 1997, if the trust companies controlled by the plaintiff Principals invoked the mechanism for which the Unit Holders Agreement provides; they have not done so. The parties to the Unit Holders Agreement are TLG, of the first part, and the four trust companies controlled by the Principals, of the second to fifth parts; the Principals themselves, and the other corporate plaintiffs are not parties. 21   General resolution, a wash up, or acquisition of the shares owned by Mr Cumberland’s trust company could, at least potentially, confer advantages as well as disadvantages on him, and would enable interests associated with him to have the benefit of credit as well as to be debited with charges. Among other things, general resolution would enable security given by Mr Cumberland over his house, now represented by security held by Westpac over a fund of $190,000 which is part of the proceeds of its sale, to be released. As the plaintiffs’ claim now stands, success in the action and the payment to them of a sum of money by Mr Cumberland would not give him any entitlement or expectation of having this security released. A further anomaly of the claim is that if they succeed the plaintiff Principals would come under no obligation to pay on to TLG any amount Mr Cumberland may be ordered to pay to them, and they would come under no obligation to pay the remaining 75 per cent of the liabilities of TLG. Payment of the plaintiffs’ claim by Mr Cumberland would have no influence on valuation of his trust company’s interest in TLG. 22   To find the relevant facts it is necessary to trawl through evidence of the plaintiffs’ recollections of a number of conversations over some years so as to discern whether those conversations establish some such contract as the plaintiffs assert. 23   It seems important to distinguish:

(1) statements and arrangements which give Principals who advance moneys to TLG assurance that any loss would be shared; and
(2) statements which express a general acceptance of liability to share other losses; from
(3) statements which could be thought to support an obligation to pay 25 per cent of losses or liabilities determined in some way on the occasion of leaving the business.

24   Statements of the first kind, which do no more than express what I regard as a legal obligation of all who request that an advance be made to a company in which they are interested, and statements of the second kind do not give any real support to proof of the contract on which the plaintiffs are suing. 25   Mr Pomfret’s first affidavit of 18 January 2000 deals with a meeting of the four Principals on or about 24 November 1995. Statements made at the meeting establish that each principal was intended to be a director and would own 25 per cent of the shares in the holding company. Mr Pomfret deposed that he said, in circumstances in which those present accepted his statement, “So we will all be responsible for 25 per cent of all assets and liabilities of the business.” With his affidavit Mr Pomfret produced minutes of the meeting of 24 November 1995; the minutes are unsigned and he did not identify them, and described Ex PEP1 in a way which related it to the meeting of 9 January 1996. The minute confirms that there would be equality of equity, but does not state that all four Principals would be responsible for 25 per cent of liabilities. However, I have no difficulty in accepting that there was some such statement. 26   Mr Pomfret’s evidence of statements at a meeting of 9 January 1996 includes acceptance by all four Principals that they were committed to paying a share of Mr Highland’s loan and any debt in the business, and he deposed that he said, “Well, I think if any of us leave while the company owes you [Highland] money or the company is in debt then I think we have to be responsible for 25% of any liability” and “[w]e should agree that if we leave we have to payoff our share of any debt, even if it means selling our home or getting a loan”. According to Mr Pomfret, Mr Labraga said, “As far as I am concerned we are all personally liable to the company for a quarter of any debt or loss in the business” and that all present agreed. The Principals also agreed that this arrangement should be in writing. The minute Ex PEP2 records that a letter of agreement was to be drawn up and also records: “Each of us are to be equally liable for any loans any of the companies (which obviously includes the initial loan by Richard) or guarantees by any of the companies in the future. This point is to be reflected in a letter of agreement.” Otherwise the minute does not record an arrangement to be liable for debts. 27   The next meeting of which Mr Pomfret’s evidence speaks occurred on 25 May 1996. By this time TLG had been incorporated and Mr Highland had made the first advance to TLG of $50,000 on 15 April 1996. At this meeting it was agreed that the company would lend Mr Cumberland money at interest with which to pay off his credit card debts. The minute of this meeting, Ex PEP4, records under the heading “Agreements” among other things “All reaffirmed their commitment to each other as equal partners …”. Mr Pomfret does not give a narrative account of this meeting. 28   There was a Quadra Business Planning Meeting on the weekend 25-27 May 1996. The minute Ex PEP5 shows that at this meeting Mr Cumberland said that he was prepared to mortgage his house as security for leasing furniture. 29   At a meeting on or about 3 June 1996 the need for capital was discussed in terms which show contemplation of more borrowings from Mr Highland. 30   There was a further meeting on 12 June 1996; the minute is Ex PEP7. Mr Pomfret’s evidence is that Mr Highland referred to his getting his money back and said, “If someone leaves I want to know that they will pay their share of the debt even if they have to sell their homes or whatever.” It was confirmed that all were committed to do this. Mr Pomfret’s evidence is that there was then discussion about what the procedure would be if someone left. Mr Highland said, “If someone leaves the business we should get a valuation conducted on the business and do a wash-up at that time.” Mr Labraga said, “We should get two valuations conducted and average them.” 31   Mr Pomfret’s evidence is that he said, “If the company is in debt then the person leaving has to pay 25 per cent of any liability in the company and hand back their shares or if the company is doing well then the company has to buy the shares back and the person out.” All agreed. 32   According to Mr Labraga’s evidence of the meeting of 12 June 1996 he said, “Also if we were in debt when any one of us left, 25 per cent would be requested and payable immediately.” Mr Cumberland denies that this was said (t66) and no other witness confirmed that it was stated or agreed that money was payable immediately. The minute Ex PEP7 does not address any immediate payability on leaving, and what it does say about the consequences of leaving relates to a proposed agreement, not a present agreement. 33   In his affidavit at para 13 Mr Cumberland expressly confirms part of Mr Pomfret’s evidence regarding the meeting of 12 June 1996 that if a Principal should leave, a valuation of the business be conducted and a wash-up done and that an outgoing shareholder be required to contribute to his share of what remaining shareholders are required to contribute. However, Mr Cumberland denied that he agreed that if the company was in debt a person leaving had to pay 25 per cent of any liability in the company and hand back their shares. 34   What is set out in the minutes about the position of a person who leaves does not include the requirement to pay 25 per cent of any liability of the company or to hand back shares. The minutes include the following under the heading “Structure needs”: “25 per cent split of group profit / debts etc. among directors”. Under the heading “Agreement needs” the minutes include: “Agreement to encapsulate spirit of 25 per cent share (profit, debts, responsibility, etc.) for each director”, “Leaving buy back procedure to be developed” and the Principals agreed that all directors have the right to decide to leave and that the group would support the decision.” The leaving procedures were intended to cover:

Leaving to start own business
Leaving to retire etc.
Suggested: payout is average of two independent valuations.
reduced payout level if leaving to compete
- staggered payment 6, 12, 18 months
- T. McCabe to be consulted.
Mr McCabe is the solicitor who advised TLG.

35   It was contended for the plaintiffs that evidence relating to this meeting and Ex PEP7 confirm the agreement alleged. In my finding they do not; only Mr Labraga affirms immediate payability, Mr Cumberland denies it, and the minutes do not confirm it. The weight of evidence is against finding that immediate payability on departure was agreed to. It is much more likely that what was agreed to was a wash-up in the manner which Mr Pomfret stated. In my view the probabilities do not support finding that there was an arrangement at this meeting for a 25 per cent contribution payable on leaving. I find there was no oral arrangement as alleged on this matter. Discussion at this meeting is the closest approach ever made to such an agreement as is sued on. 36   The terms of the minute show that the preparation of an agreement, involving consultation with the solicitor, was contemplated. A number of matters with which the agreement needed to deal were set out, but in terms which show that the contractual commitments were not established in detail and that it was contemplated they were to be entered into in writing. 37   In my finding, events at the meeting of 12 June 1996 confirmed acceptance by the Principals of the liability to pay a share of the company’s liability to Mr Highland for the borrowings from him but did not change the nature of that obligation from an indemnity which was to be called on if the company defaulted on its obligation to Mr Highland, and did not turn it into a principal obligation which substituted for the obligation of TLG. It is extremely improbable that the oral exchanges at the meeting meant or were understood to mean that the Principals undertook to repay a share of a debt which TLG could pay or had not defaulted on. 38   At meetings later in 1996 the interest which TLG would pay to Mr Highland on his advances and the interest to be paid on directors’ loans were discussed. In relation to a Quadra weekend meeting in November 1996 Mr Pomfret’s evidence is that he said, “Let’s re-affirm our commitment to each other for 25 per cent of all profits or liabilities in the business.” 39   Reference to this subject appears in the minute Ex PEP11, in a context which shows that the statement was made in the course of discussion of one of several topics in the minute - a partnership agreement which it was contemplated the Principals would enter into once it was drawn up by Mr McCabe. Provisions which were contemplated to be covered by the partnership agreement were set out at length under Topic 5 including, as the sixth point, “Each shareholder (or trust) will receive 25 per cent of profits, own 25 per cent of assets and be responsible for 25 per cent of all liabilities.” The terms of the third point show that it was still under consideration whether the owners and shareholders of the group would be the Principals themselves or their nominated trusts. The minute records the principles, and in most cases not the details, which the contemplated partnership agreement would establish. 40   Although the minute, under the heading “Topic 5”, sets out some detail of the contemplated arrangements on a shareholder leaving, the arrangements do not include an obligation such as the plaintiffs now allege is incurred by a principal who leaves. No binding agreement on the subjects referred to under Topic 5 can be said to have been reached orally at the meeting, and none is recorded in the minutes. There clearly was contemplation that a written document would be prepared and that its preparation would carry the terms of the parties’ agreement further than they were carried by the minutes. Matters as basic as the identity of the owners and shareholders, among other things, were not established. A number of the points recorded under Topic 5, however, were already established and represented the way affairs were already being conducted. 41   Mr Highland prepared a document to be used in giving instructions to Mr McCabe; this appears to be based on the part of the minute under Topic 5. This document is Ex A. Mr Highland discussed Ex A with Mr McCabe, who then prepared documents including the Unit Holders’ Agreement of 19 February 1997. 42   Topic 5 in the minute was altered in handwriting when it was confirmed. The change adding the handwriting was made by agreement of all at the next weekly meeting after circulation of the typewritten minute. The change was made with the intention of widening what had been established at the earlier meeting. (See Mr Pomfret’s affidavit paras 63-64). 43   The Unit Trust Deed and the Unit Holders’ Agreement are the embodiment in contractually binding form of the arrangements contemplated at the November Quadra meeting and recorded under Topic 5; it is those documents and not the discussion at the meeting, or the minutes, which establish what rights and obligations were brought into existence. Many of the points listed under Topic 5 in the minutes are dealt with in the Unit Holders’ Agreement, not always in a way which fully carries out the substance of the point as recorded in the minutes. The rights and obligations under the Unit Trust Deed attach to the trust companies of each of the Principals, and not the Principals themselves. 44   Sharing profits and contributing to liabilities are dealt with by cl.8 of the Unit Holders’ Agreement which is in these terms:

(a) The distribution of profit of the Company shall be in equal shares to each Unitholder pro rata according to the number of units held by each Unitholder at that time.
(b) The Unitholder shall have an equal beneficial interest in the assets of the Unit Trust and the Company referred to in Recital C hereto.
(c) In the event that Unitholders are required to contribute or make payment in respect to any losses or liabilities of the Unit Trust or of any of the Companies referred to in Recital C hereto, such losses or liabilities shall be borne equally between the Unitholders.

45   Clause 8(c) imposes an obligation to make contributions and payments on the trust companies, including Mr Cumberland’s The Eggshell Group Pty Ltd, only in respect of losses or liabilities to which “Unitholders are required to contribute or make payment …”. Clause 8(c) only operates where there is a requirement of that kind without indicating how the requirement is to arise; it may arise under some provision of the Unit Trust Deed, which is not in evidence, or otherwise under law. Whatever it is, it cannot be a basis for the plaintiffs’ claim. It creates an obligation less extensive than the plaintiffs’ claim in that it does not relate to losses or liabilities generally, but only to losses or liabilities where unitholders are required to contribute or make payment. 46   In my finding, the discussion at the November Quadra meeting, the arrangements recorded in Ex PEP11 and the Unit Holders’ Agreement did not alter or affect any obligations to which the Principals were already subject. It did not add to them, and also it did not diminish them. 47   In October 1997 arrangements were made between TLG and Westpac for TLG to obtain a banking facility called a Business Equity Line of Credit for $190,000, supported by the personal guarantees of each of the Principals, an equitable mortgage of TLG’s assets and, most significantly, a mortgage over Mr Cumberland’s house at Paddington, executed on 21 January 1998. 48   At a business planning meeting in January 1998 Mr Cumberland presented a graph which showed accumulated deficit or loss to the end of December 1997 at $578,000. In May 1998 Mr Cumberland expressed to Mr Pomfret his dissatisfaction and said that he was leaving the company. He did not in fact leave; he returned after a weekend and resumed work, but this event led to angry discussion at a meeting in May 1998. At this time Mr Cumberland was called on to give, and gave, his word that he would not abandon the business. Mr Pomfret further called on Mr Cumberland to give his word that he would pay out his share of the debt if he left TLG. Mr Cumberland did not give this commitment. 49   At a Quadra meeting in January 1999 Mr Cumberland reported that the cumulative deficit to the end of 1999 was $708,000. There was a call at the meeting for all Principals’ loans to be repaid to TLG by June 1999. 50   At a business planning meeting in May 1999 Mr Cumberland presented graph showing that the deficit had become $1m to the end of April. On Monday 24 May 1999, directly after this meeting, Mr Cumberland left TLG’s office and ceased working in the business. Since then he has not returned to work and he has taken no significant part in TLG’s affairs. TLG made payments to him for several months on a basis which has not been established and need not now be decided; this ended in August. It is not disputed that he has, since May 1999, been disabled by depressive illness from working. From about September 1999 onwards he has received payments under Disability Insurance. 51   Mr Cumberland’s affidavit evidence shows that he does not dispute that it was agreed among the Principals that their personal liability as among them for bank facilities and personal guarantees and securities provided by Principals would be equal. Cross-examination of Mr Cumberland strongly confirmed what his affidavit indicated, and showed that the Principals’ personal liability extended to loans by related persons including Mr Labraga’s parents and Mr Highland’s father (see transcript 70). Mr Cumberland denied in evidence that he ever made a statement to the effect that all Principals would give personal guarantees in respect of debts or losses of the company. Equal personal liability for the Westpac facility is established by the written guarantees which the Principals gave, and, as I was told, so is their liability under guarantees given in respect of the lease. Mr Cumberland does not dispute personal liability to contribute to any losses incurred by Mr Highland in respect of loans he made or to other losses incurred by Principals in respect of loans to TLG. Mr Cumberland’s liabilities in these respects are clearly established. However, they have not been precipitated in the sense of being immediately owing, as the evidence does not show that TLG has failed to meet obligations and, whether or not it has, the claims made against Mr Cumberland in these proceedings are not based on requiring contribution to losses of particular Principals in respect of their loans to TLG. 52   Mr Cumberland’s oral evidence shows that he accepted that there was discussion about what would happen on the exit of one of the partners, to the effect that the exiting party would equalise the loans, not immediately, (t77-78) and there was discussion about how to put a value on the 25 per cent share of the business that each of the partners was to have, and agreement to delay or stagger payment according to the circumstances of the person who left (t78). In cross-examination (t82+) plaintiffs’ counsel put to Mr Cumberland the passages in plaintiffs’ affidavits which are alleged to sustain the exit contribution agreement and about the wash-up. Mr Cumberland denied that he understood that there was to be an exit contribution immediately on leaving and that moneys arising from sale of shareholding would be paid up to two years later. 53   The distinction between the plaintiffs’ claim and the liabilities Mr Cumberland acknowledges is significant. The plaintiffs call on Mr Cumberland to pay to the plaintiff Principals 25 per cent of the deficiency in TLG’s assets in respect of its liabilities, calculated by consolidating its accounts with those of its subsidiary. They do not put any claim for a general resolution of the liabilities of all the Principals. 54   So far as evidence shows, Mr Cumberland continues to be a director of Two Lands Group, and his trust company continues to own shares and units. The plaintiffs dispute that he continues to be a director, however there was no need to resolve this dispute. I note that his removal from the Board would appear to be contrary to cl.4(b) of the Unit Holders’ Agreement. 55   The project of preparing a partnership agreement referred to in Topic 5 of PEP11 is a different project to the letter of agreement or similar document referred to several times earlier, which related to accepting responsibility for loans to the company, initially and principally loans made by Mr Highland. The obligation of principals to contribute to a loss in respect of loans by Mr Highland, or other loans made at their request was established separately from and well before the discussions which led to the formulation of subjects for a partnership agreement recorded under Topic 5 in Ex PEP11, and that obligation cannot be regarded as superseded by the Unit Holders Agreement. The Unit Holders Agreement did not deal with that obligation, and there is no reason to impute to the principals an intention, of which there is no direct evidence, that their previous arrangements and obligations about contribution to losses should come to an end with the Unit Holders Agreement. They were not parties to the Unit Holders Agreement. The Unit Holders could not sustain serious liabilities; they had no function but to hold units. The personal commitment of Principals to contribute to losses on debts to other Principals was entirely basic to all their arrangements, as otherwise there would be no Two Lands business at all. Only for convincing reasons should it be imputed in them that they intended the personal commitment to be overridden by some later arrangement. The absence of any such arrangement from the Unit Holders Agreement (and cl.8(c) cannot be seen as any expression of such an arrangement) is not an indication that their personal commitment relating to contribution had come to an end. 56   I conclude that there was no agreement among the Principals, or among any of the persons referred to in the first issue for trial, to the effect suggested there or to the effect referred to in Claim (4) in the Amended Summons. No liability to contribute 25 per cent of the debts of TLG or of the group arose upon Mr Cumberland ceasing to work in the business or since. Mr Cumberland, like other Principals, has a liability to contribute to any losses incurred by Principals who have made loans. However, the plaintiffs do not sue for such contributions, and so far as evidence shows there have not been any losses; Mr Cumberland’s leaving the business is not a catalyst for liability to make a contribution of this kind. 57   If such a liability were precipitated there could well be equitable remedies for the enforcement of the liability to contribute, and those remedies may conceivably include an order for specific performance if the obligation is held to constitute an indemnity. In this connection the plaintiffs’ counsel referred to MacIntosh v. Dalwood (No. 4) (1930) 30 SR (NSW) 415 and Re Dixon [1994] 1 Qd R 7. Equitable remedies would be available only to the Principals and only on terms which would require that they also made their contributions. All closely related entitlements to contribution would have to be resolved at the same time. 58 Mr Cumberland is at present subject to Mareva orders which restrain him not only in respect of a deposit of $190,000 which, under arrangements between him and Westpac, has been substituted for Westpac’s security over his house at Paddington, but also restrains dealing with his assets generally. The extent of this protection is excessive in relation to the part of the plaintiffs’ claim which still remains to be decided, as the claim including interest for Mr Cumberland’s liability for his loan account with TLG is for $120,000. TLG is the only appropriate plaintiff in respect of that claim. In my view Mareva relief should be continued only in respect of a fund of $120,000, and Mr Cumberland should not be subject to continuing restraint in respect of other assets. The evidence does not show that he is under any contractual obligation to furnish TLG with securities to support its bank facility. His conduct has shown that he wishes to withdraw that security, he is entitled to do so and restraint on his dealings with his assets can only be based on Mareva principles. 59 Orders:

On Claim 1 in the Amended Summons I will order a reference to establish the amount of Mr Cumberland’s liability on his Loan Account, and entry of judgment on the amount determined when confirmed. The parties should bring in draft minutes of the order of reference. The parties to the reference are TLG and Mr Cumberland.

I must now reconsider the Mareva orders. It is not appropriate that they continue in their present form.

60   The orders which I make now are:

(1) Order that Agreed Issues for trial as set out in the Schedule to this order be decided as separate questions.

Schedule. [The Schedule sets out the Agreed Issues]

(2) Order that the Agreed Issues be determined as follows:-

1. There is no such agreement

2. It is not necessary to decide this issue

3. The plaintiffs are not entitled to the declaratory relief
sought in paragraph 4 of the Amended Summons.

4. No.

(3) Dismiss Claim 4 in the Amended Summons.

(4) Each party has liberty to apply with respect to other claims in the Amended Summons.

(5) Costs reserved.

Last Modified: 09/25/2000