Radly Corporation Pty Ltd v Suncorp-Metway Limited
[2002] VSC 403
•13 September 2002
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
CORPORATIONS LIST
No. 4871 of 2001
IN THE MATTER OF RADLY CORPORATION PTY LTD
| RADLY CORPORATION PTY LTD | Plaintiff |
| v | |
| SUNCORP-METWAY LIMITED | Defendant |
| IN THE MATTER OF WELWOOD PTY LTD WELWOOD PTY LTD | |
| Plaintiff | |
| v | |
| SUNCORP-METWAY LIMITED | Defendant |
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JUDGE: | HABERSBERGER J | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 10 SEPTEMBER 2001 | |
DATE OF JUDGMENT: | 13 SEPTEMBER 2002 | |
CASE MAY BE CITED AS: | RADLY CORPORATION PTY LTD v SUNCORP-METWAY LIMITED | |
MEDIUM NEUTRAL CITATION: | [2002] VSC 403 | |
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CORPORATIONS – Section 459G(1) of the Corporations Act 2001 – Application to set aside statutory demand – Whether there was a genuine dispute – Appeal from Master dismissed.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J.A. Strahan QC and Mr P.L. McCurdy | Harwood Andrews Lawyers |
| For the Defendant | Mr P.J. Jopling QC and | Allens Arthur Robinson |
HIS HONOUR:
The Two Proceedings
The first of these proceedings is an appeal by the plaintiff, Radly Corporation Pty Ltd ("RCL"), against an order of the Senior Master dismissing its application under s.459G(1) of the Corporations Law (now the Corporations Act 2001) to set aside a statutory demand for $5,353,422.72. RCL contends that there is a "genuine dispute" within the meaning of s.459H(1)(a) of the Corporations Act 2001 as to the existence of the debt to which the demand related. Its case was that the debt was not due and payable when the demand was served.
The parties have proceeded on the basis that whatever result is reached in the RCL matter will be followed in the similar application made by Welwood Pty Ltd ("Welwood").
The plaintiff's application was initially supported by an affidavit of Mr Nayer Radly, a director of RCL, sworn on 13 March 2001. The defendant, Suncorp-Metway Limited ("Suncorp"), filed three affidavits in opposition – one by Mr David Kirk, the National Manager, Small Business Division, of Suncorp sworn on 6 April 2001, one by Ms Susan McLean, a manager in the Professional Investor Unit of Suncorp sworn on 9 April 2001 and a joint affidavit of Ms Helen Gluer and Mr Robert Gannon, Managers and Duly Constituted Attorneys of Suncorp, sworn on 9 April 2001. In reply, the plaintiff relied on an affidavit of Mr Adam Radly, a director of RCL, sworn on 11 April 2001 and a second affidavit of Mr Nayer Radly sworn on 17 April 2001. On 18 April 2001, the Senior Master ordered an adjournment "to enable the completion of affidavit evidence". The plaintiff was given a month to file and serve any further affidavit on which it would seek to rely. It filed two further affidavits, one by Mr Peter Sangster, an accountant, sworn on 18 May 2001 and a third affidavit by Mr Nayer Radly also sworn on 18 May 2001.
During the hearing before me, I indicated that I would grant Suncorp special leave pursuant to r.77.05(7) of the Supreme Court (General Civil Procedure) Rules 1996 to file a further affidavit to cover a specific point raised by RCL. On 12 September 2001, Suncorp filed an affidavit of Mr Craig Sloan, a partner in the firm of KPMG, sworn that day. Counsel for RCL reserved their rights, including the right to object if the affidavit went beyond the issue canvassed in the discussions, but otherwise did not oppose the granting of special leave.
The "Genuine Dispute" Test
There have been numerous formulations of the "genuine dispute" test. A recent authoritative pronouncement is to be found in the decision of the Court of Appeal in SpaCorp Australia Pty Ltd v Myer Stores Ltd[1]. Ormiston JA stated in that case that in order to determine whether there is a "genuine dispute" within the meaning of s.459H(1)(a):
"[t]he applicant must demonstrate the existence of a plausible contention requiring investigation and, in the words of the Full Federal Court in Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd,[2] that the dispute is 'bona fide and truly exists in fact' and its grounds are 'real and not spurious, hypothetical, illusory or misconceived'. This issue here is whether that test has been satisfied."
[1][2001] VSCA 89 at [9]
[2](1997) 76 FCR 452 at 464
Counsel for both parties submitted that an apposite test in the present proceeding was that of McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd:[3]
[3](1994) 12 ACSR 785
"It is, however, necessary to consider the meaning of the expression 'genuine dispute' where it occurs in s.450H. In my opinion that expression connotes a plausible contention requiring investigation, and raises much the same sort of considerations as the 'serious question to be tried' criterion which arises on an application for an interlocutory injunction or for the extension or removal of a caveat. This does not mean that the court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit 'however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be' not having 'sufficient prima facie plausibility to merit further investigation as to [its] truth' (cf Eng Mee Yong v Letchumanan [1980] AC 331 at 341), or 'a patently feeble legal argument or an assertion of facts unsupported by evidence': cf South Australia v Wall (1980) 24 SASR 189 at 194.
But it does mean that, except in such an extreme case, a court required to determine whether there is a genuine dispute should not embark upon an inquiry as to the credit of a witness or a deponent whose evidence is relied on as giving rise to the dispute. There is a clear difference between, on the one hand, determining whether there is a genuine dispute and, on the other hand, determining the merits of, or resolving, such a dispute."[4]
[4](1994) 12 ACSR 785 at 787-788
McLelland CJ in Eq then referred to with approval passages from two earlier cases. In Mibor Investments Pty Ltd v Commonwealth Bank of Australia[5] ("Mibor Investments") Hayne J said:
"… it is not expected that the court will embark upon any extended inquiry in order to determine whether there is a genuine dispute between the parties and certainly will not attempt to weigh the merits of that dispute. All that the legislation requires is that the court conclude that there is a dispute and that it is a genuine dispute."[6]
In Re Morris Catering (Aust) Pty Ltd[7] Thomas J said:
"There is little doubt that Div 3 … prescribes a formula that requires the court to assess the position between the parties, and preserve demands where it can be seen that there is no genuine dispute and no sufficient genuine offsetting claim. That is not to say that the court will examine the merits or settle the dispute. The specified limits of the court's examination are the ascertainment of whether there is a 'genuine dispute' and whether there is a 'genuine claim'.
It is often possible to discern the spurious, and to identify mere bluster or assertion. But beyond a perception of genuineness (or the lack of it), the court has no function. It is not helpful to perceive that one party is more likely than the other to succeed, or that the eventual state of the account between the parties is more likely to be one result than another.
The essential task is relatively simple – to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it)".[8]
[5][1994] 2 VR 290
[6][1994] 2 VR 290 at 295
[7](1993) 11 ACSR 601
[8](1993) 11 ACSR 601 at 605.
In Mibor Investments, Hayne J further said:
"Whether the defences can be described in the sense used in the Bank's submissions as 'recent inventions' does not in my view bear upon the existence in this matter as of a genuine dispute. That is to be judged according to whether there is now a genuine dispute about the alleged debt – not according to how recently it may have arisen".[9]
[9][1994] 2 VR 290 at 293
I turn therefore to consider whether these tests of a genuine dispute have been satisfied.
The Factual Background
RCL was incorporated on 10 September 1997. At all material times its directors were two brothers, Mr Adam Radly and Mr Nayer Radly. It was a holding company with interests in real property, media and technology. By agreement with Dominion Video Satellite Inc, an American company, RCL had the rights to licence the use of certain "slots" of time in Digital Broadcast Satellite systems for digital television in the United States of America.
Isis Communications Limited ("Isis") was incorporated as a wholly owned subsidiary of RCL on 3 July 1998. Isis was established as a vehicle for the acquisition of majority shareholding interests in other companies. On 2 September 1999, Isis was listed as a public company on the Australian Stock Exchange ("the ASX"). Fifty five million shares of $1 each were offered to and taken up by subscribers. RCL received (or retained) 72.4 million fully paid $1 shares ("the escrow shares"), which were the subject of a Restriction Agreement dated 25 August 1999 between RCL and the ASX whereby the escrow shares could not be sold or encumbered during a two year "escrow period" from the date of listing. Thus, the escrow period expired on 2 September 2001.
Following the Isis float and a fall in the price of the Isis shares to as low as $0.55 per share, the Radly brothers decided that RCL should purchase additional Isis shares. To finance the share purchase, Mr Adam Radly prepared a Loan Proposal, which was to be presented to a number of prospective lenders. This document proposed a loan of "$5 million (Negotiable)", at an interest rate "to be negotiated", for a term of "2 years, six months". It was proposed that, because RCL did not have "the standard servicing capacity expected under normal lending guidelines", $1 million be deducted from the loan advance and placed in a dedicated account from which funds would be drawn on a periodic basis to service interest payments on the debt. The security offered was a "first registered mortgage" over RCL's assets, "direct security over 3.6 million free trading Isis shares", a personal guarantee from Mr Adam Radly and the escrow shares. It was noted in the Loan Proposal that "the predominant asset" of RCL was the shareholding in Isis, that the shares were held in escrow for two years, and that whilst there were restrictions on directly encumbering the escrow shares, there was no restriction on encumbering the entity that owned the shares. Two ways of repaying the loan were set out in the Loan Proposal. First, the proposed future float of an associated entity was said to be a source of sufficient funds to pay out the loan. However, if that "scenario" did not eventuate:
"the two and a half year term has been selected in order to allow RCL a six month period after completion of the two year escrow period … to sell sufficient shares on market to extinguish the entire debt."
RCL approached a number of banks but encountered difficulties in obtaining the funds sought. On 5 November 1999, Mr Adam Radly forwarded by facsimile the Loan Proposal to Mr Robert Kelly, a principal of Mortgage Directions, finance broker. In late November or early December, Mr Kelly engaged Mr Peter Sangster, a public accountant, to find a lender for the plaintiff. Mr Kelly faxed a copy of the Loan Proposal to Mr Sangster.
On 10 December 1999, Mr Sangster spoke by telephone to Mr Warren Acworth of Suncorp seeking a $5 million loan on behalf of RCL. Mr Sangster said that he told Mr Acworth that RCL was experiencing difficulty in obtaining the loan because the proposed security was in the form of 71 million [sic] shares that were subject to an escrow agreement for two years, and that RCL could not "service the loan", so that it "would have to include a component to be deposited in a separate account which would be used purely for the purposes of paying interest on the loan". Mr Sangster said in his affidavit that: "[t]his was based on Adam Radly's loan proposal". Following the conversation, Mr Sangster sent a letter dated 10 December 1999, which was not received by Suncorp until 21 December 1999, confirming details of the required loan. It read as follows:
"Further to our telephone conversation I advise details as follows:
Loan required
$5,000,000
Term
30 months
Security
71,000,000 shares in Isis Communications Limited. A company listed on the Melbourne Stock Exchange.
Applicants
Radly Corporation Limited, a company owned by Mr Adam Radly who is managing director of Isis.
General
Of the $5.0m requested, $1.0m would be lodged on Term deposit from which to pay interest.
If you are able to assist, I will forward full details on hearing from you.
I wait your advices."
On about 23 December 1999, Mr Acworth informed Mr Sangster that the lending committee of Suncorp had approved the loan facility to RCL. On the same day, Mr Sangster contacted Mr Kelly who in turn informed Mr Adam Radly by letter dated 23 December 1999 that an in principle loan facility had been negotiated with an unidentified lender. By letter faxed the following day, Mr Kelly informed Mr Adam Radly that he had obtained "conditional approval for funding under terms and conditions which we believe are significantly better than those originally envisaged." It is relevant to note that the security required was said by Mr Kelly to be:
"Share Mortgage over a sufficient number of Radly Corporation's shares in Isis Communications ON CONDITION THAT SUCH SHARES ARE SPONSORABLE BY A BROKER UNDER THE CHESS SPONSORSHIP AGREEMENT AND ARE OTHERWISE COMPLETELY FREE AND AVAILABLE FOR LOAN SECURITY PURPOSES. It is understood that these shares are not currently marketable under prevailing escrow provisions."
On 29 December 1999, Mr Adam Radly and Mr Nayer Radly on behalf of RCL executed the Suncorp Share Gear Application ("the SGA"). This had been forwarded by Mr Sangster to Mr Kelly who presumably sent it to RCL. According to its terms, there should have been delivered with the SGA, as examples, blank copies of a number of other agreements – the Margin Lending Agreement, Share Mortgage, Chess Sponsorship Agreement and General Nominees Authority Agreement. RCL was instructed not to complete them, as this was to be done under the Power of Attorney granted by RCL in the SGA. The SGA contained a section entitled "Risk and Other Disclosure Statement" which referred in some detail to the lending ratio on Margin Loans and margin calls. In this section, it was stated that:
"Under the Suncorp Metway Margin Loan … Suncorp Metway … is prepared to lend funds up to a specified percentage determined by Suncorp Metway of the market value of approved securities. This percentage varies according to which securities you choose and may vary from time to time without notice. …"
It was also explained that if the value of the securities against which borrowings had been made fell below a predetermined limit the borrower and any guarantor would be required on very short notice to make up the shortfall by either reducing the loan, providing additional security, or selling some of the securities. If either of the first two courses was not followed, then Suncorp would be forced to sell sufficient securities to meet the margin call. Under the heading "Events of Default" in the SGA, the following statement appeared:
"Upon the occurrence of an event of default, Suncorp … may declare that all moneys owing by you are immediately due and payable and then take a number of steps to protect its security including selling all or part of your and any Guarantor's securities."
It was further explained in the SGA that the Chess Sponsorship Agreement meant that RCL's securities would be in a Chess holding in RCL's name under the control of an associated Suncorp company, Metway Credit Corporation Limited.
The executed SGA was received by Suncorp on 4 January 2000. It had been forwarded by Mr Sangster by letter dated 29 December 1999. Suncorp conditionally approved the application by RCL for the loan facility on 4 January 2000. The facility would be available once suitable security had been provided. By letter dated 6 January 2000, Mr Kelly wrote to the Radly brothers advising that the funding facility was now "fully approved". Mr Kelly suggested that, if necessary, direct contact could be made with Mr Acworth. He urged RCL to provide the necessary security as quickly as possible.
On 7 January 2000, the Suncorp Margin Lending Agreement, Share Mortgage, Chess Sponsorship Agreement and General Nominee authority agreement were executed under power of attorney on behalf of RCL by Mr Craig Sloan of KPMG, an "Authorised Officer" of Suncorp as defined by the SGA. Both Mr Adam Radly and Mr Nayer Radly claim they had not seen the Margin Lending Agreement ("the MLA") until the latter sought legal advice after Suncorp commenced selling Isis shares.
The MLA did not specify a date by which the loan was to be repaid to Suncorp. On the contrary, it was provided that Suncorp or the borrower could give 7 days' written notice (and at Suncorp's discretion, verbal notice) to the other of termination of the Agreement.
RCL's loan facility was approved on the basis of a Loan to Value Ratio ("LVR") of 40%. In order not to exceed that LVR, a security value of $12.5 million had to be maintained. The Isis share price opened at $0.94 per share on 7 January 2000. At that price, the value of the escrow shares was $68 million, well in excess of what was required to constitute an LVR of 40%.
In his affidavit, Mr Sangster said that, at the request of Mr Adam Radly, which was communicated to him by Mr Kelly, he telephoned Mr Acworth "shortly after forwarding the application" to ask whether Suncorp would be willing to accept a lesser number of Isis shares than all of the escrow shares. A few days later Mr Acworth told him that Suncorp's lending committee required "all of the shares to be secured in view of the fact that the facility was already risky enough because the security was in escrow for two years."
On 12 January 2000, RCL drew down $2.5 million. A further $1 million was drawn down on 17 January and the balance of the $5 million on 19 January 2000. Contrary to RCL's original plan, which was set out in the Loan Proposal, the sum of $1 million was not set aside in a separate account for the payment of interest. On 16 February 2000, RCL paid Suncorp $20,000, which was slightly more than the amount of interest due at that time. RCL made a further payment of $20,000 for interest on 2 March 2000, which was significantly less than the amount payable for a full month.
On 28 January 2000, Suncorp granted a similar facility to Welwood, a related company of RCL. Nearly half of the escrow shares were used as security for that loan. On or about 26 May 2000, Suncorp granted a further margin lending facility to Brodance Pty Ltd ("Brodance") for funding of $3 million. The Brodance facility was secured by a mortgage over Isis shares which were not subject to any escrow or restriction agreement.
On or before 20 July 2000, Suncorp conducted a review of the three loan facilities and determined that Isis shares were no longer suitable to be an approved share for security purposes. Suncorp resolved to reduce the LVR for each facility to 0% from the end of July. Suncorp argued that it was entitled to do this under clause 5.6 of the MLA which provided that Suncorp "in its absolute discretion may change the Percentage at any time during the currency of this Agreement. Any such change in the Percentage may require the Borrower and any Guarantor to pay a Margin Call …" "Percentage" was defined in clause 1.1 to mean "the maximum percentage of the Market Value which Suncorp Metway is prepared to lend as determined at any time and from time to time by Suncorp Metway in its absolute discretion." "Market Value" was defined as "the market value of the Mortgaged Securities as determined by Suncorp Metway in its absolute discretion from time to time." Each facility was therefore placed in full margin call.
From mid-January to mid-April 2000, the price of the shares on the stock exchange had generally been higher than the price on 7 January 2000, when the MLA was executed, with a highest price of $2.65 on 27 March. From mid-April to early July 2000, the price was in decline and was generally lower than the price on 7 January 2000. The lowest price was $0.41 on 26 May 2000. From early July, there was a recovery in the price to about the same or slightly better than the price on 7 January 2000. On 20 July 2000, Isis shares opened at $1.00 and closed at $1.03. On that day, Ms Susan McLean of Suncorp telephoned Mr Nayer Radly to inform him of the review and its result. She stated that Suncorp required RCL, Welwood and Brodance respectively to clear the facilities within 14 days. In her affidavit, Ms McLean said that Mr Nayer Radly stated that 14 days was not sufficient time to clear the facilities, that three months would be required to arrange alternative finance, that Suncorp was not able to deal with the escrow shares until September 2001 and that he would put a "proposal" together and send it to her.
On 26 July 2000, Mr Kirk sent an email to Mr Nayer Radly requesting "a written, detailed proposal clearly outlining the method of clearance" by close of business the following day.
Mr Nayer Radly sent an e-mail to Ms McLean on 27 July 2000, which read as follows:
"RE: SUNCORP METWAY MARGIN LENDING FACILITY
I refer to the above noted facility and discussions with the writer Thursday 20 July, and subsequent correspondence.
I confirm your instruction that Isis Communications Ltd (ISC) is no longer an ASX security that your Margin Lending Department will accept as adequate security. Particularly, I wish to confirm that the reduction of lending from 40% to 0% LVR is effective two weeks from the date of initial contact.
On this basis and that the relevant facilities' basis has changed; [RCL] hereby advises that the fourteen (14) day period referred to is not sufficient to repay the said facilities.
Furthermore, I understand that it would also be considered unusual that facilities of this size require immediate repayment. Rather, I understand that facilities of this magnitude would be frozen from further activity but also enable repayment over a period in the order of four (4) to six (6) months or as otherwise negotiated in a commercial nature.
This issue is raised as matter [sic] of concern. The nature of the impact, forced selling of this security would have on a substantial number of your other clients and the substantial number of public shareholders holding this security, would be extreme.
Consequently, we respectfully request that your office reconsider its position in relation to the proposed repayment period. Other discussions in relation to alternatives, which may prove more beneficial to both parties, are welcome. Attached to this correspondence are two options for your consideration.
I also take this opportunity to express our concern that the said facility, which is of a substantial nature, has been terminated when it was approved and initiated at a period when the company had a significantly smaller market capitalization relative to its current position. In so doing, there are some issues of responsibility that need to be considered during your assessment of this situation.
Your prompt consideration of this matter is greatly appreciated."
The two options referred to were first that there be "an LVR of 20% on the basis of no further drawdowns" with a period of approximately 6 months "to enable responsible liquidation of assets and refinance …", and secondly that there be a progressive repayment by means of five monthly instalments of $600,000 commencing on 31 August 2000 with the outstanding balance to be paid on 18 January 2001.
It should be noted that although Mr Nayer Radly said in his first affidavit that he told Ms McLean that the loan facilities were not repayable at that time, that the escrow shares could not be sold before the expiration of the restricted period, that RCL was not in breach of the terms of the loan facilities, that RCL was not in a position to repay the loan and that her request for payment within fourteen days was in breach of the terms of the loan facilities, none of this is mentioned in his subsequent letter.
Mr Nayer Radly deposed that Ms McLean "seemed confused about the basis of the RCL facility and asked me to provide her with a copy of the escrow agreement". He said that he would do so. By email dated 1 August 2000 Ms McLean repeated her request that a copy of the escrow agreement be provided as Suncorp's legal department wished "to clarify the status of the security held against" the RCL loan facility.
By email to Ms McLean dated 25 September 2000, Mr Nayer Radly requested "the current interest payment required … so that arrangements can be made." On 4 August and again on 8 August 2000, RCL paid Suncorp the sum of $50,000 for interest.
On 24 August 2000, Mr Adam Radly met with Mr Kirk, the National Manager, Small Business Division, of Suncorp, in Brisbane. In his affidavit, Mr Kirk said that Mr Adam Radly requested until the end of 2000 to clear the RCL and Welwood facilities and stated that as a sign of good faith, RCL and Welwood would each make monthly payments of $300,000 to Suncorp commencing on 1 October 2000. According to Mr Kirk, at no stage during the meeting did Mr Adam Radly allege that Suncorp was acting in breach of the agreements with RCL and Welwood. In his affidavit Mr Adam Radly said that he told Mr Kirk at the meeting that "the loans were not then repayable however I also said that I would nonetheless make inquiry as to whether the loans could be refinanced." As a result of that meeting, Mr Adam Radly sent by facsimile, on 28 August, a letter which commenced:
"As indicated during our discussion, I have investigated the relevant issues and propose to refinance the outstanding facility. Given that there are no margin lenders lending against stocks such as Isis, I will need to pursue a corporate finance arrangement and/or an external investor (possibly US based). Given the size of the facility compared to the value of the security, I do not expect that this will be difficult to arrange, however, these avenues are a little more time consuming."
He then proposed the following repayment schedule - two repayments of $600,000 on 1 November and 1 December 2000 and the outstanding balance on 1 January 2001. I note that despite Mr Adam Radly stating in his affidavit that he said to Mr Kirk that the loan was not then repayable, there is not a hint of any such view in this letter.
Mr Kirk replied by letter dated 5 September 2000. It relevantly read:
"I refer to your letter of 28 August 2000 and confirm that Suncorp Metway consent to the extension of the term of the Radly Corporation Limited and Welwood Pty Ltd facilities to 1 January 2001.
We would appreciate if the reduction programme including monthly interest payments, commenced on 1 October, 2000 as originally planned. At our meeting on 24 August you indicated that the reduction programme would be made without the need to sell Isis stock and we therefore request that you meet your original commitment."
Despite this letter, Mr Adam Radly said in his affidavit that as far as he was aware Suncorp had not responded to his letter of 28 August 2000.
In mid-September 2000, when Brodance did not comply with Suncorp's demand for it to clear its facility, Suncorp exercised its right to sell the Isis shares mortgaged to it as security for that facility. As previously stated, they were not subject to any escrow agreement. (A suggested offsetting claim by RCL in respect of the sale of these shares was not pursued on the appeal). Suncorp sold over a million Isis shares during September 2000 at prices ranging from $0.69 down to $0.40 per share. By 3 October 2000, the Isis share price had fallen below $0.40 and thereafter it continued to fall.
By a further email to Ms McLean dated 27 September 2000, Mr Nayer Radly said:
"I refer to letter dated 28 August requesting an extension of principal repayment and subsequent response.
We confirm that we are not in a position to make that principle [sic] repayment at their time.
Due to the current share price being less than half of its value at that time, we must balance our responsibilities and as such we will endeavour to meet your interest requirement."
No repayments were made by RCL between 5 September and 31 December 2000 in accordance with the terms negotiated by the exchange of correspondence. The balance of the loan was not paid on 1 January 2001.
On 12 February 2001, the deponents of the joint affidavit signed a document entitled "Election to Accelerate". It stated that following default by RCL, Suncorp elected and declared that all moneys owing by RCL to Suncorp were "now immediately due and payable to Suncorp Metway in full". On the same day, Suncorp's solicitors forwarded a notice of demand seeking payment by 20 February "of $5,337,789.96 as at 9 February 2001 pursuant to a margin lending agreement dated 7 January 2000". RCL did not comply with the demand. On 22 February 2001, RCL was served with a statutory demand for $5,353,422.72 dated 21 February 2001. A separate statutory demand in relation to the Welwood facility was also issued.
Was There a Genuine Dispute?
Mr Strahan, one of her Majesty's counsel, who appeared with Mr McCurdy of counsel for the plaintiff, submitted that there were three reasons why there was a genuine dispute about the existence of the debt.
First, he submitted that the margin lending documents, on which Suncorp relied, did not constitute the loan agreement between RCL and Suncorp, or the whole of that loan agreement. There was an overriding fundamental term, in his submission, that the loan would not be called up for a period of two years six months (alternatively two years) from 2 September 1991. That is, there was no debt due and payable by RCL to Suncorp until 2 March 2002 (alternatively 2 September 2001). This overriding fundamental term was said to have come from the terms of the Loan Proposal.
In Mr Nayer Radly's first affidavit he stated that:
"the basis of the RCL facility as agreed between RCL and the defendant was that, inter alia, the facility was not to be repaid for a period of two years …"
He said that he spoke by telephone with Mr Acworth on at least four occasions between 6 and 11 January 2000 concerning the RCL facility, including raising with him the inappropriateness of a margin lending facility given that the security for the facility would not be available for realisation for a period of two years because of the escrow agreement. Mr Strahan submitted that the various matters referred to in those conversations amounted to an acceptance by Mr Acworth on behalf of Suncorp that RCL required the loan to be maintained until six months after the escrow period, and that Suncorp would be satisfied if in the meantime steps were taken to get the escrow shares onto the Chess system as soon as that was possible. However, Mr Nayer Radly does not say that the two year term was expressly agreed. Mr Nayer Radly only deposes that Mr Acworth said that he understood that the security would be unavailable for realisation during the period of escrow. This is not saying that there would be no requirement to repay in that period. Further, these conversations were, of course, after the application by RCL for the $5 million loan had been approved by Suncorp on the terms set out in the SGA.
Mr Adam Radly's reference in his affidavit to the contents of a conversation with his own agent, Mr Kelly, "shortly before 6 January 2000" is clearly inadmissible. He therefore gave no factual basis for his assertion later in his affidavit that it was an "express term" on which the loan was advanced that it was "not due for repayment until expiration of the escrow period and then subject to a further period of 6 months in event of repayment being effected by the sale of Isis shares by RCL."
Mr Strahan submitted that the Loan Proposal was the origin of RCL's relationship with Suncorp. However, there is an issue as to whether Suncorp in fact ever received the Loan Proposal. The deponents of the joint affidavit assert that they have been unable to locate any copy of the Loan Proposal on Suncorp's files, but this is hardly conclusive. Mr Strahan submitted that Suncorp did receive the Loan Proposal as Mr Acworth, in a telephone conversation with Mr Nayer Radly, made reference to the document, thus acknowledging that he had received it. There was no evidence from Mr Acworth on this point because it was said in the joint affidavit that he was no longer employed by Suncorp. But neither was there any statement from Mr Sangster that he had forwarded the Loan Proposal to Suncorp. His affidavit only referred to the letter of 10 December 1999 being sent. Despite this being an issue, no attempt was made by RCL to have Mr Sangster clarify the situation by a further affidavit, either during the adjournment granted by the Senior Master or on the appeal before me.
I do not propose to embark on an examination of all of the factors one should take into account in reaching a conclusion on this issue, because if it is relevant to the question of a genuine dispute, that Suncorp knew that RCL was seeking a two or two and a half year term loan, then I find that Suncorp did know this. In my opinion, this is clear from Mr Sangster's letter of 10 December 1999 which was undoubtedly received by Suncorp. However, in my opinion, that knowledge is not relevant, because the clear basis of the loan facility entered into between RCL and Suncorp was that Suncorp could make margin calls at its discretion. In order to meet such a call, RCL was required to reduce the loan in part or in whole or provide extra security or Suncorp could sell all or part of the mortgaged shares. The fact that the shares could not be sold for two years did not mean, in my opinion, that there was any commitment on the part of Suncorp not to make a margin call for two years. If there was default by RCL under the MAL, Suncorp was entitled to enforce its rights, even if it could not exercise any rights in relation to the shares.
Mr Jopling, one of her Majesty's counsel, who appeared with Mr Woodward of counsel for the defendant, submitted that as the MLA did not provide for a time for repayment for the facility, and as the conversations relied on by RCL, in support of the existence of the two year term, post-date the provision and acceptance of the application for the MLA and as RCL acknowledged in the SGA that the facility would be conducted in accordance with and on the basis of the MLA, there was no genuine dispute that the debt was due and payable on 21 February 2001. He argued that RCL's claim was contrary to the written documentation. If Suncorp had intended to contract with RCL on the basis that the term of the loan was for two years, Mr Jopling submitted, it would not have gone to the trouble of putting forward the contractual documents it had, with all of the protection for Suncorp which they provided.
I accept the defendant's submissions. The evidence demonstrates quite clearly, in my opinion, that the Radly brothers understood what they were doing when they entered into the SGA and thereby the MLA. The lack of any contemporaneous complaint by them about Suncorp's right to seek repayment of the loan lends support, in my opinion, to the conclusion that there was no term of the agreement that the loan would not have to be repaid for two years. In saying that, I am not ignoring Mr Nayer Radly's third affidavit. The explanation given for not asserting their rights in writing simply does not go far enough, in my opinion. Other criticisms were made of Suncorp's conduct in that correspondence. This leads me to the conclusion that the argument now advanced lacks sufficient prima facie plausibility to merit further investigation as to its truth.
The first part of Mr Strahan's second submission was that the powers given to Suncorp under the MLA had to be used fairly and in good faith and for the purpose for which they were conferred, and not arbitrarily and unreasonably. In support of this proposition, Mr Strahan referred me to the judgment of Sheller JA in Alcatel Australia Limited v Scarcella[10], which considered whether a duty of good faith, both in performing obligations and exercising rights may, by implication, be imposed upon the parties to a contract. He fairly conceded that this was still a controversial topic, but submitted it was sufficient for his purposes to found an argument that there was a genuine dispute. Mr Strahan argued that in July 2000 there was no basis or cause for Suncorp to make any determination leading to the calling up of the whole of the loan. No reason had ever been given by Suncorp for the sudden and unexpected removal of Isis shares from the list of shares approved for security purposes. On the contrary, the value of the escrow shares had slightly increased from the date of the MLA. All of this led to the conclusion, in Mr Strahan's submission, that following the departure of Mr Acworth, Suncorp had become concerned about the loans he had negotiated on its behalf, and wrongfully decided to terminate the loan. He submitted that the imposition of the LVR of 0% was invalid because such a step was not contemplated by the MLA, at least not for reasons unconnected with protecting Suncorp's position.
[10](1998) 44 NSWLR 349 at 368-9
This submission overlooks, in my opinion, the history of the Isis share price itself and the general collapse in the price of what have been called tech stock or dot com shares. One should not be surprised that, in the circumstances, a financial institution concluded that Isis shares were no longer suitable to be an approved share for security purposes. Apart from anything else, the volatility in the Isis share price had been extraordinary. For example, on 14 April 2000 the closing price was $1.17, on the next trading day, 17 April, it was $0.698 (a drop of $0.472) and on 18 April, the closing price had risen to $0.83. Further, it was not to the point, in my opinion, that the price of Isis shares on the day Ms McLean spoke to Mr Nayer Radly (opening $1.00, closing $1.03) was slightly higher than the price when the MLA was entered into by RCL. The share price had decreased significantly during May and June and this would be sufficient for Suncorp to fear that it could happen again, despite the recent rise. The suggestion that Suncorp's change of mind about the Isis shares was really an attempt to rectify problem situations brought about by the recently departed Mr Acworth is, in my opinion, pure speculation and cannot be the basis of a genuine dispute.
Mr Strahan further submitted that, even assuming that the MLA did constitute the entire agreement between the parties, Suncorp had not complied with the required steps under the MLA. It was not established, for example, that Suncorp had ever formed the required opinion because, it was submitted, the opinion of the deponents of the joint affidavit was not sufficient.
The deponents of the joint affidavit said that:
"The defaults made by RCL, existing as at 12 February 2001, included the following:
(a)RCL had defaulted in the repayment program agreed by Adam Radly;
(b)in our opinion, RCL was no longer able to adequately carry out its obligations under the Security;
(c)in our opinion, there had been a material adverse change in the financial position of RCL by reason of the decrease in the share price of ISIS particularly given that RCL's shareholding in ISIS was its principal asset (in this regard we refer to paragraph 12 of Mr Radly's affidavit); and
(d)the market value of the ISIS shares mortgaged to Suncorp had fallen (on more than one occasion) more than:
(i) 10% on a trading day; and
(ii) 10% in aggregate on 2 consecutive trading days; and
(iii) 15% in aggregate on 3 consecutive trading days.
This is shown on a table produced by our solicitors, Allen Allen & Hemsley, following a review of the ASX records for the ISIS share price …"
However, the opinions expressed in the joint affidavit were sufficient, in my opinion, to constitute the opinion of Suncorp for the purposes of sub-paragraphs (b) and (f) of the definition of "Events of Default" in the MLA (second and third ground in the joint affidavit). In particular, I cannot see why the joint affidavit is not "a certificate of any Officer of Suncorp", within the meaning of sub-paragraph (f), and therefore "conclusive evidence of the truth" of the opinion. Another sub-paragraph relied on was (j) (fourth ground in the joint affidavit). It was not dependent on any opinion of Suncorp. The evidence clearly established that there had been a number of falls of the required percentage over the required time in the price of the Isis shares quoted on the ASX. Although Market Value is defined in terms of whatever market value is determined by Suncorp in its absolute discretion from time to time, the best price RCL could hope for was the quoted price on the ASX and, as stated, even then RCL was in default. I will consider the first ground relied on in the joint affidavit later in these reasons.
I therefore consider that Suncorp has established there was default by RCL following which, under paragraph 6.1 of the MLA, Suncorp was entitled at its option to declare that the monies owing were immediately due and payable and to direct RCL to pay all such monies to Suncorp. This was what was done by Suncorp on 12 February 2001 (see paragraph 35 above). Accordingly, I reject the submission that Suncorp had not complied with the required steps under the MLA.
Finally, Mr Strahan submitted that the MLA was not executed by RCL because it had been executed by an attorney who was not properly authorised to execute the agreement. There were three limbs to this submission. First, that the appointment of Mr Sloan as an Authorised Officer within the meaning of the SGA by two 'Level 3 Attorney[s]" for and on behalf of Suncorp by letter dated 31 May 1996 offended the maxim "delegatus non potest delegare". Second, that it was not shown that Mr Sloan was "in the employ" of KPMG in the ACT" at the time he executed the MLA as the attorney of RCL. Third, that whilst the documents identified in the 1996 letter which the Attorney was authorised to execute are described in a similar way to those listed in the SGA, there was nothing to show that the documents were the same. Mr Strahan conceded that those were all extremely technical points, but submitted that Suncorp had to comply strictly with the terms of its own documents.
In my opinion, all of these points should be rejected. First, Suncorp's Level 3 Attorneys were not delegating any of their powers to Mr Sloan. They were appointing him an Authorised Officer for the purposes of being appointed an Attorney of a borrower. Secondly, whatever one might say about the likelihood of Mr Sloan executing these documents if he were no longer in the employ of KPMG in the ACT, as previously mentioned, Mr Strahan did not oppose the granting of special leave to Suncorp to file an affidavit dealing specifically with this issue. I considered it appropriate to grant special leave because it seemed to me to be in no-one's interest to have the parties continue their dispute, if this was the only issue preventing resolution. Mr Sloan's affidavit confirmed that he was properly authorised to be appointed the attorney of RCL. Thirdly, I see no reason to read down the description of the documents in the 1996 letter by limiting the authority to a particular version of, for example, the MLA, rather than treating the description as referring to documents of that character in whatever form they appeared from time to time. Finally, I note that it would be an extraordinary result if RCL could somehow disown the MLA as not its document, when it was the very basis of the agreement under which Suncorp lent RCL $5 million.
Mr Strahan's third submission therefore failed to raise a genuine dispute.
Even if I am wrong in the above conclusions, it seems to me that there was, in any event, a promise by RCL that it would repay the loan by 1 January 2001, and it did not do that. Mr Strahan submitted that the August communications did not amount to a binding agreement, in the sense of settlement of a disputed claim, such that what had existed before had merged with a new agreement. He pointed out that in the statutory demand, Suncorp continued to assert that the rights derived from the MLA. The most that Suncorp could make of the August communications, he submitted, was an informal admission that the amount was owing.
I disagree. I consider that the August communications constituted either a fresh agreement or a variation of the MLA. Suncorp gave up its claimed right to have the loan repaid in full within 14 days in return for RCL agreeing to repay the loan on or before 1 January 2001. In my opinion, the parties were intending these negotiations to be contractual in the sense of legally binding. In my opinion, nothing could be clearer than that RCL would have relied on this agreement had Suncorp served its statutory demand prior to 1 January 2001. And it would have been entitled to do so, because the parties had compromised their dispute and agreed that whatever the rights and wrongs, RCL would repay the loan on 1 January 2001.
I have previously referred to the first default alleged in the joint affidavit, namely, that "RCL had defaulted in the repayment program agreed by Adam Radly." This appears to be treating the August communications as a variation of the MLA and as such would fall within sub-paragraph (a) of the definition of "Events of Default" in the MLA. It was hardly surprising, therefore, that Suncorp should refer in its statutory demand to the debt owed "pursuant to the Margin Lending Agreement between the company and the creditor dated 7 January 2000."
Conclusion
For the reasons given above, I have concluded that there is no "genuine dispute" within the meaning of s.459H(1)(a) of the Corporations Act 2001 as to the existence of the debt to which Suncorp's statutory demand dated 21 February 2001 related. Accordingly, the appeal against the Senior Master's order in this proceeding and the Welwood proceeding will, in each case, be dismissed with costs.
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