Re St George Development Company
[2022] VSC 295
•6 June 2022
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2018 0597
| IN THE MATTER OF ST GEORGE’S DEVELOPMENT COMPANY PTY LTD (IN LIQUIDATION) (ACN 149 242 955) | |
| MATTHEW BYRNES in his capacity as liquidator of St George’s Development Company Pty Ltd (in liquidation) (ACN 149 242 955) | Plaintiff |
S ECI 2021 4331
| IN THE MATTER OF ELIANA CONSTRUCTION AND DEVELOPING GROUP PTY LTD (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) (ACN 132 817 362) | |
| COMMONWEALTH BANK OF AUSTRALIA (and others according to the Schedule) | Plaintiff |
| v | |
| JOHN STUART POTTS in his capacity as former liquidator of Eliana Construction and Developing Group Pty Ltd (in liquidation) (receivers and managers appointed) (ACN 132 817 362) (and another according to the Schedule) | Defendants |
JUDGE: | Nichols J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 7 February 2022 |
DATE OF JUDGMENT: | 6 June 2022 |
CASE MAY BE CITED AS: | Re St George Development Company; |
MEDIUM NEUTRAL CITATION: | [2022] VSC 295 |
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MONEY – Joint venture agreement – Funding by venturers in uneven proportions – Liquidation of joint venture vehicle after failure of venture – Whether funding a capital contribution or loan – Consideration of essential elements of loan and capital – Moneys intended at all times to be repaid – Capital nature inconsistent with express terms of venturers’ relationship – Loan contracts to be inferred from all the circumstances.
CONTRACT – Inference of a contract from course of conduct – Inference of an intention to repay funds advanced – Significance of binding trust deed on inquiry to find objective intention – Consideration of relevance of post-contractual conduct in inferential fact-finding – Standard of persuasion to be attained.
CORPORATIONS – Trustee company in liquidation – Application by liquidator for directions – Interested parties joining issue in separate proceeding – Where company’s books and records vague and contradictory – Characterisation of advances.
| APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff in S ECI 2018 00597 | Mr D McAloon | Maddocks |
| For the Plaintiffs in S ECI 2021 04331 | Mr P Miller | HWL Ebsworth |
| For the Defendants in S ECI 2021 04331 | Mr P Agardy | White Clelland |
| For the Luka Medical Centre Pty Ltd | Ms T Spencer Bruce | K&L Gates |
Part A: Introduction and background............................................................................................ 1
The present applications.............................................................................................................. 1
Part B: Governing principles........................................................................................................... 5
Part C: The parties’ submissions................................................................................................... 12
Part D: The Manningham Road Venture – course of dealings............................................... 15
The evidence – preliminary....................................................................................................... 15
Initial discussions and proposed joint venture....................................................................... 16
The St George Development Unit Trust.................................................................................. 19
The venture and its funding...................................................................................................... 23
The financial statements of the Trust....................................................................................... 28
General Ledgers.......................................................................................................................... 34
Other documentary evidence.................................................................................................... 36
Report as to Affairs............................................................................................................ 36
St George’s 2017 tax return............................................................................................... 38
Eliana’s books and records............................................................................................... 40
Part E: Analysis................................................................................................................................. 41
The Unit Trust and Trust Deed................................................................................................. 41
The financial statements of the Trust....................................................................................... 43
Evidence of Dr Luka................................................................................................................... 48
Synthesis....................................................................................................................................... 55
Disposition........................................................................................................................................ 57
HER HONOUR:
Part A: Introduction and background
The present applications
Before me are two proceedings which each concern the question whether funds contributed by unit holders in a unit trust to the trustee of that trust, were made by way of capital contribution or loan.
St George’s Development Company Pty Ltd (in liquidation) (St George) was incorporated to act as the vehicle for a venture between Dr Maher Luka and Mr Magdy Sowiha through their respective entities, to purchase and develop a residential property at 164-166 Manningham Road in Bullen. It was the trustee of the St George’s Development Unit Trust (the SGD Trust) and operated for the sole purpose of acting as trustee of the Trust.[1] The unit holders in the trust are Eliana Construction & Developing Group Pty Ltd (Receivers and Managers Appointed) (in Liquidation) (Eliana) and Luka Medical Centre Pty Ltd as trustee for the Luka Family Trust (LMC).
[1]Re St George’s Development Company Pty Ltd (in liq) [2018] VSC 595, [3] (Kennedy J).
In the course of the Manningham Road Venture, St George acquired the Manningham Road property for $2.6m in 2011. The parties were unable to develop the property despite their efforts and the land was sold, undeveloped, under a contract that settled in February 2017. Following the repayment of third-party loans that had been advanced for the purposes of the development, the SGD Trust was left with surplus proceeds of $2,226,326.69 which were held in St George’s then-solicitors’ trust account pending distribution.
Eliana was placed into administration in October 2016 and into liquidation in November 2016. LMC and the liquidator of Eliana fell into disagreement as to the proper characterisation of the surplus proceeds. Their proper characterisation turns on whether, determined objectively, the parties intended that moneys contributed to St George by Eliana and LMC (the Advances) were intended be made by way of capital contributions or by way of loans. In April 2017, by their respective solicitors, they agreed that St George would make an initial payment to each unit holder of $600,000 out of the surplus proceeds, with each side reserving their position as to the character of those payments (the Interim Payments). Eliana’s Interim Payment was received on or about 11 April 2017.
St George was placed in liquidation by its then sole member, Dr Luka, on 8 June 2018.
Matthew Byrnes was appointed as Liquidator of St George in June 2018. He has previously sought and obtained orders in this proceeding enabling St George (having entered liquidation) to continue to carry on the business of the Trust and confirming that the Liquidator could hold, apply and distribute the trust property.[2]
[2]Re St George’s Development Company Pty Ltd (in liq) [2018] VSC 595.
In the St George Proceeding Mr Byrnes applies under s 90-15 of the Insolvency Practice Schedule, being Schedule 2 of the Corporations Act 2001 (Cth), and s 63 of the Trustee Act 1958 (Vic) for directions to the effect that he is justified and acting reasonably in proceeding on the basis that the funds contributed by each of the two unit holders in the trust be treated as capital contributions to St George.[3] The Liquidator seeks these orders to enable him to finalise the winding up of St George.
[3]The characterisation that the Liquidator advances is subject to one exception in respect of Luka Medical Centre Pty Ltd, described in the Liquidator’s Interlocutory Process as, “the loan taken out by [LMC] with Westpac on or about 4 July 2011” (the LMC-Westpac Loan). The Liquidator applies by the same Interlocutory Process for additional orders which the Liquidator will more particularly formulate upon receipt of these Reasons.
In the Eliana Proceeding (commenced in November 2021) the Commonwealth Bank and the Receivers and Managers of Eliana appointed pursuant to a deed of charge dated 14 June 2011 in favour of the Bank (the Eliana Plaintiffs) relevantly seek declarations that the funds contributed to St George by Eliana were capital contributions, and a related declaration that a payment of $600,000 from St George to Eliana on 17 April 2017 was a capital distribution. The Eliana proceeding is not directly concerned with the Manningham Road development, but with the receipt by Eliana of the Interim Payment. By the aforementioned deed Eliana charged to the Bank all its present and future assets and undertakings, in connection with the provision by the Bank of a credit facility.[4] The Eliana liquidator’s position was, and is, that the Advances were all made by way of loan. Although it was not presently in issue, the Eliana Plaintiffs allege that as returns of capital those moneys were attached by the fixed portion of its charge over the assets of Eliana, and the former joint liquidators of Eliana (Mr Cant and Mr Potts, together the Eliana Defendants) ought not to have distributed those proceeds to unsecured creditors in conducting the Eliana liquidation.
[4]The charge is expressed to be fixed in respect of specified categories of assets, including, relevantly, “Marketable Securities, other than those which are acquired and disposed of regularly in the ordinary course of [Eliana’s] business”; “Marketable Securities” is defined by reference to s 9 of the Corporations Act, with certain additional categories including, relevantly, “a unit or other interest in a trust or partnership”. The charge is a floating charge over all other assets.
The form of the present proceedings arose in this way. The Eliana Plaintiffs applied in late 2021 for a determination of a separate question in the Eliana proceeding pursuant to r 47.04 of the Supreme Court (General Civil Procedure) Rules 2015, namely a determination that Advances were capital contributions and that the payment of $600,000 from St George to Eliana on 17 April 2017 was a capital distribution from St George to Eliana under the SGD Trust. All parties to the Eliana Proceeding agreed and submitted that the characterisation of the monetary contributions by unit holders was a threshold question that was clearly demarcated from the balance of the issues in that proceeding.
The parties on each side of the record in the Eliana Proceeding had also appeared as interested parties on the Liquidator’s application in the St George Proceeding. On making their application for the determination of a separate question, the Eliana parties jointly sought an order that the separate question be heard and determined together with the Liquidator’s application for directions in the St George Proceeding.
The Liquidator of St George consented to that course, and all parties in both proceedings sought the joint hearing and determination of the Liquidator’s application for directions and the determination of the separate question proposed by the Eliana Plaintiffs. All parties submitted that the issues raised by both applications were in substance the same. I granted the application (see Re Eliana Construction and Developing Group [2022] VSC 23) and ordered that evidence in one proceeding be taken to be evidence in the other.
An application by a liquidator for directions and a determination of a question in a proceeding present somewhat different tasks for resolution. The giving of directions is intended to facilitate the performance of the liquidator’s functions and should be interpreted widely to give effect to that intention.[5] This approach accords with the need to get the liquidation on, and also with the nature of directions to a liquidator in not determining any substantive rights of any other party but of effectively sanctioning a liquidator’s proposed course as a reasonable one.[6]
[5]Re Lewis (2020) 145 ACSR 459 [31] (White J). The only proper subject of a liquidator's application for directions is the manner in which the liquidator should act in carrying out his functions as such, and the only binding effect of, or arising from, a direction given in pursuance of such an application (other than rendering the liquidator liable to appropriate sanctions if a direction in mandatory or prohibitory form is disobeyed) is that the liquidator, if he has made full and fair disclosure to the court of the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him in accordance with the direction: Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 679.
[6]See, eg, Re Promoseven Pty Ltd v Markey; Bluechip Development Corp (Cairns) Pty Ltd (in liq) (recs and mgrs apptd) [2013] FCA 1281, [37]; Sands Contracting Pty Ltd v Cant [2021] FCA 638, [14]; 5G Developments Pty Ltd (in liq) v Massie [2021] FCA 791, [149]; Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332 (Brennan and Dawson JJ).
However in this case, the Liquidator, having supported the joint determination of the characterisation of the Advances in both proceedings, took the view that because opposing parties would be engaged in contesting the issue, his role could be somewhat more circumspect, as he put it, than it might have had he been seeking directions without the involvement of the interested parties. The Liquidator maintained his original assessment that, although the position was not free from doubt, the better characterisation of the unit holders’ Advances was that they were capital in nature, but was content to take a back seat as it were and allow the principal protagonists to contest the issue, and abide the directions of the Court.
The Liquidator has determined that LMC and Eliana made net contributions to St George of $768,439.00 and $277,990 respectively, excluding the LMC-Westpac Loan and the Interim Payments. Mr Cant initially took issue with the Liquidator’s assessment of the quantum of the Advances but, given the amounts involved, did not agitate that point. In the event, all parties in both proceedings were content to adopt the Liquidator’s calculations.
It is important to note at the outset that, probably as a consequence of the fact that quantum was not dispute, no party advanced before me a discrete characterisation of any of the disputed Advances made by Eliana or LMC. They each submitted that it was sufficient to reach a view about the contributions in globo as it were, having regard to the totality of the evidence. No party submitted that the evidence or circumstances relevant to any particular advance of money could be materially distinguished from the circumstances of any other, such that any of the Advances warranted separate consideration or could, on the evidence, be the subject of any meaningful separate consideration. The evidence on the applications met that description.
Part B: Governing principles
The parties submitted that the question of the proper legal construction of the nature of the disputed payments is one of fact to be determined by reference to the intention of the parties (that is, the mutual intention of LMC and Eliana who were the unit holders in the SGD Trust and the participants in the Manningham Road Venture, and St George, the trustee of the SGD Trust and the recipient of the Advances), as evidenced by all of the circumstances. So much is correct, but the legal framework within which the determination is to occur, while well-established, requires further elaboration.
It was implicit in the parties’ submissions and their approach to the evidence that the parties’ mutual intention in respect of the Advances was to be determined by a process of inference. That is to say, all parties accepted that the task was to find actual intent by inference, and was not one of implying contractual terms. No party advanced a case that a term or terms should be implied into an agreement between Eliana, LMC and St George. The Eliana Defendants’ case was in substance that it could be inferred that LMC, Eliana and St George had agreed that the Advances were to be made by LMC and Eliana subject to an obligation on St George to repay the contributories at the conclusion of the venture. The other parties contented that it was to be inferred that the Advances were contributions in the nature of capital, payment of which was not made subject to an obligation to repay.
The Court of Appeal summarised the principles relating to inferred contractual terms in Grocon Constructors[7] and restated the same principles (citing Grocon) in Uren v Uren.[8] As the Court said in Grocon,
[7]Grocon Constructors (Vic) Pty Ltd v APN DF2 Projection 2 Pty Ltd [2015] VSCA 190 (Grocon), [176]-[180].
[8]Uren v Uren [2018] VSCA 141 (Uren).
It has been observed that the line between inference and implication will not always be easy to draw. However, the distinction between the two processes is set out in Deane J’s judgment in Hawkins v Clayton. After concluding that a contract existed between a testatrix and her solicitors in relation to the preparation, execution and safe custody of her will, Deane J considered what the terms of that contract were. He observed that the contractual terms upon which the will remained in the safe custody of the solicitors were left ‘largely unarticulated by the parties’. In those circumstances, he identified two ‘stages’, which he said may well overlap, for the ascertainment of the relevant terms. The first stage was described as ‘essentially one of inference of actual intention’, and entailed an inquiry as to ‘what, if any, are the terms which can properly be inferred from all the circumstances as having been included in the contract as a matter of actual intention of the parties’. The second stage was described as ‘one of imputation’ and entailed an inquiry as to ‘what, if any, are the terms which are, in all the circumstances, implied in the contract as a matter of presumed or imputed intention’.
In Byrne v Australian Airlines Ltd, Brennan CJ, Dawson and Toohey JJ drew a similar distinction between the inference of contractual terms and their implication in circumstances where there was no formal contract between the parties. They relevantly stated:
In those cases the actual terms of the contract must first be inferred before any question of implication arises. That is to say, it is necessary to arrive at some conclusion as to the actual intention of the parties before considering any presumed or imputed intention.
McHugh and Gummow J similarly stated that, where a contract was not in writing and was oral or partly oral, or it appeared that the parties had not reduced their agreement to a complete written form, courts should exercise caution and avoid an automatic or rigid application of the conditions in the BP Test. They then relevantly stated:
In such situations, the first task is to consider the evidence and find the relevant express terms. Some terms may be inferred from the evidence of a course of dealing between the parties. It may be apparent that the parties have not spelled out all the terms of their contract, but have left some or most of them to be inferred or implied.
Similarly, in Breen v Williams, Dawson and Toohey JJ stated that where there was no formal agreement, the actual terms of the contract would have to be inferred before any question of implication could arise.
In Kitching v Phillips, Murphy JA, with whom Pullin and Newnes JJA agreed, cited Hawkins, Byrne and Breen and stated that inferred terms of the kind referred to by Deane J in Hawkins would typically arise where there was no formal written agreement between the parties.
In considering the whole of the course of dealings between the parties, a contract may be inferred from the acts and conduct of the parties “as well as or in the absence of words”.[9] The process of inferential reasoning was described by Allsop J in Branir v Owston Nominees (No 2) in these terms:
A number of authorities discuss the need not to constrict one’s thinking in the formation of contract to mechanical notions of offer and acceptance. Contracts often and perhaps generally do, arise in that way…
In such circumstances, even in the absence of clear offer and acceptance, and even without being able … to identify precisely when a contract arose, if it can be stated with confidence that by a certain point the parties mutually assented to a sufficiently clear regime which must, in the circumstances, have been intended to be binding, the court will recognise the existence of a contract. Sometimes this is said to be a process of inference or implication. For my part I would see it as inferring a real intention expressed through, or to be found in, a body of conduct, including, sometimes, communications, even if it be the case that the parties did not consciously advert to or discuss, some aspect of the relationship and say: “and we hereby agree to be bound” in this or that respect. The essential question in such cases is whether the parties’ conduct, including what was said and not said and including the evident commercial aims and expectations of the parties, reveals an understanding or agreement or, as sometimes expressed, a manifestation of mutual assent, which bespeaks an intention to be legally bound to the essential elements of a contract.[10]
[9]Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 (McHugh JA, Hope and Mahoney JJA concurring), as cited in Vroon BV v Fosters Brewing Group Ltd [1994] 2 VR 32 at 82–3 and Atco Controls Pty Ltd (in liq) v Newtronics Pty Ltd (Receivers and Managers Appointed) (in liq) (2009) 25 VR 411 at 422 (Warren CJ, Nettle and Mandie JJA).
[10]Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 at [369] and the authorities there cited.
In inferring the terms of a contract by reference to their communications and course of dealings, evidence of the parties’ pre-contractual conduct is admissible on the question whether a particular term is to be inferred.[11] Post-contractual conduct may also be admissible on the question whether it should be inferred that an informal contract contains a particular term.[12] Although evidence of post-contractual conduct is not permissible in the construction of an express contract, such evidence is admissible where a contract is said to arise by inference in a course of dealing between the parties. In such cases, conduct consistent with the performance of the contract said to have been executed may be evidence both of the fact of that contract, and of its terms.[13] It may be seen, then, that the exclusion of post-contractual evidence operates to prevent the departure from a record of the parties’ agreement. Where there is no record as such, the imperative to avoid traversing the record largely falls away; all the more so when the question is not merely of an oral contract but an inferred one, where all the circumstances indicate the parties intend themselves to be bound but have not taken a particular express step of so binding themselves. In such circumstances, the line between pre- and post-contractual conduct will of necessity be blurred. Inferring a term will often involve considering conduct which post-dates the notional formation of the contract, were that date capable of identification.
[11]Regreen Asset Holdings Pty Ltd v R [2015] VSCA 286; Uren, [62].
[12]Uren, [114].
[13]Graf v Flammea [2021] VSC 149, [66] (Almond J); Lawrence v Ciantar [2020] NSWCA 89, [114]-[115] (Bathurst CJ, Meagher and Gleeson JJA agreeing).
I mention these principles because the conceptual basis for the search for intention was unexposed by the parties. It was implicit however, in their each taking the position that the character of the Advances could be determined in globo without distinguishing between the circumstances of any particular Advance and any other, that the mutual intention of the parties in the Manningham Road Venture was accepted to have been consistent throughout. Indeed, no party submitted that the contractual intention in respect of any particular Advance was different from any other, or contended that certain events or conduct should be excluded because it was post-contractual in respect of any particular Advance.
It was accepted that each of LMC and Eliana advanced funds to St George for the purpose of the Manningham Road Venture.[14] The parties excluded the possibility that the cash contributions to St George were gifts, (which, they said, was contra-indicated by the context in which they were made) and advanced the competing characterisations of contributions by way of capital, and alternatively, loans. In this case then, the choice was a binary one – the contributions were either made as ‘capital contributions’ without any contractual obligation of repayment, or as loans.
[14]There was no question that any of the moneys advanced had, for example, been misappropriated for use in the Manningham Road Venture, which might have required a somewhat different path of analysis in considering the contention that the Advances were made by way of loan.
A loan is a simple contract whose essence is an obligation to make repayment; one in which the lender advances the money in consideration of the borrower’s promise to repay.[15] The burden of proving that an advance of money made by one party to another is by way of a loan is not discharged by mere proof of the payment itself.[16] Mere proof of payment to another establishes just that, and more is required to charge the payment with a particular character, which could be done by showing advancement, a trust, a loan, or some other legal or equitable incident to the payment.[17] The existence of a contractual obligation to repay is a question of fact that must, where not express, be found in all of the circumstances.[18] It is not a condition of a valid loan that it be documented in a formal agreement, or that the advance of moneys be subject to the payment of interest or the provision of security. A loan is repayable on demand in the absence of agreement to the contrary as to the terms of repayment.[19] As Sloss J said in Shot One, where there is not sufficient evidence for the Court to make a direct finding of a loan agreement and the Court is asked to embark upon a process of inferential reasoning in order to reach the requisite state of satisfaction, the Court “must be vigilant not to allow conjecture, guesswork or surmise to fill the void”.[20]
[15]See for example, Federal Commissioner of Taxation v Radilo Enterprises (1997) 72 FCR 300, 313 (Sackville and Lehane JJ).
[16]Heydon v Perpetual Executors, Trustees & Agency Co (WA) Ltd (1930) 45 CLR 111 (Dixon J); Joaquin v Hall [1976] VR 788, 789 (Jenkinson J).
[17]Joaquin v Hall [1976] VR 788, 789 (Jenkinson J).
[18]See, eg, Hylepin; Grego v Copeland & Ors [2011] VSC 521 (Ferguson J) Schmierer v Taouk [2004] NSWSC 345 [42] (White J); see also Hylepin Pty Ltd v Doshay Pty Ltd (2020) 148 ACSR 30 (Hylepin), [55]-[59] (upheld in [2021] FCAFC 201).
[19]Barboutis v The Kart Centre Pty Ltd (no 2) [2020] WASCA 41 (Barboutis), [113].
[20]Shot One Pty Ltd (in liq) v Day [2017] VSC 741, [257], applying the broader principle explained by Gordon J in Re Day (2017) 340 ALR 368, [18] (quoting Bradshaw v McEwans Pty Ltd (1951) 217 ALR 1), that, in the course of fact-finding, “there must be more than ‘conflicting inferences of equal degrees of probability so that the choice between them is [a] mere matter of conjecture’”.
“Capital” and “working capital” do not bear fixed linguistic or legal meaning, and take their complexion from the context in which they are used. As the West Australian Court of Appeal said in Barboutis v The Kart Centre:
The terms ‘capital’ and ‘working capital’ – or sometimes ‘short-term capital’ – are common parlance in commercial life. So too they are often employed as legal terminology. The authorities sometimes even speak of ‘loan capital’ – a form of funding which arises where ‘capital is raised by loan’ ... In this sense the loan funds so received are regarded as a capital asset. But the relevant transaction is nevertheless one by way of loan. On the other hand sometimes what is said to be a ‘loan‘ cannot be characterised as such but is found to be a capital contribution. The characterisation question depends on the facts as found as influenced and informed by the context in which the contributions were made.[21] (emphasis added)
[21]Barboutis, [108], citations omitted.
The notion of capital in the context of a unit trust is considered further below.
The use of terminology such as “capital”, “capital asset”, or “loan”, is not determinative of the proper legal characterisation of the underlying transaction.[22] The labels applied by participants in a dealing do not of themselves confer a particular character on the making of an advance, but the contemporaneous descriptors given by the participants to a transaction may, in the context of their dealings more broadly, inform and assist the characterisation, which a task for the Court.
[22]Barboutis, [110].
The parties variously emphasised the significance of certain decided cases in which courts have characterised monetary contributions by parties in joint undertakings as either loans, capital or gifts, including those in which courts have adopted a characterisation contrary to that reflected in the recipient company’s accounts.[23] Where the essential task is to have regard to all of the circumstances and the course of dealings between the parties in objectively ascertaining their intention, little is to be gained by seeking to draw analogies with cases whose facts are not closely analogous. Considered carefully, despite superficial appearances, none of the cases on which the parties relied could be described as closely analogous. The task of the Court in each case is to evaluate the nature and quality of the particular evidence supporting or undermining the competing characterisations.
[23]See for example, Lotteries Pty Ltd v Umbrella Enterprises Pty Ltd (in liq) [2014] VSC 605, [183]-[184] (Mukhtar AsJ).
It suffices to say that the decided cases demonstrate that the character of an advance by a participant to a joint undertaking may be informed by, among other things, the terms of any agreement governing the manner in which the funding of the joint enterprise was to occur;[24] the treatment of the amounts in the company’s accounts and statutory documents such as tax returns;[25] whether there was any payment of interest or the provision of security for a loan;[26] whether the characterisation of an advance by way of loan, particularly where the loan is said to be repayable on demand, sits comfortably with the nature of the joint enterprise;[27] and whether the payments were made in exchange for an ownership interest.[28] A list such as this cannot be exhaustive or even comprehensive because the question will always fall to be determined in all of the circumstances. Moreover, the task is not one of mechanically identifying which of the features evident in the decided cases support one or other competing characterisation; it is essentially an evaluative exercise in which the whole of the evidence of the parties’ course of dealings must be weighed.
[24]See, eg, Barboutis, [114]-[115].
[25]See, eg, Barboutis, [110]; Aborel Nominees Pty Ltd v Horsburgh (1986) 11 ACLR 138 at 141 (Gobbo J).
[26]See, eg, Re Rural & Veterinary Requisites Pty Ltd (in liq) (1978) 3 ACLR 597, 601-2, though note Hylepin at [285] – an unsecured, interest free loan is still a loan.
[27]See, eg, Barboutis [114]; Lotteries Pty Ltd v Umbrella Enterprises Pty Ltd (in liq) [2014] VSC 605, [183] (Mukhtar AsJ).
[28]See, eg, Grego v Copeland & Ors [2011] VSC 521.
Finally, as to the forensic significance to be accorded to the company’s books and records, s 1305(1) of the Corporations Act provides that a book kept by a body corporate under a requirement of the Act is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book.[29] The weight to be attached to that evidence is a matter that is to be measured in accordance with the common sense of the tribunal. As Austin J said in ASIC v Rich, the prima facie evidence constituted by the company’s books might be outweighed by other evidence or by some quality or characteristic of the books themselves, even if there is no other evidence.[30] And as the Full Court of the Federal Court said in Whitton v Regis Towers Estate,[31] s 1305(1) of the Corporations Act does not elevate a book entry to prima facie evidence that the transaction to which it refers exists. Both camps of parties emphasised different aspects of the trustee company’s book and records, and ultimately there was no difference between them in accepting the principles set out here.
[29]Books is defined in s 9 of the Corporations Act as including each of a register, any other record of information, financial reports and financial records, however recorded or stored, and “a document”, which is itself broadly defined to include “any record of information”.
[30]ASIC v Rich (2009) 236 FLR 1, [397]-[398].
[31]Whitton v Regis Towers Estate Pty Ltd (2007) 161 FCR 20, [59].
Part C: The parties’ submissions
The parties’ respective submissions are considered further in part E, but in substance they were as follows.
All parties accepted that the financial records of the SGD Trust were in relevant parts confusing and ambiguous and that regard must be had then to the whole of the evidence in order to ascertain the parties’ intentions in respect of the Advances. As St George’s Liquidator put it, it was not readily apparent that the protagonists gave close attention to the legal character of the Advances made to the trustee. The Eliana Defendants on the one hand, and the remaining parties on the other, emphasised different parts of the evidence.
LMC and the Eliana Plaintiffs submitted the unit holders’ Advances were capital in nature. St George’s Liquidator agreed that that was the better characterisation because:
(a) On the whole, the financial statements of the trust are consistent with the unit holders mutually intending their contributions to be by way of capital. The unit holders’ contributions are recorded in the balance sheets of the Trust from year to year as “current liabilities”. Although that treatment is not on its face consistent with their character as capital advances, when the financial statements are read as a whole, they better support the characterisation of the Advances as capital in nature. The disputed contributions are uniformly designated as “capital contributions” in the notes to the balance sheets. They are described as “unpaid trust distributions” which are to be contrasted with the amounts assigned to “trade and other payables” and “borrowings”. That treatment occurs consistently in the financial statements. The accounts do not designate the Advances as “loans”, whereas loans from third parties are clearly designated as such. Principally on that basis, the Liquidator submitted that the accounts did not provide textual support for the acknowledgement of loans in respect of the Advances. Furthermore, the designation “current liability” does not of necessity equate to the recognition of the unit holders’ contributions as loans.
(b) The general ledgers have some relevance. They disclose two “capital” accounts”, in which contributions are recorded from LMC and Eliana respectively. The ledgers likely contain errors but the treatment of the Advances is consistent with the Trust having considered the Advances as capital in nature.
(c) The only direct evidence from a unit holder and party to any alleged loan agreement came from Dr Luka, who gave evidence as to discussions and dealings between the parties. He was also a director of St George. The parties’ intention must be ascertained objectively, but the evidence as to conversations between the representatives of LMC and Eliana supports the characterisation of the Advances as capital in nature.
(d) The purpose of the Advances, to enable St George to acquire and develop a capital asset which would not generate any income to service any loans until the completion of the project, was consistent with that of joint venturers injecting capital, rather than loans of money which, in the absence of terms, must be repayable on demand.
(e) The remaining documentary evidence (in particular St George’s tax return and Report as to Affairs from 2017) does not warrant the conclusion that the Advances were made by way of loan, notwithstanding that sums that were likely intended to represent the unit holders’ contributions are described therein as “current liabilities” and contributories as “unsecured creditors”.
(f) There was no evidence establishing any agreed terms or documentation supporting the making of Advances by way of loans. There was no direct evidence of an agreement in respect of an obligation to repay the amounts advanced. There was no evidence of any agreement as to the payment of interest or the provision of security.
The Eliana Defendants submitted that all funds contributed were advanced by way of loan repayable on demand without interest or security, save for the settled sum of $20 and payment for the issued units ($200), on this basis:
(a) The parties’ relationship was governed by the Trust Deed. There was capacity under the deed for the trustee to issue further units, but there was no evidence that the joint venturers applied for additional units or sought to vary their essential relationship as equal unit holders, as defined by the Trust Deed. Indeed, that relationship was maintained, and the fact that despite their early intentions Eliana and LMC made unequal contributions, was intended to be addressed by their Advances to the trustee being made by way of loan, so that what was advanced would be repaid to them at the end of the venture (or if there was a shortfall in funds, repaid in proportion to the amounts contributed). Characterising the Advances in this way is consistent with the Trust Deed, the statutory documents and the fact that the Advances are treated as liabilities in the financial accounts of the Trust.
(b) As to the financial accounts of the Trust, the balance sheets consistently recorded equity reflecting the amounts paid for the issue of units. The unit holders’ contributions were otherwise, without exception, recorded in the accounts as “current liabilities”. That designation reveals that the company’s directors, Dr Luka and Mr Sowiha, who controlled their respective unit holders and were directors of St George, understood them to be immediately payable, or payable within the year. That designation is inconsistent with the Advances being by way of capital contributions to the Trust. The financial accounts disclose drawings by Eliana and LMC, which fact is also inconsistent with the Advances having been made by way of capital contribution.
(c) The general ledgers were replete with errors and unreliable as an indicator of the character of the Advances.
(d) Documents submitted in accordance with statutory obligations in 2017 (the tax return for the trustee and the trustee’s Report as to Affairs, submitted to the Liquidator) described amounts contributed as giving rise to “current liabilities”. Those declarations were inconsistent with the Advances being by way of capital, but consistent with the unit holders intending to have made the Advances by way of loan. They are contemporaneous evidence of the acknowledgment by St George and Dr Luka, of the indebtedness of St George to LMC and Eliana, arising from the provision of funds by way of loan.
(e) Use of the term “capital” does not itself define the legal nature of advances by the unit holders. The fact that a contribution is designated “capital” (a term employed in the financial statements, the general ledgers and Dr Luka’s evidence), does not make it an equity contribution. The descriptor, “capital” may mean simply the funds made available to the Trust by owners and third party lenders, for the purpose of conducting the enterprise, including by way of loan. Furthermore, an unwritten, unsecured and interest free loan, made available for the life of the venture, is still a loan.
(f) The evidence of Dr Luka on the characterisation question should be assessed as conclusionary and internally inconsistent.
Part D: The Manningham Road Venture – course of dealings
The evidence – preliminary
Ultimately there was no meaningful factual dispute between the parties. Their differences turned on the proper characterisation of the significance of the facts.
The documentary evidence of significance comprised the Trust Deed for the SGD Trust, financial statements and general ledgers for the SGD Trust, the Tax Return for St George for 2017, and the Report as to Affairs. Apart from the Trust Deed dated 10 February 2011, there was no written agreement between the unit holders or their principals concerning their participation in the Manningham Road Venture or the making of the Advances.
All parties accepted that the books and records of the trust were replete with gaps and inconsistencies. The books of the Trust were prepared by LMC’s accountants, instructed by Dr Luka and Mr Sowiha. No accountant was called.
The initial directors and shareholders of St George were Dr Luka and Mr Sowiha. In November 2016 Mr Sowiha ceased to be a director and transferred his share to Dr Luka. Dr Luka was the only witness to give evidence. He gave evidence by affidavit about the course of the Manningham Road Venture and the dealings between LMC and Eliana in respect of it. The milestones that occurred in the life of the venture were not in contest. Mr Sowiha was not called by any party. Dr Luka was cross-examined by the Eliana defendants. The Eliana Defendants contested the reliability and meaning of Dr Luka’s evidence, including as to the discussions between himself and Mr Sowiha.
Initial discussions and proposed joint venture
Dr Luka incorporated LMC in 1996 and was, from its inception, its sole director and shareholder. LMC is the trustee of the Luka Family Trust. Eliana was incorporated on 19 August 2008 by Mr Sowiha, and carried out property development work on its own account and by way of joint ventures. Mr Sowiha was a director of Eliana from the date of its incorporation.
Dr Luka is a general medical practitioner by profession, and described himself as active in the local Egyptian community. He was introduced to Mr Sowiha by a mutual friend in 2010, and the two became friendly. In about late 2010 they discussed business opportunities, and the prospect of undertaking a property development project together in what Dr Luka described in his evidence as a “joint venture”. Dr Luka’s evidence was that, “I had capital available and was interested in investing funds in a property project and Eliana was a builder, so there was a good opportunity to work together”.
On or about 3 December 2010 Mr Sowiha telephoned Dr Luka and told him that he had identified a potential development site at 164-166 Manningham Road Bullen. Mr Sowiha asked Dr Luka whether he wanted to undertake a joint development of the property with Mr Sowiha, acquiring and building a residential apartment complex on it, and on an adjacent property at 170 Manningham Road. Mr Sowiha said that he had met with a real estate agent and obtained a proposed contract of sale from the vendor of 164-166 Manningham Road at a price of $2,600,000. That day, Mr Sowiha attended Dr Luka’s house with the real estate agent. In late 2010 Eliana and Dr Luka executed a contract of sale to acquire 164-166 Manningham Road, at a price of $2,600,000. St George was later nominated as the purchaser.
Dr Luka gave evidence of discussions between himself and Mr Sowiha in December 2010 and later in June 2011, about how they would structure and fund the venture.
Dr Luka’s evidence was that in December 2010 he and Mr Sowiha had a number of discussions which were, “in broad terms”, to the following effect:
(a) They would acquire 164-166 Manningham Road though a special purpose vehicle funded by a mixture of external debt which was anticipated at that time to be up to an estimated 70% of the value of the land, and “equal equity contributions” from Mr Sowiha and Dr Luka, through Eliana and LMC. The equity contributions would fund the costs of acquiring the land and any development costs that could not be funded with external debt;
(b) Eliana would undertake the building works to develop a residential apartment complex on the land. The special purpose vehicle would enter into a building services agreement with Eliana to this effect and would obtain a bank loan to fund construction costs;
(c) On completion of the development works, the apartments would be progressively sold, and after repayment of external lenders, LMC and Eliana “would share any profits in accordance with their respective contributions to the joint venture, as adjusted from time to time”.
I have set out the evidence in essentially the terms in which it was given, by affidavit.
LMC’s counsel properly accepted that Dr Luka could not give evidence in a conclusionary form by way of asserting the existence of an agreement. The evidence, which was initially proffered as evidence of an agreement, was relied upon as establishing the substance of what was said in discussions between the two men in late 2010. Dr Luka was cross-examined on this evidence by the Eliana Defendants.
It was put, and Dr Luka agreed, that he and Mr Sowiha had, at the commencement of their project, agreed that they would, through their entities, make equal contributions to the joint venture. Dr Luka accepted when it was put to him (as had been explained in his evidence in chief) that in fact, there was ultimately a significant difference in the overall contributions of Eliana and LMC.
When cross-examined about the description of the nature of the contributions that had been advanced in his evidence in chief (“equal equity contributions”, and “equal capital contributions”), Dr Luka said that he could not recall whether particular words were used, and said that the events had occurred about eleven years earlier. The conversations were conducted in both English and Arabic. The evidence was elicited in the following exchange:
What were the words you used with Mr Sowiha as to who’s going to contribute what? -- Yeah, we would contribute equally.
And what kind of contributions were they to be? -- To contribute to develop a project, continue to (indistinct), contribute to develop a project.
…Did you use the word, ‘capital’ when you were discussing this matter with Mr Sowiha? -- We – we would contribute money for – to develop the planning permits, get plans and, ah, and, ah, ah, make, ah, building and constructions, and that’s the contributions about, in simple language.
Did you use the word, ‘capital’, in your discussions? -- I – I can’t recall – things happened 11 years ago – particular words were used or not.
What language were you speaking? -- But yeah, the language is a simple language of contributing to acquire / purchase and equally pay – each party would equally pay to – to have this property. So we would pay town planners, we pay architects to do, and all these expenses to be able to develop a property.
Now in your conversations with Mr Sowiha what language were you speaking? -- English and Arabic.
When asked about when the agreement between LMC and Eliana was made, including that they would “make equal capital contributions”, Dr Luka said,
it was a formal agreement when St George’s company and trust were formulated and signed;
and that it was
a verbal agreement and understanding of equal capital contributions until it is formally done in a company trust – and in the company and trust deed.
It was clear, contextually, that Dr Luka was referring to the Trust Deed that was in evidence.
The St George Development Unit Trust
It was in this context that St George was incorporated, and the Trust settled in February 2011, as the special purpose vehicle for the parties’ venture.
The Trust Deed relevantly provides as follows:
(a)The trustee will accept the moneys paid by the initial unit holders to establish a trust fund. The trustee will receive $1.00 which will be paid by the initial unit holders for each unit issued and form part of the trust fund;[32]
[32]Clause 1.
(b)The deed binds and benefits all unit holders;[33]
[33]Clause 7.
(c)The trustee shall hold all assets of the unit trust on trust in accordance with the powers and provisions declared and contained in the deed. The trust fund is divided into the number of initial units specified in schedule 1 to the deed.[34] Schedule 1 provided that the initial units were LMC as trustee for the Luka Family Trust and Eliana. Each held 100 units and each unit was valued at $1.00;
[34]Clause 1.
(d)The trust commenced on 19 February 2011 and will end on the vesting day.[35] The trustee will hold the trust fund until the vesting day and accept any additional property that is gifted to the trust or purchased by the trust to be held upon and subject to the trusts contained in the deed;[36]
[35]Clause 1.
[36]Clause 7.
(e)The trust fund includes the initial sum, moneys, investments and property paid or transferred to and accepted or acquired by the trustee or held on its behalf subject to the trust, the money, investments and property of every description representing the trust fund, including accumulated income and undistributed income. Assets of the trust includes investments and equity of the trust but excludes distribution amounts that are immediately payable and not yet paid, redemption amounts not yet paid, application amounts for units not yet issued;[37]
[37]Clause 2.
(f)The trustee holds the assets of the trust fund in the beneficial interest of unit holders. The beneficial interest in the trust is vested with the unit holders of the issued units. Each unit entitles its holder to an equal share in the beneficial interest of the trust. No unit holder is entitled to any particular asset or part of any particular asset of the trust;[38]
(g)The trustee can issue additional units at any time to a person who applies for units in the prescribed form. The trustee has absolute discretion to accept or reject the application. When units are allotted to a person, rights over those units arise only when the trustee registers the person in the unit register. A person will not be deemed to be issued units in the trust unless the trustee issues a unit certificate to that person in the prescribed format. The trustee must maintain a unit holder register;[39]
(h)The trustee has absolute discretion to determine the nature of income of the trust fund, including to determine whether any receipt, gain, payment, profit, loss, outgoing, money or investment be treated as income or capital and whether or not a capital gain arises for the purposes of tax legislation.[40] The trustee may identify and account separately for any part of the income which represents the various categories of income. If such a separate accounting is made, each identified part of the above income or capital must be distributed to each unit holder in accordance to the proportion of units held by them at the beginning of the financial year.[41] When expenses or outgoings of the trust occur, the trustee may allocate them to income or capital or any category or categories at the trustee’s discretion;[42]
(i)The trustee may determine to distribute, pay or set aside income of the trust fund that is trading income, franked distributions or dividends and so on to the benefit of unit holders in the proportion of units held by them at the beginning of the financial year. If new units are issued then the distribution has to be calculated on a pro-rata basis, that is, the distribution will be based on the number of days units are held by the unit holder;[43]
(j)Any interim distribution of income for any financial year should be distributed to all unit holders in proportion to the number of units held by them on a pro-rata basis;[44]
(k)Whether or not any income of the trust fund, or part thereof, is accumulated rather than distributed, is at the absolute discretion of the trustee, as long as this accumulation accords with both the law and the deed. All amounts that are accumulated become capital of the trust fund minus any tax payable thereon. The trustee will follow the specified accumulation rules, including that all amounts accumulated will be dealt with as an addition to the trust fund; and that amounts not paid to unit holders are set aside for unit holders. Moneys may be set aside including by placing sums to the credit of that unit holder in the books of the trust fund. Those funds (which, I interpolate, as read contextually, means amounts determined to be distributed but not yet paid) will no longer form part of the trust fund but will be held by the trustee as a “separate trust fund upon trust for unit holders absolutely”. The amount set aside will be shown as a debt to each unit holder in the trust books of account and paid within 90 days of a request being made by the unit holder;[45]
(l)All decisions of the trustee concerning trust distributions must be in writing and with the consent of all trustees by majority vote. Transactions of each distribution shall be recorded in the trust’s books;[46]
(m)Any unit holder may request the trustee in a prescribed form to redeem the unit holders’ units, all or in part, on a specified redemption date. The trustee has complete discretion over whether or not to redeem units and on which date to redeem the units;[47]
(n)Any provision, condition or term of the deed may be varied by the trustee by the execution of a deed of variation or by a resolution of the board of directors of the corporate trustee. Any variation is not effective unless all unit holders have consented in writing by special resolution in a meeting of unit holders where the variation to the deed affects specified matters including the rights of unit holders to income and capital of the trust.[48]
[38]Clause 12.
[39]Clauses 13, 14, 16, 17.
[40]Clause 38.
[41]Clause 39.
[42]Clause 64.
[43]Clause 42.
[44]Clause 43.
[45]Clause 44.
[46]Clause 41.
[47]Clause 28.
[48]Clauses 96-99 (noting the exception that clause 88, concerning the removal of the trustee, could not be varied in that way).
The Trust Deed was executed by Dr Luka and Mr Sowiha for LMC and Eliana and dated 10 February 2011. It names LMC and Eliana as initial unit holders, holding 100 units each at an ascribed value of $1 each.
No other units were ever issued, and the unit holders did not subscribe for, or request the trustee to issue any additional units.
The Trust Deed was never amended. No party submitted that LMC and Eliana did not consider themselves bound by the Deed, or that one or other of them had, for example, induced a belief in the other that the relationship would be conducted on a different basis, so as to give rise to an estoppel.
The Trust Deed did not itself impose any requirement in respect of the making of contributions.
The venture and its funding
The venture to develop the Manningham Road property commenced promptly after the execution of the deed. In March 2011, Eliana and St George entered an agreement for Eliana to undertake building services including land surveys, town planning requirements, soil testing and structural design for the proposed development of 164-166 and 170 Manningham Road. LMC and Eliana had intended to develop the land at 164-166 together with the lot at 170 Manningham Road, but Eliana was unable to raise funds to contribute to the cost of acquiring 170 Manningham Road. Dr Luka and Eliana were again parties to the contract of sale for 170 Manningham Road, but now LMC alone provided the purchase price and LMC was nominated as the purchaser.
St George experienced difficulty in obtaining third party finance to settle on the acquisition of 164-166 Manningham Road, said to arise from concerns over contamination of the soil on the site. St George failed to settle the contract of sale on the settlement date of 30 May 2011 and the vendor issued a notice of rescission.
In June 2011, St George obtained a loan facility from a third tier lender, La Redoute, with a facility limit of $850,000. That amount was insufficient to fully fund the purchase price required at settlement, which was $2.475m plus GST.
In about June 2011, Dr Luka and Mr Sowiha discussed how the project would otherwise be funded. Dr Luka’s evidence was that he and Mr Sowiha had a discussion to the effect that LMC and Eliana would “make equal capital contributions to the Trust” to enable it to fund payment of the balance of the purchase price for the land; and that after accounting for GST payable on settlement and loan funds available from La Redoute, Eliana and LMC would each be required to contribute approximately $1,005,000 subject to any adjustments on settlement. Dr Luka was not specifically cross-examined about this conversation. However, having regard to his evidence in the context of the 2010 conversation, it is apparent that he did not recall what words were spoken. As with Dr Luka’s account of the conversations that occurred in about December 2010, it was evident that he was not endeavouring to give a precise account of the discussions but to convey his understanding of their substance.
During June 2011, Mr Sowiha told Dr Luka that Eliana could not source sufficient funds to contribute its $1,005,000 to the trust, and could only contribute $450,000. Dr Luka’s evidence was that they had a discussion to the following effect:
(a)LMC and Eliana would each make “reduced initial capital contributions” to the trust of approximately $450,000;
(b)LMC would source external loan funding and on-lend those funds to St George so it could complete the acquisition of the property. LMC and Eliana agreed the amount to be raised this way should be $700,000;
(c)St George would pay LMC principal and interest repayments equivalent to LMC’s obligations to its lender under whatever loan it was able to obtain; and
(d)“If and when further funds were required” by St George for the development, “then they would be contributed by the unit holders as capital and would be allocated to their respective capital balances”.
As with the earlier evidence concerning his discussions with Mr Sowiha, this evidence was not an attempt to capture the words spoken in the conversation, but the substance of it. The matters discussed in about June 2011 were not documented. Dr Luka said in his evidence in chief that,
We did not document the arrangement in relation to the loan of $700,000 from LMC (as trustee for the [Luka Family Trust]) to [St George] in writing. The arrangement to contribute capital to the SGD Trust was also undocumented albeit that the contributions were made by unit holders under the terms of the SGD trust deed.
On 30 June 2011, LMC entered into a Bank Bill Business Facility Agreement with Westpac with a limit of $700,000 and on 4 July 2011 it drew down on the facility and transferred $700,000 to St George’s bank account. It was not in dispute in the present proceedings that that amount should be treated as a loan (the LMC-Westpac Loan). There was no written agreement between St George and LMC in respect of this loan.
St George also obtained a $250,000 loan from the Grace Superannuation Fund operated by acquaintances of Dr Luka (the Grace Loan). The receipt of those moneys is recorded in the company’s bank statements on 8 July 2011. The loan was the subject of a written agreement, which included a term for the accrual of interest of 7% annually.
An additional $170,000 was still required to meet the purchase price for the land, in addition to the moneys raised from the La Redoute Loan, the LMC Loan, the Grace Loan and the parties’ $450,000 advances. Dr Luka’s evidence was that Mr Sowiha told him that “he was in a position to contribute a further $60,000 in additional capital ... above the sum of $450,000”. Dr Luka told Mr Sowiha that he would “loan additional amounts to the company through [his] associated entities in addition to [his] capital contribution… to enable the Contract to settle”. Subsequently:
(a)between 7 July 2011 and 12 July 2011, Dr Luka’s associated entity, Coburg Family Medical Clinic Pty Limited (CFMC) lent $54,250 to St George by paying $4,250 to La Redoute in maintenance of the La Redoute loan on St George’s behalf on 7 July 2011, and by transferring $50,000 to St George directly on 12 July 2011;
(b)on 11 July 2011, LMC (in its own right – that is, not in its capacity as trustee of the Luka Family Trust[49]) lent an additional sum of $55,000 to St George;[50] and
(c)on 13 July 2011, Eliana provided an additional $60,683.52 directly to third parties at settlement.
[49]LMC in its own right did not hold any interest in the SGD Trust.
[50]Those payments, totalling $109,250, are the Additional Luka Loans.
The Additional Luka Loans are recorded in St George’s books as loans, within the category of other payables, and their status as such is not disputed. The characterisation of Eliana’s additional payment of $60,683.52 is disputed in globo with its other contributions and nothing was sought to be drawn from its nature as the payment of creditors on St George’s behalf.
Dr Luka’s evidence in chief about the purpose of what he called the “initial” contributions by the unit holders (those discussed above, that is, contributions on Dr Luka’s assessment, by LMC of $100,000, $300,000, $11,000 and $43,000, and by Eliana of $450,000 and $60,683.52, during July 2011) was expressed in his affidavit in the form of a submission but was proffered as his evidence of his understanding:
The initial contributions by the unit holders to the SGD Trust were provided to capitalise the trust and to assist the Company to acquire the primary asset of the Trust, being the Property.
Dr Luka also said that further capital contributions by unit holders were made from time to time. These principally funded interest expenses incurred by St George (as trustee of the Trust) to its lenders (principally La Redoute, then Delphi Bank) in respect of loans taken out to acquire the Property and secured against first registered mortgages over the Property. He said that those contributions were “added to the unit holders’ capital accounts from time to time, as recorded in the general ledgers of the SGD Trust”. The accounts of the Trust are discussed below.
In his evidence in chief Dr Luka described the manner in which loans were explicitly recognised in the books of the Trust and in that context said that the contributions of the unit holders:
… were not repayable by the Company to the unit holders unless and until the Property was sold, funds were available and the Company, as trustee, resolved to distribute the capital of the SGD Trust.
The contract to acquire 164-166 Manningham Road settled on 20 July 2011.
The La Redoute loan was partially refinanced with a new loan facility from Delphi Bank of $1.5m in late 2012 and Bendigo Bank, one of Delphi’s parent banks, became registered mortgagee of the land at 164-166 Manningham Road in December 2012. LMC and Eliana made periodic advances to the Trust in the period 2011 to 2017 in order to fund the servicing of the Delphi Loan and occasional other expenses.
A planning permit was granted in September 2013 for the planned development, consisting of the construction of two four storey buildings, containing 61 dwellings and a basement car park. However, the development did not proceed, in part because of continued funding difficulties experienced by St George.
Eliana ceased making contributions to the company from May 2016. From that point, LMC made additional contributions to enable St George to service the Delphi loan facility. Dr Luka said that, “half of this amount ought to have been contributed by Eliana, but wasn’t”, and that payments made by LMC contributed to the servicing of the Delphi Loan and the mortgage over the land.
By early 2017, St George had commenced advertising the land for sale, along with the adjacent land at 170 Manningham Road owned by LMC. The land was ultimately sold for the sum of $3,850,000. Settlement occurred on 21 February 2017. Following payment of amounts owing to Delphi and settlement adjustments, St George received surplus proceeds of $2,226,326.69.
In response to Mr Cant, in his capacity as liquidator of Eliana, raising a dispute as to the appropriate characterisation of the parties’ contributions, the surplus funds were deposited into St George’s solicitor’s trust account, pending resolution of that dispute. As noted earlier, on 7 April 2017, by agreement between Mr Cant for Eliana and LMC, the Interim Payments were made to each unitholder of $600,000, with the parties reserving their respective positions as to the characterisation of the moneys.
The financial statements of the Trust
Financial statements for the trust were tendered by Dr Luka for each relevant year (save for 2012), with “revised” statements for 2011 and 2017 and “revised” and “interim” statements for 2017. Other parties tendered various of these in duplicate. The Liquidator tendered those financial statements on which he relied in reaching his assessment, being the 2015 (in its signed original) and 2016 statements, and another version of the 2017 statement, as noted below.
The financial statements of the SGD Trust that were in evidence were incomplete, appearing in differing versions when exhibited by different parties, were generally of uncertain production date and were all unsigned save only one version of the statements for the 2015 year. This aspect of the evidence is set out further below.
Leaving to one side the gaps and inconsistencies between versions of the financial statements, it may be said that they exhibited appreciable consistency in the manner in which the Advances and various acknowledged loans were recorded. It is necessary to explore those two aspects of the accounts.
It is convenient to set out an example of the financial statements to assist comprehension. The balance sheet as revised for the 2017 financial year includes the following, showing the disposition of the Trust’s sole significant asset in the land between financial years 2016 and 2017:
2017 2016
Note $ $
ASSETS
CURRENT ASSETS
Cash and cash equivalents 3 221 3,301
Trade and other receivables 4 1,038,143 576
TOTAL CURRENT ASSETS 1,038,364 3,877
NON-CURRENT ASSETS
Property, plant and equipment 5 (1) 4,039,904
TOTAL NON-CURRENT ASSETS (1) 4,039,904TOTAL ASSETS 1,038,363 4,043,781
LIABILITIES
CURRENT LIABILITIES
Trade and other payables 6 6,391 6,127
Unpaid trust distributions 9 885,820 1,907,328
TOTAL CURRENT LIABILITIES 892,211 1,913,455
NON-CURRENT LIABILITIES
Trade and other payables 6 109,541 109,250
Borrowings 7 604,651 2,116,337
TOTAL NON-CURRENT LIABILITIES 714,192 2,225,587
TOTAL LIABILITIES 1,606,403 4,139,042NET ASSETS (LIABILITIES) (568,040) (95,261)
EQUITY
Settled Sum 20 20
100 Units issued @ $1 Each - Luka Family Trust 100 100
100 Units issued @ $1 Each - Eliana Constructions 100 100
Accumulated losses 8 (568,260) (95,481)TOTAL EQUITY (568,040) (95,261)
As may be seen, the balance sheet lists as a “current liability” a significant sum of “unpaid trust distributions”, accompanied by a note 9. Otherwise of note is the sum of the Additional Luka Loans under non-current trade and other payables with note 6, and separately, an amount marked as non-current borrowings with note 7. The equity section remains unchanged from the settling of the trust in 2011, save for the recording of losses, which are tallied in note 8, against that equity. The format of the financial statements was in this respect, in substance, the same for each relevant year.
The parties advancing before me the characterisation of the unit holders’ contributions as “capital”, emphasised notes 6, 7 and 9 to the accounts. The format of the notes was in substance the same for each relevant year.[51] For financial year 2017, they read:
[51]Save for 2016’s financial statement which, without discernible reason or any evidence or submissions by the parties, lacked any note accompanying the liabilities section of the balance sheet.
2017 2016
$ $
6 Trade and Other Payables
Current
Sundry Creditors - 6,127
Provision- Acc & Consult Fees 6,391 -
6,391 6,127
Non-Current
Loan - CFMC Unit Trust 54,541 54,250
Loan - Luka Medical Centre PL 55,000 55,000109,541 109,250
7 Borrowings
Non-Current
Loan - Delphi Bank - 1,511,686
Loan - Luka Family Trust (WBC) 604,651 604,651
Total non-current borrowings 604,651 2,116,337Total borrowings 604,651 2,116,337
…
9 Unpaid Trust Distributions
Luka Family Trust
Opening Balance 931,399 852,621
Capital Contributed 189,443 101,1621,120,842 953,783
Drawings (609,300) (22,384)
511,542 931,399
Eliana Constructions
Opening Balance 975,929 869,666
Capital Contributed - 106,263
975,929 975,929
Drawings (601,650) -
374,279 975,929
Total Beneficiaries Funds 885,821 1,907,328
The financial statements, then, consistently designate advances by Eliana and LMC as current liabilities, and, by reference to the notes to the accounts, as “unpaid trust distributions”. In this way the accounts appear to record a running account of “capital contributed” from each of the “Luka Family Trust” and “Eliana Constructions”, in each year for which records were tendered, save 2016 for which there were no notes concerning liabilities. The total “beneficiaries funds” are recorded each year in this fashion, that total being for each of the Luka Family Trust and Eliana, the opening balance plus the amounts recorded as contributed in that year, less “drawings”.
Although the Trust Deed makes provision for the distribution of income to unit holders consequent upon a determination by the Trustee to distribute (rather than accumulate) the income of the trust or part thereof,[52] there was no evidence that any distribution had been made or contemplated, and no party submitted that I should so find. Dr Luka was asked in cross-examination why the financial statements of the trust recorded as “current liabilities”, contributions which he submits were to be characterised as capital contributions. His evidence was that he couldn’t explain the accounting. When asked whether the reference to “unpaid distributions” could be a reference to profit he said no, there was no profit.
[52]Clause 44, as noted above.
Separately, there is a consistent distinction in treatment between the “unpaid trust distributions” and the “acknowledged” loans, being the LMC-Westpac Loan and Additional Luka Loans and the third-party loans from Delphi, Grace and La Redoute. The Additional Luka Loans, Grace and La Redoute Loans (in their respective years of existence) were accounted as non-current trade and other payables, and the LMC-Westpac Loan and Delphi Loan, each of which was of a more substantial quantum, were accounted as non-current borrowings. All of the entries in the accounts designated as loans, involved third-party borrowers. I include in that description, the LMC-Westpac loan, because although the funds were lent to St George by LMC, they were borrowed from Westpac by LMC and as Dr Luka put, the fund were on-lent to St George, with St George making principal and interest payments equivalent to the obligations of LMC to Westpac. I also include the loan of $55,000 by LMC to St George in July 2011, because LMC lent those funds in its own right, and not in its capacity as trustee of the Luka Family Trust, in which capacity it was a unit holder in the SGD Trust. Dr Luka explicitly made that distinction in his evidence.
Such is the case of the “revised” financial statements. The older, unrevised statements, placed the LMC-Westpac Loan as part of the “unpaid trust distributions” together with the Advances. No party contended that the LMC-Westpac Loan should be treated as a capital contribution. Implicitly, its designation other than as a borrowing was accepted by the parties to have been in error. Interest on the LMC-Westpac Loan and Grace, Delphi and La Redoute Loans are accounted as costs against the asset value of 164-166 Manningham Road.
Dr Luka’s evidence was that he had instructed St George’s accountants, HID, in around April 2017 to prepare “revised” financial statements for the SGD Trust. He said that he asked HID to “reconsider how they had characterised the LMC-Westpac Loan in the Company’s financial statements” in view of the fact (not disputed in these proceedings) that this money had been advanced as, and was at all times treated as, a loan. The unrevised financial statements did not separately account for the LMC-Westpac Loan, and it appears likely from the amounts recorded that that amount must have been included within the “capital contributed” item. The revised accounts reflect that change, and move the LMC-Westpac Loan to borrowings.
Only the unrevised 2015 financial statements were signed by the directors (both directors, on 21 June 2016). No evidence was given as to why that was so. That statement had accounted for the funds elsewhere described as the LMC-Westpac Loan, in the LMC “capital contributed” account.
For 2017, there were four different versions of the financial statements in evidence, namely:
(a)An “unrevised” version which treats the LMC-Westpac Loan as capital contributed. No drawings on capital contributed for either joint venturer is reported. The trust’s assets are largely comprised of $2,610,115 in a “solicitor’s trust account”;
(b)A version described by Dr Luka as an “interim” statement, which accounts the LMC-Westpac Loan under the category of non-current payables in the amount of $604,651. LMC’s capital contributed before drawings is $1,120,842, and what I infer are primarily the Interim Payments are recorded as drawings on the capital contributed accounts, to LMC of $609,300 and to Eliana of $601,650;
(c)A digital copy of a financial statement which Dr Luka appeared to suggest in his evidence is the final version for 2017, though like most others it is not signed or dated. This version moves the LMC-Westpac Loan to the non-current borrowings account (consistently with the other “revised” versions, and with the original 2016 financial statement[53]), and is otherwise substantially identical to the interim statement; and
(d)A fourth version tendered by the Liquidator as among the documents he had relied upon for his assessment. This version records $1,026,326 as in the solicitor’s trust account, consistently with the revised versions. It assigns the LMC-Westpac Loan as a non-current borrowing, consistently with Dr Luka’s revised approach, which is reduced between 2016 and 2017 to nil, but does not record any drawing against LMC’s capital contributed, which has nonetheless been adjusted down to $1,106,976. By contrast, the Interim Payment of $601,650 to Eliana is recorded as a drawing against its capital contributed account. As the solicitor’s trust account has been debited in the amount of the Interim Payments, this version of the financial statement could be read as suggesting Dr Luka took that amount as a payment out of the LMC-Westpac Loan, resulting in it being reduced to nil, rather than by way of drawing on a capital account. It is not clear why the Liquidator should have been given another version different to what Dr Luka submitted to the Court, and this divergence was not brought to the Court’s attention by the parties.
[53]The 2016 statement, as mentioned, does not particularise liabilities with separate noted accounts. However, the balance sheet records $2,116,336,90 as “borrowings” which corresponds to the 2017 “final” statement’s prior-year figure combining the Delphi Loan and LMC-Westpac Loan.
The parties each acknowledged that there were gaps and inconsistencies in the accounts and that the financial statements are confusing and ambiguous in parts, though no party disputed that they formed books in the statutory sense.
The recording of the contributions of Dr Luka in particular was confused. While it was accepted by all parties that Dr Luka’s various entities made loans proper to St George, the most significant of these were not treated as such in the books until the preparation of the 2017 “revised” accounts, and was prior to that combined together with LMC’s funds and designated as “capital contributed”.
Despite being on their face year-end accounts prepared by St George’s accountants, the financial statements sometimes show what may be thought to be iterative recording. For instance, across the four tendered versions of the 2017 financial statements, the first 2017 statement fails to record the debit to assets of over $1.5 million from St George’s solicitor’s trust account, despite that debit (to fund the Interim Payments) having been made in around April 2017. This apparent oversight is remedied in later versions, in which more marginal adjustments are made to other line items.
General Ledgers
The general ledgers of the SGD Trust for 2011 to 2017 were in evidence.
The Eliana Defendants submitted, and St George’s Liquidator accepted, that the general ledgers, as unsigned, working documents, should be accorded less weight than the company’s financial statements.
The general ledgers in respect of the accounts of the SGD Trust for the years 2011 to 2017 record advances from each of Eliana and LMC within “accounts” for each of them entitled, “Capital Contributed”. The “capital contributed” accounts include numerous transactions particularised in numbered journal entries, and totals for those entries. For each year from 2012 the ledgers also record the opening balance for the year of each “Capital Contributed” account.[54] The ledgers also include separate accounts labelled “Drawings” which, for various years, appear to capture drawings from the “Capital Contributed” accounts. Those “Drawings” accounts recorded debits to the account of LMC in each year save 2015 (when $101,500 was recorded as debited directly from LMC’s Capital Contributed account), and to the account of Eliana in 2012 and 2017. Some credits were also made to LMC’s “Drawings” account in 2017. As noted earlier, ‘drawings’ were recorded in the notes to the financial statements, against the “beneficiaries funds”.
[54]Those accounts also recorded significant one-off debits in 2014 for both parties and in and 2016 and 2017 for LMC.
The Liquidator, the Eliana plaintiffs and LMC submitted that the intended character of the Advances could be taken from the description of these amounts in the notes to the accounts, as “capital contributed”. The argument was that the designation of the Advances as “current liabilities” within the balance sheet is, prima facie, consistent with their characterisation as loans. However, “current liabilities” are set out in two categories – trade and other payables and “unpaid trust distributions”. The category of trade and other payables accounts for the Additional Luka Loans and other, third party loans. However, the other category, “unpaid trust distributions”, is described in the notes accompanying the balance sheets as consisting of “capital contributed”.[64] The designation, “capital contributed”, could be read as contributions to the use of the Trust, which contributions were ascribed to the unit holders’ accounts for the projected final division of the spoils of the joint venture.
[64]Except, as noted, for 2016.
In respect of this aspect of the accounts of the Trust:
(a)First, I accept that prima facie, the accounting for a sum as liability and the description of it as a “capital contribution” may appear to be inconsistent.
(b)Secondly, as to the description of the sums advanced as “unpaid trust distributions”, no distributions of Trust income were made. No party contended that that had occurred. Indeed Dr Luka, in evidence that is described later in these Reasons, positively said that the trustee had not made any distributions. The parties then, accepted that description as erroneous.
(c)Thirdly, the accounting for the Advances in this way occurred throughout the period 2011 to 2017, and not just in the period from 2017 when the Manningham Road venture was being wound up. The implication in some of Dr Luka’s submissions that the reference to “distributions” was anticipatory of the conclusion of the venture was not an adequate explanation for what appeared in the accounts. As observed earlier, the amounts recognised as liabilities and described as “capital contributed” in the notes to the accounts, broadly corresponded with the entries in the general ledgers comprising opening balances to which “capital contributions” were added and “drawings” subtracted, and in this way, running balances were recorded in respect of the contributions of each unit holder, and reported in the Trust’s year-end financial statement.
(d)Fourthly, the maintenance of separate amounts attributable to LMC and Eliana and recorded as liabilities owing to them in this way, evidenced that the parties intended that the Advances made by LMC and Eliana would not be contributed in an undifferentiated way to the corpus of the trust, but that they be recognised as liabilities owing to each of them.
(e)Fifthly, the Liquidator acknowledged that the accounting for the Advances as liabilities was not consistent, on the face of things, with the parties’ having intended them to be capital contributions in the ordinary sense, and could only say in answer to that difficulty, that “liability” and “loan” are not inter-changeable categories. Citing the Lotteries case[65] the Liquidator emphasised the proposition that “all loans are liabilities but not all liabilities are loans”. So much is correct, but it does not take the matter very far. In this context, the liabilities assigned to the “unpaid trust distributions” category were accepted (in this proceeding) as being referable to the Advances made by the unit holders. In that context, the liabilities recognised in the accounts must be read as liabilities of the trustee to LMC and Eliana arising by reason of the Advances having been made. That is a reasonable and indeed obvious inference from what appears in the accounts and no other sensible explanation to contradict it was advanced or apparent. With that in mind it will be recalled that under the structure and sets of obligations to which the parties had committed themselves by the Deed, no liability to unit holders would arise by reason of the making of contribution to the capital of the trust (that is, to the trust fund, to be used for the purposes of the joint venture), and no distribution of income to the unit holders had been made, such as to give rise to a debt owed by the trustee to unit holders. In those circumstances, and subject to the other matters set out below, a natural inference is that the “liabilities” were in the nature of loans.
(f)Sixthly, as to the use of the expression, “capital contributions” (which was the principal textual indicator said to support the characterisation of the Advances as capital), two things may be said. The first is that the use of the descriptor in the notes to the accounts did not, within the context of the accounts, convert sums accounted as liabilities into something else. The second is that in ordinary commercial parlance, an enterprise may be put in funds or capitalised in numerous ways, including by the provision of what may be described as “loan capital”, particularly where there is no requirement that the loan be repaid until it is no longer needed for the purpose for which it is advanced.[66] If indeed the Advances were made by way of interest free loans, accounting for them as liabilities would be both appropriate and required.
[65]Lotteries Pty Ltd v Umbrella Enterprises Pty Ltd (in liq) [2014] VSC 605.
[66]Barboutis, [108].
Having regard to what is set out above, the accounts, despite their imperfections, are consistent with an intention in the parties that the contributions of Eliana and LMC not to be added to the trust fund in an undifferentiated way (in the sense that they would form part of the fund that would be divided between the unit holders in proportion to their unit holdings at the end of the day) but that the Advances be accounted for as liabilities owed by the trustee to the unit holders, and repaid to them.
In this way, although complete coherence is not possible, if the reference to “capital contributions” is read as capital (money) contributed to the trust by the unit holders by way of loans, the accounts can be read essentially coherently. Characterising the Advances as capital contributions, on the other hand, requires the description in the notes to the accounts to be read in a way that overlooks, and is in context, contrary to, the primary designation of liabilities in the balance sheet.
Next, the Liquidator, the Eliana Plaintiffs and LMC relied on the difference in treatment in the accounts between the Advances and the acknowledged loans. It was put that the accounts acknowledge those payments made to the trustee that were intended to be made by way of loan, as “loans”, and each such liability appears in either the borrowings or other payables sections of the balance sheet. The Advances are treated wholly separately, and it is to be inferred that this was done with good reason – after properly accounting for all the loans, St George and its accountants in the preparation of the financial statements then turned to separately describe running accounts to each joint venturer as capital contributed. That they did so indicates they saw the Advances as something altogether separate and other from loans.
As to this submission, the accounts do record certain liabilities as “loans”, and the unit holders’ Advances are not treated in that way. I accept that differential treatment of items within the balance sheet in this way is a contextual indicator that those responsible for the accounts drew a relevant distinction between them. The question though, is what that difference signified, when construed objectively. The submission did not go much further than to say that the parties (the trustee, and those responsible for the accounts) could have designated the unit holders’ contributions as “loans” but they did not, despite otherwise using that terminology. The difference apparent on the evidence is the fact that the Advances were moneys paid to the trustee by the unit holders, whereas those payments designated as loans, were all made by third parties (as discussed earlier). It is evidence that the parties differentiated between the two classes of liabilities, but it does not follow that without the designation “loan”, the sums advanced by Eliana and LMC were not payments to which an obligation to repay attached. It must be recalled that question is not what the parties subjectively understood by the designation, “loan” or “liability”, but whether, applying the objective theory of contract, the parties are to be taken to have intended that the advances of moneys were attended by a contractual obligation of repayment. As I have said, the accounts provide evidence of such an intention. The evidence is imperfect, and what may be gleaned from the accounts must be read together with the totality of the evidence.
Evidence of Dr Luka
The evidence of Dr Luka was, on matters of significance, unsatisfactory in a number of respects. By this I do not mean that Dr Luka did not give honest evidence, but that the form in which the evidence was given did not assist the central task of objectively discerning the parties’ intentions in respect of the Advances.
More particularly, the evidence of conversations was given in a conclusionary way; detail that might have been given was absent, and parts of the evidence directed to the intended treatment of the Advances was argumentative.
The evidence of conversations between Dr Luka and Mr Sowiha was in the form, “in the course of those discussions, we agreed (in broad terms) that…”. The Eliana Defendants did not press any objections to the admissibility of the evidence of Dr Luka save for the reference to the discussions having amounted to “agreement”, which objection was sensibly accepted. On the objection being properly taken, the evidence was adduced without further objection as evidence of Dr Luka’s account of the conversation. The Eliana defendants submitted more generally, that the form of Dr Luka’s evidence should be taken into account in assessing its weight. The issue then is not whether the evidence was admissible (it was admitted) but what it stands for.
On the central questions, the tenor of the evidence in chief, given by affidavit, differed markedly from the expression of such evidence as was elicited in cross-examination. As is common in written evidence, the language used was formal and highly structured. The difference between Dr Luka’s manner of expression in cross examination with that employed in his affidavit (some of which is set out above) suggests that the form of expression in his written evidence in chief likely reflects his lawyers’ construction of his instructions. That is not to express a general view about the meaning of the evidence or as to Dr Luka’s credit, but to emphasise the challenges inherent in extracting meaning from its words.
Dr Luka gave evidence of discussions that occurred between himself and Mr Sowiha in December 2010, during June 2011 and in about July 2011, as set out earlier.
Dr Luka’s evidence was that discussions occurred in December 2010 on a number of occasions, the dates or circumstances of which were not described. Dr Luka did not recall the words that were spoken, and that the conversations had occurred in both English and Arabic. I accept that Dr Luka and Mr Sowiha discussed that they intended that the Manningham Road Venture would be funded by both external debt and contributions by Eliana and LMC. At that point in time they had discussed making equal contributions. As to the label, “equity” contributions, given the evidence of Dr Luka that he did not recall the words spoken (which was his evidence in response to questions specifically concerning the parties’ contributions and the notion of “capital”), and the “broad terms” in which Dr Luka sought to summarise several discussions in a short passage of written evidence, it is not possible to draw from this any particular meaning other than that the parties distinguished at the outset between contributions that they would make to the venture, and external funding.
Further, the evidence was that at that point in time Dr Luka and Mr Sowiha discussed that they would share profit “in accordance with their respective contributions as adjusted from time to time”. The form of that evidence appears to be reflective of lawyers’ language, but in substance it means that the profit sharing would reflect the respective contributions. It can be seen that in Dr Luka’s account of the discussions, he advances both the proposition that the parties would make “equal equity contributions” and the proposition that their respective contributions may be “adjusted from time to time”, which adjustment would be reflected in any profit sharing upon the conclusion of the venture, meaning that they might each make different and not equal contributions to the venture. Those aspects of the evidence were in tension with one another.
Those discussions were followed by the parties’ formalising their relationship by the settling of SGD Trust and execution of the Trust Deed. The Deed imposed no requirement concerning contributions and at the outset an equal number of units was issued to LMC and Eliana (with capacity to adjust the unit holdings by issuing new units in the trustee’s discretion).
As to discussions that occurred in June 2011, Dr Luka and Mr Sowiha re-stated their intentions to make equal contributions to the Trust. Because Eliana was not in a position to contribute as much as originally expected, Dr Luka agreed that he would source external loan funding. They also discussed that they would make further contributions if and when additional funds were required.
The language used in Dr Luka’s evidence in chief in respect of the proposed additional contributions (to be made if and when required) was that, “they would be contributed by the unit holders as capital and would be allocated to their respective capital balances”. Dr Luka went on to say that, “the arrangement to contribute capital to the SGD Trust was … undocumented albeit that the contributions were made by the unit holders under the terms of the SGD trust deed”.
A number of observations may be made about this evidence. First, as discussed, Dr Luka did not recall the words used. The expression, “as capital” (which was not otherwise elaborated) needs to be read in that context.
Secondly, as to the contributions being made “under terms of the trust deed”, the terms of Trust were relevantly that the unit holders would not have an interest in the assets of the trust by reference to their contributions; they had beneficial interests in the trust in accordance with their allocated units. That notwithstanding, Dr Luka referred to the existence of “capital accounts” for unit holders without venturing any explanation for the purpose or context of the creation of those accounts or any meaningful direct reference to discussions about them. That is so notwithstanding that he was, at all relevant times, a director of the trustee who provided instructions to the Trust’s accountants. As discussed, “capital accounts” for each party were maintained in the general ledgers for St George. Capital accounts in this context may be understood as running balances of the contributions by each unit holder, recorded in the accounts of the Trust. What may be concluded from the creation of “capital accounts” is that the parties (LMC, Eliana and St George) intended that the contributions by each of the unit holders be separately accounted such that at any point in time the amount contributed by each was identifiable. Keeping separate accounts for Eliana and LMC in this way was consistent with an intention that they each be able to assert an interest in the return of those funds.
In his evidence in chief Dr Luka referred to the financial statements for the Trust for the years 2011 and 2013 to 2017,[67] observing that they classify the sums contributed by the unit holders as “unpaid trust distributions”. Of those accounts he said:
While this [is] consistent with those entitlements being capital in nature, their inclusion in the balance sheets as ‘current liabilities’ for the financial years prior to 2017 seems to be an error. The SGD Trust had not sold the [Manningham Road] Property or resolved to distribute the capital of the trust to unit holders in those years and therefore the distributions were not presently payable by [St George] to unit holders. Having regard to the nature of the unit holders’ contributions and arrangement between the Company, Eliana and LMC … the entitlement of unit holders should have been characterised as equity, not presently repayable.
[67]No financial statement for 2012 was in evidence.
Dr Luka did not give any reason for the asserted error. He was asked directly in cross-examination why the accounts had treated the unit holders’ payments in that way if as he asserted they were intended to be “capital” contributions and he said that he could give no explanation. That was so, notwithstanding that he had evidently had the opportunity to consider the issue, having adverted to it in his evidence in chief. Dr Luka (through LMC) did not seek to call the accountant for St George (whom he had instructed) to give any explanation for this error. Whether the accountant would have been able to give any illuminating evidence is another matter, but the simple point is that no effort was made to advance an explanation for the proposition that the successive recording in the accounts of the amounts representing the unit holders’ Advances as “liabilities”, was an “error”.
Dr Luka described the unit holders’ “entitlements” as being capital in nature. As discussed, any entitlements to the trust fund would in fact arise in accordance with the terms of the Trust Deed and the issued unit holdings. In Dr Luka’s evidence no attempt was made to grapple with the recording of particular amounts to which LMC and Eliana might be entitled upon the conclusion of the venture, and the terms of the Trust.
Once again, the evidence was given in conclusionary and argumentative form. The “arrangement” between St George, Eliana and LMC to which Dr Luka refers in the passage of evidence quoted immediately above, did not travel beyond the documented arrangement in the Trust Deed and the discussions described elsewhere in these reasons.
In a similar vein, Dr Luka said in his evidence in chief that,
as would be expected with contributions in the nature of capital, the Company did not accrue liability for, or pay interest to, the unit holders on their capital contributions and those sums were not repayable by the company to the unit holders unless and until the Property was sold, funds were available and the Company, as trustee, resolved to distribute the capital of the SGD trust.
It is correct that the trustee did not pay interest to LMC or Eliana in respect of any Advance paid to the trust. Otherwise however, that evidence was also given in argumentative and conclusionary form. It was not given by reference to a discussion or any documented or contemporaneous arrangement between the parties (save the arrangements and discussions already discussed).
Finally, in respect of the Report as to Affairs, Dr Luka said in his evidence in chief that he had reviewed correspondence from Mr Cant, and that,
[Mr Cant] seems to rely on the fact that I specified Eliana and LMC as creditors for the full amounts they were owed by the SGD Trust in the RATA (without delineating between loan and capital amounts) as support for his argument that the amounts contributed by Eliana to the SGD Trust were loans. Mr Cant’s conclusion is incorrect. I simply wished to highlight in the RATA that LMC and Eliana had a present claim for return of funds they had contributed to the SGD Trust. It was not my intention to imply that the capital contributions … were loans.
That evidence too, was argumentative and conclusionary. It reflects the position that must prevail if the funds advanced are to be regarded as contributions to the capital of the trust. What the evidence does make plain, however, is that LMC considered itself as having an entitlement to the return of the funds it had contributed.
It will be recalled that when asked in cross-examination why he had described the Luka Family Trust (the fund on whose behalf LMC had contributed the Advances) and the other Luka entities as unsecured creditors in the RATA, the evidence was that he had done so “for return of my funds”, and that “I just transferred the money as loans to St George’s to help us settle in”. On the face of the evidence given in cross-examination Dr Luka described the whole of the funds advanced by his entities, including the Advances made on behalf of the Luka Family Trust (ie, LMC’s Advances) as loans to the trustee. While both the questions asked of Dr Luka and his answers given in cross-examination lacked precision, at the least, Dr Luka was unambiguous in saying that he was claiming the return of his funds, including the moneys paid on behalf of the Luka Family Trust.
The declarations made in the RATA are consistent with Dr Luka, for St George, understanding that LMC and Eliana were entitled to claim repayment of the moneys they had advanced to the trustee. Similarly, the 2017 tax return for the trust treated the moneys that had been advanced as liabilities. Dr Luka said that by that time the entitlement of the unit holders to a distribution or return of capital would be appropriately recognised as presently payable. It is true that at the point at which the joint venture had concluded and the affairs of the Trust were being wound up, Dr Luka may not have subjectively distinguished between the entitlements of the unit holders as creditors and as beneficiaries. The RATA and 2017 tax returns are, nevertheless, consistent with the earlier and repeated recognition in the accounts of the liabilities flowing to the trustee on the making of the Advances by LMC and Eliana.
Circling back to the observations on Dr Luka’s evidence, the criticisms I have made of the evidence are not personal criticisms of Dr Luka and are not directed to any proposition that Dr Luka did not honestly give his evidence, but to the meaning and significance that can be accorded to that evidence.
No party submitted that any particular inference ought be drawn from the absence of Mr Sowiha. LMC made passing reference to his absence but did not formulate any inference that was said to be made more certain by reference to the facts in evidence, having regard to the fact that he was not called to give evidence. Mr Sowiha might have given evidence concerning the parties’ discussions, but having regard to the evidence that was given and its limitations as already set out, there is no sound basis on which to conclude that the evidence should be weighed differently because of his absence.
Accepting that Dr Luka was the only witness to give an account of the dealings of the joint venturers, it is nevertheless apparent that the evidence designating the contributions of the parties as “capital in nature” (and the like) was, taken as a whole and read contextually, given by way of assertions and conclusions and subjective assessments made after the event.
I accept that the parties consistently distinguished between funding for the venture that was to be obtained from external funders, and that which was to be provided by the participants. What label they applied to that funding in their discussions cannot be known because the words spoken could not be recalled so long after the event. The label “capital contributed” was certainly used in the accounts, but it was applied to amounts accounted for as liabilities.
Synthesis
To summarise, and without repeating what is set out above, it can be drawn from the evidence that:
(a)The parties bound themselves to the form of the relationship and attendant benefits and obligations set out in the Trust Deed.
(b)The parties, by the Deed, agreed that the interests of LMC and Eliana in the trust fund were beneficial interests in accordance with their unit holdings.
(c)The Advances made by the unit holders were made for the purpose of putting the trustee in funds to pursue the Manningham Road Venture, including for the purchase of the property.
(d)The parties nevertheless did not intend that the contributions made by LMC and Eliana (beyond their equity payments of $100 each) would be available for distribution at the end of the venture in accordance with the Trust Deed. Despite their initial plan, LMC and Eliana were unable to contribute equally to the venture. The trustee, then, consistently recorded and maintained a running account of what each had contributed, and those amounts were recognised as liabilities in the accounts, throughout the entire period. That they were recognised as liabilities was consistent with the parties having mutually intended that the funds were advanced on condition of an obligation of repayment. The obligations were unsecured, which necessarily had the consequence that the funds might not in fact be repaid, depending on the success or otherwise of the venture.
(e)The parties differentiated between funding obtained from third party sources (which they designated, “loans”), and moneys contributed by the unit holders, which they designated in the accounts as “capital contributed”, but while recognising the contributions as giving rise to liabilities.
(f)The accounts assigned the liabilities as current liabilities which would indicate that they were repayable within the relevant current year. The amounts contributed, less any drawings by the unit holders respectively, were accumulated from year to year, without any repayments being made. The whole of the evidence is, on balance, consistent with the parties having intended that the amounts advanced were not repayable until the conclusion of the venture.
As discussed at the outset, the labels that parties assign to contributions may be informative, but they are not determinative. They may have forensic significance but must be assessed objectively. Here, for the reasons discussed, significant weight could not be attached to the labels applied in Dr Luka’s evidence to the contributions made by the unit holders. Funding for the venture provided by the participants in this case might be better described as capital raised by way of loan.
I accept that the purpose of the provision of the Advances by the unit holders was to put the trustee in funds to undertake the joint venture. Generally speaking, that purpose may suggest an intention that moneys be contributed as capital. However, purpose must be considered in the context of the whole of the evidence.
Returning to fundamentals then, here, the proper characterisation of whether Advances by the unit holders were by way of capital contribution or loan, depends essentially upon whether or not the payments were attended by a contractual obligation on the trustee to repay those moneys to the unit holders – not as distributions under the trust but in discharge of a contractual liability to repay the funds advanced.
I infer that the parties intended that the moneys advanced by Eliana and LMC (aside from the amounts paid for their subscriptions for units, which is recorded as equity in the balance sheets of the Trust), be advanced by way of loan to the trustee, without the requirement to pay interest. The funds were for the use of the trustee in the venture for as long as required for the purposes of the venture, although the parties were free to “draw” on their contributions. Although much of the evidence was unsatisfactory, for the reasons set out, what was consistent throughout the course of the parties’ dealings was the recognition of an obligation of repayment which is the irreducible essence of a loan contract. The evidence of that intention was tolerably clear, and rose comfortably beyond the level of surmise or conjecture.
Disposition
Having found that the Advances from each of LMC and Eliana to St George (excluding the amounts paid by them for the acquisition of their units in the trust) were in the nature of loans, the conclusion follows that the Interim Payment back to Eliana was in the nature of the repayment of a loan.
In the Eliana Proceeding, the separate question, being the trial of the Eliana Plaintiffs’ claims for declarations that Eliana’s Advances to St George were capital contributions, and the Interim Payment from St George a capital distribution, is answered in each case that the declarations are refused.
As to the St George Proceeding, the Liquidator properly sought orders from the Court, in the face of significant evidentiary uncertainty and contest, that he was justified and acting reasonably in proposing to treat the Advances as capital in nature. Having made the findings in the terms I have, having heard the inter partes dispute formed by the Eliana Proceeding, I will not make those orders. I will hear from the Liquidator on a reformulated form of orders to give effect to these Reasons in the furtherance of the liquidation.
I will hear from the Eliana Parties on orders giving effect to these reasons in the Eliana Proceeding.
SCHEDULE
S ECI 2021 4331
COMMONWEALTH BANK OF AUSTRALIA
First Plaintiff
ELIANA CONSTRUCTION AND DEVELOPING GROUP PTY LTD (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) (ACN 132 817 362)
Second Plaintiff
BRETT LEIGH MORGAN AND GEOFFREY NIELS HANDBERG (IN THEIR CAPACITY AS JOINT RECEIVERS AND MANAGERS OF ELIANA CONSTRUCTION AND DEVELOPING GROUP PTY LTD (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) (ACN 132 817 362)
Third Plaintiff
JOHN STUART POTTS (IN HIS CAPACITY AS FORMER LIQUIDATOR OF ELIANA CONSTRUCTION AND DEVELOPING GROUP PTY LTD (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) (ACN 132 817 362)
First Defendant
ANTHONY ROBERT CANT (IN HIS CAPACITY AS LIQUIDATOR OF ELIANA CONSTRUCTION AND DEVELOPING GROUP PTY LTD (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) (ACN 132 817 362)
Second Defendant
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