JUDGMENT No, om. S8.0.9 2%. CATCHWORDS TRADE PRACTICES - finance for unit development and subdivision - misleading or deceptive conduct - whether representations by financier of intentions to advance moneys and pay outstanding trade creditors - whether appointment of receiver valid - whether trespass. 'Irade Practices Act 1974 s 52 HOLLISTER DEVELOPMENTS PTY LIMITED (RECEIVER AND MANAGER APPOINTED) v. CUSTOM CREDIT CORPORATION LIMITED No. WAG 36 of 1992 FRENCH J. PERTH 16 November 1994 RECEIVED 17 NOV 1994 FEDERAL COURT OF AUSTRALIA PRINCIPAL REGISTRY IN THE FEDERAL COURT ) OF AUSIRALIA ) WESTERN AUSTRALIA ) DISTRICT REGISTRY ) ) GENERAL DIVISION No. WG 36 of 1992 BETWEEN: HOLLISTER DEVELOPMENTS PTY LIMITED (PECEIVER AND MANAGER APPOINTED) Applicant and CUSTOM CREDIT CORPORATION LIMITED Respondent MINUTE OF ORDER JUDGE MAKING ORDER. FRENCH J. DATE OF ORDER: 16 NOVEMBER 1994 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The apphcation is dismissed. 2. The applicant 1s to pay the respondent the sum of $3,573,395. 3. The applicant 1s to pay the respondent's costs of the application and of the cross claim to be taxed. NOTE: Settlement and entry of Orders 1s dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION No. 36 of 1992 BETWEEN: HOLLISTER DEVELOPMENTS PTY LIMITED (RECEIVER AND MANAGER APPOINTED) Applicant and CUSTOM CREDIT CORPORATION Respondent CORAM: FRENCH J. 16 NOVEMBER 1994 REASONS FOR JUDGMENT Introduction Hollister Developments Pty Limuted (Hollister Developments) 1s a land developer and builder which undertook a project involving the construction of home units and the subdivision of land at Kenwick Although imtually financed by Citibank Savings Limited, the developer sought refinancing from Custom Credit Corporation Limited (Custom Credit). Custom Credit advanced Hollister Developments the sum of $1.35 millon. Subsequently, Hollister Developments encountered cashflow problems and had further discussions with Custom Credit about additional finance. It maintains that Custom Credit made certain representations in the course of those discussions and subsequent correspondence, they being representations about its intentions to advance moneys to Hollister Developments and to pay outstanding trade creditors so that the project could proceed. Hollister Developments asserts that Custom Credit has not honoured its commitments, has engaged in misleading or deceptive conduct and has wrongly appomted receivers over the property the subyect of the development project. It claims damages under various heads and other rehef. Custom Credit cross claims for moneys which it has advanced to Hollister 2. Developments and moneys due under a mortgage in favour of Citibank which was subsequently assigned to Custom Credit The Pleaded Case Hollister Developments 1s a land developer and builder On 28 November 1988 it became the registered proprictor of Lot 5 Stafford Road, Kenwick (the home unit land) It says that, at all material times, it was undertaking the construction of 64 home units and four commercial units on that land A mortgage in favour of Citibank Savings Linuted was registered against the land on 21 March 1989 securing an advance of $2,500,000 by that company. he mortgage lability was guaranteed by Samuel Papotto, a director of Hollister Developments, under a deed dated 17 March 1989 Arrangements with Citibank were said to permit partial discharges on the sale of any completed home units. Holhster Developments also became the registered proprietor of Lots 2 and 33 Stafford Road (the development land) on 15 November 1989. The company was at all times developing that land for subdivision into 40 building lots. On 15 November 1989 and 30 November 1989 respectively, a first mortgage was registered on the development land and a second mortgage on the home unit land to secure an advance of $1.35 million from Custom Credit. The terms of the mortgage included an entitlement to $20,000 in favour of Custom Credit as a Project Risk Fee to be made available to Custom Credit at settlement. This was debited to its account with Custom Credit on 27 November 1989. Custom Credit says that the $20,000 was included in the sum advanced and represented a risk fee. These matters were not seriously im issue. Hollister Developments says that the construction of the units on the home unit land was planned and implemented in stages. Twenty five units were to be completed by November 1989, ten in February 1990, ten in May 1990, ten in August 1990, nine in December 1990 and the four commercial units in February 1991. Periodic sales were planned to generate cashflow for Hollister Developments to finance ongoing construction Following registration of the moitgages, construction of the home units commenced as did development of the development land, These Matters aie not contested but are not adnutted by Custom Credit Before December 1989, vatious of the home units constructed by Hollister Developments were sold on the condition that settlement would occur before the end of 1989. The sales lapsed because the lots in Stage 1 were not available for dealings by that time. This meant that Hollister Developments could not make projected repayments to Citibank and incurred additional interest charges. Cashflow difficulues arose and the company accumulated outstanding debts to traders and contractors. Creditors pressing for payment totalled $270,673.84. These matters are not admitted by Custom Credit. Hollister Developments says that in May 1990, Papotto was approached by Stephen Lewis, a senor executive of Custom Credit, who told him that Custom Credit's Australian Manager, James Bonwick, was in Western Australia and wished to discuss existing and future business relationships with Hollister Developments. A 4. meeting was held between Papotto, Lewis and Bonwick in May 1990. The holding of the meeting 1s common ground but Custom Credit says its stated purpose was to discuss Hollister Developments' facility. At that time Custom Credit says it had informed Hollister Developments that the facility interest capitalisation level of $95,000 would be fully drawn by May 1990 and that Hollister Developments should make arrangements to meet further payments. During the meeting with Lewis and Bonwick, Papotto allegedly told them that Hollister Developments was in the process of buildin, on the home unit Jand and subdividing the development land, that it planned to build the units in stages, that 25 units were alieady approved for dealing, and that Lots 1, 6, 10 and 19 had been sold It ts also said that Lewis and Bonwick were told of the delays that Hollister Developments had experienced and the consequent cashflow and creditor problems. They were told the 25 units completed could be sold for $1.8 milion quickly or $2 milion on an orderly marketing basis, that Hollister Developments had heard from intending buyers in respect of the development land but needed to provide its creditors with assurance as to the availability of future funding for which there was a need in order to complete the balance of the units and the development land. It is alleged by Hollister Developments and denied by Custom Credit, that at that meeting Custom Credit represented to Hollister Developments that: "18 At such mecting the Respondent indicated and represented to the Applicant (a) that the Respondent was willing to and able to and would discharge or purchase the Citibank mortgage by mid (b) (c) (d) (ce) (f) (8) (h) June 1990 that the Respondent was in a position to assume the role of sole lender over the home unit land and development land for the purpose of providing funds to finalise both projects that any proposed funding would provide for and permit partial discharges and consequent repayment of part of the sums advanced or to be advanced that the Respondent was in a position in offer to the Applicant in respect to future arrangements Joml vepture profit sharing ariangemic nts as distinct. from the Applicant borrowing and paying interest that the Respondent was in a position to pay out the said pressing trade creditors particularised in the First Schedule hereto by mid June that the Respondent was agreeable to making available to the Applicant further funds to enable the Applicant to market a house and land package on the development land as distinct from vacant blocks alone that the Respondent was in a position to provide weekly payments to contractors and Suppliers to allow the rapid finalising of the home units and the development land subdivision that the Respondent was agreeable to informing contractors and others trading with the Applicant as to the availabilty of funds with a view to comforung such 6. contractors and others and inducing them to proceed with providing goods and services for the purpose of finalising the works above refcrred to QQ) that the Respondent was able and willing to provide a letier of approval for the purpose of the Applicant, demonstrating to creditors and contractors and others that the Applicant had the financial abihty to complete the works above pleaded" Custom Credit did not suggest. it 18 said, that there was any requirement express or implied, that upon funds being advanced by Hollister Developments they would be repayable other than by virtue of the sales program of the home units, the commercial units and the development land. Hollister Developments alleges that at Custom Credit's suggestion and representation, it made application to Custom Credit to refinance the home unit land and the development land for a loan in the amount of $5,394,541. Subsequently, according to Hollister Developments, Lewis and Bonwick verbally indicated to Papotto and Westlake that a loan of $5,396,000 had been approved. The alleged representations, and the alleged verbal approval are all denied by Custom Credit. Hollister Developments says that Custom Credit partially implemented its verbal approval by informing some trade creditors of the availability of finance, disbursing funds and informing Citibank that Custom Credit intended to purchase or payout the Citibank mortgage. 7. Hollister Developments alleges that in rehance upon Custom Credit's conduct and representations it abandoned the staged approach to the construction of the home units, incurred obligations to contractors, refrained from obtaining alternative finance, told Citibank that Custom Credit would pay 1t out in mid-June 1990 and told trade creditors that they also would be paid out by that time. Hollister Developments complains that Custom Credit did not pay out Citibank or pressing trade creditors. Various requests were allegedly made by Hollister Developments to Custom Credit for a written Ictter of approval of the advance Hollister Developments says it was told the approval was delayed because of internal administrative problems being experienced by Custom Credit Custom Credit did not indicate that the loan would not be fully proceeded with nor that it would be repayable other than from the proceeds of sale of units and building lots. The loan was approved on 18 July 1990. Subsequently, Hollister Developments took up with Custom Credit on a number of occasions the matter of paying out Citibank and pressing creditors. Custom Credit allegedly said such payments could not be made until security had been finalised. Hollister Developments says it made various approaches to Custom Credit to have the secunty documents approved. Such documentation was never made available to it. Nevertheless, Custom Credit continued to make more advances. Hollister Developments received further demands from its trade creditors and in the period leading up to August 1990 was in financial difficulty. A meeting was held 8. between Papotto, Brash and others representing Custom Credit on 4 September 1990. Hollister Developments says Papotto was told that the loan was proceeding but that security documentation was held up because of Custom Credit's internal arrangements. It was agreed that the balance of funding to finance the home unit and development lands was $145,000 for the homes and $44,000 for the subdivision. A revised sales program was agreed. The revised agreement was contained 1n a letter dated 4 September 1990. The terms of the letter were partly implemented by Custom Credit making available various payments to Hollister Developments from 7 September 1990 to 5 December 1990. An offer to purchase the 25 home units was said to have been made on 7 September 1990 by one Steve Skelin for $2 million. Citibank would not become involved but directed Hollister Developments to take the matter up with Custom Credit. Citibank declined to negotiate as it was awaiting payment by Custom Credit of its mortgage. For this reason the proposed sale did not proceed. By a notice dated 28 September 1990, Citibank demanded repayment of its advance by reason of alleged default on the part of Hollister Developments. Hollister Developments took the matter up with Custom Credit which refused to make payment to Citibank of the amount owmg. On 12 October 1990, Custom Credit demanded repayment from Hollister Developments of sums advanced by it. At the time, according to Hollister Developments, 1t was not in default under its loan arrangements with Custom Credit. The notice was said to be defective. 9. A further written offer was made by Skelin on 16 October 1990 to purchase 55 units the subject of the home unit development for a price of $3,505,000. The offer was referred to Custom Credit which directed Hollister Developments to take the matter up with Citibank. Citibank refused to become involved on the basis that it was awaiting payment out of the Citibank mortgage. For that reason the proposed sale did not proceed. By a deed dated 31 October 1990, the guarantee and indemnity executed by Papotto on 17 March 1989 was assigned by Citibank to Custom Credit. The Citibank mortgage was transferred to Custom Credit on 12 November 1990 and paid out on that day save for the sum of $20,000 or thereabouts still due to or claimed owing by Citibank. Custom Credit at no time has paid out pressing trade creditors. On 28 November 1990, it appomted receivers and managers pursuant to the Citibank mortgage which had been assigned to it and pursuant to 1ts own mortgages. Hollister Developments says that the purported appointment was and 1s invalid as there was no default entithng or enabling such appointment. Alternatively, it contends that the demand for payment made on 12 October 1990 was premature as on a proper construction of the agreement of 4 September 1990 no demand could lawfully have been made before 27 October 1990 nor before the date of appointment of the receivers. Hollister Developments says that by reason of the appointment it has suffered damages. 10. By notice dated 21 January 1991, Custom Credit demanded payment from Papotto of moneys claimed by it in respect of the Citibank mortgage and in respect of sums advanced by Custom Credit to Hollister Developments. Hollister Developments says that Custom Credit at all times knew it intended to rely upon the representations and undertakings made and given by Custom Credit. Those representations are said to have been false in various respects which are particularised. In so far as they were representations as to future matters they were made without reasonable grounds and reliance 1s placed on 351A of the Trade Practices Act 1974. Hollister Developments says that the representations and conduct of Custom Credit constituted misleading or deceptive conduct in contravention of s.52 of the Trade Practices Act 1974 as a result of which Hollister Developments suffered loss and damage. Hollister Developments goes on to plead that Bonwick, on behalf of Custom Credit, told Papotto and Westlake that 1t required all umits on the home unit land to be completed concurrently and not in stages. Previously, during May 1990, Custom Credit had decided on a policy of lending further moneys in Western Australia only if contractually obliged to do so, or if necessary to complete projects. Neither Bonwick nor any other representative of Custom Credit informed any representative of Hollister Developments of the existence of that policy. The fatlure of Custom Credit to warn Hollister Developments of the existence of the policy or to qualify its statement of willingness to consider advancing further funds by revealing that any lending would be limited by the policy constituted misleading or deceptive conduct. Alternatively, it 1s said that Hollister Developments had a reasonable ll. expectation that 1t would be informed of any material restrictions on the althty of Custom Credit's staff to make further advances of the kind desned by it and the failure to reveal the policy was therefore nusleading or deceptive Again, Hollister Developments says it has suffered loss or damage by reason of that conduct. A plea of estoppel is also raised based upon the alleged assumption of Hollister Developments that loan contracts had been made and that Custom Credit would not call up its loans or any of the moneys to which it was entitled other than pursuant to the terms of the loan contracts and that the funds hable to be repaid to it would be aid out of the sales of the property the subject of the mortgages Pp Properly j BAL A claini m trespass 1s raised based on the entry onto the home unit land and development land by Custom Credit and aggravated and exemplary damages are claimed. Relief is sought by way of a declaration that the appointment of the receiver was unlawful, damages for breach of contract, damages under s.82 of the Trade Practices Act 1974, damages for trespass, exemplary and/or aggravated damages and relief under s.87 of the Act. Custom Credit contends that the basis upon which further funds were advanced to Hollister Developments was different. It contends that all that it represented to Hollister Developments was that it was prepared to consider making payments to selected trade creditors to enable the project to continue. Such further advances were to be at the absolute discretion of Custom Credit. Payments were made to Hollister Developments, from time to time, on this basis. There was no obligation to pay all of the trade creditors. 12. Custom Credit admits receiving a request for a "bridging loan" consisting of $5,394,541 from Hollister Developments in July 1990 After some consideration, a loan of $5,396,000 was approved and Hollister Developments was informed, 1n writing, of the approval. Hlowever, that approval, 1t is said, did not constitute an offer to loan as it was subject to certain terms and conditions. Acceptance of the written approval resulted, at best, in an agreement to enter into a loan agreement upon the fulfilment of those conditions Those conditions included one which requued adequate security to be provided Hollister Developments did not fullil this condition As a resull, there wis no buding pronnse to advance the $5,396,000 appro d. In addition, Custom Credit cross clams on the original loan agreement and mortgages with Hollister Developments and upon the Citibank mortgages which had been assigned to it on 31 October 1990. It also cross claims for the addittonal sums which it subsequently lent to Hollister Developments to enable the payment of some of the trade creditors. Hollister Developments, it 1s said, had defaulted and breached various conditions in the loan agreements and the mortgages, thus justifying the written demands by Custom Credit and the appointment of receivers and managers. In total, Custom Credit claims $3,573,395.10 from Hollister Developments, being the sum still owing as at 30 June 1993. 13. Flollister Developments' Kenwick Pro,ect - Early History November 1988-November 1989 John Samuel Papotto described himself in evidence as a business advisor. He began engaging in property development in a small way in 1982 In 1986 his involvement became more serious and in Jate 1987 he took over a $2 company called Rawang Nominees Pty Ltd. That company later became [Flollister Developments Pty Ltd. Hollister Developments carried out two subdivisions of land at Maida Vale It was involved with a unit development at Fast Perth, project house construction at Woodvale and Murdoch, and other comnn wial developments In 1988 there had been a significant increase in market values for unit development. On 28 November 1988, Hollister Developments purchased land at Lot 5 Stafford Road, Kenwick for the purpose of carrying out a 64 home unit development. Planning approval had already been obtained. The purchase price was $440,000. Initial finance for the construction was provided by Reliance Finance in the amount of $1.5 million. Hollister Developments started to try to sell units off the plan from the time the land was purchased. It began marketing them in a small way in August 1988 and subsequently commenced what Papotto described as a vigorous advertising campaign. In about January 1989, a man called Karl Victor was employed by Hollister Developments as Proyect Manager for the proposed development at Stafford Road. He became a director of the company. Some works had already begun on the home unit land before he joined the land. These included earthworks and drainage. Victor prepared cost estimates for the types of unit to be constructed on the home unit land. This did not include allowances for the earthworks and 14. drainage already constructed. The costs were limited to the costs of construction According to Victor, the average cost per square metre of the units was $270. He claimed to have made this estimate in 1989 It was clear, however, that the estimate did not include any component for preliminary works comprising earthworks and drainage. Nor did it cover landscaping costs, sewerage connection, fencing, carpets, window treatments or rectification of defects. Papotto believed that Rehance Tinance would advance funds to a total value of $2 milhon to support the project. Jn the event the additional funds were not torthcoming from that source and the project had to be refimanced through Citibank Savings Corporation Ltd. On 23 February 1989, Citibank wrote to Hollister Developments indicating that 1ts application for finance had been approved in the amount of $2,500,000 with a maturity date of 12 months from the date of settlement. The loan was an interest only loan with principal due at maturity or on the sale of individual units. On 15 March 1989, Hillier Parker carried out a valuation of the proposed development on the home unit land for Citibank. The valuation was based upon market investigations in Kenwick and surrounding suburbs and referred to recently recorded unit sales in new developments with 12 or more individual units The average price for the proposed three bedroom units was projected at $80,000 and for the two bedroom units, $72,000. The gross on-completion value was assessed at $4,944,000. 15. Citibank took a first mortgage, F053088, over Lot 5 to secure the advance. The mortgage was dated 17 March 1989 On the same day, Papotto executed a Deed of Guarantee and Indemnity in favour of Citibank guaranteeing Hollister Developments' obligations under the mortgage. Construction of the units commenced in May or June 1989. Karl Victor wrote to the City of Gosnells on 27 July 1989 setting out a works schedule which, he said, was based upon currently available trades having regard to the downturn in the industiy. Assuming a comir neement dute of 7 August 1989, he proposed to have six pads completed at the end of week 1 and fittings, frxing, painting and downpipes completed at the end of weeks 7 and 8. There would be six new starts each week to complete 64 houses by the end of December 1989 According to the statement of claim, the building of the 64 home units on Lot 5 was planned and being implemented im stages comprising the completion of 25 units in or about November 1989 as a first stage, followed by three stages involving the completion of ten units each in February, May and August 1990, A fourth stage in which nine units would be completed by December 1990 and a final stage in which four commercial units would be constructed in February 1991. This, it was said, was "deliberately planned to enable periodic sales of home units to provide the applicant with a cash flow" (para.7 statement of claim). On the face of it, however, the letter was not consistent with the kind of staged development propounded in the statement of claim. 16. It was Papotto's evidence that units comprising Stage 1 of the project had been sold in 1988 on the basis that settlement would occur when the Strata Plan for the units had been approved for dealings The latest date fo scttlement on that basis was evidently December 1989. A number of sales did not go ahead because the strata plan was not approved for dealing until April 1990. The Gosnells Shire had evidently declined to issue the necessary clearances because of a deficiency in fence lines Some contracts which had been entered into were renegotiated, other prospective purchasers decided they would wait until the project was completed Marketing of the units began in a small way im August 1989 and an advertising campaign was commenced around December 1989. J.J. Ilookeis, Thornlie Branch, carried out the marketing By November 1989, much of the money borrowed from Citibank had been used on the project. Papotto repeated in his evidence the pleaded allegation that Lot 5 was always designed to be built in stages and that when Hollister Developments borrowed from Citibank it was always acknowledged that there would be additional funds to complete. By November 1989, according to Papotto, Stage 1 comprising 15 units had been completed. Stages 2, 3 and 4 each comprising 10 units, were 40% to 70% completed. Stage 5, comprising 9 units, was 80% complete. In cross-examination, he said "staged development" meant "various units in certain stages" (227). Asked to identify any document which suggested that a five stage development was being pursued in August 1989 he referred to strata plans being "in place" and the issue of building licences in stages. Cross-examined about Victor's letter of 27 July 1989 to the City of Gosnells he said that the letter did not reflect the 17. way he wanted Victor to go. He also said however that the letter had nothing to do with staged development. When Victor was cross-examined, he said Papotto had told him when he joined the company that he had to complete the development as fast as he could. He believed he could proceed in that way. He agreed that at first Papotto had told him to start work on all the units and endeavour to complete all of them at the same time. That was Victor's original plan. However, about one third of the way through the project he became aware of money problems which set back the construction. There was a change of tack to try to complete 10 units so some could be sold to finance ongomg construction. It was appaient fiom the evidence that the so called staged development was in truth a response to financial exigenues in an attempt to complete a certain number of units to finance ongoing construction of the balance. It was not planned and implemented as asserted in the pleading or im Papotto's evidence. Further support for this view came from a valuation prepared by Hilher Parker for Citibank in March 1989. No reference was made to a staged development in that report which, if a staged development had been planned, would be expected to have contained some reference to it. In November 1989, Papotto decided that Hollister Developments should exercise the options it had to purchase land adjacent to Lot 5 Stafford Road, being Lots 2 and 33 Stafford Road. He approached Custom Credit for finance for the acquisition and subdivision of the development land and for what he said was Stage 2 of the development on the home unit land. On 8 November 1989, Custom Credit approved an advance of $790,000. At about this time, however, there were further discussions between Papotto and Mr Rob See, an officer of Custom Credit, in which 18. Papotto said that he was expecting clearances to enable strata title approval of Stage 1 of the home unit land but that there was going to be a cashflow problem In the event, on 10 November 1989, Custom Credit approved an advance of $1,350,000 in lieu of the previously approved advance of $790,000. The terms of the second approval were set out im a letter to Hollister Developments dated 10 November 1989. $400,000 was to be advanced at settlement, $335,000 to be progressively advanced against builders' claims for the development land, $500,000 to be advanced progressively against builders' claims for the home unit land, $95,0U0 to represent an interest caprtalisation facility and $20,000 to be a profit share at settlement payable to Custom Credit. The security for the loan was a registered first mortgage over the development land, a registered second mortgage over a house owned by Hollister Developments at 30 Moss Street, Huntingdale and a registered second mortgage over the home unit land. A security deposit of $100,000 was to be lodged with Custom Credit. The loan was subject to various conditions including four arms-length pre-sales of single residential lots bemg achieved prior to development funding. The $100,000 security deposit was to be lodged with Custom Credit prior to funds bemg advanced on Stage 2 of the home unit land. In a form of application prepared internally by a Custom Credit officer, Mr P.F. Lewis, the purpose of the advance was described as follows: "To fund Stage IE of a 62 strata tutled residential unit development at Lot 5 Stafford Road, Kenwick and the acquisition and subdivision of Lot 2 and Part Lot 33 Stafford Road, Kenwick into 24 residential lots * (Exhibit 1 Vol 3-37) 19. And under the heading "PREAMBLE" appearing in the same document the following was stated: "Mr Papotio has approached the corporation to fund Stage II of a 62 Strata utled residential unit development on the properly adjoining the subdivision Stage I has been completely presold and will scttle in January/February 1990 completely eliminating Citibanks [sic] 1st Mortgage Stage Ji will incorporate 10 units leaving the Corporation with a debt of $500,000 over 10 units (approximate value $800,000) This development will also aid in reducing the subdivisions [sic] costs as sewerage lines and cquipment arc close at hand" Notwithstanding what appeared in the application, Papotto dened in cross-examination that he had approached Custom Credit on the basis that he was seeking funding for a second stage of the development incorporating ten units. He said the funding he was sceking was "to assist the development" and that no specific stage was mentioned at all. Asked to explain how the reference to funding of Stage 2 had appeared in the application, Papotto said that he could possibly have told Custom Credit that 1t would be repaid out of Stage 2 of the development. The fact was, as Papotto conceded, that construction had commenced on all proposed units on the home unit land by August 1989. It was put to him that by November 1989, Hollister Developments had commenced work on each of the 62 units that it intended to construct. Initially he dened that, saying that some of them only had slabs laid. However, subsequently he agreed that the laying of the slab constituted the commencement of construction. It was consistent with Victor's evidence and supportive of the conclusion that I have already expressed that the so called staged development was, in truth, a response to financial exigencies. 20. The letter of approval from Custom Credit included a requirement for a security deposit of $100,000 to be lodged with Custom Credit prior to funds beimg advanced on the home unit land. On the internal application form, the amount of "applicant's funds" was shown as $110,000 and then later as $100,000 When Papotto was referred to this in cross-examination he said that he had no idea of how the sum of $110,000 came to be in the application form and that it was the first time that he had heard he was to put in either $100,000 or $110,000. He accepted that there was a condition in the letter of approval that he should lodge $100,000 with Custom Credit but contended that an officer of the company, Mr Jim Richardson, waived the condition. The Deed of Loan - 13 November 1989 On 13 November 1989, Hollister Developments entered into a Deed of Loan with Custom Credit. Papotto, as guarantor, was also a party to the Deed. Various provisions of the Deed are relevant to the question whether there was later a default by Holhster Developments entitling Custom Credit to make demand and appoint receivers. It 1s convenient to set out those provisions here. The following definitions appear: "2.13 "Collateral Security" means any and each other security or covenant for the loan which is collateral to this Deed or to which this Deed 1s collateral now or at any time 1n the past or future held by the Lender including any Mortgage, 215 "First Advance" means the sum of ONE MILLION THREE HUNDRED AND FIFTY THOUSAND DOLLARS (31,350,000 00) to be advanced by the 2.110 21. Lender to the Borrower by progressive instalments in accordance with this Deed, "The date of first advance" means the 14th day of November 1989, "Further Advance" means any sum which the Lender agrecs to advance to the Borrower 1n accordance with this Deed, "Interest Payment Days" means the 14th day of each month, "Principal Sum" means - 21131 the whole of the balance remaining unrcpaid (whether due or not) from ume to ume of the First Advance and cach Further Advance (including all moneys drawn, repaid and redrawn), and 21132 all other advances of money (by direct advances to the Borrower, or by the Lender - "Period of the Loan" means a period of onc (1) year from the date of first advance," The following substantive provisions are also relevant: "31 4.1 Subject to the comphance by the Borrower with the terms covenants and conditions of this Deed to be complied with by the Borrower prior to the making of the First Advance, the Lender shall lend the amount of the First Advance to the Borrower in the manner provided for in this Deed The Borrower shall repay the Pnncipal Sum or so much thereof as shall for the time being be advanced and remain unpaid to the Lender immediately upon demand together with all interest due in accordance with this Deed up to the date of payment. 5.2 22. The Lender may not demand the repayment of the Principal Sum prior to the expiry of the Period of the Loan whilst the Borrower - 431 makes all payments of Principal Sum and interest provided for by this Deed, and 432 performs and observes all the terms and conditions of this Deed and ail Collateral Security The Bortower shall pay to the Lender interest calvulated - Sil from tune to ume on the outstanding balame of the Principal Sum, $12 at the Standard Rate, and $.13 from the date of first advance of the loan, on the Interest Payment Days in the manner hereinafter set out and in each casc the payment of interest shall be calculated up to and include the day of payment and shall be computed with daily rests PROVIDED THAT if and whenever a payment of interest (clear of all deductions and taxes) on the Principal Sum, or on so much thereof as for the time being shall have been advanced and remain outstanding, in respect to any period 1s made on its due date or within eight (8) days at the Concessional Rate of interest and provided no default exists in respect of any previous payment of interest required to be paid as aforesaid and provided further that all and singular the covenants terms and conditions herein and in any Collateral Security expressed or implied up to the date of payment of such interest have been duly and punctually performed and observed THEN the Lender will accept interest calculated at the Concessional Rate in lieu of the Standard Rate PROVIDED FURTHER and it 1s expressly agreed that the Lender shall be at liberty at any trme and from time to time by giving not less than one (1) calendar month's written notice to the Borrower in that regard either to increase or decrease the rate of interest payable by the Borrower hereunder (both as Xue Jo yunoo0e Jo yuswayNes Aue Jurpueisyimiou shouoW pemns0g Joyo [je pue jsaz9quT 'ung yedroung oy1 jo wowed op soy Amdes Sumuluos pue suruuns & powosp aq [Teys pooq sil Lu spaptaoid ZZ osnepo-qng *Z asnejo ul poytoads sem yourkedas Jo apoul oul, 4. OSneya sTyy UI OF poajar A[snotsaid ,siugWOAOIdUIT, Wd) 9Y) UT Popnjour oq Os[P [JeYS & LZ] ASNeIO UT 0} polos; PUP] ay uo ssuipjing JoyIo Aue pue sun yons Jo [Je JO UONINISUOS YL fooioy € LT asnelO ul pouonUeWT Ayzodoid ay uo situn Joy Ny NAsuOo 0} spusiUt I yey) pue (asneyo sty) UT pauoluoUl oJOJoquiossy ,pUey pres oY), Wo ay? UT popnyoUT aq osTe [yeys poaordut se pur] Yory jo [[z) Joolay € ZT osne[D ul peuonuow Ayodoid oy. uo syn Bunonnsuca Ajuasaid st JOMOIIOg 9Y] yey) poole pue paspojmouwoe JOYUNY st 3] ,syUowWeaoIduT, Wis) 2y} UT popnyoUl 9Q TIM OIA] WATRTSI UT SHON BUS pue Butd.UsUs qEinionns [Te pue parnber se sooiases Joyo 10/pue sed 'AWOMOo[a 'Fae 'aseIOMOS 'speOI UOTIEITUIT] MoyUA Burpnpout osoyi seas [fe surpnpour SO] YONs JO JUOUIGOJDAP SY SIO] POOTAIOS OWT puey] ples ay) aptarp-qns 01 (,pue] pres ayy, Wo) oy) UT papnpout Futag Joolay [ ZI asnejO Ul oO} perajal puey aul JO Te) JoaaYy LLL asny[O url pouonuaw Ayodoid ey. Jo Wwouryas ay) Joye 'spuaqur Jomom0g ay? wy) prer8e pue pospyznouyre Aqary sty L9 SHONVACY JAISSHUOOUd JO MIANVAL Ou SUMOTOJ SIP sew pracy OY) JapUN syuvMarv SJaaol0g sy Suoury - LVHL SAVMTV GHdIAOUd JooIny LIL asneya pue ¢¢ asneyg Jopun arqesed {snormatd ysozoiwut Jo syuauyesur ay) jo nay ul Japunany arqe (ed sjuourpeysut oy) auooag Udy) [TeYs SWUOUIPISUL PrA Yons Jo JUNOWe suzy A[uIpsOvR Jopunryoy «apquded jsagaqui JO siuoWyeysuT oy) ut uoneues fue Jo nou wd DOU yons (ue <q Lew pur (RY [CUOIsMUOD ay PUR WEY PAPPUPIS ay) 02 "€% 24. other matter or thing whatsoever and this Deed and any Collateral Security shall remain in full force and effect unul @ formal discharge thereof shall be granted and executed by the Lender" Clause 11, relating to collateral securities, provided: "111 The Borrower shall duly and punctually observe and perform all of the covenants and conditions contained in any Collateral Security to be performed on the part of the person giving such Collateral Security 112 = Ifa Mortgagor or Grantor defaults at any time in the obsivene oor pe:formane of any covenant agresinenat Of condiuon on the pet of dit Moityagor or Grantor in any Collateral Secuiity then that default shall be deew.d to be difalt by the Botrower under thus Deed ' The general default clause was cl.12 which provided in the relevant parts: "121 If the Borrower- 1211 defaults in the payment of any part of the Principal Sum or of interest or any other moneys secured by this Deed or any part thereof respectively on the day or time or in the manner hereinbefore appointed for payment thereof respectively and that default continues for eight (8) days, 1213 defaults in the performance or observance of any Collateral Security, 12.1.4 the Borrower does any act, deed, matter or thing or knowingly or willingly permits or suffers any act, decd, matter or thing to be done by or through its means or instrumentality whereby or by 25. reason Or means whereof the secunty Or position of the Lender under this Deed shall be in the opinion of the Lender become deteriorated or lessened in value, THEN and in any of those cases the remaining provisions of this clause shall become operative 122 The Principal Sum (or so much as shall be then owing) together with all interest accrucd and all other of the Secured Moneys Gf any) shall become immediately duc and payahle and be paid by the Borrower to the Lender, or the Lender may exercise any and cach power confured or implied by this Deed or by Lavy * Clause 17 sets out the securities for the loan A mortgage, E234393, dated 13 November 1989 was executed by Hollister Developments in favour of Custom Credit as a first mortgage over the development land and as a second mortgage over the land at 30 Moss Street, Huntingdale. A mortgage, E245889, dated 13 November 1989, was also registered as a second mortgage over the home unit land. The first mortgage over the home unit land was E053088 dated 17 March 1989 in favour of Citibank. The mortgagor 1s shown as Rawang Nominees Pty Ltd which was the previous name of Hollister Developments. Cashflow Difficulties - December 1989 to May 1990 Construction of the units proceeded although not without difficulty. On 30 November, the building inspector for the Town of Gosnelis carried out a site mspection of the home unit land with Victor. A number of problems were identified 26. with respect to roof framing of the units. By a letter dated 1 December 1989, the Town Clerk required seven items of rectification work to be carried out to make the frames structurally adequate before approvals necessary for the issue of strata titles would be gianted by the Council. Papotto had no recollection of the 1tems hsted in the letter. The correspondence was directed to Victor. Another letter from the Town of Gosnells on 27 December 1989 drew attention to the need to rectify fencing which had been erected in non-compliance with fencing by-laws. This requirement and the direction to remove some sandfill were to be camplied with before strata titles could issue, Papotto had orginally contemplated securing the requisite approvals from the local authority to enable him to obtain issue of the strata titles by the end of December 1989. The approvals were not forthcoming because of the construction problems identified i the correspondence from the Town of Gosnells. As a result, projected sales were unable to proceed and Hollister Developments began to experience cashflow difficulties. It was unable to meet its commitments to creditors. According to Papotto, however, creditors knew that the development was a big one and were prepared to wait to some extent. On 31 January 1990, Citibank agreed to readvance $300,000 to Hollister Developments from the proceeds of capital reductions upon settlement of the first ten units. The funds were to be made available on a draw down basis at the discretion of Citibank. In February 1990, Papotto arranged additional overdraft finance to the extent of $300,000 secured by a charge over his home in favour of the Commonwealth 27. Bank. Hollister Developments was still having trouble meeting with the requirements of the City of Gosnells. On 26 February 1990 the City of Gosnells wrote advising of various matters to be resolved prior to the issue of strata titles. These related to fencing, cracking in the units, provision of acceptable fire hydrants and a fire main and the location of tall growing trees. In the same month, Stephen Lewis was appointed as Business Development Manager with Custom Credit and given responsibility for the Hollister Developments' account Fle met Papotto on site on 2 March 1990) Papotto told hira that television marketing of the units was commencing and that ten units hud already been sold. He also told Lewis that he had standby funding available from the Commonwealth Bank. Papotto told Lewis that the expected cost of completion of the subdivision at this stage was $177,000. At the time there was only $110,000 available from Custom Credit under the terms of its advance. Lewis raised the possibility of resort to the standby finance available from the Commonwealth Bank. Papotto became very agitated, threatening legal action and said that he would stop work on the subdivision. He also indicated that he might take his business elsewhere. Lewis told him that it was necessary to establish where they were with both developments and to work together to resolve problems. On 14 March, Lewis wrote to Papotto confirming that following the final progress payment of $60,000 there were sufficient funds available at the then current interest rate to cover March and April interest requirements. The letter concluded: 28. "A capital injection, altcrnative cashflow or take out finance 18 to be in place to facilitate payment of the monthly mterest from May 1990 onwards " Custom Credit wrote to Citibank on 30 March confirming that it agreed that Citibank should allow Hollister Developments to redraw $300,000 following initial settlements of a similar amount. Citibank's priority thereafter was to be reduced at any subsequent settlement by full proceeds, including deposits held pnor to settlement Citibank was asked to confirm the arrangement. In the first three months of 1990, only two offers to purchase units were made and accepted. There were four in April and three in May. It was put to Papotto that sales were hard to come by through the first half of 1990. He said that was not really the case and then said that the company was not "pushing them that hard either" On 18 April 1990, Custom Credit wrote to Papotto pointing out that the monthly interest on the $1.35 million advanced had been capitalised for the last time and that interest due on 15 May would have to be paid. On 23 April, Custom Credit wrote to Citibank advising that the offer ta agree to the readvance of $300,000 to Hollister Developments had lapsed, Cittbank not having responded to 1t On 8 May 1990, Papotto wrote to the Commonwealth Bank advising that at that time LJ. Hooker in Thorntie were selling two to three units per week and that Hollister Developments estimated that within 26 weeks it should be able to clear all commitments to the various financial institutions. His statement that two to three units per week were being sold was false. He tried to defend his statement in cross- 29. examimation by suggesting that he was referring to the number of offers per weck coming in In this and other respects, Papatto represented as an unrehable, evasive and argumentative witness. On 10 May, Craig Dawson, a lending officer of Custom Credit, wrote to Brian Wales & Associates requesting them to prepare an assessment of the costs to complete the reinstated subdivision. On 17 May. Mr Brash the Operations Manager for Custom Credit, advised that interest for the month of May was $24 222 88 of which anly $9,76058 could be capitalised. A resultant hability of $14.462 30 was pointed out and payment requested On 21 May 1990, Brian Wales & Associates advised Custom Credit that the development land subdivision would cost $220,965 to complete. About the middle of May 1990, Papotto approached Desmond Westlake to act as a finance broker to raise funds for Hollister Developments to complete the project. Westlake is an accountant, property developer and licensed real estate agent. He was also a bankrupt at the material time. He made an application for further finance with Citibank and spoke to three or four other financiers orally to gauge their attitude to the development. In the event, he was engaged by Hollister Developments effectively to manage the completion of the project on the home unit land. Although it was his recollection that he commenced that retainer on 6 June 1990, it appears he actually started on 29 May 1990 as 1s recorded in a note in his diary. 30. By the end of May, Papotto was experiencing a "hard time" with trade creditors. A few had stopped work because they had not been paid. In the meantime, Custom Credit appointed James Bonwick to take an overseeing or supervisory role in relation to existing advances which had been made In May 1990, the then State Manager of Custom Credit was dismissed and Bonwick appounted to act in his place until a permanent appointment could be made. He reviewed Hollister Developments' account in late May 1990 and decided to meet with Papotto Stephen Lewis arranged the mi cting for 30 May Papotto Mects Bonwick and Lewis 30 May 1990 At the meeting, Bonwick introduced himself and told Papotto of the background to his visit to Perth. He told him that there had been significant changes in the Perth office and that several of the company's officers had been dismissed. He told Papotto he had been appointed as State Manager to assuime control of the office and review accounts where it was perceived that there were problems. Hollister Developments' account was one in respect of which Custom Credit perceived there was a problem. Bonwick said he was happy to discuss the position and asked Papotto to bring him up to date about the progress of the development and to provide a report about its future. Bonwick said in evidence that Papotto spent 15 or 20 minutes endeavouring to explain the status of the project, the problems he had had with obtaining titles to Stage 1 units, clearance on the land subdivision and with cashflow. He told Bonwick he did not have sufficient funds to complete the balance of the units 31. in Stages 2, 3, 4 and 5. Bonwick told Papotto that he wanted a submission about the status of the project in seven days setting out his requirements for continuing support from Custom Credit. He made it clear that support would be discretionary depending upon whether Custom Credit "deemed it appropnate" to provide it Papotto suggested that the best thing to do would be to complete the development in one stage rather than continue to stage it. Bonwick said he did not think that was an appropriate 1dea_ Papotto told him there was a significant number of trade creditors pressing Hollister Developments for payment and that unless some of them were paid, the job would probably cluse down. Bonwick suggested that Papotto mcorporate the position of the outstanding trade creditors into the submission to Custom Credit. Bonwick said he was prepared to consider the provision of carry on finance while the question of an increase in the facility to Hollister Developments was considered. He asked Papotto whether he had the capacity to pay interest because the facility previously extended was fully drawn in regard to its interest component. There was also discussion about the Citibank facility. The possibility that Custom Credit might pay out Citibank was considered. The future of the development land was also canvassed. Papotto suggested that it would be appropriate to continue development of the land subdivision and build houses on it. Bonwick did not agree. He suggested, however, that Papotto could include in his submission some reference to the cost of completing the land subdivision without the necessity to build houses. In relation to the home unit land, Bonwick was most concerned to ensure that sales of units already negotiated and any future sales take place as quickly as possible in order to reduce Hollister Developments' debt to Custom Credit. The meeting ended with Bonwick thanking Papotto for his tme and asking him to get back to Custom Credit within the 32. following seven days. He had made no decision at that meeting on Custom Credit's attitude to Hollister Developments' account On Papotto's version of the conversation, Bonwick asked him how Hollister Developments was going to meet future interest payments on the advance that was now nearly fully drawn. He told Bonwick that Hollister Developments had other assets that it could sell to service the loans. According to Papotto, Bonwick was quite happy with that advice. Papotto also said he explained to Bonwick the arrangements with Citibank and that he had had a cashflow problem because of the delay in obtaining strata titles. He said he told Bonwick that ditficultics had arisen with trade creditors which would be overcome in due course There was some discussion about the possibility of release of government funds to subsidise first home buyers late in that year. According to Papotto, Bonwick asked how Custom Credit could become more involved and help Hollister Developments. Papotto said he had responded that the only thing they needed was money to which Bonwick replied: "Oh, well, we'd look at becoming a sole lender for you, paying out Citibank, and what else do you need?" Papotto said that he raised the question of creditors and that Bonwick responded: "Well, we'll get rid of your creditors for you; we'll give you enough money to pay out your creditors; we'll consolidate both loans" The upshot, according to Papotto, was that Bonwick opened the door for Hollister Developments to go away and think about his proposition and come back with a 33. proposal. Papotto's estimate of the cost to completion was about $400,000 for the entire project. No reference was made to Custom Credit's lending policy m Western Australia. A long term plan was discussed which involved completing the unit development, getting the subdivision finished and doing other projects. On completion of the two projects Custom Credit would involve itself in jot ventures with Hollister Developments at a later stage Cross-examined about his account of the conversation, Papotto said that Bonwick invited him to consolidate his loans by paying out existing creditors including Citibank. He offered Hollister Developments the opportunity "to put a proposal together on those grounds". Asked if there was a commitment by Bonwick to provide the money, Papotto said: "I believe that was the basis of it, yes". He asserted in his evidence that he left the meeting with no doubt that he had a firm assurance from Bonwick that Custom Credit would advance to Hollister Developments enough to pay out Cittbank and complete both developments. It was, he said, a matter for him to choose whether or not to take up the offer. Despite the fact that on his account he had an offer of financial salvation from Bonwick, Papotto claimed in evidence that he said he would consider the position. Papotto's evidence on the conversation and, in particular, his suggestion that Bonwick made a firm commitment was inherently improbable. It was plain that 34. the development was in a precarious state. Hollister Developments had effectively fully drawn its advance from Custom Credit, there were pressing creditors of the order of $270,000 and Bonwick had come in to tighten, not to loosen, the criteria for advances and their supervision. In my opinion, the account given by Bonwick is by far the more probable account of the meeting. I do not accept Papotto's version. Stephen Lewis was also present at the meeting of 30 May and gave evidence consistent with that of Bonwick. He said the meeting concluded on the basis that Papotto would prepare a submission to Custom Credit and in the meantime, at its discretion, Custom Credit would "diip feed" the project It follows that T do not accept that the representations allegedly made by Custom Credit at the meeting were made. No promises or firm commitments were proffered beyond a statement of readiness to consider a submission for finance. Nothing said in the course of the meeting, m my opinion, constituted or was capable of constituting musleading or deceptive conduct on the part of Custom Credit as alleged in the statement of claim. Westlake Meets Bonwick and Lewis - 6 June_1990 A meeting took place between Westlake representing Hollister Developments, and Bonwick and Lewis, representing Custom Credit, on 6 June 1990. The meeting took place about Spm that day. Westlake introduced himself as having been appointed Project Manager by Hollister Developments. Bonwick was surprised as he had believed that he would be seeing Papotto. Westlake, he said, went to some lengths to convince him of his credentials. There was discussion about Hollister Developments' trade creditors. Westlake told Bonwick that there were substantial 35. numbers of unpaid trade creditors in respect of earlier parts of the development and pressing creditors on the existing development. He was endeavouring to reconstruct who those trade creditors were. Bonwick said, as he had on 30 May, that Custom Credit would consider paying "the existing trade creditors". By that term he meant "people that were on the site then and there". Bonwick said he told Westlake what he had told Papotto about the problem in the Custom Credit office. He told Westlake that he had come to Western Australian to review facilities where it was beheved that these were problems and that Hollister Developments' account was one of them He repeated to Westlake that he had previously asked Papotto for details of the project as it stood at the present time, costs to complete the project, a sales program, updated feasibility of the project and details of the financial position of Hollister Developments and Papotto. Westlake told Bonwick he would go away and try to collect the information Bonwick did not meet Westlake again except on one occasion when he bumped into him mm the lift foyer at Custom Credit on the following week. Westlake's account of the meeting was that 1t took about three hours and that Bonwick said it would be better for Custom Credit to take over all responsibilities for funding Hollister Developments. There was, he said, a general agreement that it would be in the best interests of Custom Credit that they have all the homes finished at quickly as possible. He was cross-exammed at some length about the conversation with Bonwick and Lewis. Without rehearsing the detail of that cross-examination, I am satisfied that the account given by Bonwick was the more 36. probably accurate account and that again he made no commitment on behalf of Custom Credit to provide any finance. There was nothing in Custom Credit's conduct on this occasion that could be characterised as representational m any relevant sense or misleading or deceptive. Counsel for Hollister Developments agreed in final address that Hollister Developments did not claim that it was misled at that date into believing that it would get the full facility. On the other hand, it seems to have been contended that Custom Credit would pay outstanding creditors to the extent of $267,000. I am satisfied that no such commitment was made In the event Custom Credit paid creditors of Hollister Developments on a selective or "drip feed" basis. The Application for Bridging Finance Shortly after the meeting of 6 June, Westlake prepared a letter from Hollister Developments to Custom Credit which sought bridging finance. The letter was undated and was signed by Papotto. It was accompanied by a number of sheets of financial information in relation to the project prepared in large part by Westlake and based, at least in part, upon information supplied to him by Papotto and Victor. Westlake accepted in cross-examination that his role at Hollister Developments at this stage was to marshal the information for submission to Custom Credit. The covering letter specified loan requirements of $5,394,541 calculated as follows: 1. Existing Loan Custom Credit $1,490,000 2 Trade Creditors $3 267,000 3 Cost to complete land subdivision S 131,000 4 Cost to complete Stafford Village § 486,000 37. 5 Cost to complete Super Deli and House $ 150,000 6 Payout Citibank loan $2,541,017 7 Payout contract of sale subdivision land S$ 79,500 8 Interest on loan capitalised (approx) $250,000 $5,394 541 The loan was to be repaid from the sale of. 1 Stafford Park Units $1,657,030 2 Land $1,139,000 3 Super Deh and House $ 381.000 $6,176,050 The first two sheets accompanying the Ietter showed projected income and expenditure for the home unit land and the development land respectively. Income from the sale of the units was shown as $4,657,050 less expenses of $3,765,000, yielding a net profit of $892,050 The sale of the subdivided land was estimated to generate income of $1,519,000 against expenses of $1,026,200, yielding a profit of $492,800. These figures, of course, presented the overall project, including both the home unit and development lands, as viable in the event that the bridging finance sought were able to be obtained. The Viability of the Project It is appropriate at this stage to consider, in the light of the figures used 38. in the letter, the viability of the project ou the assumpuion that the finance requested had been advanced In so doing it should be noted that the figure of $1,519,000 shown as the sales figure im tespect of the development land, was broken up into components of $380,000 for the Super Deh and Hlouse on the development Jand and $1,139,000 for the balance. It may be observed at the outset that the letter shawed grovs sales figures for the home unttys and th developmen! land which did not take infty account g I comnusson espens s that apposed an the accom. watt nents A commission figure of $124,000 was showa oo the tt enichars os the com russian corr ited tus the sale of the home units A fizure of $15.000 was suown as comimission in relation to the sale of the development land 'That latter figure, however, appeais to have been calculated on the assumption that a sum of $380,000 would be obtained from the sale of the Super Deh and House As the necessary approvals were not forthcoming for their proposed construction, a pro rata estimate of a reduced commission payable in respect of the sale of the development land was proposed by senior counsel for Custom Credit at $38,000 which I accept as appropriate. On that basis, commission expenses of $124,000 and $38,000 would need to be taken into account in calculating the profitability of the project as a whole as at June 1990. The letter from Hollister Developments to Custom Credit showed an amount of $2,541,017 to pay out the Citibank loan. However, as can be calculated from a facsimile letter dated 12 June 1990 from Citibank to Papotto, the overall liability at that time, after adding back additional advances, was $2,915,922. The 39. Citibank facsimile showed a total amount due of $2,628,093, comprising the orginal advance of $2,500,000, arrears of $92,569, interest of $35,124 and estimated Fmancial Institution Duttes of $400. The facsimile disclosed further construction draws of $287,829 which, when added to the amount of $2,628,093, gave a total amount due to Citibank (before credits for proceeds of umit sales) of $2,915,922. This exceeds the figure shown in the Hollister Developments' Iette: by $374,905 The Holster Developments Jeter also estimated raterest co ty as $280 000) But the co etoaed Co tors Cred ated Cruibank debts exer eded $4 ou dhon, o1UNg Miest nn oxces. Of ZU, por annum Tact ors subse s aa of cour.) for Custom Credit that on the reasonable assumption (in the light of subscquent market conditions) that the units and blocks would tthe 12 months to complete and sell from June 1990, the minimum interest would exceed $500,000. Westlake agreed in cross- examination that the figure of $250,000 for interest which was shown tn the letter was "a very conservative estimate". It was based upon an assumption that the sales would all be achieved by January 1991 in accordance with a projected cashflow statement attached to the letter. That cashflow projection was given to Westlake by Papotto. By way of aside, it can be noted that the assumed sales program in that cashflow projection was reflected in a capital reduction program imposed as one of the conditions of the approval of additional finance by Custom Credit in a letter dated 18 July 1990, which will be referred to later in these reasons In any event, Westlake agreed that if sales were to drag on for sw months beyond the six months assumed in the cashflow, then an interest allowance of at least anather $250,000 would be needed. 40. On the income side of the equation, it cin be assumed in favour of Hollister Developments that the figure of $1,139,000 for sule of the development Jand represented a reasonable assessment of its hkely yeld The Super Deh land actually realised $48,000. The value of the home units 1s shown in the letter at $4,657,050 But a licensed valuer, Clanan Marr, called by Hollister Devclopments, had valued the units on 4 October 1990 at an average of $76,000 for a three bedroom unit and $66,000 for two bedrooms Marr had signed the valuation piepared by Hilher Parker m Mach 1989 of $80,000 for three bedrogin ties and $77 000 for two b doer units, ging a tatel valu: ot S4.949,00) Siyuats had beets edoat 2? dane (doe pross prices of N132,950 dhere wer OC) uns da total, se Sf rem aaad to be sald at the time of the valuation Forty four were thiee bedroom uatts, tun were two bedroow units. The value of the remaining units was therefore $4,004,000 The value of all 60 including proceeds of those sold by 12 June, would be $4,440,950. On this basis the viability of the proposal could be assessed in terms of projected expenditure and income as follows: Expenditure Costs estimated by Hollister Developments 1n letter to Custom Credit $5,394,541 Citibank - further advances 3 374,905 Commission on unit sales $ 124,000 Commission on land sales $ 38,000 Additional interest § 250,000 Deduct Super Dell and House costs {S$ 150,000) Total Expenditure $6,031,446 41. Income Subdivision sales $1,139,000 Deli land value S$ 48,000 60 home units $4,440,950 Total Income $5,627,950 The above calulatiod stows a propected di ficimey Of £03, 196 It can be cecepted tit there hacen portifier tes who it ths process OF a sessimm a ety Nevertheless, tue fipuics do, at least im by opinion, prevent the conclusion bring reached that, on the balance of probabilith , the project was capuble of yielding a profit having regard to current market conditions Mr Marr was referred to another valuation prepared by K J. Collins for Citibank on 12 October, in which he valued the units at $67,000 to $71,000 for those with three bedrooms and $59,000 to $62,000 for those with two bedrooms. Marr accepted, upon being pressed in cross-examination, that Collins' opinion was within the bounds of a reasonable valuer's opinion That, of course, would indicate a more parlous outlook than on the assumed unit values derived from Marr's own assessment. The general conclusion that the project was not viable is supported by comments made i a valuation report prepared by Christie Whyte Moore which was in evidence. There it was said that valuation calculations set out in the report indicated that the home unit development should not have proceeded beyond the conception stage given the associated uncertainties, msk and poor return Calculations in that report in 42. relation to the home unit development indicated, as at May 1990, a proyecicd Joss of $27,851. Overall, I am satisfied on the balance of probabilities that the project was not capable of yielding a profit within the 12 months or so from May 1990 even on the assumption that the money sought from Custom Credit were advanced Progiess Poy ments Afier 6 June Mecting On 8 June 1990, Papotto wrote to Custom Credit se lene a dacn advame of $50,000 to pay costs of development Or the same dey he a a'2 a request for a drawdown of $50,000 agamst "the agreed loan" to Hollister: Developments 'This was to meet administration and supervision wages and particular trade creditors. On 8 June 1990, a sum of $50,000 was made available to Hollister Developments by Custom Credit. Further carry on payments were made by Custom Credit on 15 June totalling $48,600. On the same day, Custom Credit wrote to Hollister Developments pointing out that the existing account was in arrears to the extent of $14,462.30 due on 14 May 1990 and $25,303.10 due on 14 June 1990. A cheque for the total arrears was requested by 25 June 1990. Also on 15 June, Custom Credit sent a cheque for $1,723 direct to Phillips Fox, a creditor of Hollister Developments and $48,600 was remitted to Hollister Developments. A further cheque comprising $30,000 was forwarded to meet ongoing commitments on 27 June. On 28 June 1990 a further amount of $64,770.01 was paid, being $16,768.90 less than the amount claimed of $81,538.91. Other payments of $80,305 38, $31,308.54, $68,800 and $58,131.86 were made in July. Custom Credit continued thereafter to make payments on a selective 43. basis to specific creditors This was sometimes referred to m evidence as a "drip feed". The Letter of Approval - 18 July 1990 On 18 July 1990, Lewis signed a submission and recommendation in favour of an advance of $5,396,000 to Hollister Developments. It was noted in the submission that "TR. apphcant his a cheqaer Pobetor fo ob vatby sy erditics a pres estips Ve ate prosets the Sapper aeqgu Soo) ftule cay quapletion Of AC propech ys Chavet Coutts, tay Loss On the same day Custom Credit sent to Hollister Developments a letter stating that it had approved in principle an advance subject to certain conditions The amount of the loan was $5,396,000 for a maximum term of 12 months. Payments of the principal were to be made by way of reductions from sales through August, September, October and November of 1990. The remaining balance was to be paid within the term of the loan. Security requirements included mortgages over Hollister Developments' and Papotto's properties and a guarantee by Papotto. Conditions of the approval included the following: "Valuations by pancl valuer on the Moss Strect and Hollister Way properties along with written confirmation from prior mortgagecs establishing equity of $30,000 and $80,000 respectively " Papotto said in evidence that on receipt of the letter he rang Lewis and complained that conditions setting out a timetable for the sale of the units and the use of the 44, equity in the two residences as additional security had never been discussed According to Papotto, Lewis said, "Sign the letter and Ill get the conditions waived but you'll need to sign it or we're not going to give you any more moncy". On that basis, according to Papotto, he signed the letter and sent it back. Lewis' only evidence-in-chief on the point was of a conversation with Papotto after the valuations had come in in which he said that the offer had fallen away because they were msufficient. In cross-examination he was asked whether Papotto had complatned to him about the Jetter contammg matters which had not been cre ussed This he emphatically demed, as he abo domed the s.egestion that he had told Papoito to sign or he would not get tho money there is nothing im Vestlake s evtdeme to suggest that he was told of any proposed waiver of conditions contained in the letter He was asked im cross-examination about discussions he had had with Lewis between 18 July and 29 August when he left the employment of Hollister Developments. He made no reference to any mention of a waiver of valuation or other conditions in those subsequent conversations. I am not satisfied on Papotto's evidence that Lewis said what was attributed to him. Even in its own terms the language of Lewis' promise 'Tll get the conditions waived" suggests he would have had to refer to higher authority in any event. The promise itself so expressed could not be taken as a waiver. Upon receipt of the letter, Westlake said he rang all creditors immediately and told them the loan from Custom Credit had been approved. Following the letter Westlake said that he had a number of discussions with Lewis asking whether documentation for the loan would be finished. According to Westlake, he was told the documentation was being prepared. 45. On 24 July 1990, Lewis recensed a valuation of Papotto's house at $123,000 The house property at Hollister Way was valued at $290,000 The valuations were less than those required to meet the conditions of the letter of approval of 18 July. When told of this result by Lewis, Papotto lost his temper and banged the telephone down. Lewis told both Papotto and Westlake that the offer had fallen away with the failure to meet the valuation conditions. At the end of July and early August 1990, Lewis ceased to have responsibility for the Hollister Developments' loan and passed it over to another oliver, Paul rash who was then employed as Senin Property Linance Manager with Custom Credit) Brash met with Papotte on 21 August 1990 ar Custom Cis Cs ottts Brash mtroduced ho wself to Papotto aad sud that he had called the mecting because he was now taking over control of the account and wanted to discuss with him various aspects of it. The discussion covered sales programs of the units, costs and associated matters Brash told Papotto that Custom Credit was concerned, that there was a need to have sales of the umits and the land to reduce Hollister Developments' debt. He put to Papotto that Hollister Developments should try to adopt a sales program to ensure that the debt reduction could be made. Papotto was almost non-committal in response, but accepted that there was a need to get sales of the units and was confident that he could achieve that Papotto asked whether or not mortgage documents were being prepared in accordance with the letter of 18 July 1990. Brash told him they were not. Brash said the reason that security documentation was not bemg prepared was that the valuations had indicated that Papotto's equity in the properties had not reached the appropnate level. Papotto became quite angry at that time and criticised the valuer and the valuation. 46. On 23 August 1990, Westlake left his employnient with Elollister Developments Fhs departure followed a disagreement about payment of his fees with Papotto. During the months of May, June, July, August and September, interest was accruing due to Citibank in respect of its advance. It was put to Papotto that Hollister Developments had failed to make payments of interest due to Citibank in those months He denied that fact. However, it 1s plain that interest was due to Citrtbank during those months and that it was not paid On 3 Scptembe the new State Manaer of Custoin Cred Gordon Asmus, together with Paul Brash, met Pepotio Bre introduced Asmus to Papotio and said that the purpose of the meeting was to discuss the progress of the project at Kenwick. Brash put various items of information to Papotto about the amount of debt owing under the Citibank mortgage, the amount owing to Custom Credit and other financial information He asked Papotto if the information he was putting to him was correct. He reiterated that Custom Credit was most concerned that sales be achieved in both the unit development and the land subdivision in order to reduce the debt. He told Papotto that if the sales were not achieved, the Corporation would sell the property under its mortgage powers Papotto presented a list of creditors at the meeting and asked whether or not they could be paid. Asmus said that the Custom Credit was not prepared to pay them and that they should be the responsibility of Hollister Developments. 47. The J -ctter of 4 Septernber 1699 Brash wrote a follow up letter of 4 Septeinber 1990 mm which he noted that the cost to complete the unit development was then $145,222.08 and the cost to complete the subdivision on the development land was $44,000, representing Water Authority charges. There were then outstanding creditors on both projects and claims totalling some $328,000 of which Hollister Developments expected to pay $267,000. The letter went on to say that it was agreed that a sales timetable, which was set out, must be aclucved in ord: + to avind Custom Credit setline as mortgagee In th. event that there were less thea three unconditi ab sates of dots aim the subdivisten by 21 September 1990, a sales proge tin would be set by Custom Cirdit. An' uipated costings for the development wele set out Hollister Developments was requested to countersign the letter and return it to Custom Credit which it did In my opinion, it was with a view to protecting its own position as mortgagee that Custom Credit was endeavouring to settle a program for the sale of the units so that the overall debt position of Hollister Developments could be reduced. Custom Credit was also continuing to make progress payments on a "drip feed" basis to keep the project going so that some units could be completed for sale. I do not regard the letter of 4 September as embodying any waiver or variation of Custom Credit's right as against Hollister Developments, nor as embodying any variation of existing contractual arrangements. It did little more than set out a plan for managing the ongoing progress of the project and for the orderly sale of the units. 48. The Custom Credit Policy In the statement of claim it 19 said that during May 1990 Custom Credit had decided on a policy of lending further money 1n Western Austraha only if contractually obliged to do so or if it were necessary to complete projects. The complaint 1s made by Hollister Developments that neither Bonwick nor any other representative of Custom Credit imformed any representative of Hollister Developments of the existence of the policy. The policy as detailed im answer to interrogatories, was expressed thus "[astrucuons wer. even to oh ois of das unit of the respondent in Western Austriba known gs} operty Lintnuidl Services to implement @ pulicy that loans were only tu be made if the respondent (1) was already legally commutied to advancing mon.cs {i1) deemed it necessary to advance monies to complete projects " I accept that a general policy in these terms existed at the relevant time. However, counsel for Hollister Developments had difficulty in hus closing address in explaining just how any conduct of Custom Credit was rendered misleading or deceptive by virtue of the existence of the policy. It was suggested that Papotto would not have borrowed further funds from Custom Credit if he had known about the policy. But there 1s nothing to suggest, and counsel was unable to point to anything to suggest, that Custom Credit would have acted any differently in the absence of the policy. In my opinion, the failure to disclose the policy did not falsify anything that Custom Credit said or represented by its conduct, nor did it cause Hollister Developments to act in any way differently from the way it would have acted if it had known of the 49. existence of the policy. The Case in Misleading or Deceptive Conduct The general thrust of Hollister Developments' case in misleading or deceptive conduct was expressed by counsel in his closing address thus: it is the applicant's case that up tll May 1990 1 was proceeding with the devclopment of lot 5 im stages, that wt was defkcted from that course by the mspondent's invitation to it to apply fur a new facility, aed by ty mu).auhog or decepive conduct relating to the propos.d new facihty That is to say, the apply eat would not ha apphad for the new fecshity but for the musteading or @.veptive Conduct" As 1s apparent from the reasons already given, I am satisfied that there 1s nothmg m the conduct of Custom Credit which should be characterised as misleading or deceptive as alleged. In particular, I am not satisfied that 1t made any unconditional commitment to advance $5.396 million. The conditions expressed in the letter of 18 July 1994 were not met. I do not accept Papotto's evidence that those conditions were waived by Lewis. On the contrary, the position 1s as Lewis put it to Papotto that the offer had lapsed. The general position of Custom Credit was consistent with that of a financier endeavouring to protect its position and existing security without exposing itself unnecessarily to additional risk. The Appointment of the Receivers On 28 September 1990, Citibank sent Hollister Developments a notice of default for non-payment of money due under the terms of its mortgage, E053088. On 12 October, Custom Credit sent a notice of demand for payment of all money 50. owing to it under the mortgages E234393 and E245889 dated 13 November 1989. On 16 October 1990, a solicitor for Hollister Developments wrote to Custom Credit objecting that the demand was defective because it did not state the amount of money required to be repaid or give a ground or reason upon which the repayment was required. It was also said to be in breach of an agreement with Hollister Developments evidenced by the letter of 18 July. The solicitors for Custom Credit rephed, asserting that the notice was valid They referred to Eollister Developments default of mterest due to Custom Credit On 31 October 1990, Citibank assigned 1s interest in its morigage 053068 to Custom Credit Notice of the assignment was du'y given to F 'liister Developments The principal sun owing upder the mortgage was $2,748,200.77 as at 30 October 1990. On 28 November 1990, Custom Credit appointed jot and several receivers and managers of the properties under its mortgage E234393 and the assigned mortgage E053088. Under the Deed of Loan dated 13 November 1989, Hollister Developments was obliged by cl.11.1 to observe and perform all the covenants contained 1n any collateral security, which term was defined in cl.2.1.3 to include "any and each other security or covenant for the loan which is collateral to this Deed... including any Mortgage". By cl.11.2 a default under a collateral security is a default under the Deed. By cl.12.1.3, a default in observance of a collateral security renders the principal sum and interest under the Deed immediately due and payable. By cl.17 of the Deed, provision 1s made for execution of the mortgages. The powers exercisable under the mortgages are, it was submitted, powers "conferred or implied by this Deed" under cl.12.2. I accept that the requirement to execute the mortgage 51. confers upon the mortgagee and therefore the Jender under the Deed the power to appoint receivers and that this can rightly be identified as a power conferred by the Deed albeit it is expressly provided for in the mortgage document. The question anses then whether there has been a default which would properly ground the exercise of that power. In my opinion there was such a default at least in the failure to make the interest payments required by cl.5.1 of the Deed. The power conferred by the Deed 1s not conditioned by spe: tfication of the breach in any notice of demand or default The defiults were continuing, albeit not acted upon for a considerable time. Thcy were not waived Custom Credit's forbearance in this respect does not prevent it from exercising the powers that it did. No question of trespass on the part of the receivers arises. The Cross Claim As Hollister Developments has failed to make out any case against Custom Credit, the only matter that remains 1s the question of Custom Credit's cross claim against it for moneys owing on the Deed of Loan, the Citibank mortgages and the further advances which were made to enable the payment of some of the trade creditors during the construction period The amount of the claim 1s able to be calculated from the report prepared by Jeffery Herbert on Hollister Developments' claim for damages. The amount owing to Custom Credit 1s calculated from Annexure 8 to the Report and 1s the sum of the credit amount of $1,350,000 at the beginning of the Annexure, representing the initial loan and $2,223,395.10 which represents the sum of additional payments thereafter including liability under the Citibank mortgage. 52. That represents a total of $3,573,395 10. Judgment on that cross claim 1s likely to be of academic interest only as it appears that Hollister Developments will not be in a position to meet any part of 1t. No claim for statutory interest 1, made There will therefore be judgment on the cross claim in the amount of $3,573,395. I certify that this and the preceding fifty one (51) pages are a true copy of the Reasons for Judgment of his Honour Justice French Associate: Abia Date) /b/n/44 Counsel for the Applicant: Mr R.B. Pringle QC and Mr B. Duckham Solicitors for the Applicant: B.W. Duckham & Co. Counsel for the Respondent: Mr C.L. Zelestis QC and Ms A. Liscia Solicitors for the Respondent: Mallesons Stephen Jaques Dates of Hearing: 22-26, 29, 30 November 1993 Date of Judgment: 16 November 1994