District Court New South Wales Medium Neutral Citation: Winarch Capital Pty Ltd v Pearson & Anor [2024] NSWDC 513 Hearing dates: 28 May 2024 Date of orders: 1 November 2024 Decision date: 01 November 2024 Jurisdiction: Civil Before: Acting Judge Levy SC Decision: See paragraph [90] for orders Catchwords: MERCANTILE LAW - contract – loan agreement and related guarantee - borrower in breach of repayment terms due under a loan agreement – related claim by lender under a guarantee of the loan – verdict and judgment against both defendants for the amount claimed Legislation Cited: UCPR r 42.1 Category: Principal judgment Parties: Winarch Capital Pty Ltd (Plaintiff) David William Pearson (First Defendant) Dach Trading Pty Limited (Second Defendant) Representation: Counsel: Mr J Pokoney (Plaintiff) Mr A Gallimore (Defendants) Solicitors: Fletcher Pidcock Lawyers (Plaintiff) NJN Lawyers (Defendants) File Number(s): 2023/00033523 Publication restriction: None Judgment Table of Contents Introduction [1] – [3] Parties and relevant persons [4] – [7] Evidence overview [8] – [9] Issue [10] Factual background [11] – [41] Claim by Winarch [42] Defences by Mr Pearson and Dach [43] – [49] Evidence Review [50] – [71] - Mr Lambess' evidence [51] – [56] - Mr Pearson's' evidence [57] – [71] Consideration and determination [72] – [87] Disposition [88] Costs [89] Orders [90] Introduction 1. This is a claim for damages and interest arising from a borrower's default in loan repayments due under a commercial loan agreement and a related call upon a guarantee of that loan. 2. The foundations for the loan agreement and the guarantee was a separate agreement which provided for the borrower and his wife to transfer their shareholding in a private company. That loan was a necessary precondition to enable payment of the company's debts. 3. These reasons have been delayed by the untimely receipt of the transcript, as was foreshadowed to the parties at the hearing: T20.47. Parties and relevant persons 1. Mr Paul Lambess is the sole director, shareholder and controlling mind of the plaintiff company, Winarch Capital Pty Ltd ("Winarch"), a property development company, and in this instance, the financier of the subject loan. 2. Winarch seeks to recover loan monies it provided pursuant to a loan agreement it entered into with the borrower, the first defendant, Mr David Pearson, who ultimately defaulted on the loan repayments that were required pursuant to that agreement. 3. Winarch also proceeds against Mr Pearson's company, Dach Trading Pty Limited ("Dach") as that company is the guarantor of that loan agreement in the event of Mr Pearson's default in making loan repayments as and when they fell due. 4. Mr Pearson's default in making loan repayments occurred in the time of COVID, when unfortunately, his income stream which was normally derived in New South Wales, was interrupted by his inability to work because he was required to remain quarantined in Victoria in accordance with the COVID travel restrictions which prevailed at that time: T49.20 – T51.41. Evidence overview 1. The plaintiff relies upon a joint court book: Exhibit "A" pp1-203. It contained copies of the pleadings, and the following material documents: 1. A loan agreement dated 1 July 2021 (pp 69 -78); 2. The affidavit of Paul Davis Lambess, affirmed on 16 June 2023 (pp 30-33); 3. The affidavit of Paul Davis Lambess, affirmed on 8 May 2024 (pp 103-108); 4. Exhibit "PDL-02 to Mr Lambess' affidavit sworn on 8 May 2024 (pp109-143); 5. The Affidavit of Mr David William Pearson sworn on 15 February 2024 (pp144-200); 6. The Affidavit of Mr David William Pearson sworn on 4 March 2024 (pp 201-204); 1. In addition to the court book, the defendant relies upon the terms of a share transfer agreement he signed on 1 July 2021. Mr Lambess and Mr Pearson gave explanatory oral evidence: T10 – T39; T34 -T55. No adverse credit issues arise from their evidence, although there are some factual matters to be determined. 2. Issue 3. The essential matters to be determined in these proceedings concern which is the preferred account and construction of the circumstances in which the transactions occurred, and what findings should then follow. Factual background 1. Historically, Mr Lambess and his family trust (Lambess Family Pty Limited, the trustee of the Lambess Family Trust), together with Mr Pearson and his wife, Mrs Erin Pearson, were in business together through a jointly held corporate vehicle, a land clearing enterprise called Complete Vegetation Control Pty Ltd ("CVC"). 2. Before they entered into that commercial venture Mr Pearson had been renting a residential property from Mr Lambess: T35.7 – T35.20. 3. The history of their association was that in 2016, Mr Pearson, who started CVC and was its secretary and director , brought in Mr Lambess to join the company to expand its commercial operations. Mr Lambess was subsequently appointed as a director on 10 July 2017. 4. In July 2021, Mr Lambess and Mr Pearson decided to disengage and separate from their joint business affairs in CVC following a breakdown in their working relationship. 5. To facilitate the separation of their business affairs it was agreed that Mr Pearson and his wife would transfer their combined fifty percent shareholding in CVC to the Lambess Family Trust on agreed terms that would operate from 1 July 2021. 6. Materially, those arrangements included provision for the transfer of the Pearson's 50 percent shareholding, their resignation as directors of CVC, and the purchase by Mr Pearson of identified CVC owned plant and equipment at agreed values. Those arrangements involved an accounting exercise. 7. CVC had accrued accumulated liabilities and debts totalling $371,337. The plan for separation of the business affairs of Mr Lambess and Mr Pearson could not be implemented without the retirement of the debts of CVC. Mr Pearson's share of that debt was ultimately calculated and identified in his loan account within the CVC accounts as being in the agreed amount of $152,000: T39.20. 8. In discussions between Mr Lambess and Mr Pearson, it was decided that Mr Pearson would discharge his share of CVC'c liabilities by paying CVC the sum of $152,000. That amount represented Mr Pearson's calculated loan account in the CVC business. He therefore needed to borrow that sum from Winarch as he did not have the financial resources to make that payment: T36.25 – T36.36. As part of that arrangement, it was also agreed that the subject loan from Winarch would be guaranteed by Dach, a company in which Mr Pearson was a director. 9. The financial details that were required to achieve that outcome were worked out between the respective accountants for Mr Lambess and Mr Pearson: T37.42 – T39.29. 10. The arrangement, insofar as Mr Lambess understood, was that Mr Pearson would be obtaining his own legal advice. Although Mr Pearson said that he did not receive legal advice in respect of the proposed transactions (T42.15 – T42.17), in fact his accountant who was acting in his interests had obtained legal advice on the transactions that were being negotiated: T41.44. 11. The negotiated arrangements provided for Mr Pearson to pay the Lambess Family Trust an agreed consideration of $152,000. The objective of these transactions was to enable Mr Pearson to extricate himself from the CVC business on payment of his share of CVC's indebtedness. To do this he needed to borrow the funds in question from Winarch: T43.13 – T43.47; T46.50 – T47.5. 12. On 1 July 2021, by means of a separately executed loan agreement, the borrowed sum of $152,000 was due to be repaid by Mr Pearson to Winarch over a period of 36 months at an annual interest rate of 12.5 per cent in monthly instalments payable in arears. At the time that agreement was executed, Mr Pearson understood there was an amortisation schedule which set out a timetabled schedule of those loan repayments: T47.5 – T48.2. 13. The relevant documents were prepared and executed after preparation of a series of drafts: T44.17 – T44.47. 14. The relevant settlement date for the share transfer of shares and the purchase of plant and equipment by Mr Pearson was stated to be 23 August 2021: Exhibit "1". 15. The share transfer document and the loan agreement were signed on the same day, and they were regarded by the participants as being an integral part of the same transaction because they were inextricably linked: T45.40 – T45.49. 16. On 23 August 2021, pursuant to that loan agreement, Winarch advanced the total sum of $152,000 to the benefit of Mr Pearson. Those monies did not physically pass through Mr Pearson's hands or his bank accounts. Instead, the monies were paid to CVC to be offset against Mr Pearson's indebtedness of $152,000 as was calculated and identified in his loan account within CVC. 17. The loan agreement was transacted between Winarch, as the lender on the one hand, and Mr Pearson and Dach on the other, respectively, as the borrower and the guarantor: Exhibit "A", pp 69 – 79. 18. Mr Pearson could not have extricated himself from the CVC business without the benefit of that loan agreement as he needed to borrow the consideration sum of $152,000 to pay his share of CVC's liabilities to achieve that objective. 19. CVC's accumulated outstanding liabilities were for the financing of various items of plant and equipment, and it was liable to pay tax, superannuation, and other debts. In those arrangements, it was agreed that Winarch would pay and discharge the outstanding liabilities of CVC, where an integral part of those arrangements was the subject loan agreement with Mr Pearson. 20. In those arrangements, Mr Lambess, through Winarch, made a series of payments into the CVC bank account totalling $251,740.32. In that mix, the subject loan of $152,000 was included as it was in effect merged within the totality of those payments made by Winarch. 21. By those means, CVC was able to discharge its entire indebtedness (Exhibit "A", p 106, pars 15 – 16) and Mr Pearson was able to leave CVC after effecting the transfer of the 50 per cent shareholding by himself and his wife. The end result was that Mr Pearson's share of the CVC liabilities were extinguished, and he was then able to make his exit from CVC. 22. The parties agreed to a timetable which provided for 36 monthly loan repayments was set out in an amortisation schedule that Mr Lambess said had been provided to Mr Pearson: Exhibit "A", p 107, par 19; Exhibit "A", p 143. 23. Mr Pearson initially said that he had not been provided with that amortisation schedule. However, he ultimately agreed that he was aware of the existence of an amortisation schedule to that effect: T47.50 – T48.2. 24. Mr Pearson paid the first loan instalment due on 23 October 2021: T48.47. However the second loan repayment instalment became overdue in the sum of $5,084.95. 25. Consequently, on 4 November 2021, Winarch's solicitor sent Mr Pearson a letter of demand referring to the default in payment and demanding payment of the amount of $6,184.95 (which included $1,100 in legal fees) by 5pm on Friday 5 November 2021, 26. The letter of demand foreshadowed that in the event of a default in payment, the loan agreement would be terminated, and proceedings would then be commenced to recover the full amount of the loan: Exhibit "A", pp 80 – 82. 27. Although that letter of demand also attached a draft statement of claim (Exhibit "A", pp 83 – 89), those foreshadowed proceedings were not commenced, and further time then passed. 28. Subsequently, Mr Pearson ended up making a series of made sporadic payments, in September 2021, February 2022, and June 2022. Those payments totalled $56,469, leaving an outstanding balance of $111,130. 29. On 27 January 2023, Winarch's solicitor sent Mr Pearson a further letter of demand seeking payment of $113,350, this being the accumulated outstanding balance which was then due under the loan agreement. 30. That letter of demand sought payment of the sum of $113,350 by 3 February 2023. Also attached, was an updated draft of a proposed statement of claim: Exhibit "A", pp 90 – 101. 31. The letter of demand remained unsatisfied and the monies that were due under the loan agreement were in default arears and remained unpaid. Consequently, on 1 February 2023, these proceedings were commenced: Exhibit "A", pp 1 -12. Claim by Winarch 1. In these proceedings, Winarch simply seeks from Mr Pearson the repayment of the outstanding balance of the loan monies with interest and costs, and failing that outcome, it seeks the same remedy as provided for under the guarantee which was given by Dach. Defences by Mr Pearson and Dach 1. The respective defendants filed their amended defences on 5 July 2023, as follows. Defence relied upon by Mr Pearson 1. In his filed defence, Mr Pearson admitted that, on 1 July 2021, he had entered into the loan agreement with Winarch, which required him to repay an "Advance" of $152,000. 2. In his filed defence, Mr Pearson also admitted that it was a term of the loan agreement that he was required to make 36 monthly repayment instalments by the due date, this being the 36-month anniversary of 23 August 2021. 3. In his filed defence, Mr Pearson also admitted that Dach executed the loan agreement as the guarantor of that loan but denied that the "Advance" of $152,000 had ever been made to him by Winarch: Exhibit "A", pp 14 – 21, paras 1- 15. 4. The effect of Mr Pearson's defence, if accepted, is that he would be entitled to the common money count remedy of the return of the monies he had paid, as money had and received by Winarch. 5. Mr Pearson's defence is based on the proposition that the "Advance" referred to in the loan agreement should be construed as being a transfer of funds to him rather than a payment advanced to CVC on his behalf and for his benefit. Defence relied upon by Dach 1. In substance, Dach's defence to Winarch's claim, by which it denies liability under the guarantee it executed, is based on the propositions pleaded by Mr Pearson, namely that the loan monies in question, were never the subject of an actual "Advance" to him: Exhibit "A", pp 26 – 27, paras 1- 4. Evidence review 1. The essential points within the affidavit and the oral evidence of Mr Lambess and Mr Pearson are summarised in the paragraphs that follow. I consider that although both of those witnesses did their best to recall the events they recounted in their evidence, there are differing aspects of their evidence that require reconciliation as findings. Mr Lambess' evidence 1. Mr Lambess explained that in mid-2001, he and Mr Pearson decided that they would separate their business affairs. This was against the background of their business relationship having broken down. 2. Mr Lambess stated that to achieve that separation, through his company Winarch, signed a loan agreement with Mr Pearson. There was a related agreement which provided for Mr Pearson and his wife to transfer their shares in CVC: T11 – T12. That share transfer agreement contemplated the execution of the loan agreement: T14.42. 3. Mr Lambess said that in those arrangements, through his corporate entity Winarch, CVC's accumulated debts to the ATO, superannuation charges, credit cards, and various accumulated amounts would be and were paid out. He said that the manner in which this was achieved was by Winarch advancing the loan monies of $152,000 which were paid directly to CVC as part of Mr Pearson's contribution to paying out the debts: T16.22. 4. Mr Lambess said that the sum of $152,000 was provided to CVC by Winarch on 23 August 2021 to pay out a range of its creditors as part of the arrangements required for transfer of the Pearsons' shares in CVC (T19.29 – T20.2; T30.28), with the funds coming from Mr Lambess' family trust: T31.1 – T31.42. 5. Mr Lambess confirmed that no accounting records had been provided to demonstrate that the Lambess Family Trust had received any monies from Mr Pearson: T32.5 – T33.13. 6. Mr Lambess stated that in the payment arrangements and the documentation of the transactions in question, he had the understanding that his name, Paul, was used interchangeably with Winarch Capital, as he is the sole director and shareholder of that entity: T33.30. Mr Pearson's evidence 1. Mr Pearson stated that his business relationship with Mr Lambess broke down in about February 2021 and this was the substratum for the loan and guarantee agreements that are the subject of these proceedings: Exhibit "A", p 146, pars 11 - 14. 2. Mr Pearson explained that the CVC business the division of roles was that he would work with the machinery and undertook the earthworks and the land clearing side of the business whereas Mr Lambess would undertake work comprising the finances and the bookwork: Exhibit "A", p 146, pars 5 - 7. 3. Mr Pearson recounted how, whilst he was in the CVC business, he held the belief that another business, a holding company for CVC involving plant hire called "Dave and Paul Hire", would be started, but after he had left CVC, he discovered that he was never made a director of that plant hire business: Exhibit "A", p 146, pars 5 - 7. 4. Mr Pearson's position is that Winarch had never advanced any funds to him personally, as is demonstrated by own his bank statements: Exhibit "A", p 146, par 15. 5. Mr Pearson also asserts that he had never provided Winarch with any authority to provide loan funds "to a third party on [his] behalf" (Exhibit "A", p 146, par 18), and that the loan repayments he had made to Winarch (totalling $56,469 over a period of about 11 months) were made by mistake on his part "without contemplating the fact that [he] had not received" the loan monies that were to be advanced. 6. On that basis he strongly denied having ever been advanced such funds: Exhibit "A", pp 146 – 148, pars 19 and 21. 7. In respect of the claim under the guarantee, Mr Pearson stated that as a director of Dach, he had not received any demand from Winarch seeking payment of loan funds that remained unpaid by the borrower: Exhibit "A", p 147, par 20. 8. However, Mr Pearson recalled seeing the letter of demand dated 27 January 2023 and understood it was a demand for payment of the loan and a demand on Dach as the guarantor of that loan: T52.15 – T53.1. He was not in a position to satisfy that demand by repaying the loan: T53.12. 9. In Mr Pearson's second affidavit, which was sworn on 4 March 2024, he stated that he could not recall ever having seen the amortisation schedule that was supposed to have been annexed to the loan agreement: Exhibit "A", p 203, par 4. That position appears curious as he made sporadic payments pursuant to that schedule. 10. In his second affidavit, Mr Pearson stated that he had never obtained legal advice regarding his rights and obligations in relation to the loan agreement or the advance before he entered into that agreement: Exhibit "A", p 2013, par 5. 11. In that second affidavit Mr Pearson also stated that as the authorised representative of Dach, he had not obtained legal advice in relation to the rights and obligations of Dach as guarantor of the loan agreement: Exhibit "A", p 203, par 6. 12. On each of those respective bases, Mr Pearson seeks to avoid liability under the loan agreement and Dach's liability under the guarantee. 13. Mr Pearson maintained , inconsistently with the preponderance of the evidence in my view, that there was no loan agreement in place between himself and Winarch: T53.40. He explained that he took that view because Winarch had paid the monies directly to CVC and not to him: T54.10. He developed that evidence during his cross-examination as follows: "Q. When you emphasised that there's no loan in place between yourself and Winarch, were you trying to suggest to his Honour that you understood there to be some other loan agreement? A. No. What I'm saying is that there's a loan - I, I went into this to help pay out CVC, but the loan, he hasn't lent me the money to pay this loan back, so why would you pay something back when you haven't got that to go to that? Q. When you say he hasn't loaned you the money to pay it back, let's just break that down. A. Yep. Q. When you say "he", do you mean Mr Lambess? A. Sorry, Mr Lambess or, no, sorry, Winarch Capital hasn't loaned me the money-- Q. To pay back Winarch Capital. A. To pay CVC or Lambess Trust Fund or whatever it's called. Q. Did you understand that Winarch was loaning you money to pay CVC? A. Yes. Q. If Winarch transferred the money to CVC, that would have been consistent with your understanding, wouldn't it? A. But that's not me, that's CVC. Q. You've just indicated to his Honour-- A. Yep. Q. --that you understood the transaction to be one in which Winarch paid you to pay CVC. A. Correct, but did, Winarch didn't pay me. Q. Stay with me. A. Yep. Q. If it's the case that Winarch paid those moneys straight to CVC, not to you in order to forward them on to CVC, that would have been equally consistent with your understanding of the transaction, correct? A. Correct." [T53.46 – T54.35] 1. In that regard. His evidence continued as follows: "Q. Did you understand that $152,000 to be the contribution you were to make to the debts of CVC? A. I did. Q. You understood, didn't you, that Winarch was funding that $152,000 to go to CVC? A. I did. Q. You yourself weren't going to pay it, correct? A. I didn't have any money to pay it." 1. [T55.3 – T55.12] 2. Winarch disputes the validity of those defences. 3. Consideration and determination 4. At the time Mr Lambess and Mr Pearson entered into the respective agreements for the transfer of shares in CVC, the loan of $152,000. and the guarantee of that loan by Dach, they were sui juris, they had equal bargaining power, and they clearly had the same business objective in mind, namely, to achieve the separation of their business association which was to be achieved by Mr Pearson exiting CVC. 5. It is plain that exit strategy could not have been achieved without making the necessary financial arrangements to retire CVC's accumulate debt burden where part of that debt was, after analysis, agreed as being Mr Pearsons's responsibility. 6. There is no reasonable basis in the evidence for suggesting that when the subject agreements were signed, Mr Pearson (who carried the burden of the financial arrangements for disengagement by exiting CVC), in any way lacked the legal capacity to understand the meaning and the effect of the formal agreements and transactions both he and Dach were entering into, both with Mr Lambess and with Winarch. 7. Those agreements are expressed in clear terms. They are unambiguous, and they do not require construction by reference to evidence of extraneous circumstances or other documents except perhaps as to the meaning to be given to the term "Advance". 8. The respective agreements clearly demonstrate their underlying purposes. The business efficacy of the respective agreements is clearly expressed in the documentation that was signed. 9. In my view, in those circumstances, the fact that Mr Pearson did not seek or obtain legal advice as to his rights and obligations regarding the respective transactions and documentation does not operate to vitiate the binding legal effect of those agreements. 10. I am reinforced in that view because before entering into those subject agreements, Mr Pearson had the benefit of focussed financial and transactional advice from his accountant who was acting and negotiating in his interests. In that regard, his accountant was his agent, and he therefore cannot resile from the transactions on the basis of a claim of not having obtained legal advice. The evidence does not suggest that the accounting advice he received was in any way wrong or inadequate. 11. The resultant transactions are on their face self-explanatory, binding, and should be construed purposively to recognise their inherent business efficacy. 12. The focal point of the defences mounted by Mr Pearson and Dach centres around Mr Pearson's claim of having made mistaken payments to Winarch, the argued mistake being that he believed there had been a relevant "Advance". 13. I do not accept the reasonableness of Mr Pearson's claim and belief in that regard. It is not possible to accept that position in the absence of him having paid $152,000 to CVC – monies he did not have. It is plain that Winarch made the payment of $152,000 to CVC on his behalf, and to his benefit. 14. I find that Mr Pearson made his sporadic loan repayments to Winarch as an acknowledgment of his legal obligation to do, and not because of a mistaken belief as to his obligation to do so. 15. Mr Pearson knew there had been a loan of $152,000, as is evident from the loan agreement and his sporadic repayments, albeit in default. I accept Mr Lambess' evidence that Winarch's payments to CVC included the amount of $152,000 for Mr Pearson's benefit, although not separately identified as such. Those arrangements provided Mr Pearson with the benefit of enabling his disengagement from his business association with Mr Lambess and they also enabled his exit from CVC. 16. Mr Pearson's argument that he did not receive the "Advance" referred to in the loan agreement as those monies were not paid to him cannot be accepted in circumstances where they were paid to CVC in order to extinguish his liability for debts within that company and where those loan monies were paid for his benefit. 17. Mr Pearson cannot claim that benefit without also honouring and meeting the financial obligation of repaying the agreed loan monies which provided him with that benefit. 18. Absent Mr Pearson's ability to repay that loan in full, Dach must be held liable under its guarantee for any shortfall. 19. In arriving that those conclusions I have not overlooked Mr Pearson's evidence that after his exit from CVC he discovered that he had not been made a director of the business referred to as "Dave and Paul Hire". That evidence has no impact on the outcome of this case because as a director of CVC he had the obligation of exercising due diligence with regard to those circumstances and that matter does not feature as an issue in this case. Disposition 1. For the above reasons, I find that Winarch has established its claims against both Mr Pearson as the borrower under the loan agreement and against Dach as the guarantor of that loan. Winarch is therefore entitled to a judgment in its favour as claimed. Mr Pearson is not entitled to an order for repayment of the loan instalments he has made. The parties are therefore required to bring short minutes that incorporate the calculation of pre-judgment interest on the judgment sum of $13,330 due to Winarch. Costs 1. The defendants must pay the plaintiff's costs of the proceedings on the ordinary basis unless a party can show an entitlement to payment on some other basis: UCPR r 42.1. Orders 1. I make the following orders: 1. Verdict and judgment for the plaintiff Winarch Capital Pty Ltd against both defendants jointly and severally in the amount of $113,330 plus pre-judgment interest to be calculated; 2. Within 7 days the parties are to provide short minutes which calculate prejudgment interest consistent with these reasons; 3. The defendants are to pay the plaintiff's costs on the ordinary basis as agreed or assessed unless a party is able to demonstrate a justification for a different costs order; 4. The exhibits may be returned; 5. Liberty to apply on 7 day's notice if further or other orders are required. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 01 November 2024