ENACON LTD v ABIGROUP LTD AND SONS SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL MAHONEY, MEAGHER and CRIPPS JJA 9-10 July 1992, 4 August 1992 [1992] NSWCA 66 APPEAL FROM COMMERCIAL DIVISION — MANAGEMENT BUYOUT — CONSTRUCTION OF AGREEMENTS TO GIVE EFFECT TO BUYOUT. APPEAL from Commercial Division — Management buyout — Construction of agreements to give effect to buyout — Whether, as result of agreement, debts between companies discharged or remained to be discharged by payment — Held: Some debts remained to be discharged by payment. APPROPRIATION of sums by holding company — Effect on indebtedness between holding company and subsidiary on buyout when different accounting arrangements made by two companies. ORDER Appeal dismissed with costs. Mahoney JA Until the transaction here in question, Enacon Limited ("Enacon') was the holding company of Abigroup Limited ("Abigroup"). As at 1 July 1988, executives of Abigroup effected (as it was described) a management buyout of the company involving some $20 million. Enacon claims that the effect of the management buyout was that all indebtedness between Enacon and Abigroup was discharged; Abigroup contends that, inter alia, Enacon remains liable to Abigroup for the balance of (as it has been described) the Inter Company account between them. Proceedings have been brought by Abigroup against Enacon. The proceedings have been of complexity and reference has been made to transactions and matters other than those to which I shall refer. But Mr Gyles QC for Enacon and Mr Emmett QC for Abigroup have reduced the issues which now require to be decided to the single issue to which I shall refer as "the Gold Copper issue". That issue relates to the way in which the proceeds of sale of Abigroup's shareholding in Gold Copper Exploration Limited ("Gold Copper") were dealt with between the two companies. The proceedings were heard by Brownie J in the Commercial Division. On 18 February 1991 his Honour gave judgment for Abigroup for $1,386,506.29 (being $933,613.99 plus interest to the date of the payment). Enacon has appealed to this Court against that judgment. In order to understand the issue which has been isolated and argued, it is necessary to refer in general terms to the relationships between Enacon, Abigroup and its subsidiary companies and to the transaction to which I have referred. Counsel have properly simplified the matrix of facts by reference to which the issue is to be determined. They have to an extent deliberately over-simplified that matrix; nothing turns upon such over-simplification. I shall, at the risk of immaterial error, follow the course taken in argument. 2 UNREPORTED JUDGMENTS Before the management buyout transaction, Abigroup was a subsidiary company of Enacon: Enacon held, the court has been informed, some 61 per cent of the shares in Abigroup. Abigroup owned all of the shares in several companies ("the subsidiaries"). One of the subsidiaries owned valuable land. The management buyout transaction was, it would appear, developed by executives of Abigroup, of which Mr Cassidy was one. The objectives of the management buyout transaction were relevantly: that the executives (through their company Vercot Pty Ltd) should acquire the relevant shares in Abigroup; that Abigroup should continue to hold the shares in the main operating subsidiaries (four were to be sold to Hastings Deering Corporation Limited ("Hastings Deering")); that the land to which I have referred should be sold by the relevant subsidiary to Hastings Deering Limited (at the relevant time the holding of Enacon) and that the financial relationships between Enacon on the one hand and Abigroup and the subsidiaries on the other hand should be (I shall use a neutral term) wound up. These objectives were to be achieved, in the event, by three agreements: the primary agreement between Enacon, Vercot Pty Ltd and Hastings Deering made on 20 May 1988 ("the May agreement"); the agreement between Hastings Deering and the subsidiary for the sale of the land to Hastings Deering; and the subsequent agreement of 24 June 1988 between Enacon, Abigroup and Hastings Deering ("the June agreement"). The effect of these agreements was as I have indicated: that Enacon sold its shareholding in Abigroup to Vercot Pty Ltd; that the subsidiary sold the land to Hastings Deering; and that provision was made for the financial relationships between the two groups to be wound up. It is in what was done in respect of the last of these that the present dispute lies. In order to understand that dispute, it is necessary to understand the financial relationships existing between Enacon and Abigroup up to the date of the management buyout transaction. Enacon was, it was suggested, "the banker of the group". Moneys surplus to the immediate requirements of Abigroup and the subsidiaries were, in general, transfered to Enacon and accordingly Enacon incurred debts to the relevant company of the Abigroup group. In addition, there were from time to time transactions between Enacon and the other companies. By way of example, reference was made in argument to charges made upon Enacon by Abigroup in respect of the use of computer facilities and to other liabilities arising in the course of the business operations of the companies. As the result, the state of indebtedness between Enacon and Abigroup in respect of transactions of this kind varied considerably from time to time. In addition, Enacon from time to time provided working capital for Abigroup. It did this by way of loan. The obligation of Abigroup to Enacon in respect of, as I shall describe them, the loan transactions was, the court is informed, subordinated to the claims of other creditors of Abigroup in ways to which it is not necessary to refer. The financial transactions which accordingly took place between the companies required that accounts be set up in the records of each of the companies to record them. It is the manner in which these records were kept which has caused or at least been the occasion of the present dispute. At the times here relevant all the transactions were recorded in the records of Enacon in a single account. The court has been referred to some of the relevant records and to references in them to an account which, in the computer printout URJ ENACON LTD v ABIGROUP LTD AND SONS (Mahoney JA) 3 sheets, shows payments between the companies both in respect of loan transactions and in respect of transactions of the other kinds to which I have referred. At the relevant time, the transactions were recorded differently in the records of Abigroup. It was initially suggested in argument that Abigroup maintained two separate accounts: a loan account (No 129) recording the loan transactions, and an inter-company or current account (No 229) recording transactions of the other kinds. Again, reference was made to the computer printout sheets of Abigroup and to the way in which separate ledger accounts were kept in respect of the two classes of transactions. Subsequently during argument, it was discovered that Abigroup kept not two but three accounts. Two of the accounts (Numbers 129 and 395) related to the loan transactions and the remaining account (No 229) related to transactions of the other kinds. Counsel could offer no explanation of why, in the records of Abigroup, two accounts were kept in relation to loan transactions. However, it is not in doubt but that the amounts shown in each of these two accounts represented, in the understanding of the parties, loans of a capital nature and not indebtedness arising from transactions of the other kinds to which I have referred. Mr Gyles QC properly pointed out the existence of the third account. I come now to the problems which arose from the management buyout transaction and the form of the May and June agreements. It is these which have given rise to the present litigation. At or about the time of the completion of the transaction, the financial position of the companies was essentially as follows: in the two loan accounts in the records of Abigroup, a total indebtedness of Abigroup to Enacon was shown as $20,000,263.62; in the inter-company account in the records of Abigroup, Enacon was (as far as is here relevant) shown as indebted to Abigroup in the amount of $933,613.99. In winding up the financial relations between Enacon and Abigroup and the subsidiaries, it was necessary for the draftsman of the agreements to provide for the way in which the indebtedness of Abigroup to Enacon on the loan account was to be dealt with. This was done primarily in the May agreement: see CL2. I shall return subsequently to the details of this. But, in general terms, CL2A provided that: the loan account indebtedness of Abigroup to Enacon was $20,000,263.62; that that indebtedness would be satisfied by the payment by Abigroup to Enacon of $15,000,000; and that Enacon would release the balance of the indebtedness on the loan account, viz, $5,000,263.62. In respect of the other indebtedness between, on the one hand, Enacon, and, on the other hand, Abigroup and the subsidiaries, provision was made: CL2(c); that "all inter-company accounts between the above companies, Enacon and Abigroup will be settled by the exchange of cheques based on the audited balance of those accounts as at 1 July 1988". It is from these provisions and their operation in the context of the two accounting systems that the present dispute arises. It might have been thought that, if the records of Enacon and Abigroup were each kept according to proper accounting principles, these provisions would give rise to no difficulty in the winding up of the financial relationships between the companies. But initially a number of disputes arose as to the operation of the May and June agreements in this regard. The court is now concerned with only one of these matters, the Gold Copper issue. 4 UNREPORTED JUDGMENTS Shares in Gold Copper had at the relevant time been owned by Abigroup and by (as I shall assume) one of its subsidiaries for it. (Before the trial judge, it had been assumed that all of the Gold Copper shares had been owned by Abigroup. It appeared in argument before this Court that the legal owner of the majority of the shares was one of the subsidiaries. The question whether the subsidiary owned those shares on trust for Abigroup was not examined at the trial and Mr Gyles QC has properly indicated that no point is taken in relation to the ownership of such shares. The matter is to proceed upon the assumption that the shares owned by the subsidiary were owned as trustee for Abigroup). In March 1987, long before the management buyout transaction, Enacon had caused the Gold Copper shares to be sold and had received the proceeds of the sale of them. Enacon had not, prior to the sale, obtained the authority of Abigroup for the sale of those shares. When that sale came to the notice of executives of Abigroup, Enacon informed those executives that the shares had been sold, that the proceeds had been received by Enacon, and that those proceeds had been applied to the reduction of the indebtedness of Abigroup to Enacon. At the relevant time, there was in the records of Enacon only the one account, in which was recorded both the loan and the other transactions between Enacon and Abigroup. The proceeds of the sale of the Gold Copper shares were applied to the credit of Abigroup in that account, with the consequent reduction of the overall indebtedness of Abigroup to Enacon as shown in that account. Mr Gyles QC submitted that that dealing with the proceeds of sale was made known to the relevant executives of Abigroup and was ratified by them. I am content to accept for the purposes of the present argument that this was so. But the Gold Copper transaction was dealt with differently in the accounts of Abigroup. The amount of the proceeds of sale was debited to Enacon in the inter-company account (No 229); no entry was made in respect of those proceeds in the loan accounts (Numbers 129 and 395) in the records of Abigroup. The result of this was that, when provision came to be made in the May agreement for the winding up of the financial relationships between the companies, the amount which was taken to be the indebtedness on the loan account of Abigroup to Enacon was calculated without crediting to Abigroup the proceeds of sale of the Gold Copper shares. The sum to which I have referred $20,000,263.62 was, as I have said, the sum total of the indebtedness of Abigroup in the two loan accounts in the records of Abigroup. The proceeds of sale remained as a credit to Abigroup in the other inter-company account. Accordingly, when provision was made in the May agreement for the release of the loan indebtedness, the release, literally construed in the terms of CL2A, dealt only with the $20,000,263.62; it left outstanding the indebtedness of Enacon to Abigroup as set forth in the inter-company account of Abigroup. It is this indebtedness and this alone, which is the subject of the present appeal. 1. ABIGROUP'S CLAIMS: Abigroup has formulated its claim in two main ways. First, it claims that it is entitled effectively to recover the balance in the inter-company account of Abigroup, $933,613.99, by virtue of CL2 of the May agreement; and, second, it claims (alternatively) that it is entitled to recover that amount as a debt to it resulting from the way in which Enacon dealt with the proceeds of sale of the Gold Copper shares in the inter-company accounting. Enacon, by way of defence to the first claim, contends that the effect of the May and the June agreements was, and was intended to be, that, following the settlement and the exchange of cheques provided for in the June agreement: see, URJ ENACON LTD v ABIGROUP LTD AND SONS (Mahoney JA) 5 eg, CL7, CL11; there should be no indebtedness between Enacon on the one hand and Abigroup and the subsidiaries on the other. Alternatively, it contends that, as Abigroup is not a party to the May agreement, it cannot have or enforce any rights arising from CL2 of that agreement. In respect of the second claim made by Abigroup, Enacon contends that what happened in relation to the proceeds represented an appropriation by Enacon of those proceeds against the loan indebtedness of Abigroup to Enacon and that, notwithstanding the terms of CL2A of the May agreement, Enacon's liability in respect of the Gold Copper transaction was effectively released by either the appropriation as such or the terms of CL2A. I come now to consider the first claim of Abigroup. The May agreement was made between Vercot Pty Ltd, Enacon and Hastings Deering. The main provisions of the May agreement providing for the winding up of the financial relations between the companies are: "2. SPECIFIC CONDITIONS: A. Abigroup's loan account and interest to Enacon as at 31 December 1987 is $20,000,263.62 ('the Loan Account'). As a condition of this offer, Enacon will agree to accept $15,000,000 in full and final settlement of the Loan Account. Enacon will agree to release Abigroup in respect of repayment of the balance of the Loan Account, an amount of $5,000,263.62, together with interest on the Loan Account from 1 January 1988 to registration of the transfer of the shares to Vercot. Enacon will agree to attend to all necessary formalities to provide Abigroup with a complete release in respect of the Loan Account subject to the payment of the sum of $15,000,000 to be satisfied by payment partly in cash with the balance of assets as detailed hereunder. B. (aa) Hastings Deering will enter into an unconditional agreement with Abigroup subject only to the approval by ordinary resolution of the shareholders of Abigroup and Hastings Deering respectively at extraordinary general meetings of those companies to be held on or before 1 July 1988 whereby Hasting Deering agrees to purchase on | July 1988 all the issued shares in the capital of the following subsidiaries of Abigroup: (i) Thos Clarke and Son Pty Ltd and its subsidiary Tri-State Engineering Pty Ltd; (ii) Pitstock Pty Ltd; (iii) Abi Building Products Pty Ltd. Prior to the sale of Abi Building Products Pty Ltd the name of the company shall be changed and Abigroup shall retain the name Abi Building Products. (bb) Hastings Deering will enter into an unconditional agreement with Abigroup Management Services Pty Ltd subject only to the approval by ordinary resolution of the Shareholders of Abigroup and Hastings Deering respectively at extraordinary general meetings of those companies to be held on or before | July 1988 whereby Hastings Deering agrees to purchase on | July 1988 the properties located at 67 Chappel Road South Bankstown and 5-15 Cottam Avenue Bankstown simultaneously with the purchase of the shares in the capital of the above companies (i)-(iii). Hastings Deering and Abigroup and Abigroup Management Services Pty Ltd will agree in the agreement for sale and purchase to a total consideration for the purchase by Hastings Deering of all the shares in the above companies and the said properties of $7,300,000 to be allocated in such a manner as Hastings Deering and Abigroup and Abigroup Management Services Pty Ltd agree and in default of agreement as required by Abigroup. 6 UNREPORTED JUDGMENTS (c) All inter-company accounts between the above companies, Enacon and Abigroup will be settled by an exchange of cheques based on the audited balance of those Company accounts as at 1 July 1988." The June agreement was made between Abigroup, Hastings Deering, Vercot Pty Ltd and Enacon. It dealt in the main with: the sale of the shares in four subsidiaries by Abigroup to Hastings Deering; the sale of land by one of the Abigroup subsidiaries to Hastings Deering; and miscellaneous matters arising from the May agreement. The second matter may be put aside. In respect of the first matter, the sale of the shares in the four subsidiaries, provision was made for the payment of the price ($4,000,000): CL3; and for the payment of "the Inter Company Accounts" between Abigroup and three subsidiaries prior to completion: CL4. Provision was also made for completion of the transaction. As far as is here relevant these provisions were: "4. REPAYMENT OF INTER COMPANY ACCOUNTS The Inter Company Accounts shall all be paid prior to completion and the Inter Company Accounts balances shall all be nil on the Completion Date. 7. PAYMENT OF THE PURCHASE PRICE (1) The following amounts shall be paid by the following parties by bank cheques and due consideration to the recipients as follows: (i) On the Completion Date the Purchaser or its nominee shall pay to the Vendor $4,000,000 in respect of this Agreement; and (ii) On the Completion Date the Purchaser or its nominee shall pay to Abigroup Management $3,300,000 in respect of the Agreement for Sale of Land conveying the Premises which is interdependent with this Agreement; and (iii) On the completion date Vercot Pty Ltd shall pay to Enacon Limited $255,715.23 in respect of the purchase of 25,511,320 shares and 6,020,312 options in the Vendor pursuant to the Agreement dated 20 May 1988 which is interdependent with this Agreement and the Agreement for Sale of Land however notwithstanding payment on the Completion Date for the purposes of this Agreement Vercot Pty Ltd shall be deemed to acquire the said shares and options in the Vendor from Enacon Limited on 30 June 1988; and (iv) On the Completion Date the Vendor shall repay its loan account to Enacon Limited and Enacon Limited shall agree to accept a consideration totalling $15,000,000 pursuant to CL2A of the Agreement dated 20 May 1988. (2) The Inter Company Accounts shall be nil balances as at 1 July 1988 and shall not affect the Purchase Price. 11. COMPLETION (1) Completion of this Agreement ('Completion') shall take place at the office of Messrs Colin Biggers and Paisley of 140 Phillip Street, Sydney (or at such other place as directed by the Vendor's solicitors) on the Completion Date. (2) On Completion: (a) The Vendor shall deliver or cause to be delivered to the Purchaser or its nominee: (i) duly executed transfers in favour of the Purchaser or its nominee and share certificates in respect of all of the Shares; URJ ENACON LTD v ABIGROUP LTD AND SONS (Mahoney JA) 7 (ii) the certificate of incorporation, common seal, register of members, register of directors, register of directors' shareholdings, register of charges, minutes of directors and shareholders' meetings of the Companies in proper order and condition and fully entered up to the Completion Date; (iii) all cheque books, copies of taxation returns and assessments, financial records, agreements, insurance policies, title documents, licences, indicia of title certificates and all other records, papers, books and documents of the Companies; (iv) duly completed authority for the alteration of the signatories of the bank accounts of the Companies or closure thereof in each case in the manner required by the Purchaser; and (v) all current permits, licences and other documents issued to the Companies under any legislation or ordinance relating to its business activities; (b) The Vendor shall cause the Companies' directors to convene directors' meetings of the Companies to be held at which: (i) the registration of transfer to the Purchaser or its nominees of all of the Shares shall, subject to payment of any stamp duty thereon, be approved; Companies from all claims arising through their holding offices in the Companies; (iii) the persons who shall be specified by the Purchaser shall be appointed auditors, directors and secretaries of the Companies. (c) The Purchaser shall pay to the Vendor as the Vendor shall direct the Purchase Price referred to in CL7(1)(i) by bank cheque and the Vendor shall repay its loan account to Enacon Limited and Enacon Limited shall agree to accept a consideration totalling $15,000,000 pursuant to CL2A of the Agreement dated 20 May 1988. (d) The Vendor and the Companies shall cause to be drawn on the bank account of the Companies and to be delivered to the Vendor or as it might direct such cheques as are necessary to pay the Inter Company Accounts in accordance with CL4. (e) The Vendor shall cause the mortgagee and charges referred to in the Second Schedule to be satisfied and discharged." The June agreement used "the Companies" to refer only to the four companies the shares in which were to be sold to Hastings Deering. The term "Inter Company Accounts" was defined as follows: "(D) 'INTER COMPANY ACCOUNTS' (1) means the total as at the Balance Date of all moneys due to or owing by the Companies or any of them to or by the Vendor, or any other subsidiary of the Vendor, not being one of the Companies, by way of repayment of advances made by or to the Vendor or any subsidiary of the Vendor to or by the Companies or any of them; and (2) refers to the accounts which appear in the account ledgers of the Vendor and as agreed in the books of the following companies and under the following nominations: (i) Anemostat Pty Ltd - 'Current A/C'; (ii) Thos Clark and Son Pty Ltd - 'Current' (iii) Pitstock Pty Ltd - "Current A/C'." The construction of these agreements has given rise to considerable difficulty and various contentions have been advanced. In my opinion, it is proper to construe them according to the ordinary meaning of the language used. The terms of an agreement are to be construed by reference to the overall transaction intended to be effected by it, the position of the parties and the context in which 8 UNREPORTED JUDGMENTS the agreement was made: see generally Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 350-2 and the cases there discussed by Mason J. Mr Gyles QC for Enacon submitted that the agreements are to be construed by reference to, as he submitted them to be, the following facts: "(i) Abigroup was a subsidiary of Enacon with Enacon owning approximately 61% of the issued shares in Abigroup and options to take up more shares; (ii) Abigroup was insolvent; (iii) Abigroup owed to Enacon approximately $20,000,000; (iv) Senior executives of Abigroup lead by Mr Cassidy, through their company Vercot, were to undertake a 'management buyout' of Abigroup; (v) Vercot agreed to pay a nominal consideration for Enacon's shares in Abigroup. This reflected Abigroup's parlous financial situation. Abigroup's directors were advised by independent experts on 2 June 1988 that the company's's shares were worthless; (vi) Abigroup could not repay its indebtedness to Enacon and Enacon was obliged to accept a substantially reduced sum, viz, $15,000,000, in satisfaction of its claim against Abigroup." One of the submissions urged by Mr Gyles QC was to the effect that as the transaction was a management buyout transaction it was to be expected that the agreements made would so wind up the financial relationships between the companies that, upon the settlements there provided for, there would be no outstanding liability between them. He therefore submitted or his submissions suggested that CL2 and/or the settlement provisions in the June agreement must be understood as intended to operate to extinguish Enacon's liability for the outstanding balance of indebtedness from the Gold Copper transaction. I do not think that this argument produces the effect suggested. Assuming without deciding that the court should construe the agreements upon the basis that the winding up of the financial relations between the parties would, on settlement, produce the result that there was no outstanding liability between them, that result was, I think, intended to be produced by CL2 and in particular CL2(c). (The numbering of the clauses is curious but, in argument, nothing was seen to turn upon it). The intent of CL2(c) read literally is that Enacon's liability to Abigroup for the proceeds of sale of the Gold Copper shares would be extinguished by payment of the outstanding balance of the inter-company account as provided by CL2(c). It was then submitted for Enacon (I put the argument briefly) that CL2(c) of the May agreement did not apply to inter-company balances affecting Enacon or at least those between Enacon and Abigroup. But there are difficulties in that argument. First, it suggests that the fact that Enacon is mentioned in CL2(c) be ignored. It was, inter alia, suggested that the settlement provisions of the June agreement supported that view. I do not think that they do. The specific provisions as to "inter-company accounts" in the June agreement refer essentially to other companies, as there defined, and not to Enacon. And second, if the agreement is to operate as was suggested for Enacon, it would be necessary to alter the effect of CL2A. It is agreed that the sums there referred to, $20,000,263.62 and $5,000,263.62, result from the addition of the two loan accounts in the Abigroup records and take no account of the inter-company balance in Abigroup's records. If the effect of CL2A is to be that, in addition to those two loan accounts, there was to be a release of the sum of $933,613.99 in the inter-company account, it would be necessary to change the amount of the URJ ENACON LTD v ABIGROUP LTD AND SONS (Mahoney JA) 9 "Joan account" $20,000,263.62 by reducing it by $933,613.99 and to alter the amount released, viz, $5,000,263.62 accordingly. That is not the intent of the agreements. However, Mr Gyles QC pointed to the fact that, if CL2(c) of the May agreement is to impose an obligation upon Enacon in respect of payments of inter-company accounts as there provided, the draftsman has erred because Abigroup is not a party to the May agreement. This is a matter which, I think, was not dealt with at length before by Brownie J: it does not appear whether it was pressed in argument before the learned judge. But however that be, I do not think that that matter, though it is significant, should determine the construction of CL2 as has been suggested. The purpose of CL2(c) was, in my opinion, that the settlement of inter-company accounts should involve, inter alia, Enacon and Abigroup and both companies were referred to in the clause. It may be that the draftsman did not advert to the fact that Enacon was not a party to the May agreement. It may be that he assumed that Enacon, which had and Vercot Pty Ltd which was to take a controlling shareholding in Abigroup, would cause Abigroup to do what was necessary to carry out the intent of CL2: cf CL4 of the May agreement. And it is to be noted that CL2A of the May agreement contemplated that Abigroup would pay $15,000,000 to Enacon in discharge of its loan liability to Enacon, notwithstanding that Abigroup was not a party to the May agreement: cf CL7(1)(iv) of the June agreement. But that requires that a basis in law must be found for the claim by Abigroup against Enacon, ie, for Enacon's obligation to pay Abigroup the balance of the inter-company accounts. One of the bases on which Abigroup has sued Enacon for $933,613.99 was that CL2(c) of the May agreement imposed an obligation on Enacon to pay it and, Enacon submitted, not being a party to that agreement, it can have no obligations under it. But it is clear that Enacon took benefits under the May agreement and, of course, under the June agreement. For example, it received $15,000,000: if, as was suggested, Abigroup was insolvent, it would not have received that had the two agreements not been carried out. In my opinion, it was not open to Enacon to accept the benefit of CL2A of the May agreement without accepting the burden of the obligations intended to be imposed on it by CL2(c). I do not mean by this that Enacon could be sued on CL2(c) as such, as on a formal covenant by it to that effect: see, eg, Commonwealth Dairy Produce Equalisation Committee Ltd v McCabe (1938) 38 SR Dairy Produce 397 at 402-4. But this is not a case which turns on the common law pleadings which might have been formulated: it is a case brought in the Commercial Division. In that Division, the parties' Statement of the Nature of their Case and Defence is not to be ignored. In the present context, I would see Abigroup to have sufficiently pleaded and proved an implied agreement binding Enacon to pay the inter-company balance. That agreement would be implied from the fact that, CLA(c) purporting to oblige Enacon to pay Abigroup, and Enacon having taken advantage of the two agreements upon a basis formulated on the assumption that it would do what CL4(c) provided for it to do, Enacon impliedly agreed to do what CL4(c) required: Turner v New South Wales Mont de Piete DePosit and Investment Co Ltd (1910) 10 CLR 539 at 554-5. But, if this be wrong, it is necessary to consider Enacon's submissions as to appropriation of the Gold Copper sale proceeds. This submission, insofar as it does not depend upon an extinguishment created by CL2A, depends upon the effect of the "appropriation" of the proceeds of sale of the shares against the liability of Abigroup to Enacon. In my opinion, properly 10 UNREPORTED JUDGMENTS understood, what was then done did not effect a final and irrevocable release of Enacon's admitted liability in respect of the proceeds of sale of the shares. I shall for this purpose assume without deciding that there was a transaction, ratified by Abigroup, whereby (in the sense to which I shall refer) Enacon applied the proceeds in reduction of Abigroup's liability to Enacon. But it was clearly not the intention of either party that the liability of Enacon for those proceeds should not properly remain to be taken into account between them. There was, by that transaction, no forgiveness in respect of any part of those proceeds. Therefore, insofar as there was any effective release of this amount, the Gold Copper liability, it must be by operation of CL2A of the May agreement. But, in my opinion, it is plain that it was not the intention of either party that the effect of that clause would be that the financial relationships between Enacon and Abigroup were to be concluded on the basis that Enacon's indebtedness for the proceeds of sale should be released. Insofar as CL2A and what was done under it operated as a release, it did so by reference only to the accounts of Abigroup and what appeared in them: it operated by way of release only in respect of what appeared in the loan accounts as recorded in the records of Abigroup. The proceeds of sale formed no part of the indebtedness which was thereby to be released. But, as I understand Mr Gyles to infer, that is not the end of the matter. If there was an "appropriation", the effect of it was to extinguish the debt for the proceeds of sale as such, and there then remained no cause of action on which Abigroup could sue Enacon in respect of those proceeds of sale. I do not think that that submission should be accepted. It is based, in my respectful opinion, upon form rather than upon substance and the intention of the parties. When, as between the officers of the two companies, there was said to be an appropriation of moneys, it was in the sense that the proceeds of sale of the Gold Copper shares, which were clearly owing by Enacon to Abigroup, were not in fact repaid to Abigroup but taken into account in the course of the total indebtedness between the two companies. What was done by Enacon in respect of it, even if regard be had to its books alone, did not destroy the liability of Enacon to take it into account upon an ultimate indebtedness between the two companies. Thus, if they had between them agreed to wind up indebtedness under the loan accounts, as such, the fact that Enacon had treated it as it had would not prevent the effect of this winding up of the loan accounts being to leave Enacon liable to Abigroup for the sum in question. However the accounts were to be reconciled between the two sets of records, what was to be released as the result of CL2A of the May agreement was and was only the amount of $5,000,063.86 there referred to. Insofar as there was any other indebtedness, it was not released. If provision was not made for payment of it under CL2(c), the indebtedness, as between Enacon and Abigroup, remained. If, for example, the claim of Abigroup be based upon calculations arising from the terms of the accounts of Enacon, then, assuming the amount to be released to be that provided in CL2A of the May agreement, the liability for the relevant part of the proceeds of sale remained upon Enacon. As I have said, there was no intention of the parties, as disclosed in the agreements, to the contrary. I have referred to the terms of the agreements and the intention of the parties, as derived from the construction of them in the context in which they were made. During argument reference was made to the question whether, if it was the intention of the parties that the winding up of their financial relationships should result in no payment being made by reference to the proceeds of sale of the Gold URJ ENACON LTD v ABIGROUP LTD AND SONS (Cripps JA) 11 Copper shares, a mistake had been made in the drafting of the agreements and a failure to give effect to such intentions. Reference was made, for example, to the question whether, if such was to be taken to be the intention of the parties in the management buyout agreement, the fact that no relief had been sought or was sought by way of rectification or the like meant that, in construing the agreement, regard should not be had to such matters. If the agreements were intended to have effect according to their terms, then, I think, the suggestion that the language should be construed against the background of an intention to wind up the parties' financial relationships as Mr Gyles QC suggested must to that extent be discounted. However that be, for the reasons I have given, the result is that Enacon remained liable to Abigroup for the relevant sum. In my opinion, therefore, the appeal should be dismissed with costs. Meagher JA I agree with Mahoney JA. Cripps JA I agree with the reasons of Mahoney JA and with the orders he proposes. Appeal dismissed with costs. Counsel for the appellant: RV Gyles QC/JV NIcholas/RA Morling Solicitors for the appellant: Allen Allen and Hemsley Counsel for the respondent: AR Emmett QC/P Durack Solicitors for the respondent: Morris Fletcher and Cross