PINATA PTY LTD v MOONAGEE PTY LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL KirBY P, SHELLER and COLE JJA 8 November 1995, 6 December 1995 [1995] NSWCA 370 CONTRACT — alleged agreement wholly to satisfy indebtedness — whether agreement established in facts proved — whether performance of agreement had occurred whether actions unconscionable — held: (Dismissing appeal): Agreement not established — no issue of principle. CONTRACT — agreement to release company from liability — in Commercial Division, Hunter J holds that agreement was not established and in any case that performance of the alleged agreement had not occurred so that the alleged unconscionability was not made out — on appeal to Court of Appeal — held: (Cole JA; Kirby P and Sheller JA concurring): (1) No error shown; — (2) Although there was some discussion between the parties concerning the disputed indebtedness, such discussions never matured into the agreement pleaded and Hunter J correctly so found; (3) Accordingly, the other questions in the appeal did not arise. Howard Smith and Co Ltd v Varawa (1907) 5 CLR 68; Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 (CA) applied. CONTRACT — debt due — whether cheque for $50,000 should be credited — cheque drawn for endorsement.- examination of company records reveal receipt of cheque and endorsement — in Commercial Division, Hunter J holds that moneys were paid to be "taken into account in making a distribution" held: (Dismissing the cross-appeal): Such finding was correct on the evidence proved and accepted. Kirby P I agree with Cole JA. Sheller JA I agree with Cole JA. Cole JA Moonagee Pty Ltd (Receiver and Manager appointed) (Moonagee) sued Pinata Pty Ltd (Pinata) claiming $357,527.48. The action was fought upon the basis of that sum being a debt. Hunter J held that Pinata was indebted to Moonagee in the sum of $335,027.48 and entered judgment in that sum together with interest and costs. Pinata appealed initially upon two grounds; 1 and 2, and added by leave, grounds 1A and 2A: "1. His Honour erred in not finding as a consequence of the dealings between than the appellant had wholly satisfied its indebtedness to the respondent prior to the institution of the proceedings. 1A. That his Honour was in error in failing to find that the contract between Moonagee Pty Ltd and Castanair Pty Ltd effectively extinguished the debt from Pinata Pty Ltd to Moonagee Pty Ltd or had the effect that the Court would not permit Moonagee Pty Ltd to assert its claim against Pinata Pty Ltd. 2. His Honour erred in failing to attribute any significance or effect to the resolution of the directors of the respondent of 18 September 1991. 2A. That his Honour was in error in finding that there was no such contract or that it was too uncertain to constitute a contract." 2 UNREPORTED JUDGMENTS Moonagee has cross-appealed contending that the judgment sum should be increased by $50,000 being an amount Hunter J held had been "paid" to Moonagee in March 1989 and in respect of which credit was given in producing the resulting indebtedness of $335,027.48. The basis of the appellant's contention that Pinata had wholly satisfied its indebtedness to Moonagee prior to suit was found in an amended defence para7(h) to para7(j) in the following terms: "(h) By an agreement made in March 1989, between Moonagee and Castanair, in consideration of Moonagee's release of Pinata of all liability on Pinata's part to Moonagee, Castanair promised to provide benefits to Moonagee: (i) in the form of distributions by Castanair as the trustee of the trust referred to in subpara(c) above; and (ii) in the form of payments for office accommodation and administrative services provided by Moonagee to Castanair at a rate substantially in excess of the cost of that accommodation and those services to Moonagee to an extent sufficient to enable Moonagee to repay the whole of its indebtedness to Castanair; (i) Castanair duly performed its promises under the agreement referred to in subpara(h) above by making distributions totalling $236,720 as trustee to Moonagee and by paying Moonagee a total of $100,480 as rent and for administrative services which distributions and payments enabled Moonagee to repay the whole of its indebtedness to Castanair; (j) Moonagee's claim in these proceedings is in breach of the agreement referred to in subpara(h) above and its maintenance of that claim is unconscionable."! Hunter J held that the agreement alleged in (h) was not established. He further held that the performance of the alleged agreement asserted in (i) had not occurred. In consequence the alleged unconscionability in (j) was rejected. The issues under the amended notice of appeal are thus whether those findings should be disturbed on appeal. Regarding the cross-appeal, there was some debate before Hunter J regarding the actual state of accounts between Moonagee and Pinata. Pinata admitted loans to it of $335,460 but alleged repayment of $50,000 thus leaving a balance of $285,460. Hunter J accepted an analysis of those accounts by Mr Burke which showed an indebtedness of $385,027.48 at 30 June 1991. That sum was reduced by $50,000 which his Honour accepted was "paid" by Pinata to Moonagee in March 1989. There is no challenge to the Burke analysis figure of $385,027.48. The only issue on the cross-appeal is thus whether a credit of $50,000 should be given his Honour having found: "From that sum should be deducted the amount of $50,000 which I accept was *paid" by Pinata to Moonagee in March 1989 and "taken into account" in the trust distributions by Castanair to Moonagee."2 BACKGROUND To understand the background to para7 of the amended statement of defence it is necessary to understand some background to the three companies there mentioned. Moonagee had two directors, Mr EDL Killen (D Killen) and Mr BGL Killen (B Killen). It had three shareholders, Toukay Investments Pty Ltd, being an investment company for the EDL Killen family, Aroona Developments Pty Ltd 1. Appeal book, at 738-739 2. Appeal Book, at 774N URJ PINATA PTY LTD v MOONAGEE PTY LTD (Cole JA) 3 and Castanair. Each held one share. Toukay Investments reflected the interests of the family of EDL Killen, Aroona Developments reflected the interests of the family of BGL Killen and Castanair held its share on trust, the beneficiaries under that trust being essentially the families of D Killen and B Killen, although the two issued shares in Castanair were held by Toukay Investments and D Killen3. The directors of Castanair were D Killen and Mr G McLean, an accountant. The directors of Pinata were D Killen and Mr R Leigo, an accountant. The two issued shares were held by D Killen and Mr R Leigo but were found to be held on behalf of the interests of the families of D Killen and B Killen'. Resulting from the inter-relationship between the three companies monies moved between them at various times for various purposes. On 17 September 1991 Moonagee executed a charge over its assets to Dalgety Farmers Ltd (Dalgety) and Dalgety Rural Finance Ltd (Dalgety Rural). Pursuant to that charge a receiver and manager was appointed on 21 May 1992 and it was he who brought the proceedings to seek recovery of the asserted debt from Pinata. THE ALLEGED AGREEMENT BETWEEN MOONAGEE AND CASTANAIR DATED MARCH 1989 Evidence regarding the alleged agreement as pleaded in the amended statement of defence was given by a number of persons. Undoubtedly there was discussion from 1988 onwards concerning a disputed indebtedness of Pinata to Moonagee. The question is whether those discussions matured or crystallised into the agreement pleaded. First, Mr Leigo gave evidence regarding the alleged agreement which his Honour summarised:5 Hunter J concluded: "The evidence does not establish, in my opinion, an agreement between Moonagee and Pinata much less the agreement pleaded between Moonagee and Castanair."6 Nothing has been advanced to justify disturbing his Honour's finding of absence of agreement between Moonagee and Castanair as pleaded. Second, Mr McLean gave evidence of his recollection of discussions. That was summarised by Hunter J.7 Hunter J held: "Tt is extremely challenging to extract an agreement of any kind from this evidence other, possibly, than one between Moonagee and Pinata to write off a disputed Pinata debt to Moonagee upon payment by Pinata of the needed $50,000 to the financially troubled Moonagee. I am unable to conclude that it evidences an agreement between Castanair and Moonagee as distinct from a general understanding to that point among the principal actors that some thing should be done about the Pinata debt for a variety of reasons prominent amongst which was: (a) the fact that the debt was hotly disputed by Leigo; Appeal Book, at 190, 506, 736. Appeal Book, at 506, 190, 736. Appeal Book, at 754T-756U. Appeal Book, at 756U-756W. Appeal Book, at 758-761 NAWRY 4 UNREPORTED JUDGMENTS (b) $50,000 was being provided to Moonagee by Pinata at least in the belief of Pinata that it would resolve any claim of indebtedness against it by Moonagee." That was finding of fact open to his Honour. No basis has been advanced for disturbing it. Thus it does not establish the agreement pleaded. Third, B Killen gave evidence which his Honour summarised.8 Hunter J summarised his view of B Killen's evidence in the following terms: "Tn summary, while I am quite satisfied that B Killen's conviction that there had been an agreement in March of 1989 between Moonagee and Pinata was honestly held, the evidence is lacking to justify that conviction. The likelihood is that there had been general discussion over the years, certainly in 1988 and 1989 concerning the Pinata debt with a view to it being extinguished in some way involving Castanair's dealings with Moonagee."9 Hunter J was unable to reconcile the alleged agreement extinguishing the Pinata debt said to have been made in March 1989 with minutes of a meeting of directors of Moonagee dated 18 September 1991 purporting then to release an existing debt. Further, Hunter J noted that the financial records of Moonagee after the alleged agreement in March 1989 continued to record Pinata as a significant debtor of Moonagee!°. Nothing has been advanced to justify disturbing Hunter J's findings regarding the evidence of B Killen. It follows that his evidence does not establish the agreement pleaded. Fourth, D Killen gave evidence of the alleged agreement which his Honour summarised!!. Hunter J found that D Killen was "far from precise about the March 1989 conversation with Leigo"!2, and further held: "When closely questioned as to the content of the precise conversations upon which reliance was placed for the March 1989 agreement it has to be said that D Killen's evidence was particularly vague (see particularly T-85 et seq)."!3 Having concluded a review of D Killen's evidence his Honour held: "Being as generous as one can, in dealing with the informality with which the directors of the three companies dealt with each other and accepting that they regarded the beneficial interests under the three companies as being much the same in each case, I still find considerable difficulty in extracting from the imprecise and sometimes conflicting material presented to me any agreement between Castanair and Pinata which could have the effect of relieving Pinata of any indebtedness to Moonagee. The closest one gets to an agreement is one between Moonagee and Pinata to release the disputed debt on payment of the Dalgety cheque of $50,000. Evidence of such an agreement faces significant difficulties: (i) It is not the agreement relied upon in the amended pleadings. (ii) It is in conflict with the financial records of Pinata and Moonagee which continued to record the existence of the Pinata indebtedness ant, in the case of the Moonagee accounts, to not so much as record the receipt of the subject $50,000." 8. Appeal Book, at 762-765. 9. Appeal Book, at 765h-765M. 10. Appeal Book, at 764W-765D. 11. Appeal Book, at 765N-773D 12. Appeal Book, at 766W. 13. Appeal Book, at 771U. URJ PINATA PTY LTD v MOONAGEE PTY LTD (Cole JA) 5 The evidence of D Killen thus did not establish the agreement pleaded. Nothing has been advanced to justify disturbing his Honour's finding in this regard. Mr Bennett QC placed strong reliance upon the evidence of D Killen at 178 but this overlooks the later evidence regarding the alleged agreement of D Killen which Hunter J correctly described as "particularly vague". Not only was his Honour not satisfied that the discussions between the four persons mentioned which his Honour summarised and to which I have referred did not establish the existence of the agreement pleaded between Moonagee and Castanair, there were other empirical aspects of evidence which either denied or were inconsistent with the existence of the agreement alleged. They included the following: 1. The alleged agreement in March 1989 between Moonagee and Castanair said to have the effect of releasing Pinata from its indebtedness to Moonagee is inconsistent with the minutes of the meeting of directors of Moonagee, and the resolution passed at the meeting on 18 September 1991. That meeting was attended by D Killen, B Killen and Mr R Leigo. The minute acknowledged the existence of the debt and purported to resolve that: As of this date Pinata Pty Ltd is released from all indebtedness to Moonagee." That is quite inconsistent with the debt having been released in March 1989.14 2. The alleged agreement is inconsistent with the Moonagee ledger as at June 1990 which recorded a debt of $392,527.15 3. The alleged agreement is inconsistent with the balance sheet of Moonagee as at 30 June 1989 which recorded Pinata's indebtedness as $392,527.48. 4. The alleged agreement is inconsistent with the balance sheet of Moonagee dated 30 June 1991 which recorded the indebtedness of Pinata as $392,527.48.1!6 5. The alleged agreement is inconsistent with the trial balance sheet for year ended 30 June 1991 prepared as at 13 April 1992 which recorded the indebtedness of Pinata as $385.027.48. 6. The alleged agreement is inconsistent with the minutes of meetings of directors of Castanair held 2 September 1991 attended by Mr EDL Killen and Mr GR McLean. It was there resolved that: "Dr Killen bring to the notice of Moonagee Pty the relationship between cash contributions and income transfers made to it by Castanair and debits charged against Pinata so that the debt by Pinata be written off by Moonagee."!7 This is consistent only with the debt then existing from Pinata to Moonagee as, indeed, the minutes record. 7. The alleged agreement is inconsistent with the letter dated 18 September 1991' written by B Killen, on behalf of Moonagee, to Mr R Leigo, on behalf of Pinata, purporting "today" to have released Pinata from its indebtedness to Moonagee.!8 Some of the inconsistent statements at meetings, resolutions and financial documents to which I have referred occurred or were created after the alleged agreement was entered into in March 1989. It is permissible to have regard to such circumstances and matters in seeking to determine whether in fact a 14. Appeal Book, at 24 15. Appeal Book, at 491 16. Appeal Book, at 354. 17. Appeal Book, at 741I-741K 18. Appeal Book, at 39. 6 UNREPORTED JUDGMENTS concluded agreement was reached, as Hunter J correctly noted.!9 Here the issue is not the meaning to be give to an ambiguous agreement: it is whether there was an agreement at all.2° In my opinion the decision of Hunter J was correct. It is undoubted that, at various times, there were discussions between the four persons mentioned regarding the Pinata indebtedness. At various times each of the four directors expressed views regarding the appropriateness of discharging that indebtedness and of reasons why it may be appropriate to do so. There was discussion in which statements were made that any detriment which Moonagee might suffer in consequence could be overcome by funds being made available to it from Castanair. However there was not in March 1989 any agreement made between Moonagee and Castanair of the nature pleaded. There is a significant difference between an intention to create a legal arrangement and the making of a concluded contract?!. As the agreement alleged in the amended defence was not established, the appeal must be dismissed. Grounds of appeal numbered 1, 1A and 2A fail. Independently of the finding of absence of agreement, Hunter J found that "the defence of performance by Castanair of the alleged agreement fails and with it any entitlement of Pinata to rely upon an accord and satisfaction of its liability to Moonagee...; or upon any alleged unconscionability in the maintenance by Moonagee of its claim in these proceeding."22 Performance of the unestablished agreement was alleged in para7(i). The claim that it was unconscionable for Moonagee to seek to recover monies from Pinata was based upon the assertion that to do so would be to receive double benefit. Thus, assuming the agreement had been established, whether Castanair had performed the agreement was of importance. Hunter J found that it had not done so. In my opinion for the reasons given by Hunter J his findings that the transactions between Moonagee and Castanair did not establish any performance of the asserted agreement were correct.23 Hunter J advanced four reasons why the acts said to constitute performance of an agreement made in March 1989 were not to be characterised as being the performance of that agreement, even if it had been established. First, monies paid by Castanair to Moonagee constituting accommodation and service charges were off set by management fees in similar amounts rendered by Castanair to Moonagee. The inference was that the one was to offset the other. Thus these payments could not be characterised as performance of the alleged agreement. Second, the payments by Castanair made for service charges were recognised to be for real services. Thus there was no satisfactory evidentiary basis for asserting payments for the purpose of offsetting the loss to Moonagee by release of the Pinata debt. 19. Howard Smith and Co Ltd v Varawa (1907) 5 CLR 68 at 78 per Griffith CJ; Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 550 per Gleeson CJ. 20. Compare Council of the Upper Hunter County District v Australian Chilling and Freezing Co Ltd (1967) 118 CLR 429 at 436-437. 21. See generally Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 548. 22. Appeal Book, at 774F-774L. 23. Appeal Book, at 743K-749L. URJ PINATA PTY LTD v MOONAGEE PTY LTD (Cole JA) 7 Third, the pattern of payments and distributions by Castanair under the discretionary trust was not materially different prior to and after March 1989. Thus the post March 1989 payments could not be characterised as performance of the asserted agreement. Finally, even had it been pleaded, transfer of certain shares at a high value did not establish the performance alleged.24 I respectfully agree with the reasoning of Hunter J that none of these matters, alone or together, establish performance of the alleged agreement, and thus any unconscionability in Moonagee suing Pinata for the asserted debt. For these additional reasons the appeal fails. The second ground of appeal relates to an allegation that on 18 September 1991 the board of Moonagee resolved to release Pinata from its indebtedness, and on that day communicated that release. That matter was not pleaded in the amended defence, although it was pleaded in the original defence. In those circumstances the matter did not arise at the trial, nor does it arise on appeal. CROSS APPEAL Hunter J held that there should be deducted from monies otherwise established to be due by Pinata to Moonagee the sum of $50,000, being a cheque which was "paid" by Pinata to Moonagee in March 1989. The cheque dated 10 March 1989 was drawn by Dalgety in favour of "Dalgety Rural Finance Ltd A/C Pinalta Pty Ltd and RP Leigo or order". The Pinata accounting records reflect payment of this $50,000 in the Moonagee loan account?5. The cheque was not paid into the Moonagee bank account nor did Moonagee issue any receipt for it, and nor was its receipt recorded in the books of Moonagee. In fact the cheque was banked to the credit of Castanair?6. The minutes of the meeting of Castanair held 15 March 1989 attended by D Killen and GR McLean record: "Pinata Pty Ltd EDL Killen advised that he had obtained an amount of $50,000 from Bob Leigo by way of a Dalgety cheque due to Pinata being endorsed over to Castanair Pty. This distribution of funds was regarded by Pinata as a payment to settle debts to Moonagee Pty Ltd. It was agreed that the payment should be taken into account in making a distribution to Moonagee."27 Mr Leigo gave evidence that he delivered the cheque to D Killen at Moonagee's office as a director of Moonagee?8. D Killen received the monies "to settle debts to Moonagee Pty Ltd". Thus the monies were paid by Pinata to Moonagee, and that payment was "taken into account in making a distribution to Moonagee". Thus, in my view, the $50,000 was properly deducted from the then indebtedness of Pinata to Moonagee. It follows that the decision of Hunter J in this respect was correct. The cross-appeal must be dismissed. I would propose: 1. Appeal dismissed with costs. 2. Cross-appeal dismissed with costs. 1. Appeal dismissed with costs; and 24. Appeal Book, at 748S-749L. 25. Appeal Book, at 744L and 577R 26. Appeal Book, at 501. 27. Appeal Book, at 472. 28. Appeal Book, at 243. UNREPORTED JUDGMENTS 2. Cross-appeal dismissed with costs. COUNSEL: Appellant/Cross-respondent: DMJ Bennett QC / RJ Brender Respondent/Cross-appellant: AW Street/ JD Fitzgerald SOLICITORS: Appellant/Cross-respondent: Connery and Partners Respondent/Cross-appellant: Blake Dawson Waldron