BOOGADAH INVESTMENTS PTY LTD vy WESTPAC BANKING CORPORATION; EUMINA INVESTMENTS PTY LTD v WESTPAC BANKING CORPORATION SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL COMMERCIAL DIVISION MASON P; HANDLEY and BEAZLEY JJA 18 February 1998, 18 March 1998 [1998] NSWCA 41 Trusts — Breach — Constructive trust — Moneys paid to bank to reduce personal indebtedness of trustees — Whether moneys paid were trust moneys — Whether moneys were paid to the bank in breach of trust — Whether bank had knowledge of a dealing in breach of trust Fiduciary duty — Breach — Refinancing arrangement — Whether fiduciary relationship had arisen between the parties — Whether failure of bank to disclose all relevant considerations constituted a breach of fiduciary duty Between 1948 and 1993, Mr and Mrs Renshaw carried on a farming and grazing partnership known as Boogadah Company. The business was conducted on a 4,300 acre property called "Boogadah". Since 1948 this property had been mortgaged to Westpac Banking Corporation ("Westpac") as security for overdraft facilities used by the partnership. In 1956 Mr and Mrs Renshaw formed a company, Boogadah Investments Pty Ltd ("Investments"). Through Investments, three additional farming and grazing properties were acquired and mortgaged to the Commonwealth Bank. In 1973 a discretionary trust was created, the trustees of which were Eumina Investments Pty Ltd ("Eumina") and Mr Renshaw. Mr and Mrs Renshaw were the sole directors and shareholders of Eumina. By the mid 1980s Mr and Mrs Renshaw and Investments were having difficulty servicing their respective loans. Using money from a recent inheritance, Mrs Renshaw made two payments to the trust with the intent that the moneys would provide interest that could offset the losses made by the trust. The first payment was an interest free loan to the trust of $400,000 in April 1985, repayable at call. A further payment of $300,000 was made to the trust by Mrs Renshaw in August 1985. In December 1986 and January 1987 the $700,000 was applied by Westpac in reduction of Boogadah Company's indebtedness to the Bank. Investments paid out its borrowings from the Commonwealth Bank in July 1988 with funds lent by Westpac upon the security of Investments' properties. Certain adjustments were made between the respective indebtedness of Boogadah Company and Investments to Westpac. Mr Renshaw died in 1993. Mrs Renshaw is his executrix and sole beneficiary. Westpac brought proceedings in the Supreme Court of New South Wales against Mrs Renshaw and Investments to recover the outstanding loan moneys. In defence, Investments submitted that Westpac breached its fiduciary obligation to Investments when it paid out Investments' loan to the Commonwealth Bank and took security over its three rural properties in July 1988. These submissions were rejected by Rolfe J on the basis that there was no fiduciary relationship between the parties and no breach of fiduciary obligation. Orders were made against Mrs Renshaw and Investments for the outstanding loan moneys with orders for possession of "Boogoodah" and the three properties owned by Investments. Asecond set of proceedings were brought by Eumina against Westpac. Eumina claimed that Westpac received the sums of $400,000 and $300,000 as constructive trustee, seeking 2 UNREPORTED JUDGMENTS a declaration that Westpac was liable to account for these amounts and consequential relief or alternatively, equitable compensation. These proceedings were dismissed by the trial judge on the basis that the moneys borrowed by the trustees fell outside the definition of "The Trust Fund" in cll(e) of the Trust Deed. Held dismissing each appeal: (1) Mrs Renshaw as creditor made demand upon the trustees as debtors requiring the trustees to repay the $700,000 and the trustees responded to that demand. The parties then requested Westpac to use the moneys in partial reduction of the indebtedness of Boogadah Company. What was received by the Bank was money belonging to Mrs Renshaw and not trust moneys. In these circumstances there was no breach of trust. Barnes v Addy (1874) LR 9 Ch App 244; Stephens Travel Service International Pty Ltd (Receivers and Managers Appointed) v Qantas Airways Ltd (1988) 13 NSWLR 331, considered. In Re Harmony and Montague Tin and Copper Co (Spargo's Case) (1873) 8 Ch App 407, followed. (2) The activities of Westpac did not cast it in the role of a fiduciary. At all times, Westpac informed Mr and Mrs Renshaw and Investments of the steps it was prepared to take - steps which were dictated and acquiesced in by Mr and Mrs Renshaw and Investments with full knowledge of all material and relevant facts. Hospital Products Ltd v United States Surgical Corporation and Ors (1985) 156 CLR 41; Kelly v CA & L Commodities Corporation Pty Ltd (1989) 18 NSWLR 248; Commonwealth Bank v Smith (1991) 42 FCR 390, considered. Abalos v Australian Postal Commission (1990)171 CLR 167, followed. Mason P Between 1948 and the death of Mr Renshaw in 1993, Mr and Mrs Renshaw carried on a farming and grazing business known as Boogadah Company. The business was carried out from "Boogadah" a 4,300 acre property in the Binnaway district that was owned by Mr and Mrs Renshaw as tenants in common. Since 1948 Boogadah had been mortgaged in favour of Westpac to secure the varying overdraft facilities enjoyed by Mr and Mrs Renshaw as the partners of Boogadah Company. In 1956 the couple incorporated a company, Boogadah Investments Pty Ltd ("Investments"). Mr and Mrs Renshaw were the directors, although most of the business decisions were made by Mr Renshaw. Each of them held the "A" shares, and their children the "B" shares. Investments was set up as a vehicle whereby the ultimate benefit of its assets would pass to the children. Through Investments, the family acquired three additional farming and grazing properties that were located in the vicinity of Boogadah. However, unlike Boogadah Company, Investments banked with the Commonwealth Bank until mid 1988. The refinancing by Westpac of the Commonwealth Bank loans in 1988 is the transaction giving rise to the issues in one of these appeals. The four properties were managed and run as a single entity with Mr Renshaw effectively making the farming and business decisions. In 1973 a discretionary trust, the Julia Beatrice Crawford Trust Settlement ("the Trust") was created. At all material times the trustees were Eumina Investments Pty Ltd ("Eumina'") and Mr Renshaw. Mrs Renshaw was one of the "eligible beneficiaries". She and her husband were the sole directors and shareholders of Eumina. Mr and Mrs Renshaw borrowed from Westpac for their business and personal needs. Their ability to repay was essentially dependent upon income earned from the various properties which, in turn, was dependent upon the vagaries of farming and grazing in Australia. Another source of funds were the amounts received by Mrs Renshaw by inheritance from the estates of her father and mother. URRDGADAH INVESTMENTS PTY LTD v WESTPAC BANKING CORPORATION; EUMIN& INVESTMENTS PTY LTD v WESTPAC BANKING CORPORATION (Mason P) By at least the mid 1980s Mr and Mrs Renshaw and Investments were having difficulties in servicing their respective loans as a consequence of drought, fluctuating commodity prices, and very high interest rates. It also appears that to some extent income of Boogadah Company was being diverted to pay interest for Investments. Increasing pressure was being brought to bear upon them to reduce their debts. However, Mr Renshaw was fairly adept at resisting it. The branch manager's assessment of him in an internal bank minute of 20 January 1987 was typical: "°CD' is the controlling 'wheel' of Boogadah Company. He is aged 72 and has represented NSW at various levels in various organisations. Family is long standing and valued connection of this Branch the Bank. 'CD ' is a difficult man to deal with at times but has mellowed over past 12/18 months. Account control is tight from time to time. Connection knows cattle industry, and other rural industries, very well and they produce excellent stock Investments paid out its borrowings from the Commonwealth Bank in 1988. This was done with funds lent by Westpac upon the security of Investments' properties. The Bank and the Renshaws made certain adjustments as between the respective indebtedness to Westpac of Boogadah Company on the one hand and Investments on the other. During Mr Renshaw's lifetime no complaint was made in relation to this transaction. However, Investments now complains in these proceedings that this 1988 restructuring disadvantaged its interests in a way which betokened a breach of fiduciary duty owed by Westpac to Investments. As indicated, Mr Renshaw died in 1993. Mrs Renshaw is his executrix and sole beneficiary. It is convenient at this stage to identify two bank officers who gave evidence at the trial, Mr Parr and Mr Fenton. Mr Parr was Westpac's manager at Binnaway during 1985 and 1986. Thereafter the Renshaws' account was passed to a new "Agri Business Branch" of Westpac at Dubbo, where Mr Fenton was the officer with immediate control of the account at a managerial level. Mr Fenton was involved in the steps leading up to the refinancing of Investments' debt. PROCEEDINGS BELOW Two proceedings were heard concurrently by Rolfe J in June 1997. The main proceedings were brought by Westpac against Mrs Renshaw and Investments. The claim was for outstanding loan moneys severally secured on Boogadah (Mr and Mrs Renshaw's loan) and investments' three properties (Investments' loan). These proceedings resulted in judgment against Mrs Renshaw in the sum of $2.7 million and an order for possession of "Boogadah"; and judgment against Investments for $2.5 million and an order for possession of its three properties. Only Investments appeals against the orders made against it. Ultimately it has pressed only one matter, relating to the 1988 refinancing transaction. Investments claims that Westpac assumed the role of its adviser and thereby became its fiduciary, breaching its fiduciary duty in various ways. Rolfe J had rejected this contention. The second proceedings were brought by Eumina against Westpac. Eumina sought a declaration that Westpac was liable to account to it for sums of $400,000 and $300,000 received by it on about 18 December 1986 and 20 January 1987 respectively. Eumina sought consequential relief in respect of these amounts and, alternatively, equitable compensation in the sum of $3.3 million, being the sum of $700,000 and interest thereon. In essence Eumina sued Westpac as constructive trustee of the funds received by it in the summer of 1986-87, which 4 UNREPORTED JUDGMENTS it applied towards the personal indebtedness of Mr and Mrs Renshaw. Eumina brought an alternative claim based on s52 of the Trade Practices Act relying upon the same substratum of facts. These second proceedings were dismissed by Rolfe J and Eumina appeals against that decision. It is convenient to address the Eumina appeal first. EUMINA'S APPEAL Eumina's case was based on the first limb of the principle in Barnes v Addy (1874) LR 9 Ch App 244 dealing with strangers who receive and deal with trust property with knowledge of a dealing in breach of trust. The application of the principle to banks that act for trustees is illustrated by Stephens Travel Service International Pty Ltd (Receivers and Managers Appointed) v Qantas Airways Ltd (1988) 13 NSWLR 331. It was submitted that the Bank received trust moneys totalling $700,000 with knowledge that this money had been paid out of the Trust in breach of trust. The essential facts were as follows. By early 1985 the Trust had incurred tax losses amounting to approximately $96,000. Mrs Renshaw had or was shortly to receive substantial sums of money derived from an estate. It was proposed that she would make interest free loans to the trustees repayable at call so as to put the Trust in funds which it could use to invest and earn interest that would be available to offset these losses. On 11 April 1985 the family accountant recorded the arrangement in a letter to Mr Renshaw in the following terms: "T would confirm our telephone conversation today that Helen is to loan funds to the J B Crawford Trust Settlement with a view to recouping tax losses of the Trust which at 30" June 1983 amounted to $96,945. As you know, we have been unable to prepare a Trust return to the 30" June 1984, however, you have indicated that the amount of losses should be substantially the same figure at that date. It is proposed that Helen will loan $300,000 to the Trustees interest free and at call forthwith. In July 1985 she will loan a further $400,000 interest free and repayable at call. In this regard, her cheque should be made payable to the joint Trustees, namely CD Renshaw and Eumina Investments Pty Ltd. Assuming that the monies are invested by the Trust in Bank Bills at 15% per annum, the Trust will derive $90,000 over the next 12 months. Therefore by the end of April, 1986 the whole of the Trust losses should have been virtually recouped and the overall position should be reviewed at that date with a view to repayment of the loan monies to Helen. Interest derived by the Trust over the next 12 months will be used to repay the Trust debt to Eumina Investments Pty Ltd. This letter makes it clear that the purpose of the loans was to enable the trustees to invest the moneys and set off the income earned against Trust losses. Equally clear is the lender's intent that the loans would be interest free and repayable at call. Further evidence that the loan moneys originated from Mrs Renshaw and that they were intended by her and acknowledged by the trustees to be by way of interest free loan repayable on demand appears in two documents purporting to be resolutions of the trustees dated 23 April 1985 and 15 October 1985. There are indications that the dates of these documents are incorrect, but there is no reason to doubt the substance of what they purport to record. The mechanics of the loans were arranged between Mr Renshaw and Mr Parr. On 26 April 1985 an interest bearing deposit ("IBD") of $400,000 was established with the Binnaway Branch of Westpac in the name of the trustees. URRDGADAH INVESTMENTS PTY LTD v WESTPAC BANKING CORPORATION; EUMINA INVESTMENTS PTY LTD v WESTPAC BANKING CORPORATION (Mason P) The funds originated from Mrs Renshaw. The IBD bore interest at 14.8% and matured after 180 days (ie 23 October 1985). The interest earned on this IBD was credited to the Trust. The $400,000 IBD was obviously renewed on maturity. Then, on 21 April 1986 Mr Renshaw gave instructions to Mr Parr that the moneys be used to purchase a bank accepted commercial bill with a face value of $400,000. It is somewhat unclear whether this was purchased in the name of Mrs Renshaw or Mr and Mrs Renshaw. As regards the $300,000, an IBD was established on 2 August 1985. This was done by Mr Parr on Mrs Renshaw's instructions, and the funds were hers. The IBD was placed in her name. This did not accord with the accountant's proposal, but Mr Parr was never privy to that proposal. It is clear that it was Mrs Renshaw's intention that this transaction was to be treated as an advance to the trustees on similar terms to the earlier advance of $400,000. (See Mrs Renshaw's letters dated 11 April 1985 and 10 January 1987.) The trial judge found that Mr and Mrs Renshaw must have been aware of the fact that the money intended to be lent by Mrs Renshaw to the trustees through the mechanism referred to above had in fact been treated by the Bank as an investment in Mrs Renshaw's name. However neither complained about the way the second advance had been handled by Westpac. The trustees addressed the matter by passing a resolution that effectively justified the utilisation of the income against the Trust losses. Bank records reveal that the $300,000 IBD (standing in Mrs Renshaw's name) was made available as security for the indebtedness of Boogadah Company by early 1986 at the latest. A note of Mr Parr dated 20 May 1986 nevertheless records: "debtors do not wish to utilise credit funds as they use these to offset some of the interest costs". This is consistent with the arrangement whereby the interest accruing on the IBDs was to be available to offset interest costs payable by one entity or another to Westpac. It also reveals continuing unwillingness of Mrs Renshaw to release the corpus of the fund, over which she perceived herself to have some control, and see it absorbed in reduction of the substantial outstanding partnership loan to Westpac. (Ultimately she relented and the estate moneys were absorbed in reduction of partnership debts.) Pausing at this stage in the narrative, it is clear that Mrs Renshaw had lent $400,000 to the trustees interest free and repayable on demand with the intent that the moneys would be available to the trustees as a source for earning interest through the investment of that sum with Westpac. Whether or not the transaction referrable to the $300,000 should be characterised as a loan to the trustees on similar terms or some alternative transaction involving no more than a gift of interest accruing on moneys which remained Mrs Renshaw's, in the sense that she was the legal owner of the IBD with Westpac, is neither here nor there in the upshot, for reasons which I shall indicate. Rolfe J held that none of the $700,000 ever constituted trust funds of the Trust, apparently basing this conclusion upon the fact that moneys borrowed by the trustees fell outside the definition of "The Trust Fund" in cll(e) of the Trust Deed. This finding was challenged by senior counsel for Eumina, who urged that moneys borrowed by the trustees for trust purposes and in accordance with the Trust Deed (cf cl8(s)) must themselves be trust moneys regardless of the definition clause. I am inclined to think that this submission should be accepted, although it is not ultimately necessary to decide the matter. I am prepared to assume that both the $400,000 and the $300,000 advanced by Mrs Renshaw were effectively received by the trustees and thereafter invested with Westpac under an 6 UNREPORTED JUDGMENTS arrangement permitting the trustees to appropriate for the benefit of the Trust the income earned from the successive IBDs and bank bill. Eumina's case based upon Barnes v Addy requires it to be shown that these "trust moneys" were paid by the trustees without proper authority (ie in breach of trust) and were received by Westpac with knowledge of the antecedent breach of trust. It is at this point that Eumina's case breaks down. I have already referred to evidence indicating that in May 1986 the "debtors" (ie Mr and Mrs Renshaw) were telling Mr Parr that they did not wish the funds then invested in the two IBDs to be released to the Bank in reduction of Boogadah Company's overall indebtedness. This is relevant to the issue of the Bank's knowledge of the Trust and its breach at the time of disbursement of the "trust moneys". However it is also relevant as showing the understanding of the trustees (Mr Renshaw in his own right and Eumina as represented by its directors Mr and Mrs Renshaw) that the Trust's continuing access to the invested $700,000 was always in some way subject to some restraint in Mrs Renshaw's favour. The 1985 evidence makes it plain that this restraint consisted of her right as creditor to demand repayment of $700,000 at will. This is the context in which one comes to the critical events of 19 November 1986. On that day Mr Parr met with Mr and Mrs Renshaw. A diary note records:- "We again met with debtors today and feel that they have now 'seen the light'. CD [ie Mr Renshaw] advises they intend to sell a lot of cattle over next 3/4 months and also place IBD & C/Bill moneys in reduction of debt." That same day he reported to his superior within the Bank as follows: "Following today's meeting debtors have decided to become 'liquid' and are considering the following moves. 1. On maturity of IBD and Commercial Bill, place proceeds towards debts - thus saving approx $35[000] pa in interest... Partnership will borrow credit funds from Mrs Renshaw and hopefully be in a position to commence repayments of principle (sic) interest in say two years." Mr Parr was not challenged on the accuracy of these notes which recorded information that had been provided to him by the Renshaws. Following this meeting on 19 November 1986 the $700,000 was applied by Westpac in reduction of Boogadah Company's indebtedness to the Bank. The money was paid as the current investments matured, ie on 18 December 1986 (as to $400,000) and 20 January 1987 (as to $300,000). In accordance with the usual practice of creating records to evidence relevant dealings as reported to them, the family accountants prepared a letter dated 10 January 1987 from Mrs Renshaw addressed to the trustees. This letter (probably signed later in that fiscal year) gave notice that when the moneys previously advanced by Mrs Renshaw to the Trust in the sum of $300,000 matured from Westpac IBD on 13 January 1987 Mrs Renshaw wished that these moneys be repaid to her in full. No similar record was prepared in relation to the $400,000 which was standing in a Commercial Bill in the name of the trustees at the time of the meeting of 19 November 1986. In our view nothing turns upon this, because the unchallenged evidence relating to the conversation of 19 November 1986 shows that what was happening was that Mr and Mrs Renshaw were asking the Bank to make the necessary arrangements to have the $700,000 paid (when available on maturity of the respective investments) in reduction of the partnership's then indebtedness to the Bank. These instructions were carried out. On 17 December 1986, the date when the Commercial Bill with a face value of $400,000 matured, that sum was applied in reduction of Boogadah Company's URRDGADAH INVESTMENTS PTY LTD v WESTPAC BANKING CORPORATION; EUMINK INVESTMENTS PTY LTD v WESTPAC BANKING CORPORATION (Mason P) debt to Westpac. When the IBD for $300,000 matured on 13 January 1987 this sum was also credited by the Bank to the Boogadah Company account. Rolfe J was satisfied that Mrs Renshaw knew that payment had been made and the reasons why it was done, and that she fully acquiesced in the transaction. In my view this is a classical example of the principle stated by Mellish LJ In Re Harmony and Montague Tin and Copper Co (Spargo's Case) (1873) 8 Ch App 407 at 414: "Indeed, it is a general rule of law, that in every case where a transaction resolves itself into paying money by A to B, and then handing it back again by B toA, if the parties meet together and agree to set one demand against the other, they need not go through the form and ceremony of handing the money backwards and forwards." What happened in substance and legal effect was that Mrs Renshaw as creditor made demand upon the trustees as debtors requiring the trustees to repay the $700,000 as and when the then current investments matured. Those trustees (represented by Mr Renshaw and the two directors and shareholders of Eumina) responded to that demand. This was entirely proper, given the terms upon which the money had been lent. Rather than having a "round robin" of cheques, the parties requested the Bank to use the moneys when available in partial reduction of the indebtedness of Boogadah Company. This is what the Bank did. In these circumstances there was no breach of trust. Nor did Westpac receive trust moneys. What was received by the Bank and credited to the partnership bank account was money belonging to Mrs Renshaw who thereafter was treated as having advanced that money to the partnership of which she was a member. There being no breach of trust or receipt of trust funds it is unnecessary to consider the Bank's additional defences to the Barnes v Addy claim. The trial judge found that Westpac was not fixed with the requisite notice either of the trust in relation to the $700,000 or the alleged breach. I do not consider it necessary to consider the appellant's challenge to these findings. Nor is it necessary to concern myself with additional matters raised by Westpac in a Notice of Contention. Eumina's separate case based on s52 of the Trade Practices Act was not pressed as an independent claim. Eumina's appeal should be dismissed. APPEAL BY BOOGADAH INVESTMENTS PTY LTD Investments appeals against the trial judge's rejection of its claim for equitable compensation and interest. It is submitted that Westpac breached its fiduciary obligation to its new customer when it paid out Investments' loan to the Commonwealth Bank and took security over its three rural properties in July 1988. The fiduciary obligation was said to arise because the Bank had become an investment adviser to Investments: cf Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 at 391. The alleged breach was not based on any negligence on the part of the Bank (cf Nocton v Lord Ashburton [1914] AC 932), but rather the failure by the Bank to disclose its actual knowledge that Investments' grazing operations were not viable and that Westpac's object in taking security over Investments' properties and lending the sum it did to Investments was to reduce Boogadah Company's partnership debts. Rolfe J held that there was no fiduciary obligation and no breach. In my view he was correct on both points. My reasons follow. 8 UNREPORTED JUDGMENTS Senior counsel for Investments frankly acknowledged the difficulty he faced in the light of the role played by Mr Renshaw and the trial judge's (unchallenged) findings about the knowledge, experience and reliance of Mr and Mrs Renshaw upon Mr Renshaw's abilities to make informed decisions. What brought these findings into focus in the present appeal was the fact that Mr and Mrs Renshaw were the sole directors and shareholders of Investments, with the consequence that their knowledge, experience and self-reliance were to be imputed to Investments itself. Nevertheless, the way the case was put for Investments was as follows. Mr Fenton became the Westpac officer who dealt with Mr and Mrs Renshaw in early 1987. He learnt of the existence of Investments as a "family holding company for children" and of the fact that it did its banking business with the Commonwealth Bank at Coonabarabran. Mr Fenton set about trying to woo the banking business of Investments. Starting from 26 March 1987 Mr Fenton presented the Renshaws with computer printouts showing projected income and outgoings for the combined family farming and grazing operations. Most of the raw data came from Mr Renshaw, and was adjusted from time to time as errors were detected or circumstances changed. At this stage the partners of Boogadah Company were well over their existing overdraft limits with Westpac. The $700,000 originating from Mrs Renshaw that was the subject of the Eumina appeal had been paid in reduction, but the bank remained concerned with the state of the account. Mr Renshaw's reluctance to sell stock and a shortfall in anticipated income from wheat meant that by January 1988 Mr Fenton had to promise his superiors to undertake a full review of the account after discussion with the customers. At this stage facilities of $923,000 had been extended to the partnership against security valued by the bank at $1,079,000. Mr Fenton was aware that this security ("Boogadah") represented only about half of the land being used by the Renshaw family. (The other half was represented by Investment's three properties, then mortgaged to the Commonwealth Bank.) On 15 January 1988 Mr Fenton visited Mr and Mrs Renshaw at Boogadah. He expressed concern about the level of partnership indebtedness and spoke of the possibility of obtaining more security. It would have been obvious to all that he was referring to Investments' land. On 27 January he wrote to the Renshaws expressing "concern in the trend of the account over the past 12 months ". A deficit of $326,000 outgoings over income was detailed, and it was noted that this had occurred in a good season. On 29 January 1988 Mr Fenton reported to his superiors in the bank that the outcome for the past 12 months looked "alarming", although he considered that there was still "a good margin" without allowing equity from any other source. He reviewed the long history of the banking connection and emphasised the need to look at and budget for the overall position of the partnership and "their investment holding company". He concluded that "overall, continuation of assistance [was] warranted but on our terms from here on and with additional security requirements met in need". A spreadsheet containing projected income and outgoings for the year commencing 28 January 1988 was prepared by Mr Fenton using raw data supplied to him by Mr Renshaw. It showed an anticipated loss on operations of $95,000. On 12 February 1988 Westpac's Manager, Commercial Lending, wrote to Mr Fenton, appreciating URRDGADAH INVESTMENTS PTY LTD v WESTPAC BANKING CORPORATION; EUMINA& INVESTMENTS PTY LTD v WESTPAC BANKING CORPORATION (Mason P) "difficulties encountered by [Mr Fenton] in his dealings with these apparent [sic] wealthy people who appear reluctant to divulge required information. Negotiations will need to be continued in an effort to obtain the necessary financial positions and additional security especially with our high loan security ratio of 93.5%." A later memo (dated 16 February 1988) from the same officer expressed the view that: "Tt is obvious, on rural figures supplied, serviceability is suspect and sale of assets to obtain serviceability may be required." Investments relies on these and other internal memoranda to show that officers of Westpac were concerned with the extent of security held by the bank in early 1988 in respect of Boogadah Company's indebtedness. It is clear that the officers were concerned. However, equally clear is the fact that the Bank (through Mr Fenton) drew its concerns to the attention of Mr and Mrs Renshaw: see the dealings in January 1988 already cited, and the dealings referred to below. On 17 February 1988 Mr Fenton wrote to Mr Renshaw advising inter alia:- "I feel that, in the overall interest, it would be advisable to look at the total scenario of Boogadah Company and Boogadah Investments Pty Ltd so that we can allow for the joint position and see if there are useful recommendations we can make for your consideration." Investments complains that no mention was made in this or other letters to Mr Renshaw as to the need for sale of assets. There is nothing in this complaint. In the first place, Investments had not become the bank's customer at that time. Secondly, it is inconceivable that a man of Mr Renshaw's experience and character would have relied upon a bank officer in relation to an operational decision as to the optimum time to sell stock. Thirdly, it would have been obvious to all concerned that the sale of any asset would have reduced the level of Boogadah Company's indebtedness to the bank if the proceeds were paid to the bank. Indeed there was evidence, which Rolfe J accepted, that Mr Renshaw had discussed with Mr Fenton the possibility of selling property to reduce overall indebtedness.! In its written submission Investments also complains that the bank did not alert it to the bank's concerns about the state of Boogadah Company's accounts. This submission does far less than justice to the letters of 27 January 1988 and 17 February 1988 to which reference has been made. But once again, the submission goes nowhere when it is recognised that Mr Fenton had not commenced to provide advice to Investments at this point of time, notwithstanding that he may have foreshadowed his intention to obtain Investments as a customer under some refinancing arrangement. In any event Investments was relevantly represented by Mr and Mrs Renshaw, Mr Renshaw in particular, with the consequence that the advice that was given by the bank to the Renshaws was relevantly advice to Investments (if one assumes any involvement by Investments at this point of time). It was never suggested that the bank owed a fiduciary obligation to Mr Renshaw, and Mrs Renshaw's claim that it owed one to her individually was rejected by the trial judge. That rejection is not subject to appeal. By April 1988 Mr Fenton calculated the partnership's exposure to the bank at $1.036 million against an assessed security value of $1.136 million. On 2 May Mr Fenton rang Mr Renshaw and told him that the account "was getting up pretty high ". Mr Renshaw was questioned as to when income would next be received and he told 1. Judgement p99-p100. 10 UNREPORTED JUDGMENTS Mr Fenton that he expected that 200 steers would be sold by the end of the month. Arrangements were made for a "balance sheet review" by the end of the month and Mr Fenton told Mr Renshaw that "we need to look at increasing our security cover". This conversation was followed up by a letter to Mr and Mrs Renshaw on 6 May. The letter noted that the partnership debt stood at $1.1 million and that even with proceeds to hand from cattle sales later that month, "the level of debt is now such that our security position needs to be bolstered.... [D]ebt is back up and the remaining security is too thin for our lending ratio requirements at that level ". On 27 May 1988 Mr Fenton discussed the account with Mr and Mrs Renshaw at their property. Budget calculations were made with the figures provided by the Renshaws. These budget calculations forecast a loss of $22,352 for the ensuing year. Nevertheless Mr Fenton shared the Renshaws' optimism, to some degree. His view recorded in his internal memo was: "Removing allowance for purchases of cattle it appears that they should be able to at least, hold position, however overall expenses are too high and there is some dependency on cropping." Internal bank memoranda and the objective facts make it plain that from the bank's point of view additional security was required in order to "regularise a long standing out of order and unsecured account" (Mr Watson's memo dated 7 June 1988). From the bank's point of view improved security reduced its risk. From Mr and Mrs Renshaw's point of view the refinancing transaction enabled Boogadah Company to continue to enjoy borrowing facilities, with benefits to them personally and, ultimately, the capacity to continue to run what was essentially a single business on four combined properties. The proposal that led to the refinancing arrangement was set out in a letter from Mr Fenton to Mr and Mrs Renshaw dated 8 June 1988. So far as relevant the letter provided: "Further to our recent discussion I am pleased to advise approval of facilities, as outlined hereunder, for continuance of your partnership and personal financing needs, and to takeover debt of Boogadah Investments Pty Ltd from Commonwealth Trading Bank Coonabarabran - which debt we understand it in the vicinity of $350,000. Facilities available are:- - Fixed Rate Bill Discount Line $500,000 fixed rate 15.25% all up, for 2 years then review for continuing terms/conditions $200,000 fixed rate 15.50%, all up, for 3 years then review for continuing terms/conditions Note: both these facilities have been "locked in " for you to obtain the benefit of current rates - Term Loan $500,000 subject to a normal review for repayments. Interest at our Indicator Rate (ILR) as expressed from time to time, plus a margin of 1.50%pa and Loan Administration Charge. URRDGADAH INVESTMENTS PTY LTD v WESTPAC BANKING CORPORATION; EUMINA INVESTMENTS PTY LTD v WESTPAC BANKING CORPORATION (Mason P) - Overdraft Limit $200,000 peak debt basis and subject to annual review for reduction. Interest/Fees as above for Term Loan plus an unused limit fee of 1.50% pa. Security to be that already held plus additional registered mortgage(s) over properties known as "Balveriers" (Boogadah Mountain), "South Boogadah" and "Barang" which we understand have a total area of 2069 ha (5110 acres).... Your total liability to Westpac will be M$1.4 and this figure, viz a viz property income, makes for an onerous debtload and one to which you will need to apply firm control of expenses outgo. In this latter regard we believe you should immediately review the ongoing benefits (or lack thereof) of continuing the Bahamas company connection particularly in light of changes recently announced in the Treasurer's recent May Statement. A budget with monitoring arrangements needs to be put in place and we will be pleased to assist in that regard so that firm control of expenses is exercised to the benefit of income. The new facilities include an allowance to payout personal debt in Helen's account. Trusting this is satisfactory and is as discussed with you." Not long after this letter Mr Stephen Renshaw, the adult son of Mr and Mrs Renshaw, told Mr Fenton that the family was unwilling to extend all borrowings to the partnership on the basis of a third party security from Investments. Mr Fenton understood from this that the family wanted to maintain a segregation of the partnership debt and company debt. Nevertheless, little would have been gained (from the bank's point of view at least) from the simple expedient of substituting Westpac for the Commonwealth with respect to Investments' borrowing. It was plain to all concerned that the bank was only prepared to refinance all borrowings if it could improve its security position. This had been discussed between Mr Fenton and Mr and Mrs Renshaw. Mr Fenton went to Boogadah on 27 June. The Renshaws informed him that they had decided that they wanted the takeover of the Commonwealth debts to remain in Investments name. As a result of this visit Mr Fenton worked out a scheme which involved lending $600,000 to Investments on the security of its land (calculated at a ratio of 50%) and $900,000 to Boogadah Company on the security of its land (calculated at a ratio of 79%). Since the figure required to pay out the Commonwealth Bank was $408,000 it followed that, by spreading the bank's security in the way proposed by Mr Fenton, the Bank alleviated its security position vis a vis Boogadah. Of course, this would have been apparent to all concerned. It must not be overlooked that Mr and Mrs Renshaw were liable on their personal covenants for Boogadah Company's existing indebtedness. It may be said that they eased this liability by involving Investments in the way they did. But they were entitled to make decisions that bound Investments, and it is not part of Investments' case against Westpac that the Bank was complicit in some breach of fiduciary duty owed by Mr and Mrs Renshaw as the directors of Investments. The trial judge's finding that Mrs Renshaw acquiesced in her husband's decision to instruct Mr Fenton to refinance the transaction in this way (judgment p7) is unchallenged. So too is his finding (p101-p102) that Mr Renshaw agreed to the deal involving lending $900,000 to Boogadah Company and $600,000 to Investments. 12 UNREPORTED JUDGMENTS The documents relevant to the refinancing were executed on about 15 July 1988. The Commonwealth Bank was paid out and Westpac took a fresh mortgage from Investments over its three properties. WAS THERE A FIDUCIARY RELATIONSHIP? Investments pleaded that Westpac had undertaken an obligation of a fiduciary character to disclose to it "all relevant considerations in the knowledge of" Westpac concerning the refinancing proposal. What was pleaded not to have been disclosed by Westpac to Investments during June 1988 was:- "either [Westpac's] existing view as to the lack of viability of the business operations or Westpac's uncommunicated wish to improve its security position at the expense of Investments." In the case at trial this allegation was accompanied and reinforced by an allegation that the Bank was aware that Mrs Renshaw in her own right and as a director of Investments was under a special disability. However, the fiduciary claim raised by Mrs Renshaw as one of several defendants in proceedings brought by Westpac was rejected by the trial judge, and there is no appeal from that rejection. In considering whether Westpac owed a fiduciary duty to Investments Rolfe J instructed himself in accordance with familiar statements in Hospital Products Ltd v United States Surgical Corporation and Ors (1985) 156 CLR 41 at 68-9, 72, 96-100 and 141-2, Kelly v CA & L Commodities Corporation Pty Ltd (1989) 18 NSWLR 248 at 258-9 and Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 at 391-2. His Honour then addressed the evidence of the key witnesses at length. In her statement Mrs Renshaw had given evidence of discussion with her husband in early 1988 in relation to Mr Fenton's proposal that all the properties "should be put under the one umbrella with Westpac". However she said that she did not believe that Westpac was seeking to obtain further security over investments properties beyond the money which was advanced to pay out the loan then owed to the Commowealth Bank by Investments. According to para22 of her statement, if she had believed at the time when she executed the mortgage on behalf of Investments that the Bank was seeking to improve its overall security position or that the Bank regarded the extent of Boogadah Company's borrowings as risky or excessive, then she would not have agreed on behalf of Investments to refinance the Commonwealth Bank borrowings. In cross examination she agreed that she had been present at conversations with her husband when Mr Parr expressed concern about the level of Boogadah Company's indebtedness. She agreed that in early 1988 Mr Renshaw discussed with her that Mr Fenton was expressing serious concern about the trend in the account for the previous 12 months and that it was going to be necessary to do something about the debt the partnership owed Westpac. Notwithstanding Mrs Renshaw's assertions to the contrary, the trial judge held that he was satisfied that she was aware the Investments properties were. mortgaged and that its financial position was not good (Judgment p49). In cross examination she admitted that Mr Fenton had expressed concern to her and her husband about the Bank not having enough security to cover the amount of money the partnership owed Westpac. She agreed that the transactions that were proposed to take place in July 1988 were intended to achieve the result of improving Boogadah Company's position in connection with Westpac (ie the bank's equity), and to do that by giving Westpac additional security. On the basis URRDGADAH INVESTMENTS PTY LTD v WESTPAC BANKING CORPORATION; EUMIN& INVESTMENTS PTY LTD v WESTPAC BANKING CORPORATION (Mason P) of these answers the reamed trial judge held that Mrs Renshaw had knowledge of the indebtedness, Westpac's concern about it and its concern that it did not have sufficient security, which position it wished to rectify. Mrs Renshaw was also aware that Mr Fenton was suggesting a better interest rate than that charged by the Commonwealth Bank, this being a further matter of concern to her husband at the time. Mr Stephen Renshaw's evidence also demonstrated the Mr Renshaw senior was concerned about the interest rates being charged by the Commonwealth Bank to Investments in early 1988. In dismissing so much of the defence to Westpac's claim as relied upon Mrs Renshaw suffering from a special disability the learned trial judge said: "The evidence of Mrs Renshaw does not establish that she was under any special disability of the type to which Mr Ireland [senior counsel for Investments and Mrs Renshaw at the trial] referred. She impressed me as a lady of intelligence, who understood the general financial position. Undoubtedly she left the details of much of her financial affairs to Mr Renshaw, which, in all the circumstances, was not unreasonable for she trusted him. No reason was advanced why she should not have done so. It was said, on several occasions, that Mrs Renshaw is aged eighty years. However, at the time of the relevant events she was some ten years younger." Rolfe J summarised his reasons for rejecting Investments' claim that there was a fiduciary relationship in the following terms:2 "Tt was submitted on behalf of Investments that the activities of Westpac amounted to giving advice, which cast it in the role of a fiduciary. I disagree. In my view Westpac was trying to find a way whereby the various Renshaw accounts could be brought into order and the amount of interest payable to the Commonwealth Bank reduced. This was being done, no doubt substantially for the benefit of Westpac, but not in circumstances where advice was being given of the type or quality necessary to create a fiduciary duty. At the time Mr and Mrs Renshaw and Investments owed substantial amounts and Westpac, in conjunction with them, was trying to bring about a situation which would assist the financial position. There could be no suggestion that Westpac was acting for or on betray of the Renshaw interests, save to the extent of providing some solutions, which might satisfy its requirements to have the debt situation regularised." I agree with this analysis. His Honour next addressed the evidence of Mr Stephen Renshaw, the adult son of Mr and Mrs Renshaw. He was party to several of the discussions in early 1988 leading up to the refinancing transaction. For example he discussed the letter of 8 June 1988 with his father. The trial judge found that this discussion showed that he and his father had a lively appreciation of the offer being made by Westpac and of the Renshaws' desire to keep the accounts separate. This desire had been communicated by Mr Stephen Renshaw to Mr Fenton on about 27 June 1988. The evidence of Mr Renshaw junior and of Mr Fenton concerning subsequent discussions on this topic, leading up to the execution of the security documents referable to the refinancing transaction, is set out and reviewed in detail at p64-p76 of the judgment. The terms under which Mr Renshaw junior participated in these discussions were relied upon by Rolfe J in his conclusion that Mr Renshaw junior understood the financial position of all of the relevant parties as well as what was being put forward by Westpac in relation to the proposed restructuring. Since he had participated in his parents' discussions that led to 2. Judgment p64. 14 UNREPORTED JUDGMENTS them executing the relevant documents, this evidence and the trial judge's assessment of it was (in my view) properly considered relevant to the rejection of the claim that Westpac was assuming a fiduciary role vis a vis Investments (Judgment p74). The next witness whose evidence was referable to Investments' case was Mr Fenton, who was found by Rolfe J to be a totally credible and reliable witness. In particular his Honour concluded that the computer-based budgeting information prepared from 1987 onwards was based on information furnished by Mr Renshaw, save for projections in relation to banking matters which were made by Westpac. In rejecting the case based upon the preparation of the budgets as showing the way in which Westpac was giving advice, the learned judge held that the evidence did not rise above Westpac3 "putting information into its computer and producing a result, based on the client 's figures, which could have been derived by a far more laborious process. Westpac was not purporting to give any advice as to how the farming and grazing operations were to be run. Its concern was to produce figures based on the clients' input to see how the debt to it could be reduced. It had a very real interest in this." I respectfully agree. His Honour held, in my view correctly, that the letter dated 27 January 1988 was in truth no more than a provision of advice as to the state of Boogadah Company's account and the need to take steps to bring it into order. "Westpac was seeking to further its own interests to try to ensure that its debt was repaid. But it was not doing so in circumstances which would lead to the creation of a fiduciary duty conformably with the authorities...."" Again, I agree. I would add that it is very difficult to see how this letter (written in January 1988) could be seen as advice to Investments as distinct from Mr and Mrs Renshaw to whom it was addressed. Whatever Mr Fenton's intentions at the time, there was nothing at this time to indicate that discussions were taking place between the parties on the topic of Investments becoming a customer of Westpac. Rolfe J was also correct in rejecting the submission that Mr Fenton's letters of 17 February 1988 and 6 May 1988 represented the proffering of any advice which could lead to the creation of a fiduciary duty. He was also correct to emphasise that the later letter written to Mrs Renshaw emphasised the total indebtedness of Boogadah Company, the need for the Bank's security position to be bolstered, and the necessity to give the matter consideration in the light of the figures. This shows that there would have been no breach of any fiduciary obligation, had it existed.. It is to be remembered that Investments' claim that the Bank breached its fiduciary obligation centred upon an alleged failure by officers of the Bank to reveal two matters of significance of which it was said the Bank had actual knowledge in mid-1988, namely (a) Westpac's belief that the farming and grazing operations as a whole were not viable in the circumstances at that time; and (b) Westpac's wish to improve its security position at the expense of Investments. As to (a) Rolfe J accepted Mr Fenton's evidence when he said that he did not think that the farming and grazing operations were not viable. The trial judge's acceptance of this denial (that had been tested in cross examination) was one which was clearly open on the evidence. Consistent with the principles in Abalos v Australian Postal Commission (1990) 171 CLR 167, the challenge to this finding must fail. In mid-1988 Mr Renshaw was representing strongly that he 3. Judgment p93 URRDGADAH INVESTMENTS PTY LTD v WESTPAC BANKING CORPORATION; EUMINA INVESTMENTS PTY LTD v WESTPAC BANKING CORPORATION (Beazley JA) expected that the family would be able to service the several debts. The Bank officers may have been sceptical, but that is far removed from saying that they knew at the time that a crash was inevitable. In the appeal senior counsel for Investments laid particular emphasis upon a concession made by Mr Fenton (AB 374) when he conceded that the situation had become hopeless within 6 months of the refinancing transaction. But this went no further than a concession based on retrospection. As to (b) the dealings to which I have referred reveal clearly that the Bank disclosed its wish to improve its overall security position as a price for the refinancing. The trial judge's finding that Mr and Mrs Renshaw knew this has already been mentioned. Rolfe J returned to the fiduciary case at p108-p112 of his judgment. I shall not set out this passage, with which I respectfully agree. His Honour's conclusion was: "Tn the result I am of the view that the facts do not establish that Westpac was in a fiduciary relationship with Mr and Mrs Renshaw or with Investments. At all times it informed them of the steps it was prepared to take - steps which, in the end, were dictated and acquiesced in by Mr and Mrs Renshaw and Investments with full knowledge of all material and relevant facts. This defence must, accordingly, fail." The evidence I have summarised shows that this conclusion was entirely justified. Investments' appeal should also be dismissed. Handley JA I agree with the judgment of Mason P and only wish to add some brief remarks on the question of the $700,000 borrowed by the trustees of the Julia Beatrice Crawford Trust Settlement from Mrs Renshaw. The trial Judge thought that the borrowed monies did not become trust funds because they fell outside the definition of "the trust fund" in cll(e) of the Deed. This is a narrow definition limited to capital monies received from the settlor and others as accretions to the trust, any accumulated income, and the property for the time being representing such monies. The definition is not comprehensive because it does not include income derived by the trustees from the trust assets unless and until it is accumulated. Such income is not derived beneficially by the trustees and is, without doubt, an asset of the trust. In my judgment monies borrowed by the trustees on behalf of the trust are in the same category, the proceeds becoming a trust asset, and the debt a trust liability. Beazley JA I have had the advantage of reading in draft the judgments of Mason P and Handley JA, with which I agree and have nothing to add. I agree with the orders proposed by Mason P. Appeals dismissed with costs. Counsel for the appellant: J Ireland CJ and J Stuckey-Clarke Solicitors for the appellant: Nicholas Eddy & Co Counsel for the respondent: R McColl SC and D Pritchard Solicitors for the respondent: Henry Davis York