New South Wales Court of Appeal CITATION : Cole v. Kealey [2001] NSWCA 336 FILE NUMBER(S) : CA 40922/00 HEARING DATE(S) : 14 September 2001 JUDGMENT DATE : 14 September 2001 PARTIES : Terry Cole - appellant John Kealey - respondent JUDGMENT OF : Heydon JA at 44; Hodgson JA at 1; O'Keefe J at 45 LOWER COURT JURISDICTION : District Court LOWER COURT DC4706/97 FILE NUMBER(S) : LOWER COURT Payne DCJ JUDICIAL OFFICER : COUNSEL : Mr. T. Somers for appellant Mr. R.P. Greenhill SC with Mr. I. Mescher for respondent SOLICITORS : Clinch Neville Long, Sydney for appellant V. Gavdik & Co., Beecroft for respondent CATCHWORDS : CONTRACT - Loan - Whether to company or principal of the company - No appealable error by trial judge. ND DECISION : Appeal dismissed with costs. IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40922/00 DC 6707/97 HEYDON JA HODGSON JA O'KEEFE J Friday, 14th September 2001 COLE V. KEALEY Judgment 1 HODGSON JA: On 30 October 2000 Payne DCJ gave judgment in favour of the respondent, John Kealey, against the appellant, Terry Cole, in the sum of $100,000 plus interest at 11 percent. Although this is not spelt out in the appeal papers, I assume this means interest at 11 percent per annum from 27 September 1996, the date of the relevant advance, and I assume that the primary judge either did or would have awarded the costs of the proceedings against the appellant in favour of the respondent. 2 Mr. Cole appeals from that judgment. Before considering the grounds of appeal, it is convenient to outline the relevant circumstances. 3 In September 1995, Mr Kealey took up an accounting position with Mr Cole's group of companies, one of which was the company CAV Australia Pty Ltd, which I will call CAV. 4 On 3 June 1996 Mr Kealey signed a letter addressed to one of CAV's suppliers, namely, NEC Australia Pty Ltd, which I will call NEC. That letter was in the following terms. The undersigned herewith Guarantees NEC Australia in the sum of ($100,000.00) One hundred thousand Dollars for on behalf of the Account namely CAV Australia Pty. Ltd. of 219 Beecroft Road, Cheltenham, NSW, 2119. This guarantee is secured on Term Deposit held by The Commonwealth Bank, Baulkham Hills, 2153 term deposit No.2279 50153058 commenced on 28/5/96. I hereby acknowledge that this guarantee to you shall stand as collateral should CAV Australia Pty. Ltd. fail in their Account obligations as Agreed by NEC Australia Pty. Ltd. and CAV Australia Pty. Ltd. As per their credit account. The term deposit referred to in that letter was in an amount of $60,000. 5 On 25 June 1996 the Commonwealth Bank of Australia (CBA) wrote to Mr Kealey a letter in the following terms. The documents described below are provided herewith for your signature. Your present maximum liability to the Bank under the documents is $104,000-00 plus interest, costs, charges and expenses as provided in the documents. Prior to signing the documents you should satisfy yourself that you understand the full nature and effect of your liabilities to the Bank and obtain appropriate advice, legal or otherwise, if you are at all uncertain of your position. Your signature to the documents should be witnessed by an adult person (specially qualified where so called for in the documents) who is not the borrower/debtor and/or a co-guarantor/mortgagor (if any) under the documents. Documents Guarantee by you in respect of the indebtedness to the Bank of CAV Australia Pty Ltd (debtor), liabilities under which are secured by Letter of Set-Off by you over Term Deposit account nos. 2279 5015 3058 and 2279 5015 3159 lodged at Baulkham Hills NSW branch. 6 One of the term deposits referred to in that letter was the same as that referred to in Mr Kealey's letter to NEC, and the other was a term deposit for $40,000. 7 On 16 July 1996, Mr Kealey signed a guarantee of CAV's debt to CBA as contemplated in the 25 June letter. 8 On 27 September 1996 Mr Kealey provided a cheque for $100,000 in favour of CAV, which was paid into CAV's account for the purpose of the proceeds being used to pay a debt of CAV owing to NEC. 9 On 16 October 1996, Mr Kealey's business, previously carried on under the name Keajon Construction Software, was incorporated under the name of Keajon Pty Ltd. 10 On or about 29 November, 1996 Mr Kealey advanced a further $17,000 which, it seems, was used for the benefit of another company in the CAV group, namely, Videocel Australia Pty Ltd (Videocel). 11 On 17 April 1997 Mr Kealey and Mr Cole both signed a document in the following terms: This is an Agreement between JOHN KEALEY and TERRY COLE dated 17th April, 1997. LOAN AGREEMENT - PRINCIPAL OF S217,OOO LENT TO THE CAV GROUP OF COMPANIES. The above amount was lent by Keajon Pty. Ltd. as follows - $60,000 term deposit, and $40,000 term deposit was placed in Commonwealth Bank of Australia to cover an overdraft on CAV Australia Pty. Ltd. on 16th July, 1996. $100,000 as payment of debt due to NEC for CAV Australia Pty. Ltd. on 27th September, 1996, and $17,000 was lent to CAV Victoria Pty. Ltd. to cover goods on 29th November, 1996. It is agreed by both parties that an effective interest rate of 11% per annum be paid on this principal amount only being $217,000, and the interest component would reduce accordingly when the principal is reduced. THE INTENT The intent is to start paying interest of $460 per week to Keajon Construction Software, payable fortnightly. Based on the following calculations of when the capital was introduced, the current interest due to date equals $15,152.86. As mentioned above, the interest will reduce as the principal of $217,000 reduces, however, the effective rate will always be 11% per annum, PRINCIPAL It is intended for Terry Cole to have his Accountants in Sydney present the Company's books to his Bank with the intent to achieve a loan of approximately $100,000 to S150,000. Upon obtaining this loan, an amount of up to $100,000 is intended to be used to repay the current CAV Australia overdraft of S100,000 being to repay part of the principal off the loan. This will allow two term deposits or part thereof to be released to Keajon Pty. Ltd. therefore reducing the debt. This would leave a balance of principal and interest. We would intend to clear the debt by paying principal of $20,000 to $30,000 each quarter to Keajon Pty. Ltd. This is all subject to realistic sales targets being achieved, however, the intent is to clear the debt as soon as possible. 12 On the same day Mr Kealey's employment or engagement with the CAV group was terminated. 13 On 30 April 1997, administrators of CAV were appointed under s 436A of the Corporations Law. 14 On 6 May 1997, Mr Kealey had a telephone conversation with Mr Gladman, who was employed in the office of the administrators. As recorded in notes by Mr Gladman, the conversation was to the effect that Mr Kealey was owed $200,000 by CAV and $17,000 by Seleco, another CAV group company. However, in cross-examination, Mr Gladman agreed that it accorded with his best recollection that Mr Kealey said in that conversation, "I am not a creditor of CAV. They were personal loans." 15 A letter of the following day from Mr Kealey's solicitors to the administrators asserted that Mr Kealey would not lodge a proof of debt in CAV "unless and until his legal rights have been examined and established". 16 On 28 May 1997, CAV went into liquidation. On the same day, solicitors acting for Mr Kealey wrote a letter to Mr Cole alleging loans totalling $217,000 from Mr Kealey to Mr Cole and requiring repayment. 17 On 12 June 1997, CBA, pursuant to the guarantee of 16 July 1997, appropriated the proceeds of the two fixed term deposits towards payment of debts owing by CAV to CBA. 18 On a date which appears to be 31 July 1997, these proceedings were commenced by Mr. Kealey in the District Court, claiming that Mr Cole promised to repay the amount of the fixed term deposit given as security to CBA if the guarantee was not discharged, claiming that $100,000 had been lent to Mr Cole on 27 September 1996 and claiming that $17,000 had been lent to Mr Cole on 29 November 1996. Accordingly, in the statement of claim, Mr Kealey claimed $217,000 plus interest from Mr Cole. 19 On 15 December 1997, Mr Kealey commenced proceedings in the Local Court against Videocel, claiming on the basis of a loan of $17,000 made to Videocel on 29 November 1996. A cheque for $19,986.52 was paid in settlement of that claim on 3 June 1998. 20 Mr Cole's defence to these proceedings was to the effect that the liability for $200,000 was a liability of CAV and not Mr Cole, and that the $17,000 had been lent to Videocel and had been repaid. 21 Mr Kealey gave evidence of conversations at the time of each of the advances, to the general effect that Mr Cole was undertaking to repay them, and that Mr Cole was the borrower, at least in relation to the second and third advances. Mr Kealey gave evidence that Mr Cole gave him a statement of Mr Cole's personal assets and liabilities on 12 or 13 July 1996, so as to assure him of Mr Cole's ability to repay the loans. 22 Mr Kealey gave evidence that on 27 April 1997 he was first shown a form of agreement in which he agreed not to take any action against Mr Cole if he refused to sign, and then subsequently on the same day was shown an agreement in the form which was signed, which he did in fact sign in circumstances of some stress because of the termination of his engagement. 23 Mr Cole denied the conversations to the extent that they had the effect of suggesting personal liability in Mr Cole. He claimed that he had first seen the statement of his assets and liabilities as an annexure to Mr Kealey's affidavit in the proceedings. He claimed that he and Mr Kealey together had drawn up the document of 27 April 1997. 24 Evidence was given in the proceedings by one Valerie Meehan, who was employed as a secretary by CAV from May 1996 until the appointment of the administrators, to the effect that she prepared the statement of assets and liabilities at the direction of Mr Cole from a document containing handwritten amendments, and that she had typed up the document of 27 April 1997 at the dictation of Mr Cole. 25 The primary judge accepted Miss Meehan's evidence on the first point, and rejected Mr Cole's evidence that he first saw the document annexed to Mr Kealey's affidavit, but, by reason of the content of the statement of assets and liabilities, held that the document had not been prepared prior to October 1996 and that Mr Kealey did not see it until after October 1996. 26 The primary judge found in favour of Mr Kealey in relation to the advance of $100,000 made on 27 September 1996 and in favour of Mr Cole in relation to the other two advances, giving the following summary of reasons. Accordingly in this case matters of credit and honesty and reliability are not and cannot be completely determinative. I have in considerable detail in this judgment referred to the evidence. I can of course accept part of what a witness says and reject other parts. I must also bear in mind the standard of proof on the balance of probabilities and the onus it being on the plaintiff. In relation to the money provided by way of security in the form of two term deposits in the sum of $100,000 on 16 July 1996 to enable CAV to have an overdraft in addition to all of the matters noted above in a summary way only I note the following considerations: (1) The plaintiff had been prepared on 3 June 1996 shortly before to be a guarantor in the sum of $100,000. He guaranteed to NEC Australia on behalf of CAV Australia. One of the term deposits, No 22795015058 in the sum of $60,000 was utilised on 3 June 1996 and again on 16 July 1996. The occasion of 16 July 1996 related to the ability of the company to continue trading with NEC. The first replaced the second. As he had done it once before and only shortly before in my view a reasonable inference can be drawn that he was prepared to do it again. (2) One of the reasons as to why he did what he did on 3 June 1996 was otherwise nobody would have got paid, including himself. No doubt this consideration was still applicable as at 16 July 1996. (3) The letter from the Commonwealth Bank Annexure A to Exhibit P1 dated 25 June 1996 concerning the overdraft facility. This brings his intention to provide continue financial accommodation closer to 3 June 1996. (4) He was prepared to advance money to a company even though a much lesser amount on 29 November 1997. He lent $17,000 to Videocel Australia Pty Limited being the company itself. (5) My findings as to the Assets and Liabilities document. (6) The equivocal content of the Agreement of 17 April 1997. (7) I do not find any real assistance from the evidence concerning the failure of CAV outlined above. Either side argued it supported their case but ultimately the respective submissions go back to what the plaintiff and the defendant each said or provided to Mr Gladman and the accounting firm. Accordingly having considered all of the evidence and the written submissions I am not satisfied it is more probable than not this loan was a personal loan. I am of the view it is more probable the money was lent to the company itself. In relation to the second advance or loan on 27/9/1998 of $100,000 by way of Mr Kealey's personal cheque payable to CAV, in addition to all of the matters noted above in a summary way only I note the following considerations: (1) The plaintiff must have realised by this time the difficulties CAV was experiencing. (para 25, Exhibit P1) (2) This money was meant to be invested in a property. (para 16-21, Exhibit P1) (3) An emergency situation arose. I accept the conversation related in paragraph 22 of Exhibit P1 did take place. The plaintiff expected to receive "20 per cent" for his trouble. (4) The plaintiff made an admission not to his credit as to why the cheque was made payable to CAV rather than NEC. (5) The lack of evidence from the defendant or any explanation as to how this $100,000 came to be advanced. (6) The inconsistency in the defendant's affidavits as to how the money this money was spent. (7) This advance was quite different from the method used on 3 June 1996 and 16 July 1996. Accordingly having considered all of the evidence and the written submissions I am satisfied it is more probable than not this loan was a personal loan. In relation to the $17,000 in cash the plaintiff said he lent Mr Cole for the use of Seleco in addition to all of the matters noted above in a summary way only I note the following matters: (1) There is a conflict in the evidence as to the date the money was advanced, either 28 November 1996 or 29 November 1996. (2) If it was he 28th as Mr Kealey said in his affidavit (para 30, Exhibit P1) and on occasion when giving evidence then that is inconsistent with the date in the Agreement dated 17 April 1997 and on the handwritten note and it gives weight to the entry on the handwritten note being in respect of Videocel and the word Seleco was an error. In any event it was omitted from the Agreement. (3) There is no documentary evidence to support the existence of this alleged loan not even a bank statement from any relevant account of Mr Kealey. Accordingly having considered all of the evidence and the written submissions I am not satisfied on the balance of probabilities this money was advanced. 27 The point numbered 2 in relation to the advance of 27 September 1996 referred to the circumstance, which was common ground, that this $100,000 was discussed first as a possible investment in a purchase of property. The point numbered 3 relates to a conversation on or about 20 September 1996 in which, according to paragraph 22 of Exhibit P1 in the proceedings, Mr Cole made this statement. NEC is about to cut my credit because the video projector sales have not reached target and they are demanding $100,000 immediately. John could you lend me the $100,000 which you intend to invest in the Thornleigh property so I can get NEC off my back. I will pay it back within six weeks as soon as the funds come through from the WA and Victorian sales. I will repay the loan at 20 per cent for your trouble. 28 The point numbered 4 refers to evidence from Mr Kealey that Mr Cole originally requested that the cheque be made out in favour of NEC, but then said to make it out to CAV as he did not want NEC to think that he had to borrow the money. 29 The grounds of appeal in relation to the finding in favour of Mr Kealey are set out in paragraph 5 of the notice of appeal as follows: (a) At pages 23-24 of her judgment, her Honour dealt with the history of loan 2, but there is, with respect, no basis to support her findings that the loan was a personal loan to the appellant. Rather, at page 23, paragraph (4) of her judgment the trial judge discredits the respondent by saying that he had made an admission not to his credit. (b) The trial judge erred in her failure to consider at all the proposition formerly considered by her with respect to loan 1, that the reason for the cheque for loan 2 may have been the same reason as identified by her as at 3 June 1996 and 16 July 1996 (see the judgment page 22, paragraph (2)), namely, "nobody would have got paid including himself". (c) The trial judge erred in her finding that there was a "lack of evidence from the defendant or any explanation as to how this $100,000.00 came to be advanced" (page 24, item (5) .That proposition ignores the contents of the supplementary Affidavit of the appellant defendant sworn on 3 August 2000. At paragraphs 17-21 thereof, the appellant comprehensively refers to the sequence of events that led to the changing market conditions resulting in CAV being caught with an oversupply of stock and the "blow-out" of its account with NEC. It is submitted that the appellant's version of events in his supplementary Affidavit is consistent with the version contained in the respondent's Affidavit sworn 20 March 2000 at page 5, paragraph 22, which attributes a conversation between the appellant and respondent as follows:- He (Cole) said: "NEC is about to cut my credit because the video projector sales have not reached target and they are demanding $100,000.00 immediately". (d) The trial judge erred in her finding that the evidence of the appellant defendant was inconsistent, (page 24, item (6)). It is submitted, with respect that there was no such inconsistency in the appellant's affidavits vis: The appellant's primary Affidavit sworn 20 April 2000 at paragraph 75 thereof, agrees with the conversation referred to in paragraph 22 of the respondent's Affidavit, that NEC were about to cut credit and were demanding $100,000.00 immediately. It is submitted that that proposition in the appellant's initial Affidavit is consistent with paragraphs 20 and 21 of his supplementary Affidavit of 3 August 2000. (e) In summary, none of the propositions set forth by the trial judge on pages 23 and 24 of the judgment at items 1 -7 are consistent with the conclusion reached by her that it was more probable than not that loan 2 was a personal loan. 30 The primary submission on behalf of the appellant, Mr Cole, was to the effect that there was overwhelming documentary evidence to support the proposition that all loans made by Mr Kealey were made, not to Mr Cole personally, but to the companys CAV and Videocel. In support of that proposition, Mr Somers, for the appellant, referred to the documentation to which I have already referred in my outline. He submitted in effect there was no document alleging personal loans from Mr Kealey to Mr Cole prior to the solicitor's letter of 28 May 1997. 31 In oral submissions, Mr Somers stressed the significance of the guarantee letter signed on 3 June 1996, and he submitted that in substance the advance of 27 September 1996 was a continuation of the support provided by that guarantee. The $100,000 was admittedly provided for the purpose of paying NEC, and such payment would reduce Mr Kealey's exposure under the guarantee of 3 June 1996. That close relationship between the letter of 3 June 1996 and the advance of 27 September 1996, Mr Somers submitted, was not considered by the primary judge. 32 Mr Somers also submitted that the primary judge's summary reasons in relation to this advance disclosed error. He submitted that point 5 of those reasons, referring to a lack of evidence as to how the $100,000 came to be advanced, was simply incorrect; and also that point 6, referring to inconsistency in the defendant's affidavit as to how the money was spent, was likewise incorrect. There was nothing in Mr Cole's evidence inconsistent with the proposition that the money was used, as Mr Kealey understood it would be used, to pay off debts owing to NEC and there was, indeed, no issue about this in the case. 33 Mr Somers submitted that this was not a case where the decision of the primary judge could be supported simply on the basis of credit findings made by the primary judge. He referred to SRA NSW V Earthline Constructions (1999) 73 ALJR at 306, and particularly at pp 321 and 331 and following. 34 I accept the submission that the appeal cannot be determined simply on the basis of credit findings by the primary judge, and that it is necessary to consider the effect of the oral evidence, having regard to the primary judge's credit findings, along with the documentary evidence relied on by the appellant to which I have referred. 35 However, there is significance in the credit findings made by the primary judge. The primary judge did in fact make findings adverse to the credit of both parties. In relation to Mr Cole, one important finding was the rejection of Mr Cole's claim that he had not seen the statement of assets and liabilities prior to seeing it annexed to Mr Kealey's affidavit. That finding is a particularly telling one, as it is virtually impossible to explain this as an honest mistake or one of confusion. 36 The primary judge also made findings against Mr Kealey. The finding that he did not see this statement until after October 1996 was a serious finding, because Mr Kealey had sought to rely on that statement to support a claim that the guarantee given to CBA was made in reliance on it. However, it is just conceivable that that could have been the result of an honest reconstruction and of confusion. 37 In any event, having regard to the findings as to credit which the primary judge made, it was certainly open to her to find that the particular conversation of about 20 September 1996 occurred in the terms described by Mr Kealey. That conversation is particularly significant, because it relates to the $100,000 which Mr Kealey proposed to invest in some property, and contains a request by Mr Cole to lend "me" this $100,000 and the words, "I will pay it back." 38 Although the finding is not made explicitly, it seems clear that the primary judge also found that Mr Cole originally requested a cheque in favour of NEC and subsequently altered this to a request for a cheque in favour of CAV. That finding is, in my opinion, implicit in the point numbered 4 of the summary of reasons in relation to this loan. 39 The primary judge's comments in points 5 and 6 were criticised. However, in my opinion, the primary judge could well have taken the view that Mr Cole did fail to give a satisfactory account of circumstances leading to this advance, and could have found it unsatisfactory that Mr Cole, while implying that the money was used to pay NEC, refrained from explicitly stating how much, if any, he actually used for that purpose. I accept Mr Somers' submission that there was no inconsistency, and there is some force in his submission that it would be unfair to regard the evidence as satisfactory when that matter does not really appear to have been a live issue in the proceedings. However, I do not think those comments by the primary judge would be sufficient to vitiate her judgment. 40 There is force in Mr Somers' submission that the advance of $100,000 could be seen as continuing the support of CAV originated in the letter of guarantee to NEC, but that consideration can properly be regarded, in my view, as outweighed by the explicit terms of the conversation which the primary judge accepted. I note also that payment of debts to NEC, although beneficial to Mr Kealey by reducing his exposure under his guarantee, was equally beneficial to Mr Cole, who had also guaranteed the debts owing to NEC. 41 Mr Somers has submitted that this consideration, flowing from the possible relationship between the original guarantee of NEC debts and the subsequent payment of $100,000, was not analysed by the primary judge. In fact the primary judge referred to and placed some weight on the initial guarantee of NEC, and I do not consider the failure to discuss this issue a matter that would vitiate the judgment. 42 In my opinion, the finding that the advance of 27 September 1996 was a personal advance to Mr Cole is not in any way undercut by the document of 17 April 1997. That document refers to the $217,000 lent to the CAV group and does not specify that the loan of 27 September was a loan to CAV, although it specifies it as payment of a debt due to NEC for CAV. The document is between Mr Kealey and Mr Cole personally, and supports a view that Mr Cole was undertaking some personal responsibility in relation to repayment. The better view on the evidence seems to be that it was drafted by Mr Cole, and the primary judge found, as she was entitled to, that it was signed by Mr Kealey when he was stressed. 43 For those reasons, in my opinion, a ground is not made out for interfering with the primary judge's decision and, in my opinion, the appeal should be dismissed. 44 HEYDON J: I agree. 45 O'KEEFE J: I agree. 46 HEYDON J: The order of the court is that the appeal will be dismissed with costs. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.