New South Wales Supreme Court CITATION : Aneve Pty Ltd & Ors v. Bank of Western Australia Ltd [2004] NSWSC 640 HEARING DATE(S) : 27 to 29 April and 4 May, 2004 JUDGMENT DATE : 20 July 2004 JURISDICTION: Equity Division JUDGMENT OF : Palmer J DECISION : Judgment for Defendant on Plaintiff's Statement of Claim; judgment for Defendant/ Cross Claimant on Cross Claim. CATCHWORDS : TRADE PRACTICES - MISLEADING AND DECEPTIVE CONDUCT - Whether alleged misrepresentations made by Defendant to Plaintiffs - whether Plaintiffs relied upon anything said - issues solely of credit. LEGISLATION CITED : Trade Practices Act 1974 (Cth) - s.51AA, s.52, s.87 - Briginshaw v Briginshaw (1930) 60 CLR 336 CASES CITED : - Moukhayber v Camden Timber & Hardware Co Pty Ltd [2002] NSWCA 58 - Rhesa Shipping Co SA v Edmunds [1985] 2 All ER 712 - Timms v Commonwealth Bank of Australia [2004] NSWSC 76 Aneve Pty Limited - First Plaintiff PARTIES : Aniello Iannuzzi - Second Plaintiff Paraskevi Iannuzzi - Third Plaintiff Bank of Western Australia Limited - Defendant FILE NUMBER(S) : SC 1063/03 COUNSEL : B.M.J. Toomey QC, A.G. Diethelm - Plaintiffs B. McClintock SC, R. Brender - Defendant SOLICITORS : R.F. Bergagnin & Co - Plaintiffs Blake Dawson Waldron - Defendant Introduction and issues 1 The Second Plaintiff, Dr Aniello Iannuzzi and the Third Plaintiff, his wife, Dr Paraskevi Iannuzzi, are the sole directors of the First Plaintiff ("Aneve"), which is a family trust company. To avoid confusion, I will adopt the course taken by Counsel for the parties and will refer hereafter to the Second Plaintiff as "Dr Iannuzzi" and to the Third Plaintiff as "Dr Tsironis", which is her maiden name. 2 By instrument dated 21 January 2002, Aneve guaranteed to the Defendant ("BankWest") repayment by Barrington Estates Ltd ("Barrington") of an advance of $1M ("the Guarantee and Indemnity"). The Guarantee and Indemnity was supported by a Performance Bond, originally dated 4 March 2002 but now replaced by another bond dated 28 January 2003, issued by St George Bank Limited ("St George") whereunder St George undertook to pay to BankWest upon demand a sum of up to $1M ("the Performance Bond"). The Performance Bond in turn was supported by an instrument dated 28 February 2002 whereby Drs Iannuzzi and Tsironis guaranteed to St George the repayment of all monies payable to it by Aneve ("the St George Guarantee"). The St George Guarantee was supported by securities over four pieces of real estate owned by Dr Iannuzzi, a company controlled by him and Dr Tsironis' parents ("the Securities"). I will refer to the Guarantee and Indemnity, the Performance Bond, the St George Guarantee and the Securities collectively as the "Transaction Documents". 3 The Plaintiffs allege that execution of the Transaction Documents was procured by conduct on the part of BankWest which was misleading or deceptive or unconscionable, in contravention of s.52 and s.51AA Trade Practices Act 1974 (Cth) (" TPA "). They seek declarations to that effect. Aneve seeks an order under s.87 TPA declaring the Guarantee and Indemnity to be void and to have been void ab initio. The Plaintiffs further seek an order that BankWest be permanently restrained from making any demand on St George under the Performance Bond. BankWest, by its Cross Claim, seeks a declaration that it is entitled to make demand under the Performance Bond and it seeks damages in accordance with the usual undertaking as to damages given to the Court by the Plaintiffs on 10 January 2003. 4 The case turns upon issues of credit. Drs Iannuzzi and Tsironis say that certain oral representations were made to them by Mr David Lennon, a director of BankWest, on two occasions in December 2001. The first occasion was a telephone conversation between Dr Iannuzzi and Mr Lennon on 22 December 2001, in which Mr Gary Blom, Managing Director of Barrington, also participated. The second occasion was a meeting between Mr Lennon and his wife and Drs Iannuzzi and Tsironis at the latters' holiday house at Blue Bay on 29 December 2001. 5 Drs Iannuzzi and Tsironis say that they relied upon the representations made by Mr Lennon in those meetings in deciding that Aneve would enter into the Guarantee and Indemnity. The Plaintiffs say that the representations were false, or misleading or deceptive, and in respect of those representations which are as to future matters, they say that there was no reasonable ground upon which the representations could have been made. In addition, they say that the making of the representations was unconscionable. 6 BankWest denies that: – any of the representations were made by Mr Lennon as alleged; – any representations which were made by Mr Lennon were misleading or deceptive or were made without reasonable grounds; – any representations made by Mr Lennon were relied upon by Aneve; – any representations made were causative of loss to Aneve. 7 BankWest says further that if any misrepresentations were made by Mr Lennon, Aneve is disentitled to relief because it failed to take care of its own interests. 8 The only persons present at the first discussion on 22 December 2001 were Mr Blom, Dr Iannuzzi and, by telephone, Mr Lennon. The only persons present at the second discussion on 29 December at Blue Bay were Mr and Mrs Lennon and Drs Iannuzzi and Tsironis. No contemporaneous note of either discussion was taken. No record or other note of either discussion was made within a reasonable time thereafter. 9 Mr Blom has not been called to give evidence; neither has Mrs Lennon. Mr Lennon suffered a severe stroke in May 2002 and he is incapable of giving evidence. The only evidence of the discussion on 22 December 2001 is that given by Dr Iannuzzi. The only evidence of the second discussion on 29 December 2001 is that given by Drs Iannuzzi and Tsironis. 10 The first critical issue of credit is whether the doctors' evidence as to what was said by Mr Lennon can be accepted in the light of other evidence, mainly documentary, which has been adduced. The second critical issue of credit is whether they relied on whatever was said by Mr Lennon in the light of what transpired thereafter. 11 The Plaintiffs engaged solicitors, Messrs Tress Cocks & Maddox, to advise them before entering into the transaction. Mr Cheung of that firm was the solicitor principally concerned. Dr Iannuzzi also consulted his accountant, Mr Belos, and sought finance for the transaction from the National Australia Bank ("NAB"). Drs Iannuzzi and Tsironis say that, notwithstanding the advices of their solicitor, Mr Cheung, their accountant, Mr Belos and, in particular, the advice of two officers of the NAB, Mr Coupe and Mr Leeson, they continued to rely upon the alleged oral representations made by Mr Lennon on 22 and 29 December 2001 in deciding that Aneve would enter into the transaction. 12 As the state of mind of the Plaintiffs is an issue in the proceedings, they have not been entitled to claim privilege in respect of communications passing between them and their solicitors. Consequently, a large number of documents from their solicitors' files has been admitted into evidence. Nevertheless, the Plaintiffs have not called as witnesses Messrs Cheung, Belos, Coupe and Leeson. The evidence as to the Plaintiffs' continuing reliance upon the alleged representations of Mr Lennon is, therefore, solely that of Drs Iannuzzi and Tsironis. 13 It is clear, therefore, that on the issues of what, if any, representations were made by Mr Lennon and what, if any, reliance was placed on them by Aneve, the credit of Drs Iannuzzi and Tsironis is critical. Their credit is directly and vigorously attacked by BankWest. Mr McClintock SC, who appears with Mr Brender for BankWest, says that it is not necessary to find that Drs Iannuzzi and Tsironis are deliberately lying; he says that it is sufficient to find that their evidence is entirely unreliable either because of mistaken recollection or mistaken reconstruction. On the other hand, Mr Toomey QC, who appears with Mr Diethelm for Aneve, says that if one accepts the evidence of Drs Iannuzzi and Tsironis as to the statements made to them by Mr Lennon about the solvency and trading of Barrington, and about the absence of any risk in the transaction, then it follows from what Mr Lennon obviously knew about the company's affairs that he was deliberately lying to them. If one does not accept that Mr Lennon was deliberately lying, Mr Toomey says, then it will be because of a finding that Drs Iannuzzi and Tsironis are lying. 14 I do not think that it is necessary or desirable to begin the task of assessing credit with the view that such dichotomy is inevitable. However, it is appropriate to bear in mind that the discussions between Mr Lennon and Drs Iannuzzi and Tsironis are fairly recent, having occurred some two years and four months ago; that the proceedings were commenced on 10 January 2003, just over a year after the discussions occurred, so that Drs Iannuzzi and Tsironis must have prepared statements of evidence for their solicitors before that time; and that Drs Iannuzzi and Tsironis say in their evidence in the witness box that they have a clear recollection of the critical statements made by Mr Lennon. In view of those circumstances, there is not much likelihood that the passage of time in itself is the explanation for any evidence given by them which is shown to be seriously incorrect. The pleaded representations 15 The Plaintiffs allege that the following misleading, deceptive or unconscionable representations were made to them by Mr Lennon on behalf of BankWest at the meeting on 29 December 2001. They say that the representations continued uncorrected until, in reliance thereon, they executed the Transaction Documents. The Balance Sheet Representation Mr Lennon represented that the financial position of the Barrington Estates group of companies was: "Total current assets 25,268,362 Total non-current assets 34,194,594 Total assets $59,462,956 Total current liabilities 12,722,637 Total non-current liabilities 24,484,351 Total liabilities $37,206,988 Net assets/shareholders' equity $22,255,968 " Contrary to the representation, the financial position of the Barrington Group was: "Total current assets 18,064,093 Total non-current assets 37,079,889 Total assets $55,143,982 Total current liabilities 10,201,367 Total non-current liabilities 35,793,756 Total liabilities $45,995,123 Net assets/shareholders' equity $9,148,859 " The Solvency Representation Mr Lennon represented that the Barrington group of companies was not at that time in financial difficulties and was not expected to experience such difficulties throughout the 2002 calendar year. Contrary to the representation, in December 2001 the Barrington Group was experiencing significant cash flow difficulties and was expected to continue to have such difficulties throughout 2002. The Bridging Tranche Representation Mr Lennon represented that the amount of $2.5M would be sufficient to allow the Barrington Group to trade until 30 June 2002. In fact, BankWest expected in December 2001 that the Barrington Group was likely to require a further $4.4M in working capital in addition to the amount of $2.5M. The Asset Sales Representation Mr Lennon represented that the sale of assets of the Barrington Group would commence in January 2002 and would be complete by 30 June 2002. In fact, the sale of assets did not commence until late April or early May 2002 and no assets had been sold by 30 June 2002. The Receivership Representation Mr Lennon represented that BankWest would not at any time appoint receivers to Barrington or to the other members of the Barrington Group. In fact, BankWest appointed receivers to the Barrington Group on 22 May 2002. I will refer collectively to these alleged representations as "the Representations". It is important to note that all of the Representations are said to be express and complete in themselves; there is no allegation of a duty to make disclosure so that silence, or failure to qualify or explain, is in itself a misrepresentation or misleading, deceptive or unconscionable conduct. Oral evidence of critical conversations 16 Before the affidavits of Drs Iannuzzi and Tsironis were read, Mr McClintock sought that the affidavit evidence of the doctors as to the critical conversations on 22 and 29 December 2001 not be read and that they be required to give that evidence orally, as credit was the central issue in the case and the other participants in the conversations were not to be called. Mr Toomey had no objection to this course. 17 I considered that, in the special circumstances of this case, that course should be adopted: where, as here, evidence of representations is to be given and there is available to the Court neither the evidence of the alleged representor nor any contemporaneous record of the occasion, it is usually better for the Court to hear the witness's evidence in his or her own words rather than in the words of an affidavit prepared by a lawyer. 18 Accordingly, I rejected paragraphs 33 and 41 to 50 of Dr Iannuzzi's affidavit of 10 January 2003, and paragraphs 25 to 31 of Dr Tsironis' affidavit of the same date. 19 At the conclusion of the evidence, Mr Toomey sought to tender the rejected portions of the doctors' affidavits. I declined to admit them because the doctors had given their evidence fully in examination in chief and had been cross examined at length on that evidence. In my opinion, that, and no other, was the evidence upon which the issues in the case had to be decided. The uncontested facts up to 22 December 2001 20 Drs Iannuzzi and Tsironis have been carrying on practice as general practitioners in Coonabarabran for eight years. As will emerge from evidence discussed later, in addition to his medical practice Dr Iannuzzi has been extensively engaged in investment activities for some time. I think it fair to describe him as at December 2001 as an astute and experienced investor. 21 Aneve and Dr Tsironis' parents are the shareholders of a company called Darcy Byron Pty Ltd ("Darcy Byron"). In December 1999, on the initiative of Dr Iannuzzi, Darcy Byron purchased an established vineyard known as the Mount Eyre Vineyards near Broke in the Hunter Valley. Dr Iannuzzi sought to run the vineyard as a profitable grape growing and wine production business, although he had no previous experience in the wine industry. 22 Barrington was an established wine producer which owned a vineyard and wine production facilities, called the Yarraman Road Estate, in the Hunter Valley not far from the Mount Eyre Vineyard. Shortly after Darcy Byron acquired the Mount Eyre Vineyard, Dr Iannuzzi met the managing director of Barrington, Mr Gary Blom. Mr Blom was also a major shareholder of Barrington. Dr Iannuzzi was anxious to find outlets for the grapes produced at the Mount Eyre Vineyard and as a result of his discussions with Mr Blom he soon obtained two contracts with Barrington. One was a "grape supply contract" under which the Mount Eyre Vineyard would sell grapes to Barrington; the other was a "wine making contract" under which Barrington would manufacture wine for Mount Eyre using its grapes. Each of these contracts was for a term of three years, commencing in January 2000. Dr Iannuzzi was also concerned to obtain means of marketing and distributing the Mount Eyre wine production and he had discussions with Mr Blom with a view to procuring a distribution agreement. However, nothing eventuated from these discussions. 23 In October 2000 and July 2001 Barrington, through subsidiary or associated companies, acquired vineyards in the Margaret River region in Western Australia, in the Pyrenees region in Victoria, and in the McLaren Vale region in South Australia. The acquisition of these vineyards was financed, for the most part, by BankWest, which ultimately advanced to the Barrington group of companies approximately $22M, pursuant to a facility agreement dated 27 July 2001. 24 By agreements and mortgages dated 28 July 2001, BankWest held security over the real estate and other assets of the Barrington Group in first priority to a number of other lenders, namely, a Dr Morrison, a United States investor called Mr Earl Slick, and Perpetual Trustee Company Limited as trustee for the Quadrant Capital Fund. The amount for which BankWest had priority under its Deed of Priority was $22M together with "any interest, fees, costs and expenses (whether or not capitalised) payable" in connection with its loan facility to the Barrington Group. 25 By December 2001, the Barrington Group was in difficulties. Mr Slick, who had lent about $4.5M to Barrington and was a 25% shareholder, had lost confidence in Mr Blom and wanted him removed as managing director. On 4 December 2001, Mr Slick's solicitors served notices of demand on the Barrington Group calling up Mr Slick's loans. It was clear that the Barrington Group did not have the funds to make repayment of the loans. Mr Blom succumbed to pressure and resigned as a director of Barrington on 10 December 2001. 26 On 19 December 2001, an urgent meeting was held at BankWest's offices to discuss Barrington's current position and the injection of further funds to permit the group to continue trading. Present at the meeting were Messrs David Lennon, (BankWest's Director, Structured Finance), Greg Wynne (Chief Manager, Credit, NSW and Queensland), Paul McGarry (Manager, Structured Finance), Shane Ross (Manager, Structured Finance), Leo Seward (Managing Director, Barrington), Charles Gibb (Chief Operating Officer, Barrington), Chris Hadley (Managing Director, Quadrant Capital Fund) and lawyers representing Mr Slick. Notes of the discussion at the meeting taken by Mr Lennon's subordinate officer, Mr McGarry, were later incorporated in a memorandum dated 3 January 2002 prepared by Mr McGarry. 27 The memorandum prepared by Mr McGarry records that Mr Seward and Mr Tom Slick (the son of Mr Earl Slick) were the only two remaining directors of Barrington after the "forced resignation" of Mr Blom. Mr Seward was concerned about the potential liability of the directors for insolvent trading and had considered the appointment of administrators to Barrington. 28 The memorandum proceeds: "To assist with current cash needs and provide Barrington with 'breathing space' it was proposed that $2.5M in new funding be provided to Barrington by the following parties in the proportions set out below:– Slicks – $1.0M Quadrant - $0.5M Gary Blom $1.0M (Credit support to be provided by a third party investor). Leo Seaward agreed that the directors would not appoint Voluntary Administrators pending the negotiation of the injection of $2.5M of additional funding. The Slicks sought instructions from Earl Slick overnight in relation to the proposal (he resides in the USA). Mr Slick advised that he would not support any proposal that involved Gary Blom. It appeared at that stage that the injection of the new funding would not occur. We were concerned that a Voluntary Administrator would be appointed to Barrington. As a way forward it was then suggested that the Bank provide the $1M of funding in lieu of Gary Blom. Without the involvement of Gary Blom the Slicks advised that they would be supportive of the proposal. The Bank agreed to act as the 'conduit' for $1M of the funding provided its loan and interest was supported by a Letter of Credit from an Australian Bank." 29 According to Dr Iannuzzi, in early December 2001 Mr Blom had telephoned him asking if he had access to $1M. No further detail of the discussion is given by Dr Iannuzzi. In late December, according to Dr Iannuzzi, Mr Blom telephoned again, asking if Dr Iannuzzi had access to $1M. Dr Iannuzzi says that he replied: "That all depends on what it is for. I might be able to borrow it if it was for the right reason" . Mr Blom then said: "I want to come and meet you to talk about it." They then arranged to meet on Saturday, 22 December 2001, at Dr Iannuzzi's home in Coonabarabran. 30 According to Dr Iannuzzi, this is the full extent of his conversations with Mr Blom prior to 22 December 2001. However, on 20 December Mr Blom's solicitor, Mr Michael Eyers, sent a facsimile to Mr Lennon and the other parties' representatives, advising inter alia: "In a fax yesterday I set out some terms on which our client, Gary Blom, is prepared to arrange the provision of $1 million as 40% of a $2.5 million secured debt facility to Barrington Estates Limited (to rank behind BankWest and Dr. Morrison but ahead of all other existing shareholder debt). Following discussions yesterday afternoon I advise that: the $1 million will be provided through Viticulture Professional Co. Pty Limited by interests associated with Dr. Aniello Ianuzzi of Mount Eyre Vineyards; confirmation from Dr. Ianuzzi that the funds will be placed with this firm by close of business on Thursday, 27 December 2001 is to be provided by 10:00 am on Monday, 24 December 2001; interest at 10% per annum will be payable on repayment of principal which is to be from proceeds of sale of Barrington Estate Limited or its businesses, or 31 December 2002, whichever is the earlier." In a covering facsimile to Mr Lennon, Mr Eyers said: "Gary has asked me to remind all parties that the name of Dr. Ianuzzi is provided in confidence and he is not to be contacted until his letter of confirmation is provided on Monday, assuming we get to that point." 31 Mr Eyers' letter suggests that the essential terms of the agreement between Dr Iannuzzi and Mr Blom had been discussed between them on or prior to 20 December and that Dr Iannuzzi was to confirm his agreement by 24 December 2001. Meeting on 22 December 2001 32 On Saturday, 22 December, Mr Blom came to see Dr Iannuzzi at his home in Coonabarabran. Dr Tsironis and their children were at their holiday home at Blue Bay and no one else was present at the meeting. Following is the account of the meeting given by Dr Iannuzzi in his evidence in chief. 33 Mr Blom described the structure and shareholding of Barrington Estates and its operations. He said that it had a distribution company and said that Mount Eyre's wine could be sold through that distribution company. 34 Mr Blom said that there were difficulties at board level, that the board members just could not get along, and that he had decided that the best thing was to sell the company as a going concern. He said that because of the discord amongst the board members, he had stood down as Managing Director because he could not work with or trust the other directors. 35 Mr Blom gave Dr Iannuzzi a balance sheet of Barrington Estates as at 30 June 2001, which was then the subject of some discussion. He said that the shareholders had come to an agreement whereby $2.5M was required to ensure that the sale of the company was carried out in an orderly manner. He said that the company would be placed on the market just after the New Year and that of the $2.5M required he would be responsible for $1M. He said that he did not have that money available, which was the reason that he had approached Dr Iannuzzi. 36 Mr Blom said that BankWest was the major financier for the company. He said that there were "international parties" interested in buying the company, one of which being a large wine and spirits company which he named. 37 Mr Blom offered the following terms to Dr Iannuzzi: Dr Iannuzzi would have an option over 900,000 of Mr Blom's shares in Barrington Estates, the exercise price of the option being $1 and Dr Iannuzzi would receive interest on the $1M loan at the rate of 10% per annum. 38 At the end of the discussion, Mr Blom suggested that he ring Mr Lennon so that Dr Iannuzzi could speak to him. Mr Blom then rang Mr Lennon and a conversation between the three men took place over a speaker-phone. 39 Mr Blom gave Mr Lennon a very brief résumé of his discussions with Dr Iannuzzi. Dr Iannuzzi then gave this evidence: "Q: Did Lennon say anything about the nature of the transaction as to whether it carried any risk or not? A: Lennon said the transaction was safe." 40 Mr Lennon and Dr Iannuzzi then made arrangements for a further meeting between them, to take place at Dr Iannuzzi's holiday home at Blue Bay, on 28 December. Mr Lennon said that he would use the meeting as an opportunity to take his wife for a few days to a resort called Kim's Camp, which is very close to the Iannuzzis' holiday home at Blue Bay. 41 Telephone records show that the telephone call between Mr Lennon, Mr Blom and Dr Iannuzzi lasted a little more than eighteen minutes. The uncontested facts up to 29 December 2001 42 At 9.25am on 24 December 2001, Dr Iannuzzi sent an e-mail to a Mr Martin Kennedy at NAB. The e-mail refers to an e-mail from "Darrell" (Mr Darrell Leeson of NAB) and asks Mr Kennedy to give Mr Leeson information regarding "the deal he will discuss with Gary Blom today" at a meeting scheduled for 10:00am. The information to be conveyed was: "– equity component of the deal: Mr Blom is offering 900,000 shares in the Barrington Estates group. Darrell should make sure that assurances are made that between the execution of the deal, and the sale of the group to another party that the following conditions apply, and should be included in the agreement: * The letter of credit deal is to be in the name of Dr Aniello Iannuzzi, so it can act as a tax deduction. The 900,000 shares are to be by way of a $1 option (in total, for all 900,000 shares), able to be executed at any time after the letter of credit is approved by the NAB, and I have paid to execute such a letter of credit. * Mr Blom does not sell or transfer or forfeit any of his shares to any other party in this time, with the exception of the 900,000 shares being transferred to Aneve. * Aneve's total shareholding does not fall below 6.9% of the company if Slick does not convert his note, and below 6% of the company if Slick converts his note. The meaning of all of this will be apparent after Mr Blom makes his presentation. – Aneve will re-invest the profits from the convertible note interest rate deal into its debt with the NAB. Any cash (post-tax) earned from the sale of the 900,000 shares will also be for Aneve debt reduction, of the Blue Bay property. I hope this helps." 43 This e-mail strongly suggests that by 24 December Dr Iannuzzi had already obtained some fairly detailed information relevant to the proposed transaction and had given it close consideration. 44 At 12:34pm on 24 December an e-mail was sent by Barrington's solicitor, Mr Sutherland, to representatives of Barrington's shareholders and to Barrington's chief operating officer in the following terms: "I've spoken to BankWest this afternoon. They have had discussions with NAB and they are comfortable that Ianuzzi's security will be provided without any problems. Accordingly would you both please confirm that Slick and Quadrant will be involved in the further financing. I'll distribute a draft terms sheet if not this afternoon then on Thursday morning." 45 Dr Iannuzzi went to Blue Bay for Christmas and at that time he discussed with Dr Tsironis the pro forma balance sheet for Barrington which Mr Blom had given him at their meeting on 22 December. 46 On 26 December, Dr Iannuzzi wrote the following letter to Mr Lennon: "Thank you for your recent communication via telephone. Eve and I are looking forward to meeting with you on Friday. What follows this covering letter includes: Directions to our house at Toowoon Bay Assets and liabilities summary Summary of my account balances of my major accounts (does not include $1.305M bills for Mount Eyre Vineyards) Executive summary of our investments Thumbnail cashflow analysis of wine business Our CVs Recent valuation on property at Toowoon Bay, and letter of complaint to the valuer. My accountant, Menio Belos, will fax you some up-to-date financials on Thursday." 47 Attached to the letter was a statement of assets and liabilities. It is significant to note that Dr Iannuzzi gives comparative values of the assets according to their "worth (bank)" and to "my valuation" . Dr Iannuzzi's valuations exceeded the bank's estimate of worth by a total of $815,000. The attached "Executive Investment Summary" prepared by Dr Iannuzzi showed a sophisticated analysis of the property and other assets owned by Dr Iannuzzi and Dr Tsironis and their family trust. 48 There is also attached to the letter to Mr Lennon a valuation of the Blue Bay property as at 2 December 2001, which was apparently required by NAB in support of its loan facilities to the doctors. It is highly instructive that Dr Iannuzzi included in this attachment a letter which he had written to the valuers on 18 December 2001. The letter criticises the valuation methodology of the valuers in terms which are aggressive to the point of rudeness. What is significant is that Dr Iannuzzi sought to demonstrate in that letter that his own understanding of valuation method was at least equal to the valuers' and, even more importantly as he repeats on three occasions, his own enquiries had disclosed information about the value of his property which was apparently unknown to the valuers. It seems to me that this letter is very revealing of Dr Iannuzzi's attitude to information provided to him by others and as to whether he is the sort of person to accept what he is told by others without making his own enquiries. 49 On 27 December, Mr Lennon forwarded by e-mail to Mr McGarry an e-mail from Mr Gibb, the Chief Operating Officer of Barrington, which reported that unless there was a capital injection into Barrington's business by 9 January 2002 there would be "significant implications in terms of our ability to generate business to keep ourselves 'above water' early in the new year" . The e-mail detailed certain critical payments which had to be made and notices of demand which had been received. The e-mail left no doubt that Barrington was experiencing a severe liquidity crisis. 29 December meeting – Dr Tsironis' evidence 50 As it transpired, the meeting at Blue Bay which Dr Iannuzzi had arranged with Mr Lennon for 28 December had to be postponed to the morning of Saturday, 29 December 2001. The following is the account of the 29 December meeting given by Dr Tsironis in her examination in chief. 51 Dr Tsironis gave birth to her fourth child, Christopher, on 7 December 2001. After the birth she and her four children remained at their holiday house in Blue Bay while Dr Iannuzzi returned to Coonabarabran. They spoke by telephone every day and during one of these conversations Dr Iannuzzi told Dr Tsironis that Mr Blom was coming to see him at Coonabarabran on 22 December. Shortly after that meeting, Dr Iannuzzi told her that Mr Lennon would be coming to Blue Bay to discuss the proposal with both of them. 52 Mr Lennon and his wife arrived at the Blue Bay house at some time between 9am and 10am on 29 December, a Saturday. Dr Iannuzzi and Dr Tsironis were there with only Christopher, the other children having been taken out by their grandparents. Christopher had been diagnosed only days before with a serious liver condition and this was very much on Dr Tsironis' mind. She kept Christopher with her for most of the meeting which lasted between one and a half hours and two hours. 53 At the beginning of the meeting, after the exchange of pleasantries, Dr Iannuzzi said to Mr Lennon: "… that we were relying solely on this meeting to decide whether to actually give the letter of credit for the $1M that they had requested. Q: What did David Lennon say in answer to that? A: I can't remember his exact words." 54 Mr Lennon said on more than one occasion during the course of the meeting that Barrington Estates was worth between $55M and $60M and that BankWest had independent valuations which confirmed those figures. Dr Iannuzzi had the balance sheet which Mr Blom had given him and Dr Tsironis asked Mr Lennon whether it was correct. Mr Lennon said that it was. 55 Mr Lennon said that because of disagreement within the board as to the direction in which Barrington was going, BankWest had taken over the day-to-day running of the company. BankWest required $2.5M from the shareholders as a sign that they were supporting the sale of the company. $1M would come from Mr Blom, $1M from Mr Slick and $500,000 from Quadrant. The bank required the money as a sign of commitment that none of the major shareholders would interrupt the sale process and "to keep the company going to fund the sale's process" . He also said that the commitment of funds from the shareholders was to ensure that they would not put the company into receivership and that he knew of no other creditor who could put the company into receivership. 56 Mr Lennon said that the company was trading well, that it had a strong future ahead of it and that "they were confident that they'd had interest from overseas as well as locally" to buy the company. He said that the company would be on the market in mid-January and would be sold by 30 June. 57 Mr Lennon said that he was in the process of obtaining an agreement between the major shareholders that none of them was to jeopardise the sale process or destabilise the company in any way. 58 As to Mr Blom's offer of an option over 900,000 shares in the company: "A: [Mr Lennon] said words to the effect that he understood that Gary Blom had offered us 900,000 shares if we would put in the $1m for him that he could not come up with, and he said, 'I also realise that we, as the bank, are offering you 10 per cent of the $1m, but if the shares are worth nothing, you know, that wouldn't be enough to get you into the deal' : the 900,000 shares, if they were worth nothing, that the 10 per cent wouldn't really be enough to get us into the deal. Q: Did he say whether he thought the share options were worth anything? A: He said that he believed that the company would be sold for around the $55m mark, if not more, but he wasn't sure of what value the actual shares would have." 59 Dr Iannuzzi and Dr Tsironis asked about whether BankWest would be able to procure Barrington Estates to enter into grape selling contracts and wine making contracts with their company to replace those contracts which were about to expire two months later. Mr Lennon said that the bank had full control of the company and was able to procure those contracts. 60 Dr Tsironis gave this evidence: "Q: Did Mr Lennon say anything about whether or not there was any risk in the proposition of you people giving the letter of credit? A: He did a few times. Q: What did he say? A: He said that if he though that our million was at all at risk that he would not let us get into the deal. Q: Did he say anything else? You said he mentioned it on a few occasions. A: Yes, he did. He mentioned it in relation to where the $1m would sit in terms of priority, that he was confident that the bank would achieve around the $55m mark for the sale of the company and that our $1m would rank with the bank's $22m as first priority. He also mentioned that in relation to – he and his wife apparently were involved in a … Q: Don't say 'apparently'; did he tell you? A: Yes, he did tell me. Q: What did he tell you? A: Well, it was himself and Merryn who were involved in a business in the Blue Mountains. I can't remember the exact nature of the business, but I know that the business went bad and they did lose money and he said to us, 'I know what it feels like to lose money and I wouldn't let you get into the deal if I thought that your $1m was at risk' ." 61 According to Dr Tsirionis, Mr Lennon said nothing about Barrington being short of money or being unable to pay its trading debts. If he had mentioned those matters, she would definitely not have been interested in the proposed transaction. 62 In concluding her evidence in chief, Dr Tsironis said that neither she nor Dr Iannuzzi said anything to Mr Lennon during the course of the meeting to indicate that they were favourably disposed to the proposition, but that after Mr and Mrs Lennon had left she and Dr Iannuzzi agreed that they would give the proposed letter of credit. Dr Tsironis took no further part in the transaction after the 29 December meeting. The 29 December meeting – Dr Iannuzzi's evidence 63 The following is the account of the 29 December meeting given by Dr Iannuzzi in his examination in chief. 64 At the start of the meeting, Dr Iannuzzi said to Mr Lennon that he and his wife would not be together for any substantial period of time over the Christmas holidays for reasons related to Christopher's illness. He said that they "would be relying heavily" on what Mr Lennon was saying about the transaction. 65 Mr Lennon said that there was a disagreement at board level between the directors and shareholders of Barrington, that Mr Slick in particular was "being difficult in respect to the ongoing running of the business" , that as a result Mr Blom had stepped down and that BankWest had taken over the affairs of the company. He said that the company would be sold as a going concern as soon as possible and he had identified 30 June 2002 as the time by which the sale process would be completed. The shareholders were required to lend $2.5M to the company as a commitment to the orderly sale of the company as a going concern. 66 There was discussion concerning the balance sheet of Barrington given to Dr Iannuzzi by Mr Blom. Mr Lennon's estimate was that the company would be sold as a going concern for between $50M and $60M. He said that the assets and liabilities were reflected in the balance sheet. 67 They discussed a range of prices which the assets might realise in a "fire sale scenario" and in a "good scenario". Dr Iannuzzi went through the assets on the balance sheet and made his own calculations of what he thought they would realise on a "fire sale basis" and Mr Lennon "agreed that my conclusions were reasonable conclusions" . Dr Iannuzzi was asked: "Q. How were those figures arrived at; were they your figures or jointly yours, or Mr Lennon's? A. Mainly I just talked through those figures and explained to him how I was thinking about them and he seemed to agree with what I was saying. Q. How did he indicate that he seemed to agree? A. Well, he didn't object to what I was saying for a start. I can't remember any specific words that he used but certainly we were in agreement as to those figures. Q. Did you write those figures down in his presence? A. Yes." 68 Dr Iannuzzi was asked whether Mr Lennon said anything about his position if there was a fire sale. He responded: "A. He said we were in a safe position, that the $1m was not at risk." 69 Dr Iannuzzi asked why BankWest would not put the $2.5M into the company. Mr Lennon "gave me a complex sort of response that there were credit committees and procedures and basically it would be difficult to arrange" . 70 Mr Lennon said that it was in nobody's interest for the company to go into receivership. It would not be put into receivership because the only one who could do that was the bank and the bank was not going to do it. He was satisfied that there was no other creditor who was in a position to put the company into receivership; the shareholders had agreed that the company would not go into receivership and this agreement would be formalised in writing. 71 Mr Lennon said that he felt Barrington was a good company, that it had a lot of potential, that it was trading well, and he had an optimistic view of the company "with the exception obviously of the Slicks, who were undermining the process" . 72 Dr Iannuzzi referred to the option over Mr Blom's shares in Barrington. Mr Lennon said: "… that we shouldn't be basing our judgment on the up side or the benefit of this deal based on the equity and the provision of the option." 73 Dr Iannuzzi and Mr Lennon discussed the question of new contracts between Barrington and Mount Eyre Vineyard. Dr Iannuzzi said: "A. The discussion was that we would benefit by having a continuation of the existing grape sale contracts and wine making contracts, as well as I also discussed with him the distribution sale which had been discussed in the past and never materialised and I said to him that I would like to see some contracts like that put in place, because that would then give us a clear benefit and ensure the short term progress of our company, Mount Eyre. Q. Would you have considered this deal had it not been for the advantages for Mount Eyre? A. No. It wouldn't have been - no. Q. Was that your motivation? A. The motivation was to help Mount Eyre." 74 Mr Lennon said nothing about any financial difficulties of Barrington. Dr Iannuzzi said that if he had known that the directors of Barrington were concerned about insolvent trading, he would not have proceeded with the transaction. 75 Dr Iannuzzi said that immediately after the meeting with Mr Lennon concluded he had a discussion with Dr Tsironis. He said that he "was happy that the transaction was safe" . 76 He was shown the e-mail from Mr Gibb to Mr Lennon on 21 December 2001 to which I have referred in paragraph 49 and he said that if he had been aware that Barrington was in the position revealed by the document he would not have gone into the transaction. Events after 29 December 2002 77 In paragraph 54 of his affidavit of 10 January 2003, Dr Iannuzzi said that shortly after his meeting with Mr Lennon on 29 December 2001 he called the manager of the Marrickville Business Branch of NAB to enquire about obtaining the letter of credit "but after discussions the NAB declined to provide the letter of credit" . Dr Iannuzzi did not disclose in either of his affidavits the following circumstances. 78 On 2 January 2002, Mr Coupe of NAB sent Dr Iannuzzi an e-mail in the following terms: "I need your help to get this proposal through to a stage that would be acceptable to the Bank. The main issue that the Bank has is overall group serviceability plus amortisation of commercial facilities (Darcy Byron P/L) over a commercial term not exceeding 10 years. Based upon personal taxation returns supplied by your accountant and other information supplied by you relating to rental income/ expenditure, I have constructed the following table. Please advise where you believe the information does not stack up." Then followed a detailed table showing income available to Dr Iannuzzi and Dr Tsironis and their associated entities and the liabilities which that income would have to meet. The analysis shows surplus funds to meet living expenses of $13,883 per year. Later in the e-mail, Mr Coupe said: "Nello, we understand that you wish to get this proposal approved and due to the value we place on your relationship we're endeavouring to piece the proposal together to meet both the Bank's and your satisfaction. Clearly, there is risk evident against this lending, or BankWest themselves would be providing the $2.5M that Barrington Estates needs against their existing security held . Notwithstanding that point, the potential for upside is also strong with flow on effects to Darcy Byron in terms of product sale and to yourself in investment and shareholding return. [Emphasis added.] If the $1M Letter of Credit required was to be called upon (note – contractual terms needed to be vetted), there would be an additional $1M of debt crystallised which your Group would need to service. If this were to happen, are you prepared to sell assets to reduce gearing to a more manageable level? If so what are you prepared to sell? Additionally, are you prepared to sell your shares – advised by you to have an estimated worth of $110K – to meet interest costs? Due to only nominal surplus funds available in the above table, these issues are important with your feedback required for inclusion in a submission if it is to proceed." 79 Dr Iannuzzi replied to this e-mail on the same day. He identified those assets to be sold "if we got into trouble" . He said: "I do not have the same gloomy picture about our servicing the debt as you do … obviously if we default on the loan, then the securities can be called upon by the NAB. Isn't that the whole point of having security?" 80 On 3 January 2002, Mr Coupe responded to Dr Iannuzzi by e-mail, in the course of which he said: "In this high risk proposal, we want you to be clearly aware of the position and take care of the 'what ifs'." 81 On 8 January 2002, Mr Coupe sent Dr Iannuzzi an e-mail advising of NAB's reasons for declining his funding request for the $1M letter of credit. In the course of the e-mail, Mr Coupe gave as one reason for refusal the insufficiency of income to meet repayment of principal and that asset sales were considered a last resort. The other reasons for refusal were: "The level of risk attributable to new borrowing -- 3rd party security risk - i.e. the need to further involve your parents in law & their financial position to secure the new facility. – the speculative nature of the investment -- i.e. dependent upon Barrington meeting cashflow projections when balance sheets provided reveal prior loss trading accumulation . Noted - past financials are not included in information memorandum. – failure of Barrington's Banker BankWest to provide funding direct - after all they have 1st Registered Mortgages over property & business assets. Whilst we certainly do value your business & can understand your desire to be involved in this dealing due to the benefits available to you (i.e. potential interest return, shareholding, vineyard sales, etc), the proposal does carry a strong degree of risk with Barrington clearly needing funding going forward to meet substantial growth plans and against a financial track record that does not yet show a continued record of trading profitability. Saleability of a controlling interest in Barrington is yet to be determined . Nello, your comments to the effect that the bank's failure to provide funding would result in you transferring your funding arrangements are disappointing & ultimately we would not want to see that happen. Our decision to decline the new funding was based upon commercial considerations and risk." [Emphasis added.] From this e-mail it appears clear that by 8 January 2002 NAB had been provided with balance sheets for Barrington which revealed that Barrington was trading with accumulated losses and that the "investment" was dependent upon Barrington meeting its cash flow projections. Mr Coupe pointed out that it was significant that Barrington's own bank, BankWest was not itself prepared to lend further even though it had first registered securities. He further pointed out that the proposal carried "a strong degree of risk" and the reasons he gave for that conclusion were essentially founded upon the picture of unprofitable trading which had emerged from the balance sheets of Barrington provided to him. 82 An internal note dated 8 January 2002 prepared by Mr Coupe for the purpose of considering Dr Iannuzzi's application to NAB gives an analysis of the proposal in the following terms: "RISK : $1M is part of $2.5M syndication to principals of Barrington for working capital purposes pending sale of that business – Rabobank to broker sale with potential purchasers. If sale does not eventuate then letter of credit issued on behalf of Iannuzzi via Gary Blom – is likely to be called upon – debt to be raised. … FACTORS/INFORMATION : Dr Iannuzzi is well aware of risk however is prepared to undertake same in view of upside. : Servicing is already tight – see table attached. Notwithstanding this point Nello has advised: (1) that he has $110K worth of shares that he is prepared to sell if necessary to service debt if L/C called upon …" 83 On 9 January 2002, BankWest's solicitors sent to Dr Iannuzzi's solicitors, Tress Cocks & Maddox, for approval a draft Guarantee and Indemnity and a draft letter of credit. In his first affidavit, Dr Iannuzzi said that within a week of meeting Mr Lennon he had instructed Tress Cocks & Maddox to act for Aneve and that Mr Cheung of that firm acted "in finalising the documentation" . Dr Iannuzzi said nothing about any discussions which he had with Mr Cheung or about any advice which might have been given to him by Mr Cheung. Neither of Dr Iannuzzi's affidavits gave any evidence about the circumstances leading up to execution by the Plaintiffs of the Transaction Documents on 28 February 2002 or about what happened between execution of the Transaction Documents and the appointment of receivers to Barrington. 84 In his first affidavit Dr Iannuzzi said that Mr McGarry of BankWest called him on either 21 or 22 May 2002 to tell him that Barrington was being put into receivership because Mr Slick was obstructing the sale of assets. Dr Iannuzzi accepted the statement by Mr McGarry that this was a positive step and he himself did nothing further until 1 August 2002 when Mr McGarry informed him that the sale of assets was not making progress and that Aneve's Guarantee and Indemnity was likely to be called upon by BankWest. Dr Iannuzzi then decided to seek legal advice, which resulted in these proceedings being commenced. Dr Iannuzzi's second affidavit 85 In his affidavit sworn 20 May 2003, Dr Iannuzzi said that between his first contact with Mr Lennon on 22 December 2001 and Aneve's execution of the Guarantee and Indemnity on or about 21 January 2002 his principal contact at BankWest was with Mr Lennon. After the meeting of 29 December, several e-mails were exchanged and some telephone conversations took place but: "At no time during these communications did David Lennon say (nor did anyone else from the Bank say) anything to the effect of any of the following propositions: a. that there was any pressure from BankWest or any other creditor to sell Barrington Estates ("Barrington") (or its assets) in part or in whole; b. that we should make our own enquiries about the financial status of Barrington; c. that we should not rely upon anything he said; d. that Earl Slick (or anyone else) had already taken steps towards legal action and calling in his loans; e. that the balance sheet we were looking at (referred to in paragraph 44 of my previous affidavit) was out of date or wrong in any way; f. that he had updated valuations that valued the assets of the company at less than $46 million in one report and less than $40 million in another; g. that Barrington was in default under any facility or loan or security document; h. that Bankwest was proposing an 'informal workout' as compared to a formal receivership; i. that Earl Slick had imposed unacceptable ultimatum conditions which might require Bankwest to enforce its security; j. that the company had suffered a significant downturn in sales, and that it had lost important sales and distribution agreements; k. that Bankwest had employed independent accountants with expertise in insolvency and receiverships to assess the state of the company; l. that Bankwest had entered into an Option Agreement with Barrington in July 2001 under which it had taken options over shares in the company in consideration for providing facilities; m. the Bank's interest, fees and other costs would rank ahead of our letter of credit; n. that Bankwest was dissatisfied with Barrington's accounts and record keeping, and there were gaps in significant historical and financial information which it had about the company; o. that previous financing from Bankwest had imposed a condition that Barrington raise $15 million in equity, which condition had not been fulfilled; p. that a Bank report indicated that Barrington would require a further $8 million in equity during the calendar year of 2002; q. that senior management at Barrington had warned Lennon of a serious lack of funds in the company, and that $2.5 million would not be enough to keep the company afloat. If David Lennon (or anyone else on behalf of Bankwest) had told me that any of the propositions in the preceding paragraph was true, that would have influenced my decision to enter into the Guarantee and to arrange for St George to issue the Letter of Credit. If I had known that several of these propositions were true (let alone all of them) then I would most certainly not have caused Aneve Pty Limited to enter into the Guarantee and arrange for the Letter of Credit." The Deal Summary 86 Dr Iannuzzi did not refer in either of his affidavits to a document which he had prepared for his solicitors and a mortgage broker and had sent to them on 9 January 2002, the day after his finance application to NAB was rejected. The Deal Summary is an extremely detailed document of eight pages. Unfortunately, it contains so many statements of significance that it must be set out in its entirety. I have, for convenience, emphasised those passages which are of particular importance. " Barrington Estates Deal Summary CONFIDENTIAL Dr Aniello Iannuzzi, for the benefit of prospective financiers and those providing him with legal advice, has prepared this summary. The contents of this summary are confidential, and represent the views of Dr Aniello Iannuzzi only. Background on Barrington Estates Founded by Gary Blom about 6 years ago, with the purchase of Barrington Estate from Rosemount. Apparently was a messy affair. Barrington Estate is now called Yarraman Road, as it is on Yarraman Road, Wybong, in the Upper Hunter. Gary Blom has invested a lot of money and energy into the estate, with new plantings and a new winery. The winery is modern and worth about $5M in replacement value. The Barrington Estate property is worth about $10M in my eyes . Gary Blom has a business, and not a wine, background. This has resulted in his approach to the business being focussed on business primarily, with wine as a secondary, albeit important, consideration. This has led to a credibility problem in the industry. However it has also resulted in perceptive assessments of the market in broad, international terms. Gary Blom is very aware of market trends, corporate plays and facts and figures. Gary Blom then came to the realisation that medium sized wine interests like his have little future, unless they have superlative brand recognition and quality-for-price ratios. Barrington Estate failed on both accounts . This meant that Barrington Estate had the following options available, with the following likely outcomes : Try to trade its way to better market profile and size. This would fail . Sell out to recover funds and make a profit. This would fail in the Upper Hunter and with poor brand recognition and sales . Go bankrupt . Downsize. This was not an option, as Gary Blom had invested too much money to not realise an income or profit. Upsize. This would allow market penetration, acquisition of brands and better sales. It would also mean it becomes a significant buy-out target for larger domestic firms or overseas firms. Gary Blom decided to take the last option. He needed more money, and did a deal with Quadrant, the investment arm of Westpac. They bought a share of the company, which allowed development of the Yarraman Rd site, and paved the way for acquisitions. It then became apparent that money was again drying up . Quadrant referred Blom to Mr Slick, a USQ investor, in his eighties. Allegedly a billionaire, Mr Slick was thought by Blom and Quadrant to be a good 'silent partner' and source of funds. Slick therefore becomes the third major shareholder. In 2000 and 2001, the following acquisitions were made: Hayshed Hill – a medium Margaret River company, with a good reputation at the lower to medium end of the market. Mount Avoca – a small, successful producer in the Victorian Pyrenees. Haselgrove – a medium producer in McLaren Vale, with an excellent portfolio of reds. The new mother company is called Barrington Estates. The original Barrington Estate is now known as Yarraman Road. Together, the four companies have a capacity to produce almost 500,000 cases per year. The company is in the top 30 in terms of size in Australia. It has spread its risk and wines all around Australia; this is good in terms of variety of wine styles, but awkward in terms of co-ordinating administrative tasks. The three new acquisitions are all more accepted, credible and better quality than Yarraman Road in terms of sales, distribution and wine. Barrington Estates is putting together a smart group of personnel, with good industry experience, to handle the marketing and distribution of their wines. Sales are slow . Export has suddenly become tougher since September 11, 2001 . The expansion from one site to four sites was rapid . More money was needed . Gary Blom also wanted to remain the major shareholder. In order to remain the largest shareholder, Gary led the company to borrowing money, rather than raising capital through selling more shares in the company, hence diluting his holding. This was done in the following ways: Quadrant and Slick both lent money to the company, despite being shareholders. These loans amount to about $15M. Slick has taken out a convertible note, valued at about $5M. If he exercises this note, it will be at about $2.08 per share. If he exercises, the company debt falls by $5M, however shareholdings dilute for all but Slick. Partial payment of Hayshed Hill, so that Dr Morrison, the original owner, is still owed $1.5M. BankWest has lent them $22M . In addition, one new shareholder was taken in, Leo Seward. This man was involved in the Hayshed Hill business. He purchased 900,000 shares for $1.5M. As I understand it, Barrington Estates has about 13,000,000 shares, not including Slick's convertible note. The approximate distribution (subject to confirmation): Seward 900,000 shares Blom 6,000,000 shares Slick 3,500,000 shares Quadrant 3,000,000 shares Before any deal goes ahead, the number of shares in Barrington, and all options etc need to be determined, so that we suddenly do not end up owning nothing . [Emphasis in original.] Background on Gary Blom I do not know as much as I should. What I do know is that he is seen as shady by many, and a businessman and dealmaker . He brought IMAX to Australia, and was the chairman on Darling Harbour Harbourside development. I believe he got many off side in that time. He also got Rosemount off side when he bought the first vineyard. Why is he not liked? I have no proof. It could even be that people are jealous of him. May need more research . State of the wine industry … (not relevant) Mount Eyre & Barrington Estates The Iannuzzi and Tsironis families bought Mount Eyre Vineyards, Broke, in mid-1999. We signed a grape sale and winemaking contract with Barrington Estate (then, still the one estate) for 3 years. The last year will be the upcoming 2002 vintage. We helped Barrington Estates sign an important export agency agreement for Canada, which will be potentially worth millions to them over the years. As our relationship has built over the years, and Barrington Estates has grown. It has become apparent that distribution would be very difficult to achieve for Mount Eyre, given its production is 5000-9000 cases per year. Now that Barrington Estates has set up a nationwide distribution, we have agreed that they will also distribute our wines. This has clear benefits to us in terms of sales, but also helps Barrington, as it gives them a broader product range, and ensures we have common goals in producing good fruit and wine. It also means that if Mount Eyre cannot keep up with its own demands, then Barrington can supply us with bulk wine, sales of which is a small, but important source of business for them at Haselgrove. The Need for the current deal Barrington has again hit a cash crisis ! Sales have basically not hit projections, and everyone is getting edgy . It was decided that to raise capital, the company would merge with a public ASX company, Hotham Wines . This would effectively be a takeover of Hotham by Barrington, but importantly giving them access to the stock market . This would solve the issue of cash and capital . The deal was set up for November-December 2001. Slick vetoed the merger. This annoyed the other shareholders, not least Blom, who was MD of the company. Slick then made a call on his loan, and the motivation then became clear: send the company into liquidation, and then take over Barrington for a pittance . Blom resigned, and the board of directors became unworkable. Seward took over as interim MD. BankWest got edgy, too . BankWest, while secure, need this deal to not fall over, as it would be a blemish on their lending . David Lennon, in the corporate lending in Sydney, overseeing this deal. A deal amongst the shareholders has been brokered along these lines, in order to settle the impasse: 1. State of play defined Deloittes audited the company and concluded that $2.5M is needed to keep the company afloat until 30 June 2002 . Company assets valued by BankWest as $59M . Company debt $42M . Not including convertible note . Net assets, therefore about $17M . 2. Company to be sold Shareholders to sign agreement that if a 'bailout' to occur, then company to be put up for sale immediately . Major international banks to tender for the rights to the sale. Current state of wine industry, with globalisation and consolidation, plus weak Australian dollar, means buyers should be forthcoming. BankWest insists company be sold by 30 June 2002 . 3. Company to be kept trading Q uadrant and Slick agree to freeze their $15M in loans, effectively removing a major cash flow problem from the company . All agree that to sell a trading company is far preferable to selling a company in liquidation . My advice is that the company worth $50-$70M if still trading . Company worth only $40M if insolvent, according to BankWest . 4. 'Bailout' The $2.5M needed to keep company trading to be put in by 3 major shareholders . Quadrant to put in $500K. BankWest $1M Blom $1M The $2.5M is to be a loan to the company for 12 months, at 10% p.a. This $2.5M will be secured against second mortgages, and only be underneath the $22M owed to BankWest and the $1.5M owed to Dr Morrison. The problem is that Blom cannot access $1M, and has approached us for help. [Emphasis in original.] If Blom cannot raise the $1M in time, the deal falls over, and the company is doomed . Blom's $6M invested over the years will effectively be worthless . What Blom has offered us Blom has negotiated privately with BankWest to accept a back-to-back letter of credit for $1M. In other words, we do not need to draw the $1M, unless Barrington fails to repay the loan after 12 months (this needs to be spelt out very clearly in the documentation). [Emphasis in original.] Regardless of whether the $1M is drawn, we get the 10% interest anyway. For providing the line of credit, Blom will give us an option over 900,000 shares, exercisable for $1 in total. The value of these shares will depend on the sale price of the company. If the company is sold for net assets, then the price per share is about $0.75. Gary Blom informs me that to break even, the shareholders must recover the following per share: Blom $1.70 Slick $2.08 Quadrant $2.00 Seward $1.70 Assuming the company stays liquid, the 900,000 shares will be worth anywhere from $600K to $1.5M . If the company goes bust, the shares are worth nothing . Our reply Given the problems faced by Barrington, it is likely that the $1M will indeed be drawn upon . Given interest rates for such loans will be about 8%, this leaves a margin of 2%, or $20K. In this scenario, the shares are also worth zero. Therefore to expose us to this deal for only $20K is pointless . Therefore we insisted on certain other conditions, which were agreed to by Blom . The deal is not to go ahead unless documentation for what appears below is completed to our satisfaction before the $1M is made available. [Emphasis in original.] We receive $50K of the first $1M Blom makes from his entire share sale when Barrington is sold, exclusive of our 900,000 shares. Once Blom has made $1M, then our shares should be worth a significant amount. We can exercise our $1 at any time, without conditions. Full shareholder entitlements pass to us for the 900,000 shares. We will not be directors of the company, and therefore not liable for losses of the company. Full disclosure of all relevant, completed shareholders' agreements regarding security of the $2.5M and sale of the company. Signing of a 3-year grape sale agreement with Barrington Estates for the sale of a minimum of 40t Semillon grapes @ $1200/t, applicable to vintages 2003-2005. Signing of a 3-year winemaking agreement with Barrington for winemaking @ $800/t, with other associated charges at reasonable market rates. Signing of a 3-year national wine distribution agreement, with Barrington agreeing to sell a minimum of 2000 cases per year of our wine (using the current allocations of product range as a guide). If the 2000 cases are not achieved, then the 2000 will be purchased from us by Barrington regardless. Mount Eyre to guarantee a minimum stock of 4000 cases available for sale on the local market at any one time (no vintage to be specified). We do not require legal advice on these contracts at this point in time, and will satisfy ourselves that they are correct before going ahead. The above three agreements between Barrington and Mount Eyre must be such that it is specified that any sale of Barrington must carry conditions that the 3-year contracts with Mount Eyre are to be honoured by the new owner. [Emphasis in original.] The benefits to our company are self-explanatory. If the shares become worth nothing, and the company remains solvent and sells , the contracts must be honoured by the new owners, guaranteeing us income. In this respect the deal is still of great benefit to us . If Barrington goes bankrupt, then the contracts are worth nil . Possible outcomes Assuming Blom gets his paperwork right, this is what can happen : Barrington goes bankrupt . This is the worst case . This would mean a 'fire sale' takes place and assets are sold off one by one . I have calculated that even in fie sale conditions, that $30M will be realised . Given BankWest and Dr Morrison are only owed $23.5M, we still recover our $1M, and go home a lot wiser and sober ! If the $1M is not recovered, we take some good land, wine or equipment very cheaply . Barrington sells for less than net assets . The 900,000 shares are worth only a small sum, but we still make the 10% and whatever the shares are worth. We also have ongoing contracts and sales distribution. Barrington sells for net assets or better . The shares are worth a lot of money. Blom is hopeful that the company will sell for 1-2 times net assets, but that there have been industry precedents of 3 times net assets (this was for Petaluma, and they are not Petaluma!) Whoever buys Barrington will have to keep dealing with Mount Eyre. This will either help us grow, or lead to them wanting to buy out of the contracts or buy out our business. I hope this helps you! Aniello Inanuzzi" [Underline emphasis added.] Dr Tsironis' cross examination 87 Dr Tsironis was called as Mr Toomey's first witness. She said that she had left to Dr Iannuzzi all business arrangements and discussions with solicitors and St George for procuring the $1M letter of credit. 88 Dr Tsironis said that she had never seen the Deal Summary prepared by Dr Iannuzzi on 9 January 2002. Not having seen the document before, she was unable to give much evidence about its contents. 89 One matter was raised in cross examination which reflects on Dr Tsironis' credit generally. She was asked about a statutory declaration which she had made for the purpose of the transaction wherein she guaranteed the liability of Aneve to St George in order to obtain the $1M letter of credit. In the statutory declaration, Dr Tsironis stated: "I have received independent advice regarding the loan and security documents. After receiving that advice I have freely and voluntarily signed … the Deed of Guarantee and Indemnity and the Deed of Cross Collateralisation." 90 The independent advice referred to in that statutory declaration was said to have been provided to her by Mr Menio Belogiannis (usually referred to as Mr Belos), who is, and had been for many years, the accountant for Dr Iannuzzi and Dr Tsironis and of Dr Tsironis' parents. Mr Belos gave a certificate as part of the Transaction Documents in which he stated that he had discussed with Dr Tsironis the viability of the transaction, amongst other things. 91 Dr Tsironis said that, in fact, it was not true that she had received independent advice from Mr Belos about the transaction, as she had stated in the statutory declaration. She said that she had signed the statutory declaration without reading it. I will return to the significance of this evidence in due course. Dr Iannuzzi's explanation of the NAB advice 92 Dr Tsironis had been called first by Mr Toomey despite a request by Mr McClintock that Dr Iannuzzi, as the major witness for the Plaintiffs, be called first. Dr Tsironis was cross examined upon NAB's refusal to provide funding and, most significantly, upon the Deal Summary, which had not been included in the Agreed Tender Bundle and had been produced by Tress Cocks & Maddox in answer to a subpoena served by BankWest. Dr Iannuzzi's evidence commenced on the morning after Dr Tsironis had been cross examined about the Deal Summary. Clearly, there had been an opportunity for the Plaintiffs' legal advisers to consult overnight with Dr Ianuzzi about the NAB advice and the Deal Summary. 93 Mr Toomey, having obtained Dr Iannuzzi's evidence as to the meetings of 22 and 29 December, then sought his explanations as to the NAB advice and the Deal Summary. 94 Dr Iannuzzi said that he had disagreed with Mr Coupe's assessment that the proposed transaction was high risk. He said that the reason was: "A. Because I had the assurances of Lennon from our meeting on 29 December. Lennon was a much more senior banker than John Coupe, and therefore I felt that Lennon knew much more about this deal than John Coupe. Furthermore, this was a period of time with the National Bank there was a lot of upheaval in the managers and I didn't feel John Coupe had a good grasp of our affairs. Indeed, he had his own personal distractions as well at the time. He had a wife with a brain tumour and he had his mind elsewhere." I find this a strange explanation, for three reasons. 95 First, it is clear to me from Mr Coupe's summaries of the Plaintiffs' financial affairs that, in fact, both he and NAB had a very good grasp of those affairs and that Mr Coupe communicated his understanding and concerns very carefully and clearly. 96 Second, it was Mr Leeson, Mr Coupe's superior, and not Mr Coupe, who told Dr Iannuzzi that "there was no way I was going to get finance" . The reason Mr Leeson gave to Dr Iannuzzi was significant: "Q. And what did he say to you? A. He said the reason why I wouldn't get this finance was Gary Blom. Q. Is that all he said? Did he expand on that? A. Well, basically he said that Gary Blom's reputation, in his mind, was not a good reputation and that anything to do with Blom he didn't want to be part of." 97 Third, it is difficult to believe that Dr Iannuzzi would place more reliance on Mr Lennon than on Mr Leeson and NAB. Dr Iannuzzi's relationship with NAB had been a long term one and the bank had provided him and his associated entities with substantial credit facilities. On the other hand, Dr Iannuzzi had never met or spoken to Mr Lennon before 22 December 2001, when they spoke by telephone for about eighteen minutes, and he had met Mr Lennon face-to-face only once, for about an hour and a half on 29 December. Further, Mr Lennon's "assurances" were in connection with a transaction which involved Mr Blom, whom Mr Leeson regarded as untrustworthy – a view of Mr Blom which, according to Dr Iannuzzi in his Deal Summary, was shared by many. 98 Dr Iannuzzi said that he prepared the Deal Summary from three sources of information: his dealings with Barrington from about 1999 onwards, what he had been told by Mr Blom, and what he had been told by Mr Lennon. In his dealings with Barrington he had spoken to Mr Gibb, amongst others. 99 Dr Iannuzzi was asked as to his source of knowledge for the statement in the Deal Summary "Barrington has again hit a cash crisis" . He said: "A. Well, the source of that knowledge was just previous information I've already outlined in this document as well as the discussions I had with Blom and Lennon." I pause here to observe that if Mr Lennon had told Dr Iannuzzi that Barrington had "again hit a cash crisis" , that statement was scarcely consistent with statements by Mr Lennon that the company was trading well, there was "no risk" , and that the proposed transaction was "safe" . 100 A little later Dr Iannuzzi expanded on this evidence: "A. The subject of the Slicks came up, and there was also broader discussion than what I had just previously said that has been deleted, but Lennon was mentioning that the Slicks had been difficult. He mentioned this tactic of Chapter 11 I think it is called that they used to – he said they more or less sabotage a company and then they can buy it back cheaply. As part of that discussion Lennon also said that the Slicks were meant to be providing money and they were now talking of providing money and that is why they had to come to this agreement …" 101 Dr Iannuzzi was asked: "Q. The next sentence 'Sales have basically not hit projections' : who told you that? A. Blom didn't tell me that. Lennon did mention that sales weren't hitting projection, but that is also something that I viewed as a problem throughout the wine industry as well, so that has got my view in there as well as what I had been told by Lennon." Again, I pause to observe that the statement by Mr Lennon that sales had not hit projections was scarcely consistent with a statement by Mr Lennon that the company was trading well. 102 He was taken to another statement in the Deal Summary: "Q. Just take the first sentence: Given the problems faced by Barrington, it is likely that the $1m will indeed be drawn upon. Was that your belief when you wrote that? A. Yes, it was. I wouldn't have written it otherwise. Q. And what did you think would be the result if the $1m was drawn upon? A. Well, I understood that the $1m would also be used as part of the sale process and in order to sell the company, so it was likely that it was going to be used and it had been calculated as being what was necessary to keep the company going. Q. Did you understand that if the $1m was drawn upon, you may not recover? A. That was certainly not something that I was factoring into my thinking because Lennon had told me it was safe and the $1m and the money spent on this would be recovered as part of the sale process as well." Dr Iannuzzi's statement that not recovering the $1M at all was "not something that I was factoring into my thinking" is contradicted by his analysis in the Deal Summary: "If the $1M is not recovered, we take some good land, wine or equipment very cheaply" , obviously meaning that all would not be lost if the $1M was not recovered because Mount Eyre would still be able to buy assets of Barrington very cheaply at a 'fire sale' . 103 Dr Iannuzzi, in his affidavits and in his evidence in chief, had been insistent that the discussion with Mr Lennon on 29 December had been straightforward and that Mr Lennon had given him the clear and unequivocal assurance that "we were in a safe position, that the $1M was not at risk" . He had said at the conclusion of the meeting with Mr Lennon: "I was happy that the transaction was safe" . The impression clearly sought to be given by the Plaintiffs' Statement of Claim and by their affidavit evidence was that it was a simple case of two doctors relying implicitly on unequivocal, straightforward assurances by Mr Lennon at one meeting that the transaction was "safe" , deciding to proceed, instructing solicitors merely to prepare the appropriate documentation, and then executing it. 104 Confronted with his own assessments of risk in the Deal Summary, Dr Iannuzzi could no longer assert that the case was quite so simple. He gave this evidence: "HIS HONOUR: Q. Just so that I understand your position, Dr Iannuzzi, are you saying that if you had believed that there was any real risk that the guarantee for $1m would actually be called upon, you would not have entered into the transaction? A. Called upon and lost, your Honour, rather than just called upon and then repaid. There's a distinction there and, as things progressed, the difference between being called upon, in my view, had changed. The implications of being called upon for the $1m had changed substantially between earlier on and then later, once it was all in concrete, the 'called upon' had quite a different significance to what it did earlier on. Q. Just so that I can understand what you mean by that because you were talking about your belief changing over a certain period of time, as I understand it – is that right? A. Well, there's a little bit of confusion, your Honour, because initially when the $1m and guarantee was being discussed, it was as part of this – well, it was always part of the $2.5m, and this $2.5m would be used for the company and to oversee the orderly sale of the process, but by the time we actually progressed and signed the guarantee, the letter of credit and the agreement was such that it would only be called upon at the conclusion of the sale process if the sale process didn't realise the assets and that basically 'calling upon' in the final agreement, basically meant that we were out, the $1m was lost; whereas initially the $1m could have been drawn upon to be used as part of this orderly process in an orderly company which could then have been repaid when the company is sold. Q. What I want to understand is this: at the conclusion of your discussion with Mr Lennon on 29 December 2001, was it your belief that there was no real risk that the $1m guarantee would ever be called upon? A. As I understand it, the $1m would not be lost. Q. Was it your belief at the end of that discussion that the $1m guarantee would be called upon but that you would not lose money in the end? A. That was, yes, certainly a possibility. That was an understanding that I had as a possibility at the end of that conversation, but then, as the actual nitty gritty happened and evolved with the guarantee, the status of this $1m changed a little bit so that it then became a situation where, if BankWest called upon it, it basically would have meant that the money was lost because it became such that the bank was then putting in the money and that – because the agreement was that the LC would be then called upon at its expiry or if the sale process was exhausted and the bank didn't recover enough money to pay out its own principal. Q. I'm not sure I quite follow that progression of thought. Did you have any discussions with Mr Lennon after 29 December 2001 which led you to change your beliefs or views about the risk involved in this transaction? When I say 'discussions with Mr Lennon, after 29 December' , I mean between 29 December and the time that you actually delivered the guarantee and the letter of credit? A. There was no discussion, your Honour, in terms of the risk changing, of the status of the safety changing. It was actually the – I'm not a banker. I'm not a financier. I don't quite understand, you know, how LCs work but I do understand that the safety wasn't changed. That side of the thinking had never altered. The $1m was safe. No matter what happened with the sale process, our money should have been well and truly covered because there was plenty of fat in the equation. But, as the final letter of credit stood, it had taken on a status such that it was there sort of as I've explained: if it was drawn upon, the final circumstances drawing upon the letter of credit would have meant that the money, in effect, was lost; whereas initial discussions of the $1m were such that it could have been drawn, even in part, just to help this process to oversee the orderly sale of the company. Q. Am I understanding you rightly? You say that as the transaction took shape in its final form with a letter of credit – did you appreciate then that there was a risk that the $1m could be actually lost? A. Well, the safety aspect was always very clear in my mind, that it was a very safe transaction, because Lennon had given me these assurances. He had verified the balance sheet. He commented on two occasions that, 'Your money would be safe'. He had made these allusions to the business in the Blue Mountains to give us some more comfort. He gave me a lot of confidence in the process and that he knew what he was doing, that he had full control of this process. My opinion of the safety of the transaction didn't waver between the time I met him and the time it was actually signed off, no, it didn't change whatsoever; but the mechanics of the nitty gritty of actually of the letter of credit and all that sort of thing was not something that I must confess I was fully in charge of because I'm not a banker and I don't understand how these instruments work in totality. Q. I assume that you discussed with your lawyers how this transaction would work before you gave your final assent to it, did you? A. Well, final assent, I understood that the $1m would be called on only in the event that they didn't recover their funds or if the letter of credit expired, the sale process not being exhausted; but again because of those assurances that it would be sold by 30 June, et cetera, that was a scenario that I just didn't have any imagination could really in reality occur because of all these assurances I'd had and all these representations I'd had." 105 This evidence, and the manner in which Dr Iannuzzi gave it, impressed me most unfavourably. It was full of voluble evasions, qualifications, distinctions, changes of position, ex post facto rationalisations and self justifications. Dr Iannuzzi gave me the strong impression of a man trying hard to accommodate very different versions of what had happened: the version he had given in his affidavit evidence and the version which appeared from his own Deal Summary. Dr Iannuzzi's cross examination 106 Mr McClintock's cross examination of Dr Iannuzzi was highly damaging to the doctor's credit. I will recite but a few examples. 107 In his second affidavit Dr Iannuzzi said that at no time prior to his execution of the Transaction Documents did Mr Lennon or anyone else from BankWest say anything to the effect that Mr Slick had taken steps towards calling in his loans to Barrington. However, in the Deal Summary under the heading "The need for current deal" Dr Iannuzzi recounted the circumstances which had brought Barrington to its "cash crisis" . One of the circumstances was: "Slick then made a call on his loans" to Barrington. This was correct: as I have noted, Mr Slick's solicitors had served Notices of Demand on Barrington on 4 December 2001. 108 Dr Iannuzzi's cross examination proceeded: "Q. Do you see it says, 'Slick then made a call on his loan' ? Do you see that? A. Yes. Q. That tells you that prior to 9 January 2002, Mr Slick had made a call on his loan; that's correct, isn't it? A. Yes. Q. You said in your evidence that Mr Lennon and Mr Blom had told you that; correct? A. Yes. Q. You say in your affidavit, in effect, that Mr Lennon didn't tell that you Mr Slick was calling in his loans? A. Yes. Q. The two statements are inconsistent, aren't they, Dr Iannuzzi? A. You could say that. Q. One of them is true – HIS HONOUR: Q. Well, I want your answer, not what you attribute to Mr McClintock. What do you say? Are the two statements inconsistent? A. Well, not – I don't believe so in entirety, your Honour, because I think there is context that needs to be taken into account here. MR McCLINTOCK: Q. What context do you say needs to be taken into account to reconcile those two statements – being 4(d) and the second last paragraph on page 7 – so that they are consistent? A. Because Lennon had told us that Slick was being mischievous; Lennon had told us that he was using this tactic of wanting to use the Chapter 11 tactic, and this document that I've prepared here is somewhat interpretive on my part. It's not an exhaustive document. It's not a complete document. It was never meant to be a document that I – you know, I never thought it would come to this. Q. You never thought we'd find out about it, did you? A. I'm not sure about that. It's not something that I'd ever contemplated. Q. I'm sorry for interrupting you. I shouldn't have done that. Would you continue your answer? A. And therefore it appeared to me that there could have been some threats there without necessarily formally being taken into an approach of legal action, so there are degrees of this calling. You see, I'm not a financier. I mean 'calling' and 'taking legal action' , there are implications here which I'm not sure of." 109 Dr Iannuzzi struck me as distinctly uncomfortable when Mr McClintock put to him that his two statements were inconsistent. After a long awkward silence (of which I made a note at the time), his response was: "You could say that" . He then gave a voluble, rambling, evasive, self-serving and, ultimately, quite unbelievable answer. I am satisfied that Dr Iannuzzi was not telling the truth in his second affidavit when he said that neither Mr Lennon nor anyone from BankWest had told him prior to execution of the Transaction Documents that Mr Slick had called in his loan to Barrington. 110 In his second affidavit, Dr Iannuzzi said that at no time prior to his execution of the Transaction Documents did Mr Lennon or anyone else from BankWest say anything to the effect that Barrington was in default under any facility or loan or security document. 111 On 15 January 2002, Dr Iannuzzi sent an e-mail to his solicitor, Mr Cheung, in the following terms: "This has been written after our telephone conversation late this afternoon. 1. BankWest has been instructed by me as to what is required with respect to: – veracity of assets & liabilities – waivers of default – $1.0M vs $1.1M – drawing on the $1.0M (conditional) BankWest will resolve all these issues Wed morning, so there is no need to do anything there." 112 -The cross examination proceeded: "Q. You see that, that you have said 'BankWest has been instructed by me as to what is required with respect to' , second point, 'waivers of default' ? A. Yes. Q. What had you told BankWest about waivers of default? A. I'm not sure. Q. You knew, didn't you, that Barrington Estates was in default under the loan agreement? A. I'm not sure what I believed with respect to that. Q. Dr Iannuzzi, you have written there that you instructed BankWest as to what was required with waivers of default, haven't you? A. Yes. Q. Is it your evidence that you don't remember now what you were referring to there? A. I don't remember what I was referring to. Q. You are aware, aren't you, that Barrington Estates was in default as at 15 January 2002 with the loan agreements with BankWest? A. Can't remember. Q. You are also aware, aren't you, that your lawyers had insisted that the defaults be waived prior to you going ahead with the transaction because if they weren't waived BankWest could immediately call up the loan? A. I recall that there were waivers of default discussed, the exact details of which I am unclear on, but I also do know that Lennon was overseeing this proceeding and that he was in charge of it and I had trusted he knew what he was doing through all of this. HIS HONOUR: Q. I just want to understand that last answer Dr Iannuzzi, you say that you were aware prior to final execution and delivery of the guarantee and the letter of credit that Barrington was in default of its facility agreement with the bank? A. I'm aware that there was – through my discussions with Lennon and through all this goings on I was aware that there were negotiations between the bank and the parties of the board, et cetera, that they were patching up some problems of some sort. I'm not exactly sure of the exact details, the nature of which, and all that sort of thing. Q. What I want to understand from you is although you may not have been aware of the precise content of the negotiations, were you aware that there were negotiations in progress to try and cure the problem of the fact that Barrington was in default with BankWest? A. I was aware that there were problems – sorry, could you repeat your question, your Honour? Q. While you were not aware of the content of the negotiations, were you aware that there were negotiations in progress to try and get around the problem caused by the fact that the company, Barrington, was in default with BankWest, I should say? A. Sorry? Q. You referred to some negotiations to get around the problem between the board of the company and the bank. A. This was a time, your Honour, when there was obviously a bit of upheaval going on, a lot of negotiation, a lot of things going on. I know that there were negotiations between the bank and the board, the nature of which I didn't know the details of. I do recall the words 'default' and 'waivers of default' were mentioned through those things, but the significance and meanings of those things I must confess I have a very poor understanding for, but I was aware that Lennon was in all of this negotiating through and that he was overseeing the process, and I was relying on him heavily through all of this to make sure this was right. … MR McCLINTOCK: Q. Just go to paragraph 4(g) of the affidavit which you have in front of you. You see there that you say that Mr Lennon didn't tell you that Barrington was in default under any facility or loan or security document? A. No, I don't think he did, no. Q. You certainly were aware of the need to obtain waivers of default prior to 21 January 2002, weren't you? A. I think so. Q. And the reason why it was necessary to obtain waivers was that Barrington Estates was in default, wasn't it, to your knowledge? A. Well, it must have been, but again the significance of all these things I'm not sure of, Mr McClintock. I'm not a trained banker or financier." 113 Again, this evidence struck me as most unsatisfactory. First, I simply cannot accept Dr Iannuzzi's assertion that he has a "very poor understanding" of the significance and meaning of the words "default" and "waiver of default" . His analysis in the Deal Summary and his correspondence with NAB (see e.g. Exhibit D2) show that he is very familiar indeed with all aspects of property dealing and investment financing and, indeed, he is often prepared to assert his own views in those areas aggressively and with complete self confidence. 114 Second, Dr Iannuzzi clearly endeavoured to suggest in his second affidavit that he had no idea prior to execution of the Transaction Documents that Barrington was in any sort of difficulty with BankWest by reason of default or otherwise. Yet his evidence in cross examination shows that this was not at all the true picture. 115 Third, Dr Iannuzzi's repeated insistence that, in all of his confusion and doubt, he simply trusted Mr Lennon to make sure that everything would turn out all right is simply unbelievable in the face of the evidence as to his own negotiations and enquiries, as emerges from the Deal Summary and the documents produced by Dr Iannuzzi's solicitors. 116 Dr Iannuzzi was cross examined about the statement in his second affidavit that he was not told by Mr Lennon or anyone else from BankWest that BankWest's interest, fees and other costs would rank ahead of the Plaintiff's letter of credit in the distribution of funds from asset sales. Dr Iannuzzi admitted that his solicitors had sent him a document on 10 January 2001 which summarised the proposed order of priority of distribution in the contemplated transaction. The relevant parts of the document are as follows: "Bank of Western Australia Ltd, Barry Thomas Morrison, Earl Frates Slick (trustee) and Perpetual Trustee Company Ltd (trustee) have taken security over Barrington Estates Ltd and its subsidiaries above (the "Group") and have previously agreed certain priority arrangements. They now propose regulating their priority position in accordance with the summarised priority order set out in the table below (although the final position is not yet agreed). 1. BankWest first to $22.0m (which can be increased to $25.0m) 2. Morrison second to $2.5m 3. BankWest/Slick/Perpetual third to $2.5m (pro rata in relation to the current proposed $2.5m funding – this is the funding which will be supported by the letter of credit). … To each of the above dollar amounts, interest, fees, costs and expenses are additional." 117 Dr Iannuzzi agreed that he had sent an e-mail to his solicitors on 11 January 2001 in which, inter alia, he corrected the statement in the priority sheet that Dr Morrison had priority for $2.5M, saying that Dr Morrison was in fact owed only $1.5M. The following exchange then took place: "The fact that you were able to correct this priority sheet shows that you read it with some attention, doesn't it? A. It shows that I read it. Q. And with some attention, Dr Iannuzzi? A. It's only a one page document. Q. But you read it carefully, didn't you? A. If that's the conclusion you want to draw. Q. No, Dr Iannuzzi, I don't want to draw any conclusion. A. Sorry. Q. I want your evidence as to whether you read this carefully or not? A. Well, I read it. Q. You read it carefully, may I suggest, because you wanted to check whether the information contained in it was accurate? A. Yes." 118 I regard Dr Iannuzzi's evident reluctance in this passage to admit what must have been the truth to be another example of his willingness to engage in prevarication and evasion when faced with an awkward question. 119 Dr Iannuzzi was then asked about the statement in the priority sheet "to each of the above dollar amounts, interest, fees, costs and expenses are additional" . The cross examination proceeded: "Q. That told you that additional to BankWest's $22m were interest, fees, costs and expenses; that's correct, isn't it? A. That's what it says. Q. You were aware of that when you read this document on 10 or 11 January 2002, weren't you? A. I'm not sure if I read that bit, but I don't believe this to be the final priority deed, Mr McClintock. Q. You were aware, weren't you, that if this priorities document stood, it was telling you that BankWest was entitled to add interest, fees, costs and expenses to the principal amount of the debt? A. That's what it says. Q. Yes, and the consequence is, isn't it, that if it was entitled to do that, those amounts would rank ahead of the $1m that you were, in effect, guaranteeing? A. That's not my understanding. Q. That's what it says there, isn't it, Dr Iannuzzi? A. That's what it says, but that's not what Lennon told me. Q. It's what Blake Dawson Waldron, on behalf of the bank, was telling your solicitor, who told you on 10 and 11 January, isn't it? A. Yes, but that wasn't the only mistake that was made." … "Q. … Let us look at what you said in your affidavit. You said: 'At no time during these communications did David Lennon say( nor did anyone else from the bank say) … ' That's what you said, isn't it? A. Say, yes, say. Q. It's perfectly clear that Blake Dawson Waldron, on behalf of the bank, was saying in the document which appears on page 846 that interest, fees and costs were additional to principal and that they therefore ranked ahead of the $1m? A. But Blakes is not the bank." 120 The specious distinction drawn by Dr Iannuzzi between BankWest telling him something and BankWest's solicitors telling him something was indicative of the prevaricating way in which Dr Iannuzzi was prepared to give his evidence. 121 The cross examination proceeded: "Q. When you were swearing this affidavit in May 2003, a little over a year and four months after you read that document, you knew that Blake Dawson Waldron, on behalf of the bank, had told Tress Cocks that interest, fees and other costs would be additional - correct - to the principal? A. Well, it was on the sheet. It was on the page. Q. Yes. And you knew that they would therefore rank ahead of your letter of credit, didn't you? A. Well, I didn't quite appreciate it in that way, I must say. Q. Dr Iannuzzi, I don't want to be in any way unfair to you, but I want to suggest to you that when you swore this affidavit, you knew that paragraph 4(m) was untrue? A. Paragraph which was untrue? Q. Paragraph 4(m). Read the introductory words of paragraph 4 and subparagraph (m) to yourself. A. Yes: 'The Bank's interest, fees and other costs would rank ahead of our letter of credit.' Q. Please, don't rush yourself. Read the introductory words of paragraph 4 and read paragraph (m) to yourself. A. (Witness does as requested.) Q. Have you read that? A. I have read it. Q. It wasn't true, was it? A. I believe it was true because that's the way I understood it, Mr McClintock. Q. I want to suggest to you, Dr Iannuzzi, not merely is it untrue, but you knew it was untrue when you swore that affidavit, didn't you? A. No, I understood that our money, the $1m, would rank ahead of all those things because that is the way it was explained to me and my wife by Mr Lennon. Q. I want to suggest to you that that is simply untrue, that Mr Lennon never said anything like that? A. I don't agree with that." 122 Dr Iannuzzi's explanation that he did not understand the plain meaning of a straightforward statement in the priority sheet, which he must have read carefully, because of what Mr Lennon had said in the meeting on 29 December is, to my mind, incapable of acceptance. 123 Dr Iannuzzi conceded that Mr Lennon said at the 29 December meeting that he and Dr Tsironis should look not only at the up-side of the transaction but also at the down-side. Dr Iannuzzi added: "In our conversation at Blue Bay this was the only cautionary remark that he made. Everything else was positive and comforting." He was then asked about the alleged Solvency Representation. 124 Dr Iannuzzi conceded that in the Plaintiffs' Statement of Claim he was alleging that he was not aware that Barrington was in financial difficulties. He was taken to paragraph 46 of his first affidavit in which he had said: "I was never under the impression that [Barrington] was in any sort of a precarious position." He was then taken to what he had written in the Deal Summary of 9 January 2002. 125 He admitted that he was of the view at the time that he wrote the Deal Summary that Barrington was in a "cash crisis" , however he said that "cash crisis" was a "poor choice of words" on his part and that he had "overstated" the position. I completely reject that explanation. Dr Iannuzzi is a highly articulate person who has no difficulty in expressing himself very clearly and forcefully in writing. There is no reason for him to have "overstated" the position in a document which he was preparing for his own legal advisers. 126 Dr Iannuzzi was asked directly whether he still said that what he had sworn in the first sentence of paragraph 46 of his first affidavit was true. He replied: "Yes" . There is no need to dwell at length on the manifest inconsistencies between Dr Iannuzzi's assertion that prior to his execution of the Transaction Documents he had no inkling that Barrington was "in any sort of precarious position" and the state of his knowledge as clearly revealed in his Deal Summary, his other evidence, and in documents produced from NAB and his solicitors. I will merely summarise some of the inconsistencies. 127 Dr Iannuzzi had said in examination in chief that Mr Lennon had told him that Barrington was trading well. When asked about the statement in the Deal Summary "sales have basically not hit projections" , he said that Mr Lennon had told him that. The two statements are inconsistent. 128 Dr Iannuzzi said in paragraph 46 that he was never under the impression that Barrington was "in any sort of precarious position" , yet the Deal Summary is riddled with statements such as: – Barrington's sales being "slow" ; – money "again drying up" ; – Barrington having "again hit a cash crisis" ; – "everyone is getting edgy" ; – Mr Slick's desire to "send the company into liquidation and then take over Barrington for a pittance" ; – "a major cash flow" problem of the company; – the company being worth "only $40M if insolvent, according to BankWest" ; – $2.5M being needed "to keep the company trading" ; – "if Blom cannot raise the $1M in time, the deal falls over and the company is doomed" ; – "assuming the company stays liquid" ; – "if the company goes bust, the shares are worth nothing" ; – "this is what can happen: Barrington goes bankrupt …" . 129 Further, I refer again to NAB's advice to Dr Iannuzzi on 8 January 2002, pointing out to Dr Iannuzzi Barrington's "trading loss accumulation" , the "strong degree of risk" involved in the proposed transaction, and to the fact that Barrington clearly needed funds to meet substantial growth plans "against a financial track record that doesn't yet show a continued record of trading profitability" . 130 In the light of this evidence I conclude that Dr Iannuzzi's statement in paragraph 46 of his first affidavit that "I was never under the impression that the company was in any sort of precarious position" was a serious and deliberate falsehood at the time that the affidavit was sworn, and that that false statement was made with the intention of inducing the Court to believe that Dr Iannuzzi, in entering into the Transaction Documents, had relied implicitly only upon representations which he claimed Mr Lennon had made to him in the meetings of 22 and 29 December 2001. Confronted in the witness box with the evident falsity of his evidence in paragraph 46 of his affidavit, Dr Iannuzzi nevertheless chose to adhere to it. 131 For the reasons which I have elaborated at some length, I am unable to accept Dr Iannuzzi as a witness of any credit. Conclusions as to the Representations 132 It must be remembered that the Plaintiffs, in their Statement of Claim, rely only upon express Representations alleged to have been made by Mr Lennon; there is no allegation of misleading, deceptive or unconscionable conduct by means of implicit representations or by failing to disclose what there was a duty to disclose. 133 As I have said at the commencement of this judgment, the case turns, first, upon whether the Plaintiffs have proved to the Court's satisfaction that the statements alleged to have been made by Mr Lennon to them were made and, second, whether the Plaintiffs relied to any extent at all on what was said by Mr Lennon in the two meetings. 134 I have come to the conclusion that the Plaintiffs have failed to prove that any of the Representations alleged in the Statement of Claim were, in fact, made by Mr Lennon. My reasons are as follows. 135 First, I must bear in mind that what is alleged against Mr Lennon, if true, brands him as a deliberate and blatant liar: it is quite clear from the evidence as to the discussions in which Mr Lennon had participated prior to 22 and 29 December 2001 that, if he made the statements about Barrington attributed to him, particularly those about the company's trading position, prospects and solvency, then he must have known that those statements were false. Further, if he had given any assurances to Drs Tsironis and Iannuzzi to the effect that the proposed letter of credit transaction with BankWest was "safe" or that he would not let them get into the deal "if he thought that [their] million was at all at risk" , then, not to put too fine a point upon it, he must have been a complete fraudster. That is a very serious allegation of misconduct to allege against a senior bank officer. 136 I find it inherently improbable that Mr Lennon, a senior officer of a major bank, would make such blatantly fraudulent representations in a commercial transaction which was clearly so fraught with risk of collapse and litigation that the probability of his exposure as a fraudster, to the ruin of his career, must have been seen as high. Mr Lennon must have been mindful of the risk of something he said to Dr Iannuzzi being used against him, if not from his own considerable banking experience, then because he was actually reminded before the meeting of 29 December. Mr McGarry gave evidence that on or about 28 December 2001 he had a conversation with Mr Lennon in which Mr Lennon told him that Mr Blom had arranged for him to go to Blue Bay to discuss with Dr Iannuzzi the "guarantee in support of Blom's funding in the package" . Mr McGarry said to Mr Lennon: "The deal with Iannuzzi is between them, not us. Blom's arranged this, let's not get involved. Issues can arise in these sorts of situations. Be careful of what you say to Dr Iannuzzi." Mr Lennon replied: "I'm not stupid, Paul." Mr McGarry was cross examined about this conversation. I have no hesitation in accepting Mr McGarry's evidence that the conversation occurred as he said. 137 Second, I must bear in mind that Mr Lennon has not been able to give evidence or to defend himself in any way. The serious accusations of misconduct against him depend solely on the uncorroborated evidence of Drs Iannuzzi and Tsironis, both of whom have, of course, a strong motivation for accusing BankWest and Mr Lennon of wrongdoing and thus escaping their liabilities. 138 Third, I take into account that in the only document which Dr Iannuzzi brought into existence to record his analysis of the proposed transaction, i.e. the Deal Summary, there is no reference whatsoever to any assurances by Mr Lennon that the transaction was "safe" or that it had no risk or little risk, or that Dr Iannuzzi was relying on something said by Mr Lennon. There is no reference at all in the document to the meetings with Mr Lennon which occurred on 22 December and 29 December. This is surprising if, as Dr Tsironis and Dr Iannuzzi would have it, they made up their minds to enter into the transaction on the basis of what Mr Lennon had said at the meeting of 29 December. 139 Fourth, I take into account that I am unable to accept Dr Iannuzzi as a witness of any credit. 140 Fifth, I regard it as improbable in the highest degree that Dr Iannuzzi would have accepted trustingly and at face value anything that Mr Lennon had said at the meetings of 22 and 29 December. The content of Dr Iannuzzi's communications with NAB, with their valuers, and with St George immediately after his execution of the Transaction Documents, taken in conjunction with his demeanour in the witness box, convince me that he is the sort of person who takes nothing and nobody on trust in his business dealings, who regards himself as knowledgeable and experienced in business matters, who always makes his own enquiries to the fullest extent possible, who makes his own judgments and who is not backward in criticising in blunt terms those who do not agree with him. 141 Sixth, I take into account that Dr Tsironis' credit generally is adversely affected by the fact that, if her evidence in cross examination is to be believed, she falsely swore a statutory declaration as to the independent advice which she had received from Mr Belos prior to executing the Transaction Documents, knowing that the statutory declaration was to be relied upon by St George Bank. 142 Seventh, it is clear that at the time of the meeting on 29 December and thereafter Dr Tsironis was wholly and understandably preoccupied with the serious medical condition of her new-born baby. I think it highly unlikely that at the meeting on 29 December she was in a state of mind in which she could focus on what was being said between Mr Lennon and her husband or could afterwards retain an accurate recollection of it. 143 Eighth, it is clear that Dr Tsironis left implementation of the transaction entirely to Dr Iannuzzi. Her evidence generally and her demeanour, coupled with the very assertive manner of Dr Iannuzzi, leaves me with the strong impression that in matters of business Dr Tsironis is prepared to acquiesce in decisions made by Dr Iannuzzi and that she is very much directed by him in that regard. I am of the view that in business matters Dr Tsironis would be prepared to support Dr Iannuzzi to whatever extent he felt necessary, if he required it of her. 144 Ninth, I take into account generally as to the Plaintiffs' case that they have not been willing to call as witnesses those from whom they had received advice in connection with the transaction and who could have given direct evidence on the issue of reliance, namely, the NAB officers, Mr Coupe and Mr Leeson, their accountant, Mr Belos, and their solicitor, Mr Cheung. In my view, their evidence was required to explain what advice they gave to Dr Iannuzzi, if any, as to the subject matter of the Representations and as to what response Dr Iannuzzi made, if any, to that advice. Without their evidence, the inference is clearly open that Dr Iannuzzi discussed with them, or some of them, what he had been told both by Mr Blom and by Mr Lennon and sought their assessment. I conclude that the evidence of those witnesses would not have assisted the Plaintiffs' case. 145 Tenth, as against the foregoing, I take into account that BankWest has not called Mrs Lennon, who was present at the meeting of 29 December. Mrs Lennon could possibly have given evidence contradicting the evidence of Dr Iannuzzi and Dr Tsironis as to what Mr Lennon said at the meeting. However, I am not satisfied that the failure to call her has the same significance as the Plaintiffs' failure to call the four witnesses to whom I have referred above. The Plaintiffs' absent witnesses were all professional people directly involved in the transaction and must have had an intelligent understanding of what had been discussed between Dr Iannuzzi and themselves respectively. On the other hand, there is nothing to suggest that Mrs Lennon was knowledgeable in business affairs generally or about this transaction in particular so that she could be expected to have paid any particular attention to what was being said between Mr Lennon and Dr Iannuzzi. She was present at the meeting only because Mr Lennon was using the opportunity of taking her on a brief holiday. In view of what I regard as the overwhelming evidence as to the credit of Dr Iannuzzi and Dr Tsironis, and in view of the inherent improbability of their accounts of the 29 December meeting, I do not find that BankWest's failure to call Mrs Lennon has any great significance. 146 Eleventh, in addition to all of the foregoing reasons, I find it inherently improbable that Mr Lennon would have made the Balance Sheet Representation in light of the fact that the balance sheet being discussed was out of date and BankWest was then in the process of obtaining an urgent, up-to-date review of Barrington's financial position. 147 In summary, I must be satisfied on the balance of probabilities that Mr Lennon made one or more of the Representations, bearing in mind that a finding that he did so requires a finding of serious dishonesty on his part. I bear in mind also that before making a finding of fact that Mr Lennon made any of the Representations, I must feel "an actual persuasion" that he did so: Briginshaw v Briginshaw (1930) 60 CLR 336, at 361. 148 In Rhesa Shipping Co SA v Edmunds [1985] 2 All ER 712 at 718, Lord Brandon of Oakbrook said: "The judge is not bound always to make a finding one way or the other with regard to the facts averred by the parties. He has open to him the third alternative of saying that the party on whom the burden of proof lies in relation to any averment made by him has failed to discharge that burden. No judge likes to decide cases on burden of proof if he can legitimately avoid having to do so. There are cases, however, in which, owing to the unsatisfactory state of the evidence or otherwise, deciding on the burden of proof is the only just course for him to take." Quoted with approval in Moukhayber v Camden Timber & Hardware Co Pty Ltd [2002] NSWCA 58 per Heydon JA, and in Timms v Commonwealth Bank of Australia [2004] NSWSC 76 per Barrett J. 149 In the present case I may well have been able confidently to make a finding of fact as to whether any of the Representations were made had Mr Lennon's evidence been available. In the absence of Mr Lennon, the state of the evidence generally is not nearly as satisfactory as it could have been. In those circumstances, I prefer to make a decision on the basis of whether or not the Plaintiffs have discharged the burden of proof which lies upon them. 150 For the reasons which I have given, I am very far from feeling any actual persuasion that Mr Lennon made any of the Representations. Accordingly, I hold that the Plaintiffs have failed to prove that any of the Representations were made. Reliance 151 My conclusion as to the making of the Representations is sufficient to dispose of the case. However, for completeness, I should indicate my findings on the issue of reliance. 152 For the same reasons which I have given above in support of my conclusion as to the making of the Representations, I am far from feeling an actual persuasion that the Plaintiffs relied on anything said by Mr Lennon at the 22 or 29 December meetings pertaining to the subject matter of the Representations. My assessment of Dr Iannuzzi's willingness to rely on others has been given elsewhere. In particular, the Deal Summary shows that he made his own assessments and judgments, doubtless with the benefit of the advice of Mr Belos and Mr Cheung, whom he has not called to give evidence. 153 In particular, Dr Iannuzzi's assessment of the value of Barrington's assets was clearly his own opinion, not that of Mr Lennon. For example, he said in the Deal Summary that the Barrington Estates property was worth "$10M in my eyes" . He said: "My advice is that the company is worth $50-$70M if still trading" although neither Dr Iannuzzi nor Dr Tsironis said that Mr Lennon ever referred to a figure of $70M. 154 For the reasons which I have given, I cannot accept that Dr Tsironis, in making a decision to execute the Transaction Documents, relied upon anything other than Dr Iannuzzi's decision and his views. If it is true that she signed a statutory declaration that she had received independent advice from Mr Belos when she had not received that advice, or that she signed the statutory declaration without reading it, then she demonstrated thereby that she did not wish to take any active and informed part in deciding whether the transaction should proceed. I find it difficult to believe that she made up her mind that the transaction should proceed on the basis of what was said on 29 December and had no further discussion with Dr Iannuzzi about the matter between then and the time that she came to execute the Transaction Documents. 155 Aneve, of course, was merely the corporate manifestation of Dr Iannuzzi and Dr Tsironis. 156 Accordingly, if Mr Lennon said anything to the effect of any of the Representations, I conclude that the Plaintiffs have failed to discharge the burden of proving that they placed any reliance whatsoever on what was said in making a decision to execute the Transaction Documents. Orders 157 For the reasons which I have given, there will be judgment for the Defendant on the Plaintiffs' Statement of Claim. There will be a declaration and orders in terms of paragraphs 1, 2 and 3 of the Defendant/Cross Claimant's Cross Claim. 158 I will stand the proceedings over for a short time to enable the parties to bring in Short Minutes of Order reflecting these reasons and the orders proposed. I will set a timetable for such steps as are necessary to determine the quantum of damages payable by the Plaintiffs/Cross Defendants pursuant to their undertaking as to damages given to the Court on 10 January 2003. I will then hear argument, if any, as to costs. – oOo – Last Modified: 07/26/2004 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. 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