New South Wales Supreme Court CITATION : Pioneer Park Pty Limited (in liquidation), Clifford John Carpenter, Merlo Australia Pty Limited & Ors v Australia and New Zealand Banking Group Limited [2006] NSWSC 883 HEARING DATE(S) : 17/7/06 - 21/7/06, 24/7/06-28/7/06, 31/7/06-4/8/06, 9/8/06-11/8/06, 14/8/06-17/8/06, 21/8/06, 24/8/06 JUDGMENT DATE : 20 September 2006 JURISDICTION : Equity Division Commercial List JUDGMENT OF : Einstein J DECISION : ANZ was on 10 June 1999 entitled to enforce its registered mortgage debenture dated 25 January 1996 over the assets and undertaking of Pioneer Park [previously Domino Mining Equipment Pty Ltd] for the purpose of s 436 of the Corporations Law (as it was then). CATCHWORDS : Banker and customer - Claim by Pioneer Park Pty Ltd [previously "Domino Mining Equipment Pty Ltd"] that ANZ and New Zealand Banking Group Ltd wrongfully placed the company into administration and then liquidation in breach of terms and conditions of the banking agreements which regulated their relationship - Contract - Documenting of loan facilities - Whether certain facilities were provided for a fixed term or at least until an annual review date - Bank gives 30 days notice of termination of facilities expressly pursuant to provision dealing with right to review facilities - Notice impotent and misconceived - Subsequent notice demands immediate payment of amount said to be due - Shepherd v Felt & Textiles (1931) 45 CLR 359 - Whether ANZ entitled to rely upon validity of either or both notices in terms of other bases by way of events of default now said to have been available - Contract - Proper construction of facilities agreements - Reasonableness of opportunity to comply with demand - Good faith and reasonableness - Whether imported as implied terms into banker customer relationship - Trade Practices - Fair Trading - Misleading and deceptive conduct - Estoppel - Insolvency - Events of default - Gearing ratio formula - Whether particular failures to perform contractual obligations were remediable - Evidence - Jones v Dunkel - Principles - Dobbs Clause Bankruptcy Act 1924 (Cth) Bankruptcy Act 1996 (Cth) Civil Procedure Act 2005 (NSW) Conveyancing Act 1919 (NSW) LEGISLATION CITED : Corporations Act 2001 (Cth) Evidence Act 1995 (NSW) Fair Trading Act 1987 (NSW) Limitations Act 1969 (NSW). Real Property Act 1900 (NSW) Trade Practices Act 1974 (Cth) Adler v Australian Securities and Investments Commission [2003] NSWCA 131 Alcatel Australia Ltd v Scarcella & Ors (1998) 44 NSWLR 349 Allen v Carbone (1975) 132 CLR 528 Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 Australia and New Zealand Banking Group Ltd and Ors v Pan Foods Company Importers and Distributors Pty Ltd and Ors - [1999] 1 VR 29 Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 Batson v de Carvalho (1948) 48 SR (NSW) 417 Braithwaite v Foreign Hardwood Co [1905] 2 KB 543 British and Beningtons Ltd v North Western Cachar Tea Co [1923] AC 48 Bunbury Foods Pty Ltd v National Bank of Australasia Ltd (1984) 51 ALR 609 Bunge Corporation, New York v Tradax Export SA, Panama [1981] 1 WLR 711 Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187 Byrne v Australian Airlines Ltd (1995) 185 CLR 410 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Commonwealth Homes & Investment Co. Ltd v. MacKellar (1939) 63 CLR 351 Concut Pty Ltd v Worrell (2000) 75 ALJR 312; 176 ALR 693 Dobbs v the National Bank of Australasia Ltd (1935) 53 CLR 643 General Credits Ltd v Wenham (1989) 18 NSWLR 570 Inland Revenue Commissioners v Raphael [1935] AC 96 Jones v Dunkel (1959) 101 CLR 298 Landers v Schmidt [1983] 1 Qd R 188 CASES CITED : L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 Lustre Hosiery Limited v York (1935) 54 CLR 134 Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd [2001] 2 WLR 170 Massey v Sladen (1868) LR4Ex 13 Matthews v Brodie [unreported, Supreme Court of Victoria, McGarvie J, 2 April 1980, BC 8000008] McMahon v State Bank of New South Wales (1990) 8 ACLC 315 Mercer v Whall (1845) 5 QB 447 Minion v Graystone Pty Ltd [1990] 1 Qd R 157 Mobile Innovations Pty Ltd v Vodafone Pty Ltd [2003] NSWSC 166 Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 Overlook v Foxtel [2002] NSWSC 17 Pan Foods Company Importers & Distributors Pty Ltd & Ors v Australia and New Zealand Banking Group Ltd & Ors (2000) 170 ALR 579 Pioneer Park Pty Ltd (in liq) v ANZ Banking Group Ltd and Ors: [2005] NSWSC 498 and [2005] NSWSC 832 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 Ridgway v The Hungerford Market Company (1835) 3 Ad and El 171; 111 ER 378 Sandell v Porter (1966) 115 CLR 666 Schellenberg v Tunnel Holdings Pty Ltd (2000) 170 ALR 594 Shepherd v Felt & Textiles (1931) 45 CLR 359 Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213 Tricontinental Corp v HDFI Ltd (1990) 21 NSWLR 689 Tymshare Inc v Covell 727 F2d 1145 (1984) Williams v Frayne (1937) 58 CLR 710 PARTIES : Pioneer Park Pty Limited ACN 002 706 881 (in Liquidation); Clifford John Carpenter; Merlo Australia Pty Limited; Merlo Wholesale Pty Limited and Domino Hire Pty Limited [Plaintiffs] Australia and New Zealand Banking Group Limited [Defendant] FILE NUMBER(S) : SC 50156/04; 50163/04; 50096/05; 50118/05 COUNSEL : Mr JJ Garnsey QC, Mr B Connell (Plaintiffs) Mr J Gleeson SC, Mr J Thomson (Defendant) SOLICITORS : PMF Legal (Plaintiffs) Minter Ellison (Defendant) THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION Einstein J Wednesady 20 September 2006 50156/04 Pioneer Park Pty Limited (in liquidation) v Australia and New Zealand Banking Group Limited 50163/04 Clifford John Carpenter v Australia and New Zealand Banking Group Limited 50096/05 Merlo Australia Pty Limited & Ors v Australia and New Zealand Banking Group Limited 50118/05 Australia and New Zealand Banking Group Limited v Clifford John Carpenter JUDGMENT The proceedings 1 The Pioneer Park group of companies and Mr Clifford Carpenter [who was at all material times a director of each of the group companies] bring these proceedings against the Australia and New Zealand Banking Group Ltd claiming that Pioneer Park Pty Ltd was wrongfully placed into administration and then liquidation in breach of the terms and conditions of the banking agreements which regulated their relationship. 2 ANZ had on 3 May 1999 purported to give 30 days notice terminating the facilities and had on 8 June 1999 demanded the immediate payment of an amount said to be due. 3 The proceedings whilst involving many issues, centrally include the allegation by the Pioneer Group that ANZ had mistakenly proceeded in terms to give the termination notices pursuant to clause 9 of the General Conditions [which regulated the loans] upon the basis that the facilities were by then provided at least until an annual review date, whereas in fact, certain of the facilities are said to have been for a fixed term which, by the General Conditions, could not be terminated until the end of that term. 4 Without being exhaustive it may be noted that ANZ amongst its several disparate defences, contends that even if it had mistakenly proceeded on the above basis, it is entitled to establish a contractual justification for the termination letters, inter alia relying upon Shepherd v Felt & Textiles (1931) 45 CLR 359 [for the proposition that it is entitled to go outside of the express basis for the termination given in the letters of termination and to rely upon other bases now also said to have been available]. General background 5 The general background to the proceedings was usefully recited in two interlocutory judgments: Pioneer Park Pty Ltd v ANZ Banking Group Ltd and others: [2005] NSWSC 498 and [2005] NSWSC 832, inter alia noting the September 2004 grant of leave under s237 of the Corporations Act to Mr Carpenter to bring the proceedings on behalf of Pioneer Park 6 Following the commencement of the several sets of proceedings described in those judgments, orders were made for all proceedings to be consolidated in this Court and the final hearing proceeded in terms of an amended consolidated summons. The plaintiffs 7 The five plaintiffs to that summons are: i. Pioneer Park Pty Ltd [previously "Domino Mining Equipment Pty Ltd"] ii. Mr Clifford John Carpenter iii. Merlo Australia Pty Ltd iv. Merlo Wholesale Pty Ltd v. Domino Hire Pty Ltd [As a matter of convenience the judgment will commonly not differentiate between these parties but will refer to the plaintiffs, including Mr Carpenter, as "the Group" or "the Group companies" and in some cases to "Pioneer Park" or "Domino Mining". Where it does become necessary to differentiate between the plaintiffs for particular reasons this will be done. In the event that the Court inadvertently fails to so distinguish in the reasons which follow, the parties will be given an opportunity to suggest corrigenda which will be made if appropriate]. The business of the Group 8 Pioneer Park [under its previous name] had at various times between 1990 until on or about 10 June 1999 [the date when voluntary administrators were appointed under part 3A of the Corporations Law] manufactured and sold heavy machinery particularly in the coal mining industry. The machines were very expensive, purpose built machines, long in production, high in cost, and low in volume. 9 It was the owner of certain assets including land known as Lot 1 Lake Road, Tuggerah, New South Wales. 10 It was ultimately controlled in its day to day operations by Mr Carpenter, who was at all material times the general manager and a director of Pioneer. 11 The position with respect to the Merlo Companies was as follows: Merlo Australia i. Until 4 February 2000 Merlo Australia was exclusively licensed by Merlo SPA Industrie Metalmeccanica ("Merlo SPA"), a company incorporated in Italy to import into Australia and distribute and sell in Australia, products manufactured and supplied by Merlo SPA (the "Merlo Products"). Merlo Australia pursuant to the licence, imported into Australia and authorised Merlo Wholesale to sell the Merlo Products in Australia. Merlo Wholesale ii. Until 4 February 2000 Merlo Wholesale carried on the business of distributing and selling the Merlo Products in Australia and overseas. 12 Domino Hire carried on the business of acquiring and hiring heavy equipment for use in industry including the coal mining industry. It hired out machines manufactured by Pioneer to coal mines, principally, and those machines were usually purchased by the hirer on the expiry of the hiring. 13 Mr Carpenter also ultimately controlled the day-to-day operations of Merlo Australia, Merlo Wholesale and Domino Hire. Retreat Group structure 14 The Group Structure was not in issue. Essentially that structure had been recorded in the following chart: The case put 15 The gravamen of the Group's case is that: i. ANZ was not entitled to enforce its charge and appoint administrators under section 436C of the Corporations Law; ii. the administrators were thus not effectively appointed liquidators by section 446A of the Corporations Law; iii. ANZ was not entitled to sell the group's property. 16 Merlo Wholesale and Merlo Australia also claim that their loan facilities were terminated in breach of the terms and conditions of their facility agreements with ANZ. 17 The second to fifth plaintiffs each claim that as well as Pioneer Park, they suffered damage from misleading and deceptive conduct of ANZ in contravention of the Trade Practices Act and the Fair Trading Act. The central issues 18 The central issues concern: i. Ascertainment of the terms of the contracts for the provision of banking facilities to the Group [it is common ground that there were many variations to the banking facility contracts. The crucial relevance of the search for contractual terms regulating each of the facilities concerns the need to ascertain: a) whether a pleaded event of default has been established by ANZ; b) if not, whether or not by the time when ANZ in May 1999 purported to give notice terminating the facilities, the facilities had been provided until at least the next review date or remained a facility for an agreed fixed term of five years to terminate on 31 January 1996] ii. Alleged misleading and deceptive conduct by ANZ said to have been in breach of s 52 of the Trade Practices Act , 1974 and s 42 of the Fair Trading Act, 1987 . 19 The following recital of the central issues put forward by ANZ, albeit not being necessarily entirely exhaustive, suffices for present purposes to give more adjectival detail to the precise questions requiring to be answered: Issue 1: What were the relevant terms of the original facilities granted in January 1996 as amended in May 1996? Issue 2: What variation, if any, was effected to the terms of the facilities by ANZ's letter of 3 March 1997? Issue 3: What changes, if any, to the contractual arrangements were brought about by the facility letters of April, June and October 1998? Issue 4: Was ANZ in breach of contract in maturing the $500,000 bill to the overdraft account on 1 December 1998? Issue 5: Did ANZ act in breach of contract in 1999 by retiring the remaining commercial bills of $1.5 million to the overdraft on 26 March 1999; giving 30 days notice terminating facilities on 3 May 1999; demanding payment of $2.515 million as monies outstanding on the overdraft account on 8 June 1999; and in the subsequent appointment of the administrator and the exercise of the power of sale? [The essential proposition was put by Mr Garnsey QC appearing for the group in the following terms: Was the initial five-year term for the fully drawn advance ever changed? The answer to that is no, in the letter of offer and facilities when it became the fully drawn advance/commercial bill acceptance and discount facility, interchangeable, the five year term was expressly stated for each of those components. [transcript 31.20]"] Issue 6: Assuming ANZ succeeds in defending its actions from the charge of breach of contract, what are the consequences for the proceedings? Issue 7: Do the Merlo companies have any claim? Issue 8: Does Domino Hire have any claim? Issue 9: Do any of the Carpenter interests have a claim under the TPA which adds anything to the contract causes of action? Issue 10: Does ANZ have any statute limitation defences in relation to proceedings commenced in 2005? The alleged events of default 20 It is convenient to shortly summarise the alleged events of default relied upon by ANZ: a) Insolvency or inability to pay debts [General Conditions 10(1) (a)] [ANZ has pleaded that at all material times Pioneer Park was insolvent or unable to pay its debts. However during the hearing ANZ contended that the insolvency or inability to pay debts is alleged to have occurred at least by May 1999 and likely by an earlier date]. b) Material change in circumstances [General Conditions 10 (1) (k)] [The particular changes in circumstances alleged and the allegation as to the bank's opinion in terms of those changes having had a material adverse effect within the meaning of this General Condition are dealt with in the judgment below] c) Breach of contractual gearing covenant [General Conditions 10 (1) (n)] d) Failure to provide signed and audited accounts [The allegation is that: · At all material times the following terms were express written terms of the agreement between Pioneer Park and the Bank: (a) Pioneer Park would provide to the Bank its consolidated annual financial statements as soon as they became available, but not later than 120 days after the end of each financial year; (b) Pioneer Park would provide to the Bank its consolidated balance sheet and profit and loss accounts for each financial half year as soon as they became available, but not later than 90 days after the end of each financial half year. They must be certified by a director or secretary as giving a true and fair view of Pioneer Park's financial position as at the end of the half year; (c) Pioneer Park would provide to the Bank the annual financial statements of any related entity as soon as they became available, but no later than 120 days after the end of each financial year; and (d) Pioneer Park would provide to the Bank any financial or other information the Bank asked for by the time specified by the Bank. · No signed accounts were ever delivered for the income year ended 1998.] Reliability of witnesses 21 It is convenient to next deal with the reliability of the witnesses called. Mr Carpenter 22 Mr Carpenter had been an experienced chartered accountant and qualified auditor admitted to the "B" list of liquidators and had acted as a receiver or liquidator of many companies. He had held a number of directorships of private and public companies. 23 Mr Carpenter had made several affidavits. He was extensively cross-examined for many days. He clearly had an abiding interest in the result of the proceedings. 24 It is generally not possible to accept his evidence as reliable unless it is corroborated by contemporaneous documents or by evidence given by another witness whose evidence, in turn, is accepted as reliable. The fact is that his sense of grievance in terms of what he regards as disgraceful conduct by ANZ, colours much of the evidence which he gave: witness his evidence (at transcript [332][333]): [I]t wasn't justified. They were alleging all these defaults, one after the other. Each one was refuted and the bank would give us no answer and slide off, they'd come back with another default and this just went on through a process over many months and with the help of my solicitor each one was rebutted and it was crazy as far as I was concerned. They were doing everything they could to destroy me. … [I was} very angry but because of my nature and so on, and my training, actually I controlled it and so I was going to my solicitor to handle it, at this stage, and to the chairman and we were dealing with the punches as they came, one at a time. I wasn't on the broad brush approach because, well, it was terrible and you did mention or it has been mentioned many times why did I show Mr Soper the rumble in the jungle, which I mean, that's almost laughable now, but the message there, which I don't think Mr Soper picked up at all, was just sometimes the little guy gets up and fights and holds his ground, and that was Mohammed Ali against George Foreman, but I think Mr Soper went away thinking, this guy's a nut but there was a message that I was trying to convey to him, that he was the bully boy, he was standing over me and, well, I was going to hold my ground, for better or worse." 25 Notwithstanding the several occasions on which he was reminded of the need to give responsive answers, he often followed the answer with some form of commentary. 26 An example of the unreliability of his evidence concerned his alteration of position [examined in the reasons] in relation to his recollection as to whether he had or had not even received the crucial ANZ letter of 3 March 1997. 27 A further reflection on his credit involves the transactions engaged in during the second half of May 1999 examined in the reasons. 28 A reflection on his credit is to be found upon a close examination of the AMP shares transaction [examined in the judgment], the salient features of which involved: i. Mr Carpenter purporting to act as the officer entering the transaction on behalf of both his own company, Retreat, as well as Domino Mining; ii. the transaction being one whereunder Domino Mining would acquire AMP shares from Retreat at their listing price in a circumstance in which Mr Carpenter believed that the shares would come on at about $18 [there being no written documenting of the so-called "agreement" to enter into the transaction]; iii. there being no resolution of the board of directors of Domino Mining to the effect that it had agreed that when the shares would be listed, it would buy the shares at the listing price or at the highest price achieved at any time on the listing day; iv. the AMP shares opening at $35, peaking at $45 for less than a minute and closing at the end of the 15th of June listing day at $23. The shares thereafter going no higher than $23; v. Domino Mining effectively making an immediate notional loss of in excess of $700,000; vi. Retreat making an immediate gain from the transaction of roughly the same order; vii. the transaction being used to clear up intercompany loans: the funds notionally paid to Retreat were then used to repay its loan from Domino Hire, which in turn repaid a loan from Domino Mining; viii. sundry timing parameters the subject of the detailed cross-examination [transcript 215 et seq] reflecting adversely on the credit of Mr Carpenter who was fully aware of the general circumstances and yet proceeded with this transaction in the face of the clear fact that Domino Mining was to make an enormous loss and Retreat to gain an enormous windfall. 29 Other examples of the unreliability of particular parts of his evidence are dealt with in the reasons. Mr David Henderson 30 Evidence was given by Mr David Henderson who, together with his late brother Mr Robert Henderson, had known Mr Carpenter since they were at school together and continued to enjoy a close personal friendship and social acquaintance with Mr Carpenter. 31 Both he and his brother had been associated with Mr Carpenter by way of a professional association and common directorships. Until Mr Carpenter ceased practice as a chartered accountant in about 1991, Mr Carpenter's firm provided accounting and audit services to D & R Henderson and associated companies. After that time, Mr Carpenter joined the board of D & R Henderson as a director, and both the Henderson brothers joined the boards of Domino Mining Equipment, and subsequently the boards of Merlo Wholesale, Merlo Australia and Domino Hire, Mr Carpenter being a director and chairman of those companies. Both the Hendersons remained on the boards of Pioneer, the Merlo Companies, and Domino Hire until they resigned from those boards, in about mid 1999. 32 Although Mr Henderson gave evidence on a range of topics including his attendance at meetings of Pioneer companies, the central proposition of special significance in relation to these proceedings [sought to be put forward by the Pioneer Group through Mr Henderson as a witness] was that the group companies could not be said to have been insolvent at any particular point in time because the Hendersons [whether through their own companies or through their personal finances] were prepared to provide the necessary shortfall in working capital or indeed to refinance all of the ANZ facilities were this to be necessary. 33 The evidence is dealt with below in some detail. However at this early point in the judgment dealing with reliability of witnesses, it has to be said that Mr Henderson's evidence was coloured by his strong beliefs: i. that the information given to him by Mr Carpenter about the circumstances leading to the administration of the Group was and is true; ii. that Mr Carpenter's grievances against ANZ are well founded; iii. that ANZ acted vindictively towards Mr Carpenter; iv. that ANZ had absolutely no basis to terminate the facilities of Pioneer when it did; which beliefs have caused him to lend money to Mr Carpenter to fund the proceedings [cf transcript 879] 34 Mr Henderson exhibited what can only be described as a very poor recollection of meetings which he attended and of his then knowledge and/or belief as to the circumstances of the Pioneer group. On many many occasions he answered to the effect that he could not recollect. 35 In my view his evidence requires to be extremely carefully monitored. The reliability of that evidence is very strongly affected by his closeness to Mr Carpenter. It must be tested by the contemporaneous written documents. They often do not support evidence which he gave in the witness box. This is not to suggest that he knowingly gave false evidence, but only that as one often finds in court cases, witnesses may come to believe that a particular state of affairs was the case some years ago when, in fact, the contemporaneous written documents which go into evidence [and the whole of the matrix of fact established inter alia by other witnesses] demonstrates that that state of affairs was in fact quite different. 36 His recollection in relation to the circumstances in which Pioneer Park came to purchase AMP shares was also very vague. Essentially that recollection was that he, his brother and Mr Carpenter had had discussions prior to the date of listing from which he had understood that Pioneer was to purchase the shares. However there was nothing which he did as a director of Pioneer prior to the date of listing to commit that company to the purchase of the shares, unless a motion to that effect had been passed at a board meeting: [the evidence included no such minute/motion of or passed at any board meeting]. 37 His evidence included: Q. Mr Henderson, one thing that that I am trying to follow is whether there was, as far as you can recall it, in terms of whatever involvement you can recall having with the AMP share issue, some form of documenting of an agreement and I wondered whether you could recall at any stage through the discussions, whenever they were, to do with the as it were AMP share sale, any form of agreement documenting just what it is that was the transaction? A. … I don't recall us having any formal document. All I recall at the time, at the time of the AMP share matter, in the media and in the community was that it was considered a windfall opportunity at the time and as such, it was regarded by us as such and by many in the community as such. Q. No, I am just interested in the documenting in relation to Mr Carpenter or Retreat or, as it then was I think, Domino of whatever arrangement was said to be an agreement or similar. A. I simply just don't recall any of the details and I still don't know Mr Carpenter's actual holding, which would have actually - at the time which would have actually enabled him to receive the shares. [Transcript 732] 38 As the judgment below details, Mr Carpenter took it upon himself to act for all parties to the transaction [transcript 217.02]. These were shares which were acquired by Domino Mining at $45.00 and subsequently sold for a price below $23.00, such that as already observed, Domino Mining lost $700,000 on sale of the shares. The informal approach to the transaction reflects badly on the credit of the directors, the terms and dealings having been left to the unfettered discretion of Mr Carpenter, who then took advantage of his position to make a windfall gain. 39 In fairness to Mr David Henderson there are a number of indications in the evidence that he was not consulted by Mr Carpenter of actions he was taking, even in relation to putting forward offers by D & R Henderson Pty Ltd. 40 The burden of the evidence given by Mr Henderson was that had they been asked, he and his brother would have caused D & R Henderson Pty Ltd to write a cheque immediately for $2.5 million to take over ANZ securities at the material time [transcript 870.20]. Curiously no such cheque was ever written notwithstanding the groups travails at the time. The matter is dealt with in the judgment. 41 Under cross-examination Mr Henderson was taken to a letter from P.A. Somerset and Co solicitors written by Mr Paul Fordyce to Minter Ellison acting for ANZ [dealing with Domino Mining and Merlo Wholesale] commencing: "We have been instructed by D & R Henderson Pty Ltd... to offer $150,000 for all of the Bank's securities over the Companies." 42 Under cross-examination Mr Henderson gave evidence that he had not seen this letter at the time; he did not believe that Mr Carpenter had any discussion with him about whether he was going to instruct Mr Fordyce to make the offer; he had no knowledge that at about this time his company was offering $150,000 for all of the ANZ securities over the company; the letter had come as complete news to him in the witness box; he was unable to give any explanation as a director of the company as to how the offer could have been made on behalf of the company and could not offer any explanation as to why the company was offering the bank the amount in question for its securities. 43 It is plainly possible that Mr Carpenter was by no means candid with Mr Henderson in relation to other activities of the Group and perhaps with the benefit of the whole picture, Mr Henderson may have been dissuaded from his very strong belief in everything which Mr Carpenter had put to him back then. Mr Nielsen 44 The evidence given by Mr Nielsen is extensively examined through the judgment. That section of the judgment is self-explanatory and the respective findings concerning his reliability are to be found in that section. There is no suggestion but that he carried out his level best to adequately recall the events of the time in the course of his giving of evidence. Mr Soper 45 Mr Soper was the person with the carriage of the relevant accounts from early December 1998 until they were terminated and took the decision to enforce the Bank's securities and appoint Administrators. 46 The detailed reasons deal with the finding rejecting his evidence that in completing the 11 December 1998 diary note, he had intended the diary note to record both a 'take on review' and 'the annual review'. Likewise the reasons explain the finding that the occasion when Mr Soper formed the view that the materials which he had examined constituted an event of default within the meaning of clause 10 (1) (k) of the General Conditions, had nothing to do with and was not a part of any annual review but involved only the giving of an instruction to Ms Agsten that a clause 10 (1) (k) event of default had been identified [for the purpose of the ANZ being in a position to send the 4 February 1999 letter to the Group's solicitors]. 47 Mr Soper accepted and relied on Mr Carpenter's various assurances that refinancing was imminent in deferring termination of the remaining facilities. 48 As with a number of the other witnesses, his precise recollection of conversations had been materially aided by diary notes and memoranda. As appropriate the reasons given in the judgment travel into more detail where conflicts as between his evidence and the evidence particularly of Mr Carpenter, require resolution. In one specific instance certain of Mr Soper's evidence [in relation to the 11 December 1998 meeting with Mr Carpenter] is found to be reliable and Mr Carpenter's evidence shown to be inaccurate by reference to Mr Carpenter's own diary note of that meeting. 49 In the result and as the reasons make clear, in some areas his evidence is rejected and in some areas his evidence is accepted. The contemporaneous documents assist in this regard Ms Agsten 50 Ms Agsten's evidence is detailed in the reasons which follow. She did demonstrate some real uncertainty in terms of her recollection of the events at hand. However it is clear that in giving her evidence she was doing the best that she could to recall the events which occurred some considerable time ago. Mr Brennan 51 Mr Brennan was the senior Bank officer confirming the decision to transfer file to Group Credit Management at the end of November 1998, including instructions to High Risk to spill the bill maturing 1 December 1998 to overdraft. 52 Mr Brennan's evidence is regarded as generally reliable, he again, as with many of the other ANZ witnesses called, being heavily reliant upon contemporaneous documents. Mr Harvey 53 Mr Harvey was the responsible bank officer involved in communications relevant to the construction of the 7 October 1998 facility variation letter. He had the discussion with Mr Carpenter on 20 November when it was agreed that Pioneer could have 3 months to refinance at Pioneer's request. The evidence in that regard is examined carefully in the judgment. 54 His evidence is regarded as generally reliable. It is consistent with the contemporaneous documents. Mr Kilcran 55 Mr Kilcran gave evidence corroborating Mr Harvey as to the communications relevant to construing the 7 October 1998 facility variation letter. In a number of instances he had prepared diary notes which are discussed in the judgment. 56 His evidence is accepted as reliable. Mr Staples 57 In my view Mr Staples [who was the external accountant for Pioneer Park] appeared to be a careful and conscientious witness whose evidence was consistent with his past practices. However his evidence concerning parameters of concern in relation to the gearing ratio issue raises certain real doubts [most particular by reference to his belief that he had calculated an external debt ratio for June 1998 using a particular electronic file] examined in the reasons. Mr Donovan 58 Mr Donovan [a former Pioneer employee] gave evidence about the decline in the fortunes and prospects for the business over the period leading up to the insolvent administration. His evidence is accepted as reliable Mr Martin 59 Mr Martin [another former Pioneer employee as 'purchasing officer'] gave evidence of problems which had been encountered in obtaining parts from suppliers in the period leading up to the insolvent administration of Pioneer, and of the system of releasing cheques to pay critical suppliers when payment was necessary to procure more supplies. His evidence is accepted as reliable. Mr Hall 60 Mr Hall was the administrator and first liquidator. He reviewed Pioneer's position at the commencement of the administration and documented and gave evidence of various statements and claims made by Mr Carpenter in that context. His evidence is accepted as reliable. Mr Slater 61 Mr Slater worked for Mr Hall at the premises during the administration, and confirmed parameters of activity at that time. He also managed the process of collecting Pioneer's records and the recording of what was kept and what was discarded. His evidence is accepted as reliable. Other witnesses 62 It is strictly unnecessary to travel through all of the other witnesses who were called. As and when appropriate they receive mention in the judgment. They included: i. Mr Farquhar who valued Pioneer's Plant and equipment and Stock for Mr Hall. ii. Ms Johnson who proved the records of one of Pioneer's suppliers, "Steelmark", showing continuous failure to pay within trade terms from July 1998 to April 1999. iii. Mr Murray who gave evidence of Pioneer's failure to pay the accounts of Fastserve on time through late 1998 and early 1999. Put Pioneer on Stop Supply November 1998, and issued Local Court proceedings 10 May 1999 in order to obtain payment of long overdue accounts. 63 As it has been unnecessary to deal with quantum, it is not necessary to treat with the evidence going only to that issue. The history of the transactions 64 As one would anticipate, the express terms and conditions governing the accounts and facilities of the group with ANZ are to be found in a number of documents which represent the agreement between ANZ and Pioneer, as banker and customer, and Mr Carpenter as guarantor, as varied from time to time. The initial contacts 65 The initial contacts between ANZ and Pioneer are recorded principally in an ANZ diary note (B Vol 6 Tab 38) dated 29 December 1995 prepared by Mr M A Jones, Mr Neilson's "Manager's Assistant", which records a series of meetings held with Mr Carpenter and Pioneer "to discuss the possible refinancing of company's facilities currently held with St George Partnership Bank". [Mr Neilson being the relationship manager for the groups accounts between January 1996 and August 1998]. 66 On the first page of the ANZ Diary Note of 29 December 1995 there appears the following: "Current facilities held with St George are tabled below. Facilities sought to accommodate refinance and company's ongoing requirements are outlined under proposed limits. $000,s Current Limits Proposed Limits Variation Ter'n Proposed Margin / Fee Date Domino Mining Equip P/L 2,250 2,500 +250 FDA – Term Loan 1.25% / - 600 500 +100 5 years 1.0% / 1.5% OD Subject to A/R 0 2,000 +2,000 DOC O/S Standard Rates Subject to A/R 0 400 +400 Standard Rates FCDL Subject to A/R Note: LAF of 0.5% approx $27K 600 2,900 +2,500 Revolving: 2,250 2,500 +250 Terminating TOTAL 2,650 5,400 2,550 67 It is apparent that the proposed limit for the FDA – Term Loan was $2,500,000 and the termination date was five years. On the second page of that diary note, the following appears: "ORIGINAL PURPOSE OF FACILITY & REPAYMENT SOURCE & TIMING … FDA – TERM LOAN Purpose: Assist with the purchase of Tuggerah premises. Repayment: Overall reduction of approx $1 Million over initial term of 5 years. Balance ($1.5 Million) to be renegotiated for a further term." The General Conditions 68 The letter of offer of 8 January 1996 (B Vol 6 Tab 39) contained the following: "General Conditions and Specific Conditions Our General Conditions (Second Edition 1995) apply to the facilities as well as any applicable Specific Conditions (Second Edition 1995) to the facilities. Both the General Conditions and any applicable Specific Conditions are enclosed with this letter of offer." "Annual review The facilities are subject to annual review. The next review date will be on 31 January 1997 ." [emphasis added] 69 The General Conditions (being the Second Edition 1995) of ANZ (B Vol 5 Tab 30) contain the following provisions: " 2. Term of the facilities We will provide each facility for the agreed period unless: (a) you default and we exercise our option to terminate a facility; or (b) there is a change in law that prevents us from providing a facility. NOTE: You will be in default if you break your obligations under this agreement. To find out what default means, see clause 10; for our rights if you are in default, see clause 11. For our rights if there is a change in the law which prevents us from making a facility available, see clause 18. The agreed period means: (a) if the letter of offers sets out a specific termination date for the facility, at least the period until the specific termination date; (b) if the letter of offer says that the facility is available at least until the next review date, at least until the next review date ; (c) if the letter of offer says that the facility is "on demand" – the period until we demand repayment. NOTE: Different facilities may be provided for different periods . Details of the period for which we agree to provide a particular facility are set out in our offer. … 9. Review of the facilities Right of review (1) we have a right to review the facilities (and the conditions of the facilities, including pricing and securities) in accordance with this clause. What we can do on a review (2) If, following a credit re-assessment, we determine that there has been a change in credit, we may give you a written notice stating that we wish: (a) to change any of the conditions of the facilities provided to you; or (b) to terminate a facility, but only if the letter of offer says that the particular facility is provided until at least the review date. we must give you at least 30 days' notice, unless you agree to a shorter period. If we give notice before the review date, the notice period cannot expire before the review date. NOTE: Sub-clause (2) does not allow us to do any of the following things unless you agree or unless you are in default: alter the period which we have agreed with you to make a facility available (see clause 2 for agreed period); change the conditions of a facility before the review date; or change a condition of a facility, if we have previously agreed with you in writing that we will not change that condition (for example, if we have agreed to a fixed rate of interest for a particular period, we cannot change that fixed rate of interest for that period). (3) If we give you notice that we wish to change any of the conditions of the facility provided to you, then unless we agree otherwise with you: (a) the changes take effect from the day when you accept the changes; and (b) if you do not accept the changes before the end of the notice period then, with effect from the end of the notice period, all the facilities become repayable on demand by us. (4) If we give you notice under sub-clause (2) that we wish to terminate a facility, then termination takes effect at the end of the notice period. You must pay us immediately upon termination the outstanding money under the facility (including any costs or losses determined under clause 7(2)). Our rights under other clauses (5) This clause does not affect: (a) the rights we have if you are in default; or (b) our right at any time to terminate immediately a facility which is "on demand" by making a demand for payment. … 10. Default Events of default for all customers (1) You will be in default if any of the following things happen: (a) failure to pay: you fail to pay on time an amount that is due and payable by you under a transaction document; (b) securities become enforceable: an event occurs that causes an encumbrance or a security given by you to become enforceable; … (i) insolvency: (i) you suspend payment of your debts; (ii) you are, or state you are, or are presumed by law to be, insolvent or unable to pay your debts; or (iii) you take a step for the purpose of entering into a compromise or arrangement with any of your creditors or with any of your members; … (k) change in circumstances: circumstances arise that, , may have a material adverse effect on: (i) your business, assets or financial condition; or (ii) your ability to perform your obligations under any transaction document; … (n) failure to perform obligations: you breach an obligation under a transaction document and either: (i) the breach cannot be remedied; or (ii) if it can be remedied – we give you a written notice requiring you to remedy it and 5 business days later, it is still not remedied. [This paragraph does not cover cases that are covered by other paragraphs of this sub-clause or by sub-clauses (2) to (7)] Companies – additional events of default (2) If you are a company, you will also be in default if any of the following things happen: (a) winding up: an application is made, a resolution is passed or an order is made for your winding up; (b) external administration: you become an externally administered body corporate or a controller or a trustee for creditors is appointed in respect of any of your property; or … 11. Consequences of default Our options (1) If you are in default, we may waive the rights that we have. … (2) If you are in default, we may do any one or more of the following: (a) terminate immediately some or all of our obligations under this agreement; (b) change immediately some or all of the conditions on which one or more of the facilities are made available (in particular, we may cancel an unused facility limit by reducing the facility limit for the facility or we may make the facility "on demand"); (c) make some or all of the money that is or may become owing to us in respect of one or more of the facilities immediately due and payable to us (this includes the face value of all outstanding bills); and (d) require you to provide us with enough cash to cover us for any contingent liabilities we may have under a facility (for example, a contingent liability under a letter of credit). (3) we will give you written notice after acting under sub-clause (2)(a) or (b). (4) we will make money due and payable (see sub-clauses (2)(c) and (d)) by giving you written notice, which becomes effective immediately we give it. ... 16 Waiver The rights that we have under the transaction documents cannot be waived except by our giving you written notice waiving the particular right In particular: (a) we do not waive any right that we have in connection with this agreement merely because we do not exercise it, or do not exercise it as soon as we can; and (b) if we exercise a right once or partly, it does not mean that we cannot exercise that right again or other rights. 24. Inconsistency (1) If there is an inconsistency between the letter of offer and either these General Conditions or the Specific Conditions for a facility, the letter of offer prevails. (2) If there is an inconsistency between these General Conditions and the Specific Conditions for a facility, the Specific Conditions prevail. (3) If there is an inconsistency between this agreement and a security, this agreement prevails. [emphasis added] [As and when appropriate the definitions provisions [clause 23] will be referred to below] The Annual Review date 70 It will be recalled that a note to clause 2 of the General Conditions made plain that different facilities might be provided for different periods and that details of the periods for which ANZ agreed to provide a particular facility would be set out in the relevant ANZ offer. 71 In much of what follows, tracking what was the annual review date with respect to all facilities [where a particular facility had not been given an identifying date as its termination date] becomes important. Likewise following the proper construction of a term that all facilities are subject to annual review [followed by detail of the next review date] becomes important. The crucial questions become what were ANZ's contractual rights and what were the Groups correlative contractual rights. Letter of offer dated 8 January 1996 and variation by letter of 17 May 1996 72 By the letter of offer dated 8 January 1996 (B Vol 6 Tab 39) ANZ agreed to provide facilities to Pioneer. The facilities are listed as follows: Facility Facility Limit AUD Overdraft 500,000 Fixed Rate Fully Drawn Advance 2,500,000 Documentary Credit/Documents Surrender No. 1 Facility 2,000,000 Documentary Credit/Documents Surrender No. 2 Facility 77,000 Foreign Currency Dealing Limit 400,000 Indemnity Guarantee – Performance Bond 206,000 Financial Guarantee 2,845,000 Total Limits 8,528,000 73 The Facilities Schedule to the Letter of Offer (MFI-1 p6) specified: i. in respect of the Overdraft Facility: Facility limit $500,000 Termination date Subject to Annual Review ii. in respect of the Fixed Rate Fully Drawn Advance Facility: "Facility Limit $2,5000,000 Termination Date 5 years from date of drawdown" iii. in respect of the Foreign Currency Dealing facility: Facility limit $400,000 Termination Date Subject to Annual Review Findings as to the facilities at inception 74 Focussing upon the relevant issues, the following are the Court's findings with respect to the relevant terms of the regional facilities properly construed: (i) the Letter of Offer incorporated the General Conditions which in clause 2 expressly provides for an "agreed period" [which, if the Letter of Offer sets out a specific termination date for a facility, is "at least the period until the specific termination date" and, if the Letter of Offer says that the facility is available at least until the next review date, "at least until the next review date", or for a purely "on demand" facility, is the period until the Bank demands repayment]; (ii) the 8 January 1996 letter of offer included a fixed rate fully drawn advance facility ("FRFDA " ) of $2.5 million with a stated termination date of 5 years from the date of drawdown; (iii) hence the Fully Drawn Advance Facility case was clearly at inception , a facility with a specific termination date; (iv) this is so notwithstanding the statement in the Letter of Offer: "The facilities are subject to annual review. The next review date will be on 31 January 1997"; (v) under the General Conditions, on an annual review credit reassessment, under Clause 9(2), if the Bank determined that there has been a change in credit, it could give a written notice stating that it wished to : a) change any of the conditions of the facilities; or b) to terminate a facility (but only if the letter of offer stated that the particular facility was provided until at least the next review date). [30 days notice was required unless the customer agreed to a shorter period]; (vi) for the purpose of General Condition 9(2), on an annual review the Bank was entitled to change the conditions of the FRFDA, but was not entitled to terminate it (absent a default). This is expressly stated in clause 9(2)(b) and in the Explanatory Notes to that subclause; (vii) hence, under the General Conditions, for a term of a facility to be limited by annual review, the Letter of Offer must contain a statement in substance to the effect "that the facility is available at least until the next review date" (clause 2(b)) (as defining "the agreed period", and to be contrasted to 2(a) referring to a provision for a specific termination date) or "that the particular facility is provided until at least the review date" (clause 9(2)(b)); (viii) the statement in the Letter of Offer that "The facilities are subject to annual review" receives attention later in the judgment; (ix) the effect of such a review, in relation to the term of a facility, depends upon whether the facility is for an agreed period for a fixed term, or not , and relies upon the application of clause 9 of the General Conditions to the type of facility; (x) in this context it must be borne in mind that the letter of offer (specifying the fixed term) by virtue of clause 24 of the General Conditions takes precedence over all other documents ; (xi) under the 8 January 1996 letter, the company was obliged to make principal reductions of approximately $1 million over the term of 5 years of the FRFDA; (xii) under the 8 January 1996 letter, all facilities were subject to conditions, including an obligation to provide consolidated annual financial statements within 120 days after the end of the financial year; half yearly statements not later than 90 days after the end of each financial year (certified by a director or secretary) and gearing was to reduce to approximately 1.8:1 by FYE June 1998 calculated in accordance with a specified equation; (xiii) under Clause 10 of the General Conditions, events of default included 'insolvency'; 'circumstances arising that in the Bank's opinion may have a material adverse effect on the customer's business, assets or financial condition, or the customer's ability to perform its obligations under any transaction document'; 'failing to pay any creditor before the end of any grace period' or 'breach of any obligation under a transaction document that could not be remedied or, if it could be remedied, remained unremedied after 5 business days notice'; (xiv) under Clause 11(2) of the General Conditions, if an event of default occurred, the Bank had the option [subject to compliance with the notice provisions respectively provided for in sub clauses (3) and (4)] to terminate any or all of its obligations; change immediately some or all of the conditions of the facilities (including making a facility on demand); or to make monies due and payable. Implication of implied terms – good faith/reasonableness 75 The Group contends that there was also an implied term that any rights of the bank under clauses 9 or 11 had to be exercised in good faith and reasonably. 76 There certainly was no express term to this effect. 77 In Mobile Innovations Pty Ltd v Vodafone Pty Ltd [2003] NSWSC 166 the Court had occasion (at [604] et seq) to give close consideration to the current state of law in terms of the implication into commercial contracts of inter alia, the duties of parties: i. to exercise good faith in the performance of such contracts; ii. to act reasonably in the performance of such contracts. 78 For present purposes it is sufficient to simply repeat the following observations there made [none of which were adversely commented on in the appeal from the decision, which turned on a factual analysis]: Good Faith 613 As a general proposition, the current state of the law in New South Wales is that there will usually be implied by law into commercial contracts made between parties at arms length, a term requiring the exercise of good faith in the performance of such contracts. Such a term takes its place alongside the implied obligations: · to do all such things as are necessary to enable the other party to have the benefit of the contractual promise; · not to hinder or prevent the fulfilment of the purpose of express promises made in the contract. [ Alcatel Australia Ltd v Scarcella and others (1998) 44 NSWLR 349, Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187] 614 The recent decision of the New South Wales Court of Appeal in Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187 includes some particular focus upon the implied term of reasonableness, making the point that the Australian authorities make no distinction of substance between that term and the implied term of good faith. The close association of ideas between the terms 'unreasonableness', 'lack of good faith' and 'unconscionability' is emphasised in Burger King at para 170 and para 171 where the judgment of Priestley JA in Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 263 and 265 is cited. 615 In Burger King , the Court said at paragraph 171: 'Rolfe J observed that in Alcatel, Sheller JA at 369 appeared to equate the notions of "reasonableness" and "good faith". Whilst Sheller JA did not say that in terms, his review of the case law and academic and extra-judicial writings on the topic, clearly support the proposition." 616 The nature and extent of the duty was recently considered by Barrett J in Overlook v Foxtel [2002] NSWSC 17 : "[63] But what are the content and effect of such an implied term? This question was the subject of discussion by the Court of Appeal in Burger King. Sheller, Beazley and Stein JJA referred to the observation of Sir Anthony Mason in his 1993 Cambridge Lecture (see now (2000) 116 LQR 66 at 69) that the concept "embraced no less than three related notions", being: "(1) an obligation on the parties to co-operate in achieving the contractual objects (loyalty to the promise itself); (2) compliance with honest standards of conduct; and (3) compliance with standards of conduct which are reasonable having regard to the interests of the parties." [64] There is some overlap here with the terms implied by law as referred to in Peters (WA) Ltd. Sir Anthony's duty of "loyalty to the promise itself" may well include the duties not to hinder fulfilment of the promise's purpose and to do everything necessary to enable the other party to have the benefit of the promise. The more substantial and separate content of the duty of good faith itself would therefore seem to lie in the second and third limbs of Sir Anthony's formulation - that is, adherence to standards of conduct which are honest, as well as being reasonable having regard to the parties' interests. [65] If adherence to such standards of conduct is the predominant component of a separate obligation of good faith in performance of a contract, it becomes necessary to enquire about the extent to which selflessness is required. It must be accepted that the party subject to the obligation is not required to subordinate the party's own interests, so long as pursuit of those interests does not entail unreasonable interference with the enjoyment of a benefit conferred by the express contractual terms so that the enjoyment becomes (or could become), in words used by McHugh and Gummow JJ in Byrne v Australian Airlines Ltd (1995) 185 CLR 410, "nugatory, worthless or, perhaps, seriously undermined". This seems to me to be the principle emerging from para 172 to para 177 of the joint judgment in Burger King where the various authorities are collected and discussed. [66} Dr Elisabeth Peden of the University of Sydney has characterised the effect of the good faith requirement in contractual performance as follows ("Incorporation of Terms of Good Faith in Contract Law in Australia", (2001) 23 Syd L Rev 222): "Most basically, by using the obligation to perform in good faith as a principle of construction the courts are merely required to ensure that the parties have genuinely adhered to the bargain which they entered into. This will require an examination of the whole contract and the underlying intentions. Strict rights may not be adhered to, if in the context of the contract as a whole, this would subvert the character of the contract. Most cases that discuss the concept do so in terms of negatives, that is, what is not in breach of good faith. This makes sense, since it is the context of the contract read as a whole that will indicate what is appropriate and what is not." [67] Viewed in this way, the implied obligation of good faith underwrites the spirit of the contract and supports the integrity of its character. A party is precluded from cynical resort to the black letter. But no party is fixed with the duty to subordinate self-interest entirely which is the lot of the fiduciary: Burger King at para 187. The duty is not a duty to prefer the interests of the other contracting party. It is, rather, a duty to recognise and to have due regard to the legitimate interests of both the parties in the enjoyment of the fruits of the contract as delineated by its terms. [68] In many ways, the implied obligation of good faith is best regarded as an obligation to eschew bad faith. This is borne out by the following succinct statement by Lord Scott of Foscote in Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd [2001] 2 WLR 170, a case concerning the duty of good faith in the insurance context: "Unless the assured has acted in bad faith, he cannot, in my opinion, be in breach of a duty of good faith, utmost or otherwise." [69] The approach which regards a duty of good faith as a duty to eschew bad faith is also supported by United States jurisprudence to which resort may appropriately be had: Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Burger King at para 147ff. Writing in 1968, Professor Summers described the duty of good faith imposed by the United States Uniform Commercial Code as an "excluder": R S Summers, "Good Faith in General Contract Law and the Sales Provisions of the Uniform Commercial Code", (1968) 54 Va L Rev 195. Its operation and effect were stated as follows: "It is a phrase without general meaning (or meanings) of its own and serves to exclude a wide range of heterogeneous forms of bad faith. In a particular context the phrase takes on specific meaning, but usually this is only by way of contrast with the specific form of bad faith actually or hypothetically ruled out." [70] In Tymshare Inc v Covell 727 F2d 1145 (1984), Scalia J concluded that: "The doctrine of good faith performance is a means of finding within a contract an implied obligation not to engage in the particular form of conduct which, in the case at hand, constitutes 'bad faith'." [71] Scalia J went on to say that the contract itself will indicate the content of the duty in the sense that it is imbued or infused with the obligation not to engage in particular conduct." 617 An important consideration, as Barrett J held in Overlook v Foxtel, is that the implied duty of good faith does not require a party to subordinate its contractual rights… Obligation of good faith and reasonableness 680 The pleaded implied term is that Vodafone will act in good faith and reasonably in exercising its powers under the ASP . 681 As with the above analysis in terms of duty to co-operate, the far more difficult question in terms of implication of a good faith or reasonableness term concerns extrapolating from the general to the particular. The real question is as to the reach of the term. Precisely what conduct will constitute a relevant breach of these duties? 682 As already pointed out, this is one of those cases where likely there is an assimilation of the duties of cooperation and of good faith/reasonableness. In that sense both sets of duties extend to cover duties to act honestly and duties to have regard to the legitimate interests of the other party. 683 I would accept that there was an implied obligation to behave honestly and to do all such things as were necessary to enable the other party to have the benefit of the contract. [To my mind these are elements of good faith [cf Peden supra at 165]]. 79 Whilst the decision in Vodafone was of course confined to the particular terms of the contract there under consideration, it may at least be said that in the case presently before the Court, the reach of the implied obligations, [both of the group as well as of ANZ], to act in good faith and to act reasonably, can only be assessed having regard to the provisions of the contract which regulated the granting of the facilities. Neither party was required to subordinate its contractual rights. Compliance with the terms of the original letter of offer 80 The original letter of offer was accepted on 10 January 1996 and all conditions precedent satisfied by Pioneer and by Mr Carpenter as guarantor by 25 January 1996. About that date the funds of the Fully Drawn Advance Facility were drawn down. 81 Pursuant to the Security Schedule of the Letter of Offer, Pioneer granted a mortgage debenture by way of fixed and floating charge over its assets and undertaking to ANZ to secure moneys owing under the facilities granted by ANZ. 82 Further, again pursuant to the Security Schedule to the Letter of Offer Pioneer entered into a registered Real Property Act mortgage of the Tuggerah Property. That mortgage incorporated the ANZ's Memorandum of Common Provisions no. 0466274. The variation effected by the Bank's letter of 17 May 1996 83 As is clear from what follows, under the 17 May 1996 letter, the FRFDA was reduced from a $2.5 million limit to a $500,000 limit, with the termination date remaining 5 years from the date of drawdown. The limit was now interchangeable with the limit on the new $2 million commercial bill acceptance discount facility ("CBAD") which also had a termination date of 5 years form the date of drawdown. The arrangement remained for principal reductions of approximately $1 million over the 5 year term, now across both facilities. All other conditions, including the existing General Conditions, remained unchanged. The background to the 17 May 1996 variation 84 After security documents had been executed and provided. and a limited guarantee provided by Mrs Carpenter, and an unlimited guarantee provided by Mr Carpenter, discussions took place between ANZ and Pioneer, which related, [in respect of the major part of the fixed rate Fully Drawn Advance Facility (as to $2 million),] to substitution of a variable rate Commercial Bill Acceptance/Discount Facility enabling greater flexibility to obtain more favourable interest rates. 85 The results of those discussions were set out in the letter of 17 May 1996 from ANZ to Mr Carpenter and Pioneer and were accepted in writing by Mr Carpenter for Pioneer on 29 May 1996. The letter confirmed the agreed fixed term for the Fully Drawn Advance Facility and the Variable Rate Commercial Bill Acceptance/Discount Facility ("FDA/CBADF") reading as follows: "Domino Mining Equipment Pty Limited Following our recent discussions, we are pleased to offer variations to some of the conditions on which the existing facilities are provided as follows Fixed Rate Fully Drawn Advance Facility Facility limit: $500,000 (interchangeable with Commercial Bill Facility – Total Limit $2,500,000) Termination date: 5 years from date of drawdown … Specific Conditions: Specific Conditions for the facility were enclosed in Letter of Offer dated 8/1/96 Variable Rate Commercial Bill Acceptance/Discount Facility Facility limit: $2,000,000.00 (representing the aggregate face value of the bills) Interchangeable with Fixed Rate Fully Drawn Advance Facility – Total Limit $2,5000,000. Termination date: 5 years from date of drawdown. … Specific Conditions: Specific Conditions for the facility are enclosed. Foreign Currency Dealing Facility Facility limit: AUD 685,000.00 (For this purpose we adjust the face value of the customer's obligation under each transaction by a multiplier (determined by us). The process includes conversion of any foreign currency amount to the equivalent amount in AUD). Termination date: Not before the next review. … Existing Conditions If you agree to the variations, the existing General Conditions and Specific Conditions will continue to apply to the Facilities." 86 The specific conditions of the Variable Rate Commercial Bill Facility do not appear to contain anything material. 87 Domino Mining accepted the 17 May offer on 29 May 1996. 88 It is clearly the case that the term of the FDA/CBADF continued to be 5 years from the date of drawdown. The term was then and continued to be clearly a fixed term within clause 2(a) of the General Conditions and the facilities were to continue until the specific termination date of five years from date of drawdown. The term was noted to expire on 3 May 2001. Was the agreed fixed term of the FDA/CBADF ever varied? The Bank's letter of 3 March 1997 89 This issue raises an important question of credit as to whether any or all of the terms of the letter of 3 March 1997 ever bound the parties. If all the terms of this letter came to bind the parties then the express term that the overdraft facility was given a termination date: "not before the next review date" would mean that, on each annual review thereafter, ANZ had the right under clause 9 (2) of the General Conditions, not only to change conditions attached to the facility, but also to terminate the facility on 30 days notice. [It is appropriate to note at this stage that nothing in the later letters of 6 April 1998 or 9 June 1998 affected this position giving the overdraft facility a termination date as 'not before the next review date'. Those intermediate letters add nothing to the subject, otherwise than that it was not proposed to vary extant conditions not affected by the intermediate letters. It is also appropriate to note that for reasons given later in this judgment, the terms of the 7 October 1998 letter [properly construed against the context in which that letter of offer came to be sent, following the acceptance by the Group of a draft of that letter], made clear that the continuing overdraft facility continued to be subject to annual review, the next annual review date to be on 30 November 1998. In context and apropos the overdraft facility, these words are not to be construed as differing from the words used in the 3 March 1997 letter in terms of the termination date "not before the next review date". Hence the overdraft facility as and from 7 October 1998 was regulated by a term that its termination date was not before the next review date due on 30 November 1998.] 90 The letter of 3 March 1997, signed by Mr Nielsen who was at the time the relationship manager for the southern region of ANZ personally familiar with the Group's accounts and arrangements, was relevantly in the following terms: LETTER OF OFFER We are pleased to offer the facilities set out below to: DOMINO MINING EQUIPMENT PTY LTD ACN 002 706 881 Summary of facilities A summary of facilities is as follows: Facility Facility Limit AUD *Overdraft 750,000 Fixed Rate Fully Drawn Advance 350,000 Commercial Bill – Fixed /Variable 2,000,000 Encashment of Cheque Facility 5,000 *Documentary Credit/Documents Surrender No.1 Facility 2,000,000 Foreign Currency Dealing Limit 685,000 Indemnity Guarantee – Performance Bond 206,000 Financial Guarantee 422.256 Total Limits 6,418,256 (*Denotes Interchangeability) Details of the facilities are set out in the facilities schedule to this letter of offer. Security Securities for the facilities are set out in the security schedule to this letter of offer. Financial reports You agree to provide us with: · Your signed audited annual financial statements O/A DOMINO MINING EQUIPMENT PTY LTD as soon as they are available but not later than 120 days after the end of each financial year. · Your balance sheet and profit and loss accounts for each financial half-year as soon as they are available, but not later than 90 days after the end of each financial half-year. They must be certified by a director or secretary as giving a true and fair view of your financial position as at the end of the half-year. · The annual financial statements of any corporate surety as soon as they are available, but no later than 120 days after the end of each financial year. · The annual financial statements of any related entity soon as they are available, but no later than 120 days after the end of each financial year. · The annual financial statements of any surety which is an individual, on or before each review date. · Evidence of renewal of life insurance policy over CLIFF CARPENTER to be reviewed annually. · Provision of current copies of insurance policies (ie. noting the ANZ Bank as mortgagee/interested party) over the security items held, detailed in the Security Schedule of this Letter of Offer. Annual review The facilities are subject to annual review . The next review date will be on 30 November 1997. General Conditions and Specific Conditions Our General Conditions (Second Edition 1995) apply to the facilities as well as any applicable Specific Conditions (Second Edition 1995) to the facilities. Both the General Conditions and any applicable Specific Conditions are enclosed with this letter of offer. For the purpose of Clause 3 of the General Conditions, the applicable rate of interest is the Bank's reference rate plus margin, plus 2% pa. Other Conditions Approved facilities as tabled are subject to the following additional covenants:- 1. Year ending June 1997 audited accounts to substantiate minimum value of $4M with regard to stock and debtors. 2. Effective gearing to evidence a reducing trend from maximum 3.1:1 as at year ending June 96 and to achieve a level of approx 1.8:1 by FYE June 98 calculated as per the following equation: Total liabilities_________________ Shareholders Funds – Intangible Assets 3. No payment of Dividends and/or increase in loans to shareholders/directors/associated companies are to be made without the prior written acknowledgment/ agreement of the Bank. 4. 2RM over Directors home is to be considered for release upon satisfactory completion of Army Contract. 5. Take out of adequate Keyman Insurance on Chairman, Cliff Carpenter, for assignment to the Bank or provision of existing Life Policies being assigned to the ANZ Bank with a minimum Surrender Value of $350K. 6. Documentary Credit/Surrender Facility is to be subject to Froward Exchange Cover being taken out or alternatively set procedures being agreed to monitor FX movements, arrangement of cover etc. Conditions precedent Our obligation to make any facilities available is subject to our being satisfied that you have complied with clause 4 of the General Conditions. Offer period Our offer is available for acceptance until the close of business on 23 April 1997, unless otherwise extended by the Bank in writing. We may withdraw our offer at any time before you accept it if we become aware of anything which, in our opinion, adversely alters the basis on which we made our offer. Acceptance To accept this offer, please sign the duplicate of this letter of offer where indicated and return it to me at this office. [emphasis added] 91 The terms of the attached Facilities Schedule are appended as Appendix 1 to the Judgment. 92 It is appropriate to note that part of the Facilities Schedule [which is not reproduced in Appendix 1] includes the following: Customer Information Sheet This information sheet is attached to assist you in completing the steps necessary to accept our offer and satisfy those things required by the Bank before it will make the facilities available… To accept our offer: · SIGN the attached duplicate letter of offer where indicated on page 12 and 14 · RETURN the signed duplicate letter of offer to the Bank at our address shown in the letter, by 23 April 1997. Certain other information and documents must also be provided before the Bank will make the facilities available: The following documents are provided with this offer: · Extract of minutes of a meeting of directors of the company approving the transaction documents for acceptance. An example is enclosed with this letter for your convenience." 93 Of critical significance is the fact that: i. the detail given of the overdraft facility included: "Termination date: Not before the next review date (Temporary OD $250,000 to clear in full by 20/4/97)." ii. the detail given of the variable rate commercial Bill acceptance/discount facility included: "Termination date: Not before the next review date." 94 Had the letter been accepted, it would establish that the anterior fixed five-year term of the FDA/CBADF had been varied by agreement: resulting in the FDA having a termination date of 31 December 2001 and the CBADF having a termination date as "not before the next review date", which was to be on 30 November 1997. Dealing with the issue Evidence given by Mr Carpenter 95 Mr Carpenter: i. in his affidavit of 14 November 2005, gave evidence that he could not recall receiving the letter of 3 March 1997 and that he had no recollection or record of ever having received or signed such a document and did not believe that he had ever received it or agreed to it on his behalf or on behalf of Pioneer or that Pioneer ever accepted that letter [paragraph 47]; ii. in his later affidavit of 11 July 2006, gave evidence that he now recalled receiving the letter which he had read and was unhappy with [as to its terms]. His evidence was now: (a) that he showed the letter to Mr Robert Henderson who advised him not to sign it; (b) that he then telephoned Mr Nielsen and said that he was not going to agree to the document and would not sign it; (c) that Mr Nielsen responded by telling him that he was not the first person to pick up on the matter, to leave it with Mr Nielsen , and that it had come from head office; (d) that neither Mr Neilson nor he raised it again before he was sent and received the next variation letter for the Pioneer facility in 1998 [paragraph 62]. 96 The cross-examination of Mr Carpenter on the subject [transcript 405 et seq] simply elicited that although up until 14 November 2005, Mr Carpenter had taken a consistent position in a number of courts, [including instructing counsel to cross-examine], on the basis that he had never received the letter, he was unable to identify what caused his memory to be improved, save to say that he thought this was in a general discussion with Mr Fordyce. In answer to the proposition that there were various parameters in respect of which the letter recorded the grant of facilities which were taken up [such as an encashment of cheque facility which he requested in early 1997] in respect of which he had accepted the benefit, Mr Carpenter gave evidence that he did not even know of these matters. 97 His cross-examination included the following: Q. ….Did Mr Neilson say to you in response to whatever you said, "If you need clarification you will have to put your concerns in writing"? A. No. Q. Do you deny he said that? A. Absolutely. Well, I say absolutely as far as I can recall . No, I'm clear in my mind what he said but you don't want to hear that. … Q. Do you deny that Mr Neilson told you something to the effect that if you had concerns about the letter you would need to put them in writing? A. I have absolutely no recollection of that whatsoever. HIS HONOUR: Q. So you are unable to agree or deny, is that correct, because you have no recollection? A. Correct, your Honour. … MR GLEESON: Q. And do you have any recollection whether he told you that if there was to be any clarification, it would have to come from the customer service unit of the bank as opposed to him? A. No, no. Q. Do you deny he said that? A. Yes. I have no recollection of it . Q. Is it the fact, Mr Carpenter, that you well knew that this letter was to record the basis of your continuing facilities from the bank and if you wished to vary it you would need to say so in writing to the bank. A. No, no. Q. You deny that, do you? A. Yes. It was an offer for me to accept. I didn't accept it. [Transcript 410/411] Evidence given by Mr Nielsen 98 Mr Nielsen who was called by the Pioneer parties, gave evidence that: i. the letter of offer of 3 March 1997 was never signed or accepted by Mr Carpenter; ii. after he had sent the letter he had not received any response to it and had asked his assistant to make inquiries of Mr Carpenter about the letter; iii. Mr Carpenter then telephoned him and said that he had some reservations about signing the letter because of what seemed to be changes to the terms of the advances; iv. Mr Carpenter had said that he needed some clarification about that matter before he could take the matter any further; v. Mr Nielsen had said to him that if he needed clarification, it would have to come from the ANZ, 'CSU' which was responsible for preparing the document and that he would need to have Mr Carpenter's concerns put into writing ; vi. that he did not recall Mr Carpenter say anything further. 99 Mr Nielsen gave evidence [affidavit 12 July 2006 paragraph 22 et seq] that in the normal course [according to usual practice with which he was familiar], had a signed letter of offer of 3 March 1997 been received, the receipt of it would have been recorded in a brief diary note, as it was deemed a security document and would have been forwarded to CSU for appropriate recording. He did not recall ever receiving an accepted offer of the letter and did not believe that one was ever received. 100 Mr Nielsen's evidence was that after the conversation with Mr Carpenter, there were communications and negotiations between Mr Carpenter and ANZ concerning variations to certain details of other facilities and there were subsequent communications including the variation letter of 6 April 1998 accepted in late April 1998. So far as his recollection was concerned, the letter of 3 March 9097 was never accepted before or after these other letters had been accepted. Examining the evidence given by Mr Nielsen in an attempt to follow the respective credit memoranda and variation letters through his eyes 101 The internal records of ANZ are the cause of considerable confusion in endeavouring to ascertain how ANZ viewed the 3 March variation letter. The confusion is proliferated by reason of the evidence given by Mr Nielsen. 102 Bearing in mind the intense significance of the issue to the Group's case it appropriate to pay close attention to the evidence given by Mr Nielsen under cross-examination concerning: i. the respective credit memoranda and variation letters and their interrelationship; ii. his own recollection and or understanding of these documents at the time and/or presently. 103 At the same time it must be steadfastly kept in mind that the Court is concerned to ascertain the objective determination of the intention of the parties from a consideration of the communications exchanged by them and that the approach to internal memoranda or statements as to subjective intention is closely prescribed by principle. Admissions stand apart. 104 A fair summary of the general approach can be seen in the following passage from the judgment in Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 [at 550 and following] as put by the Chief Justice, with whose reasons for judgment Hope and Mahoney JJA agreed: "…The case involves the objective determination of the intention of the parties from a consideration of a series of communications exchanged by them in the context of their dealings over a period of time. In those circumstances it is both appropriate and necessary to have regard to the commercial circumstances surrounding the exchange of communications and, in particular to the subject matter of those communications : Allen v Carbone (1975) 132 CLR 528 at 531-532. Furthermore, as was noted earlier, it is proper to have regard to communications between the parties subsequent to the date of the alleged contract to the extent to which those communications throw light upon the meaning of the language which is being considered for the purpose of determining whether it expresses an intention one way or the other upon the critical matter. At the least, such subsequent communications will often form part of the context in which the particular exchanges in question are to be evaluated. The position is by no means so clear, however, in connection with internal memoranda … or statements as to subjective intention made by individuals in the course of giving evidence. As it happens, although the learned judge had a good deal of material of this kind put before him at the hearing, it was not particularly helpful even if admissible. In the first place, a great deal of it was equivocal and individual pieces of evidence were contradictory in effect. Some of the persons who participated in the negotiations in question were called to the witness box and vigorously examined as to what was going on inside their minds at particular times. This process in the end principally served to demonstrate what might have been expected to be the case, that is to say, that the witnesses, not being lawyers themselves, were in a state of considerable confusion about the issue that ultimately emerged as determinative of the rights of the parties …….. In so far as acts or statements of the kind referred to, not involving communications between the parties, are claimed to be relevant in a case such as the present upon the ground that they constitute an admission, it seems to me that it will often be necessary to identify with some care the fact which is said to have been admitted. As was noted, there may be cases in which the issue is such that the fact of the subjective state of mind of one or other of the parties is relevant. Normally, however, what is in issue is not their subjective state of mind but their "intention as expressed" (cf Inland Revenue Commissioners v Raphael [1935] AC 96 at 142 per Lord Wright) and caution may need to be exercised in relating the fact which is said to be admitted to the fact which is legally relevant." [emphasis added] 105 Mr Nielsen gave evidence that the bank's policy was that it was necessary to create credit memoranda when varying facilities of any shape or form for a client. Hence in the ordinary course of issuing a facility variation letter of the type issued on 3 March 1997, the normal course was that any such variation letter would be preceded by a credit memorandum. Looking forward into the detail, Mr Nielsen was unable to identify which was the precise credit memorandum which in those terms, had supported the 3 January 1997 letter of offer [giving evidence that there might well be some other credit memorandum to any of those in evidence which would have been the relevant memorandum] [transcript 593]. 106 It has to be said that albeit the detailed cross examination of Mr Nielsen in relation to the many letters of offer and credit memoranda, a very important parameter concerns: i. the circumstance that the letter of 3 March 1997 had been prepared by the customer service unit; ii. the fact that Mr Nielsen did not generally spend time re-evaluating details as he did not regarded it as part of his task to check the terms by which facilities were being varied or renewed; iii. the fact that he did not agree that at the time when he sent letter out, he would necessarily have reviewed the terms. 107 In this state of affairs he nonetheless purported to give evidence that there was an error in the facilities schedule to the letter in relation to the termination date for the variable-rate commercial bill acceptance/discount facility, which on his evidence, should have been recorded as 31 December 2001. This view was however based upon module G of the 24 July 1997 credit memorandum describing the CBAD-F/V as having a term of five years with interest only. 108 This evidence can only be regarded as a reconstruction reached after the event, and is clearly inconsistent with the very terms of the 3 March 1997 letter. 109 Working through the sundry documents of relevance [covered in his evidence or put to him] in chronological fashion [and annotating the summary], provides much of the relevant detail including transcript references to his evidence: i. It should first be noted that ANZ had not been able to locate any credit memoranda for the original offer nor for the 7 May 1996 offers [transcript 589.47]; The letter of 8 January 1996 ii. The letter of 8 January 1996 plainly offered the fixed rate fully drawn advance facility of $2,500,000 as having a termination date being five years from the date of drawdown, it being common ground that the date of drawdown was in the late January or early February 1996; The variation letter of 17 May 1996 iii. The variation letter of 17 May 1996 now identified the fixed rate fully drawn advance facility of $500,000 as interchangeable with the Commercial bill Facility, there being a total limit of $2,500,000. Hence the expiry date 'five years from the date of drawdown' in respect of each of these interchangeable facilities would appear to have been appropriate to be noted by ANZ as the end of January 2001 [say 31 1 01] as being five years from the date of the original drawdown [transcript 588.31]. The repayment arrangement in respect of each facility as at 17 May 1996 was for principal reductions of approximately $1,000,000 over a term of five years, with the balance, $1.5 million, to be renegotiated for a further term of maturity. The same formula was used in both those interchangeable facilities, so that the intention was that this would apply across the two facilities on an aggregated basis [transcript 588.35]. iv. Hence if ANZ had been preparing a credit memorandum on the basis of the 17 May 1996 facility letter, upon the assumption that the date of drawdown was late January 1996, the termination date for the facilities would be shown as late January 1996 [transcript 588.48]. The credit memorandum of 3 January 1997 v. The credit memorandum of 3 January 1997 approved by Mr Nielsen [on module F of ANZ's credit memoranda template] identified: a) the termination date of the FDA-FR as at 31 December 2001; b) the termination date of the CBAD-FV as also 31 December 2001. Mr Nielsen gave as the reason for these dates the fact that this was due to a continuity in terms of what was replicated through all the Credit Memoranda. His proposition was that on each of the credit memoranda which he was shown, the dates were carried forward and that unless the manager's assistant would amend a particular date, that date would always remain unchanged [transcript 589.39]. His evidence was that it was difficult to determine whether or not this credit memorandum of 3 January 1997 was that which had supported the facility offer of 3 March 1997 [transcript 593.24] However Mr Nielsen could not give any explanation,[if there had been no intervening variation letter between 17 May 1996 and 3 January 1997], as to why the termination date shown in the credit memorandum of 3 January 1997 was given as 31 December 2001 [transcript 590.1] The credit memorandum of 18 February 1997 vi. The credit memorandum of 18 February 1997 also approved by Mr Nielsen, again identified the termination dates for the FDA-FR and the CBAD-F/V as 31 December 2001. Mr Nielsen denied that this credit memorandum [in accordance with his understanding of the procedures] was that which had supported the facility variation offer of 3 March 1997 [transcript 593.33] vii. In re-examination Mr Nielsen gave evidence that in relation to the credit memoranda of January 1997 and 19 February 1997 he had not intended to vary the terms of the two facilities [whatever they may be], identified in the original letter of 8 January 1996 and the variation letter of May 1996 [transcript 641.5] The 3 March 1997 letter of offer viii. Mr Nielsen [in terms of the 3 March 1997 letter of offer] not only could not accept that it was based upon/accompanied by either of the credit memoranda of 3 January 1997 or that of 18th February 1997, but additionally made the point that the total limits [$6,418,256] identified in the summary of the facilities did not correlate with either of those credit memoranda [transcript 594.46] ix. It was put to Mr Nielsen that the facilities schedule to the letter of offer of 3 March 1997 was the first time that one finds in any of the facility letters , any reference to the termination date "31 December 2001"], [this being the termination date identified for the fixed rate fully drawn advance facility]. He accepted this proposition. [At the same time it should be noted that the same facilities schedule to the letter of 3 March 1997 gives a termination date for the variable rate commercial bill acceptance /discount facility as "not before the next review date". Mr Nielsen gave evidence that this was an error [transcript 591.27] and should have been recorded as 31 December 2001 [transcript 601.43]. Being of that opinion he was unable to agree with the proposition that this particular schedule had, for the first time, introduced a difference in the termination date as between the two facilities]. It is appropriate to infer from his evidence that in his view the correct termination date for the variable rate commercial bill acceptance/discount facility should have been recorded in the letter of offer of 3 March 1997 as '31 December 2001'. That view was based upon module G of the 24 July 1997 credit memorandum describing the CBAD-F/V as having a term of five years with interest only [transcript 601.50] Mr Nielsen did accept however that: a) one clear difference between facilities offered by the letter of 3 March 1997 and the offer made by the earlier letter of 17 May 1996, was that there was no longer any requirement to reduce the total amount of the facilities by $1,000,000 over five years, and that in lieu of that amortisation regime, i. the fixed rate fully drawn advance facility now appeared as a repayment arrangement of $50,000 per quarter; ii. the variable rate commercial bill facility now appeared as "interest only." [transcript 591.52] b) another difference between the facilities offered by the letter of 3 March 1997 and the offer made by the earlier letter of 7 May 1996 was that the facilities were no longer described as interchangeable x. Mr Nielsen did not agree that at the time when he sent the letter of 3 March 1997 he would necessarily have reviewed the terms of the annual review and variation letter of offer. This was because in practice these letters were prepared by the customer service unit [CSU] and would be checked by the manager of that unit and were then handed to the local manager for execution of signature. Generally speaking Mr Nielsen would not spend time re-evaluating details as he did not regard it as part of his task to check the terms by which facilities were being varied or renewed [transcript 602]. The credit memorandum dated 24 July 1997 xi. The credit memorandum dated 24 July 1997 again [in module F] identified the termination date for both the FDA-FR and the CBAD-FV as 31 December 2001. His manager's assistant had prepared that credit memorandum. xii. Mr Nielsen first gave evidence that this termination date clearly referred to the termination date in the variation letter of 17 May 1996 [transcript 581.46/Statement paragraph 28]. He appeared in that regard to be giving evidence which amounted to stating that the material facility documentation applicable was that of 17 May 1996 [as distinct from the facility documentation of March 1997]. xiii. However on being pressed with the issue, he later [transcript 605.30] did agree that the memorandum of 24 July 1997 did not, in reference to a termination date, refer to the termination date in the variation letter of 17 May 1996. xiv. Mr Nielsen gave evidence as follows: "Q. …. The internal bank records of the stated facilities as they existed prior to the variation of 6 April '98 did not show that the FDA and the CBAD facilities were interchangeable. That's right, isn't it? A. Correct. Q. And therefore regardless of your understanding as it is expressed in the last sentence of paragraph 33, the bank records that you have been shown show that whatever your understanding was, the bank records did not - would not support a statement that the interchangeable facilities of $2.5 million referred to in the previous letters of offer had not been varied by that date? A. The bank's records do not reflect my understanding … correct." [Transcript 606.37] The credit memorandum of 6 March 1998 xv. The credit memorandum of 6 March 1998 again in module F identified the termination date for both the FDA-FR and the CBAD-FV as 31 December 2001. Mr Nielsen would not accept that these termination dates were a reference to the variation letter of March 1997 [transcript 584]. His reason for giving that answer was as follows: "The termination date refers to the original approval of the facilities, so it is a carry forward on each of the module Fs as each credit memorandum is prepared in future. So it doesn't get changed. So from the very first one module F is a carry forward module and only then things that change under the new submission when they are put through are varied. So the constant denominators, such as original dates approved for facilities remain unchanged." [He was unable to give any reason why there appeared to have been a change between some expiry dates stated in the credit memoranda of 24 July 1997 and the 6 March 1998 [transcript 585.1]] The 6 April 1998 variation letter xvi. The 6 April 1998 variation letter identified two temporary overdraft facilities in terms of the additional facilities,: a) that for $500,000 being given a termination date as "[n]ot before the next review date. To clear in full by 30 April 1998." b) that for the $600,000 being given a termination date as "[n]ot before the next review date. To clear in full by 31 May 1998." The credit memorandum of 27 May 1998 xvii. The credit memorandum of 27 May 1998 prepared by Mr Jones under the supervision of Mr Nielsen [in module F] identified the termination dates of both the FDA-FR as well as the CBAD-FV as 31 December 2001. 110 A measure of the difficulty involved in following any attempt to correlate credit memoranda to the letter of 3 March 1997 may be seen from the following excerpt of the cross-examination of Mr Nielsen: "Q. Very well. What I want to put to you is the reference in the credit memoranda of 3 January '97 … to 31 December 2001, being the expiry date or the termination date for the FDA and the CBAD facilities? A. Yes. Q. I want to ask you whether that might reflect some decision which has either been made or was in contemplation to make an offer in terms of the offer of 3 March '97 which states at least in respect of the FDA, a termination date of 31 December 2001? A. No, not necessarily. Q. Where else would the information come from to state that expiry date in the credit memoranda of 3 January '97? A. The CSU prepares letters of offer… From the credit memorandum that adjoins the file… So they would draw that information from their own investigation of looking at the file when they prepare the letters of offer. Q. So one possibility is that at least in respect of the FDA the termination date in the offer of 3 March '97 came from the credit memorandum stating that as being the termination date for that facility? A. Possibly. Q. …Is this a possibility, that the CSU, which prepared this letter, did not think it appropriate for the variable rate of commercial bill acceptance discount facility to have a term to 31 December and therefore suggested it be terminable… before the next review date? A. No. Q. Why is that not a possibility, Mr Neilson? A. Again, the correlation with the details in the letter of offer of 3 March 1997 did not mirror in any way the CM details 3/1/97. … Including the fact that the CM specifically incorporates the approval of all interchangeabilities which should have then been reflected in a subsequent lever of offer, hence why again I cannot correlate the 3 March letter of offer representing the 3 January CM. Q. You are not prepared to contemplate that in preparing the letter of offer the CSU made a decision to vary the terms of the facilities so that they are set out as set out in the offer of 3 March '97? A. No. [Transcript 594-596] Examining the position before and after the letter of 3 March 1997 111 It is appropriate to return to examine the respects in which the letter of 3 March 1997 varied the anterior position, the negotiations in that regard and importantly to focus upon the manner in which the Group availed itself of the altered facilities thereafter. 112 The convenient way to approach this examination is to deal with each facility separately. Overdraft facility 113 The overdraft facility limit was increased from $500,000 by a temporary overdraft of $250,000, which was to be cleared in full by 20 April 1997. As previously observed, the termination date for the facility less the temporary overdraft was stated as "not before the next review date". 114 The increase in the overdraft limit arose out of a request by Mr Carpenter to the Bank to ease the temporary strain on working capital caused by slow paying debtors. His request was documented in Mr Jones' Diary Note dated 7 February 1997 [Tender Bundle Tab 66] and Mr Neilson's Diary Note dated 11 February 1997 [Tender Bundle Tab 68]. 115 The Bank required sighting of December financials prior to committing any formal approval for the additional facility and Mr Carpenter provided a report of financials as at December 1996 which confirmed weak cash flows in November, December and February but had strong forecasted cash flows for the remaining months of the financial year [Tender Bundle Tab 69]. 116 The Group's overdraft account remained above the $500,000 limit, which was illustrated in a spreadsheet the defendant prepared using the Group's ANZ Operating Account Bank Statements, Letters of Offer, Credit Memoranda [Tender Bundle Tab 10]. Fully Drawn Advance 117 The FDA limit was reduced from $500,000 to $350,000. The anterior interchangeability with the limit on the CBAD was removed. The termination date, which was previously "5 years from drawdown" [either February 2001 or May 2001], was extended to 31 December 2001. The repayment arrangement was varied from principal reductions of $1 million over 5 years to $50,000 per quarter until fully repaid by the end of 1998. 118 The proposed variations to the facility were part of the refinancing of the Group's St George facilities. The reduction of $150,000 in the limit of the FDA reflected payments already made by the Group. 119 The negotiations between Mr Carpenter and the Bank were documented in Mr Jones' Diary Note dated 5 May 1997 [Tender Bundle Tab 99] wherein the following was recorded "Cliff Carpenter called…the opportunity was taken to discuss rollover of FDA-F." Mr Carpenter subsequently signed an undated drawdown notice for the $350,000 facility [Tender Bundle Tab 3]. 120 The Group made quarterly payments of $50,000 which commenced on 3 July 1997, in accordance with the undated drawdown notice which stated the first instalment was payable on 2 July 1997. Commercial Bill Acceptance/Discount Facility (CBAD) 121 As previously observed the CBAD was no longer interchangeable with the FDA and the limit was fixed at $2 million. The termination date was now "not before next review date". The previous repayment requirement of $1 million principal reduction over 5 years [in respect of the two then interchangeable facilities] was no longer required. 122 Similar to the FDA, the changes to the CBAD were part of the refinancing of the Group's borrowings. 123 The Group continued to utilise the CBAD through to June 1999 subject to variations, which are in contention. The letter of variation of 7 October 1998 also noted the facility as subject to annual review. Encashment Facility 124 An encashment of cheque facility with a facility limit of $5,000 was provided with the determination date: "Not before the next review date". 125 Pioneer had the benefit of the encashment of cheque facility from the Wyong branch. Mr Neilson's diary note of 7 July 1997 recorded discussions with Mr Carpenter regarding the Bank's intention to close the Wyong branch 'sometime in the next few months' and Mr Carpenter's advice to Mr Neilson that he consequently needed to consider various options, including obtaining Petty Cash. DOC/OS No 1 126 The Overdraft was noted as being interchangeable with the DOC O/S. 127 The Doc Credit No 1 Facility was recorded as having a determination date "not before next review date". 128 Pioneer enjoyed the benefit of this interchangeable limit of $2.5 million (with the added advantages of increases in the temporary overdraft limit as provided from time to time). As illustrated from the excesses spreadsheet MFI D8, Pioneer's account exceeded the $500K limit in February 1997, and while the balance fluctuated, it was accommodated by the interchangeable limit. 129 Diary notes record conversations between the Bank and Ms Stewart and/or Mr Carpenter with a view to reducing the excess based on the interchangeable limit, being the limit interchangeable between these facilities. The interchangeable limit was ultimately cancelled in April 1998 following the completion of the army contract. Foreign Currency Dealing facility 130 A Facility of the same limit was extended until 'next review date'. Financial Guarantee 131 The facility was extended until an expected date of 31 March 1997 with lower limit of $422,256 and lower minimum fee of $2,111 per half year. 132 There are several diary notes which record the maturing of the term deposit and its roll over for a further 7 days. The facility was reduced following some repayments, and the interest that accrued on the term deposit was credited into the Army account. There is correspondence from the Army which supports the reduction of the Financial Guarantee facility, until its ultimate completion. Decision 133 The existence of the letter of 3 March 1997 and the subsequent availing by the Group of the altered facilities provide the only basis for any suggestion that the fixed term of the FDA/CBADF was ever varied by any agreement. 134 The test is an objective one: examining the whole of the circumstances, including inter alia the nature of and the relationship between the parties and the standards of reasonable conduct in the known circumstances, here that of a continuing banker customer relationship ["the test paragraph"]. 135 The court accepts as reliable the evidence given by Mr Nielsen of the content of the conversation with Mr Carpenter when, on the version which is accepted; i. Mr Carpenter advised that he had some reservations about signing the letter because of what seemed to be changes to the terms of the advances; ii. Mr Nielsen said that if Mr Carpenter needed clarification, it would have to come from the ANZ CSU which was responsible for preparing the document and that he would need to have Mr Carpenter's concerns put into writing; iii. No such written communication was ever received. [Indeed it may be noted that the final submissions of the Group contended that Mr Carpenter "protested to Mr Nielsen, who suggested he put his concerns in writing but Mr Carpenter never did so".] 136 Mr Nielsen's evidence is consistent with his recollection that the CSU had prepared the letter and that he would not necessarily have reviewed the terms. The balance of probabilities favours his having responded to Mr Carpenter's reservations by requiring that they be put into writing for CSU consideration. 137 The finding of the Court is that applying the objective test [set out in the above "test paragraph"] and likewise accepting and applying the whole of the foundational approach set out in the test paragraph: i. the respects in which the letter of 3 March 1997 varied the anterior facilities, taken together with ii. the fact that the Group availed itself of the altered facilities, justifies the drawing of an inference that both parties intended that they be bound by the whole of the terms provided for in the letter, including that providing for the variable rate commercial Bill acceptance/discount facility having a determination date "Not before the next review date", to be subject to annual review. 138 It would be reasonable to infer that Mr Carpenter having raised the need for some clarification and having been told that his concerns would need to be put into writing before they could be passed on to CSU, having rethought the matter had determined not to further press his concerns. The inference is one which is fairly reached by an objective approach to the whole of the circumstances. The Group continued to take up the altered facilities. The Group did not take up the invitation to express its concerns in writing. Hence the variation was effected consensually. 139 In submissions, the Group emphasized the requirements that the customer provide a signed letter of offer and an extract of minutes of the meeting of directors of the company approving transaction documents for acceptance. However in the circumstances, these requirements were really no more than a requirement that a documented written acceptance be furnished to ANZ. The conduct of both parties thereafter particularly in relation to the group availing itself of the altered facilities underpins the finding that the variation was effected consensually in terms of a common law offer and acceptance. 140 Another way of likely putting the legal position [which seems to me to be synonymous with the proposition that a consensual variation was effected], would be to view what occurred in terms of a conventional estoppel. The detriment was constituted by the offering of the new accommodation which ANZ was not obliged to offer. 141 The court accepts and adopts the submissions of ANZ in this regard: "Analysing the letter and the conduct in terms of the law of contract, the following proposition is assumed to be uncontroversial. In situations where the customer seeks to have the bank extend or modify existing facilities, or grant additional facilities or indulgences, any such extension or modification or grant of additional facilities, is to be classified as a variation or renegotiation of the facilities and the bank is entitled to stipulate the terms and conditions on which it was prepared to grant (if at all) the changed facilities, without being restricted by the terms of the pre-existing facilities. Of course such a negotiation would not necessarily bind the customer as a matter of contract until the legal requirements for acceptance of the variation offer were fulfilled, but in the normal course, acceptance would be taken as established if the offeree used or took the benefit of the variation proposed, having knowledge of the terms on which it was being offered. That is what occurred in this case." 142 It is unnecessary to consider whether the position may have been different had the altered facilities been de minimus. 143 To the contrary, one finds that the 3 March 1997 letter provided some real changes to the anterior facilities and in a number of instances, granted facilities expressly utilising the terms "Termination: not before next review date": cf the $750,000 overdraft; the Encashment of Cheque facility; the $2,000,000 Documentary Credit/Documents surrender No 1 facility; the $685,000 Foreign Currency Dealing Facility. 144 The fact that the 3 March 1997 letter expressly gave the CBAD a termination date as "Not before the next review date", simply cannot be gainsaid. Mr Nielsen's evidence that this was an error and that the correct termination date should have been 31 December 2001 constitutes no more than an opinion. The opinion is no more than that for the reason that the document was prepared by CSU and that Mr Nielsen would not necessarily have reviewed it. Whilst it is true that there was evidence [in the form of an internal Credit Risk Review as at 30 June 1998 -Exhibit P 10] that the CSU had not been providing timely and adequate support, had not been fully staffed since inception, was not staffed it with fully trained personnel and that the set staff had been doing some of the CSU's duties, none of this speaks to the particular matter in hand as having necessarily constituted an error. 145 The proposition that the termination dates for the CBAD and the FDA should logically have mirrored one another because that was the position in the 17 May 1996 letter, whilst at first blush a seemingly attractive proposition, does not survive closer analysis for reasons including that: i. the 3 March 1997 letter removed the anterior inter-changeability of these two facilities; ii. the March letter departed from the anterior repayment arrangement with respect to the CBAD, now appearing as "interest only" [having previously, when the two facilities were interchangeable, been subject to the principal reduction requirement of $1,000,000 over a five-year term with arrangements for the balance of $1.5 million to be renegotiated for a further term of maturity]. 146 And in any event the Court is not dealing with what may or may not with the benefit of hindsight be regarded as 'logical'. The Court is simply dealing with communications between parties. Hence the very special significance of what was said between Mr Carpenter and Mr Nielsen which has already been dealt with. 147 The position would of course have been different had ANZ [through Mr Neilsen or some other officer] stated to Mr Carpenter [or the Group] that the CBAD had been misdescribed in the 3 March letter and was in fact to terminate 5 years from drawdown or alternatively on 31 December 2001. On the evidence no such communication was ever made. What changes, if any, to the contractual arrangements were brought about by the facility letters of April, June and October 1998? 148 Before turning to the detail of the later letters the short position may be summarised by making the point that [save for the dates given for the next annual review of the facilities in the 6 April 1998 and 7 October 1998 letters], each of the subsequent letters: i. when dealing with particular additional facilities described in the letters, provided detail of the termination date: generally in terms of " not before the next review date " [from time to time adding the date by which, for example, a temporary overdraft was to clear in full]; ii. dealt with what had gone before using the words: " No other variations "Except as indicated above, it is not proposed to vary any of the other conditions of your facilities" 149 As previously observed the later letter of 7 October 1998, after describing all of the subject facilities also continued: " Annual Review All facilities are subject to Annual Review . The next annual review date will be on 30 November 1998." [emphasis added] 150 The later letters to Domino Mining were relevantly in the following terms: Letter of 6 April 1998 "Annual review and variation letter Domino Mining Equipment Pty Limited ACN 002 706 881 Following the annual review of your facilities , we are pleased to offer additional facilities and variations to the conditions on which the existing facilities are provided as follows: Summary of facilities A summary of facilities is as follows: Facility Facility Limit AUD Overdraft Facility $ 500,000 Fixed Rate Fully Drawn Advance Facility $ 150,000 Commercial Bill Facility $ 2,000,000 Encashment Facility $ 5,000 Payroll Facility $ 110,000 Clean Credit Facility – ANZ OnLine $ 100,000 Temporary Overdraft Facility (1) $ 500,000 Temporary Overdraft Facility (2) $ 600,000 TOTAL $ 3,965,000 Details of Additional Facilities Temporary Overdraft Facility (1) Facility limit: $500,000 (o/a Operating Account) Termination date: Not before the next review date. To clear in full by 30th April 1998. Purpose: Working capital. … Temporary Overdraft Facility (2) Facility limit: $600,000 (o/a Army Account) Termination date: Not before the next review date. To clear in full by 31st May 1998. Purpose: Facilitate completion of the Australian Army contract. … No other variations Except as indicated above, it is not proposed to vary any of the other conditions of your facilities." Annual review Our next annual review of your facilities will be on 30 November 1998. Letter of 9 June 1998 Following our recent discussions, we are pleased to offer variations to some of the conditions on which the existing facilities are provided as follows: Summary of facilities A summary of facilities is as follows: Facility Facility Limit AUD Overdraft Facility $ 500,000 Fixed Rate Fully Drawn Advance Facility $ 150,000 Foreign Currency Dealing Facility $ 200,000 Commercial Bill Facility $ 2,000,000 Encashment Facility $ 5,000 Payroll Facility $ 110,000 Clean Credit Facility – ANZ OnLine $ 100,000 Temporary Overdraft Facility (1) $ 500,000 Temporary Overdraft Facility (2) $ 600,000 TOTAL $ 4,415,000 Details of Additional Facilities Temporary Overdraft Facility (1) Facility limit: $500,000 (o/a Operating Account) Termination date: Not before the next review date. To clear in full by 31st July 1998. Purpose: Working capital. … Temporary Overdraft Facility (2) Facility limit: $600,000 (o/a Army Account) Termination date: Not before the next review date. To clear in full by 31st July 1998. Purpose: Facilitate completion of the Australian Army contract. … No other variations Except as indicated above, it is not proposed to vary any of the other conditions of your facilities." The letter of 9 June 1998 was accepted by Domino on 2 July 1998 (B Vol 10 Tab 260) and by Mr Carpenter as surety on 7 July 1998 (B Vol 10 Tab 260 page 5. Letter of 7 October 1998 "Following our recent discussions, we are pleased to offer additional facilities and variations to some of the conditions on which the existing facilities are provided as follows: Customer Facility Facility Limit AUD (1) Overdraft Facility – Basic* $500,000 (2) Overdraft Facility – Temporary** $400,000 (3) Fixed Rate Fully Drawn Advance Facility* $50,000 (4) Foreign Currency Dealing Facility* Domino Mining (5) Commercial Bill Facility* $200,000 Equipment Pty Ltd – (6) Encashment Facility* $2,000,000 A.C.N. 002 706 881 (7) Payroll Facility* $5,000 (8) Clean Credit Facility – ANZ Online* $110,000 (9)Temporary Overdraft Facility # 1** $100,000 (10)Temporary Overdraft Facility # 2** $375,000 TOTAL FACILITIES $225,000 $3,965,000 * Existing facility – existing specific conditions relating to facility continue to apply. ** "Additional Facilities" – refer to Facilities schedule for conditions. Annual Review All facilities are subject to Annual Review. The next annual review date will be on 30th November 1998. Conditions continue Until you accept our offer and have complied with all conditions precedent, the arrangements for the facilities that we are making available to you, including the conditions on which those facilities are being made available, continue. All other conditions currently existing and which are not expressly varied by this Variation Letter of Offer will, upon acceptance of this Variation Letter of Offer, continue to apply. (emphasis added) …" The Facilities Schedule referred only to facilities (2), (9) and (10). These references were as follows: (2) Overdraft Facility-Temporary Purpose-Working capital "Termination Date: Temporary limit to reduce to $300,000 upon drawdown of variable rate fully drawn advance # 1 (Facility (9)) (9) Variable Rate Fully Drawn Advance Facility Facility Limit $375,000 Termination Date: 16 December 1998 Purpose: To facilitate EFIC Guaranteed Contract for sale of machinery to China (10) Variable Rate For the Drawn Advance Facility Facility limit: $225,000 Termination date: 30 December 1998 subject to Annual Review due 30 November 1998 Purpose: To facilitate EFIC Guaranteed Contract for sale of spare parts The 6 October 1998 draft variation letter of offer 151 On 2 October 1998 a meeting had taken place between Mr Carpenter and bank officers. Mr Carpenter sought to have existing excesses on the $500,000 overdraft taken up in a new $400,000 temporary overdraft which would reduce by $100,000 shortly and be fully cleared by the end of November. He also sought a $600,000 FDA facility to be guaranteed by EFIC to fund contracts with Chinese clients. 152 In terms of the evidentiary conflict between the versions of the meeting given on the one hand by Mr Harvey and Mr Kilcran, and on the other hand by Mr Carpenter, the balance of probabilities favours acceptance of the version of Messrs Harvey and Kilcran as reliable. Their versions are supported by the diary note [12/348]. 153 Mr Carpenter was told that given the trading losses to 30 June 1998, as well as current-account excesses and increased funding requests, ANZ was concerned with the ongoing viability of the group and would need full cross-collateralisation of group companies and provision of consolidated audited financial statements as a requirement for ongoing Bank support in the medium to long term. He was told that ANZ would be looking to confirm the ongoing viability of the total group and that Domino was not in a position to support other entities if they were loss making. 154 It is particularly important to note that on 6 October 1998 Mr Kilcran forwarded to Mr Carpenter, a draft variation letter of offer in respect of the increased facilities which had been discussed at their meeting on the previous week. In the covering facsimile Mr Kilcran said: "Could you please advise us of your thoughts with respect to the terms, conditions and repayment dates set in the Variation Letter and whether you consider them acceptable and inaccurate reflection of our discussions." 155 Mr Kilcran prepared a diary note following his having forwarded the draft variation letter to Mr Carpenter. The diary note records that Ms Stewart had subsequently called back on behalf of Mr Carpenter raising a number of issues concerning the draft. None of these issues affect the proposed term that all facilities be subject to annual review and that the next annual review date would be on 30 November 1998 [the only timing issue concerned an extension of the termination date on the $400,000 temporary overdraft and the $375,000 FDA facility until 16 December 1998]. 156 Shortly after 7 October 1998 Carpenter accepted the variation letter on behalf of Domino Mining Equipment, including 3 additional facilities and the term that all facilities were subject to annual review [12/353]. 157 In those circumstances the sending of the 7 October 1998 letter plainly constituted a letter of variation to the terms of the anterior facilities, importantly injecting without question, the term that all facilities were subject to annual review, the next annual review date to be on 30 November 1998. 158 Indeed Mr Carpenter's oral evidence included the following: "Q. Then I want to take you to October 1998… … That is a letter from the bank headed "Variation letter of offer" dated 7 October 1998 and it contains at the end of it a request "to accept the variations for additional facilities by signing the duplicate and returning it to us". Do you see that? A. Yes. Q. When you got the letter I take it you read it? A. Yes, I did. Q. And what did you think the bank would do if you signed it and sent it back? A. Provide me with those facilities until the next annual review and we would both be bound by the terms and conditions of the agreement. Q. And then you have given evidence that you signed it and sent it back? A. Yes. Q. After you signed it and sent it back, what did you think the bank would do? A. I repeat, provide the facilities and we would both be bound by the terms and conditions of the contract." [Transcript 160-161] (Emphasis added.) 159 I note in this regard the fact that after the table listing all of the facilities, [with each facility either having a cross-reference by single or by double asterisks], one finds the descriptions: "*Existing facility-existing specific conditions relating to facility continue to apply **Additional facilities-refer to Facilities schedule for conditions" 160 This form of wording is then followed with: "Annual Review" "All facilities are subject to Annual review. The next annual review date will be on 30 November 1998". 161 In my view the proper contextual approach is to read what is presented as identifying that all facilities were now subject to Annual Review. And in any event the matrix of fact appropriate to be taken into account in construing the reference to 'all facilities now being subject to annual review', must include the anterior advice to Mr Carpenter of the banks concerns: i. with the ongoing viability of the group; ii. with the need for full cross collateralisation of group companies and the provision of consolidated audited financial statements as a requirement for ongoing Bank support in the medium to long term. 162 In this regard the analysis put forward by ANZ is accepted as correct and adopted in what follows. It focuses upon the CBAD. The analysis in part treats with the matter upon the assumption that the 3 March 1997 letter was not accepted and hence that the CBAD facility was not a revolving facility by dint of that letter. Notwithstanding that the finding is that the 3 March letter was accepted, the analysis which follows serves as a convenient examination of the position should the decision on the 3 March letter be incorrect. 163 The general rule is that where it is determined that the terms of the agreement are wholly contained in writing and are unambiguous or of a plain meaning, extrinsic evidence cannot be admitted to subtract from, add to, vary or contradict the language of the written agreement: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 347. 164 Generally the contract is to be construed objectively and to give effect to the apparent intention of the parties as disclosed by their written document, and direct evidence of the parties' actual subjective intentions and expectations is inadmissible for purposes of construction: Codelfa Ibid at 348 and 352. 165 The language used in a contract is generally assigned its natural and ordinary meaning, read in the light of the contract as a whole but where it is ambiguous, surrounding circumstances may be taken into account in assigning the presumed meaning. Surrounding circumstances include the matrix of mutually known facts and the background, object, context and commercial purpose of the transaction viewed objectively on the basis of what reasonable persons in the position of the parties would have had in mind: Codelfa Ibid at 347-352. For this purpose the "contract as a whole" in the context of the Pioneer facilities extends back to the original facility letter of 8 January 1996 and all subsequent variations, in the absence of any occasion in the interim where the rights and obligations of the parties were completely restated afresh as distinct from varied. 166 Applying those general principles in the current context and assuming that the finding as to the 3 March 1997 letter was incorrect, the question which would arise is whether there is an ambiguity in the terms of the letter of offer dated 7 October 1998 which would render the discussions on 2 October and the intervening communications relevantly available as "surrounding circumstances" for the purpose of resolving such ambiguity. 167 There are two overlapping aspects of ambiguity to be resolved: i. First there would be an ambiguity arising from the wording of the 7 October 1998 facility letter. The ambiguity would be whether the term "all facilities are subject to annual review" (objectively understood) amounted to an express variation of the CBAD facility so that it became subject to an entitlement on the part of the bank to terminate the facility following an annual review or alternatively, that it ceased to be a facility granted for a fixed period and became a facility available at least until the next review date for the purposes of the operation of the General Conditions (especially clauses 2 and 9(2)(b)). ii. Second, when the variation letter of offer dated 7 October 1998, is reviewed in the context of the previous documentation of the facilities described as "existing" in the October variation letter, it appears that the principal (if not the sole) "variations to some of the conditions on which the existing facilities are provided" (emphasis added) was the provision to confirm or make those facilities "subject to annual review". The other conditions introduced by the 7 October variation letter appear to be additional conditions applying regardless of what facilities there are rather than any variation of existing facilities. Thus the text of the variation offer also would introduce an ambiguity as to what variation is being made to the existing facilities. 168 The argument against this view is that there is no incompatibility between the proposition that "all facilities are subject to annual review" and the continuation of the CBAD facility as a fixed term facility, because fixed term facilities were subject to annual review: it is simply that the general conditions made different provisions about what ANZ was entitled to do upon an annual review of such facilities. Thus on this approach, no question arises about the intended reach of the term that "all facilities are subject to annual review". 169 However I accept as correct the submission that even if the CBAD had not become a revolving facility "subject to annual review" by dint of the 3 March 1997 letter, this argument would not be conclusive in this case. The history of the documentation of variation to the facilities (leaving aside for present purposes the March 1997 letter – although it is not an exception in this regard), shows that it was not ANZ's practice in respect of its variation offers to Pioneer Park, to use the term "subject to annual review" in relation to fixed term facilities. As a matter of historical record of the facility variation documents, fixed term facilities were consistently not described as "subject to annual review", in contrast to other facilities which were so described. 170 The prior observance of this convention in the documenting of the variation of facilities shows that the 7 October variation offer departs from the pattern previously observed. I accept that this introduces sufficient doubt about the intended scope of the term, to permit regard to be had to the surrounding circumstances, including in this case the communications noted above leading up to the issuing of the October 1998 variation letter, for the purpose of attempting to clarify the intended contractual effect. 171 Thus in the posited circumstance, the 7 October 1998 variation letter would be ambiguous on the question as to whether the CBAD facility was expressly varied so that, instead of being treated as a fixed term facility for the purposes of the general conditions, it became a facility which was "subject to annual review" (that is, like the others) and liable to be terminated following a review. Hence the evidence of communications between the parties on and subsequent to 2 October 1998 would be admissible for the purpose of resolving that ambiguity and would lead to the conclusion that in the light of such communications, two reasonable parties in the position of ANZ and Pioneer Park would be taken, by using the words "all facilities are subject to annual review", to have expressly varied the CBAD facility, so that it would be treated at the pending annual review, as a facility granted at least until the next review date, rather than for a fixed term expiring in 2001. Focussing upon the Overdraft Facility 172 The convenient approach is to initially focus on the position as it was from time to time with respect to the Overdraft Facility. 173 By dint of the letter of 8 January 1996 the overdraft became subject to the next annual review which was to take place on 31 January 97. 174 That position remained the same following the 17 May 1996 letter which did not expressly deal with the subject to save for providing that if the variations were agreed, the existing General Conditions and Specific Conditions would continue to apply to the facilities [plainly being a reference to the existing conditions]. 175 The 3 March 1997 letter constituted a contractual offer to vary the anterior position with respect to the overdraft as it now included a term that the facilities were subject to annual review and that the next review date would be on 30 November 1997. This was apt to apply to the overdraft facility, to the encashment of cheque facility, and to the Documentary Credit/documents surrender No 1 facility, but not to the FDA. 176 The 6 April 1998 letter, commencing with the statement "Following an annual review we are pleased to offer …", now confirmed that the facilities were subject to annual review and that the next review date would be on 30 November 1997. 177 This position followed through the sending of both the letters of 9 June 1998 and of 7 October 1998: i. the former not adverting to the situation expressly, save for indicating that except as indicated in the letter it was not proposed to vary any of the other conditions of the facilities; ii. the latter making clear that all facilities were subject to annual review and repeating that the next annual review date would be on 30 November 1998. 178 Some adjectival information disclosed in the evidence which is consistent with the above findings is as follows: i. Neilson Statement Ex P1 paras 19 and 20, and the Business Banking Credit Memorandum dated 3 January 1997 (Jones Tab 9 pages 125 to 147 Ex PX Vol 7 Tab 63 ) . The recommendation on page 128 under purpose: number 2 provided "Recommend Annual Review date be realigned to 30 November annually (ie. in lieu of 31 August) in order to accommodate receipt/analysis of YE financials (generally available by end of Oct each year). Amending A/R date will also assist in better 'spreading' the number of reviews due on Set 205 over that period." ii. Mr Neilson says that in accordance with that recommendation, it was intended that future annual reviews be carried out on or about 30 November annually thereafter, in addition to whatever other reviews or reconsiderations were necessary from time to time. The reference to "Set 205" is a reference to Mr Neilson's portfolio. iii. Ms Huelin's Diary Note of 20 November 1998 (Ex PX Vol 12 Tab 388) noted that the Annual Review was due on 30 November 1998 in the following terms: "Annual review for the connection is due 30/11/98, with the following options:- (a) Extend facilities for 3 months only and request the customer to seek refinance. We know that Mr Carpenter has banking relationships with St George and NAB. (b) Immediate transfer of the connection to GCM, to exit the relationship. (c) Control remains with Business Banking High Risk Unit, subject to the following conditions:- * Full cross collateralisation of security * Immediate review and increase of all pricing * Immediate appointment of an IA to assess the ongoing viability of the business Mr Carpenter has requested the Bank to consider taking over a $700K loan currently provided by St George Bank. This loan is secured by residential property at Dural, valued at approximately $2.0M (Note: this is the property that we currently hold 2RM, refer above comments). Any consideration of this proposal would be on the basis that the Dural property is provided unconditionally as security, with independent legal and financial advice to be sought by Mrs Carpenter. Whilst, this would result in an increase in total limits, our security position would improve, however is not supported unless IA confirms ongoing serviceability." Focusing upon the Variable Rate Commercial Bill Acceptance/Discount facility 179 By dint of the 3 March 1997 letter, this facility lost its anterior five-year fixed term status and became subject to review on the next annual review date of 30 November 1997. Hence its termination date mirrored that nominated for the overdraft in the 3 March letter. 180 There was no review on that date but a review on 6 April 1998 took place, following which the letter of 6 April 1998 made clear that the next annual review would be on 30 November 1998. 181 There was no variation to this anterior position by the letter of 9 June 1998. In context and following the wording in the 3 March 1997 letter: "Termination not before the next review date", meant that the CBAD had a termination date as not before 30 November 1998. 182 The letter of 7 October 1998 made clear that the next annual review date would be on 30 November 1998. Focusing upon the fixed-rate fully drawn facility 183 By dint of the 3 May 97 letter, the termination date became 31 December 2001 [an extension from the anterior position of five years from the date of drawdown]. 184 This position continued unaffected by the letters of 6 April 98 and 9 June 1998 but was affected by the terms of the letter of 7 October 1998 which as previously indicated, plainly constituted a variation to the anterior position. This facility was clearly now subject to a next annual review on November 1998. It was ultimately paid out in late 1998 and no longer falls for examination in the present litigious context. Decision 185 To summarise, the findings are as follows: i. the anterior fixed terms of the interchangeable FDA/CBAD were varied by the terms of the 3 March 1997 letter; ii. the letter of 6 April 1998 confirmed the existing position that all facilities [save for the fixed rate fully drawn facility] were subject to annual review, with the next annual review at 30 November 1998. It also granted two new temporary overdraft facilities which were to clear in full by 30 April and 31 May 1998 respectively. Otherwise the existing contractual position was unchanged; iii. the letter of 9 June 1998 extended the temporary overdraft facilities to clear in full by 31 July 1998, but otherwise left the terms of the existing facilities unchanged; iv. the letter of 7 October 1998 expressly provided that all facilities were the subject of annual review. v. as previously noted, the evidence establishes that this letter was negotiated and agreed in a factual context as evidenced by a meeting of 2 October 1998 between Mr Harvey and Mr Kilcran of the Bank and Mr Carpenter. The finding is that at that meeting: a. Mr Carpenter needed and was granted additional short term facilities, that the Bank was not otherwise obliged to give; and b. the Bank made clear that it would not be prepared to continue long term facilities unless Mr Carpenter could adequately establish, at the annual review in November 1998, that the group had the financial ability to repay principal and interest over an acceptable term and provide adequate additional security; vi. properly construed, the effect of the 7 October 1998 letter was either to confirm or establish that, at that annual review coming up shortly (November 1998), the Bank would have the right to change the conditions of, or terminate, all facilities, including the CBAD; vii. the letter of 7 October 1998 put beyond doubt, if there was any, that the $2 million CBAD was subject to annual review (at 30 November 1998) as with all other facilities; [but as previously observed the terminology used in the 3 March letter: "Termination Date": "not before the next review date" is appropriately regarded as colouring the words used in the 7 October letter qua the CBAD as reading: "Termination Date": "not before the next review date on 30 November 1998"] viii. pursuant to that annual review the Bank had a right, if it determined there was a change in credit, to change the conditions of the facility (Clause 9(2)(a) of General Conditions) and a right to terminate the facility (Clause 9(2)(b)). 186 It is appropriate to make clear that the Group's contentions on two particular matters have been taken into account in reaching the above findings. In that regard the following represents the manner in which the Court has dealt with those two contentions. The Group's contentions relying upon admissions in ANZ's credit memoranda 187 The Group also seeks to characterise the various contents of Modules F & G in the ANZ credit memoranda as "admissions". For this purpose, the relevant representation is within subparagraph (c) of the definition of "representation" in the Evidence Act Dictionary – "a representation not intended by its maker to be communicated to or seen by another person," or (d) – "a representation that for any reason is not communicated". 188 It should be recalled that on the evidence: i. that the practice was for these schedules to get carried over from the previous CM, with unchanged facilities remaining as recorded in the system without being re-validated. ii. the contents of CMs were regarded as confidential within the Bank and the contents were not communicated to the customer. 189 Thus, to the extent the contents of Modules F & G are seen to be "adverse to the [bank's] interest in the outcome of the proceeding" they qualify as admissions within the meaning of the dictionary, and are excepted from the hearsay rule and the opinion rule under s.81 of the Evidence Act. 190 It is clear that viewed as a admissions, the probative force of the evidence of the various contents of Modules F and G in the credit memoranda require to be determined by reference to the circumstances in which such admissions are made and may depend altogether upon the party's source of knowledge: Lustre Hosiery Limited v York (1935) 54 CLR 134. In particular and as ANZ has submitted, there is a distinction between the admissibility and the sufficiency of such an admission to establish or support an affirmative conclusion in favour of the party who tenders or relies on it. It does not follow that because such evidence is admissible it is enough to prove the issue: York at 139 and 143-4. 191 Each of the following submissions by ANZ are accepted in terms of the proposition that considered through the above described prism, the features that result in the Modules F and G 'admissions' insufficient for the Group's purposes are as follows: i. The assertion in Module F that the CBAD's termination date is/was 31 December 2001 can only be explained as an error; there is just no basis for such an entry anywhere in the evidence and Pioneer has never sought to assert a case that any facility ever was agreed to expire on that date; ii. Mr Neilson, who was the responsible officer at the time this erroneous entry first appeared, was unable to explain it; iii. Although it seems to have escaped Mr Neilson's attention, the Schedule G description of facility repayment schedules was in conflict with the bank's dual approval credit policy, because (compared to the previously approved facilities proposed to be varied by the January and February 1997 CMs), the 5 year term remained in place without half of the repayment obligation embedded in the May 1996 facilities restructure – ie, to reduce the previously interchangeable FDA and CBAD facilities by $1M over 5 years. No credit approval was given to sanction such a significant change in the terms on which the facilities were made available to Pioneer; iv. The CSU, when it prepared the variation letter of offer based on the CMs in March 1997 did not adopt Mr Neilson's error in so far as it conflicted with the Bank's dual approval credit policies. Putting the CBAD facility onto a revolving basis avoided that conflict. v. The admission(s) cannot prevail in the face of the document in which the bank explicitly communicated to Pioneer the terms on which it was prepared to continue to provide the further and further restructured facilities in March 1997, in circumstances where the precise matter in issue was noticed by Mr Carpenter, was the subject of discussions between him and the Hendersons, and the subject of the conversation between him and Neilson and his subsequent silence as recounted in paragraphs 22-4 of his statement Ex P1. 192 Indeed and as ANZ also observes, it would be a strange outcome if the existence of some inconsistent summary descriptions in an internal confidential record not revealed before compulsory process in the course of litigation would change the legal effect of a chain of written communications between two contracting parties where the subject matter is dealt with explicitly. That result is precluded by the High Court's decision in Codelfa and subsequent authorities applying Codelfa. The Group's reliance upon the contents of Modules F and G as a business record 193 Certainly the contents of these modules were business records. However that fact does not assist in the quest to establish the contractual term of any facility because the content of the contractual terms are to be found in the chain of facility documents and facility variation documents and in the communications between the parties in that regard. The judgment generally deals with the proper legal analysis in terms of the all-important 3 March 1997 letter. 194 In so far as the Group seeks to rely on Modules F and G to suggest the letter of 3 March 1997 contained errors, the fact that the credit memoranda constitute business records cannot be gainsaid. The value of the documents is as ANZ has submitted, made considerably weaker by reason of the fact that the termination dates stated in Module F conflict with those referenced in Module G. Returning to the detail of AMP transaction 195 The nature of the AMP transaction is discernible by a "two leg" analysis. Essentially the transaction involved: i. The transfer of shares from the Carpenters (including Mr and Mrs Carpenter and other family members) into Retreat. ii. The subsequent transfer of shares from Retreat into Domino Mining. 196 The precise terms of the AMP transaction were particularly unclear for the following reasons: · the arrangement was not documented in writing (transcript 217.31); · Mr Carpenter could not recall the specific date he made the arrangement with himself but "months before [the listing date]" (transcript 217.26); · the price at which the shares would be transferred was "at the listing price" (transcript 217.35); · there was no resolution of the board of directors of Domino Mining (transcript 218.06). 197 Hence the nature and terms of the AMP transaction are only able to be gleaned from the oral evidence of Mr Carpenter, Mr Henderson and a few contemporaneous documents. 198 Mr Carpenter's own evidence was that the transaction constituted 'a deal' with himself prior to 15 June 1998, to sell the shares from Retreat to Domino Mining at the price of listing, and that he had informed Mr Neilson and the Hendersons of this. 199 The whole of the analysis which follows is informed by the Court taking into account section 140 (2) of the Evidence Act 1995 (NSW) and in particular subsection (c) and reaching findings in accordance with the treatment of the subject given in Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 at 449 - 450. Contemporaneous documents recording the nature and terms of the transaction 200 The contemporary documents were: i. Mr Neilson's 16/6/98 Diary Note – [PX 10 Tab 267]. The diary note records: "AMP Shares Cliff has transferred his and Papeete's (wife) shareholding (approx 36K shares) into Retreat at the quoted price of $10.43. Entity has prior Capital Gains Losses and therefore negates impact should they decide to sell in the future" ii. Mr Jones' 27/7/98 Diary Note – [PX 12 Tab 305]. The diary note records: "Cliff advised he and his wife's AMP Shares (approx 32,000 shares) received as a result of the outcome of the recent float of that company was sold to Retreat P/L (related entity) for $10.43 (Capital Gains price) prior to listing. They were subsequently sold on 15/6/98 (ie first day of listing) for $45.00 a share (market price) to Domino Mining Equipment P/L. This transaction in effect cleared up intercompany loans between Retreat P/L who repaid loan from Domino Hire P/L who in turn repaid loan from Domino Mining Equipment P/L. Domino now owns shares valued at approx. $640K (ie 32,000 shares @ $20 each). Domino was required to pay $8.5K stamp duty on the transfer and capital gains incurred by Retreat P/L will be offset by capital gain losses previously recorded by that company". iii Minutes of Domino Mining Board Meeting 14 August 1998 – [PX 12 Tab 311]. The Minutes include: "GENERAL MANAGER'S REPORT: … ii) AMP Shares. A final decision on the AMP shares would be delayed until the return of RHH [Robert Henderson] in 10 days time." Extent of disclosure to the Bank about the AMP transaction 201 Mr Carpenter gave evidence that the AMP transaction "was fully disclosed beforehand to the ANZ Bank" (transcript 216.13). Later his evidence was: "Q. And secondly you say the full deal, as we have just been through it, was disclosed to officers of the ANZ Bank on 16 June 1998, is that right? A. Not disclosed. Events were happening. They were aware of it and we discussed what had happened because the shares had listed the previous data extraordinary price, but the deal itself had been foreshadowed and disclosed to the bank long before then. [Transcript 216.23]" 202 ANZ relies on the diary note of Mr Neilson dated 16 June 1998 as evidence of the disclosure made by Mr Carpenter to the Bank about the first leg of the transaction but contends that there was no disclosure at that date about the second leg of the transaction by which the shares were sold from Retreat to Domino Mining for the listing price. 203 On the balance of probabilities the contemporary diary notes warrant a finding that the second leg of the transaction was first disclosed to ANZ at the time it was recorded in the diary note dated 27 July 1998. This proposition was put to Mr Carpenter who disagreed and repeated his earlier evidence that "the bank had been informed about the coming transaction before then and that this was just a restatement of advice that they already knew" (transcript 226.35). 204 Mr Carpenter's evidence in fact directly contradicted what, if accurate, the earlier diary note, albeit dated 16 June, had recorded him as saying: the earlier diary note containing no detail about the sale of shares to Domino Mining on the 15 June day of listing. 205 Based upon the evidence the balance of possibilities favours a finding that at the date of listing the only deal that had been done was between Mr Carpenter's family and Retreat. Was there some form of agreement which would bind the parties to a second leg of the transaction and if so when was such agreement entered into? 206 Mr Carpenter was asked whether he considered Domino Mining to be bound to a legal obligation to buy the shares from Retreat at the listing price on 15 June 1998. His answer was "yes, I suppose so, yes". [transcript 218.1] 207 The finding is however that prior to the date of listing the second leg of the transaction was in no way the subject of any agreement binding Domino Mining. The share transfer 208 The only evidence of any agreement is the share transfer document [PX 9 Tab 178] which, on ANZ's contention, was brought into existence in August 1998. 209 The share transfer records the first leg of the transaction by which members of the Carpenter family transferred their shares to Retreat with a date of purchase of 20 May 1998. 210 The record of the second leg of the transaction is somewhat unclear as there are two versions of the document: i. the first is an incomplete transfer from Retreat to Domino, which has a date of 15 June 1998 but no date at the end and an ineffective seal with only Ms Stewart's signature; ii. the second, which also has a date of 15 June 1998 [a date disputed by ANZ], contains Mr Robert Henderson's and Ms Stewart's signatures next to Domino Mining and Mr and Mrs Carpenter's signatures next to Retreat. 211 The evidence suggests that there was no binding agreement on Domino Mining to acquire the shares either prior to or on the listing date and that the transaction in fact likely occurred between 14 and 20 August 1998. 212 The minutes of the Board meeting of 14 August 1998 appear to evidence the final decision [on whether Domino Mining would buy the shares from Retreat] not having been made until Mr Henderson signed the share transfer sometime after that meeting. The likely date at which Mr Henderson signed the document would appear to be on or about August 1998, because of the letter on that date from Ms Stewart to Mr Somerset attaching the share transfer. Other contemporaneous evidence 213 The loss on the AMP transaction was not included in the 30 June management accounts provided to ANZ on 13 August 1998. This further evidences that the second leg of the transaction had likely not been resolved upon at that time. 214 Mr Henderson was closely cross-examined on the details of the AMP transaction. He demonstrated a poor recollection of his conversations with Mr Carpenter on the matter, often responding to questions with "No, I have no idea" or "I don't know", even when questioned about his own involvement in the matter: "Q: And I want to put to you that the decision by Domino Mining that it would buy the shares from Retreat at the price of $45 a share was something which you made shortly after 14 August when your brother returned from overseas? A: No, I have no idea. (transcript 731.31) … Q: Is it possible that the occasion upon which you learnt of a plan that the shares be acquired by Domino Mining at the price of $45 was some time on or shortly after 14 August 1998? A: I don't know. What date were the shares listed? (transcript 732.07)." Financial impact of the AMP transaction Benefit of the transaction to Retreat 215 The first benefit to Retreat is that because it had prior capital gains tax losses, should it decide to sell in the future, it would be able to offset the capital gain with pre-existing capital losses: [The amount of capital gains tax profit of $34.57 per share over the 36,000 shares resulted in a profit of about a million dollars. If Retreat had capital gains losses of a million dollars or more, it would then pay no tax on that gain. The accounts for Retreat (PX 11/284) recorded that there were retained losses of $1.3 million in the 1997 year, which although reducing to $1.04 million in the 1998 year, were still sufficient to offset the capital gains tax profit arising from the transaction.] 216 The second benefit was that Retreat would actually receive from Domino Mining $45 per share, [approximately $1.4 million]. Retreat used that money to repay Domino Hire, which in turn repaid Domino Mining. The accounts for Retreat (PX 11/284) showed that the loan due to Domino Hire by Retreat, which in 1997 stood at $1.978 million, was reduced to $385,000 in 1998 after being paid down using the $1.4 million Retreat obtained from Domino Mining. The accounts also showed an abnormal item where Retreat made $1,099,948 gain on disposal of the AMP shares. Benefit of the transaction to Domino Hire 217 The benefit to Domino Hire can be observed from Domino Mining's accounts. The non-current receivable from Domino Hire was written down from $1.5 million in 1997 to $419,000 in 1998 after Domino Hire paid it down using the money it received from Retreat. 218 The net effect of the AMP transaction on the various entities was: i. a loss of $700,000 for Domino Mining; ii. Retreat and Domino Hire disentangling their financial affairs from Domino Mining to the extent of $1 million. 219 At the very least that the transactions were bereft of proper and timely documentation. The evidence justifies a finding that Mr Carpenter was prepared to engage in what amounted to a backdated transaction for the purpose of enabling Retreat to make a substantial tax free profit to the corresponding detriment of Domino Mining Equipment and unwind the inter-group relationships. The effect on credit 220 Mr Carpenter gave evidence during cross-examination that it was news to him that the shares had peaked at $45 only for a second when he thought that was the market price. The evidence is rejected. His intense interest in the float and his evidence of reading the papers make this evidence highly improbable. Material adverse change 221 Mr Carpenter conceded that the AMP transaction, which resulted in an abnormal loss of $744,000, was a materially adverse transaction for the company (transcript 215.32 and 227.25). 222 Mr Henderson also agreed that the transaction was an adverse transaction for the company (transcript 664.42) and he could not identify any commercial purpose for Domino Mining to pay the high price on the date of the listing (transcript 736). 223 Ultimately the windfall profit to Retreat was used to enable it to repay a loan to Domino Hire, and in turn Domino Hire to repay a loan to Domino Mining Equipment. Thus, if Domino Mining Equipment was to be placed into liquidation, it would not have claims against Domino Hire [being a company over which the Bank had no securities (although the Hendersons did]. The way forward 224 Having dealt with issues 1, 2 and 3 as earlier identified, it seems next convenient to deal with the events which followed the 7 October 1998 facility letter. There are a number of issues for consideration and these principally involve: i. the allegation by the Group that ANZ's rights were compromised by its failure to issue timely default notices after 20 November 1998; ii. a close focus upon the communications between ANZ and the Group during late 1998 and into 1999; iii. whether ANZ was in breach of contract in maturing the $500,000 bill to the overdraft account on 1 December 1998; iv. whether ANZ acted in breach of contract in 1999 by retiring the remaining commercial bills to the overdraft on 26 March 1999 and by giving the 30 day notice terminating facilities on 3 May 1999 and then demanding payment of $2,515,000 as moneys outstanding on the overdraft account on 8 June 1999. 225 As will appear from what follows, it is particularly important to carry out a careful analysis of ANZ's ultimate demand made in the second letter on 8 June 1999. As the judgment in due course reaches the conclusion that nominate events of default were in place as at the date of that ultimate demand, it will be convenient to deal with this analysis by positing such default, and thereafter, to give the reasons why the defaults are proven to have been in place. 226 It will then be necessary to deal with the respective cases concerning: i. material adverse change; ii. insolvency; iii. gearing ratio; iv. failure to provide signed accounts. 227 Finally a number of isolated issues will require to be treated with. Late 1998 and into 1999 The unsigned 1998 accounts 228 The finding is that the unsigned 1998 accounts were provided to ANZ shortly before 20 November 1998 [12/388]. Sales were shown to have dropped from $18.7 million to $8 million; gross profit margin remained low; and NPBT was -$1.275 million, including an abnormal loss of $745,000 on the AMP shares. These were matters justifying alarm. Conversation between Mr Harvey and Mr Carpenter of 20 November 1998 229 The version of what took place given by Mr Harvey in his affidavit evidence on this conversation is accepted as reliable in contradistinction to the evidence given by Mr Carpenter in relation to the subject. Mr Harvey's evidence is generally consistent also with Mr Carpenter's file note of 23 November 1998 [12/391]. 230 It is fair to observe that Mr Carpenter: i. in his affidavit of 14 November 2005 at [103] gave a version of the conversation with Mr Harvey on 20 November 1998 to the effect that it was Mr Harvey who suggested and required a refinance within 3 months, to which he gave a rushed response on his car telephone; ii. in oral evidence sought to place a further construction on this: that his response was just a throw away one and there was not any agreement (transcript 286); and further that Mr Harvey was holding a gun to his head and that it was 'a stick up' (transcript 289 - 290, 338 – 9). 231 However Mr Carpenter's own memorandum of 23 November 1998 [prepared and submitted to the board of Domino Mining] expressed the position there was an agreement between Mr Carpenter and Mr Harvey that a refinance would occur and would be completed by the end of February 1999: an agreement to bring the relationship to an end in a professional and amicable way [12/391]. 232 The handwriting on Mr Carpenter's memorandum records him saying to Mr Harvey "I think we should call it a day". Mr Carpenter initially denied this (transcript 286) but then accepted that it may be accurate (transcript 288). 233 Further, there were a series of later letters from Mr Carpenter where he made the point that he had been the one who had initiated the decision to move the facilities away from the Bank; that it was a matter agreed between him and the Bank; and that Mr Harvey had been relaxed and constructive: [14/474; transcript 338 – 341; 14/478, 14/477] [14/459, 13/444]. 234 Whilst the finding accepts that Mr Carpenter was extremely troubled and anxious at what he perceived to be disgraceful behaviour in the manner in which ANZ had treated him, the issue for the Court is as to what was said between the parties in terms of their way forward. Mr Harvey and Mr Carpenter either agreed that the parties would terminate their relationship in a professional and amicable manner with the 3-month timetable or they did not so agree. 235 The finding is that: i. Mr Harvey said it was the Bank's wish to engage an investigative accountant to specifically focus on future orders and cashflows for the Bank to review its position with no guarantees on the ultimate outcomes and recommendations; ii. Mr Carpenter dissuaded Mr Harvey from any immediate appointment to this effect; iii. Mr Carpenter said "I really wonder where I'm going Rick , I think we should call it a day". iv. Mr Harvey and Mr Carpenter [the latter no doubt under enormous pressure], stated that the parties would terminate their relationship in a professional and amicable manner with a 3 month timetable; Following 20 November 1998 236 The finding is that in the days which followed 20 November 1998: i. officers in the Bank's High Risk Department, namely Messrs Brennan and Pidcock, formed the view based on the 30 June 1998 accounts, an analysis of the company, and a serviceability and security coverage calculation that there had been a sharp deterioration in the position of Domino Mining and a most disturbing deterioration in financial circumstances [cf diary note of 20 November]; ii. The account was transferred to Mr Soper at GCM. 27 November 1998 237 On 27 November 1998: i. Mr Carpenter's memorandum was tabled before the board of Domino Mining Equipment. ii. There was a discussion of the 30 June accounts and the 30 September management accounts. iii. The impact of the low sales volumes was noted [13/399]. iv. Mr Carpenter was to investigate refinance in accordance with his memorandum and report back to the board. v. Similarly, at the Merlo board meeting it was agreed to pursue refinance from another Bank [38/3]. Formal board meetings are no longer held 238 As ANZ has submitted, between 27 November 1998 and the appointment of the administrator in June 1999, there is no evidence of any board minute of Domino Mining Equipment [Mr Carpenter confirmed he was unaware of any formal board meetings in this period: transcript 205. The evidence of Mr Henderson was similar: transcript 668.] 239 The finding, again as ANZ has submitted, is that even if during this period there were discussions from time to time on matters concerning Domino Mining Equipment, the fact that the board had for all intents and purposes ceased to meet and carry out the regular process of reviewing management accounts, receiving a report from Mr Carpenter and having an inspection of the factory [as Mr Henderson deposed had been the practice] is specially significant in terms of the company moving into a position of decline and eventual shutdown. 30 November 1998 240 On 30 November 1998, ANZ spilled a $500,000 mature commercial bill to the overdraft account of Domino Mining (13/401). This was made apparent to the company in its bank statements (18/9 and 10) and was not the subject of any complaint. [a more detailed analysis of the retiring of the Commercial Bills into the overdraft account, including the whole of the terms regulating the commercial bills facility, is set out later in the judgment] 11 December 1998 241 On 11 December 1998 there was a meeting between Mr Carpenter and Mr Soper. The finding is that the general content of the meeting is accurately recorded in Mr Carpenter's diary notes [13/409]. In this regard the balance of probabilities favours an acceptance of Mr Soper's affidavit and oral evidence of the conversation (transcript 756-7, 782-787) as opposed to an acceptance of Mr Carpenter's evidence (transcript 304-317). 242 It is not unimportant to note that Mr Carpenter's own hand writing on the type version of his notes includes an arrow: i. leading from the word "Brian" [the context being the reference to Mr Soper to whom the files were now handed]; ii. to the handwritten note: "Soper, new Bank office exit manager. 243 This removes the underpinning for any suggestion that Mr Carpenter was not by now, aware that ANZ was looking at an exiting of the relationship. 244 The broader evidentiary position with respect to the refinancing disclosures includes the following matters: i. in his 14 November 2005 affidavit at [109 and 113] Mr Carpenter denied that he mentioned the names of any banks to Mr Soper as potential refinanciers in either December 1998 or January 1999. ii. he reaffirmed this evidence in respect to the 11 December meeting (transcript 305) but, when pressed, agreed he did mention the name of the Commonwealth Bank for Merlo and Westpac for Domino Mining (transcript 306). iii. however, he added to his answer that he had had no contact at that time with the Commonwealth Bank (transcript 306) whereas, after he was shown the document, he had to agree that evidence was wrong (transcript 307). iv. he finally accepted that the first and second sentences of paragraph 109 of the affidavit were wrong (transcript 308). He would not accept that the 3rd sentence was wrong – the one stating that, at 11 December 1998, he believed the main facility had a 5 year term (transcript 308). However, in the light of the admitted inaccuracy to the first 2 sentences in the paragraph, his evidence as to the 3rd is rejected. v. other aspects of Mr Carpenter's evidence in relation to the 11 December 1998 meeting with Mr Soper were proved to be inaccurate by reference to Mr Carpenter's own diary note of that meeting. vi. Mr Carpenter acknowledged that part of his evidence was wrong (transcript 312) but refused to accept his own language that there was an agreement with Mr Soper to allow until the end of February for refinance and again contended that a gun was being held to his head (transcript 312). vii. Mr Soper's evidence as to what was said at the meeting was put to Mr Carpenter, and much of it disagreed with. viii. Mr Henderson confirmed that Mr Carpenter reported to him consistent with Mr Carpenter's memorandum: (transcript 873). 245 The diary note of 11 December 1998 [PX 13/407 at p 7] includes: " Refinance Mr Carpenter has acknowledged that the bank wants to exit the relationship with Domino and has undertaken to complete refinance by 28/2/99. He is proposing to refinance Domino Mining equipment through Westpac Bank, Merlo Wholesale through the Commonwealth Banking and his housing loan which is currently with St George Bank through AMP. Mr Carpenter has agreed to execute (subject to his own legal advice) a settlement deed to formalise the exit of the relationship with the Bank. It has been agreed that if refinance is not completed by 28 February 1999 then he would consent to the Bank appointing a Receiver and Manager to Domino Mining Equipment and Merlo Wholesale as well as mortgagee control of the Tuggerah industrial property being the HQ of the Domino Group" 246 The finding is that what was conveyed at this meeting included the following: (a) that Mr Soper was the exit manager for the account; (b) the timetable for refinance remained a 3 month period to the end of February 1999; (c) that ANZ would provide a proposed exit deed for Mr Carpenter to consider under legal advice; (d) that if refinance was not achieved by the end of February, ANZ would be free to take enforcement action; (e) that Westpac was a possible refinancer for Domino Mining and the Commonwealth Bank a possible refinancer for Merlo. [it should be recalled that Mr Henderson confirmed that Mr Carpenter had told him there was an agreement to refinance by end February 1999 (transcript 873).] 247 It was put to Mr Soper, under cross-examination, that the diary note was incorrect in stating that if refinance was not completed by 28 February, Mr Carpenter would consent to ANZ appointing a receiver and manager to Domino Mining and Merlo Wholesale. His evidence was that words to this effect had been said [although Mr Soper in the witness box expressed the view that whether Mr Carpenter would agree to it was another thing] [transcript 784]. Mr Soper puts the section of the conversation as having a context of Mr Carpenter having reassured him that the refinance would in fact take place, words to the effect of the following being used by Mr Carpenter: "Oh yes, you can have a receiver and manager if I don't get finance." 248 Whether or not this was a circumstance in which the subtext of the conversation in terms of the heated situation was one where Mr Carpenter meant what he said or the opposite is difficult to ascertain. These proceedings do not turn on the matter. However the balance of probabilities suggests that the evidence given by Mr Soper is reliable in the particular context which he recalls. 249 Mr Soper gave evidence that he thought his mindset at the time he left the meeting was that Mr Carpenter had made it very clear that his intentions were to refinance and that he was very confident that refinance would take place: Mr Soper left the meeting with that confidence [transcript 783.2-5]. December 1998 - 9 April 1999 250 During this bracket of time considerable correspondence passed between ANZ and Pioneer's solicitors generally documenting negotiations between the parties in relation to the entry into of a settlement deed and the discharge of a mortgage granted to ANZ by Mrs Carpenter. It is generally unnecessary to chronicle each item of correspondence. All have been taken into account in the reasons to be found in the judgment. On occasion particular items of correspondence are identified and examined. 251 Ultimately the parties proved unable to agree the terms of the settlement deed. December 1998 - January 1999 252 The finding is that: i. Mr Soper's close examination of the account was commenced in December: see the 11 December diary note [13/407], and continued in late January when he returned from leave and had the benefit of the December 1998 management accounts. However he did not carry out an 'annual review'. ii. Those management accounts reflected further losses of $360,000 for the 6 month period [13/424]. 18 January 1999 253 On about this date Mr Carpenter told Mr Soper that he had standby arrangements in place for refinance to take place on 28 February 1999 and that he was negotiating with a number of banks for refinance. The statement was untrue. (transcript 325). 9 February 1999 254 On this date Mr Carpenter told Mr Soper that he would have little trouble in refinancing Domino Mining Equipment and that he was looking at Westpac to take out Domino Mining Equipment - which was a false statement to his knowledge (transcript 327). 255 Mr Carpenter's evidence in this regard included: MR GLEESON: Q. Yes. I have asked you whether you will accept this is a false statement and your answer is you were parrying him? A. Yes. Q. My question to you is why won't you accept that this was a false statement? A. Well, I'll accept it, I'll accept it. Q. And at the time you made it, you knew it was a false statement you were making to Mr Soper? A. More a casual statement because I was being pressured and I wasn't very concerned about it. Q. You've accepted this much, that the statement you made at the time was a false statement. I'm now asking you the next question, you knew at the time when you made it that you were making a false statement. Do you agree with that? A. Yes. [Transcript 326-327] Early February 1999 256 The finding is that on about 4 February 1999 Mr Soper, in consultation with Ms Agsten, specifically turned his mind to whether there was material adverse change within Clause 10(1)(k) of the general conditions and formed the view there was, based on trading losses: Soper statement at [74]. 257 This was communicated to the company in ANZ's letter of 4 February 1999 [13/437]. Mr Carpenter brought it to the attention of Mr David Henderson [Henderson transcript 882]. 19 February 1999 258 On 19 February 1999 Mr Carpenter's lawyer wrote to ANZ requesting an extension to refinance by 28 March 1999. The letter stated "As you would also appreciate the discussions about our client transferring its business to a new bank was planned to take place within 3 months. This took no account of the fact that Christmas, New Year and the holidays were in the middle of that period. This has made the process a little slower… The Bank has not taken into account the fact that the period which was discussed for ending arrangements failed to take into account the disruption with the Christmas/ New Year break. The date should be changed to 28 March" (Tab 32). 24 February 1999 259 By letter dated 24 February the Group's solicitor wrote to ANZ and advising that the bank's threat to unilaterally terminate the banking facilities or appoint an investigative accountant or receiver was looming on 28 February and asking for an acknowledgment that ANZ would not act precipitously to cause irreparable damage to the business in all of the circumstances. 25 February 1999 260 By letter dated 25 February ANZ responded by stating that in an attempt to organise an amicable parting of the ways, ANZ accepted an extension of time to 26 February for the refinancing of the facilities to take place. The Bank added that it pointed out that the facilities have expired and that this extension to allow time for refinance does not constitute an extension of the facilities and all rights under the Transaction Documents are reserved (Tab 33). 26 February 1999 – Mis-statements as to progression of alternative finance arrangements 261 On 26 February 1999 Mr Carpenter instructed his solicitor to send a letter to the Bank stating that alternative finance was progressing well but would take another 3 to 4 weeks, at which time he would bring the arrangements with the Bank to an end – which were also false statements to his knowledge [transcript 331]. These statements had a material influence on Mr Soper's state of mind [transcript 817]. 262 By late February 1999, the attempts by Mr Carpenter to refinance the Domino Mining Equipment account with Westpac had failed and the preliminary enquiry to St George had also terminated. Mr Henderson learnt this: [transcript 873]. 263 As is apparent from the matters already outlined, this is an area in respect of which much of the evidence given by Mr Carpenter is shown to have been no more than a construct which was simply false. 264 The finding is that Mr Carpenter made a series of misleading and on occasion calculated false statements to ANZ about his refinance attempts: probably on 18 January 1999, and certainly 9 February, 26 February and 25 March 1999. 265 As ANZ has submitted, the matter which falsified the statements as to refinance was that Mr Carpenter admitted that his contact with Westpac was in late January where a manager came out to the property and a few days afterwards indicated Westpac were not interested in going ahead with any application. On the balance of probabilities, Westpac were probably given the December management accounts (transcript 297 – 299). Mr Carpenter described their position as not surprising in view of the losses that were there (transcript 299). 266 Mr Carpenter's only other contact was with Mr Neilson, who was now at St George, who was only mildly responsive. He had left St George by the end of February and the matter was taken no further with St George (transcript 300 – 301). Thereafter Mr Carpenter did not identify any other bank for Domino Mining Equipment (transcript 301). 267 At the same time as Mr Carpenter was misleading ANZ officers dealing with his matter, he was attempting to exploit a connection with the Chairman of ANZ to have the decisions of those officers reversed. He was not frank with the Chairman because he failed to reveal the fact that he had been misleading the Bank officers in question: transcript 328. 268 Mr Carpenter attempted to retract his admissions of telling deliberate falsehoods on the next morning of his continued cross examination: transcript 348. However on examination it becomes plain that the matter which he said he had overlooked in making the earlier admissions was completely irrelevant to those admissions. Even if he was making enquiries of AMP Bank at the relevant time to refinance his home loan, that fact in no way justified statements being made to ANZ that he was actively refinancing his Domino Mining loans. [See transcript 350] Focusing upon the position with the D & R Henderson Pty Ltd loans Position by February 1999 269 The position with the D & R Henderson Pty Ltd loans by February 1999 was as follows: i. $655,000 had been lent unsecured at commercial interest rates to Domino Mining, with the last advance in September 1998; ii. the purpose of these advances was as interim finance: to put Domino Mining in funds to enable it to complete contracts which, when paid for, would enable the repayment of the loans. The term of the loan matched expected period of payment from the customer: transcript 675 – 6, 730 – 1; iii. by February 1999 these monies were overdue, and there were no monies expected to come in from contracts which could repay them; iv. in addition, there were apparently some loans which the Henderson Superannuation Fund had made to Domino Hire under the security of a charge over it. 270 In February 1999 Mr Staples provided advice to the Hendersons that there were potential problems under the SIS legislation with the Henderson Superannuation Fund lending monies to Domino Hire. The problem lay in these monies being on-lent to Domino Mining or Retreat: if those companies went down Domino Hire could not be repaid and thus the Superannuation Fund could not be repaid. 271 The risk of the investment being considered imprudent created a risk of losing tax status for the Superannuation Fund which needed to be avoided [13/440]. Mr Carpenter agreed: transcript 367. Mr Henderson confirmed: transcript 678. 272 In addition, Mr Staples' memorandum provides evidence (confirmed by David Henderson: transcript 677) that, at this time, Mr Robert Henderson had expressed a desire to move more of the loan funds under the charge and away from the unsecured exposure to Domino Mining. Mr Carpenter agreed: transcript 365. Correspondence during March 2 March 1999 273 By letter from ANZ of 2 March the Group was advised that the three forward exchange contracts which had been rolled over on 26 February 1999 had been rolled over on numerous occasions. ANZ advised that it was not prepared to roll those contracts over again, that the contracts expired on 5 March 1999 and sought that the Group ensure that appropriate arrangements were made 5 March 1999 – Further time is sought 274 By letter dated 5 March 1999 the Group's solicitor dealt with a number of issues but in particular noted that it had requested ANZ to allow its client further time to finalise its refinancing, thanking ANZ for the extension and advising that it would keep ANZ advised. 11 March 1999 275 By letter dated 11 March 1999 ANZ indicated that if a short extension was necessary it required confirmation by citing a letter of approval that finance was pending with a firm date for settlement advised. It also advised that all the facilities had expired and had not been renewed. 12 March 1999 – Mr Carpenter writes to the ANZ chairman 276 By letter dated 12 March 1999 Mr Carpenter wrote to Mr Goode, the chairman of ANZ Banking Group making a series of complaints 16 March 1999 277 By letter dated 16 March 1999 Mr Carpenter forwarded to Mr Goode a document purporting to set out the history of the relationship. 19 March 1999 278 By facsimile dated 19 March 1999, Mr Carpenter's lawyer advised ANZ "that the discharge of our client's mortgage will take 2 – 3 weeks …… a Discharge of Mortgage is about the simplest document that can be prepared… The period of 2 – 3 weeks required by the Bank to discharge a mortgage obviously becomes a much longer time to transfer all of a group of companies' accounts to another bank …. We further note in all of this that you have simply ignored the release of the guarantee given by Mrs Carpenter. Please advise what progress is taking place in relation to that issue" (Tab 37). 25 March 1999 279 By letter dated 25 March 1999, ANZ advised the Group's solicitors that albeit having been informed that it would be informed of developments, ANZ had not received either correspondence or communication from the Group or its solicitor in relation to the refinance. It's sought full details of how the refinancing was progressing, advising that if a short extension was required, it would need to sight a letter of approval that refinancing was pending with the firm date for settlement advised. It also advised that the commercial bills of $500,000 and $1,000,000 would fall due on the following day and that given that ANZ had heard nothing from the Group regarding the progress of the refinance, the Commercial Bills would be retired into the overdraft. 280 By letter also dated 25 March 1999 ANZ [Mr Soper] responded to the letter which had been addressed to Mr Goode in detail, ending the letter with the following: "the Bank asks that you provide firm details as to when refinance is to take place as the agreed extended date for refinance, being 26 March 1999 would have passed by the time this letter is received by you and you have been silent on the point during March, 1999." 30 March 1999 281 By letter dated 30 March 1999 Mr Carpenter wrote to Mr Soper covering a number of matters and raising the many differences between the parties 282 By letter dated 30 March 1999 Mr Carpenter wrote to Ms Graham, the ANZ National Customer Liason person with a series of questions suggesting misconduct by ANZ 31 March 1999 283 By letter dated 31 March 1999 ANZ wrote to the Group's solicitors dismissing a number of suggestions that Domino was unable to apply for refinance because of the existence of a second mortgage to ANZ and inter alia advising that attempts made to justify a further extension were simply not acceptable in a refinancing scenario. This letter advised that the facilities in the name of Domino as at 30 March 9099 comprised: · Two encashment facilities · a payroll facility · a foreign currency dealing limit of $200,000 [currently nil liabilities] · an overdraft account limit $2,500,000 [currently drawn $2,478, 487.86] Otherwise position during March 1999 284 During March, all loans from the D & R Henderson Pty Ltd to Domino Mining were repaid, by way of Domino Hire taking over the obligation on those loans. 285 Thereafter, no further monies were ever advanced directly from any Henderson entity to Domino Mining. Carpenter: transcript 361, 363. 286 Mr David Henderson was unable to shed any light on the purpose of the above described repayment [transcript 676]. The balance of probabilities favours the inference [particularly drawn from Mr Staples' February memorandum, and the fact that Domino Mining had no contracts on foot which would produce monies which would repay the loans], that the Hendersons made a decision that they wanted the unsecured loan by D & R Henderson Pty Ltd to be repaid because the purpose for them had now passed; the time for repayment had expired; and they had decided that they did not wish to have any further unsecured exposure to Domino Mining Equipment. 287 The balance of probabilities further favours the inference that from this withdrawal of funds from Domino Mining Equipment, that thereafter D & R Henderson Pty Ltd would not have advanced any further funds unsecured to Domino Mining Equipment unless there was clear evidence of a particular contract being entered which would generate the funds for repayment. There was no such evidence of any such contract. 288 During the giving of evidence by Mr David Henderson there was a strong focus upon the question of whether or not the Henderson's, through their companies or personally, would have lent any monies unsecured to Domino Mining for the purpose of enabling it to pay out part or all of the banks facilities. The Court proceeds to reach findings on the balance of probabilities read in the light of the evidence before the Court. 289 The simple but very powerful fact is that notwithstanding that Mr Henderson had been told by Mr Carpenter shortly after 3 May 1999 that the bank had issued the letter stating that it would terminate all facilities within 30 days in the absence of repayment, no steps were taken by either Mr Henderson or his brother to draw on facilities which were apparently able to be drawn upon to pay out ANZ the $2.5 million amount or any part thereof. 290 The evidence given by Mr Henderson was that Mr Carpenter had declined to request assistance in the form of the necessary funding. This proposition does not per se justify a finding on the balance of probabilities that Mr Henderson or his brother or their corporate resources were prepared to pay out ANZ, had a request been forthcoming from Mr Carpenter. Indeed what actually happened as disclosed on the evidence, makes it very difficult to hold that there was any such preparedness at all. 291 The finding reached on the balance of probabilities in the light of all of the evidence is that the Hendersons would not lend any monies unsecured to Domino Mining for the purpose of enabling it to pay out part or all of the Bank's facilities [transcript 682 - 683] 292 It is certainly plain that: i. while the securities remained extant with the Bank there was no other available security which Domino Mining could offer to the Hendersons for any further loan: Mr Carpenter transcript 369; ii. there was no evidence that Mr Carpenter ever took any steps to seek to raise the smaller amount of $500,000: transcript 353. 293 It should be recalled that Mr Carpenter agreed that had he considered inviting the Hendersons to advance $500,000 unsecured, leaving the Bank secured for a $2 million debt, that would have been a commercially imprudent transaction for the Hendersons to engage in and one he would have been very reluctant to ask them to engage in: transcript 370. ANZ spills the balance of the bills to the overdraft 294 At the end of March, one month after the agreed 3 month period for refinance, the Bank chose to spill the balance of the bills to the overdraft [14/473]. 295 The Bank extended the 3 month period for refinance for a further 2 months. Mr Henderson acknowledged this was fair and reasonable: transcript 880 – 881. 296 Neither Mr Carpenter nor Mr Henderson could give evidence of any specific conversation between the end of refinance attempts in February and receipt of the May demand from the Bank concerning a possible refinance by the Hendersons of the Bank facilities. See Mr Carpenter at transcript 303 and Mr Henderson at transcript 882-4. Mr Henderson confirmed that there was no request made by Mr Carpenter of this nature [transcript 884]. February through to May 1999 – deferral of creditors 297 The evidence discloses that during the period February through to May, the company was deferring its creditors until the last possible moment, and was the subject of a statutory demand and several statements of claim. It was unable to pay its tax bills on time. As ANZ submits, none of this can be put down to mere oversight or disputes with the creditors. 298 Mr Henderson gave evidence that he was not aware of this practise of deferring creditors (transcript 745-8). If he had been it would have been a matter of great concern to him. He attempted to qualify or retract this evidence later by saying that what he would have needed was an explanation and that he would have taken steps to see the debts paid (transcript 841). However, as ANZ has submitted, the simple fact is that he was a director of the company for a lengthy period and, according to him, completely oblivious to the way in which the company was actually behaving with its creditors. 299 It is common ground that the Hendersons advanced no monies to Domino Mining Equipment after March 1999. 8 April 1999 – ANZ agrees to a further extension of time 300 By letter dated 8 April 1999 ANZ [Mr Soper] wrote to Mr Carpenter and advising inter alia as follows: "You have made it clear that you want Domino and Merlo to exit its relationship with the Bank and the Bank has made it clear that it wants Domino and Merlo to leave. The issues to resolve is when this is to happen. As part of your solicitor's facsimile dated 26 March 1999 a request was made for an additional 28 days for finance to be completed, although the reasons given for the time extension is not understood, the Bank will agree to an additional time period, until 26/4/99, on the basis that this will be the final extension of time the Bank will agree to and facilities will be terminated after that date" 9 April 99 301 By facsimile of this date Mr Fordyce advised ANZ inter alia as follows: "The Easter break has interceded whilst our client is expecting a reply on its application for alternative funding arrangements…" 302 This accurately, as Mr Carpenter accepted, recorded what he had instructed Mr Fordyces to say [transcript 341]. The transcript then continues: Q. And as at the date of this letter, the fact was you did not have extant any application for alternative funding arrangements? A. Not for Domino, no. Q. And you were not awaiting on a reply to any application for alternative funding arrangements? A. No, I don' t believe so. Q. When you told Mr Fordyce to communicate this to the bank, you knew that you were asking for him to communicate a false statement? A. Yes, I suppose so, yes. Q. You knew that the effect of Mr Fordyce following your instructions would be that you would be misleading the bank officers? A. As I - as he says here, we were really waiting for the - a general inquiry to be conducted by Mrs Jane Graham, who the chairman had invited to adjudicate on this matter. That was the real issue. Q. In relation to the first sentence of the paragraph-- A. Yes, no there was no active financing going on - attempts to refinance at that point of time. Q. And you knew that by communicating that statement through your solicitor you would be telling the bank a false statement, correct? A. Ask my solicitor, he wrote the letter, not me. Q. You knew that by asking Mr Fordyce to make that statement to the bank, a false statement would be made on your behalf to the bank, didn't you?… A. It was - from when I sit here, misleading, yes, on that fact. Q. At the time you asked him to send it, you knew it was misleading, didn't you? A. He sent it and yes, I can remember speaking to Mr Somerset about the letter at the time, yes. Q. At the time you asked him to send it, you knew the effect of the communication being made on your behalf would be to mislead the bank, correct? A. Yes, okay. [Transcript 342] Returning to the communications between Mr Carpenter and the Hendersons after the ANZ demand had been received 303 After the Bank's demand of 3 May was received, within the next few days Mr Carpenter communicated its contents to the Hendersons and, according to him, made clear to them that if the demand was not met within the 30 days, ANZ would be likely to appoint a receiver or an administrator [transcript 499 - 500]. Mr Henderson accepted that he was told about the letter but disputed he was told the latter matter (transcript 679). 304 Mr Carpenter gave evidence that he spoke with the Hendersons at about this time about them offering money. However, he confirmed that they did not say that it would be an equity injection and they did not say in terms that it would be subordinated (transcript 356 – 357). 305 It seems quite clear that the Hendersons had a sufficient opportunity to take out all of ANZ's facilities had they chosen to do so: [Mr Henderson at transcript 681, making an admission contrary to his statement evidence]. As previously observed, Mr Henderson's position was that he never received a request from Mr Carpenter to do so: transcript 682. 306 In all the circumstances the finding [reached on the balance of probabilities in the light of all of the evidence] is that even if Mr Carpenter had made that request, D & R Henderson Pty Ltd would have needed to have satisfied itself of the following matters before committing their company's funds to take over the whole of the Bank's facilities: i. obtaining all the Bank's securities (transcript 682, 847); ii. ascertaining whether there was an availability within the D & R Henderson Pty Ltd current overdraft or bill facilities to pay an amount of $2.5 million (transcript 847): Mr Henderson could not give evidence as to the amount of those facilities (transcript 681) and the balance sheet showed there were already substantial drawings of bills [D10]; iii. establishing that it was a commercially prudent use of the funds of D & R Henderson, given that that company was not in the business of lending money; the amount was far in excess of anything which had ever been lent to the Carpenter interests (transcript 850 – 3); iv. entering into a close consideration of the most up-to-date financial position of Domino Mining, including the state of forward orders, the position with creditors, whether there was a cashflow forecast or budget in existence; and whether, after 2 years of consistent losses, there was any real strategy in place which was likely to see the company return to profit: see Henderson at transcript 854 – 856. In particular he needed to be satisfied the company was not making losses (transcript 855); v. taking into consideration that the company already had substantial exposures to Domino Hire [ 16/569] which, although secured, might be partly at risk given the weak position of that company: see Henderson at transcript 856 – 8. Transactions entered into in second half of May 1999 307 The finding is that during the second half of May 1999 Mr Carpenter engaged in a series of transactions consistent with a plan that he would allow ANZ's demand on Domino Mining to go unmet and when the Bank appointed a receiver or administrator, it would find that some assets of the company had been removed to other entities through which Mr Carpenter could continue his businesses. Accordingly the evidence establishes the following: i. on 17 May 1999 Mr Carpenter changed the name of Domino Mining to Pioneer Park (transcript 374), which would not make sense if the company was to continue its existing business. On that same date he also sought to change the name of another company, Domino Properties Pty Limited, to Domino Mining Parts & Service Pty Ltd (though this change was not processed by ASIC until 3 June 1999) [39/56]; ii. on 18 May Mr Carpenter told Mr Donovan, as was the fact, that he was establishing a new parts and services company and offered him work there (transcript 389); iii. on 17 May Mr Carpenter announced that he was placing the Pioneer Park employees on a 3 day week as recorded in Mr Donovan's diary (D18). (Employees by now were down to about 17 from a high of 100: transcript 352); iv. on 18 May Mr Carpenter told Mr Donovan to have prepared a new sign to be erected at the premises with the name of the new entity, Domino Mining Parts and Services (transcript 389); v. when a substantial payment was received on 18 May in respect to an Army spare parts contract, Mr Carpenter used $30,000 towards the purchase of a vehicle for himself, far in excess of the agreed car allowance under his employment contract and with the knowledge that he would not be working with the company much longer (transcript 436). Much of the balance of the funds were paid to his other companies; vi. at the end of May Mr Carpenter caused Pioneer Park to transfer its 4 partly finished machines to Domino Hire at a price of $370,000 when the cost to Pioneer Park of building those machines was $600,000. He thereby evinced an intention that the business of manufacturing new machines would no longer be carried out by Pioneer Park. Instead, it would be Domino Hire (through a sub-contractor) that would finish the manufacture of these machines (transcript 383). This was the only sale of machines in the first half of 1999: transcript 374. vii. on 31 May Mr Carpenter caused to be drawn up partially completed leases over the property in favour of Domino Hire and Merlo so that those companies could continue to run their businesses from the same premises (transcript 385); viii. Mr Carpenter was considering transferring the manufacturing business (such as it was) to a new entity (transcript 376 – 7); ix. Mr Carpenter, after May, asserted that ownership of intellectual property in the plans of the business lay with Retreat, not Pioneer Park (transcript 425). 308 Notwithstanding Mr Carpenter's firm view that ANZ had acted in breach of contract in placing the company into administration, the above-described conduct reflects adversely on his credit. 1 June 1999 and following 309 On 1 June Mr Carpenter caused his solicitor to make an offer in the name of D & R Henderson Pty Ltd to take out all ANZ securities for $150,000 (D5). As ANZ has submitted, the offer implicitly allowed ANZ to keep the land as Mr Carpenter asserted (transcript 478), it evinced an intent that, if any money was to be used from the Hendersons, it would not be an amount sufficient to pay out all the debts to ANZ and it would not be on unsecured terms. Mr Henderson gave evidence that he had had no knowledge of the offer being made on behalf of his company: transcript 869. 310 From early June there is evidence [39/46 – 49] of Mr Carpenter causing the parts and service business to be carried on through the new entity, Domino Mining Parts & Services, contrary to his evidence in chief that the first transaction of this company was in October (transcript 173). 311 The finding is that by the time ANZ's demand expired and an administrator was subsequently appointed on 10 June, the position was that: i. Pioneer Park had no orders on its books for machines; ii. Pioneer Park was no longer manufacturing any machines; iii. Domino Hire was, through sub-contractors, finishing the manufacture of 4 machines; iv. parts and service work was being done by the new entity, Domino Mining Parts & Service Pty Ltd. 312 Mr Carpenter himself had no cash reserves to put into Domino Mining at this time: transcript 390. 313 Mr Henderson was unable to identify any strategy in place at the time to turn around losses: transcript 883. Approximately 23 June 1999 - Conversation with Messrs Hall and Turner of PWC 314 The finding is that Mr Carpenter had a conversation with Messrs Hall and Turner of PWC on about 23 June substantially in the terms recorded in the PWC file note [22/15,16]. Mr Carpenter said inter alia: i. the Tuggerah land was "a dog of a property"; ii. the Hendersons had decided not to refinance; iii. his offer was to allow the Bank to take the property, release its claims, with the fund to be put up to meet some of the company's obligations. 315 An offer was then made in early June 1999 [D5]. Mr Henderson claimed to have no knowledge of the offer: transcript 871. There was no obvious source from which the $470,000 would come, in instalments, if not the Hendersons. 316 At no time did the Hendersons, through any entity of theirs, actually advance, or according to their evidence, offer to advance, any sum of money to the Bank to take out its facilities. 317 Late in his evidence, Mr Henderson sought to change paragraph 3 of his second statement and now claimed that the monies might have come from some entity other than D & R Henderson Pty Ltd. ANZ submitted that this change was necessitated because he appreciated that his evidence that D & R Henderson Pty Ltd would and could have written an immediate cheque for $2.5 million was heavily destroyed once commercial prudence was considered. 318 Mr Henderson did confirm that even with the other entities he identified [transcript 859], they would not be simply giving money away or lending on totally uncommercial terms. They would have required a reasonable prospect of recovering their principal and interest on the transaction (transcript 855 and 866), that the company already had substantial exposures to Domino Hire [16/569] which, although secured, might be partly at risk given the weak position of that company: [see Mr Henderson at transcript 856 – 8]. Based on any objective analysis of the position of Domino Mining Equipment at the relevant time, there was a very high prospect that money would be lost. Analysis of the ultimate ANZ demand for immediate payment 319 As earlier observed the convenient course is to carry out this analysis positing that there were a number of events of default by 8 June 1999 and thereafter, to identify and give reasons for the findings in relation to those disparate events of default. 320 As will appear from what follows, the Group [albeit raising many matters of contention] placed enormous stress upon the following matters: I. the contention that the letter of 3 May 1999 and the subsequent notice of 8 June 99 were ineffective to make any moneys due and payable after an annual review under clause 9 of the General Conditions; ii. the contention that no effective notice had ever been given under clause 11 (4) of the General Conditions. 321 Whilst clearly the whole of the events which occurred between 30 November 1998 and 3 May/8 June 1999 fall for extremely close examination, the efficient approach is to deal directly with the second of these contentions. Clause 11 (2) of the General Conditions 322 It is convenient to commence by addressing clause 11(2) of the General Conditions which of course posits that the customer is in default. On close analysis of relevance to these proceedings [but noting the need to examine any possible overlap], clause 11(2) in the event of a default, gives ANZ an election as between the following courses: i. an entitlement to terminate immediately [with written notice after so acting to be given] some or all of its obligations under the agreement [although it may be arguable, it does not seem to me that this provision properly construed, should be taken to include an entitlement to terminate otherwise than immediately : the purpose of these close provisions is to be perfectly precise so that both parties can understand the rights given to ANZ without debate] [clause 11 (2) (a) and 11 (3)]; ii. the right to change immediately some or all of the conditions on which one or more of the facilities are made available [as in particular to make the facility 'on demand'] [with written notice after so acting to be given] [clause 11 (2) (b) and 11 (3)]; iii. the right by giving written notice [which becomes effective immediately upon being given] to make some or all of the money that is or may become owing to ANZ in respect of one or more of the facilities immediately due and payable to ANZ [clause 11 (2) (c) and the 11(4). Examining the letter of 3 May 1999 against these ANZ contractual rights 323 Upon examination of the letter of 3 May 1999 the following becomes clear: i. The covering letter: addressed to Mr Carpenter, Domino Mining, of 3 May made clear that what was enclosed was a copy of the letter served on the registered address of Domino giving 30 days notice of termination of facilities provided to Domino; ii. the letter of 3 May 1999 was squarely grounded upon clause 9 (2) (b) of the General Conditions and squarely reliant upon a review of the facilities having been carried out on 11 December 1998; iii. the letter did not purport to terminate the facilities immediately ; iv. the letter did not purport to change immediately any of the conditions. Whilst it may also be arguable that it purported to make the facility "on demand", the better view is that the statement in the letter as to the effect of the notice [tying that effect to the description given in clause 9 (4)], was not to make the facility "on demand"; v. nor did the letter purport to make some or all of the money that was or may become owing to ANZ in respect of one or more of the facilities immediately due and payable to ANZ [witness the giving of 30 days notice requiring payment not immediately, but rather 'immediately upon the posited termination']. And in this respect the letter could only have made money due and payable by being given by written notice to become effectively immediately when that notice was given. 324 The Court rejects as misconceived the submission put by ANZ that the 3 May letter could operate under Clause 11 (2) (a) and (3) as a notice under that clause construed as offering the customer a forbearance of 30 days before ANZ would further act upon it. The notice was far too specific in terms of its being given in accordance with clause 9 (2) (b) of the General Conditions. Examining the subsequent letter of 8 June 1999 325 The subsequent letter of 8 June 1999 notified Domino Mining that the amount payable to ANZ 'on termination of the [3 May] notice on 4 June 1999' was $2,515,408.82 and demanded the immediate payment of that amount. 326 But does the demand of the immediate payment, albeit misconceived in terms of its underpinning, survive in terms of an otherwise right of ANZ? 327 The questions which arise in terms of the validity or invalidity of the 8 June letter centrally involve the following: i. whether notwithstanding its expressed foundation in terms of the 3 May letter [ but subject to the matter referred to in ii below], the letter may nonetheless be regarded as compliant with clause 11 (2) (c) as operating to make some or all of the moneys owing in respect of one or more of the facilities immediately due and payable ? ii. whether the letter in demanding the immediate payment, was invalid as failing to give the Group a reasonable opportunity by which to comply with the demand? Shepherd v Felt and Textiles of Australia Ltd 328 The first of these matters at the least requires a close consideration of the decision of the High Court of Australia in Shepherd v Felt and Textiles of Australia Ltd. (1931) 45 CLR 359. 329 Dixon J put the matter as follows: "The rule is of general application in the discharge of contract by breach and enables a party to any simple contract who fails or refuses further to observe its stipulations to rely upon a breach of conditions, committed before he so failed or so refused, by the opposite party to the contract as operating to absolve him from the contract as from the time of such breach of condition whether he was aware of it or not when he himself failed or refused to perform the stipulations of the contract." [emphasis added] 330 Not dissimilarly, in British and Beningtons Ltd v North Western Cachar Tea Co [1923] AC 48, Lord Sumner, overruling Braithwaite v Foreign Hardwood Co [1905] 2 KB 543, said (at p. 71): "I do not think … a buyer, who has repudiated a contract for a given reason which fails him, has, therefore, no other opportunity of defence either as to the whole or as to part, but must fail utterly. If he had repudiated, giving no reason at all, I suppose all reasons would be open to him. His motives certainly are immaterial, and I do not see why his reasons should be crucial." His Lordship continued (at p. 72): "… I do not see how the fact, that the buyers have wrongly said "we treat this contract as being at an end, owing to your unreasonable delay in the performance of it" obliges them, when that reason fails, to pay in full, if, at the very time of this repudiation, the sellers had become wholly and finally disabled from performing essential terms of the contract altogether." The origins of the rule 331 In other words, it is the legal justification or otherwise, ex post facto, of the party's termination that is of concern, not the adequacy of a terminating party's contemporaneous reasons for so acting: it is a question of legal entitlement objectively determined, not a matter of conscience. 332 The reasons for this appear to be historically based in practicalities. In Ridgway v The Hungerford Market Company (1835) 3 Ad and E 171; 111 ER 378, to quote from the headnote to that report: "A clerk, employed by a company to enter proceedings in their minute book, entered on the margin of the minute book a protest in his own name against a summons for appointing a successor to himself … " 333 The plaintiff clerk was duly dismissed. At the trial on application that a nonsuit be made absolute, the company sought to justify the dismissal on the ground of misconduct, constituted by the clear impropriety of the clerk entering personal protests in the minute book. The plaintiff asserted inter alia an entitlement to three-quarters of his annual salary, being the amount which he contended was unpaid to him as at the time of his dismissal, on the grounds that he was wrongly dismissed. In discussion of that point, Lord Denham, CJ, said (3 Ad and E 177–178; 111 ER 380): "Now it is not necessary that a master, having a good ground of dismissal, should either state it to the servant, or act upon it. It is enough if it exist, and if there be improper conduct in fact. Suppose a servant had heard that his master intended to dismiss him without notice, and were to insult him in consequence: it is clear that the insult would justify the master in dismissing the servant; and yet, if he intended to dismiss him independently of the insult, the motive for the dismissal would be different from the justification. It is unnecessary to discuss how it would be, if the master, at the time of the dismissal, had no knowledge of the fact which was to justify it; yet I think the justification would be good, even if the fact, existing at the time, were not known to the master. Here, the jury have found the existence of a cause justifying the dismissal. Although, therefore, it has been ably argued for the plaintiff that it was necessary for the dismissal to be traced to that cause, then as I think the existence of the justification sufficient, whether that was or was not the motive of the dismissal, I hold that the plaintiff has incapacitated himself from complaining …" 334 This reasoning was reiterated and explained by Lord Denham for the Court in Mercer v Whall (1845) 5 QB 447, 466; 114 E.R. 1318, 1325: That case is right, because, if good ground of dismissal existed, the plaintiff suffered no wrong from the dismissal from not having been accused of it. 335 In Ridgway, Justice Coleridge explained the rationale (3 Ad and E 180; 111 ER 381): "As to the existence of a sufficient cause, the jury have found it; and they were right in so doing. The act of entering the protest on the minute book was inconsistent with his service; a servant of this kind, if allowed to do such acts, would be useless. But then it is said that it should have been put to the jury, whether this cause was the operating motive for the dismissal. I own that I was impressed for a considerable time with the weight of this argument. But I think that when a master, sued for wages, defends himself upon the ground that he had dismissed the servant, and that there was in fact something which justified the dismissal, that presents an intelligible issue to a jury: whereas, if the inquiry were to be, whether this justifying cause operated in the master's mind, a jury, in the great majority of cases, could not pronounce a satisfactory verdict. I think it is enough to shew a justification existing in point of fact ." [emphasis added] 336 The law's focus on the question of legal entitlement, determined ex post facto, rather than on the actual justification motivating the dismissal, thus appears to be derived largely from historical scepticism as to a jury's capacity to make a finding of fact vis-à-vis a man's motives. One peculiar comparison that might be drawn in relation to this continuing reluctance is that juries regularly make just such findings in criminal cases: only there they are asked to make such a finding to the obviously higher standard of 'beyond reasonable doubt', and not merely on the balance of probabilities. 337 The rule has been recently treated with by the High Court of Australia. In Concut Pty Ltd v Worrell (2000) 75 ALJR 312; 176 ALR 693, the High Court (per Gleeson CJ, Gaudron and Gummow JJ) put the matter as follows: [27] The trial judge had held that Mr Wells' activities in relation to the building operations at Beaudesert had amounted to significant misconduct which was sufficient to terminate his employment. His Honour also held, with reference to Shepherd v Felt and Textiles of Australia Ltd that it did not matter that at the time of the dismissal Concut had not been aware of that misconduct. That misconduct nevertheless was available to Concut to resist the action for damages for wrongful dismissal instituted by Mr Wells. [28] The majority in the Court of Appeal did not controvert those grounds upon which the case had been decided at trial. Plainly, the trial judge was correct in deciding the case in this way. … [29] In this court, no attempt was made, and none would have succeeded, to deny the proposition of law expressed in Shepherd . The proposition that the dismissal of an employee may be justified upon grounds on which the employer did not act and of which the employer was unaware when the employee was discharged is but an application of what, in Shepherd , Dixon J identified as a rule of general application with respect to the discharge of contract by breach. [citations omitted] Justice McHugh concurred: [42] … The fact that the employer was not aware of, and was not acting upon, the employee's serious misconduct when it purported to terminate the employment contract on 1 February 1988 is irrelevant: [ Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359, 370–371, 373, 377–378, 391]. 338 Neither party has been in a position to cite any authority for the proposition that the above described principle has been held to be inapplicable by reason of the terms of a particular contract where the parties are held, upon the proper construction of such contract, to have effectively stipulated that the, and only the, grounds notified as grounding a termination, may be relied upon in a given case. Indeed McMahon v State Bank of New South Wales (1990) 8 ACLC 315 a decision of the New South Wales Court of Appeal, applied Shepherd in a banking contract context [cf Meagher JA at 319]. 339 In Minion v Graystone Pty Ltd [1990] 1 Qd R 157 McPherson J had occasion to examine the arguable width of the principle expressed in Shepherd, drawing attention to a later expression of the scope of the principle by Sir Owen Dixon himself. McPherson J [at 160] put the matter as follows: "The decision in Matthews v Brodie is thus an authority for applying the principle in Shepherd's case outside the strict limits of discharge for breach. It nevertheless does not decide whether it extends to other cases where what it is sought to do is not to terminate the contract, whether pursuant to an express power or not, but to give effect to some other contractual power or right exercisable by giving notice upon the happening of a specified event or events. As to that, I have not located any precise authority, nor were we referred to any, directly in point . What was said by Dixon J. in the passage set out above [referring to the rule as of general application] is expressed in terms that are referable to discharge of contract on breach; but his Honour's view of the scope of the principle did not expressly so confine it. In Commonwealth Homes & Investment Co. Ltd. MacKellar (1939) 63 CLR 351, the same learned judge returned to the question in the course of discussing a decision of the House of Lords upholding the claim of a shareholder to be relieved of his contract of allotment. His Honour's explanation of the case (63 CLR 351, 378) was that it could be regarded as an instance of valid compromise "or of the application of the general rule that, where a legal justification in fact exists for a course taken, it will suffice to support its validity though the parties or one of them acted for other reasons and in ignorance of its existence: cf. Shepherd ."…. Finally, this broad view of the scope of the principle was repeated in William v Frayne (1937) 58 CLR 710, 733, where Sir Owen Dixon, in a passage that was cited with approval in this Court in Landers v Schmidt [1983] 1 Qd R 188, 196 said: "... as a general rule, it is enough that upon true facts a party is entitled to act as he has done, and his justification is independent of his own knowledge of the facts (Cp. the cases mentioned in Shepherd v Felt & Textiles of Australia Ltd ." These later statements of the principle rest on a much broader basis, and are susceptible of more extensive application than is suggested by the limited terms used in Shepherd's case , which was evidently regarded by Sir Owen Dixon as simply an illustration of the wider doctrine that he later expounded. Shortly stated, it is that the action taken must be capable of being justified at law, but that the grounds of justification, although they must have existed, need not have been known or relied upon at the time the action was taken." [emphasis added] 340 The Group strongly urged upon the Court the proposition that the principle expressed in Shepherd cannot and should not be presently engaged. 341 Close consideration has been given to the question of whether properly construed, the General Conditions provide for a statement of the precise reasons for ANZ invoking clause 11 (2). Plainly there is no express provision to this effect. In my view that clause cannot be construed as requiring a statement of the reasons for the invocation of the clause. 342 This is not however to suggest that where clause 9(2) (a) or (b) are engaged, the notice must not identify which of those sub-clauses is being engaged. Nor is it to suggest that in the event of a remediable breach, clause 10 (1) (n) (ii) must not be complied with to the letter. In short where the General Conditions expressly provide for the giving of particular forms of notice, the giving of those forms of notice become essential pre-conditions to the validity of any such notice. 343 However as soon as one turns one's focus away from the notice provisions of clause 9 of the General Conditions and proceeds to a careful examination of clause 11 (3) and(4) [dealing with the giving of notice], it becomes clear that in none of the circumstances regulated by subclause (2), is there an express [nor it seems to me, an implicit] requirement to notify the precise grounds of the default. Nor does the context of the banking relationship or the circumstances in which this default clause may be engaged, permit the Court by a construction route, to find any such requirement to notify the grounds of default. 344 The present inquiry is concerned with contractual powers which of course, turn on the proper construction of the material provisions of the contract. The proper construction of clause 11 of the General Conditions simply does not involve a requirement that grounds of default be notified. Hence ANZ was entitled to make the demand in the 8 June letter and to rely upon any grounds of default which were available as justifying the making of that demand. Reasonable opportunity to comply with demand 345 Consideration was given in Bunbury Foods Pty Ltd v National Bank of Australasia Ltd (1984) 51 ALR 609 to a number of issues concerning the validity of a bank's demand for immediate payment of a debt payable on demand [in terms of the term regulating the contract]. The appellants had relied upon the statement of Cleasby B in Massey v Sladen (1868) LR 4 Ex 13 in the following terms: "The defendants are seeking to enforce the strict construction of a very stringent clause, by which the sum due is to be paid instantly on demand, without any delay, and on default the goods are to be seized. But if you want to enforce such a right, you must make a demand which is specific, you must let the debtor know what is the sum you insist on the payment of." 346 In Bunbury Foods the High Court noted that the proposition advanced by Cleasby B was expressed to relate to the case where the demand was to pay the debt instanter, no time being allowed to the debtor to comply before the security was enforced against him. The Court continued: "The proposition is designed to afford some protection to a debtor against the oppressive operation of a provision entitling a creditor to enforce a security on the debtor's failure to make payment immediately once demand is made for a debt expressed to be payable on demand. However, it is now a well established principle of law that a debtor required to pay a debt payable on demand must be allowed a reasonable time to meet the demand. Even in a case where a deed provided that the debt was payable "immediately upon demand thereof in writing" it was held that the provision must be given a reasonable construction so that the debtor had a reasonable time to get the money from some convenient place… This does not mean that the notice calling up the debt is invalid unless it requires payment "within a reasonable time". It means no more than that the debtor must be allowed a reasonable opportunity to pay before it can be said that he has failed to comply with the demand. A notice requiring payment forthwith will be regarded as allowing the debtor a reasonable time within which to comply. Until a reasonable time in the sense discussed has elapsed the creditor cannot enforce his security. As Piggott B stated in Massey v Sladen …. "It is not necessary to define what time ought to lapse between the notice and the seizure. It must be a question of the circumstances and relations of the parties, and it would be difficult, perhaps impossible, to lay down any rule of law on the subject, except that the interval must be a reasonable one. But it is quite clear that the plaintiff did not intend to stipulate for a merely illusory notice, but for some notice on which he might reasonably expect to be able to act. When this principle is given full weight the situation in which Cleasby B thought it appropriate to require the creditor to specify the amount of the debt the subject of the demand is significantly altered. Upon the making of a demand the debtor has a reasonable time to obtain the money. True it is, that in the absence of a specific statement of the debt, he may lack precise knowledge of the amount which he must pay in order to avoid enforcement or realisation of the security. On the other hand to require the creditor in all cases to specify the amount of the debt may operate to impose an onerous burden upon him. It is of some materiality to note that it is not essential to the validity of a notice calling up a debt that it correctly states the amount of the debt. Even a notice given to the mortgagor by the mortgagee as a condition precedent of a power of sale is not rendered invalid because it demands payment of more than is due…. The foregoing examination supports the view that the interests of the parties will be more adequately protected by the principle that the debtor must be allowed a reasonable opportunity to comply with the demand before the creditor can enforce or realise the security than by the adoption of the suggested proposition that the notice of demand must specify the amount of the debt. In determining whether the debtor has had such an opportunity it will be relevant to take account of the debtor's knowledge, lack of knowledge and means of knowledge of the amount due and of the information which the creditor has provided in that respect, including the response which he has made to any inquiry by the debtor. " [emphasis added] 347 In determining whether Domino had a reasonable opportunity to comply with the demand made in the 8 June letter, the following factors require to be taken into account: i. the whole of the circumstances leading to the issue of the letter; ii. the fact that the letter effectively put forward that the demand was grounded upon the anterior notice [which on the findings later set out in this judgment was incorrect]; iii. the fact that Domino had been aware for a considerable period that the facilities were being closely monitored by ANZ and that Mr Carpenter had told Mr Henderson in about February 1999 that ANZ had asserted to him that there was a material adverse change in the position of Domino and that this was an event of default under the security; iv. the agreement of 20 November that Pioneer could have three months in which to refinance, hence aimed at bringing the relationship to an end and the subsequent extensions of that time; v. the fact that under clause 11 of the General Conditions the grounds of default did not have to be notified; vi. the date upon which voluntary administrators were appointed, namely 10 June 1999. 348 The finding is that in all of those circumstances, Pioneer was given a reasonable opportunity to comply with the demand in the 8 June letter. 349 Even the sending of the earlier notice of 3 May [albeit its invalidity as a clause 9 (2) (b) notice], served to put Pioneer on notice that the ANZ was purporting to give 30 days' notice terminating the facilities. Whilst Pioneer may have been entitled to dismiss the particular notice as impotent in contractual terms, the notice must have sent the clearest warning signs to the company. Clearly this occurred as is evidenced by Mr Carpenter having informed the Hendersons of the content of the 30 day demand. 350 In the result: i. ANZ was on 10 June 1999 entitled to enforce its registered mortgage debenture dated 25 January 1996 over the assets and undertaking of Pioneer Park for the purpose of s 436 of the Corporations Law (as it was then); ii. the relevant provision of that Charge was clause 8.1 (i) which provided that the Charge 'immediately became enforceable' when the mortgagor [Pioneer Park] failed to pay any of the Secured Moneys on demand'; iii. ANZ was contractually entitled to demand the moneys sought in these proceedings from Pioneer Park as at June 1999. 351 Before leaving the topic it is appropriate to note the evidence given by Mr Soper that, if for any reason, he had been told that there was an issue whether the earlier notice of termination of facilities was invalid, he would have relied upon any available event of default, subject to legal advice, including Clause 10(1)(k): [statement at [100]]. 352 On the balance of probabilities this evidence may be accepted as reliable. The finding is that if, for any reason, the June demand cannot be sustained as valid in terms of the reasons already given, ANZ could and would have continued to form, or separately form, an opinion of material adverse change so as to trigger the clause. It was entitled to rely on all of its rights pursuant to the terms and conditions of the subject letters of offer. Was there an annual review? 353 ANZ claimed in its letter of 11 May 1999 that an annual review had taken place on 11 December 1998. 354 The Group has strongly contended that no such annual review took place on that date or on any other date. Its contention is that instead of an annual review for the purposes of clause 9 of the General Conditions, after which ANZ could give notice to terminate facilities, ANZ decided upon an "exit strategy" and transferred the Pioneer and Merlo accounts to Group Credit Management under Mr Brennan, with Mr Soper as the manager. 355 There can be no doubt but that ANZ did determine in late November 1998 that the circumstances warranted immediate transfer to Group Credit Management to enforce an exit strategy. The matter is carefully documented in the diary note of 20 November 1998 [PX 12/388] and the ancillary handwritten and file notes. 356 The question of whether, and if so when, an annual review also took place and whether or not, and if so when, an opinion was formed by the appropriate officer/officers of ANZ determining, following a credit reassessment, that there had been a change in credit within the meaning of and for the purpose of Clause 9 (2), is one of fact. 357 Importantly it seems to me that it is necessary to show that an appropriate officer of ANZ in fact turned his or her mind to the task in hand being properly characterised as an 'annual review'. This is because the process of carrying out an annual review was important, as Mr Soper conceded [transcript 792.15]. He also conceded that one of the reasons why an annual review was important was because ANZ might have to reconsider credit and give notice as a result of the annual review to terminate facilities and to call up moneys [transcript 792.19]. It is pertinent to note that the definition of "credit re-assessment" in the General Conditions was as follows: "credit re-assessment" means an assessment of the facilities made by us: (a) applying our then current criteria for assessing applications for the provision of facilities; and (b) as if we were assessing a new application at that time by you for the provision of the facilities." 358 The short position proven by the evidence is that Mr Soper regarded the exit strategy as decided and in place (T778.20), unless the decision was reversed, and it never was (transcript 778.30). 359 Mr Soper had his assistant, Ms Theresa Casanova, prepare a diary note which was in the nature of a 'take on' diary note of which the first draft is a document dated 4 December 1998 (Ex PX Vol 13 Tab 404). That became the diary note dated 11 December 1998 (Ex PX Vol 13 Tab 408 which Mr Soper eventually signed off in January 1999 on his return from England (T803.10) after a meeting with Mr Carpenter on 11 December 1998 in which Mr Soper did not use the words "annual review" (T787.5-.10). 360 Mr Soper had given evidence in his statement that in completing the 11 December diary note he had intended the diary note to record both take on review and the annual review. He referred from time to time in his statement to the diary note as "the Annual Review diary note". 361 Mr Soper in his cross-examination from T787.3 to T793.5 also conceded: i. that annual reviews were serious matters which were usually diarised and generally [but not necessarily always] after notification to the client (T791); ii. that although he read the diary note several times, he did not change the stated purpose of the note (T789); iii. that he could not really recollect what he had said to Ms Casanova about the statement of purpose in the note. 362 The note (Ex PX Vol 13 Tab 408) relevantly reads: "PURPOSE OF DIARY NOTE To transfer group from BB High Risk and to outline proposed strategy. REASON FOR TRANSFER TO GCM: Deterioration of financial position i.e. high gearing and operating loss recorded for 1998. Industry outlook of a downturn in conditions due to the impact of the Asian Crisis. Inability to generate sufficient cash flow to amortise current facilities within a commercial time frame. Facilities expired on 30/11/98 and customer has been advised that facilities will not be renewed. [emphasis added] 363 Although a statement by Ms Casanova had been filed, she was not called [this decision only having been notified after the cross-examination of Mr Soper]. Upon accepted principles it may be inferred that her evidence could not have assisted ANZ. It is convenient to briefly review those principles. i. In litigation for final relief, it is accepted that where a party fails to call a witness the Court may infer that the evidence which such witness could have given would not have assisted the relevant party's case. That principle is generally known as the rule in Jones v Dunkel , but altogether outside of that authority, the principle simply expresses an inference which the Court may reach. ii. The following extracts clarify the position in concerning how to approach the principles laid down in Jones v Dunkel : "The unexplained failure by a party to give evidence, to call witnesses, or tender documents, may - not must - in appropriate circumstances lead to an inference that the uncalled evidence would not have assisted that party's case. The appropriate circumstances exist where it was within the power of the party to tender the evidence which was not tendered." (JD Heydon, Cross on Evidence, 6th ed, Butterworths, Sydney, 2000 at [1215]) "This instance of a Jones v Dunkel inference…, also available where there is unexplained failure by the party to call a witness or tender documentary evidence, can entitle the judge or jury more readily to accept the evidence of the opposite party which might have been contradicted, or more readily to draw any inference fairly available from the evidence called by the other party. A Jones v Dunkel inference cannot fill gaps in the evidence, or convert conjecture and suspicion into inference, but unless it is to be empty of content the inference if drawn may weigh the scales, however slightly, in favour of the opposing party." [ Adler v Australian Securities and Investments Commission [2003] NSWCA 131 at [649] per Giles JA, Mason P and Beazley JA agreeing] "[T]he rule [in Jones v Dunkel ] only applies where a party is "required to explain or contradict" something. What a party is required to explain or contradict depends on the issues as thrown up in the pleadings and by the course of evidence in the case. No inference can be drawn unless evidence is given of facts "requiring an answer". [ Cross on Evidence , Butterworths, [6th Ed] D Byrne, JD Heydon vol 1 at [1215]] [Passage quoted with approval in the joint judgment of Gleeson CJ and McHugh J in Schellenberg v Tunnel Holdings Pty Ltd (2000) 170 ALR 594 at 608 - 609]. 364 It does seem to me that the questions [which remained even after the evidence given by Mr Soper], were in a number of instances sufficiently opaque to have required that Ms Casanova be called to clarify areas of uncertainty, and this notwithstanding ANZ's contention that she had a clearly limited and merely clerical role in the bank's management of the plaintiff's accounts. Mr Soper had given evidence that he had asked her to prepare what she could from the file in terms of a 'take on' diary note. ANZ submitted [transcript 1703] that Ms Casanova was the author of the first draft of the diary note. And in circumstances in which an important question arose as to why the diary note and its antecedent did not state its purpose as being to conduct an annual review, it is appropriate to infer that the evidence of Ms Casanova would not have assisted ANZ's case. 365 In the light of all of the evidence called including the contemporary documents: i. the ANZ submission that Mr Soper's take-on diary note dated 11 December 1998 was intended to constitute and record an annual review is rejected as being inconsistent with the terms and stated purpose of the document. ii. Mr Soper's evidence in his statement that in completing the 11 December diary note he had intended the diary note to record both a take on review and the annual review, is also rejected. 366 Moving to subclause 10 (1) (k), clearly the formation of the opinion that the change in circumstances may have the relevant material adverse effect within this subclause is part of the event of default: Australia and New Zealand Banking Group Ltd and Others v Pan Foods Company Importers and Distributors Pty Ltd and Others - [1999] 1 VR 29 at paras 1, 27, 45 (unaffected on this point in the High Court). 367 The fact is that in the course of the correspondence concerning the draft deeds being negotiated, ANZ on 4 February 1999 wrote to the solicitors for the Group advising inter alia as follows: "From the Bank's point of view and under the transaction documents, as Domino has recorded trading losses for the 1998 financial year and for the six months to 31 December 1998, this may have a material adverse effect on Domino's business and a flow on effect on the ability of Domino to perform its obligations under the transaction documents. This constitutes a default under the securities…" 368 I am satisfied from the evidence given by Mr Soper: i. that after his return from annual leave on about 20 January 1999 he was made aware of the half yearly financials to 31 December 1998 which had been received in respect of Pioneer, Merlo Wholesale and Merlo Australia; ii. in thereafter consulting with Ms Agsten, he specifically reviewed the question of ANZ's entitlement to rely on material adverse change as a basis to assert default under the facility documentation, his attention being drawn to the precise wording of clause 10 (1) (k), and he in fact saying to her, that in his view the trading losses which Pioneer had suffered were sufficient to form the basis for a default based on that wording. 369 The evidence given by Mr Soper included: Q. Mr Soper, you didn't say specifically to her that you had carried out an annual review, did you? A. I can't recall the conversations that I had with her. The instructions with her were to perform a deed. She prepared the deed and I relied upon her views on the deed. The deed went out. It was a bit rushed but I just don't keep recollections or notes on conversations I have with lawyers because there is many, there is numerous. Q. Until you spoke to Ms Agsten you had never considered clause 10 of the general conditions as something you should look at re a default, had you? A. No, she directed me to that. Q. When did she direct you to that, do you recall? A. It was when I came back from leave and there was a letter responding to the first deed, suggesting a number of errors or a number of dispute was certain comments. I went through and reviewed the file in more detail. We sat down and talk about the matter in more detail and then she specifically referred me to the clause 10 and I think it is (k) in relation to material or adverse change. We spoke about that and I was of the view that she was right, that that was very much a default under the general conditions . Q. That was after the first draft deed had gone out? A. Yes. Q. Had been commented upon, there had been a letter back from Mr Fordyce of B A Somerset and then you and Ms Agsten had a discussion in which clause 10 was mentioned? A. That's - yes. Q. What did she say to you? A. I can't recall the exact words but I mean the matter was discussed in detail with her, as far as the lawyer on the case. The losses were talked to and she said that this would constitute a default under 10 (k) of the general conditions and on review of that I firmly agreed with her . [Transcript 808-809] 370 Neither Mr Soper nor Ms Agsten gave evidence that they had discussed the topic of an annual review being or having been carried out. 371 The evidence given by Ms Agsten satisfied me that her recollection was particularly poor in relation to the events at hand. Having said that, it is clear that in giving her evidence she was doing the best that she could do recall those events. 372 Her evidence [at transcript 829] included that Mr Soper had said to her that there had been an adverse change in the financials and that there was a breach in the overdrafts and that in those respects, she had prepared the draft settlement deed. She was then asked whether when preparing the first deed, she had a discussion with Mr Soper about what might or might not be an adverse material change and her evidence was that she had not. Then [at transcript 830 and 831] her evidence was that she could not recall Mr Soper using the words "material adverse change" in talking with her. She simply could not recall the precise words which were used in his discussion with her. Finding 373 The finding is that the first time when Mr Soper considered clause 10 (1) (k) of the General Conditions was when Ms Agsten drew his attention to the clause in relation to material adverse effect. He conceded this. It was then that he certainly in his mind, formed the view that the materials which he had examined did constitute an event of default within the meaning of clause 10 (1) (k) of the General Conditions. 374 The finding is that Mr Soper then satisfied himself that there had been a change in circumstances: in short circumstances had arisen that in his opinion may have a material adverse effect on Pioneer's business, assets and financial condition as well as on its ability to perform its obligations under transaction documents. 375 The problem for ANZ's case simply has to do with the environment in which Mr Soper was acting from time to time. The finding is that he did not in fact at any material time, turn his mind to the task in hand being, or being properly characterised, as an 'annual review'. The documentary evidence confirms the finding. 376 Mr Soper's handwritten note appearing on a copy of the letter of 25 January 1999 received from the solicitors for the Group reading "Final Review 30 November 1998. Told would not extend for another period" fortifies the finding that no annual review was carried out up to that point in time [or indeed at any material point in time] but rather, that ANZ either simply believed it was entitled to refuse to extend the facilities when the review date had been reached, or failed to consider its strict contractual position at the time, [preferring to try to achieve an accommodation whereunder the Group would refinance, and to hold its hand on its legal rights pending the outcome of efforts to refinance]. 377 The occasion when Mr Soper formed the view that the materials which he had examined constituted an event of default within the meaning of clause 10 (1) (k) of the General Conditions, had nothing to do with and was not a part of any annual review. He formed the view in giving an instruction to Ms Agsten that a clause 10 (1) (k) event of default had been identified for the purpose of the ANZ being in a position to send the 4 February 1999 letter to the Group's solicitors. 378 The fact that Mr Soper did, as a matter of turning his mind to the precise issue, determine that an event of default in terms of clause 10 (1) (k) had occurred [in terms of a relevant change in circumstances having a material adverse effect as described in this sub clause], is very clearly demonstrated by the fact that in an earlier draft by Ms Agsten [of the letter from ANZ to the solicitors for the Group], wording appeared which was amended in the final draft. It was so amended following Mr Soper's instruction. This earlier draft [PX 13/436] in fact includes his handwriting making the amendment. I record hereunder the original terms of the draft: "From the Bank's point of view and under the transaction documents, as Domino has recorded trading losses for the 1998 financial year, this may have a material adverse effect on Domino's business and a flow on effect on the ability of Domino to perform its obligations under the transaction documents. This constitutes a default under the securities…" The handwritten amendment which carried through into the final form of the letter, added a reference to the recording of trading losses for the 6 months to 31 December 1998, hence resulting in the following form of wording: "From the Bank's point of view and under the transaction documents, as Domino has recorded trading losses for the 1998 financial year and for the six months to 31 December 1998 , this may have a material adverse effect on Domino's business and a flow on effect on the ability of Domino to perform its obligations under the transaction documents. This constitutes a default under the securities…" [emphasis added] 379 As already observed Mr Henderson gave evidence that Mr Carpenter told him in about February 1999 that ANZ had asserted to him that there was a material adverse change in the position of Domino and that this was an event of default under the security. [transcript 882] 380 Nor has ANZ established that either of Mr Brennan or Mr Pidcock at any material time purported to carry out an 'annual review'. This is not to say that they did not form opinions satisfying the requirements of clause 10 (1) (k) of the General Conditions. Mr Brennan clearly did [transcript 984.35 – his evidence to this effect is accepted as reliable]. Again for ANZ the problem is that the whole of the environment under which its relevant officers were acting on and after late November 1998 [as particularly demonstrated in the 20 November 1998 and the 11 December 1998 'take-one' diary notes] involved ANZ: i. having grave cause for alarm at the deteriorating financial position of the Group; ii. seemingly eschewing any need to carry out an annual review [which if carried out would have entitled ANZ on notice to have altered or terminated facilities], but instead determining upon a course of: a) putting to the Group that it should agree a refinance date to be 28 February 1999; b) accepting Mr Carpenter's assurance that this was agreed to; c) seeking to have that agreement to refinance formalised in a deed; d) thereafter leaving the position somewhat inchoate. 381 The Court does accept that the entitlement of ANZ to exercise particular rights of review under clause 9 of the General Conditions requires a considerable degree of formality, bearing in mind the rights given to ANZ under that clause. It was and is simply not possible for ANZ to keep up its sleeve, the possibility that a right of review under clause 9 may still be open to it, notwithstanding a reasonably significant [in the circumstances] passage of time after the relevant review date has come and gone whilst negotiations have continued with the customer. 382 In this regard I accept as of substance the Group's contention that where clause 9 (2) included the term: "If we give notice before the review date, the notice period cannot expire before the review date" the proper construction of this provision would, once the review date was reached, give to ANZ a reasonable time in which to carry out the review. 383 In the present circumstances ANZ neither turned its mind to carrying out the review, nor could hold open for an indeterminate time of its choosing, the period of time when such a review could be commenced and then duly completed. 384 Effectively ANZ: i. failed to carry out the annual review at all, either on or after 30 November 1998; ii. months later claimed [in the letter giving 30 days notice that facilities would be cancelled] that an annual review had been completed on 11 December; iii. from late January or early February 1999 had, by Mr Soper, formed the necessary opinion which grounded a clause 10 (1) (k) event of default. 385 Whilst certainly there was room for Mr Soper across broadly the same periods of time, to carry out both of the exercises involved in: i. a clause 9 review [and subclause 9(2) determination of a change in credit] justifying the mobilisation of such rights if any as such determination may have conferred on ANZ; ii. reaching the opinion [provided for in clause 10 (1) (k)] of the necessary change in circumstances which may have the necessary material adverse effect to ground an event of default; if the clause 9 review was being carried out, it was necessary for him to turn his mind to this circumstance as the activity being carried out and the finding is that he did not do this. 386 As already observed ANZ was about effecting an exit strategy. Mr Brennan said as much in his handwritten annotations to Ms Huelin's diary note of 20 November 1998 setting out his recommendations. And as he accepted [transcript 983] in making his recommendation of transfer to Group Credit Management, once such transfer took place, an exit strategy would be implemented absent some positive decision made to the contrary. In Mr Harvey's view a transfer to GCM "was an exit" [transcript 927.34]. 387 However in terms of the legal analysis: i. it is plain that once the necessary opinion was formed engaging clause 10 (1) (k) and hence resulting in an event of default, ANZ became entitled to exercise the rights provided for in clause 11 of the General Conditions; ii. that entitlement was never expressly waived under clause 16; iii. however by way of concessions, ANZ did in its letter of 25 February 1999, accept a further extension of time to 26 March 1999 in order to permit the refinancing of the facilities, and in its letter of 8 April, agreed to a further extension until 26 April to be the final extension; iv. in the 25 February letter ANZ had confirmed that Domino Mining had suffered trading losses and ANZ's continuing concerns in that regard; v. once the further extensions first up to 26 March and then up to 26 April had expired, there could be no suggestion of any inhibition in ANZ's entitlement to exercise the rights provided for in clause 11 by reason of the clause 10 (1) (k) event of default; vi. nor [even if this were open to the Group to pursue in the light of clause 16 and/or in the light of the pleadings], does the evidence before the Court justify a finding that ANZ is estopped [whether by any of its conduct between the expiration of its final extension on 26 April and the sending of the 8 June letter or by any of its anterior conduct] from relying upon its extant entitlement to exercise the rights provided for in clause 11 by reason of the clause 10 (1) (k) event of default; vii. once the necessary opinion had been formed engaging clause 10 (1) (k) and hence resulting in an event of default, it was not necessary for ANZ to communicate that circumstance to the Group: [indeed as earlier observed in relation to the initial three-month extension of time, any formal notification of that circumstance could be confidently expected to radically affect any refinancing prospects which the Group may have had]; viii. ANZ's entitlement to exercise the rights given to it under General Condition clause 11 [following its reaching a clause 10 (1) (k) opinion of a material adverse effect by reason of the change in circumstances] would continue for a reasonable time following the reaching of that opinion; ix. in all of the circumstances, the exercise of those rights by the letter of 8 June 1999, took place within a reasonable time following the reaching of the relevant opinion [notwithstanding the misconceived attempt by ANZ in purporting by the letter of 3 May 1999 to give notice grounded upon clause 9 (2) (b) of the General Conditions]; x. ANZ on 8 June gave the written notice which made the moneys due and payable. ANZ's estoppel/misleading conduct claim 388 In light of the above analysis it seems strictly unnecessary to deal with the sophisticated ANZ contentions to the effect that: i. the evidence establishes that ANZ to its detriment, relied on the statement by Mr Carpenter and his solicitor that Domino Mining and Merlo were refinancing with other lenders; ii. ANZ's actions to its detriment reliant upon those statements were: a) it did not serve notices of default on Domino Mining Equipment prior to 10 June 1999; b) it did not serve a formal notice (requiring payment of its facilities) on Merlo Wholesale prior to 11 May 1999. 389 There are some difficulties with this analysis. Having said that it was certainly the case that both parties are to be taken as having been acutely aware of the difficulties which would stand in the face of the Group if formal notices of default or termination of facilities or the like were served immediately. 390 It has to be recalled that ANZ and the Group were plainly bound by formal contractual terms. 391 The situation which obtained by late November 1998 was one in respect of which ANZ had a number of options. That was the date when all of the facilities had become subject to annual review. If ANZ was, as appears to have been the case, content to reach an accommodation with the Group, a parameter of which was that the Group would be given a period of three months in which to refinance and to permit the relationship to be brought to an end, that was a matter which ought to have been documented in a formal sense in order to be binding. Indeed the attempts which followed, by way of the exchange of a draft deed seeking to formalise repayment arrangements, are testimony to this as having been seen as a desirable course. However the attempts failed and the draft deed was never signed. 392 In circumstances such as obtained ANZ is shown to have simply failed to protect its own interests by: i. either properly documenting yet a further variation to the terms upon which the facilities were being provided, so as to leave in place its entitlement to carry out a further review on an appropriate date, such for example as three-months following 20 November 1998 or ii. by carrying out an annual review and in circumstances which would appear to have engaged General Condition 9 (2), to have given a 30 day notice either pursuant to subclause (2) (a) or (b). 393 Nonetheless ANZ remained entitled once the Clause 10 (1) (k) 'material adverse effect opinion' had been reached, to mobilise its clause 11 rights in that regard as and when necessary as long as it did so within a reasonable period of the formation of the relevant opinion and as long as that opinion had not become otiose [in the sense of being rendered irrelevant] by changed circumstances. That is what it ended up doing. The somewhat extended period which passed between the formation of the opinion and 8 June 1999 is explicable by reference to the repeated requests to extend the date by which the refinancing was to be completed or the facilities would be called up. The evidence permits the finding which is made that as at 8 June the opinion was still held and had not become otiose by changed circumstances. This is apparent from the following: i. Mr Soper was effectively the liason officer within ANZ receiving, or being copied with and on many occasions responding to communications from Mr Carpenter to ANZ by way of complaints within the bracket of time extending through the months from March and following [transcript 810 et seq]; ii. he was the person with primary responsibility of making recommendations in terms of proposed actions and strategies [transcript 813]; iii. Mr Soper had authored a diary note of 12 April 1999 in which he had made the point that the last financial data received from Domino was in December 1998 which had highlighted continual losses for the Group and that he was concerned about the position of the Group as no figures had been provided since then, adding that the delaying tactics of Mr Carpenter may be shadowing further deterioration in the trading of the Group; iv. his cross examination on the diary note includes: Q. Then over on the next page, under "Strategy", the third paragraph, "If facilities are not repaid by 26 April a 30 day termination notice will be issued", and that's referring to the commercial bill which had been rolled over I think by you and was due on 26 March, is that right or-- A. It says, "Commercial bill 1.5 which were at" - "which was outstanding as at 26 March 1999 was retired into the overdraft". Q. Yes, so you're contemplating a 30 day notice in respect of that as well? A. No, 30 day notice - well, it was part of the facilities, yes. Q. And then signed off by your manager's assistant and you, Ms Agsten, corporate solicitor, and Mr Graham, the state manager? A. Yes. Q. And when you wrote that diary note you were directing your mind to a termination under clause 9 of the general conditions? A. Yes. Q. You weren't directing your mind to any default under clause 10 or notice of default and calling up moneys under clause 11? A. Those defaults were still there as far as I was concerned . The termination notice was the one that was being considered. [Transcript 818] 394 The overwhelming balance of probabilities favours the proposition that Mr Sopers recommendations would have been adopted by ANZ. 395 Albeit that ANZ's failure to issue a timely default notice after 20 November 1998 took place in the context of Mr Carpenter's statements about refinance, there are real difficulties in accepting the contention that Pioneer is estopped for that reason, from contending that ANZ remained bound by its strict contractual rights. 396 The analysis of those contractual rights has already been set out and it is unnecessary to further travel into ANZ's estoppel/misleading conduct cases. Whether ANZ breached the contractual terms in maturing the $500,000 bill to the overdraft account on 1 December 1998 and/or in retiring the remaining commercial bills to the overdraft on 26 March 1999 397 This section of the issues for determination in these proceedings becomes somewhat complex as it travels through the treatment by ANZ of the commercial bills. 398 For that reason a short summary of the findings may be in order before travelling through the detail. The findings are: i. the first of the $500,000 bills was ultimately paid out in late 1998 and no longer falls for examination in the present litigious context; ii. a close examination of the precise terms and conditions and governing the CBAD against the events which occurred in relation to the remaining $500,000 and $1,000,000 bills, demonstrates the following: a) the whole of the events which as between November 1998 and March 1999 was underpinned by an agreement between the parties that cessation of the relationship would occur in an amicable manner and that the period of time needed by the Group to refinance its facilities was the period up to 28 March 1999; b) each of the further rollovers were recorded on the bank statements, there being no dissent from the Group; c) no instructions having been given by the Group to roll over the November or March bills, ANZ, albeit having an option to continue to roll the bills over for seven-day periods, had no duty to do so; d) ANZ did not breach the terms of the contract in its actions with respect to the remaining bills. Returning to examine the detail 399 One begins with the Specific Conditions pursuant to which the Variable Rate Commercial Bill Acceptance/Discount Facility was offered [PX 5/31]. This provided inter alia: Specific Conditions Variable Rate Commercial Bill Acceptance/Discount Facility 1. Drawdown notice (1) You cannot make a drawing under the facility until we receive the following documents properly executed to our satisfaction: (a) Commercial Bills – Authority (Standard ANZ Bank document); (b) Power of Attorney – Commercial Bills (Standard ANZ Bank document); and (c) Indemnity Commercial Bills (Standard ANZ Bank document). (2) Any instruction given under the Commercial Bills – Authority must be given by you or by your authorised representative. (3) An instruction which requests us to accept (without discounting) bills is irrevocable when given. (4) An instruction which requests us to accept and discount bills is irrevocable when you accept a yield rate and tenor under specific condition 2(2). 2. Rate and tenor quotations (1) If you want us to accept and discount the bills, you may, on or before the drawdown date, ask us to quote a yield rate in respect of the amount of the drawing for one or more tenors of no less than 7 and no more than 185 days (or any other tenor agreed by us). However, you cannot ask us to quote for a tenor which has a maturity date after the termination date of the facility. NOTE: The "termination date" is a defined term in the General Conditions. It need not be the "review date". (2) To make the drawing (including a forward start drawing), you must, on or before the drawdown date, within the time allowed by us, accept a yield rate and a tenor which, in our opinion are consistent with one of our quotations. A tenor which would otherwise end on a day which is not a business day is extended to the following business day (unless we both agree otherwise). A "forward start drawing" means a drawing for which a rate, fee or premium quoted by us is accepted more than two clear business days before the relevant drawdown date. 3. Amount payable by us on discount of bills Subject to specific condition 6 and to the provisions of the agreement, on the drawdown date for a bill to be discounted by us, we shall pay to you the face value of the bill less: (a) the amount of discount calculated at the relevant yield rate under the agreement; (b) the acceptance fee (if any) for the bill and any outstanding line fee; and (c) applicable stamp duty and other taxes in respect of the bill. 4. Automatic rollover - unless you give notice If we have discounted variable rate bills pursuant to an instruction then, unless you have: (a) given notice to us, at least two clear business days before the maturity date for the bills, stating that you do not wish to roll the bills; or (b) actually given an instruction requesting us to accept and discount new bills (on rollover of the maturing bills) and have accepted a tenor and a yield rate for new bills in accordance with specific condition 2(2); we may roll the bills as if you have given an irrevocable instruction requesting us to accept and discount new bills (on rollover of the maturing bills) and had accepted as a yield rate the bank bill buying rate calculated by us by reference to the face value of the bills, for a tenor of 7 days (extended, if necessary, to end on a business day). 400 At the same time it is necessary to keep in mind the terms of the Commercial Bills-Authority documents enclosed with ANZ's letter to Mr Carpenter of 29 April 1996 [PX 6/50]. 401 Then as a matter of convenience it is necessary to keep closely at hand the spreadsheet prepared by ANZ to illustrate each event of significance in the respective rollovers and the maturing of the commercial bills [MFI D 24]. [A copy of that document with the respective colouring and annotations is conveniently annexed to this judgment as Annexure B. Whilst the Court discourages annexure's to judgments this is one of those rare occasions where such an annexure may assist the reader, and if the proceedings travel to the Court of Appeal, that Court]. The issue 402 The whole of the exercise is concerned with ascertaining whether ANZ acted in breach of contract in its treatment of the bills. Travelling through the spreadsheet 403 As the spreadsheet indicates under the CBAD there were 3 bills in 1996, respectively for $1,000,000, $500,000 and a further $500,000. The spreadsheet records the manner in which the initial bills rolled over, there being relevant instructions to do so. 404 These rollovers were unexceptional, taking place where specific instruction was given by the customer at the beginning of the arrangement to roll over periods. [PX 7/51 gave instructions to ANZ, the detail of which is unnecessary to record]. That is the occasion when the term loan was rolled into the bills and that instruction operated on a continuing basis through until July 1997 [being the entries marked in blue on the spreadsheet]. 405 The spreadsheet then records in green that which occurred from July 1997 through until November 1998, that is for the following 14 months. As the spreadsheet records, the bank rolled the bills on the periods that had been established by the original letter carrying it forward. The evidence as to this is to be found in bank statements. In other words, the evidence establishes that up until November 1998 the parties continued the periods of the rollover which had been established by the initial letter. 406 In November 1998 the bank temporarily matured a bill a month early and then immediately recreated it and it rolled over for 30 days. 407 Hence when one gets to November 1998: i. the $1,000,000 is coming up for maturity; ii. the 1st of the $500,000 bills is coming up for maturity; iii. the 2nd of the $500,000 bills will come up for maturity in December. 408 In November ANZ rolled the $1,000,000 bill over for 1 month pending the annual review. 409 A diary note dated 24 November 1998 had confirmed that annual review was due on 30 November 1998 with all facilities expiring; that approval was sought to roll the $1,000,000 bill for 1 month pending completion of the annual review; and that ANZ had verbally requested the Group to seek refinance of facilities within 3 months and that the strategy would be formalised in the forthcoming annual review [bundle 12/393]. 410 On December 23 [which is the 2nd of the green entries], ANZ rolled the remaining $500,000 bill over until 1 March. The date of 1 March was chosen to coincide with the agreed period of 3-months that Mr Carpenter had asked be allowed for refinance. The internal authority for the roll over is to be found at [PX 37/5]. The relevant bank statement recording this is to be found at [PX 18/9]. 411 A diary note by Mr Soper dated 23 February in 1999 [PX 13/5] noted that the Commercial bill for $500,000 was due to mature on 26 February 1999 with the CBAD for $1,000,000 due to mature on 1 March 1999. The note indicates that the Bills would be rolled over until 26 March 1999. A note in the handwriting of Mr Soper states "Facilities are to mature to coincide with the date given for Domino to refinance" [cf PX 13/442]. 412 In the result: i. the remaining $500,000 bill was matured by moving the debit to the overdraft account on 29 March 1999 ii. the remaining $1,000,000 bill was matured by moving the debit to the overdraft account on the same day The legal analysis 413 The whole of the events which took place between November 1998 and March 1999 in connection with the $1,000,000 bill and the surviving $500,000 bill was underpinned by the arrangement between the parties that the cessation of the relationship would occur in an amicable manner and that the period of time needed by the Group to refinance its facilities was the period initially of 3 months and then extended to 26 March and after a hiatus of about 11 days, extended on 8 April until 26 April. ANZ's actions in that regard concerning the further rollovers were recorded on the bank statements. There was no dissent from the Group. 414 The actual bills in existence from November 1998 onwards totalled $1.5 million and from the end of March 1999 totalled zero. 415 From late 1998 onwards, there were no bills drawn, accepted or discounted between ANZ and Domino Mining. That is to say the Company had not given the necessary instructions for the drawing or rollover of any bill and ANZ had not issued any confirmation advice of a bill. 416 In terms of identifying the actual overdraft from time to time: i. it included the amounts matured from the bills; ii. hence in November it included the additional $500,000 from the 1st bill which had matured; iii. from the transfer of the limits in March 1999 it included the additional $1.5 million from the remaining bills. 417 The Group was informed of the material events and voiced no dissension. The evidence established that Mr Carpenter never asked nor gave ANZ an instruction to do anything different than it actually did in respect of the bills. 418 The Group never in fact gave any instruction to roll over the November or March Bills. ANZ's obligation as a matter of the written contract was, if in receipt of a valid instruction to roll a bill over, to comply with that construction. Its contractual entitlement if there was no valid instruction, was represented by its option to roll that bill over for 7 day periods. That was an option but was not elevated into a duty. Decision 419 In the result the Group's contentions that ANZ was in breach of contract in maturing the $500,000 bill to the overdraft account on 1 December 1998 is of no substance. Likewise the Group's contentions that ANZ was in breach of contract in retiring the remaining commercial bills of $1.5 million to the overdraft in late 1999 is of no substance. The Group's good faith and misleading and deceptive conduct cases 420 The Group's cases contending that ANZ breached its obligations of good faith and its case in terms of misleading and deceptive conduct pursued under both the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1987 (NSW) have no substance in the face of the findings of fact set out in these reasons. The rights of both parties were contractual rights. The analysis of those contractual rights is carefully treated with in these reasons. 421 Whilst certainly the findings reject ANZ's contention that an annual review was held at a material time after 30 November 1998 and, in consequence, reject the letter of 3 May 1999 as giving any form of valid contractual notice, ANZ has succeeded on the ultimate question of upholding the validity of the subsequent letter of 8 June 1999. That letter has been shown to be justified by reason of the events of default which had, by then, taken place hence permitting ANZ to make all of the moneys owing under the facilities immediately due and payable by giving written notice [becoming effective immediately when given]. 422 On the factual findings, whilst it would clearly have been preferable for ANZ to have specifically highlighted the fact that the 3 March 1997 letter, if accepted, would have the effect of depriving the Group of the previously agreed CBAD fixed term, Mr Carpenter was sufficiently alerted to raise a concern at what appeared to be changes in the terms of the advances with Mr Nielsen. 423 The finding is that ANZ did not mislead the Group by the terms of the 3 March 1997 letter. Nor is it shown to have failed to exercise in good faith its rights and powers, nor to have failed to cooperate and to do all things reasonably necessary on its part to enable performance of the contractual agreement as varied, nor to have conducted itself so as to frustrate or prevent the performance by the Group of the agreement. 424 An important parameter in the case pursued by the Group concerns the extent of the information given to the Group at material times concerning ANZ having acted in particular ways. To the contrary of that case, many of the allegations of lack of notice have to be dismissed on the evidence covering bank statements, communications between the parties and lack of complaint in relation to the manner in which the Commercial Bills were dealt with by ANZ: Bank Statements i. There is no doubt but that the bank statements recorded that on 30 November, ANZ matured the $500,000 Commercial bill into the overdraft permitting the overdraft at that point to run to a debit of $1.249 million [Transcript 1626] [PX 18/10]; ii. Likewise the bank statement at page 778 records the bank on 26 March 1999 debiting $1.5 million in the overdraft, allowing it then to run at $2.439 million [Transcript 1626] [PX 18/6]; iii. Likewise the bank statement at page 826 for 3 June 1999 shows the overdraft running at $2.481 million; 25 March letter iv. In the letter dated 25 March 1999 ANZ wrote to the solicitors for the Group as follows: We refer to our discussion with your secretary on 19 March 1999 and note your subsequent letter of 19 March 1999. We have read your comments and observe that in the scheme of things your client has had ample time, namely some four months to depart and arrange alternate finance. Your client claims that he advised the Bank of his intention to depart by telephone call to Mr Harvey of 20 November 1998. In December of 1998 he advised Mr Soper that refinance would be effected by end February 1999. By letter dated 26 February 1999 you advised that your "client's alternative financing is progressing well but will take another 3 or 4 weeks…." The Bank accepted the extension of time to 26 March 1999. Therefore your client has had the "much longer time period to transfer all of a group of companies' accounts to another bank" referred to in your letter of 19 March 1999. By letter dated 5 March 1999, you noted that "you would keep the Bank informed of developments". Neither the writer nor Mr Soper has to date received either correspondence or communication from either yourself or your client in relation to the refinance. Please provide full details of how the refinancing is progressing. If a short extension is required the Bank will need to sight the letter of approval that refinancing is pending with a firm date for settlement advised. The Commercial Bills in the amounts of $500,000 and $1,000,000 fall due on 26 March 1999. Given that the Bank has heard nothing from you regarding the progress of the refinance the Commercial Bills will be retired into the overdraft on 26 March 1999. [PX 14 tab 467] 31 March letter v. By the letter dated 31 March 1999 ANZ wrote to the solicitors for the Group making a number of points including rejecting as untenable the proposition that Domino was unable to apply for refinance because of the existence of a second mortgage to ANZ. In this letter ANZ advised what were the facilities in the name of Domino as at 30 March 1999 by listing them as: 1. the two encashment facilities, 2. a payroll facility, 3. the foreign currency dealing limit 4. the overdraft account at limit $2,500,000 currently drawn $2,478,487.86. Lack of protest/complaint as to treatment in relation to overdraft vi. Nor did Mr Carpenter protest to the bank in relevant terms: a) He conceded that at no time up until 10 June 1999, did he say to ANZ orally or in writing, that it had wrongly recorded the amount shown on the bank statements as at 31 December 1998 for the overdraft [transcript 322]; b) Indeed the actual management accounts prepared by Domino at the time [as at 31 December 1998] record the bank overdraft as $797,000 [PX 13/424] [These were the management accounts provided to Mr Soper on 18 January 1999, as is evidenced by a diary note [13/431] summarising events when Mr Carpenter called in to ANZ to provide the Bank with half yearly financials to 31 December 1998]. vii. Other relevant evidence supporting the proposition of a lack of relevant complaint at any material point in time, include: a) the fact that in the first draft of the deed and settlement and propose release forwarded by ANZ to the Group on 22 December 1998 identified the overdraft as including the first $500,000 that had been matured to the overdraft and the CBAD BILL having been reduced to $1.5 million [PX 14/417]; b) in the letter from the Group's solicitors to ANZ of 25 January 1999 a number of complaints were made in relation to the first draft of the deed but there is no complaint about the manner in which the Domino facilities had been defined [bundle 13/434]; c) in ANZ's second draft of the deed of 4 February 1999, the Domino facilities are again defined in the same way in the first schedule and again one finds no complaint about the definition of those facilities; d) in the further letter of 5 March 1999 from the Group's solicitors, various complaints are made, but there is no complaint in relation to the size of the overdraft or the reduction in the bill facility [PX 13/453]; e) on 16 March Mr Carpenter provided the chairman of ANZ with a chronology by way of a detailed history of the account but the chronology includes no complaint about the increase in the overdraft or about the terms of the exit agreement so far as concerned that matter. [PX 13/459]; f) in the letter consisting of a list of complaints of 30 March 1999 sent by Mr Carpenter to Mr Soper [bundle 14/474], one finds no complaint about the increase in the overdraft. Nor is any complaint about that matter found in the later letter of 15 April 1998 from Mr Carpenter to Mr Soper [bundle 14/488]; g) Exhibit P 32, a document apparently emanating from the administrator, sets out in particular detail complaints made by Mr Carpenter. Notwithstanding the chronology of critical dates, the summary, the overview, the 17 points made or the history document with 47 points, there is no complaint of the occasion when ANZ matured the $1.5 million. Indeed the same document records there being $2,000,000 in commercial bills as at September 1998 but as at May 9099 there being no bills and $2.5 million in the banks overdraft. 425 For reasons otherwise given in the judgment, none of the pleaded allegations of misleading and deceptive conduct of ANZ have been established. Whilst it is unnecessary to specifically refer to each of the matters complained of, it is appropriate to expressly single out [as ultimately not proven] , the following allegations : i. the alleged decision of the Bank to exit Pioneer and the Merlo companies come what may, and irrespective of the proper term of the CBADF and the requirements of clauses 9, 10 and 11 of the General Conditions; ii. the alleged pressure placed on Mr Carpenter to come to an agreement to exit ANZ irrespective of the terms of the letters of offer and the General Conditions , and the continuation of fixed term or revolving facilities (the FDA/CBADF and the overdraft). 426 It is to be recalled that in late November 1998 Mr Harvey had said that ANZ wished to engage an investigative accountant and that Mr Carpenter had dissuaded him from this course, the accommodation reached involving the 3 month timetable. 427 The reasons deal with the failure to conduct the all important annual review after 30 November 1998 and with the invalidity of the 3 May 1999 notice purporting to be given in accordance with clause 9 (4) of the General Conditions. However in the context of the whole of the circumstances proven to have occurred in the period from late November 1998 until the giving of the final 8 June 1999 notice, these matters do not give rise in these proceedings to any entitlement to relief. The Group has simply not been in a position to prove that in reliance upon any proven misleading and deceptive conduct, it altered its position to its detriment as by failing to take some other course available to it. Detrimental reliance or change in position are essential elements in claims to relief for alleged misleading and deceptive conduct. There is no evidence that Mr Carpenter for example, abandoned attempts to obtain refinance which he would otherwise have been able to procure. 428 In fact to the contrary, the Group did in fact achieve a window of opportunity in which to endeavour to refinance, although that refinancing was never procured. The only arguable misleading and deceptive conduct was constituted by the sending of the invalid 3 May 1999 notice. There is no evidence of any reliance by the Group on any assumption that the notice was valid. 429 Standing back from the heat generated in the litigation it is important not to lose sight of the fact that the Group at material times was suffering from severe haemorrhaging and that at every moment, ANZ's rights under clauses other than clause 9, were expressly reserved in clause 9 (5). Gearing ratio 430 It is next convenient to deal with the respective cases concerning the gearing ratio. The 8 January 1996 facility letter 431 The gearing ratio had been spelled out in the 8 January 1996 facility letter. That letter sets out the contractual formula for calculating the gearing ratio as follows: 2. Effective gearing to evidence a reducing trend from maximum 3.1:1 as at year ending June 96 and to achieve a level of approx 1.8:1 by FYE June 98 calculated as per the following equation: Total Liabilities Shareholders Funds – Intangible Assets" ANZ's construction of the clause 432 ANZ construes and applies the clause as it is written in the letter of 8 January 1996. In particular, it contends that this means: i. Total liabilities are all liabilities owed by the company to any third parties as shown in the balance sheets; ii. Shareholder funds are the difference between total assets and total liabilities as shown on the balance statements; iii. Intangible assets includes: (A) intangibles as shown on the balance sheet; (B) future income tax benefits (FIBT); and (C) prepayments. Assuming no later special agreement varying the original gearing ratio formula 433 It was plain from the cross-examination of Mr Carpenter to [transcript 441-242] that upon the assumption that there was no later special agreement between the parties which varied the original gearing ratio formula, Pioneer's gearing ratio for the financial year ended 30 June 1998 was correctly calculated as 3.07:1. which exceeded the required level of 1.8:1. Pioneer Park's construction of the clause 434 Pioneer Park's construction of the ratio involves the following differences from ANZ: i. In calculating total liabilities, Pioneer Park excludes : (a) liabilities otherwise secured by third party property; (b) liabilities otherwise owed to directors or related entities; and ii. In calculating shareholder funds, Pioneer Park increases equity by the amount of any loans from directors, whether or not they are subordinated to other liabilities. How the matter stands 435 The parties agree that if all of Pioneer Park's contentions are correct, the actual ratio was 1.68:1 which was in accordance with the contract. 436 If, however, Pioneer Park is wrong in its contentions, Pioneer Park was in breach of the gearing ratio covenant. Parameters of the evidence given 437 Mr Carpenter had either himself prepared or arranged for someone else to prepare a document ["the aide memoir"] [11/291A] for the purpose of the litigation in order to set out the Group's contentions under the alleged variation to the gearing ratio fixed in the original letter. 438 His affidavit evidence had been that in so far as areas in the aide memoir differed from the terms of the original gearing ratio, these were matters which were agreed between Mr Staples and Mr Nielson. 439 However Mr Carpenter had himself not been involved in the ratio discussions [transcript 243.50]. His evidence had been that he was told something by either Mr Staples or Mr Nielson, more likely Mr Staples, to the effect that the gearing ratio matter had been agreed with ANZ, including in writing [transcript 244.22]. The evidence given by Mr Staples 440 Mr Staples had deposed that: i. On or about 31 October 1996 he sent a letter to Mr Neilson with a schedule. The letter also enclosed draft accounts of Pioneer. ii. Mr Neilson called him and said words to the effect "I've received your package. Your calculation of the gearing ratio seems OK. I will check it with my finance people. I'll get back to you." iii. He subsequently had contact with Mr Neilson within 1 to 2 weeks. Mr Neilson said "I have spoken to my finance people and the revised method of calculating the gearing ratio are OK." iv. Prior to sending the letter and enclosures referred to above, Mr Staples had discussed the matter with Neilson. The effect of these discussions was as follows: Mr Staples: "Domino has significant contracts with the Australian Army. The Company is going to have a lot of stock on hand and cash on deposit from the Army for payments made in advance of delivery of the Merlo machines. Mr Carpenter has already provided you with real property security to cover the additional facility to finance these contracts. The ANZ formula applied by the ANZ to calculate the gearing ratio won't work in these circumstances. We need to exclude the liabilities relating to the Army contract when calculating the external debt ratio because the advance payments from the Army are shown as a liability. The Company has not yet delivered the machines, and the liability is substantially offset by cash on deposit from the Army advance payments. Are you agreeable to that?" Neilson said: "I'll have to check on this and come back to you." 441 To the extent that version of the conversation included the sentence "Mr Cliff Carpenter has already provided you with real property security to cover the additional facility to finance these contracts", that was not taken up in Mr Carpenter's explanation of the proposed variation in his 31 October 1996 letter [7/57]. Mr Staples confirmed that the only matters he discussed with Neilson were those recorded in that letter [transcript 536]. 442 In paragraph 16 of Mr Staples affidavit he had referred to a document at Tab 8. The paragraph was rejected and leave was given to lead oral evidence on the topic. He gave evidence that in 1997 he created a new Excel file and inserted the 1995 and 1996 numbers and then included the 1997 numbers (transcript 515). He then: i. gave evidence that he believed that he calculated an external debt ratio for June 1998 using the same electronic file and he presumed Tab 8 had come from it (transcript 516). ii. gave evidence that he added all of the data in the column headed June 1998 and the horizontal additions in relation to security for the Dural property and the shareholder loans being treated as quasi capital (transcript 524). iii. identified the Tab 8 document as a reproduction of this information that he created at around the time he completed the June 1998 accounts, being when he issued the audited accounts and audited opinion. iii. gave evidence that he issued the 1998 accounts to Mr Carpenter in late September 1998, but could not recollect doing anything with the gearing ratio document (transcript 528). iv. gave evidence that he had discussions with Mr Carpenter before he completed the 1998 gearing ratio document (transcript 529). v. could not give evidence in any satisfactory form as to those discussions, other than that it was Mr Carpenter as the moving party to make the further adjustments to the gearing ratio (transcript 530). 443 I accept as correct ANZ's submission that there is considerable doubt about this evidence for the following reasons: i. Mr Staples could not produce any document from the 1998 period to record that he had in fact created a document in the form of Tab 8 at that time. ii. there was no corroboration from Mr Carpenter that his discussions with Mr Staples about the 2 additional variations to the gearing ratio occurred at the time. [While this is what appeared on the face of Mr Carpenter's 14 November 2005 affidavit at [61], Mr Carpenter admitted that he was referring to conversations with Staples recently in the course of preparation for the case (transcript 348)]. The ultimate approach does not require resolution of these doubts 444 Ultimately it is simply unnecessary to resolve these doubts about this part of Mr Staples' evidence. This is because what was clearly established through the cross-examination, was that Mr Staples had had no discussion with Mr Neilson, or any other Bank officer, at any time proposing or agreeing to additional or different variations to those recorded in the 1996 and 1997 letters which remained relevant as at 1998; and that whatever conversations he had had with Mr Carpenter about additional variations, he did not pass on to the Bank [transcript 536]. Finding 445 For those reasons the finding is that Pioneer was in breach as at 30 June 1998 of the gearing ratio covenant. Was the breach remediable? 446 The next question which arises is whether or not the breach was remediable. 447 Burger King Corporation [referred to above] and the cases therein cited, require the Court to adopt the approach of asking whether, at the date of breach, the breach was in fact capable of cure at a future date, not necessarily limited to a period of 5 days. 448 I accept that where the breach consists in a failure to comply with a time provision which is a once and for all breach, the breach is still capable of cure if it is possible to set things right for the future, even though they have not been right for some past period. 449 Applying those tests to the breach of the gearing ratio covenant, the findings are as follows: i. the breach as at 30 June 1998 was very substantial both in its size and effect; ii. based on the unsigned 30 June 1998 accounts [11/281] and the evidence in the case, there was no basis upon which the company could have rearranged its balance sheet within any reasonable timeframe in order to procure compliance with the covenant. [the company had no ability to reduce its borrowings any faster than it was. It would have needed an increase in equity of in excess of $1.7 million to achieve compliance with the covenant]; iii. even after the company reduced its debt after 30 June 1998 it remained in substantial breach on the ANZ's construction [which is presently upheld] as at December 1998 and May 1999: (transcript 319 and 353 respectively); iv. it is true that there was no evidence expressly led that the Hendersons or any other person would have put in equity either at all or of the necessary dimensions, in order to cure the covenants. 450 In the result, applying the language of Samuels JA in Tricontinental Corporation Ltd, when one focuses upon the effect of the default in the given circumstances rather than merely the historical fact of its occurrence, on the balance of probabilities, if Domino Mining had been given an opportunity to remedy this breach, it was not possible that it could so arrange its affairs as to enable compliance with the ratio. 451 Indeed it is fair to say that on Mr Carpenter's case, he took every step available to him to pay down debt and improve the balance sheet of Domino Mining between June 1998 and May 1999, yet at all times the covenant was grossly breached. 452 The Group submitted that ANZ had waived the requirement as to the gearing ratio. The submission was that: i. the evidence established that ANZ was prepared to waive the requirement as to the gearing ratio in relation to what were not truly external liabilities; ii. the failure to achieve the gearing ratio required by the letter of 8 January 1996 [by 30 June 1997] was not the subject of any complaint or protest by ANZ and was not recorded as a default until Mr Soper's diary note of 11 December 1998, after the determination of the exit strategy. 453 These submissions are not of substance. There was no written notice under the General Conditions clause 16 waiving the obligation to comply with the gearing ratio condition at all, whether in relation to the external liabilities or liabilities which were arguably external liabilities or any other matter. The proposition that the gearing ratio issue was not recorded as a default until the diary note of 11 December 1998 appears in some fashion to be connected by the Groups submission, with the determination of the exit strategy. The matter of the decision to seek to exit the relationship is elsewhere dealt with in these reasons. 454 In any event it is well established that waiver of a contractual right requires knowledge. The failure to provide any signed accounts at any time after 20 November 1998 is the subject of findings below. 455 The proposition that ANZ waived the Group's obligation to comply with the gearing ratio condition must fail in the face of the Group's failure to provide any signed accounts at any time after 20 November 1998. Indeed none of the conduct of ANZ in relation to the periods of time during which it extended time to the Group to refinance is consistent with any such waiver. To the contrary, ANZ had made very plain that it was complying with the requests so as to permit refinancing to be completed, in the absence of which the facilities would be called up. 456 The finding is that the whole of the communications between the parties during the period following 20 November 1998 was one in which it was absolutely clear to the Group that to the contrary of ANZ waiving any of its contractual rights, it was doing no more and no less than permitting the Group to carry out its best endeavours to achieve a refinancing, but that the whole of ANZ's contractual rights would be availed of in the event that the refinancing was unsuccessful. The evidence is consistent with this finding. To the extent that the finding involves the drawing of an inference from the evidence, that inference is inescapable. 457 In any event, the type of default meant that it could not be 'spent'. 458 In the result the breach of the gearing ratio has been established. 459 The breach was irremediable. This constituted an event of default. The default continued up to 9 June 1999. ANZ at no time conducted itself so as to waive its entitlement to rely upon the event of default. As the judgment has already made clear, it was not necessary for ANZ to notify the precise grounds of the default. The alleged failure to provide signed and audited accounts 460 Mr Carpenter exhibited a degree of confusion as to the date when, on his evidence, he delivered a signed copy of the audited accounts in a sealed envelope addressed to Mr Harvey leaving the same the ANZ bank: (a) [at transcript 177.45] his evidence was that by about 5 or 6 September a signed copy of the accounts was provided to the bank; (b) later [at transcript 194] his evidence was that a copy of the unsigned accounts had been handed over on 29 August 1998 and a copy of the signed accounts handed over on 30 August 1998; (c) later [at transcript 195] he conceded being confused as between August and September and gave evidence that he could not recall whether it was 29 August or 29 September when a copy of the signed accounts had been left for the Bank; (d) the matter was left by the cross examiner in dealing with the state of Mr Carpenter's evidence as being that the signed accounts were handed over either on 30 August or on 30 September [on whichever basis following the signing one or two days earlier by the directors of the accounts and by the auditors of the accounts]. 461 Mr Carpenter was challenged under cross-examination was a number of contemporaneous documents suggesting: (a) that the board of Domino Mining had not met between 14 August and 27 November 1998; (b) that the first occasion on which the board considered as a board the accounts for the year ended 1998 was 27 November 1998. 462 It seems clear from his own evidence that there was a real degree of slackness in terms of preparation of minutes and the filling in of dates purporting to record minutes of meetings: transcript 202.5. He sought to distinguish between 'structured formal meetings' where accounts were presented and what he described as unstructured meetings [transcript 198.11]. 463 He accepted that there was no record in the unsigned set of directors minutes for 27 November 1998 of the board having met at any time between 14 August and 27 November, that is to say in a structured sense [transcript 199.20]. 464 He vigorously denied the proposition that as at the 27 November 1998 neither the directors nor the auditors had signed the accounts. 465 The contemporaneous documents put to Mr Carpenter in relation to this topic were: i. the letter of 16 September 1990 in which the target date for the production of audited accounts for Mr Carpenter's holding company, Retreat, was 31 October 1998; ii. a note by Mr Kilcran , assistant manager to Mr Harvey, of a meeting between Mr Harvey and Mr Carpenter of 2 October 1998 in which the following appears: "[Mr Carpenter] has acknowledged matters raised and whilst not in full agreement with same, advised he would discuss, negotiate issues further when audited financials are to hand." iii. handwritten work papers prepared for the purposes of preparation of the 30 June 1998 Domino Mining Accounts: [These materials admitted into evidence as exhibit D2 and bearing a note indicating that they have been prepared and dated 6 October 1998] clearly record that Mr Carpenter had confirmed a number of matters necessary for clarification by way of preparatory works necessary in order to finalise the accounts for the year ended 30 June. The detail of these matters is not necessary to be set out in the judgment that at least included: (a) the warranty provision for the year to be adequately set out as $50,000 [which figure accords with the figure to be found in the actual accounts] ; (b) the decision that the AMP shares would be referred to in the accounts at a cost price of $1.431 million and evaluation being placed on the trade marks at $1.00 [which figures again accord with those to be found in the actual accounts] (c) the position that a provision be made of $744,859 in diminution in value of the AMP shares [which provision accords with that to be found in the actual accounts] 466 Mr Carpenter was also challenged with the document to be found in PX volume 12 at tab 365 recording that on 28 October 1998 he had told Mr Harvey that he hoped to have audited consolidated financials to hand early the following week and with a document at tab 371 recording that on 2 November he had said to Mr Harvey that he did not yet have the audited consolidated financials but hoped to have them to discuss at a meeting on 10 November. He denied the proposition put to him. 467 He was also shown tab 378, a contemporaneous document, suggesting that on 9 November he had said to Mr Harvey that he still did not have the audited consolidated financials because the auditors were waiting for a particular professional valuation. He denied this proposition. Evidence given by Mr Staples 468 Mr Staples was the external accountant for Pioneer Park from the time Retreat purchased the Company in or about June 1990 until the company had voluntary administrators appointed in May 1999. 469 Part of the function that he discharged for the Company was to liaise with ANZ in relation to a gearing ratio which the Company had to comply with as part of its conditions of its facilities with the ANZ. He also liaised with ANZ from time to time on matters relating to the Company's facilities and banking arrangements. 470 Mr Staples gave evidence [which is accepted as reliable] that he recalled Mr Carpenter pressurising him to get the Domino accounts finished early [transcript 541.27]. 471 A deal of the problem arose because he had not been able to produce a copy of the 1998 accounts of Domino Mining signed by himself or the directors, the difficulties having apparently arisen when a different mode of storing old files had been adopted. 472 His evidence was that Mr Carpenter had asked for the accounts to be prepared early and that he had made an effort to prepare them earlier than the work plan review [of 30 June 1998] had planned [transcript 541.36]. However what he had provided were described by him as 'preliminary drafts' based on preliminary information which he had had and some limited fieldwork. His evidence was that there would have been other fieldwork carried out to complete the accounts and to issue the opinion subsequent to having provided those draft accounts to Mr Carpenter [transcript 551.7]. 473 His evidence was that that he believed that the remaining fieldwork had extended into October 1998. He accepted that it followed from his evidence that if he provided Mr Carpenter with a second set of accounts, including all the necessary fieldwork for the purpose of the audit process, that would have occurred sometime in October or November [transcript 551]. 474 At transcript 552 and following he was closely cross-examined on a number of specific instances of the further fieldwork, by reference to working papers kept by his firm in relation to the 1998 audit. It is unnecessary to chronicle all of the specifics but they included changes to the AMP share write-down which accounted for $800,000 of a particular adjustment. His evidence for example included: Q. Would you agree that the journal paper I have just taken you to indicates that that change to the accounts was made somewhere after 13 October 1998 but on or before 22 October 1998? A. Yes. Q. And any form of accounts that you have provided Mr Carpenter in September by way of preliminary draft accounts would not have included the write-down on the AMP shares? A. Yes. …. Q. And apart from the AMP shares which may be the largest difference, there would have been other differences between those documents, for instance the operating loss on the 13 October document is $500,000, whereas by the time of the next document it is $530,000? A. Yes. Q. And would you agree there were also other changes in the assets side of the balance sheet? A. A lot of the changes in the asset side of the balance sheet would be reclassifications which are done for disclosure purposes in the accounts. …. Between assets and liabilities. Q. Yes, and would you agree based on that analysis that the revised form of accounts following your field work, if you provided that to Mr Carpenter, it must have happened some time after 22 October 1998? A. Yes. [Transcript 557] 475 Whilst it is fair to comment that he had [on the previous day] when commencing to give evidence: i. referred to the accounts having been prepared using electronic accounting software; ii. been shown various audit working papers dealing with: a) the amount of the adequate warranty provision to be included in the 30 June accounts, b) the cost price of the AMP shares to be included as an investment in those accounts, c) the stock write-down being carried out for the 30 June period, d) the work paper recording the journal entry on 22 October for the 30 June accounts showing the diminution in the AMP investment, e) the several adjustments including to the tax expense which was to appear in the 30 June 1998 accounts. iii. referred to the fact that the persons who had been working on the audit would likely have put the journal entries straight in to the software to produce the accounts and would likely have subsequently written up the journal entries for the altered audited file iv. at one stage in giving evidence in chief stated that his best recollection was that he had completed the 1998 accounts in late September 1998 [transcript 524.15]. these matters were qualified by him in the fashion which he explained on the following day [transcript 559-560]. 476 The answers given on the previous afternoon did include evidence that the accounts had been substantially completed and available in September, but did not include evidence that he had actually physically signed the accounts at that time when they were issued. His evidence had been that he would not have signed the accounts until the directors had signed them. 477 The evidence given by Mr Staples on the matter is accepted as reliable. The cross-examination on the previous afternoon had proceeded apace and I do not see that it can be said that Mr Staples evidence given on the following day, was so inconsistent with that given on the previous day, as to render his evidence unreliable. The ANZ diary note dated 2 October 1998 478 This is a significant diary note of a meeting attended by Mr Carpenter, Ms Stewart (present for part of the meeting only), Mr David James (present for part of the meeting only), Mr Harvey and Mr Kilcran [who was Mr Harvey's assistant manager]. 479 The diary note records requests by Mr Carpenter for further facilities and statements by Mr Harvey as to the limited basis on which the bank would be willing to provide long-term facilities to Pioneer. The note records that Mr Carpenter sought to have existing excesses on the $500,000 overdraft taken up in a new $400,000 temporary overdraft which would reduce by $100,000 shortly and be fully cleared by the end of November. He had also sought A$600,000 FDA facility to be guaranteed by EFIC to fund contracts with each Chinese clients. The note includes the following: " Serviceability Although cashflow forecast indicates that Bank facilities can be serviced in the short term, Mr Carpenter was advised that the Bank's willingness to provide long term facilities was dependent upon confirmation that the company could repay principal and interest over a term acceptable to the Bank . Given that Domino Mining recorded a trading loss for the 12 months to 30.06.1998, as well as current account excesses and increased funding requests, the Bank was concerned with the long term viability of the company. The Group is not fully cross-collateralised and there exists several companies for which the Bank does not receive any financial data. Mr Carpenter, being a CPA, has established tax effective financial and legal structures and although he indicated that the total Group is probably profitable and cash positive overall, this can not be confirmed on currently available information. Full cross-collateralisation of Group companies and provision of consolidated audited financial statements for same is recognised as an essential requirement for ongoing Bank support in the medium to long term. Although reluctant to commit to same at this stage Mr Carpenter has agreed to address this issue as part of annual review discussions to be held mid-October . He is aware that we are looking to confirm the ongoing viability of the total Group. ie Domino is not in a position to support other entities should they be making losses or alternatively can other group entities support Domino. [emphasis added] 480 The note includes the following summary: Summary Interview covered two separate matters: (i) Short term requirements and the capacity to reduce OD to within Bank limit $500K. (ii) Initial discussions regarding issues to be addressed at annual review to enable ongoing facilities to be put in place. Will now submit brief CM advises seeking approval for facilities covering short term requirements. Cliff is aware that we will not continue facilities on the existing basis in view of losses incurred by Domino . He has acknowledged matters raised and whilst not in full agreement with same advised that he will discuss/negotiate issues further when audited financials are to hand and is confident that we will be able to put in place arrangements acceptable to both himself and the Bank. Evidence given by Kilcran 481 Mr Kilcran gave evidence and was cross-examined. In his statement he gave evidence that the diary note recorded the issues discussed at the meeting. Under cross-examination it became reasonably plain that the whole of his now recollection was based upon the diary note. The cross examiner sought to establish that the diary note included some materials which were obtained from the banks file and or from conversations with particular persons at the bank. This was accepted by Mr Kilcran. Notwithstanding that acceptance, the note does stand [at least in parts], as a record of the essence of what was discussed at the meeting, that having been its purpose. Evidence given by Mr Harvey 482 Mr Harvey also gave evidence in relation to the meeting. His recollection was likewise very much based upon what the diary note documented. His evidence was that the substance of what he had said and the substance of what Mr Carpenter had said, was documented in the diary note. However he had given evidence in his statement at paragraph 18-20 as follows: 18 There was further discussion in which the topic of whether this could be confirmed on the basis of currently available information was raised, the result of which Mr Carpenter either said or agreed (I do not recall which) that the profitability and overall cash flow position could not be established to the Bank's satisfaction on the basis of the information then available. 19 I then said words to the effect: 'Any ongoing Bank support for Domino [Pioneer] would be dependant on the provision of consolidated audited financial statements for the group showing a capacity to both service interest and repay the facilities over a term acceptable to the Bank. It will also require full cross-collateralisation of group companies to secure the facilities. We are looking to confirm the on-going viability of the total group. Domino is not in a position to support other entitles if they are loss-making. The question is whether other group entitles can support Domino to ensure the facilities the Bank has provided can be repaid. 20 I understood from Mr Carpenter's response that he understood what I had said about the Bank's unwillingness to continue the facilities unless the viability of the group and its ongoing capacity to service them and repay them over an acceptable time was established to the Bank's satisfaction, supported by audited consolidated financial statements . [emphasis added] 483 It was put to Mr Harvey that his evidence in paragraph 19 [to having stated that ongoing ANZ support for Domino would be dependant on the provision of consolidated audited financial statements for the group showing a capacity to both service interest and repay the facilities over a term acceptable to the Bank] was in fact said on a later occasion. He denied the suggestion although accepting that it may well have been repeated on a later occasion. That evidence is accepted as reliable. Finding 484 Ultimately the position which emerges from all of the ANZ diary notes is simply that there is no evidence of signed accounts being delivered at any time after 20 November 1998. No such accounts have been produced by ANZ. Nor has the Group been able to produce a signed version of the account from its own records, the company records retained by Mr Thomas or the records of Mr Staples. 485 The only evidence of a board minute of a directors meeting to approve the accounts is of a supposed meeting of no identified date, place or time (Exhibit D1). However Mr Carpenter agreed there were no formal board minutes after 27 November 1998 [transcript 205]. As ANZ has contended, it not established that any such meeting occurred or that the accounts were ever signed by the directors or the auditor. 486 It will be recalled that the covenant required accounts to be signed and delivered by 31 October 1998. Neither occurred. Thereafter, if accounts had been signed this would have been after 27 November 1998. Yet there was no evidence led from the Group that accounts would have been signed then had ANZ given notice. That evidence could have been called. In the context of this litigation the failure of the Group took all that evidence seems surprising indeed. 487 Notwithstanding this state of affairs I am not persuaded that the breach was incapable of remedy. In this regard it should be recalled that the current state of the authorities as reflected in the decision of the Court of Appeal in Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187 identifies the operative principles as follows: [119] ...Is a breach, which is a once and for all breach, for example, failure to comply with a time provision, capable of being cured? [120] In L Schuler AG v Wickman Machine Tool Sales Ltd , Lord Reid, in construing a notice of termination clause in an agreement said at 249-250: "It appears to me that cl 11(a)(i) is intended to apply to all material breaches of the agreement which are capable of being remedied. The question then is what is meant in this context by the word "remedy" . It could mean obviate or nullify the effect of a breach so that any damage already done is in some way made good. Or it could mean cure so that matters are put right for the future. I think that the latter is the more natural meaning . The word is commonly used in connection with diseases or ailments and they would normally be said to be remedied if they were cured although no cure can remove the past effect or result of the disease before the cure took place. And in general it can only be in a rare case that any remedy of something that has gone wrong in the performance of a continuing positive obligation will, in addition to putting it right for the future, remove or nullify damage already incurred before the remedy was applied. To restrict the meaning of remedy to cases where all damage past and future can be put right would leave hardly any scope at all for this clause. On the other hand, there are cases where it would seem a misuse of language to say that a breach can be remedied." (Emphasis added) [121] The statement of Sugerman J in Batson v de Carvalho , at 427, is to the same effect: "To 'remedy' a breach is not to perform the impossible task of wiping it out - of producing the same condition of affairs as if the breach had never occurred. It is to set things right for the future, and that may be done even though they have for some period not been right, and even though that may have caused some damage to the lessor. ... A breach may be remedied ... even though the time for doing the thing under the covenant may have passed ..." [122] In Tricontinental Corp v HDFI , Samuels JA said at 702: "It is arguable that the 'Event of Default' in this case was one that could not be rectified because the precise time was fixed on 30 November 1987, that time had passed and could therefore not be retrieved: cf the remarks of Lord Wilberforce in Bunge Corporation, New York v Tradax Export SA, Panama [1981] 1 WLR 711 at 715; [1981] 2 All ER 513 at 541, in relation to breaches of time clauses; but see Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 562. If that is the case, then there would be no need to go beyond cl2.2.1(a). In his judgment Waddell A-JA has set out a passage from the judgment of Sugerman J in Batson v De Carvalho (1948) 48 SR (NSW) 417 at 427, concerning the construction of the words 'capable of remedy' in s129(1)(b) of the Conveyancing Act 1919 . I agree with Waddell A-JA that an analogous approach should be taken to the construction of cl2.2.1. If that is that case, then one fixes upon the effect of the default in the given circumstances rather than upon the historical fact of its occurrence. The principal effect of Selkis' default is that Tricontinental did not receive its money. If Selkis were given a (sic) opportunity to remedy this, it is possible that it could so arrange its affairs as to enable it to pay up. Hence it might be said that in this sense the event of default was capable of remedy." (emphasis added) [123] Waddell AJA said at 722-723: It is said that failure to pay on a particular date is not a default which is capable of rectification because the date has passed and nothing can be done to re-establish what should have been done. On this view, only a continuing default could be regarded as capable of rectification. However, in my opinion, the default in failing to pay the bills due on 30 November was capable of rectification by paying the money due, together with additional interest as provided by the facility agreement, at a future date. I adopt the reasoning of Sugerman J in Batson v De Carvalho ... in relation to whether a default under a lease can be remedied." 488 Clause 10(1)(a) was therefore not attracted. The breach was capable of being remedied. Insolvency 489 The question of whether Domino Mining is shown to have been insolvent at any and if so what material date was strongly litigated. Not only were the facts in issue but extensive time was taken with the experts in terms of the principles to be applied in determining the issue. As counsel for the Group correctly submitted [final submissions in reply (at 58)], the essential question is one of judgment upon a consideration of all material factors. The ultimate question is one of fact to be ascertained from a consideration of the company's financial position taken as a whole: Sandell v Porter (1966) 115 CLR 666; Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213 per Palmer J. Naturally each case will require examination against a range of parameters, often being unique to the company in focus. 490 As Southern Cross Interiors makes plain: i. Commercial realities will be relevant to the company's financial position as a whole in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable. ii. In assessing whether a company's position as a whole reveals surmountable temporary illiquidity or insurmountable endemic illiquidity resulting in insolvency, it is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency. Proper approach to consideration of insolvency 491 For present purposes the summary of the proper approach given by Mr Hunter [the Group's insolvency expert] in his report of 13 July 2006 may generally be accepted as stating the manner in which the principles should be applied. 492 That summary was as follows: i. S.95A of the Corporations Law ("the Act") defined solvency and insolvency. S.95A stated: "(1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable. (2) A person who is not solvent is insolvent." ii. The test of insolvency prescribed in s. 95A (1) is no different in substance from that originally found in s. 95 of the Bankruptcy Act 1924 (Cth) and then in s. 122 (1) of the Bankruptcy Act 1996 (Cth). iii. S.95A(l) requires ascertainment of the company's existing debts, its debts within the near future, the date each will be due for payment, the company's present and expected cash resources and the date the cash will be received. iv. Whilst the test for solvency is primarily a cash flow test, it also requires a consideration of the company's financial condition at the relevant time in its entirety, including its business, assets, liabilities, facilities available and its ability to borrow funds and raise capital. Overall, the test of solvency is one of commercial reality. v. There are a number of factors or tests which require consideration when assessing the question of solvency, they include the working capital test and net asset test which are often referred to collectively as the balance sheet test. However…these tests are merely indicative and not determinative of the question of solvency. An additional test referred to as the quick asset or "acid test" may also be considered. …[T]he quick asset test is of limited value in that it fails to consider the business in its entirety. vi. The critical enquiry is the identification of the company's debts which are due and payable at the relevant time. It is then necessary to determine the realisable assets or sources of funds available to pay those debts. vii. It is necessary to review, consider and analyse all relevant financial and other material both at the relevant time and in the future to assess the solvency position of a company. Company's Balance Sheet viii. A consideration of a company's balance sheet at the relevant time is one factor to be taken into account in assessing solvency. The most obvious limitation of a balance sheet is that it represents a financial snapshot of a company at a particular date. The assessment of the company's solvency requires a wider consideration. ix. It is often accepted, as a rule of thumb, that a company will be regarded as insolvent if its current liabilities exceed its current assets. This statement, however, cannot be any more than a mere rule of thumb. A company may fail this test but still be able to demonstrate that it can pay all its debts as and when they become due and payable. x. Further, a deficiency of total assets to total liabilities is not conclusive as to insolvency. A company could have a deficiency of net assets yet, because of a very strong profit making business, be in a position to pay all its debts as and when they become due and payable. Even if a net asset deficiency exists, the company's reasonable cash flow projections may indicate that it could generate sufficient funds to be able to eliminate that deficiency before the long term debt becomes due and payable. The company would be solvent in those circumstances. Company's Assets xi. [Mr Hunter had expressed the opinion that all of the company's assets should be taken into account at the relevant time so as to determine what funds can be realised from those assets within a reasonable period of time to pay its debts when payable. It seems to me that it is appropriate to be cautious in relation to that proposition. Likely my concern is already dealt with by Mr Hunter's next paragraph [ie xii] In any event, to be quite clear I note that Mr Donnelly had expressed the view that: a) not all assets of a company should be taken into account when considering solvency b) for example, where assets which are essential to the continuation of a company's business are proposed to be sold, the proceeds of those assets should not be taken into account In my own view, Mr Donnelly's proposition is correct: Not all of the assets of the company should be taken into account when considering solvency of a going concern. It would seem illogical to take into account profits as part of a cash flow and at the same time to hypothesise that the assets necessary for the business to be conducted are to be sold. A qualification is of course where what is proposed is something short of realisation of the assets: for example charging them, in which case it would be appropriate to take into account all chargeable assets] xii. It is necessary to look not only at moneys that were immediately available but also at moneys that could have been procured by sale, mortgage or pledge of assets within a reasonable period. In this regard it is important to determine whether the company owns any substantial assets and what prospects exist of generating funds from the sale or mortgage of those assets. In addition, the impact resulting from the sale of such assets on future trading operations must be taken into consideration. xiii. Consideration needs to be given to whether assets have been properly classified as between current and non current assets in the company's Balance Sheet, especially if reliance is to be placed on the working capital or net asset tests in assessing solvency. Company's Liabilities xiv. All of the company's liabilities should be ascertained at the relevant time so as to determine which are debts that are or will become due and payable within the near future and those which are of a long term nature or are secured debts. xv. Consideration needs to be given to whether liabilities have been properly classified as between current and non current liabilities in the company's Balance Sheet, especially if reliance is to be placed on the working capital or net asset tests in assessing solvency. Company's Debts Due and Payable xvi. All of the company's debts at the relevant time must be considered so as to determine when those debts are due and payable. When considering when a debt is due and payable, it needs to be borne in mind that a company may have a contractual obligation as to payment of the debt at a particular time. That time due may be varied by agreement or by course of conduct between the parties. Company's Business xvii. The trading performance of a company at the relevant time requires consideration so as to determine if current and expected profits and cash flow from the business can be used to satisfy debts. xviii. In addition to cash flow generated from trading activities, the introduction of further capital or loans can provide the cash flow needed to satisfy debts. Cash Flow xix. A consideration of a company's immediate and future cash flow is of major relevance when assessing solvency. It is necessary to consider cash flow not only from trading operations but also from other sources such as bankers and stakeholders. A company's cash flow projections provide valuable information as to its ability to meet its debts as and when they fall due. Alternative Funding xx. S. 95A(1) does not state that the company's debts must be paid from its own funds. They can be paid from other sources. It is thus important to ascertain whether the company has the ability to access money from other people or sources and to raise funds from its bankers and stakeholders to meet any shortfall in readily realizable assets. xxi. If a company were to borrow further funds (other than the introduction of additional capital), such borrowings would create an additional debt, that is to say, one debt replacing another. Any such borrowings may need to be long term in nature. In addition, the prospects of obtaining such loans and the ability to service them out of existing and future cash flow also need to be considered. Other Matters xxii. There are also other matters which may need to be considered in assessing solvency. These include: · the dishonouring of cheques by the company; · suppliers delivering goods to the company only on COD basis; · the company issuing post dated or rounded sum cheques; · the company making special arrangements with creditors; · the company unable to produce accurate and timely financial information; · the company has unpaid group tax, payroll tax, workers compensation · premiums and superannuation contributions; · the company has poor relationship with its banks or financiers; · the company has received solicitors' letters, demands and summonses. 493 Generally I did not understand the evidence given by Mr Donnelly as to the proper approach to be taken to the question as differing from that set out above and given by Mr Hunter. The finding 494 For the reasons which follow, the finding is that the company was insolvent by at least the commencement of June 1999. It is unnecessary to decide at which prior date it became insolvent. In this regard it will be recalled that the finding already set out in the above reasons has been that by the time ANZ's demand expired and an administrator was subsequently appointed on 10 June, the position was that: i. Pioneer Park had no orders on its books for machines; ii. Pioneer Park was no longer manufacturing any machines; iii. Domino Hire was, through sub-contractors, finishing the manufacture of 4 machines; iv. parts and service work was being done by the new entity, Domino Mining Parts & Service Pty Ltd. Overview of indicators of insolvency 495 The court accepts that no individual insolvency indicator is in itself sufficient to establish insolvency and that it is therefore necessary to overlay various insolvency indicators to determine the so-called 'point of no return'. Nevertheless whilst keeping that consideration steadfastly in mind, it does seem to be convenient on an overview basis to very shortly state at least the principal indicators which underpin the Court's decision that the company was insolvent by at least the commencement of June 1999. Those indicators are: i. an endemic deficiency in working capital deficiency [treated with under the balance sheet test]; ii. a negative net asset position [also treated with under the balance sheet test]; iii. a proven inability to meet creditors on time; iv. unavailability/absence of other cash resources [vide inability to refinance outside of the Hendersons; inability to refinance through the Hendersons] [treated with under the cashflow test]. 496 It is strictly unnecessary to go further and to rely upon the so-called 'suspicious transactions'. Having said that, it is certainly true that Mr Donnelly took these matters into account in his report and that the reasons include findings on these matters. 497 The state of the industry at the time also serves to provide a context of relevance. Turning to the detail 498 The manner in which the insolvency issue was litigated concerned an extraordinarily close analysis of almost every integer of arguable relevance. 499 There were many areas in respect of which the central experts called by the parties, had been given disparate assumptions to rely upon and where the actual facts were in issue. Hence each cross examiner both put a number of assumptions to the witnesses being cross-examined and also sought to disassemble the report provided by the witnesses by a close testing of the foundational material relied upon in reaching the opinions expressed in the reports. Accounts reconstructed by Mr Carpenter 500 One only example of the difficulties involved, concerned management accounts [annexure F to Mr Hunter's report of 13 July 2006] relied upon by him as accurate in forming his opinion that the company was solvent as at 31 May 1999. He assumed that these were the accounts in existence at the end of May 1999 and no one had informed him that the accounts were a reconstruction produced by Mr Carpenter for the purpose of the proceedings in recent times. It will be recalled that Mr Carpenter had been an experienced chartered accountant and qualified auditor admitted to the 'B' list of liquidators and had acted as receiver or liquidator of approximately 30 companies. Accounts reconstructed by Mr Donnelly 501 Mr Donnelly, [called as the ANZ's insolvency expert], approached the matter by reconstructing the profit and loss account for the company for July 1998 – May 1999 from its general ledger (Tab 61 of Mr Donnelly). Generally his evidence is accepted as soundly based and as having disclosed a clear transparency of reasoning processes. What the document shows is that not only were there losses to December 1998 of $359,000 as reported to ANZ in January 1999, but that the month of December itself, and each succeeding month up until May 1999, also resulted in losses, and that in particular, the losses for the period from January to May 1999 were in the order of $670,000. The balance sheet for the company at 31 May 1999 records the deterioration of shareholders funds of $670,000 since 31 December 1998. Mr Donnelly's conclusion 502 Mr Donnelly had in fact concluded that Pioneer Park was insolvent from at least 9 February 1999. Integers examined 503 Outside of the close analysis of accounting issues [including matters such as the true value of the stock at material times, the time which it would take to realise that stock, the true value of the land which was owned at material times and weighing into the equation whether or not and if so when and in what amounts, ANZ was entitled to pursue its debts], it was necessary for the experts to treat with the difficult topic of whether or not they were obliged take into account the assumption [pressed by the Group, but denied by ANZ], that one or other of the Hendersons or their companies would always have been prepared to provide sufficient funds to pay out all creditors who were pressing and to do so immediately upon request. Whether or not that assumption would prove correct was always a matter for the Court's decision. 504 It is unnecessary to set out all of the evidence before the Court. Evidence given by Mr Donovan 505 The evidence not only included the evidence of experts called in relation to the coal mining industry [Mr Domsalla called for the Group and Mr Barnett called for ANZ], but also included evidence given by Mr Peter Donovan who had prior to August 1999 been employed by Domino Mining. 506 By the late 1970s Mr Donovan had begun to gain experience in the repair, sale and field promotion of mining equipment and was able to give evidence of having had approximately 35 years experience in the mining industry. 507 His role at Pioneer as at June 1999 was that of Sales and Service Manager and he had occupied that position since approximately 1995. He had principal responsibility for the sale of Pioneer's machinery and technical service capabilities, assisting with the commissioning of machinery and training purchasers' staff. He reported to Mr Carpenter and Mr David James [the Operations Manager] on Pioneer's sales. He also took part in Pioneer's management team meetings. 508 As part of his role he would often travel interstate and overseas to attract new work for Pioneer and to build on existing client relationships. Between 1995 and 1999 he made approximately 15 trips to China where his role was to market and progress tenders and to assist with the installation of machinery and the conduct of training. He had very recently returned from a business trip to China when the appointment of administrators to Pioneer occurred. 509 In his statement of 15 June 2006 [noting that a number of the documents referred to in the statement, went into evidence as business records or as records of minutes which he had attended or as recollections of his subjective state of mind as to particular matters at the time] he gave evidence that: i. to his recollection between 1995 and June 1999 Pioneer's workforce was reduced from about 95 employees to about 17; ii. from early 1997 a number of reports were commissioned, a careful reading of which show that they included issues and concerns going to cash flow, shrinking local market, lack of funds, outdated work practices and equipment; iii. from late 1997 and continuing, minutes of management team meetings [and like meetings of one type or another] chronicle the problems which Pioneer was facing in terms of the diminishing sales of spare parts, Pioneer not having had available on hand, sufficient spare parts to be able to respond quickly to customer orders for spare parts, not having the cash to purchase spare parts readily, some suppliers of spare parts having Pioneer on a 'stop supply' so that it had to pay 'cash on delivery' to purchase spare parts [which created further delays in the supply of spare parts because cheques often had to be drawn before a spare parts order could be made with some suppliers]; iv. his close examination of the affidavit of Mr Domsalla in terms of his own experience, led to his giving the following evidence: In his own long personal experience as an employee of Pioneer and its predecessors since 1972 and as its Sales and Service Manager throughout the late 1990's it was never a certainty that Pioneer would obtain non-warranty repair or overhaul work on its own machines. To the contrary, in his personal experience, particularly throughout the 1990's, the market for overhauls was very competitive and price sensitive and Pioneer had to fight to get any overhaul work on its machines. Pioneer did conduct field service work for customers but it also faced significant competition from mine workshops (who did their own repairs) and also from a number of small, independent diesel and mechanical workshops. For example, he knew from personal experience that during the 1990's at least the following organisations were direct competitors for Pioneer's overhaul and repair work and did this work on Pioneer's machines: · a company called Gateway Engineering Pty Limited; · a company called Narellan Diesel Service Pty Ltd; · a business called Hymec Mining and Engineering; · a business called Fitzsimmons Diesel; and · a business called Fleetbilt Driveshaft Services at Port Kembla did transmission overhauls and axle repairs. This competition and the decline in service work undertaken by Pioneer was one of the significant issues addressed by Turnaround Consulting. Its June 1997 report (Tab 7) at 7.3.5 'Service Work' recorded: "Our understanding of the history of Domino is that at one stage it operated a successful service operation out of Sydney to service the numerous Domino machines operating in NSW mines. Further, there were service fitters travelling to collieries gaining further service work. Since the shutdown of the Sydney service operation the extent of service activity has decreased dramatically to the extent where today other companies are servicing Domino machines." Back in the period 1997 – 1999, from regularly speaking with Pioneer's customers, he knew that Pioneer's competitors were charging lower hourly rates for repair and overhaul work than Pioneer. He believed that Pioneer's competitors could do this because, unlike Pioneer, they did not have engineering and sales costs which had to be supported. Many parts on Pioneer's machines were generic and could be easily obtained (Pioneer's parts suppliers also supplied its competitors). Even where parts were Pioneer-designed and made, Pioneer would often sell the parts separately to its competitors in any event. Also in his experience, competitors often re-engineered and manufactured Pioneer-made parts to get service and overhaul work. It was not difficult for competitors to do this cost-effectively where their hourly rates were much cheaper than Pioneer's rates. An example of how price competitive overhaul work was in the late 1990's, is the profitability of several overhauls undertaken by Pioneer in late 1997 and 1998, which were all completed at a loss. The gross profit analysis is taken from the 'monthly break ups' and 'statements of actual gross profit' behind Tab 36 and he had not attempted to independently verify their accuracy: Source S/O Description Cost $ Inv No. Sale $ (Loss) $ Oct 97 10127 Tahmoor Grader O/H 116,458.79 36797 99,192.88 (17,265.91) Nov 97 10624 W'cliff Mob O/H 107,129.89 37016 75,000.00 (32,129.89) Nov 97 11045 W'cliff Mob O/H 90,374.16 37015 75,000.00 (15,374.16) Mar 98 10123 Tower Mob #38 O/H 193,746.67 37785 192,477.75 (1,268.92) Apr 98 11300 Ulan Pet3 O/H 115,240.11 37887 99,695.57 (15,544.54) v. by late 1997, Pioneer's capacity to undertake repair work was already curtailed by a lack of employees; vi. as a consequence the workshop could do less repairs and these took longer to complete; vii. when combined with a lack of spare parts, production was impacted significantly; viii. by June 1999, Pioneer only had a total of 17 employees of which 10 worked in the workshop and the field service team. 510 He also gave evidence as follows: "After my return to Australia from China in early 1998 until June 1999, apart from the sale of a Pet 6 to Moonee Colliery in March 1998 (see Management Team minutes dated 17 March 1998 behind Tab 26) I was not able to sell any new Pioneer machines. I continued to market Pioneer's machines to collieries but there was little interest in purchasing them and no sales were made. By the end of November 1998 after the despatch of the two Myne Loaders to China, Pioneer had no external orders for mining equipment. All of the manufacturing production (as opposed to repair work) which was underway in Pioneer's workshop after that date was, to my knowledge, for internal orders, i.e. for Pioneer stock and with the objective of keeping the workshop staff occupied. The market for underground mining equipment continued to be depressed throughout 1999 and for some time until late 2003. I started work with P.J. Berriman in August 1999, initially as Production and Service Manager and then from 2003 as Sales Manager in relation to underground mining equipment similar to that manufactured by Pioneer. My experience of the industry and the market for underground mining equipment in the years after 1999 was that the market continued to be very tight during 2000, 2001, 2002 and for most of 2003. The market for mining equipment improved marginally towards the end of 2003, was better again in 2004 and was reasonable in 2005." 511 Suffice it to observe that the evidence given by Mr Donovan and the contemporaneous documents in evidence do paint a picture of Pioneer as having from at least 1997, experienced a significant decline in its prospects. Evidence of Mr Domsalla and Mr Barnett 512 The evidence of Mr Domsalla and the evidence of Mr Barnett treat with a number of subjects but part company when dealing with the particular cycles in the coalmining market: i. Mr Domsalla expressing the view, based upon his experience, that the coal mining industry had been cyclical subject to seven-year cycles and that in about 1998 and 1999, the coal industry had a downturn as a result of which the market for the sale and modification of coalmining equipment was poor but during which period there was a growing market for the sale of coalmining equipment to China which was expanding its coalmining industry; ii. Mr Barnett producing in his report an extraordinarily detailed overview dealing with many parameters of the New South Wales and Queensland coal mine numbers, production and employment, the Australian export coal market, the coal price slump since 1980, costs of production, the status of new underground mines in New South Wales and Queensland, returns on shareholders funds and other matters. His evidence included the following: "100 In my opinion the structural factors that have influenced the economics of the underground coal mining industry since 1995 have been: a. The continuing demise of the bord and pillar operations by longwall mines and by opencut mines; b. The fewer continuous miner units used in longwall mines as both continuous miner and longwall production capability has improved. c. The reduction in employment and cash costs combined with the increasing productivity of longwall mines; and d. The reduction in the capital investment required to build a new mine. 101. The NSW coal industry has had four periods of economic hardship since the early 1980's. The first and most severe was in 1988 when the prices of the three types of export coal fell to very low levels. NSW was more affected than Queensland as more mines in Queensland produce the highest priced hard coking coal. In 1987 and 1988 a total of 14 NSW mines closed, 14 underground and 2 opencut. In addition a number of mines were downsized to remain competitive. Mine employment fell by 2500. 102. By late 1989 prices had recovered to a reasonable level and hard and other coking coal prices continued to slowly rise but steam coal prices trended slowly down. In early 1994 other coking coal prices fell sharply to levels nearly as low as in 1988 while steam coal fell to a little below A$45 per tonne. A total of 20 mines shut during the 1991 to 1994 period. In 1991 to 1993 16 mines shut, mainly old mines from the South Coast, the Burragorang Valley and the Newcastle District. Between June 1992 and June 1995, 2200 NSW miners lost their jobs, of which 1950 were from underground mines. 103 Between September 1995 and 1998 hard coking coal and other coking coal prices rose but steam coal prices wandered down and up over a range of about A$5/tonne. From late 1998 prices started to drop sharply to levels below that reached in 1994. The low prices lasted until the end of 2000 before increasing steeply. NSW mine employment fell by nearly 4800 between June 1997 and June 2000, of which 3200 were from underground mines. Underground production fell be 6mt saleable. In 1998, 1999 and 2000 27 NSW mines shut, 16 underground and 11 opencut. The underground mines were mainly old mines while the opencuts, with one exception were small mines producing steam coal for the domestic market. 104 From about 1996 the NSW industry had embarked on a positive policy of lowering cash costs by closing high cost mines and improving mine productivity at the other mines, which generally involved reducing employment. Capital expenditure was also controlled more closely. 105 By early 2002 coal prices had risen to record levels and the industry earned a return on shareholders funds of 29.5 percent, the first time it had exceeded 10.5 percent in at least 12 years. However, by the end of 2003 steam coal and other coking coal prices were at record lows. The 2002 price peak was so short that there was no time for miners to respond with additional investment. There was no peak in mine closures corresponding to this serious drop in export prices. Instead 5 mines a year shut in 2001, 2003 and 2004 and six mines shut in 2002; a total of 15 underground mines shut. NSW underground production dropped about 4 mtpa between 2002-03 and 2003-04 and employment fell by 430. 106 Queensland underground operations decreased by 7.2mt but this was more to do with technical problems with two large longwalls than with coal prices; hard coking coal prices did not fall to the low levels experienced by steam coal and other coking coal. 107 From the end of 2004 export prices have soared to very high levels, especially for hard coking coal. Steam coal has been achieving prices of A$65 per tonne and over while other coking coal has been selling for around A$100 and more. The price of Hard coking coal has reached A$160 per tonne. Cash costs have risen due to supply shortages and increased cost of petroleum that affects diesel prices, but also the cost of explosives. Tyres for the very large off road trucks have been in very limited supply. Coal royalties have risen steeply as in both Queensland and NSW they are directly related to the sales price of the coal. However, the coal industries of NSW and Queensland have never before enjoyed such high profits." The evidence is determinative 513 Mr Garnsey, leading counsel for the Group, many times during the addresses and during the hearing, stressed the importance of the Court taking into account the extensive history of Pioneer and its general goodwill and good name, submitting that the Court should strain against making any precipitous finding to the effect that Pioneer had no future, simply because it was experiencing a downturn due to cyclical market forces. Those submissions have been carefully taken into account in the findings which are made in this judgment. However it has to be said that at the end of the day, the evidence clearly established that applying conventional principles, Pioneer's deteriorating financial position justifies the finding that at the least by the commencement of June 1999, the company was insolvent and that it likely was insolvent for some time prior to that point in time. 514 As previously observed the question is simply one of fact and the protestations of blue sky in terms of Pioneer's continued prospects as at that date have to be dismissed on the evidence. Findings 515 The Court's findings on a number of parameters of significance [conveniently called "the MFI D19 findings"] are as follows and are in each case taken from MFI D 19 [and supported by the footnotes to that document]: Losses: i. Domino Mining Equipment had consistently made losses between July 1997 and May 1999. Total losses over the period were in excess of $2.3 million, including in excess of $1.6 million on the trading account. Two thirds of shareholder funds were lost in this period; ii. the trend in terms of trading losses over this period was a worsening one. Trading losses for the 11 months to May 1999 were twice the trading losses in the previous 12 months period. Within that last 11 months, the trading losses in the last 5 months were the worst the company had recorded in any part of its history ($670,000). In each month of 1999, losses exceeded $100,000; iii. as at May 1999, the company did not have any identifiable strategy to turn around the losses, other than keeping employees at a low number to reduce costs and pursuing prospects for work; iv. as at May 1999, the company did not have any business budgets or cash flow budgets for the next year. Deferral of creditors: v. Domino Mining Equipment Pty Ltd had a long established practice of 'holding' cheques, which practice was constituted by the following activities: a) Invoices would be received and entered into the company's accounting system for the month in which they were received. At the end of the following month, a cheque run would be conducted in respect of the invoices which had been reconciled and the cheques printed. That would result in the company's accounting system recording that the subject invoices were paid in that month (T688, 38-53; T689, 19-22); b) The cheques were then held in separate folders with their respective invoices until they were due for release (T689, 19-22). There was a 30 day folder and 60 day folder by month name (T692, 34-42) and sometimes there were occasions when there were more than two months of held cheques (T692, 44-48). c) Release of the held cheques was usually prioritised on the basis of the 'the oldest first' and then creditors pressing for payment. However, if there was not enough money to pay all the oldest cheques first and there were some important suppliers that Domino Mining Equipment needed to pay – the more recent invoices – they would have been paid (T700, 14-52, T701, 1-13)). When creditors were pressing for payment they were generally told to wait until Domino Mining Equipment received some money in – and their cheque would be released when the money was received (T690, 40-55; T691, 12-18 and 35-55). An example of what pressing creditors were told is: "We are expecting $100,000 in from Ulan by next Friday, your cheque is drawn, ready to go, that's when it will go." (T691, 12-18) d) Consequently, as at May 1997 Domino Mining Equipment was holding back a total of $406,000 in cheques for February 1997 invoices (T698, 34-44); as at October 1997 there were three months of held cheques totalling $378,000 (T699, 34-40); as at January 1998 there were three months of held cheques going back to October 1997 totalling $241,000 (T699, 42-49); as at February 1998 there were four months of held cheques totalling $280,000 (T699, 51-55, T700 1-2); and as at May 1998 there were four months of held cheques totalling $223,000 (T701, 25-28). e) The practice of holding cheques did not change after May 1998 (T708, 44-50); f) Payroll tax that was due in respect of returns for July 1998, August 1998 and September 1998 was not paid when it was due (T716, 25-54) and assessments for late payment interest were issued by the Office of State Revenue in January 1999 (T717, 1-39, 396); [27/3; 29/28]; g) As at 31 December 1998, about 25% of Domino Mining Equipment's creditors were 60 days or more (T713, 39-41; T714, 20-21) [37/13]; h) On 13 January 1999, Bridgestone Earthmover Tyres Pty Ltd filed a Statement of Liquidated Claim against Domino Mining Equipment for the sum of $732 (plus costs) in respect of goods sold and delivered in the month of August 1998 [29/24]; i) On 12 February 1999 the Deputy Commissioner of Taxation issued a statutory demand to Domino Mining Equipment for unpaid Fringe Benefits Tax due on 28 October 1998 and 28 January 1999 (T718, 1-11) [27/4]; j) Rarely a week went past without some creditor whose payment was due calling to inquire when payment would be made (T692, 26-28). And, in 1999 at least a couple of creditors a week would call to chase up payments that were due to them (T691 50-55, T692 1-10); k) In or about April 1999, Domino Mining Equipment was deferring payment of creditors, even though they were chasing payment (T710,31-34); l) As at 31 May 1999, of the trade creditors of $165,000, 21% were more than 60 days outstanding and 36% more than 90 days outstanding [14/518]; m) From time to time a supplier to Domino Mining Equipment Pty Ltd would refuse further supply until previous invoices had been paid (T695, 7-10); n) From the end of 1998 through to June 1999, many suppliers had Domino Mining Equipment on 'stop supply'; ie they just would not supply Domino Mining Equipment (T696, 28-32). In 1998 and 1999, it was a frequent occurrence for bigger suppliers to Domino Mining Equipment, who had allowed Domino to operate through an account, to put it on 'cash on delivery' terms, though often those suppliers would allow Domino to resume trading on an account once it had caught up with the outstanding credit (T696, 50-55, T697 1-35); o) Problems in paying creditors could not be put down to disputes or oversight (T393-4); and p) On 10 May 1999 Muldell Pty Ltd (trading as Fastserve Industrial Supplies) filed a Statement of Liquidated Claim against Domino Mining Equipment for $3,947.14 for goods sold and delivered between 21 January 1999 and 24 March 1999. [27/5]. Future prospects of the company as at May 1999: vi. apart from 4 partly finished machines sold to Domino Hire Pty Ltd in late May 1999 which that company would have to finish, the company had no other machines on manufacture or order in the first 5 months of 1999; vii. Mr Carpenter had a plan to move at some date any future manufacturing operations as might exist into another entity; viii. employees had been reduced from a high of 100 to 17, with a 3 day week employed; ix. by 18 May 1999 Mr Carpenter had decided that the parts and service work in the future would be carried on by a different entity not owned by the company, Domino Mining Parts & Services Pty Ltd; x. the new entity was incorporated on 3 June 1999. There is evidence that by the beginning of June it was already taking over parts and services orders which had previously come to Domino Mining Pty Ltd, although Mr Carpenter gave evidence that this was done by employees prematurely; xi. there was one prospect of an order from China for parts which Mr Carpenter gave evidence had been left carelessly on the desk of an employee, Mr Grahame Donovan, for several months. Later in the year it matured into an order which was taken advantage of by the new entity; xii. although there were many Domino Mining machines in use in the industry creating the potential for service or parts work, industry conditions were very poor, limiting the value of such work; xiii. in the first 5 months of 1999, apart from one substantial contract for about $500,000 for the sale of parts to the Army, service and parts work was running at only about $100,000 - $150,000 per month; xiv. by May 1999 the company had about $1.2 million in stock. About $200,000 of it was obsolete. The balance was slow moving, since manufacturing, parts and service work was very slow; xv. Mr Carpenter asserted that Retreat Pty Ltd owned the company's plans; xvi. Domino Mining Pty Ltd no longer had the "Domino " name after 17 May 1999 – it was now called Pioneer Park Pty Ltd. Refinance prospects: xvii. For the reasons given in this judgment ANZ was entitled to demand the full $2.5 million in May 1999. xviii. The fact is that the company had no resources within its balance sheet to pay a demand by ANZ of $500,000, let alone $2.5 million; xix. with a mortgage over its land and registered debenture over its assets in favour of the Bank, the company had no other assets which it could offer as security for a loan of $500,000 or greater; xx. Mr Carpenter had no resources to tip into the company; xxi. Mr Carpenter had made 2 applications to refinance ANZ's debt in January/February 1999, the second being preliminary only. Both failed. Thereafter he made no application to any other Bank or financier to take over the Bank's debt; xxii. the only possible prospect for refinance lay with D & R Henderson Pty Ltd or some other person or entity associated with the Hendersons; xxiii. it would have been commercially imprudent for the Hendersons to lend $500,000, let alone $2.5 million, unsecured to the company to pay out the admitted overdraft. Mr Carpenter would have been very reluctant to ask them to do so and they would not have done so; xxiv. the Hendersons had full knowledge from November 1998 through to mid-1999 of the developments between the company and ANZ and of the failure of refinance attempts; xxv. the Hendersons had an ample opportunity to pay out ANZ's debt and take over all its facilities had they decided to do so; xxvi. Mr Carpenter declined to request them to do so; xxvii. there was a dispute in the evidence as to whether the Hendersons, through any of the entities, would and could have advanced $2.5 million to take over all the Bank securities had Carpenter requested them to do so; xxviii. The finding is that D & R Henderson Pty Ltd would not have advanced $2.5 million and taken over all of the ANZ securities unless it established that it was a commercially prudent investment by way of a careful analysis of the company's financial position and future prospects. The Company would have required appropriate terms to document the loan, including security, a commercial interest rate and a date for repayment. The company would have had to not be making losses; xxix. if the Hendersons had contemplated using anything other than D & R Henderson Pty Ltd to advance the $2.5 million, they would still have required a realistic prospect of recovering their money plus interest and to be satisfied the company had orders and a viable business. No balance sheet for any such entity has been produced; xxx. what in fact occurred from March 1999 was that D & R Henderson Pty Ltd withdrew the $655,000 it had lent unsecured to Domino Mining Pty Ltd; accepting instead, a loan from Domino Hire Pty Ltd; and, as at 30 June 1999, was owed over $1 million by Domino Hire. Domino Hire also owed the Henderson Superannuation Fund over $600,000 which the Hendersons were looking to see repaid. The company's balance sheet at May 1999: xxxi. the 30 May management accounts and the balance sheet attached to the PWC report of 7 June 1999 may be taken as a good start to the company's position subject to the following; (a) land was overstated by $81,839; (b) at least one substantial debtor of $50,000 - $60,000 (or more) was the subject of a dispute as to recoverability; (c) stock is recorded at $1.2 million but about $200,000 of it was obsolete and the balance was slow moving. Fair market value was $270,000 and auction value $66,000; (d) of the total debt to the Bank $2.5 million was a current liability; (e) of the trade creditors of $165,000, 21% were more than 60 days outstanding and 36% more than 90 days outstanding; (f) as to the intercompany loan of $148,000 owing to Domino Hire Pty Limited, there is no documented evidence of any agreement by Domino Hire to defer or subordinate repayment of that amount. Domino Hire itself was in a weak financial position as of May 1999 and could not afford to deferral or subordination; and (g) the value of the Tuggerah land was $2,175,000 at 8 June 1999 (and remained so to January 2001). [in this respect the respective valuers, Mr Corbin and Mr Dick were ultimately in substantial agreement, their remaining differences after conclave as noted in Exhibit P21 generally resolved in 'the hot tub' on 4 August – transcript 1327 et seq] Mr Donnelly's evidence 516 Mr Donnelly travelled with careful detail through the following topics in order to reach the conclusions of insolvency expressed in his report : i. Creditor forbearances/indulgences ii. Endemic Shortage of Working Capital-Balance Sheet Test (in contrast to temporary lack of liquidity) iii. Availability of other cash resources-Cash Flow Test iv. 'Suspicious' Transactions v. Status of Industry Generally [dealing with the financial state of the industry in which the company operated] 517 It was his view that no individual insolvency indicator was itself sufficient to establish insolvency but that it was necessary to overlay various insolvency indicators to determine 'the point of no return'. 518 Based upon the extensive and detailed chronology set out in his report he expressed the following views: i. The industry in which DMEPL [Domino Mining Equipment Pty Ltd"] operated was suffering adverse economic conditions from at least 1 July 1998 onwards. This was reflected in DMEPL's 31 December 1998 $359K operating loss; ii. DMEPL was aware shortly after 24 August 1998 ANZ would no longer tolerate unauthorised overdraft excesses and sought to correct this situation thereafter divesting itself of surplus assets (non-current); iii. Notwithstanding these divestments, DMEPL was unable to honour its contractual terms with ANZ by 12 October 1998; iv. By 24 November 1998, DMEPL had agreed with ANZ that it would refinance by 28 February 1999; v. On 11 December 1998, ANZ advised DMEPL in the event that refinance was not obtained by 28 February 1999, it would appoint a Receiver and Manager to DMEPL. This should have lead Mr Carpenter (a former Registered Liquidator) to realise the seriousness of ANZ's intent and it is not unreasonable to assume he did all that he could to refinance in the period thereafter; and vi. By 9 February 1999 DMEPL no longer had any reasonable expectation of refinancing the business. vii. From early 1999 to June 1999 there is evidence of non-payment or late payment of other unsecured creditors some of whom took legal action to recover their debts. 519 The evidence before the Court establishes the ground for each of these conclusions [conveniently referred to as "the 7 Donnelly conclusions]. 520 Mr Donnelly's report sets out a chronology which although not in every detail squaring with the evidence before the Court, was certainly sufficiently in conformity with that evidence to mean that the reasoning given in his report is not shown to have been misconceived by any significant departure from the materials in evidence. 521 The form of the report travels into and out of chronology references and often descends into detail [as for example in terms of setting out schedules detailing matters such as overdraft movements, comparisons of particular trading results contained in ANZ diary notes, his review of general ledger trial balances for particular periods, his review of cash books during particular periods revealing the holding of cheques drawn but not released, his review of creditor correspondence and his analyses of particular balance sheets, monthly management accounts, working capital detail , trading profits and the like]. 522 Here again it cannot be said that the approach taken in his report is misconceived by reason of any significant departure from the proper approach to be taken to the materials in evidence. It is only to be expected that some discrepancies will be thrown up where the complex accounting treatment requires to deal with so many integers and where the appropriate assumptions are often somewhat debatable. It is for that reason that the overview summary findings were earlier set out. 523 Certainly his analysis, at least based upon the materials referred to in his report and in his oral evidence, is not in principle shown to have been misconceived by any significant departure from the vast bulk of the materials in evidence: [the Group's submission in respect of a suggested mis-classification of a receipt of $600,000 is dealt with in the reasons below]. What that analysis does is to provide an entirely transparent approach by way of exposing the treatment to be given to the many factors earlier outlined in these reasons under the heading "Proper approach to consideration of insolvency". Whilst the critical question is always one of commercial reality, the ordered approach given by Mr Donnelly to each of the relevant integers is accepted as a fair and balanced approach. 524 The short position is that Mr Donnelly's evidence given in his report [supplemented by his evidence in chief and closely tested in his cross examination] is clearly confirmatory of the Court's ultimate decision of fact ascertained from a consideration of Pioneer Park's financial position taken as a whole and importantly taking into account the commercial realities relevant to that financial position. Save for any possible occasional discrepancy between Mr Donnelly's assumptions [and figures] and the Court's findings set out above, Mr Donnelly's reasons are adopted as correct and balanced in terms of the ultimate decision of insolvency as at the commencement of June 1999. It is unnecessary to decide at which date prior to June the company was likely insolvent. The material chronology 525 The chronology travels through many of the ANZ diary notes and extracts from directors meetings and serves to provide a reasonably succinct and collapsed thumbnail sketch overview of many of the material events. Notwithstanding that many of the matters summarised in the chronology have one way or another been referred to in the early reasons, it is very important to stand back from all of that detail and to simply focus upon the basic raw materials which were not able to be gainsaid and which are captured by Mr Donnelly in this chronology. For that reason it is convenient to set out without being repetitive, a deal of significant entries [which have been somewhat edited on occasion to achieve efficiency]. 526 The chronology was as follows: "7 February 1997 Overdraft excess of $26K on DMEPL's $500K overdraft facility. The ANZ Diary Note states "Received a call from Cliff Carpenter who acknowledged that company is experiencing temporary strain on their WCP and would update position next Tuesday 11/2/97 with Geoff Neilson" (Tab 3). 11 February 1997 Mr Carpenter met with Mr Neilson. The ANZ Diary Note records "Cliff believes they will have a need for a $250K Temp OD facility to cover them through until mid April at the latest (agreed dated was 20 April 1997) … Advised Cliff we would be happy to consider, however … would like to sight Dec financials prior to committing any formal approval" (Tab 4). February 1997 to April 1998 As evidenced by the table below, DMEPL generally exceeded its authorised overdraft limit in the period 7 February 1997 to 6 April 1998. In preparing this table, I have relied upon a schedule prepared by Minter Ellison detailing the overdraft movements from 2 January 1997 to 2 August 1999 (Tab 6). Whilst the overdraft position was not exceeded at all times in this period, the table shows a general pattern where DMEPL was unable to operate within its approved limits. Date Unauthorised Overdraft Excess 7-Feb-97 $28,852 11-Feb-97 $59,594 14-Feb-97 $156,194 14-Mar-97 $48,970 19-Mar-97 $68,411 20-Mar-97 $72,686 8-Apr-97 $39,627 20-Apr-97 $143,191 15-May-97 $400,657 9-Jul-97 $71,262 15-Aug-97 $143,231 29-Sep-97 $103,701 20-Oct-97 $314,385 18-Nov-97 $17,794 1-Dec-97 $37,625 22-Jan-98 $235,259 17-Mar-98 $510,615 Directors' Meetings Extracts (Tab 7) 22 May 1997 – April 1997 Accounts were tabled and discussed and the loss of $150,973 was not satisfactory. Mr Carpenter advised "he had held a meeting with the key staff and informed them that the losses cannot continue, and that they had until 31/12/97 to correct the position or he would close down the company". A draft report from Turnaround Consulting ("TC") was also tabled at this meeting which highlighted significant problems with purchasing and production. 31 July 1997 TC final report tabled – resulting in redundancy of 6 staff. 4 September 1997 General Manager's report was tabled and noted "Cash as always remained very tight and would get tougher before it got better". 17 October 1997 Audit of June 1997 accounts completed and "the accounts would be submitted to the ANZ Bank next week for their annual review". Management accounts for July and August 1997 were also tabled – "year-to-date loss was regarded as totally unacceptable". 15 December 1997 No forward sales prospects at this point. Cash Problem – DMEPL is using Army cash to fund the business, and will have a problem when the Army Contract is completed. $300K in funding will be required next February. 9 March 1998 Mr Carpenter tabled a letter to ANZ dated 23 February 1998 that had been discussed with the Bank. The letter, inter alia, advised the Bank that negotiations were underway for the sale and leaseback of the property owned by DMEPL to Coal Operations Australia Limited. In relation to that sale, Mr Carpenter advised "I am frightened to make any definite statement on the ultimate outcome other than to state that I believe the property will be sold and settled before 30 June 1998 for a price sufficient to fully repay the debt owing to the bank". 10 March 1998 Offer of voluntary redundancy made to staff. 6 April 1998 [Mr Donnelly here summarised the temporary additional overdraft facilities: $500K working capital facility to clear by 30 April 1998 and $600K to facilitate completion of the Army contract to clear by 31 May 1998 (Tab 8)]. 1 May 1998 The ANZ agreed to extend the temporary $500K working capital facility (which originally expired on 30 April 1998) to 31 July 1998. The temporary $600K army facility (which was to have expired on 31 May 1998) was to be reduced to $300K on 30 May 1998 and to be cleared by 31 July 1998 (Tab 9). 12 May 1998 Directors' minutes record cash flow problems; tabling of March management accounts – "these were an area of great concern ….. the company still was not trading profitably". It was also noted in this context that "CJC was instructed to lift his game" (presumably by co-directors D & R Henderson who were in attendance) (Tab 10). 9 June 1998 [Mr Donnelly here referred to the 9 June facility variation letter] 26 June 1998 Directors' minutes record that the "cash position was considered critical" and that "D & R Henderson advanced $100,000 for repayment by 20th December 1998 together with a further reduction of $250,000 by the same date" (Tab 12). 31 July 1998 The temporary $500K working capital facility was not repaid by its expiry date… 1 August 1998 to 27 August 1998 Overdraft As evidenced by the table below, DMEPL materially exceeded its authorised overdraft limit in the period 1 August 1998 to 27 August 1998. In preparing this table, I have relied upon a schedule prepared by Minter Ellison detailing the overdraft movements from 2 January 1997 to 2 August 1999 (Tab 6). Date Unauthorised Overdraft Excess 4-Aug-98 $878,032 12-Aug-98 $963,709 17-Aug-98 $995,241 25-Aug-98 $986,067 27-Aug-98 $1,002,774 Directors Minutes 14 August 1998 Final decision on sale of AMP shares will be made on return of R Henderson in 10 days; a short – term loan of $30K (presumably from D & R Henderson) was made for repayment on 30 September 1998 together with interest of 10% pa.; Mr Carpenter to implement five (5) more immediate redundancies. From this, I assume that there was a $30K loan made by D & R Henderson repayable on 30 September 1998 (Tab 14) 28 August 1998 The 28 August 1998 ANZ Diary Note states: "Cliff Carpenter who advised that come Monday 31/8/98 he may have favourable news to advise in relation to full clearance of excess from the outcome of developments over the weekend. Cliff was not prepared to elaborate, however, he has previously intimated from discussions with MGR. Nielson that capital injection of $1M has been discussed from other directors David and Robert Henderson of D&R Henderson P/L" (Tab 15). 2 September 1998 The 2 September 1998 ANZ Diary Note (Tab 16) does not elaborate on the 'favourable news' that Mr Carpenter referred to on 28 August 1998. Not having seen any evidence to the contrary, I would infer that the potential financier declined to invest in DMEPL. Instead the Diary Note states Mr Carpenter "was under the impression that Geoff [Nielsen] had approved the excess position of up to $1.5M until 15 October 1998". This is confirmed in Mr Carpenter's letter to ANZ of 7 September 1998 (Tab 16) where he states "I am surprised as the last word on this matter with the account manager on 12th August was that the deadline was 15th October – a date I am sure he would confirm". The ANZ Diary Note of 2 September 1998 does however go on to record that "The reason that we had recorded clearance by 15/9/98 was that he had advised Geoff that he could clear the excess by 15/9/98". This position would appear to also reflect the information that was contained in a facsimile from Julie Stewart of DMEPL to Peter Jones at ANZ dated 25 August 1998 which advises "I know Cliff is intending to see you and Geoff by the 15th September with the view of having all the accounts back within their normal limits but he needs this further space (i.e to 15th September) to get everything in order". In my view, it is not material to my analysis whether the excess position was approved to 15 September 1998 or 15 October 1998. [emphasis added] 15 September 1998 The excess position was not cleared by 15 September 1998. The 15 September 1998 ANZ Diary Note indicates the unauthorised excess was $430K (Tab 17). According to the ANZ Diary Note of that day, Mr Carpenter "advised that the bank should advise him that they do not want the connection and he would 'pay them out tomorrow' but not before advising certain directors of the bank's board of his plight and dissatisfaction of John Harrison". One interpretation of this statement is that Mr Carpenter was of the opinion that he could obtain alternate finance immediately if required. 25 September 1998 The 25 September 1998 ANZ Diary Note stated "Account has been downgraded to 7E…and transferred to Rick Harvey". It is uncertain if this downgrade was communicated to DMEPL and/or Mr Carpenter. I am instructed that Mr Carpenter denies any knowledge of the downgrade. At this time the unauthorised overdraft was $372K (Tab 18). 2 October 1998 The 2 October 1998 ANZ Diary Note states "Meeting was held today at Customer's Tuggerah premises to discuss account status….Cliff is aware that we will not continue facilities on the existing basis in view of losses incurred by Domino" (Tab 19). 7 October 1998 [Mr Donnelly here summarised the 7 October variation letter of offer which offered inter alia a $400K temporary overdraft facility for working capital which expired on 16 December 1998. The temporary overdraft would be reduced to $300K if a $375K FDA facility also offered on that date was fully drawn]. 12 October 1998 The 12 October 1998 ANZ Diary Note states there was a $6K unauthorised overdraft excess (Tab 21). 14 October 1998 The 14 October 1998 ANZ Diary Note (Tab 22) states the $375K FDA facility was fully drawn on that date. In accordance with the terms of the 7 October 1998 variation, the temporary overdraft was reduced from $400K to $300K. By letter dated 14 October 1998 (Tab 22), Mr Carpenter was advised of this fact: "In accordance with the Bank's Variation Letter of Offer dated 7th October 1998, the limit on the Company's overdraft facility is to now reduce to $800,000, to further reduce to $500,000 upon receipt of proceeds from the said export contract, or by 16 December 1998". 20 November 1998 The 20 November 1998 ANZ Diary Note (Tab 23) states "Audited , consolidated annual accounts are now to hand, together with management accounts for the 3 month period to 30 September 1998". The Diary Note states for DMEPL "management accounts for the September 1998 quarter are expected to be finalised next week". The comparison of the trading results for DMEPL contained in the ANZ Diary Note is set out in the table below together with my assessment as to the change in those results which indicates that DMEPL suffered a material deterioration in its financial performance for the year ended 30 June 1998 from the previous year: 30-Jun-98 30-Jun-97 % Change $000 $000 % Sales 8,018 18,772 -57% Gross Profit Margin 1,073 1,798 -40% Net Profit/(Loss) Before Tax (1,275) 243 -625% The 20 November 1998 ANZ Diary Note also states: "Manager advised he had spoken with Mr Carpenter. Customer has requested three months to seek refinance of facilities". I am instructed that Mr Carpenter disputes this information and maintains that the three month timeframe was imposed on him by the ANZ. Notwithstanding this information, whether the three month timeframe was mutually agreed or not, is not material to my analysis. [emphasis added] 24 November 1998 The 24 November 1998 ANZ Diary Note states "we have verbally requested the Group to seek refinance of facilities within 3 months" (Tab 24). In other words, by 24 November 1998 ANZ had agreed with Mr Carpenter's 20 November 1998 request. Again, I note my instructions that Mr Carpenter disputes that he requested three months to refinance the facilities. As previously noted, I do not consider that either version of the facts is material to my analysis . [emphasis added] The Diary Note also records the fact that part of the company's commercial bill facility ($1M) matured to the overdraft account on 20 November 1998. 27 November 1998 Directors' minute for meeting held on 27 November 1998 (Tab 25) records sale of AMP shares and deposit of proceeds to DMEPL overdraft account; implementation of more redundancies; tabling of monthly accounts to September 1998 – "the impact of volume (the lack of) was evident … Overheads were to be tightened further"; tabling of a memorandum dealing with the sequence of events since 20th November 1998 in relation to "Bank" – "It was left to CJC to report back on steps taken, progress made and problems encountered, together with final recommendations". The separate memorandum (Tab 25) attached to the minutes of 27 November 1998 reflects the outcome of discussions with Mr Rick Harvey from the ANZ on 20 November 1998. The memorandum notes that "After some brief discussion we both agreed that the parties should terminate their relationship in a professional and amicable manner and to that end he suggested I work to a three month timetable". A handwritten notation on the memorandum which I have presumed to have been penned by Mr Carpenter notes Mr Carpenter's recollection of the conversation to the effect that "I really wonder where I'm going Rick, I think we should call it a day". The memorandum then considers the financing options available and the proposed group structure. 11 December 1998 The 11 December 1998 ANZ Diary Note (Tab 26) states "Mr Carpenter has acknowledged the Bank wants to exit the relationship with Domino and has undertaken to complete refinance by 28 February 1999. He is proposing to refinance Domino Mining Equipment through Westpac…It has been agreed that if refinance is not completed by 28 February 1999 then he will consent to the Bank appointing a Receiver & Manager to Domino Mining Equipment". I am instructed that Mr Carpenter disputes the information recorded in this Diary Note. 20 January 1999 The 20 January 1999 ANZ Diary Note (Tab 27) states "Mr Carpenter advised that he does have standby arrangements in place for the refinance to take place on 28/2/99. He is also negotiating with a number of banks for the refinance and believes that they will not have any problems obtaining finance on time". The ANZ Diary Note also summarised the December 1998 half yearly financials for DMEPL as follows: 31-Dec-98 $000 Sales 2,317 Gross Profit Margin 416 Net Profit/(Loss) Before Tax (359) According to the ANZ Diary Note, Mr Carpenter stated "They are actually making profits for the months of November and December." My review of the General Ledger Trial Balances for DMEPL (refer Section 4.2.4) for the months of November and December 1998 reflect the following results: Nov-98 Dec-98 $000 $000 Sales 1,067 550 Gross Profit Margin 212 132 Net Profit/(Loss) Before Tax (188) 310 The sales for these months appear to be inflated (in comparison to other months) by the sale of new machines in November of $600K and December of $464K. In relation to these sales, I would note the following: 1) A facsimile from Mr Carpenter's lawyer to Minter Ellison dated 25 May 2006 (Tab 28) notes that "The amount of $600K was paid by cheque to Domino Mining Equipment Pty Ltd on 23 December 1998 on behalf of Domino Hire Pty Ltd ….. The payment was made to Domino Mining to manufacture four machines … ". The ANZ bank statement for DMEPL (Tab 29) discloses two deposits to the overdraft account on 23 December 1998 that total $600K. In the absence of any information to the contrary, I have assumed that these deposits represent the payment made by Domino Hire to DMEPL in order that DMEPL could commence the manufacture of the four machines referred to in the letter of 25 May 2006 from Mr Carpenter's lawyer. 2) Absent further clarification, I assume that the $600K that was booked to sales in the management accounts for November 1998 actually relates to the deposit received in December 1998 for the manufacture of the four machines for Domino Hire. 3) I would question the treatment of the $600K given that it represented a deposit on machines to be manufactured, and should therefore not have been credited to sales until the machines had been manufactured and invoiced to Domino Hire. The more accurate treatment of this receipt would have been to record it against the current liability for "Customer Deposits" or "Sales Deposits Received". 4) Absent further clarification, I have assumed that the sales of new machines recorded in the management accounts in December 1998 relate to the sale of new machines and spare parts to Yanzhou Mining Group in China invoiced on 11 November 1998 )Tab 30). The ANZ Bank statements of 22 December 1998 (Tab 30) and the ANZ Diary Note of 23 December 1998 (Tab 30) records receipt of $375K in discharge of the FDA facility and $294,568 for part clearance of the temporary overdraft facility of $300K that expired on 16 December 1998. This is consistent with the comments at the 14 October 1998 bullet point above. 9 February 1999 The 9 February 1999 ANZ Diary Note (Tab 31) may indicate a rethinking of Mr Carpenter's viewpoint that he would be able to refinance by 28 February 1999: "Refinance by end February 1999. Mr Carpenter was asked to update on the progress being achieved in this regard. Mr Carpenter repeated what he previously said that he would have little trouble in refinancing Domino Mining Group…When pressed on whether this would take place by 28/2/99 Mr Carpenter became very evasive...This may have something to do with the poor profitability record of Domino Mining Equipment. Mr Carpenter did reiterate what he has also previously said that he has other avenues from which, if necessary, he can raise finance to repay the Bank. These other avenues have been referred to as private investors known to him". [Mr Donnelly next proceeded to generally summarise correspondence which had passed between ANZ and Mr Carpenter or the Group's solicitor earlier set out in these reasons, namely: i. letter of 19 February from the Group's solicitor; ii. letter of 25 February from ANZ to Mr Carpenter; iii. letter of 26 February from the Groups solicitor advising that alternative financing was progressing well but would take another three or four weeks at which time the Group would bring to an end, in the most appropriate way, it arrangements with ANZ; iv. letter of 5 March from the Group's solicitor seeking until 26 March to finalise its refinancing; v. letter of the 11 March to the Group's solicitor; vi. letter of 19 March from the Group's solicitor; vii. letter of 25 March from ANZ's solicitors advising that the commercial bills of $500,000 and $1,000,000 would fall due on the following day and that given that ANZ had heard nothing from the Group regarding the progress of the refinance, the commercial bills would be retired into the overdraft on 26 March 1999] 26 March 1999 ANZ matured the $1.5M Commercial Bills into the overdraft facility the limit for which was increased by $1.5M (Tab 38). 30 March 1999 By letter dated 30 March 1999, Mr Carpenter advised ANZ that its failure to discharge his wife's mortgage and guarantee has "delayed my refinancing" (Tab 39). In relation to this matter, I note: (1) On 23 December 1998 Mr Carpenter faxed ANZ a request to extinguish the second mortgage on his wife's home and her personal guarantee. Mr Carpenter did not suggest at that time that this matter could delay his refinancing (Tab 40). (2) On 20 January 1999 Mr Carpenter met with ANZ. The Diary Note of that meeting does not state Mr Carpenter suggested this matter could delay the refinancing (Tab 27). (3) On 25 January 1999 Mr Carpenter's lawyer wrote to ANZ and requested that Mrs Carpenter's guarantee should be released as the contract for which it was given "has been completed". Mr Carpenter did not suggest at that time this matter could delay the refinancing (Tab 41). (4) On 19 February 1999 Mr Carpenter's lawyer wrote to ANZ and inter alia, made reference to Mrs Carpenter and the Dural Mortgage. At no stage did Mr Carpenter's lawyer suggest that this was a matter that would delay the refinancing (Tab 32). (5) On 26 February 1999 Mr Carpenter's lawyer wrote to ANZ and did not suggest at that time this matter could delay the refinancing (Tab 34). (6) On 5 March 1999 Mr Carpenter's lawyer wrote to ANZ but again that correspondence did not suggest that the failure to release Mrs Carpenter's securities was causing any delay to the refinance (Tab 35). (7) On 19 March 1999 Mr Carpenter's lawyer wrote to ANZ again seeking advice on the progress of releasing Mrs Carpenter's securities but again made no suggestion that any delay in this regard was or would affect the refinance (Tab 37). ANZ stated in its 31 March 1999 response to Mr Carpenter's 30 March 1999 letter: "Your suggestion that Domino is unable to apply for refinance because of the existence of a second mortgage to the Bank is in our view untenable. Individuals and companies every day apply for refinance of their liabilities upon encumbered properties… As early as 4 February 1999 you were informed in writing that the Bank makes no claim under its mortgage. The existence of it in no way inhibits applications for refinance to be made and in fact obtained" (Tab 42). I have not seen any documents or evidence which would explain how not having the second mortgage and guarantee discharged delayed any refinance that may have been available. [Mr Donnelly next proceeded to summarise later of the correspondence, namely: i. letter of 8 April from ANZ to Mr Carpenter advising that it would " agree to an additional time period, until 26/4/99, on the basis that this will be the final extension of time the Bank will agree to and facilities will be terminated after that date"; ii. the 5 May letter giving 30 days notice; iii. the advice of 24 May by PriceWaterhouseCoopers to the Group of its appointment as investigating accountant and its request for access to all records; iv. the 9 June ANZ notice ] 10 June 1999 On 10 June 1999 ANZ appointed PWC as Voluntary Administrator. On that date, according to PWC in its 29 June 1999 report to creditors "Due to a lack of short term cash flow it was necessary to terminate all of the company's 17 employees upon our appointment"." 527 Mr Donnelly also reviewed creditor communications: "Other Creditor Communications University of Technology Sydney (UTS) Examination On 25 February 1997, Katherine Garbutt in association with the UTS completed an examination of DMEPL. During the course of that review, Ms Garbutt undertook an examination of the active suppliers to DMEPL. At that time, there were "two hundred and thirty six active suppliers to DME. Of these, twenty nine were 'on hold' and eighty one were COD payment" (Tab 48). This demonstrates a pattern of failing to pay suppliers within normal trading terms. From the information available to me, that pattern was continued by DMEPL. Examples of the failure of DMEPL to pay their ordinary trade creditors as and when those debts fell due are set out below. Review of Cash Books Manual cashbooks maintained by DMEPL from May 1997 to July 1998 reveal the regular "holding" of cheques drawn but not released by the company (Tab 49). I have summarised the quantum of cheques held each month below: Month Value of Cheques Held ($) May-97 $406,881.07 June-97 $185,564.99 July-97 $150,319.19 Aug-97 $433,367.08 Sept-97 $494,281.36 Oct-97 $378,085.98 Nov-97 $125,157.54 Dec-97 $184,740.45 Jan-98 $241,507.30 Feb-98 $280,123.96 Mar-98 $363,964.10 Apr-98 $171,669.47 May-98 $223,697.45 June-98 $152,975.64 July-98 $92,373.36 The practice of drawing cheques and then holding them rather than releasing them in payment of the relevant accounts demonstrates that DMEPL did not have sufficient funds to meet debts that were currently payable. Companies that practice the holding of cheques, often only release those payments that they absolutely have to in order to avoid stops being placed on supply of goods or other services essential to the ongoing operation of the business. Review of Creditor Requests for Payment A review of the "Creditor Requests for Payment" schedules provided to me indicate that for the period 19 March 1999 to 23 April 1999 DMEPL was routinely delaying payment of creditors and only effecting payment when necessary to avoid legal action or stop supply. These schedules support the position raised above in relation to the cheques regularly held by DMEPL in an effort to manage its cash flow within its existing facility limits (Tab 50). Review of Creditor Correspondence A review of the company records has identified a regular record of requests for payment of outstanding accounts by creditors of DMEPL (Tab 51). An inspection of available correspondence with creditors reveals the following: Creditor Amount ($) Date of Request Date of Invoices Nature of Correspondence Austin Equipment (Newcastle) Pty Ltd $,202.15 8-Mar-99 Nov-98 Facsimile request for payment Dec-98 BOC Gases $1,916.20 15-Mar-99 Jan, Feb, Mar-99 Overdue Notice BOC Gases $4,118.47 19-Apr-99 Jan, Feb, Mar, Apr-99 Overdue Notice – Final Notice Cleanaway $258.25 11-Mar-99 Feb-99 Overdue reminder Central Coast Metal Protectives Pty Ltd $1,890.00 14-Apr-99 Feb, Mar-99 Overdue reminder requesting payment by 23-Apr-99. Handwritten notation "Deferred 27/4" ELGAS $406.40 7-Apr-99 Feb, Mar-99 Reminder notice Engineering Safety Service $425.40 22-Apr-99 Feb-99 Note of telephone request for payment Industrial Hydraulic Services Pty Ltd $190.00 Unknown Jan-99 Reminder notice Toll Ipec $1,053.63 31-Mar-99 Feb-99 Reminder letter. Handwritten notation "Deferred till 27/4 Must Pay" Lawes & Associates Pty Ltd $12,300.00 2-Feb-99 Sept-98 Account Rendered Parker Hannifin (Australia) Pty Ltd $757.20 26-Mar-99 Jan-99 Overdue notice Quality Assurance Services $3,570.00 5-Mar-99 Nov-98, Jan, Mar-99 Reminder notice Universal Fluid Power Pty Ltd $2,035.78 17-Mar-99 Jan-99 Reminder letter Muldell Pty Limited $3,947.14 10-May-99 21-Jan-99 to 24 Mar-99 Statement of Liquidated Claim Review of Payment Advices and Supporting Documents Carpenter Owens invoice dated 12 October 1998 for $20,000. Part paid on 31 December 1998 in the sum of $7,522.63 and on 4 March 1999 in the sum of $12,477.37 (Tab 52); Office of State Revenue notices of assessment dated 4 January 1999 for $1,143.05 in interest on late payment of payroll tax for the months of July, August and September 1998. Interest for late payment was paid on 3 February 1999. Note that August 1998 ($7,453.90) and September 1998 ($6,408.11) payroll tax (due for payment by the 7th day after the end of the month) was not paid until 31 December 1998 (Tab 53). Office of State Revenue notices of assessment dated 26 May 1999 for interest on late payment of payroll tax for the months of October, November and December 1998 in the sum of $983.41. I have not been able to identify the date that the payroll tax for these months was paid. However, given that the pay-roll tax for August and September 1998 was not paid until 31 December 1998 and the interest assessments for those payments were issued in mid-January 1999; it is reasonable to assume that the October, November and December 1998 pay-roll tax debts were paid sometime around early May 1999 well after their due date for payment (being the 7th day after the end of the month) (Tab 54). Statements of Liquidated Claim / Statutory Demands Creditors Statutory Demand dated 12 February 1999 in respect of Fringe Benefits Tax outstanding to the Australian Taxation Office dating back to 28 October 1998 in the sum of $11,316.70. Paid on 2 March 1999 (Tab 55) Statement of Liquidated Claim filed by Bridgestone Earthmover Tyres Pty Limited on 13 January 1999 for $928 in respect of goods sold and delivered in August 1998. Paid in January 1999 (Tab 56). Statement of Liquidated Claim filed by Muldell Pty Limited on 10 May 1999 for $3,947.14 in respect of goods sold and delivered between 21 January 1999 and 24 March 1999. From the printout of the customer account history that has been provided to me, DMEPL discharged the debt due to Muldell Pty Limited in three instalments as follows: Date Paid Amount ($) 27-May-99 843.27 2-Jun-99 1,802.36 4-Jun-99 1,301.51 The time taken to discharge this debt would suggest that at that point in time, DMEPL clearly did not have the funds to pay its debts as and when they fell due (Tab 57)." Conclusion 528 His conclusion was expressed as follows: "In my opinion, as indicated by the chronology above, ANZ may have voluntarily consented to DMEPL exceeding its authorised overdraft limits in the period prior to 8 October 1998 but not at any time thereafter. I have formed this review by considering the following: · I am instructed to make an assumption for present purposes that Mr Nielsen, the ANZ branch manager responsible for the DMEPL relationship for the period prior to 24 August 1998, may have verbally represented to Mr Carpenter that unauthorised overdraft excesses would be permitted until 15 October 1998. · On 8 October 1998, Mr Carpenter accepted a letter of variation offered by ANZ on 7 October 1998 (Tab 20). In my view, this formal acceptance of a variation in agreement superseded any earlier oral agreement that may have led Mr Carpenter to believe unauthorised overdraft excesses would be tolerated until 15 October 1998. · On 12 October 1998 DMEPL exceeded its authorised overdraft notwithstanding the agreement accepted by Mr Carpenter on 8 October 1998 (Tab 21). In short, DMEPL was unable to adhere to the 8 October 1998 agreement within four days of it accepting ANZ's revised terms. I can find no instance of Mr Carpenter claiming ANZ voluntarily consented to the unauthorised overdraft either on 12 October 1998 or at any time thereafter. Moreover, from my review of the evidence available to me on the communications with the other creditors of DMEPL, it is clear that DMEPL had historically had problems in failing to pay suppliers within normal trading terms and had adopted the approach to paying creditors when it had to rather than when the debts fell due." Endemic Shortage of Working capital - Balance Sheet Test 529 The opinions expressed in this section of his report by Mr Donnelly set out the reasoning processes and bases upon which those reasoning processes have been set out. In my view his cross examination did not provide any significant dent in the reasoning processes upon which he relied. 530 His report included the following in this regard: "Introduction Consideration of the Balance Sheet Test must take into account more than a mere assessment of the total asset and liability position of a company. Such an analysis fails to provide any clear evidence to support whether a company can pay its debts as and when they fall due. To obtain a better assessment of the Balance Sheet Test it is generally accepted that it is necessary to undertake a review of working capital and quick assets. Working Capital An assessment of working capital enables us to ascertain the extent to which current assets may be realised to pay current liabilities. An analysis of working capital provides an indicator as to the amount of current assets that are available at relatively short notice to meet current liabilities. In doing so, working capital assumes that current assets such as inventories and debtors are generally converted to cash at the same rate as creditors are to be paid. Quick Assets (Readily Available Working Capital) This is often referred to as 'the acid test' and provides further dissection of a company's working capital position and its ability to raise cash quickly through the sale or disposal of assets to meet repayments of current liabilities. An assessment of a company's quick asset position is based on more restrictive criteria in that it: · Excludes inventory from current assets on the basis that its conversion into cash will be in the ordinary course of business and that its urgent conversion into cash would not equate to its book value; and · Excludes the bank overdraft from current liabilities on the basis that, whilst in most circumstances the bank overdraft is repayable on demand, in most circumstances such a demand would not be made in the ordinary course of carrying on business. Balance Sheets I have summarised the available balance sheets (Tab 58) for DMEPL since 30 June, 1998 as set out below: $000's 30.06.98 31.12.98 31.05.99 10.06.99 Current Assets 3,350 2,463 1,449 1,382 Current Liabilities 2,994 1,294 2,858 2,922 Working Capital 356 1,169 (1,409) (1,540) Fixed Assets 2,972 2,825 2,677 2,548 Debts due by related companies 420 - - - Other non-current assets 834 141 137 - 4,226 2,966 2,814 2,548 4,582 4,135 1,405 1,008 Non-Current Liabilities Debts due to related parties 144 657 148 - Other non-current liabilities 2,385 1,785 235 - 2,529 2,442 383 - Net Assets 2,053 1,693 1,022 1,008 Working Capital Analysis The following schedule considers the working capital of DMEPL at the relevant dates in the context of the information provided at Section 4.2.1. $000's 30.06.98 31.12.98 31.05.99 10.06.99 Working Capital 356 1,169 (1,409) (1,540) Less Inventory (2,541) (1,740) (1,215) (1,193) Add Overdraft 1,704 796 2,481 2,500 Readily Available Working Capital (481) 225 (143) (233) Readily Available Working Capital if the $2M bill commercial bill facility was not repayable on demand but the bank overdraft was repayable on demand from December 1998 (Note 1) (481) (571) (624) (733) Note 1 – Readily Available Working Capital has been determined by deducting the bank overdraft on the basis that it was repayable on demand from December 1998. From the above analysis, it is clear that DMEPL had inadequate readily available working capital since June 1998 (with the exception of December 1998). The general absence of adequate readily available working capital at each of the relevant balance dates would render the company technically insolvent at 30 June 1998, 31 May 1999 and 10 June 1999 on a balance sheet test. In this regard, it is noted that the true test of solvency is the cash flow test, the results of which are discussed in details at Section 4.3 of this report. Bearing in mind the downturn in sales as evidenced by the results for the half year ended 31 December 1998 (refer Section 5.1 at 20 January 1999 bullet point) and the possible misclassification of sales to Domino Hire Pty Limited for $600K (refer Section 4.1.2 at the 20 January 1999 bullet point and Section 4.3.4), DMEPL may have been insolvent as at 31 December 1998 on a working capital analysis. Assuming the position taken by DMEPL that the ANZ was not entitled to call up the commercial bill facility following an annual review, the readily available working capital position reflects that DMEPL did not have the capacity to pay its debts as and when they fell due at each of the balance dates. Analysis of Monthly Management Accounts Whilst I do not have monthly management accounts to consider the working capital position of DMEPL, I have reviewed the general ledger trial balances for DMEPL for the months of July 1998 through to May 1999 (Tab 59). From those general ledger trial balances, I have compiled monthly balance sheets (Tab 60) and profit and loss statements (Tab 61) for the period July 1998 to May 1999 by: · In the case of balance sheet items, recording the end balance for each asset and liability as set out in the relevant trial balance for each month; and · In the case of profit and loss items, recording the difference between the end balance and the opening balance for each profit and loss item set out in the relevant trial balance for each month. The monthly balance sheets are summarised hereunder for the following months: · October 1998 · November 1998 (being the closest date in time to 1 December 1998); · January 1999; and · April 1999 (being the closest date in time to 5 May 1999); $000's Oct Nov Jan April 1998 1998 1999 1999 Current Assets 3,276 3,914 2,558 2,152 Current Liabilities (Note 1) 1,837 2,238 2,087 1,992 Working Capital 1,439 1,676 471 160 Fixed Assets 2,889 2,865 2,807 2,703 Debts due by related companies - - - - Other non-current assets 135 135 135 135 3,024 3,000 2,942 2,838 4,463 4,676 3,413 2,998 Non-Current Liabilities Debts due to related parties - - - - Other non-current liabilities 2,891 2,794 1,837 1,832 2,891 2,794 1,837 1,832 Net Assets 1,572 1,882 1,576 1,166 Note 1 – Assuming that sales were misclassified, $600K should be added to Current Liabilities as at 31 January 1999 and 30 April 1999 to reflect the $600K deposit received from D & R Henderson Pty Limited for the manufacture of four machines for Domino Hire Pty Limited (refer Section 4.1.2 at the 20 January 1999 bullet point and Section 4.3.4) The following schedule considers the working capital of DMEPL at the relevant dates in the context of the information provided at Section 4.2.1. $000's Oct Nov Jan April 1998 1998 1999 1999 Working Capital (Note 1) 1,439 1,676 471 160 Less Inventory (2,827) (2,110) (1,772) (1,799) Add Overdraft 805 760 950 1,024 Readily Available Working Capital (583) 326 (378) (615) Readily Available Working Capital if the $2M bill commercial bill facility was not repayable on demand but the bank overdraft was repayable on demand from October 1998 (Note 2) (1,388) (434) (1,328) (1,639) Note 1 – General ledger trial balance includes commercial bill facility as a non-current liability. Therefore the effect of this facility is not reflected in the working capital results. Note 2 – Readily Available Working Capital has been determined by deducting the bank overdraft on the basis that it was repayable on demand from October 1998. Again, it is apparent that DMEPL had inadequate readily available working capital from 31 October 1998. Assuming the position taken by DMEPL that the ANZ was not entitled to call up the commercial bill facility following an annual review, the readily available working capital position reflects that DMEPL did not have the capacity to pay its debts as and when they fell due at each of the balance dates. Results of Application of the Balance Sheet Test On the basis that stock is included at book value, DMEPL passes the general balance sheet test applying total assets to total liabilities from June 1998 up until June 1999. However, as early as June 1998, DMEPL fails the stricter (and more relevant) working capital test for the first time with a recorded shortfall in readily available working capital of $481K. That position worsens over time whereby, at 30 April 1999, DMEPL has a working capital deficiency of $615K and a readily available working capital deficiency of $1,639K. By 10 June 1999, and using the estimated realisable values attributed to the current assets and current liabilities by Mr Carpenter (Tab 58) at that point in time, the position further worsens as follows: Estimated Realisable Value ($) Current Assets Debtors 99,150 Cash 108 Stock 491,330 WIP 105,067 Total Current Assets 695,655 Current Liabilities Taxes 10,872 Wages 18,267 Unsecured Creditors 140,369 ANZ 2,500,000 Total Current Liabilities 2,669,508 Working Capital (1,973,853) Readily Available Working Capital if the $2M commercial bill facility was not repayable on demand but the bank overdraft was repayable on demand (Note 1) (570,250) Note 1 – Readily Available Working Capital has been determined by adjusting Working Capital by deducting stock and work in progress (on the basis that if DMEPL is continuing in business it will need these assets) and adding back the $2M commercial bill facility on the assumption that the ANZ was not entitled to call up that facility. I note that on 10 June 1999 ANZ appointed PWC as Voluntary Administrator (Tab 47). On that date, according to PWC in their 29 June 1999 report to creditors "Due to a lack of short term cash flow it was necessary to terminate all of the company's 17 employees upon our appointment". In other words, on that date, without any overdraft facility there was insufficient working capital to continue the business. In my opinion, at 10 June 1999, the magnitude of the working capital deficiency indicates DMEPL was 'balance sheet' insolvent in that it was unable to extinguish the $2.5M ANZ overdraft from its current assets (assuming that the whole debt was due at that date). Alternatively, if only the $500K overdraft facility was due at 10 June 1999 then, assuming inventory and work in progress are not available for immediate realisation (in the context of DMEPL requiring those assets to continue in business), I have not identified any evidence of an immediate source of funds to discharge the overdraft facility. This is reflected in the shortfall in readily available working capital set out in the table above. On 5 May 1999, by letter dated 3 May 1999 (Tab 44), DMEPL was given thirty days notice terminating all facilities after which time it was to immediately repay $2,467,855. At this point in time, on the ANZ's case, $2.5M was repayable at the very latest by 4 June 1999. On Mr Carpenter's case, only $500K was repayable. On either scenario, it is my opinion that DMEPL did not have sufficient readily available working capital to repay either $2.5M or $500K on 10 June 1999. In the absence of available information at 5 May 1999, I have reviewed the management accounts at 30 April 1999 (Tab 60) (extracted from the general ledger trial balance for that month) and the Balance Sheet for DMEPL at 31 May 1999 (Tab 58). Having regard to the financial information available at 30 April 1999 and 31 May 1999, it is apparent that DMEPL did not have the capacity to repay ANZ from its current assets at that time on a balance sheet test. Based on my review of the 31 May 1999 and 10 June 1999 Balance Sheets, I am of the view that DMEPL, in the absence of any other material, did not have the ability in the period 31 May 1999 to 10 June 1999 to repay the $2.5M debt which on the ANZ's case fell due at the very latest on 4 June 1999. In my opinion, this suggests that DMEPL was insolvent from at least 31 May 1999 on a balance sheet test. However, having regard to the analysis of the monthly management accounts (at Section 4.2.4) DMEPL was, in my opinion, insolvent from at least 31 October 1998." Availability of other cash resources-Cash Flow Test 531 Mr Donnelly expressed the following views in his report in relation to these issues: "Trading Profits It may be possible for a company to pay current liabilities from trading profits. According to a 13 August 1998 Diary Note (Tab 62), ANZ was supplied with a Budgeted Balance Sheet and Profit and Loss Budget for the year ended 30 June 1999 for DMEPL. The Profit and Loss Budget, which is not attached to the diary note, is summarised below: $000's Best Case Most Likely Worst Case Sales 7,578 7,250 7,000 Gross Profit Margin 2,577 1,740 1,212 Net Profit/(Loss) Before Tax 691 473 (157) However, as summarised in Section 4.1.2 (at the 20 January 1999 bullet point), DMEPL suffered a $359K loss for the six month period ending 31 December 1998. Whilst I do not have monthly management accounts to consider the operating results of DMEPL, I have reviewed the general ledger trial balances for DMEPL for the months of July 1998 through to May 1999 (Tab 59). From those general ledger trial balances, I have compiled monthly profit and loss accounts for that period (Tab 61). In this regard, I would refer to Section 4.2.4 for the methodology adopted in the preparation of these accounts. The monthly profit and loss accounts are summarised hereunder for the following months: · October 1998 · November 1998 (being the closest date in time to 1 December 1998); · January 1999; and · April 1999 (being the closest date in time to 5 May 1999). $000's Oct Nov Jan April 1998 1998 1999 1999 Sales 133 1,239 152 97 Expenses 275 929 270 224 Net Profit/(Loss) Before Tax (142) 310 (118) (127) Comparison to 1999 Budget 92 114 (58) 77 From the information contained in the monthly general ledger trial balances, the accumulated net loss for the 11 months to 31 May 1999 was $1,030,699 (compared to the budgeted 'most likely' profit for the 12 months to June 1999 of $473K). Clearly, one interpretation of DMEPL's inability to secure finance in this period is that its ongoing trading losses would not be attractive to a potential financier. From the general ledger trial balances, total sales for the 11 months to 31 May 1999 were $3,745,979. Assuming average sales of $340K per month, estimated sales for the year ended 30 June 1999 would be approximately $4,085,979. When compared to the previous financial year, DMEPL's sales data may be summarised as follows: 30-Jun-99 30-Jun-98 % Change (Estimated) (Actual) $000 $000 % Sales 4,086 8,018 -49% In summary, based on actual sales to May 1999 and assumed sales for the month of June 1999, sales for the year ended 30 June 1999 may have deteriorated by approximately 49% over the previous year. As noted above, the net loss to 31 May 1999 was $1,030,699, assuming an average loss of $94K per month, then the net loss for the year ended 30 June 1999 would be $1,124,699. According to PWC's undated Information Memorandum "Up until 10 June 1999, DME employed 17 permanent staff, which has been reduced from approximately 80 since 30 June 1998" (Tab 63). With such a major reduction in staff numbers and in the absence of some other explanation, it seems to me that DMEPL would have been unlikely to replicate the volume of sales experienced by DMEPL in the period prior to the staff reductions. In my view, from the above analysis it is reasonable to conclude DMEPL was unable to repay outstanding current liabilities from its internal activities in the period 1 July 1998 onwards. From Non-Current Assets The disposal of non-current assets may have resulted in additional 'free cash' to assist with the payment of current liabilities. Fixed assets were as follows in the period 30 June 1998 (Tab 58) onwards: $000's Book Value 10.06.99 Book Value 31.05.99 Book Value 31.12.98 Book Value 30.06.98 Loan to Domino Hire - - - 420 Investments (AMP Shares) - - - 687 Land & Buildings 2,257 2,316 2,331 2,349 Motor Vehicles - - - 118 Plant, Equipment & Computers 291 361 494 417 Other - 2 6 88 Intangibles - - - 12 Future Income Tax Benefit - 135 135 135 Total 2,548 2,814 2,966 4,226 Exposure to ANZ (excl overdraft) - - 1,550 2,150 This table indicates non-current assets deteriorated substantially in the period 30 June 1998 to 31 December 1998. One interpretation of this reduction is that in this period DMEPL sought to realise all non-core assets to repay ANZ. For example, it sold its shares in AMP and Domino Hire Pty Limited discharged its $420K loan. If this interpretation is correct, then from 31 December 1998 DMEPL's remaining non-current assets were essential to operate the business as a going concern and therefore could not be sold. This interpretation, which also assumes ANZ would have refused any sale and leaseback proposal of these assets (to protect its security position), would indicate DMEPL was unable to look to non-current assets when seeking to improve its liquidity position in the period 31 December 1998 onwards. Refinancing As discussed in Section 4.1: · On 28 August 1998 Mr Carpenter stated he might be able to obtain additional finance: "Cliff Carpenter who [sic] advised that come Monday 31/8/98 he may have favourable news" (Tab 15). · On 15 September 1998 Mr Carpenter "advised that the bank should advise him that they do not want the connection and he would 'pay them out tomorrow'" (Tab 17). · On 20 November 1998 Mr Carpenter "has requested three months to seek refinance of facilities" (Tab 23). · On 11 December 1998 "Mr Carpenter has acknowledged the Bank wants to exit the relationship with Domino and has undertaken to complete refinance by 28 February 1999. He is proposing to refinance Domino Mining Equipment through Westpac…It has been agreed that if refinance is not completed by 28 February 1999 then he will consent to the Bank appointing a Receiver & Manager to Domino Mining Equipment" (Tab 26). · In the period 11 December 1998 to 20 January 1999, Mr Carpenter advised he could meet the 28 February 1999 deadline (Tab 27). However, the 9 February 1999 ANZ Diary Note states: "Refinance by end February 1999. Mr Carpenter was asked to update on the progress being achieved in this regard. Mr Carpenter repeated what he previously said that he would have little trouble in refinancing Domino Mining Group…When pressed on whether this would take place by 28/2/99 Mr Carpenter became very evasive...This may have something to do with the poor profitability record of Domino Mining Equipment. Mr Carpenter did reiterate what he has also previously said that he has other avenues from which, if necessary, he can raise finance to repay the Bank" (Tab 31). From the fact that at this point there is no evidence of a refinance in process, I infer that a refinance could not be achieved. In the 7 June 1999 letter, PWC advised that as at 6 June 1999 DMEPL "has not prepared forecasts/budgets for the next twelve months" (Tab 64) Similarly, on or about 6 June 1999 (Tab 64) DMEPL advised PWC the following records were unavailable: · A general ledger for April & May 1999; and · Monthly management accounts for July to December 1998. In my view it is difficult to understand how a refinance could have occurred without such information. In the event that such information never existed, the most probable source of refinance was from an existing shareholder/investor who had intimate knowledge of DMEPL. In this regard, it may be that there were never any offers of refinancing; on 24 May 1999 (Tab 45) PWC requested DMEPL provide it with, inter alia, "proposals to refinance the companies' banking facilities with the ANZ Bank and related documents and correspondence." I am not in the possession of any correspondence which suggests DMEPL provided this information to PWC. One interpretation of this lack of documentation is that there were never any offers of refinancing. In a Position Statement as at 1 December 1995, Mr Carpenter states that "Apart from superannuation and life policies, I have no assets whatsoever". In my opinion this suggests that Mr Carpenter was unable to personally refinance the debt (Tab 65). On 9 February 1999 Mr Carpenter "did reiterate what he has also previously said that he has other avenues from which, if necessary, he can raise finance to repay the Bank" (Tab 31). Having regard to the matters raised above, I have assumed that after 9 February 1999 such avenues for refinancing were not realistically available in view of the following: · Firstly, Mr Carpenter had made similar statements on 28 August 1998 (Tab 15) and 15 September 1998 (Tab 17) which did not eventuate in refinance. · Secondly, on 11 December 1998 ANZ has recorded in its Diary Note that it advised Mr Carpenter it wished to exit by 28 February 1999 failing which the ANZ would take steps to appoint a Receiver & Manager to DMEPL (Tab 26). As a former registered liquidator, Mr Carpenter would have fully understood the gravity of appointing a Receiver & Manager to DMEPL particularly since he had personally guaranteed ANZ's indebtedness. I have assumed that by 9 February 1999, Mr Carpenter had explored every possibility for obtaining alternate finance and realised there was no reasonable prospect of obtaining it. I make this assumption notwithstanding the following: · On 19 February 1999 Mr Carpenter's lawyer wrote to ANZ seeking an extension in time to refinance to 28 March 1999 on the basis "… that Christmas, New Year and the holidays were in the middle of that period. This has made the process a little slower.." (Tab 32); and · On 26 February 1999 Mr Carpenter's lawyer wrote to ANZ and advised that "alternative financing is progressing well but will take another 3 or 4 weeks .." (Tab 34). In the absence of any material to evidence finance applications being made and progressing I would disregard the requests for extensions of time subsequent to 9 February 1999. In its 6 September 1999 report to creditors (Tab 66), PWC states "an extensive program was undertaken in an attempt to sell the company's business assets as a going concern. Despite a number of offers being received, none were considered reasonable and accordingly, this method of sale has been terminated". In my view PWC's failure to sell DMEPL's business as a going concern suggests that from at least 10 June 1999 onwards it would have been very difficult to refinance DMEPL. D & R Henderson According to the ANZ 28 August 1998 Diary Note, on that date "Cliff Carpenter advised that come Monday 31/8/98 he may have favourable news to advise…not prepared to elaborate, however, he has previously intimated from discussions with MGR. Nielson that capital injection of $1M has been discussed with other directors David and Robert Henderson of D & R Henderson P/L" (Tab 15). It is apparent that this favourable news did not eventuate. However, the financial statements in my possession indicate D & R Henderson Pty Limited did provide financial assistance in the period prior to 31 May 1999. At 30 June 1997 and 1998, a current liability to D & R Henderson Pty Limited was recorded in the balance in the amount of $281K and $383K respectively (Tab 58). The balance sheet at 31 December 1998 records a non-current liability payable to D & R Henderson of $537,471 (Tab 58). As discussed in 4.1.2 (at the 20 January 1999 bullet point), D & R Henderson Pty Limited prepaid $600K for four machines in December 1998 (Tab 28 / Tab 29) which were subsequently transferred to Domino Hire Pty Limited sometime in the period 24 to 29 May 1999. This transaction was credited to sales for the month of November but for the reasons set out at Section 4.1.2 should properly have been classified as a current liability for 'Customer Deposits' or 'Sales Deposits Received' pending receipt invoicing and delivery of the machines to Domino Hire. In this regard, I would also refer to the Subpoena to D & R Henderson Pty Limited dated 10 May 2006 (Tab 67) and the letter to Minter Ellison dated 25 May 2006 from PMF Legal (Tab 68) confirming that D & R Henderson Pty Limited had no documents to produce evidencing loans or advances or repayments of loans or advances to DMEPL or Domino Hire Pty Limited. Based on this information, I have been asked to assume that no loans or advances were ever made by D & R Henderson Pty Limited in which case DMEPL had no evidence to indicate D & R Henderson Pty Limited was a financier." State of the coalmining industry generally 532 Mr Donnelly took into account his review of Mr Barnett's report. He expressed his opinions in relation to the status of the industry generally, by first observing that the financial health of a particular industry sector may indicate insolvency issues for a company which is dependent on that sector if the company is undercapitalised and the sector has experienced adverse financial conditions for an extended period. This reasoning is accepted. 533 He noted the following matters from Mr Barnett's report: i. DMEPL's main market for sales was New South Wales (NSW") underground mines (paragraph 14); ii. From 1979 to 1998: a) DMEPL sold 88 units of equipment (paragraph 9); b) Of those 88 units, DMEPL sold 66 units to mines in, or companies operating in, NSW in either longwall or bord and pillar mines (paragraph 11); c) 41 of the 66 units were sold to only 16 NSW longwall mines of which half have since closed. 14 of the 66 units were sold to 6 NSW bord and pillar mines of which one has since closed (paragraph 13). iii. From late 1998 prices started to drop sharply. NSW mine employment fell by nearly 4,800 between June 1997 and June 2000. In 1998,1999 and 2000 27 NSW mines were closed (paragraph 103). iv. From about 1996 capital expenditure was closely controlled (paragraph 104). 534 Mr Donnelly expressed the view that from this evidence it appeared that the coal industry had generally been in decline and that in NSW in particular, there had been significant mine closures and a general push to improve mine productivity and reduce costs. This seems a fair summary of the evidence given by Mr Barnett. 535 He agreed with PWC that the depressed state of the coal industry "has led to reduced orders for new machines and for major overhaul and service work". 536 Mr Donnelly approached the matter upon the basis that Pioneer did have some contracts with Chinese mines. He was however unable to locate any evidence which suggested that forward orders would have substantially turned around Pioneer's financial performance. He expressed the view that if there were such orders, Mr Carpenter would most likely have discussed them with ANZ in order to 'buy' more time. 537 In his report he said: According to PWC's undated Information Memorandum, "the majority of work in progress at 10 June 1999 was related to the manufacture of parts for DME stock or to the construction of four Domino machines for a company associated with DME's directors, Domino Hire Pty Limited". 538 In his view this suggested that there were no material forward orders from Chinese mines in the period from January 1999. 539 Finally he expressed the view that the domestic industry downturn and the lack of Chinese sales explained why DMEPL's sales deteriorated significantly. The suggested mis-classification 540 Earlier in these reasons reference was made to the Group's submission in respect of a suggested mis-classification of a receipt of $600,000. In this regard I accept as correct ANZ's contention that this statement mis- construes Mr Donnelly's report and his evidence. To be more precise the position is as follows: i. In his report at page 24 (handwritten numbering, top right of page), Mr Donnelly noted that the General Ledger Trial Balances for Domino Mining recorded sales for the month of November and December 1998 as $1,067M and $0.550M respectively. ii. With respect to November 1998 he noted that the sales "appear to be inflated (in comparison to other months) by the sale of new machines in November of $600K" . iii. Mr Donnelly then referred to a facsimile dated 26 May 2006 from PMF Legal (the plaintiffs' solicitor) which recorded that: "The amount of $600K was paid by cheque to Domino Mining Equipment Pty Ltd on 23 December 1998 on behalf of Domino Hire Pty Ltd … The payment was made to Domino Mining to manufacture four machines …" . iv. Two deposits totalling $600K were made to Domino Mining's bank account on 23 December 1998. v. On the basis of this information, Mr Donnelly then made the following assumptions : a) in the absence of any information to the contrary , that these deposits represent the payment by Domino Hire to DMEPL in order that DMEPL could commence the manufacture of the four machines referred to in the letter of 25 May 2006 from Mr Carpenter's lawyer; b) absent further clarification , that the $600K that was booked to sales in the management accounts for November 1998 actually relates to the deposit received in December 1998 for the manufacture of the four machines for Domino Hire. On the basis of that assumption , Mr Donnelly then wrote (top of page 25): "I would question the treatment of the $600K given that it represented a deposit on machines to be manufactured, and should therefore not have been credited to sales until the machines had been manufactured and invoiced to Domino Hire. The more accurate treatment of this receipt would have been to record it against the current liability for 'Customer Deposits' or 'Sales Deposits Received'"; c) absent further clarification , that the sales of new machines recorded in the management accounts in December 1998 relate to the sale of new machines and spare parts to Yanzhou Mining Group in China (for the detailed reasons given). d) Mr Donnelly's 'Note 1' to the Table on page 39 of his report, merely records the concern he expressed as recorded in sub-paragraph (b) above, that on the information available to him and on the disclosed assumptions he had made, the receipt of the $600K should have received a different accounting treatment. e) Mr Donnelly did not adjust the company's monthly balance sheets to reflect this view, but accepted the company's accounting treatment of the transaction. f) The significant factor to note is that if Mr Donnelly had made any adjustment, the company's position would have been worse . His oral evidence in cross-examination was consistent with this [transcript 1491]: "The note 1 that's there was put there because I suspicious that the transaction was an identical amount to the funds advanced by D & R Henderson. We saw the money go into the bank account. If D & R Henderson had advanced the money and it wasn't treated as a sale, then the normal entry would be to debit the bank and you would credit the loan account. We couldn't find a loan account for D & R Henderson, so given - we couldn't find a loan account for D & R Henderson in the company's records, we saw 600,000 go in, it was treated as a sale, so I've tread - sorry, I maintain the records as prepared by the company's general ledger, but I noted that this could well be a mistake and if it's a mistake or a mis-classification, the position will be 600,000 worse. Now, I didn't change the company's records but I noted that it could be wrong." 541 Further the submission of the Group that ANZ's case supported by the evidence given by Mr Donnelly, comes down to a contention that, for solvency, an enterprise must have confirmed forward orders to cover expenses, is incorrect. Mr Donnelly in particular covered an enormous amount of ground in terms of the integers taken into account. These reasons are grounded upon the company's financial position taken as a whole in terms of each of the integers which have been examined. Examining the evidence given by Mr Hunter 542 Mr Hunter has had extensive experience having been a partner in a number of firms and having been the division head of insolvency for the Sydney office and for Australia of Arthur Anderson, Chartered Accountants. He was also a member of the worldwide insolvency group of that firm. In 1986 he established his own consulting practice specialising in investigations, forensic accounting and insolvency related matters. During his period in being an official liquidator, on his estimate he was appointed as liquidator, receiver or some other form of administrator to over 2000 entities. He had acted as an expert on behalf of several firms of solicitors preparing reports concerning solvency, trading whilst insolvent, other insolvency related matters, investigation/forensic accounting matters, valuation of entities/businesses/assets, claims relating to damages and/or economic loss. 543 In the executive summary of his report he expressed the view that Pioneer was solvent on each of the dates 1 December 1998; 5 May 1999; 9 June 1999; and 10 June 1999. 544 His summary view which requires to be read in conjunction with his full report, relied upon the following matters as foundational to his opinions: i. Pioneer had positive working capital at the relevant dates; ii. Pioneer had a surplus of net assets at the relevant dates; iii. Pioneer considered that it had long term funding from the ANZ through until January 2001; iv. Pioneer had alternative sources of funding at the Relevant Dates; v. The report from the investigative accountant to the ANZ dated 7 June 1999 disclosed(on a going concern basis) that as at 31 May 1999, Pioneer was able to pay all of its liabilities. 545 As already observed Mr Hunter had relied upon the accuracy of the management accounts for 31 May 1999 [annexed to his report at tab F] in forming his opinion that the company was solvent at that date [transcript 1271]. Those accounts had been provided to him by the Group's solicitors. Hence at commencement, an important set of materials from which he had worked, represented a mistaken assumption. The mistake was not his as he simply complied with the instructions which he was given. 546 Although there were many areas across which he was extensively cross-examined, very early in his cross examination he accepted that the major difference between the approach which he had taken and the approach which Mr Donnelly had taken, was that Mr Hunter had assumed that $2,000,000 of the ANZ debt was a non-current liability, whereas Mr Donnelly had assumed that the whole of the sum of $2.5 million was a current liability. Hence these two experts were apart in relation to the correct accounting treatment to be accorded to the ANZ facility [Mr Hunter accepting that the other $0.5 million had been an ANZ advance]. 547 For the reasons set out in the judgment, the Court's finding is that by reason of the clause 10(1)(k) event of default [and the entitlement of ANZ by reason of that event of default to make money due and payable by giving written notice which would become effective immediately upon being given], the whole of the ANZ indebtedness was a current liability. 548 In expressing his opinions Mr Hunter had formed the view that the company was not insolvent at 31 May 1999 for the following reasons: i. The company had a net asset surplus (transcript1274.30); ii. The company had a working capital surplus (transcript 1274.31); iii. Stock was undervalued as suggested by Mr Domsalla that it was in fact worth $2.75 million (transcript 1274.43); iv. The value of the property was taken at $2.175 million (transcript 1274.49). Dealing with each of these reasons seriatim Working capital 549 Under cross-examination Mr Hunter agreed that in relation to the second of these reasons, upon the assumptions: i. that the $2.5 million bank debt be regarded as a current liability; ii. that the position of the Hendersons be ignored, the position would be that there was a working capital deficiency [transcript 1275.5]. This circumstance would it seems to me, remove the underpinning for at least one of the significant indicators relied upon by Mr Hunter in his executive summary, where he had posited that the company had a positive working capital at the relevant dates. Net assets [ property valuation; stock valuation; Yangzhou debt] 550 Dealing with the first of these reasons, Mr Hunter's approach once it was put to him that there was a working capital deficiency, was that notwithstanding that capital deficiency, there were still positive net assets: this upon the assumption that the assets were properly valued at about $1.16 million less the director controlled loans of $148,000, that is to say valued in the balance sheet 'Annexure F' from which Mr Hunter had been working, at a little over $1,000,000. 551 Mr Hunter gave the following evidence in this regard: Q. We'll go through some more factors, but so far - and we can only deal with them one by one - we've got, on the assumptions I'm making, a $1.4 million working capital deficiency, which is an indicator of insolvency and we've got a $1 million debt asset surplus which tends somewhat in the other direction. Do you agree with that much? A. I do. [transcript 1276] 552 Concerning net assets, it was put to Mr Hunter that expert real estate valuers on both sides of the record agreed on a value of the Tuggerah property at $2.175 million in 1999 and up to 2001. Mr Hunter had however prepared his report on the basis of an instruction that the property, plant and equipment were, if anything, undervalued, especially the Tuggerah land. 553 Dealing with stock values, initially Mr Hunter under cross-examination expressed the views both: i. that one could not form a view as to insolvency or solvency based on estimated auction values for stock but that one required to treat with the subject on a going concern basis; ii. that he would not be more inclined to assess solvency by reference to the fair market value of stock. [transcript 1278 .30] 554 Mr Hunter accepted that if insolvency was being assessed retrospectively, the Lawsons stock values of $271,000 or $66,000 would need to be taken into account [transcript 1279.15]. The finding is that these values reduce the current assets from a book value of $1.3 million as at 9 June 1999 to a figure between $181,000 and $386,000: Exhibit 22. Mr Hunter's reasoning appeared to be that on a retrospective basis, the company was insolvent: Q. Let me try again Mr Hunter, what I'm suggesting is that leaving aside a retrospective assessment of insolvency where I think you'd agree it's pretty clearly insolvent based on Lawsons numbers, correct? A. Retrospective, yes. [transcript 1416 .40] 555 Once making: i. the realistic assumption that ANZ was not offering any further forbearance on the recovery of its debts after May 1999 and ii. the assumption that in the ordinary course, the company was converting stock into cash at $50,000-$100,000 per month, Mr Hunter under cross-examination, accepted that even from a prospective view, the company would have a grave problem with solvency unless it attempted to realise the stock in a shorter period than its ordinary trading pattern [transcript 1281.14]. The cross-examination of Mr Hunter included: Q. ..[I]f we take the stock at the upper end of the Lawson's valuation and we take the land at the land valuer's and we discount Yanzhou we have got negative net assets. Correct? A. Correct. Q. So we have got a company with fairly substantial working capital deficiency and negative net assets. Would you agree that although we haven't yet looked at the entire picture, those two indicators are reasonably strong indicators pointing in the direction of insolvency? A. Hypothetically, yes. Q. I then just want to add in this element: If the bank says, look, we really just want our money within thirty days, then what the company is going to have to do with the stock is actually put it out to the auction value, aren't they, as opposed to attempt to get the fair market value over two or three months? A. Yes. Q. If we make that assumption there is going to be a further $200,000 variation. Correct? A. Yes. Q. So we are going to have negative net assets of in the order of $400,000? A. Yes. [Transcript 1283-1284] Yangzhou debt 556 Mr Hunter had factored into certain of his working papers the fact that the Yangzhou debt, would not have been an available debt for solvency purposes [transcript 1282.53]. 557 Further, Mr Hunter conceded that, assuming the stock was written down to Lawsons' fair market value, the land was written down to the value given by the real estate experts and the Yangzhou debt was treated as non-recoverable, the net asset position of the company would be negative $100,000 - $200,000 [transcript 1283], being a reasonably strong indicator of insolvency [transcript 1284.10]. The deferral of creditors 558 Earlier in these reasons the situation with respect to the deferral of creditors has been examined. This matter was drawn to the attention of Mr Hunter under cross-examination for the reason that he had been instructed to prepare his report upon the assumption that the creditors were being paid in the normal course of business in accordance with usual industry terms. On the evidence this assumption was unwarranted. It is simply another example of the manner in which Mr Hunter's instructions had departed from the reality as proven by the evidence. Finding 559 It will be recalled that during at least part of the cross-examination of Mr Hunter, he had been asked to leave to the side the question of whether or not the Hendersons or their companies, would be a readily available source of funding in any straightened circumstances of the Group. In that regard for reasons given elsewhere in this judgment, any such assumption could not be made. 560 At most even if the Court was to limit itself to approaching the matter from and only from his perspective, Mr Hunter's evidence would on his concessions given under cross examination suggest that the following clear indicators of insolvency have been shown by 9 June 1999: i. a working capital deficiency of $1.4 million ii. negative net assets of $400,000 iii. unavailability/absence of other cash resources. Evidence given by Mr Gower 561 As will appear from what follows, the evidence of Mr Gower serves to fortify the earlier set out finding as to insolvency. 562 Mr Gower has had extensive experience in a wide range of corporate advisory and consultancy assignments and has acted as an expert witness in major commercial litigation matters. He is a former partner of Deloitte Touche Tohmatsu and of its predecessor Duesburys. He has had extensive experience in audit investigation assignments covering major industrial, mining and trading companies. His experience has included accounting support inter alia covering analysis of the fairness of acquisition considerations to be paid; valuation of businesses; due diligence investigations; general financial analysis and advice and litigation engagements involving giving evidence in respect of accounting matters generally and quantification of economic loss. 563 The instructions to Mr Gower included the provision of a report setting out his opinions as to whether Pioneer's business was viable at 10 June 1999, and if so, what was the value of Pioneer at 10 June 1999. 564 For the purposes of his report he assumed the term "viable" to mean that the entity: i. was solvent, i.e., able to pay it's debts as and when they fall due; and ii. had the ability to continue its operations from its core business. 565 His opinion was that Pioneer was not viable at 10 June 1999 for the reasons detailed in his report. The principal reasons were: i. Pioneer was not profitable; ii. Pioneer had an increasing reliance on debt; iii. Pioneer was unable to service its existing debt and was fully drawn down on its existing facilities; and iv. Pioneer had suffered a substantial depletion in its assets, particularly working capital. The replenishment of these assets would require funding which was not available to Pioneer. 566 Without travelling through the assumptions upon which Mr Gower operated in preparing his report it is convenient to simply set out his reasons for his opinion on the question of whether or not the business was viable as at 10 June 1999. 567 Notwithstanding that some of the opinions expressed by Mr Gower utilised alternative approaches to certain of the financial information relied upon in Mr Donnelly's analysis, it does seem to me that at the least, the opinions which he expressed fortify the above described finding as to insolvency. In that regard Mr Gower expressed the following opinions: "In determining the viability of Pioneer as at 10 June 1999 the following matters are significant: (a) Pioneer was not profitable (i) The following EBIT had been achieved by Pioneer during the period from July 1994 to December 1999: (ii) The EBIT losses incurred during 1997 and 1998 and the six months to December 1998 were a consequence of declining gross margins which were inadequate to sustain Pioneer's overhead structure; (iii) Based on the documents which I have examined, there are no forecasts, business plans or other documents which in my opinion provide any reasonable expectation that the adverse profitability and gross profit margins would be rectified during the period subsequent to 31 December 1998 and during the period immediately subsequent to 10 June 1999; and (iv) Unprofitable trading caused Pioneer to incur cash outflows of $2.5m during the 1998 and 1999 financial years. (b) Increasing reliance on debt (i) By June 1998 there was an increasing reliance on debt finance to fund the business. This is demonstrated by the increase in the level of interest bearing debt to $4.0m at June 1998 compared to $2.7m the previous year. This represents an increase of $1.3m; (ii) At 30 June 1996 Pioneer had an interest bearing debt/shareholders funds ratio of 1.02. By June 1998 this ratio had more than doubled to 2.14, i.e. debt levels had doubled in relation to shareholders equity; and (iii) The increase in debt indicates Pioneer was financing its loss making operations through further borrowings rather than through internal generation of cash flows. (c) Inability to service debt (i) In 1996 Pioneer's EBIT of $395,000 was inadequate to fund its gross interest expense of $400,000; and (ii) Pioneer incurred an EBIT loss in 1997 and 1998 and therefore was unable to fund its cost of debt during each of these years. (d) Inability to access further funding (i) I am instructed Pioneer was fully drawn on its commercial bill facility and no further financial accommodation would be available after 10 June 1999; and (ii) The company had negligible cash at 10 June 1999. (e) Depletion in assets (i) Pioneer's operating losses caused a reduction in its net assets such that at 10 June 1999 net assets had been reduced to $1.1m; (ii) Current assets progressively reduced from $13.0m at 30 June 1996 to $1.4m at 10 June 1999. The reduction of debtors and inventories was of a similar order of magnitude; and (iii) Current liabilities reduced from $10.9m at 30 June 1996 to $2.8m at 10 June 1999. At 10 June 1999 current liabilities principally comprised of an overdraft of $2.5m. In my opinion, the working capital of Pioneer was so depleted at 10 June 1999 that a substantial injection of funds would be needed if trading were to return to levels achieved during the years prior to 30 June 1997, and even at those levels profitability is not assured. I consider that if Pioneer were to seek to re-establish its business, at 10 June 1999 there was a need for an injection of funds. This was necessary to replenish working capital on the basis that there would be an obvious necessity to fund receivables and inventories if trading was to return to the levels of earlier years. To my knowledge at 10 June 1999 Pioneer did not have any business plans, a programme to access funding necessary to replenish working capital or re-establish profitable trading. In this regard the budget for the year to 30 June 1999 indicated revenues of $7.5m and a pre tax profit of $431,000 for the year. Budgeted revenues, profits and profit margins were not achieved during the six month period to 31 December 1998 by such a substantial margin that I consider that the June 1999 budget could not reasonably be regarded as providing any objective indicator of Pioneer's expected financial performance as at 10 June 1999. In my opinion, for the reasons provided above, Pioneer was not viable at 10 June 1999. Pioneer was unable to continue to trade on 10 June 1999 because it did not have sufficient working capital to continue operations from its core business, (even if it were solvent, and I express no opinion on the issue of solvency). The report of Administrators PricewaterhouseCoopers to creditors states that they were not able to obtain reasonable offers for the sale of the business as a going concern, albeit that the process took place between 10 June 1999 and 29 July 1999 when the company lapsed into liquidation. In my opinion, for the reasons stated here, the value of Pioneer at 10 June 1999 was in the range of its liquidation (or break up value) and the value of its tangible assets realised as a going concern. I have not undertaken either analysis and therefore express no opinion as to the value of Pioneer at 10 June 1999." The testing of the opinion of Mr Gower 568 The convenient approach is to examine the evidence given by Mr Gower against that given by Mr Richardson who was called by the Group. 569 Mr Richardson's evidence may shortly be thumbnail sketched as follows: i. Mr Richardson swore three affidavits in these proceedings, one of 7 April 2006 and two of the same date 10 July 2006. The first one contains a report with a valuation and the second contains a report in answer to Mr Donnelly's report of 16 June 2006 and the third contains a report commenting upon to Mr Gower's report of 19 June 2006. (transcript 1199) ii. Mr Richardson formed the following opinions: a) the valuation method known as capitalisation of future maintainable earnings cannot be used in respect to Domino Mining because there are no identifiable earnings (transcript 1207.38); b) there was not enough information for him to conduct a discounted cash flow valuation (transcript 1207); c) The two primary methods for valuing shares are the above two methods (transcript 1207.49) iii. Mr Richardson gave an opinion as to the viability of Domino Mining as at June 1999 on the basis of a going concern under the asset based valuation method. Normally these are only used as a secondary check or guide to a primary valuation method, which focuses on the company's earnings or cashflow (transcript 1208). iv. Mr Richardson preferred to value the assets on the basis that Pioneer continued to trade as a going concern and was solvent and that a purchaser would have paid some amount for goodwill on the basis that the business could be re-engineered to earn a small annual after tax profit v. Mr Richardson considered the hypothesis that a purchaser might have been able to re-engineer the business of Domino Mining (transcript 1224). He expressed a view that if that was a reasonable hypothesis then a purchaser might have been prepared to pay a sum of $200,000 for goodwill (transcript 1224). His view was not based on using the capitalisation of future maintainable earnings method. (transcript 1224). vi. Mr Richardson's approach to the concept of goodwill does not assume that goodwill has no existence independently from the conduct of a business (transcript 1229). He does not proceed on the basis that goodwill cannot be severed from the business which created it (transcript 1229) He proceeds on the premise that goodwill has value because it can be bought and sold as part of a business (transcript 1229) and that the value of goodwill of a business is tied to the fortunes of a business (transcript 1229). vii. Mr Richardson's valuation methodology contains 2 steps: a) value for the net assets on an ERV basis; b) add an amount for the goodwill (transcript 1230). viii. Mr Richardson agreed that after Mr Gleeson took him to additional information the first stage of the valuation would have given a figure of negative $650,000 (transcript 1231) and in relation to the hypothesis that the name and the technical drawings might produce a positive value, in his position in terms of his expertise, he can do no more than say that it is a hypothesis but whether it is realistic would depend upon the expertise of others (transcript 1231). ix. the following matters were put to Mr Richardson at transcript 1240: (1) that the company had no established future maintainable earnings; (2) the adjusted ERV valuation; (3) the adjusted working capital deficiency calculations; (4) the facts relating to creditors in MFI D19; (5) the substantial re-organisation of this company required to achieve profits into the future; (6) the non existence of any plan by the company at the time which would have achieved such a substantial re-organisation. x. On those six matters put to Mr Richardson he agreed with the opinion that Pioneer lacked viability as at the end of May 1999. 570 In my view there are several problems with the reasoning and approach taken by Mr Richardson. The short position in terms of identifying these difficulties is as follows: i. as to his asset based valuation for the company, this method as he conceded, is a secondary valuation method only; ii. although Mr Richardson conceded that he could not properly value the company on a going concern basis, he continued to provide calculations on the basis of estimated realisable value of assets; iii. for the reason expressed in ii, the Court can safely conclude that an asset based valuation which assumes that Pioneer was a going concern is inappropriate; iv. there are two problems with the hypothesis posited by Mr Richardson that a purchaser might have been able to re-engineer the business of Domino Mining, upon which basis a purchaser might have been prepared to pay a sum of $200,000 for goodwill: (1) Mr Richardson agreed that he had not conducted a business case analysis as to the size of the injection of funds needed in order to re-engineer the company's business to allow it to continue trading [but during the course of cross examination he agreed that it would cost at least $2.5 million to pay out the bank overdraft and probably a further $500,000, to rebuild the company]; (2) The problem with the suggested sum of $200,000 for goodwill is that Mr Richardson's cross-examination demonstrated that he was not dealing here with goodwill in its true sense: cf Federal Commission of Taxation v Murray 1998 193 CLR 605. What he had in fact assumed was that the buyer was essentially buying the naming rights and the other rights associated with drawings and copyright and applying a value to those rights on the basis that he would expect a purchaser would have purchased those rights essentially as an 'add on'. The fact was that Mr Richardson did not have expertise in relation to the valuation of the naming and other rights referred to above. 571 As ANZ has submitted, Mr Richardson is seen to have made the following substantial concessions on the question of viability: a) he could not opine that the company was a going concern: ( transcript 1209 ) and ( transcript 1207 ) ; b) his opinion was in fact that Pioneer did lack viability, making the assumptions (proven on the evidence) of no established future maintainable earnings, the adjusted ERV valuation Exhibit D20, the adjusted working capital deficiency calculations at ( transcript 1238 ) , the matters in MFI D19 relating to creditors, and the company's need for a substantial re-organisation of business ( transcript 1240 ) . Conclusion 572 For the above reasons, the approach and methodology of Mr Gower is preferred to that of Mr Richardson. The case pursued by Merlo Wholesale and Merlo Australia 573 Only minor attention was given during the hearing to these cases. The short position is as follows: i. the banking facilities provided by ANZ to Merlo Wholesale are to be found in letter of offer [9/135] dated 29 August 1997, the facilities being Documentary Credit/Documents/ Surrender and Foreign Currency dealing limit [as varied by the annual review and variation letters from ANZ dated 6 April and 9 June 1998]; ii. the facilities were expressly made not terminable before the next review date; iii. the initial letter of offer of 29 August had required both Merlo companies to provide security comprising a mortgage debenture and deed of charge over the assets and undertaking of each of these companies, together with cross guarantee and indemnity between them and guarantee and indemnity in respect of the indebtedness of each of them by Mr Carpenter; vi. Merlo Australia was first granted an encashment facility of $1,000 by letter of 9 June 1998 v. the facilities incorporated by reference, the terms and conditions set out in ANZ's General Conditions (Second edition 1995); vi. ANZ by notice addressed to Merlo Wholesale dated 11 May 1999 [PX 14/500] again: a) notified the customer that in accordance with clause 9 of the General Conditions it had undertaken a review of the facilities on the 11 December 1998; b) purported in accordance with clause 9 (2) (b) of the General conditions to give 30 days notice terminating the facilities; c) stated that in accordance with clause 9(4) of the General Conditions, the effect of the notice was to require Merlo to pay ANZ immediately upon that termination, the Outstanding Money within the meaning of the General Conditions; d) again attached to the notice a schedule setting out the current balance of the facilities making the point that the exact figures would change over the 30 day period of the notice and that further details of the amount to be paid would be given shortly before termination adding that the company might in the meantime he elect to repay the facilities; e) the company was advised that unless the terms of the notice were satisfied, ANZ would take such action as it was advised to enforce the securities it held for repayment of the facilities. vi. Here again the notice was invalid for the reason that no annual review had been undertaken. 574 The central differences with the position which obtained in relation to Pioneer Park was that on any view, there were no fixed term facilities, and that the facilities were clearly always subject to annual review. Further all that happened after the giving of the above described notice was that Merlo Wholesale paid out the demand by paying the amount of $270,000. 575 Albeit that there are a few diary notes which overlap with materials already treated within the judgment, the short chronology provided by ANZ in its final submissions [which is generally taken from contemporaneous documents in evidence] is convenient to be borne in mind in terms of the history of these facilities: 13 August 1998 576 ANZ diary note of this date [12/310] records receipt of management figures for the year ending 30 June 1998 of entities within the client group. The Merlo Companies' position is reviewed commencing at page 12 of this document. It records that Merlo Wholesale has a debit balance on its operating account of $138,391.00 without any approved overdraft facility. It extracts figures from the accounts of Merlo Wholesale as at 30 June 1998 and compares them with budget projections for the same date. That comparison shows that sales achieved of $1.205 million dollars compared with budgeted sales of $6.037 million dollars. Gross profit of $143,000.00 compared with budget $797,000.00, EBIT of $86,000.00 compared with budget of $653,000.00 and net profit before tax of $86,000.00 compared with budgeted net profit of $437,000.00. In comments under cash flow, it notes that surplus funds of $475,000.00 were utilised toward repayment of loans from Domino Mining. Financial structure indicates that although effective equity increased from $340,000.00 at the beginning of the year to $408,000.00 at the end of the year, working capital over the same period declined from a surplus of $116,000.00 to a deficit of $19,000.00. This reduction is attributed to an increase in the loan to Merlo Australia from profits generated, to fund the loss in Merlo Australia. 577 Analysis of Merlo Australia figures commences at page 16 of the diary note. Figures for 30 June 1998 are compared to budget and show sales of $1.374 million dollars compared to budgeted sales of $7 million dollars, gross profit of $201,000.00 compared to budget of $963,000.00 EBIT shows a loss of $53,000.00 compared to a budget EBIT of $437,000.00 and a net loss before tax of $53,000.00 compared to budgeted profit of $293,000.00. The diary note records: "If losses continue to feature in this entity, it will place additional strain on MW [Merlo Wholesale] as less of the sale proceeds will be repatriated back to MW to meet maturing L/C's as it will be required to be absorbed to cover the losses in MA". 578 The diary note also records projections which the customer sets out in a budget for the year ended 30 June 1999 on account of Merlo Australia Pty Limited, indicating budgeted sales of $2.221 million dollars EBIT of $133,000.00 and net profit before tax of $89,000.00. It appears that Mr Jones and Mr Neilson have then adjusted these figures for the purpose of projecting a "most likely" scenario for 30 June 1999 and 30 June 2000. Sales have been reduced by 9% and the gross profit is adjusted from budget of $263,000.00 to $303,000.00 for 1999 more closely reflecting gross profit ratios evident in the historical data provided. Total expenses are increased to 18.21% of projected sales, which more closely matches the ratio of expenses to sales indicated in the actual figures for 1997 and 1998 and compares to an unrealistic budget projection of expenses totalling only 5.85% of sales for 1999. As a result of these adjustments, Mr Jones and Mr Neilson derive a most likely scenario where EBIT would be minus $65,000.00 compared to the budget projection of positive $133,000.00 and a net loss of $65,000.00 compared to a budgeted profit of $89,000.00. 579 The diary note records at page 18 that Merlo Australia's financial structure indicates a deterioration in effective equity from $140,000.00 to $87,000.00 and a deterioration in working capital from a deficit of $25,000.00 at 30 June 1997 to a deficit of $78,000.00 at 30 June 1998. 580 The security indicator for Merlo Wholesale is ranked "F". The CART rating is assessed at 6. 22 October 1998 581 A diary note by Mr Harvey of this date [12/360] records telephone call from Julie Stewart to advise that Merlo Wholesale account will overdraw $160K-$170K on payment of a Letter of credit for $170K due 21 October, to reduce to $50K by 26/10/98 and clear in full by end of month. Mr Harvey advised Ms Stewart that there were no arrangements in place for this and it was expected that the account would remain in credit. After some more discussion, Ms Stewart explained that with 4 machines currently "on the water" Merlo did not intend any further purchases until say two of those machines were sold. Ms Stewart then requested a formal interchangeable Doc O/S/OD facility of $1M which was declined. 582 Mr Harvey told Ms Stewart he would support payment of LC $170K in the absence of any alternative subject to: (a) OD to reduce to $50K by 26/10/98 and clear in full by 31/10/98; (b) No further LC's to be established without specific approval which would not be likely whilst any overdraft excess remained outstanding. 583 It appears that this proposed arrangement was approved, and approval of Mr Brennan and relieving SMC is endorsed on the diary note with Mr Brennan adding some comments. The note also records the arrangement being implemented. International advised that following payment of LC of $170K on 21st October the total Doc S/O liability would be approximately $440K. International were not to establish and further credits without reference. 584 The diary note also records that "Cliff Carpenter has previously been advised that the Merlo balance sheet strength alone does not support continuation of the $1M Doc S/O line." Mrs Stewart had no relevant recollection of the conversation(s) but confirmed that such an arrangement if made would have been after consultation with Mr Carpenter: transcript 724-6. 585 A diary note of Mr Kilcran of this date [12/ 362] notes Merlo Wholesale account excess of $162,190.95 against nil limit. "Excess permitted in terms of Diary Note dated 20.01.1998." 586 It seems that there was agreement between Mr Harvey and Ms Stewart to permit the excess on the terms stated in the 20 October diary note. 28 October 1998 587 A diary note of Mr Harvey [12/365] records excess on Merlo Wholesale account is at $50,580. Records (in last paragraph) discussion with Ms Stewart in which she confirmed that they expected the excess to clear by the end of the month as arranged. 2 November 1998 588 A diary note of Mr Harvey [12/371] records excess on Merlo Wholesale account is at $50,915. Mr Harvey chasing up non-clearance of the excess. Records discussion of the terms under which the facility was set up. Mr Harvey confirms no overdraft facilities in place for Merlo. 5 November 1998 589 Diary note of Huelin [12/374] records excess on Merlo Wholesale account is at $51,014. Records follow-up conversations with Carpenter and Stewart about clearance of the excess. 9 November 1998 590 Diary note prepared by Mr Harvey [12/378] indicates that Merlo Wholesale has debit excess of $51,440. Mr Harvey noted that Mr Carpenter asserted that the documentary credit arrangements were put in place on the basis that they would endeavour to sell the imported machines within the 180 day doc S facility. However, there would be occasions when this would not be possible. On these occasions the Doc/ S liability would revert to overdraft until the machines were sold. Mr Harvey confirmed to Mr Carpenter that there were no interchangeable facilities in place. The doc S/O is set up as a trade finance facility and not ongoing bailment finance. Mr Harvey requested transfer of funds from other companies to clear excess. Mr Carpenter said all available working capital in Domino is being used to purchase spare parts to supply the China Contract. The diary note records request to authorise an extended overdraft limit of $52,000.00 until 30 November 1998 transferred from the unutilised doc S/0 facility. Notes from Mr Brennan and Mr Peacock indicate approval for this proposal, stating that the situation is unsatisfactory and must be put in order ASAP. The note indicates that unless all issues can be resolved on 17 November, may need to consider transfer to GCM. 20 November 1998 591 Diary note of Ms Kerri Huelin [12/388] records financial monitoring of Domino Mining following receipt of audited consolidated accounts together with management accounts for three (3) months period to September 1998. In respect of Merlo Australia and its controlled entities, it was noted that the trading performance of the Merlo group improved slightly over the last twelve (12) months to record a small profit. Merlo Wholesale sales for the period ended 30 June 1998 are recorded as $1.205 million dollars with a net profit before tax of $84,000.00. Profit for the September quarter was noted to be significantly below budgeted levels with sales being 53% below budget. And it is noted that operating expenses are $3,000 over budget, despite the fall in turnover. In view of the above trading results and the company's history of poor budgeting, the ability to achieve projected profitability levels for 30 June 1999 must be questioned. In relation to Merlo Australia, the diary note refers to the loss in Merlo Australia for the period ended 30 June 1998 of $75,000 compared to a loss of $53,000.00 tabled in management accounts previously furnished and analysed in the diary note of 13 August 1998. Results for the September 1998 quarter were described as disappointing, with a profit of $2,000.00 compared to a budgeted profit of $29,000.00. The diary note states "the fall in sales is attributed to the general down turn being experienced in the industry". "The company has budgeted for a NPBT of $134K for the twelve (12) months to 30/6/99. In view of the above, trading results to the three (3) months to 30/6/98, the history of poor budgeting the company's ability to meet to forecast for 30/6/99 must be further investigated and critically assessed. The appointment of an independent investigative accountant to assess budgets and ongoing group viability is considered appropriate, if we are to continue to maintain a banking relationship with this group". 592 In respect of the Merlo Australia security position, this was assessed as disclosing a shortfall of $788,000.00 compared to the total limits of the facilities, and a security indicator of "F" was considered appropriate. A CART assessment indicated a rating of 8 in respect of Merlo Australia and controlled entities. Mr Brennan's handwritten note at the end of this diary note, recommends immediate transfer to GCM to enforce an exit strategy and as to appointment of an IA, would be left to GCM. Mr Pidcock agreed to the transfer and recommended various steps be taken immediately. So far as the Merlo facilities were concerned, the note "OD temp $52.5K has cleared and can now be cancelled. Meantime CCR 8F confirmed O/A Merlo Australia P/L and Merlo Wholesale P/L…" Mr Pidcock also stated "docy….O/S limit to reduce to $450K (run off of residual to take until May 1999). No further L/C establishments". 11 December 1998 593 The diary note prepared mainly by Mr Soper as his record of conducting the annual review which had been due 30 November 1998 [13/407]. This document also covers the Merlo facilities and notes that the documentary credit/O/S facility has been placed on a reduction basis only with runoff of L/C's throughout the first half of 1999. [This is consistent with the diary notes of 20-28 October noted above.] Mr Soper calculated the Bank's security over Merlo Wholesale was worth $233,000.00 less than the amount of the outstanding facilities. The diary note records Mr Carpenter's intention to refinance Merlo Wholesale through the Commonwealth Bank. Soper decided not to raise a provision in respect of Merlo Wholesale at that point, noting to review that position in May if necessary. 20 January 1999 594 Diary note of Mr Soper of this date [13/432] records a request from Mr Carpenter for a new letter of credit to be opened for Merlo Wholesale. Mr Soper advised Mr Carpenter that the limit for the Merlo Wholesale facility had been pegged at $422,000.00 on the basis that the facilities had expired on 30 November 1998 and the Bank was not going to extend facilities to the Domino Mining group on the basis that the refinance was to take place by 28 February 1999. Mr Carpenter apparently said that the establishment of the letter of credit was extremely important. Mr Soper indicated that the Bank would look at the situation in some detail and get back to him. 21 January 1999 595 Diary note of Mr Soper [13/433] records him telephoning Mr Carpenter to propose a way the Bank could extend letters of credit within existing facilities if outstanding letters of credit were prepaid. 596 In respect of one particular matter concerning the Merlo facilities it is to be noted that: i. Mr Carpenter gave evidence in his 14 November 2005 affidavit at [128] that in January 1999 that he learnt that the letter of credit facility was to be capped at the level of existing drawings of about $425,000; ii. in oral evidence he said this was the first he learnt this had happened (transcript 418); iii. however, the documentary evidence [12/360] shows that this was agreed between Mrs Stewart and Mr Harvey as early as October 1998, in a context where Mrs Stewart on behalf of Merlo and Mr Carpenter was seeking an indulgence from the Bank to allow letters of credit to be drawn over their approved limit; vi. the finding is that on the balance of probabilities it is implausible that Mrs Stewart would have agreed such a significant variation without purporting to, and obtaining, the consent of Mr Carpenter. [ The cross-examination of Mr Carpenter dealt with this matter at 418 et seq] v. under cross-examination Ms Stewart had difficulties remembering the particular events and a number of instances could neither denying or con firm the specific content of her conversations with Mr Harvey. Their evidence included: Q. What I want to suggest to you, and tell me whether you are in a position to agree with it, disagree or can't remember, is that on [about 20 October 1998] ..the bank actually agreed to allow a temporary overdraft up to $170,000 to reduce to $50,000 by 26 October and to clear in full by 31 October in accordance with the advice you had given as recorded in the first paragraph. A. Yes. … Q. I want to suggest to you that he told you that he would support the payment, that is allow that temporary overdraft, in the absence of any alternative source of funds on the part of Merlo Wholesale, subject to the two conditions he lists, one of which was no further letters of credit to be established without specific approval. Do you agree with that? A. I agree that that's what's written there. I don't remember him saying that. Q. Do you deny that he said words to that effect? A. I don't remember so I can't deny or confirm. Q. I want to suggest to you that the letter of credit did put the Merlo Wholesale account into overdraft of $162,000 on the following day. Do you remember that or not? A. No. Q. And it was reduced to $50,000 by 28 October, that by 9 November the debit was still $51,000. Do you remember that? A. No. Q. And I want to suggest to you that on 20 October you made an arrangement for temporary financial accommodation for Merlo Wholesale under which the agreement was there would be no further letters established without specific approval…. Q. Are you able to deny that? A. I don't remember him saying that. Q. I see, and if the conversation happened as recounted in this file note, doing a deal such as that, is that something you would consult with Mr Carpenter about? A. Yes. He would have asked me to make the call. [Transcript 725-726] Dealing with the cases 597 In essence the claim for breach of contract appears to be for breach by ANZ of implied terms to exercise rights and powers in good faith, to co-operate in the performance of the contract and not to conduct itself to frustrate the performance by Merlo Australia, Merlo Wholesale or Mr Carpenter of the agreements between them and ANZ. 598 Merlo Wholesale and Merlo Australia appear to be advancing claims for breach of contract based on a facility which Merlo Wholesale had with the Bank allegedly "for its benefit and for the benefit of Merlo Australia". 599 As ANZ has submitted, this assertion is not supported by any evidence directed to that issue. Hence it does not seem to be shown that Merlo Wholesale held the facility on trust for Merlo Australia. 600 Merlo Australia's case in contract is simply answered by a lack of privity. The short position is that save for the encashment facility, Merlo Australia was not a party to any relevant contract. In these circumstances it is impossible for Merlo Australia to establish a claim for breach of contract. 601 ANZ has additional defences in relation to the claims pursued by the Merlo companies. Claims statute barred 602 Importantly these include the contention that the claim is statute barred. The breach of contract occurred more than six years prior to the Merlo Companies being added to the proceedings. 603 As pleaded, the cause of action for breach of contract accrued on or shortly after 11 December 1998, with the consequence that it became statute barred on or shortly after 11 December 2004. The Merlo proceedings were commenced after that date, on 22 June 2005 by summons in proceedings number 5009 of 2006. Hence these claims are defeated by the statutory extinguishment of the cause of action effected under the Limitations Act 1969 (NSW). 604 The Merlo companies have sought to outflank this defence by contending that ANZ confirmed the causes of action by its letter of the 11 May 1999 and by its subsequent conduct in commencing and prosecuting the proceedings as well as by instituting in prosecuting proceedings against Mr Carpenter on the Guarantee. 605 There is no substance in this attempt to outflank the limitations defence. The simple fact is that the breach contended for occurred prior to the six year period. 606 The Group's submissions misconceive the proper analysis of what is constituted by confirmation of a course of action: see General Credits v Wenham (1989) 18 NSWLR 570 at 574. Confirmation means ANZ taking some step to acknowledge that the company had a cause of action for breach of contract. ANZ took no such step but acted to the contrary. Causation 607 Another answer to the claim by the Merlo companies is to be found in the causation issue. The Merlo companies' contend that the Italian licensor effectively took away the licence. 608 Such evidence as is before the court, suggests that the Italian licensor was concerned by reason of Merlo being part of a group which was in financial difficulties. On 21 June 1999 Merlo SPA informed both the Australian Merlo companies that because of the appointment of the administrators to Pioneer, the continuation of the licence of Merlo Australia to import and distribute and sell Merlo product for Australia was in doubt and on 26 October 1999, Merlo SPA gave notice of termination of the licence on 4 February 2000. Another concern was that Merlo SPA had the view that Mr Carpenter's company was too small to service the Australian territory. 609 In truth once Pioneers respective cases fail, it is extraordinarily difficult, where there were no fixed facilities, to see any particular loss having been suffered by Merlo Wholesale by reason of receiving a notice giving 30 days notice terminating the facilities and then paying out the $270,000 called for. This may be discerned from the following excerpt of the Group's final submissions in reply: "[T]he breach lies essentially in the inclusion of the Merlo companies in the purported review of 11 December 1998, after the irreversible decision to exit the Pioneer and Merlo companies, the decision depending upon the ANZ's wrongful conduct and breach of contract and in contravention of the Trade Practices Act in relation to Pioneer, that "washing over" into the Merlo companies leading to the termination of their facilities after the purported review dated 11 December 1998, which the Plaintiffs say was spurious and carried out in bad faith, that is, with a predetermined end. The result of the review had been determined by Mr Pidcock and Mr Brennan on 26 November 1998, as noted on Ms Huelin's diary note of 20 November 1998, and was considered by Mr Soper to be an irreversible decision, and to be implemented, unless he decided otherwise." [para 121] 610 Even the Group's opening submissions, following a recitation of the claims that Pioneer was wrongfully placed into administration and in liquidation and that ANZ was not entitled to enforce its security documents, emphasised that Merlo Wholesale and Merlo Australia as well as Pioneer, suffered damage from the relevant misleading and deceptive conduct of the ANZ. The claim by the Merlo companies was so closely tied to the claims by Pioneer that an attempt to separate out some form of damage sustained by the Merlo Companies simply fails. The essence of the claim depended upon the principal Pioneer claim succeeding, which it has not. The alleged loss 611 There are also major obstacles in the face of the claims for loss. It is however unnecessary to travel into this area. 612 No actionable misrepresentations are shown on the evidence. No relevant reliance is shown, no relevant detriment arising out of such reliance is shown. Other matters The Dobbs clause issue 613 Clauses 35 and 38 of the Guarantee signed by Mr Carpenter on 25 June 1996 were in the following terms: 35. Notices, demands and certificates from ANZ will be signed ANZ agrees that all notices, demands and certificates that ANZ gives the guarantor under this guarantee will be signed by an ANZ officer or by a lawyer acting for ANZ Note "ANZ officer" is defined in Clause 46… 38. Bank certificates and their effect I agree that ANZ may give a certificate concerning any of the following matters: (a) the amount of the guaranteed money owing as at a specified day; (b) for the purposes of clause 17: (i) the applicable interest rates; (ii) the dates for payment of interest; (iii) the periods for the circulation, payment and capitalisation of interest; (c) the amount of loss referred to in clause 9.1; Note Clause 9.1 refers to currency conversions (d) whether the customer is, or I am, in default; (e) making a demand or giving a notice. I agree that such a certificate as to a matter referred to in paragraph (a) or (c) is final and binding on me to the full extent permitted by law. I agree that such a certificate as to any other matter is sufficient evidence of the accuracy of its contents. 614 Mr Phillip Kerr, a manager in the Corporate Portfolio Management (NSW) group employed by ANZ, signed a certificate of debt dated 20 June 2006, purporting to do so pursuant to clause 38. 615 The certificate was in the following terms: Certificate of Debt 1. This certificate is pursuant to clause 38 of the Guarantee and Indemnity dated 25 January 1996 ( Guarantee ) between Australia and New Zealand Banking Group Limited and Mr Clifford Carpenter in respect of obligations incurred by or at the request of Pioneer Park Pty Ltd (In Liquidation) (formerly known as Domino Mining Equipment Pty Ltd). 2. I certify that on 8 December 1999, the amount of money secured by the Guarantee, which amounts comprise the 'guaranteed money' within the meaning and for the purposes of the Guarantee is the sum of $399,769.60. 3. The Australia and New Zealand Banking Group Limited also claims interest in accordance with section 100 of the Civil Procedure Act 2005 from 9 December 1999 to the date of judgment, if successful. As at 20 June 2006, the interest claimed is $247,643.58 calculated at the daily rate of $98.57. 4. As at 20 June 2006, the amount owed to the Australia and New Zealand Banking Group Limited is $647,413.18, comprising of the amount of the debt as at 8 December 1999 and interest as set out in paragraph 3 above. 616 Mr Carpenter's counsel contended that clause 38 was materially different from that considered in Dobbs v the National Bank of Australia Ltd (1935) 53 CLR 643 in that ANZ itself and not an officer, was said to be the nominated author of the certificate. This submission is not of substance for the reason that although the clause refers to ANZ, under clause 35 all such certificates must be signed by an ANZ officer. Neither substance nor effect distinguishes these circumstances from those considered in the High Court decision. 617 Mr Kerr's evidence was that he had "inspected the Bank's books and records in relation to the amount outstanding to it by Mr Carpenter" (paragraph 3 of his affidavit). Mr Kerr certified that on 8 December 1999 the amount due to the Bank by Mr Carpenter was the sum of $399,769.60. 618 The documents on which Mr Kerr relied in calculating the debt were produced to the Court (MFI-P6). Mr Kerr was shown MFI-P6 and confirmed that it comprised the documents he had relied upon in producing his certificate of debt. Those documents included: (a) a document entitled 'Up to Date Payout Figures' dated 8 December 1999 [ANZ.004.30] which records: i. an 'account balance' of $380,303.67; and ii. a 'closing balance' of $399,769.61 after adjustments. (b) an account statement dated 8 December 1999 [ANZ.004.302] recording the 'account balance' of $380,303.67; and (c) a Bank diary note dated 8 December 1999 (page 389) [ANZ.014.037] confirming the debt for the purpose of the demand at $399,769.61 based on the account balance of $308,303.67. 619 Mr Kerr's affidavit [paragraph 6(b)] made clear that the Civil Procedure Act 2005 interest that was claimed by the Bank had been calculated by the Bank's solicitors and the calculation was attached to his affidavit (Annexure 'C'). That does not alter the conclusiveness of Mr Kerr's certificate. 620 No attack was made on Mr Kerr's determination and certification that the debt due to the Bank on 8 December 1999 was $399,769.60 (verified by primary Bank documents put to him in cross-examination and unchallenged) or his evidence that no payments had been made to reduce the debt owed to the Bank. The calculation of the statutory interest merely followed by way of application of the statutory formula and rates – neither of which were challenged. 621 In the result there is no substance in the contention that ANZ is unable to rely on the certificate to establish moneys owing by Mr Carpenter under his guarantee. Claim for damages by Mr Carpenter 622 Mr Carpenter claims damages for distress, embarrassment, hurt feelings and physical inconvenience said to have been caused by the consequences of the Bank appointing administrators to Pioneer. These damages are claimed on an aggravated basis. 623 The only contracts to which Mr Carpenter was a party were his contracts of guarantee for the Pioneer and Merlo Wholesale facilities respectively. These contracts exclude any entitlement to claim damages based on ANZ's dealings with the customers (as distinct from any equitable rights as surety which are not excluded by the terms of the guarantees for this purpose). 624 As ANZ has submitted, on no view did any contract between Mr Carpenter and ANZ carry with it any assurance or promise that Mr Carpenter would be able to continue earning remuneration from Pioneer. 625 Nor did such contracts carry any assurance or promise that Mr Carpenter would not need to deal with the stress, vexation and worry that might arise on an insolvent administration of Pioneer in which the employees of Pioneer were unable to receive payment of their entitlements. 626 In any event the general rule is that damages of this nature do not flow from a breach of contract. To the extent that Mr Carpenter claims to have suffered any 'physical inconvenience, such inconvenience is not of a nature which is immediately connected with any assumed breach of contract by the Bank so as to fall within the limited exception to the general rule (cf Hobbs v The London and South Western Railway Co (1875) LR 10 QB 111). 627 Whilst it is unnecessary to go further, ANZ is correct in its submission that insofar as the Group has led evidence from Mr Bridger of Pitcher Partners, this does nothing more than to carry out some calculations of the remuneration that Mr Carpenter might have received on a projected basis had Pioneer continued in business and prospered. 628 In light of the findings there is no substance to these claims. Returning to the untidy contractual position 629 Before concluding these reasons it seems to me a fair observation that a deal of the difficulties which have arisen in relation to this litigation stem from the particularly untidy contractual position which existed by the date when the 3 May 1999 and later the 8 June 1999 letters were sent to Pioneer Park. The first letter has been shown to have been invalid in terms of the proper contractual analysis. For the reasons given, ANZ's entitlement to rely upon the later notice has been upheld. Short minutes of order 630 The approach taken has been to deal with the central structural issues. Leave is granted to the parties to raise any particular claim or defence which they may contend has been overlooked in the reasons. Subject to that leave being exercised, the parties will be required to bring in short minutes of order on which occasion costs will be able to be dealt with. A timetable for the way forward will be set shortly. ***************** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.