The letter concluded:
"If as you suggest there is a definite lender now available, please inform us of your proposal to progress the matter and we will seek the decision of the Murray River Pty Limited Board."
154 Mr Branagan replied on 3 August 1999 saying that he generally agreed with the timetable of events and confirming that he had a lender willing to fund the transaction in two parts being an "initial advance" and "construction finance" with the amount of the initial advance being contingent upon the viability of the project. He said that the valuer had been instructed to establish the value "as is" and on completion the letter continued:
"Until all the issues pertinent to the valuation have been addressed we cannot proceed. We understand that the valuer has several issues unresolved.
We have also repeatedly requested a status report on the prospecti [sic]. Although promised has not been received.
To progress the matter please supply to the valuer the information he is requesting and the status report direct to Direct Mortgage Funding Pty Ltd."
155 Mr Branagan received a letter from Laing & Simmons dated 13 August 1999 in which that firm referred to original assessments of value made by it and conveyed revisions of those assessments. The "as is" value initially assessed by Laing & Simmons was $5,700,000. The revised "as is" value as at 30 June 1999 was stated to be $3,500,000. The "gross realisation" value was $28,840,000 and the revision thereof was $24,556,000. The revision was said to be a consequence of increased building costs. The "as is" value had regard to land value and the value of building works to 30 June 1999.
156 On 10 September 1999, DMF wrote to Essington asking for a copy of the current lease of Lot 29. Also sought was "clarification as to whether this lease will be in place when the initial land settlement takes place or if the proposed 99 year lease currently being negotiated will be in place". The matter of lease term was taken up by Laing & Simmons in a letter of 21 September 1999 to Mr Branagan. That letter concluded with an expression of opinion that the "as is" value "with extended lease" was $2,450,000, while the "as is" value "without extended lease" was $500,000. The respective gross realisation values were stated to be $23,456,000 "with extended lease" and $20,595,470 "without extended lease".
157 On 15 October 1999, DMF wrote to the defendant conveying "verbal advice" of the availability of a facility of $8 million, consisting of an initial advance of $500,000 and with the balance being "withheld and drawn down on a cost to complete basis". The loan was described as subject to the borrower providing "satisfactory take out via" prospectus capital raising, pre-sales or bank finance. It was later explained that the initial advance was 100% of the current "as is" value as determined by the valuer. This offer was declined by MRL by letter sent on the same day.
158 Mr Branagan says in his affidavit that the obtaining of construction finance for MRL was "always dependent" on an acceptable valuation, the existence of an executed fixed price building contract, a lodged and approved prospectus, a take-out facility by way of fully subscribed prospectus or bank or similar funding and an extension of the lease of Lot 29 to 99 years.
Attempt to raise funds from NAB
159 By late August 1999, MRL had retained Mercator Funds Management Limited ("Mercator") to seek finance for it. Mr Hickie of Mercator wrote to the defendant on 23 August 1999 forwarding what is described as "the letter from the National Australia Bank with respect to a loan facility for $13 million", said to have been obtained for MRL by Home Link Mortgage Corporation Limited. The letter referred to "main preconditions" including pre-sale of all apartments and guarantees from the two joint venture partners (described as "non negotiable").
160 It appears that the NAB possibility was pursued since, on or about 19 October 1999, a letter of offer was received by MRL from NAB. NAB indicated its willingness to make available a facility of $13 million to assist with the construction of the resort. The expiry date was 30 September 2000. NAB required first mortgage security over Lot 29 and a first charge over MRL's assets generally. Conditions precedent to drawdown included the following:
(a) a sworn valuation of the property showing a value of at least $26 million after completion of improvements;
(b) contribution by Essington and the Club of a minimum of 40% of the required $7.8 million of project costs funded by equity;
(c) evidence of second mortgage funding of at least $4.5 million towards the project;
(d) extension of the lease term to 2088;
(e) satisfactory review by NAB of the proposed prospectus;
(e) pre-sales of units in the development of not less than 142 in number and $26 million in value; and
(g) an executed management agreement with an acceptable resort operator.
Moves towards the raising of capital
161 By December 1998, moves towards the preparation of a prospectus for a raising of capital by MRL were underway. There exists a draft prospectus (labelled "3rd Draft 2/12/98") which had been prepared by a consultant ("Peter") retained for the purpose at the defendant's suggestion. That draft contained statements as follows:
"Construction is programmed to commence in February 1999 and to be completed by December 1999."
"The construction program allows for the completion of the 142 units by December 1999."
"The existing resort, which has been operated by the Club for [????] years, will close at the end of January 1999 to be demolished to make way for the new resort."
162 In early 1999, there was contact between the defendant and Mr Jones, on the one hand, and Mr Gary Urwin of Urwin Fernandez Pty Ltd, a firm specialising in the sourcing of venture capital. On 10 March 1999, Mr Urwin wrote to the defendant referring to their recent conversations and the defendant's requirement "to appoint an appropriately qualified person to chair the Due Diligence Committee to be established in relation to the proposed issue of Capital by Murray River Limited". He went on to confirm having been informed of the proposal that MRL issue a prospectus to raise $4 million to facilitate the construction of a resort on land presently owned by the Club. He also recorded having been informed that the proposed resort would be managed by Hilton International and that "an agreement in this regard is presently being documented". He commented that the prospectus "appears to be in an advanced stage of drafting" and that it was appropriate to "commence verification". This, he said, would appropriately be undertaken by a due diligence committee, the workings of which he went on to explain.
163 Mr Urwin arranged for the matter to be progressed by his colleague, Mr Fernandez, who deposes that his dealings thereafter were mainly with Mr Jones. Mr Fernandez also deposes that his client was MRL. He described his firm's task as follows:
"We were appointed to chair and coordinate the DDC that was to be established in relation to the proposed issue of capital by MR. The DDC was to finalise a prospectus for the development of the Mulwala Lakeside Resort. The role of the DDC was to verify the statements made in the prospectus. MR proposed to issue a prospectus to raise money to facilitate the construction of the Resort. The members of the DDC were myself, Jones, Greg Beattie of Eakin McCaffery Cox solicitors and Mr Menzalis from BDO Nelson Parkhill Chartered Accountants & Consultants ('BDO')."
164 The first meeting of the due diligence committee took place on 16 March 1999. The next day, BDO Nelson Parkhill (Mr Mentzalis) wrote to Mr Jones referring to the previous day's meeting and saying that it appeared that BDO would need to prepare both an independent accountant's report and an independent review of the directors' profit forecasts. He went on to explain what would be involved and concluded:
"We stress that the overall structure of the deal needs to be resolved first, as this will necessarily underpin your forecasts. Furthermore, additional items are likely to be requested from you as we gain a greater understanding of the overall transaction and your requirements."
165 On 22 March 1999, Mr Beattie of Eakin McCaffery & Cox wrote a letter to Mr Fernandez referring to the first meeting of the due diligence committee held on 16 March 1999. The purpose of the letter was to outline "some of the legal concerns and problems to be dealt with in relation to proceeding to the preparation of a prospectus for Murray River Pty Limited to raise the construction costs of the development from the public". Mr Beattie went on to refer first to matters concerning land title. He explained that Lot 29 was one of 30 lots in a strata plan and that each lease covered a separate part of the overall site. He drew attention in particular to two provisions of the lease for Lot 29. First, he referred to provisions which, "whilst ambiguous, seemed to contemplate a review of the rent payable in respect of Lot 29 in the event of a redevelopment or development of Lot 29". Second, he referred to provisions requiring the written approval of WAMC to any new development. He noted, in connection with both these aspects, that plans and specifications for the proposed development had been provided to WAMC and that it was conducting a review of the rent.
166 Mr Beattie next referred to the term of each lease and noted the expiry date of 31 October 2036. He referred also to the application already made to WAMC to extend the term, adding:
"As it is a requirement of the Strata Titles (Leasehold) Act 1986 that all leasehold estates in the same Strata Plan have the same term, we note that Mr Jones of EAP is arranging for letters from the Owners' Corporation and the other owners of the leasehold estates in the Strata Plan to formally request the WAMC for similar extensions of their leasehold estates."
167 Mr Beattie then said:
"WAMC has informally agreed in conference to an extension of the lease term to 2088 and is currently reviewing the rent to be charged in respect of this extended term."
168 Mr Beattie's letter then referred to the existing joint venture agreement between Essington and the Club and said that, for the purpose of preparing a prospectus, he would prefer to see MRL with an option to purchase Lot 29 and was currently preparing such a document with a view to submitting it to the Club's solicitors for their consent.
169 It is Mr Fernandez's evidence that he had, to that point, been unaware that the extension of the lease of Lot 29 was still being negotiated. He says in his affidavit:
"Until the extension of the Crown lease on Lot 29 from 36 years to 99 years was granted, there was no realistic prospect of finalising the prospectus."
170 Mr Fernandez submitted to Mr Jones on 1 April 1999 a due diligence planning memorandum and due diligence workplan with a view to their being discussed at a meeting on 7 April 1999.
171 A letter of 12 April 1999 from Mr Jones to Mr Fernandez confirms that the drafts were discussed at that meeting and minor changes were made. He then gave dates by which various items sought from Essington would be provided, the latest being 20 April 1999. It was reported to a meeting of the directors of MRL held on 13 April 1999 that the due diligence committee was "proceeding with a target date to lodge the documents with ASIC - 28 May 1999".
172 An agenda and other documents (due diligence planning memorandum and due diligence workplan) were distributed on 13 April 1999 for the purposes of the first meeting of the due diligence committee scheduled to be held on 22 April 1999. These were sent by Mr Fernandez to Mr Beattie, Mr Mentzalis and Mr Jones.
173 The minutes of the meeting held on 22 April 1999 were distributed by Mr Fernandez to the same persons on 23 April 1999. The minutes refer to a number of matters communicated by Mr Jones to the meeting including a need for $16.8 million construction finance, with an "indicative offer" having been received, "conditional upon suitable exit strategy". He then referred to the "various exit strategies identified", being 30% pre-sales, capital raising via the prospectus, take out by a bank or other financial institution and underwriting of the proposed capital raising. That part of the minutes continues:
"LJ explained that of the various proposed exit strategies set out above, the most likely scenario (currently at a relevantly advanced stage) is the underwriting. The indication is that Mr Rodney Adler is in favour of underwriting the proposed share issue under the prospectus."
174 The minutes then record information given by Mr Jones about immediate finance:
"LJ explained to the meeting that at present, finance amounting to a total of $1.4 million had been raised through a private lender (a construction funding superannuation fund) in order to finance stage 1 of the construction. The first drawdown of $440,000 was to be made today and the balance in 7 days' time."
175 After referring to Mr Jones' reference to a total cost of $22.5 million (made up of construction costs of $16.8 million, land cost of $3 million and costs of 'prospectus etc' of the balance) Mr Jones is reported to have said:
"LJ also noted that an offer has been received from Bankwest to take out the first stage funding of $1.4 million, plus the balance of $16.8 million required to fund the construction. This offer is currently under consideration."
176 Mr Fernandez gave evidence that, at the meeting of 22 April 1999, it was agreed that the estimate for completion of the draft prospectus was the first week of May 1999. He also said in his affidavit:
"Once this had been completed, members of the DDC would undertake the review, particularly in relation to the correctness and internal consistency of the contents in the prospectus."
177 On 19 May 1999, Mr Fernandez received from Mr Jones the accounts of MRL as at 31 May 1999 and a document headed "Murray River Resort Project Feasibility". The latter reflected a total cost for the project of $22,227,447.
178 A meeting of the due diligence committee took place on the same day, 19 May 1999. Mr Beattie of Eakin McCaffery Cox informed the meeting that he had on that day received from the Club's solicitors documents for the transfer of Lot 29 to MRL (on 24 May 1999, Mr Beattie sent Mr Jones a copy of the special conditions from the contract as he thought they would be relevant to the financing arrangements Mr Jones was negotiating). Mr Fernandez's handwritten notes of the meeting refer to a number of matters communicated by Mr Jones - including that Hilton Hotels were not proceeding and might be replaced by Marriott or Sheraton; that the body corporate would meet the following Wednesday to approve extension of the term of the lease from WAMC and the new subdivision; and that it appeared that an underwriter ("a private individual") had been "signed up" although "a contract has not been drafted. Mr Beattie is recorded in the notes as having indicated that the plan of subdivision was needed as soon as possible for presentation to the body corporate.
179 On or about 5 July 1999, Mr Fernandez received a copy of the letter of that date from Mr Jones to Mr Branagan of DMF saying that Mr Urwin, chairman of the due diligence committee, had been asked to respond to Mr Branagan's letter of 2 July 1999 (see paragraph [151]). Mr Fernandez did nothing in response but did on 5 August 1999 write to Mr Jones as follows:
"Could you please advise me of the status with regards to the above company [MRL], in particular the progress on the Prospectus? I look forward to your written reply shortly."
180 Mr Fernandez received no reply to this letter.
181 Another meeting of the due diligence committee took place on 4 November 1999. Present were the members of the committee (Mr Fernandez, Mr Beattie, Mr Mentzalis and Mr Jones) plus Mr Edwards and a Mr David Hickey of Mercator Funds Management Limited. Mr Hickie informed the meeting of a proposal for the provision of finance by NAB. The proposal came to fruition at a later stage, although in a highly conditional form (see paragraphs [159] and [160]).
182 On 5 November 1999, Mr Jones sent to Mr Fernandez a draft prospectus, a draft hotel management agreement, a draft sales list and unit entitlement and a draft strata management agreement.
183 On 15 November 1999, Mr Fernandez wrote to Mr Jones about the possibility of using Pannell Kerr Forster "for the special independent report to be included as part of the prospectus". He gave Mr Jones some information on that firm and suggested he contact them direct.
184 Thereafter, nothing further was done by or in relation to the due diligence committee. Mr Fernandez's evidence is that this was because of MRL's failure to provide and confirm important information needed for the prospectus. Mr Fernandez also says that, "long after" regular meetings of the committee ceased, he was told by Mr Jones that the obtaining of approval for the prospectus had been taken over by Mr Hickie of Mercator.
Attempts to obtain extension of the lease term
185 On 8 September 1998, Mr Jones, using Essington letterhead, wrote to WAMC informing it of the Club's proposal to develop Lot 29 by replacing the existing tourist complex with a new 142 suite resort complex. He said that Shire Council required WAMC's approval as part of the development application process.
186 A meeting took place on 22 September 1998 between Mr Radcliffe of WAMC, Mr Jones, Mr Beattie of MRL's solicitors, Eakin McCaffery Cox, and a representative of the Department of Land and Water Conservation. According to Mr Radcliffe's note of the meeting, Mr Jones, after outlining the development proposal said that expiry of current leases in 2036 did not give sufficient economic base to raise finance and market the project. Mr Jones said that an extension to 99 years was sought. Mr Radcliffe, according to his note, replied that a full 99 year extension from 2036 was not likely to be approved but that it might be possible to treat the last extension of 50 years as a 99 year extension so that the term would continue to 2088. In response to an inquiry from Mr Jones whether it would be possible to acquire the freehold, Mr Radcliffe, according to his note, said that this would not be possible because it was contrary to Departmental policy.
187 By letter dated 6 October 1998, the Department of Land and Water Conservation wrote to Mr Jones conveying consent on behalf of WAMC as lessor to the lodgment of a development application with the Shire Council in respect of the proposed development. Nothing was said about any extension of the lease.
188 The initial meeting with WAMC does not appear to have been followed up until early 1999. On 15 January 1999, Mr Beattie wrote to Mr Jones referring to the meeting and mentioning WAMC's agreement to provide the Shire Council with a consent in relation to the lodgment of the development application (which Mr Beattie said he understood had been provided) and WAMC's agreement in principle to extend the lease term, subject to agreement on rental. Mr Beattie said that, following execution of the joint venture agreement between Essington and the Club, he had confirmed with the Club's solicitors that he might approach WAMC "to negotiate any extension to the leasehold estate".
189 According to a letter sent by Mr Jones to A.W. Male on 1 February 1999, a meeting between Mr Beattie and Mr Radcliffe of WAMC took place and WAMC "have agreed to vary the lease for a term of 99 years backdated to the original lease, that is 1989". He referred to the recommended new rent figure and said that approval of the proposal would take two to three weeks.
190 Mr Beattie of Eakin McCaffery & Cox, acting for MRL, attended meetings with WAMC on 18 and 22 January 1999. On 28 January 1999, he wrote to WAMC (attention Mr Radcliffe) formally seeking variation of the lease by extension of the term from 31 October 2036 to 31 October 2088. Recognising that the request was made by a person with no interest in the lease, he added that he was obtaining a formal letter from the owners' corporation of strata plan 37724 requesting the extension in relation to the leasehold estates for all lots and the common property. He noted (presumably having been informed by Mr Radcliffe) that WAMC could begin the process of dealing with the application before receiving the formal application from the owners' corporation.
191 On 28 May 1999, Mr Radcliffe wrote to Mr Jones saying that WAMC had given approval under the lease to the erection of buildings and structures described in the plans and specifications submitted to the Department and approved by the Shire Council. Nothing was said at this point about extension of the term of the lease.
192 On 8 November 1999, Mr Radcliffe wrote to Eakin McCaffery & Cox saying that he was still awaiting advice from the Regional Director, Murray Region regarding extension of the lease term. He enclosed a variation document used in another matter, suggesting that it might be used as a precedent - although obviously without pre-empting the extension decision itself.
193 On 24 February 2000, Mr Radcliffe wrote to Eakin McCaffery & Cox forwarding a copy of a letter he had sent to Mercator Funds Management Limited which read in part as follows:
"I am pleased to advise that approval in principle has been given on behalf of the Water Administration Ministerial Corporation to extension of the lease terms for the strata leasehold scheme SP 377424 from the current expiry date in 2036 to expiry in 2088.
Final approval is subject to execution of satisfactory legal documents to effect the extension of the leases and any associated changes to the leases that may be required."
194 Mr Radcliffe said in evidence that this letter to Mercator was the "first external communication of a decision to approve in principle an extension of the lease to 31 October 2088". He said that the decision was made in December 1999 by the Regional Director, Murray Region.
195 On 18 May 2000, Mr Radcliffe wrote to the Chief Executive Officer of the Club referring to a request by Mr Curtis-Smith for confirmation of the approval of the lease extension so that it might be included in the prospectus. He then said:
"I am able to confirm that the leases will be varied to extend all the existing leases to terminate on the 31st October 2088. It is not anticipated that the terms and conditions of the existing leases will alter other than the termination date and any minor consequential amendments arising from the extension of the lease terms. Upon the completion of the development on Lot 29 and the registration of the Strata Plan, new leases will issue in respect of the new lots formed, and the additional common property thereby formed merged with the existing common property lease. A rental review will be made upon the registration of the strata plan in accordance with the provisions of the existing leases."
Conclusions on solvency
196 The negotiations with all potential financiers made it clear from the very outset (that is, from the point in late 1998 at which attempts to raise finance began) that, at a commercial level, funding of the construction would not be feasible without some, at least, of a number of elements: guarantees from the Club and Essington, security over the leasehold interest in Lot 29, extension of the lease term to 2088, availability of a satisfactory valuation based on the extended lease term, the execution of a fixed price building contract, the existence of a management agreement with a recognised hotel or resort operator and a coherent "take-out" strategy by way of capital raising, bank funding or other acceptable longer term arrangement. The catalogue of requirements (a) to (g) in the NAB letter of October 1999 (see paragraph [160] above) is representative of lenders' attitudes, although aspects varied in detailed respects among the various potential lenders.
197 The key requirements of AFS and DMF were made known virtually from the outset of discussions with them. The requirement for security over the leasehold was stated in the "Service Agreement and Irrevocable Authority" with AFS dated 15 December 1998 and in the DMF letter of the same date. The requirement for extension of the lease term to 2088 was stated in the AFS letter of 12 January 1999 and confirmed on behalf of MRL to DMF when, on 17 February 1999, MRL sent to DMF the Male valuation which was predicated on the extension of the lease term. The need for pre-sales of units or capital raising or some other exit strategy was flagged by AFS in a letter of 22 October 1998 and by DMF in a letter dated 15 December 1998. These fundamental considerations were repeated throughout the course of correspondence and discussions with the potential finance providers. None of them could have been regarded as negotiable. They represented essential elements of the ability to raise finance and must have been understood accordingly by the defendant.
198 Extension of the lease term was a requirement of all lenders except Leigh in respect of the $440,000 short-term loan it actually made. In fact, the loan from Leigh can be seen as a fairly reliable indication of the full extent of the independent borrowing capacity of MRL at that time, even with the availability of the leasehold as security. The only other indication of borrowing capacity predicated on security over the leasehold without extension of the term was that received on 16 May 1999 from HGR through AFS to the effect that $600,000 might be lent on that basis. Without extension of the lease term, borrowings beyond $650,000 supported only by security over the leasehold must be regarded as having been commercially unavailable.
199 Even with extension of the lease term, no lender was willing to finance the total construction cost in the absence of an exit plan. The only tangible steps MRL took in that direction were the capital-raising steps to which I have referred in outlining the evidence about the draft prospectus and the due diligence committee and its activities. As that review shows, the extension of the lease term was seen by at least the due diligence committee's chairman, Mr Fernandez, as essential to the proposal to raise capital. Mr Beattie may be taken to have been similarly aware. By November 1999, the prospectus plans were no longer being progressed through the due diligence committee, although there was some talk of a similar proposal being pursued through Mercator. The latter proposal, if it ever existed, never came to anything.
200 The first written confirmation of an in-principle decision by WAMC to extend the lease to 2088 was issued by WAMC in February 2000. Mr Jones told Mr Male a year earlier, in February 1999, that WAMC had agreed to the extension, citing Mr Beattie as the source of this information. But Mr Beattie's correspondence of that period (his letter of 15 January 1999 to Mr Jones and his letter of 28 June 1999 to Mr Radcliffe) does not bear out any suggestion that he had received any such assurance from WAMC. And several months later, on 8 November 1999, Mr Radcliffe made it clear to Mr Beattie that the attitude of the Regional Director, Murray Region, to the matter of extension of the term was still awaited. Before February 2000, there may have been grounds for speculation that WAMC would eventually agree to an extension of the lease term. But there was no basis on which anyone could believe that the extension would be granted.
201 In the light of all this evidence, the position in the period from January 1999 was that MRL, standing alone and with access only to the leasehold by way of non-recourse third party security from the Club, was capable of borrowing in the open market only the $440,000 it in fact borrowed from Leigh (or, perhaps, the $600,000 that HGR indicated may be available). The crucial matters of lease extension and capital raising - together with other aspects of a viable operation including take-out strategy - were in such a state that any objective assessment would have shown that further funds were, as a matter of commercial practicability, simply not available. The onerous terms of the Leigh loan emphasised the unattractiveness of the proposition from a lender's viewpoint.
202 The defendant, in submissions, makes much of the argument that the Club should have provided financial support to MRL and that there was a well-based and reasonable expectation that it would do so. He points, in that respect, to clauses 5.1 to 5.4 of the joint venture agreement. The submission is that the Club was obliged by those provisions, read in the light of a provision compelling co-operation (clause 2.1), to provide funds to MRL as the need arose. (Logic would say that, if the Club was bound in that way, Essington was likewise bound.) Mr Mullarvey testified that the Club made it clear from the outset that it would not be involved in funding and, in particular, would not give any guarantee. That, according to the defendant, was irrelevant (even if true) in view of an "entire agreement clause" (clause 11.6).
203 The joint venture agreement clearly contemplated the possibility that the Club or Essington or both might make loans to MRL or guarantee repayment of loans obtained by MRL. One need not look beyond clauses 5.2(b) and 5.3 for confirmation of this. But the agreement did not oblige either party to make loans or to give guarantees. There was no more than contemplation of the possibility and a statement of certain agreements that would be operative if and when, as a matter of separate and subsequent decision, the possibility became real. Clause 5.1 justified the Club's attitude that it was for Essington to arrange all funding without resort to the parties. Essington, moreover, recognised that reality at the time. Its early approaches to Mr Robinson of AFS were on the express basis, acknowledged by him in his letter of 16 December 1998 to the defendant, that neither Essington nor the Club would be providing guarantees. The early approaches to DMF were on the same basis. The defendant was fully aware that the Club would not give any guarantee and he cannot have had any well-based expectation that it would change its mind. This case is clearly distinguishable from one in which some past pattern of behaviour may ground an expectation of shareholder support: see for example Deputy Commissioner for Corporate Affairs v Caratti (1980) 5 ACLR 119, Flavel v Day (1984) 9 ACLR 502.
204 I should deal, at this point, with another submission advanced on behalf of the defendant. The submission was to the effect that the Club wrongfully or improperly failed to complete the transfer of Lot 29 to MRL in accordance with clauses 3.3 and 3.4 of the joint venture agreement; and that the Club thereby, in effect, denied to MRL borrowing capacity that it could have turned to account.
205 The evidence shows that some steps were taken towards implementation of clauses 3.3 and 3.4 in early 1999 with a view to completion of the transfer of Lot 29 to MRL by 31 May 1999 but that the transfer was never completed. The evidence also shows that the condition in clause 3.3 were never satisfied, which means that those steps were taken despite the agreement rather than in pursuance of it. Mr Hughes of counsel, who appeared for the defendant, pointed to some inconsistent statements in Club documents on the matter. He also referred to aspects of the evidence showing that Mr Mullarvey was party to such inconsistent statements. The reason for discontinuation of the steps to transfer the leasehold to MRL do not appear clearly. But it seems to me that they do not matter.
206 In obtaining the Leigh loan of $440,000, MRL was able to provide third party security given by the Club over the leasehold in the form of a specific mortgage without recourse - in other words, the lender was in a position where it could look to MRL for repayment and, in case of default, exercise mortgagee rights in respect of the Club's leasehold, but without any right of action against the Club for any deficiency. Had the property been owned by MRL, its borrowing capability would have been the same. As with the Leigh loan, a lender would have enjoyed a promise by MRL to pay and the right, in case of default, to resort to the leasehold property by way of exercise of the power of sale.
207 I deal next with another submission made on behalf of the defendant. Mr Hughes emphasised that, at and after a meeting on 16 May 1999 in Canberra between the defendant and Mr Joss (to be dealt with in some detail later), Mr Joss was aware of MRL's financial problems and wished to find a "practical solution". In late 1999, CJC informed NAB that it was not about to sue MRL for moneys due. Mr Joss accepted that this was said in the hope that it would persuade NAB to make facilities available to MRL so that CJC could be paid.
208 These matters are referred to as a basis for a submission, based on Re Kerisbeck Pty Ltd (1992) 10 ACLC 619, that the debts upon which ASIC relies were not, in reality, due. The thesis is that CJC, by acting as it did, extended the time for payment. The evidence does not support this. CJC's concern throughout was to protect its position. That may, at times, have entailed a willingness not to press for payment in the hope that something hastening payment would eventuate. But CJC at all times continued to assert, and in no way abandoned, its right to immediate payment.
209 It is also argued that the willingness of CJC to be patient if that seemed conducive to some positive outcome had an effect on the solvency position. But again, the evidence does not support a conclusion that the debts to CJC were ever the subject of any revision or new payment arrangement justifying a legal conclusion that they were not due and therefore a negative component of the solvency calculation.
210 Even allowing for the fullest recognition of the principle in Sandell v Porter (above), as understood in the light of Lewis v Doran (above), that an assessment of solvency pays attention not only to financial resources already held but also to those reasonably obtainable in a relatively short time, the clear conclusion must be that MRL was insolvent at the time it incurred each of the debts to CJC upon which ASIC relies. It had no reasonably accessible source of capital and no developed means of raising capital by prospectus or from the joint venture parties. Nor did it have saleable assets. The only way in which it could have obtained cash was by borrowing. For reasons I have stated, $600,000 must be regarded as fairly representing the maximum extent of MRL's borrowing capacity. The Leigh loan was for an extremely short term and on onerous terms. Its availability therefore really did nothing to enhance the availability of cash to meet other debts. By obtaining the Leigh loan and applying it towards satisfaction of the indebtedness to CJC, MRL merely substituted debt carrying a one month term for debt that was overdue. That did nothing to enhance solvency. Any remaining borrowing capacity of the order of $160,000 was quite inadequate in the circumstances.
211 My conclusion on the issue of solvency is that MRL was insolvent when, on 3 February 1999, CJC began work on the project and that it continued in a state of insolvency at all times thereafter.
The defendant's knowledge of commencement of work
212 In the light of the findings to this point, the next relevant inquiry is whether one of two conditions arising from s.588G(2) was satisfied: was the defendant aware at the time of the incurring of the relevant debts to CJC that there were grounds for suspecting that MRL was insolvent or would become insolvent by the incurring of the debts; or, alternatively, would a reasonable person in a like position in MRL's circumstances have been so aware? The first step in considering these matters is to look to aspects of the evidence directly involving the defendant.
213 Before the end of 1998, the defendant was aware that KCMS were providing project management services for the proposed construction and that CJC was likely to be the builder. He knew that Mr Jones and Mr McNamara were having discussions with CJC, including discussions about the proposed contract setting out the basis upon which CJC would undertake construction of the resort. These matters are clear from evidence given by the defendant himself.
214 The defendant said in cross-examination that he believed that he would have seen the draft prospectus of 2 December 1998. He considered it likely that he saw that draft in December 1998. He would thus have seen the statements in the draft prospectus to the effect that construction was programmed to commence in February 1999 and to be completed by December 1999, with demolition work beginning after close of the Club's existing resort at the end of January 1999.
215 The defendant accepted in cross-examination that he had seen the conditional offer of finance from DMF dated 15 December 1998. He confirmed his understanding at the time that this was an offer of development finance and that it was conditional. Furthermore, he appreciated that development finance would not be obtained in the absence of extension of the lease to 2088 and receipt of an acceptable valuation based on a lease to 2088.
216 At virtually the same time, the defendant was in contact with AFS and confirmed the understanding of Mr Robinson of that company that guarantees from Essington and the Club were not available to support borrowings by MRL. This is made clear by Mr Robinson's letter to the defendant dated 16 December 1998 which was acknowledged by the defendant's letter of 17 December 1998. The defendant maintained in evidence that he believed the Club was obliged by clause 5.3 of the joint venture agreement to provide guarantees. But he did not obtain any legal advice about that and any such understanding would have been inconsistent with the position he represented to Mr Branagan. The approaches to potential lenders at that time were consistent with an understanding that the Club would not be providing guarantees and could not be compelled to do so.
217 By 31 January 1999, therefore, the defendant was, on the evidence, in a position where he knew that construction finance was not readily and immediately available through either AFS or DMF and that any such finance was going to have to be obtained in a way that did not entail the giving of any guarantee by the Club. Furthermore, his knowledge, at that point, was also such that he appreciated the need for an extension of the lease term to 99 years and the need to be able to show some suitable take-out strategy to a financier. Indeed, his appreciation of the need to raise capital is evidenced by the fact that, under his auspices, steps towards the drafting of a prospectus were, by January 1999, already in train, although in somewhat embryonic form.
218 Against this background, I turn to the evidence about the defendant's knowledge of progress with CJC and the proposal that work should start on 3 February 1999. Plans in that direction became increasingly firm toward the end of 1998. According to Mr Joss' evidence, there had been a decision by early December that 3 February 1999 was to be the commencement date. On 8 December 1998, Mr Jones wrote to Mr Branagan that finance was required "to enable the builder to commence work on 3 February 1999". A CJC construction programme dated 8 December 1998 showed 3 February 1999 as the date on which CJC would take possession of the site. On 10 December 1998, Mr Jones referred, in a letter to Mr Branagan, to a need for funding "through to July 1999" because "ASIC may take four to five months to approve the prospectus", thus implying that the funding requirement would crystallise four or five months before July 1999.
219 In early 1999, according to Mr Jones' evidence, he told the defendant that the Club had said that construction needed to be completed by December 1999 and "therefore needs to commence by February". He said he told the defendant this in the context of an inquiry regarding progress with funding. Mr Jones also explained to the defendant, according to Mr Jones' evidence, the importance of completion by December 1999 and how that completion date had been fixed. I quote from Mr Jones' cross-examination:
"A. The position was quite clear. It was explained to Mr Edwards that if the contract did not complete by that December date, it would be delayed for at least 12 months.