Austral Softwoods Tumbarumba P/L v Tasman KB P/L; Harmoni P/L v Tasman KB P/L

(i) that the representations were made in May 2001, supported and to a degree repeated in various forms, as set out in the factual narrative below;

(ii) that they were relied upon by the relevant Plaintiff;

(iii) that the Defendant failed to take or pay for the relevant timber under the supply agreements, with the consequence that the shortfall in turnover and profit led to the relevant loans failing to be repaid, such that

(iv) the Plaintiff in each case is entitled to rely upon s51AC and s52 with consequent remedies under s87 of the Trade Practices Act 1974 (Cth) calling in aid the onus upon the Defendant, as maker of the representation with respect to a future matter, to show that it had reasonable grounds for making the representation (s51A of the Act), and

(v) in the alternative, the Plaintiff in each case is entitled to reduce the statutory demand amount to zero by an "offsetting amount" pursuant to s459H by way of "counterclaim, set-off or cross-demand", on the basis that there was a breach by the Defendant of the relevant supply agreements giving rise to such cross-claim. In that regard the relevant Plaintiff sought to overcome the lack of identity between the sellers under the supply agreements as compared to borrowers under the loan transactions in two ways. First, by relying upon the relevant representation. Second, by contending that the amount owed under the Supply Agreement which would have repaid the loans if paid would have been made available for that purpose by dividend or loan; then that this fact, known to the parties, somehow gave rise to a legal liability on the part of the Defendant constituting a cross-demand within s459H. 4 The Defendant attempts to meet these contentions essentially by the following submissions. It faces the difficulty that to succeed the Defendant must show that, on the limited evidence currently before the Court, and in circumstances where the Defendant has put on no evidence in rebuttal, that the effect of such submissions is to leave not even a plausible contention requiring further investigation. 5 The submissions are as follows:

(a) that no representation was made but merely a statement of present intention, if even that,

(b) such representation as the Plaintiffs contend could not have been relied upon;

(b) that under the loan agreement, as subsequently documented, the original undocumented loan obligations were indubitably breached by the relevant Plaintiff's failure to make payment, or by its insolvency, each being an event of default;

(c) that the supply agreements were repudiated wrongfully by the supplying companies in the Plaintiff's corporate group, such that the Plaintiffs could not rely upon the absence of cash flow from those agreements in the circumstances;

(d) that even accepting that the representations made were as contended by the Plaintiffs and were relied upon, the amount of profit said to have been lost, namely $3.5 m according to the uncontested evidence of the Plaintiffs' Mr Howley would have been earned over an eighteen month period; whereas the relevant representation spoke only from the time it was made, namely May 2001, to either the end of June 2001 when the contract was repudiated or to the end of September 2001 (the date the Defendant contends was the date required by the loan agreement for repayment). It is said to follow from this mismatch between the longer profit earning period and the shorter period in respect of the representation that it was not possible, even accepting the Plaintiff's evidence at its highest, to generate in two months or five months the cash flow as would have resulted from that proportion of the profit earning period to enable the relevant loans to be repaid.

(e) that the Defendant relies upon a letter dated 29 June 2001 annexed to Mr Howley's affidavit ("WJH1") with a reconciliation as at 29 June 2001 to demonstrate that, though $805,424.03 was the balance owing at 29 June 2001, under the applicable variation to the supply agreement ("HW12") there was a further month to pay following the delivery of the product (see cl 4) and thus that there was no basis for terminating the relevant supply agreement or treating it as repudiated. FACTUAL NARRATIVE 6 The following Factual Narrative prepared by the Plaintiffs is agreed as constituting a statement of the evidence for purposes of the present determination under s459G of the Corporations Law. "Narrative of Facts of the Plaintiffs In this narrative: "AST" means the plaintiff in proceedings no 4310 of 2001. "Harmoni" means the plaintiff in proceedings no 4311 of 2001. "Tasman" means the defendant in proceedings no 4310 and 4311 of 2001. "Howley 1" means the affidavit of William James Howley sworn 2 September 2001. "Howley 2" means the affidavit of William James Howley sworn 25 October 2000. "Howley 3" means the affidavit of William James Howley sworn 8 November 2001. "Wolthuizen" means the affidavit of Harmon Wolthuizen sworn 8 November 2001. "Hodges" means the affidavit of Glenn Robert Hodges sworn 3 October 2001. "Austral Group" means: (a) Harmoni Pty Limited (ultimate holding company) ("Harmoni"); (b) ASP Consolidated Pty Limited (intermediate holding company) ("ASP"); (c) Austral Softwoods Holbrook Pty Limited (formerly Austral Softwoods Pty Limited) ("ASH"); (d) Austral Softwoods Bombala Pty Limited ("ASB"); and (e) Austral Softwoods Tumbarumba Pty Limited (formerly Tumbarumba Investments Pty Limited) ("AST"). "Mr Wolthuizen" means sole director and secretary of AST and Harmoni. "Mr Frost" means Robert Kenneth Frost, director and 50% shareholder (through R K Frost Investments Pty Limited) of Tasman and director of ASH for period 10 October 1997 to 24 February 2000. Date Event 1 January 1986 Tasman registered. [Exhibit HW4 of Wolthuizen.] 30 January 1987 Mr Frost commences (and remains) as director of Tasman. [Exhibit HW4 of Wolthuizen.] 1991 Mr Wolthuizen commences in timber industry. [Para 2 of Wolthuizen.] 29 July 1993 Harmoni registered. [Exhibit HGH 1 of Hodges.] 29 October 1996 ASH registered. [Exhibit HW3 of Wolthuizen.] 1996 Mr Wolthuizen meets Mr Frost through Mr Butterfield at Heathcote Sawmill and, thereafter, Tasman became largest purchaser of all products sold out of Heathcote Sawmill. [Para 4 and 5 of Wolthuizen.] 1997 Mr Wolthuizen and Mr Frost discuss possibility of establishing new sawmill and Mr Frost is keen to be involved. Mr Wolthuizen obtains interest of State Government and State Forests. [Paras 6 and 7 of Wolthuizen.] 23 September 1997 ASP Consolidated Pty Limited registered. [Exhibit HGH 1 of Hodges.] Mid-late 1997 Mr Frost confirms that he is keen to take whatever product which can be supplied from development of Holbrook Sawmill. [Para 8 of Wolthuizen.] Shortly thereafter Mr Frost and Mr Wolthuizen discussed possibility of Mr Frost acquiring possible equity interest of 15% to 20% in Harmoni in consideration for investment of $1 million. Ultimately, Mr Frost could not raise the $1 million investment but Mr Frost ultimately does not proceed. However, Mr Frost again states that he was still keen to obtain all product from any new facility. [Para 9-12 of Wolthuizen.] 10 October 1997 Mr Frost commences as director of ASH [Para 5 of Hodges.] Toward end of 1997 Subsidiary of Finemores, Toll (FHL) Limited acquires 50% interest in ASH and Mr Frost agrees to continue as director of ASH. [Para 14 and 15 of Wolthuizen.] 1998 ASH and Tasman enter into supply agreement commencing on 1 January 1998 and continuing until 31 December 2010 for annual supply of up to 90,000 cubic metres of Structural Lumber. See clause 4.4 and schedule for required volumes to be taken or paid for by Tasman. [Para 12 and annex B of Howley 1.] Mid 1998 Mr Wolthuizen becomes aware that CSR Limited was interested in selling Bombala sawmill. Mr Frost tells Mr Wolthuizen he must go for it. Tasman will buy all the product including from the new mill and Mr Frost can lend Mr Wolthuizen the money he needs for it. Mr Frost lent money for the acquisition of the Bombala site purchased by Softwood Development Corporation. The loan was repaid from cash flow from the Holbrook and the Bombala facilities. [Para 17 of Wolthuizen.] 30 March 1999 ASB registered [Exhibit HGH 1 of Hodges.] Late 1999 Finemore expresses desire to divest non core assets including interest in ASH. Mr Wolthuizen purchases that interest with help of loans of $250,000 and $400,000 from Mr Frost. The loans were never documented but were repaid from cash flow of ASH. [Para 18 and 19 of Wolthuizen.] 10 December 1999 Letter of offer of facilities with limit of $24.9 million by Suncorp Metway to ASP which includes as security (ix) "Tripartite Agreement between Tasman KB…., Austral and the Bank". [Exhibit HW5 of Wolthuizen.] Late December 1999 Tasman agrees to enter into tripartite agreement with Suncorp Metway, ASH and Tasman (ultimately dated 28 March 2000). Austral Group's refinanced indebtedness to ANZ with Suncorp Metway. Mr Frost attends meeting with Suncorp Metway and assures bank that Tasman will purchase whatever product is produced by ASH. [Paras 20-23 of Wolthuizen.] 24 February 2000 Mr Frost ceases as director of ASH. [Para 5 of Hodges.] 28 March 2000 Tripartite agreement between Tasman, ASH and Suncorp Metway wherein, inter alia, Tasman covenants that it will duly and punctually observe its obligations under the supply agreement dated 1 January 1998 between Tasman and ASH (clause 4.1(a)). [Exhibit HW7 of Wolthuizen.] April 2000 ASH's goes back into full production based on representations by Mr Frost. Shortly thereafter, Mr Wolthuizen tells Mr Frost that he is already owed $1.25 million for stock and has got $3 million worth of stock on the ground. Mr Frost says "Don't worry, it will be okay." [Para 43 of Wolthuizen.] June 2000 Mr Howley becomes involved with Austral Group as consultant. [Para 8 of Howley 1.] 1 July 2000 Softwood Development Corporation Pty Limited and Tasman enter into supply agreement commencing on 1 July 2000 and continuing until 11 June 2005 for annual supply of up to 30,000 cubic metres of untreated Sawn Timber. See clause 3.3 and definition of "Volume" for required volume to be taken or paid for by Tasman. [Para 13 and annex C of Howley 1.] July 2000 Market particularly strong. Mr Frost informs Mr Wolthuizen that Boral wants to sell out of its Tumbarumba mill. Mr Wolthuizen is reluctant because the Group does not have the financial capacity to take on the new project. Mr Frost says it is too good an opportunity to miss, that he will assist with the raising of money and that, with Tasman's support, there will be no problem paying out the loan from the Group's cash flow. [Para 24 of Wolthuizen.] Shortly thereafter Mr Frost agreed to put up $1.25 million to help with the acquisition and agreement entered into between Tumbarumba Investments Pty Limited (subsequently known as AST) with Boral subsidiary, Hardy's Pty Limited. Mr Frost advances $1.25 million to AST for the purposes of assisting in acquisition of Tumbarumba mill. [Paras 25 and 26 of Wolthuizen.] 24 July 2000 AST registered. [Exhibit HGH 1 of Hodges.] 28 July 2000 Agreement for sale of business between Hardy's Pty Limited and AST for asset purchase of Tumbarumba timber saw milling business for a purchase price of $11 million. [Exhibit HW9 of Wolthuizen.] September 2000 Mr Howley commences employment with Group as general manager/marketing and distribution. [Para 8 of Howley 1.] 13 September 2000 Tasman's "business plan for the marketing of Austral Softwood Group's incremental softwood capacity 99/00 to 04/05" stating: · (page 4) "Tasman KB Pty Limited (TKB) is Australia's largest Australian-owned regional wholesaler of softwood products; servicing timber and hardware merchants and trust & frame manufacturers in NSW, Victoria, Queensland and SA…. Closely allied to Austral Softwoods, Fletcher Challenge Forest Products and other major softwood growers and millers, TKB now wants to take advantage of access to incremental mill capacity and profitably boost its shares of available priority markets which give the best mill returns. This plan sets out the objectives and strategies which will absorb Austral's planned increased mill output of around 305,000 M3 from October 2000 through to June 2005. Objectives 20000/01 Place Austral's initial capacity expansion of 100 k M3 in treated and untreated wide section joists, decking, full treated range and framing markets…. Market overview…..TKB believes that a realistic expectation of a 15% decline in new dwellings construction may have a similar effect on the consumption of softwood structural products and thus we have facted this into our considerations of market sizing and the consequences of lower demand and replacement of imports. Importantly, reduced consumption in the Australian market will be serviced by Australian production, which will actually rise in volume as a proportion of the total softwood market." · (page 6) "Key TKB actions….. incremental resource will be secured through a proposed 10 year take and pay contract commencing October 1, 2000 with Austral Softwoods for new incremental capacity (305,000 M3) which will underwrite that Group's operating cash flow. These initiatives will offset restrictions TKB has faced during previous periods when timber has been scarce due to off shore producers producing volume internationally rather than with Australian wholesalers. TKB's relationship with Austral Softwoods is strategic because new softwood logging licences issued by State Forests in NSW to Austral are the last of the major NSW licence allocations in eastern states before 2005/2010." · (page 8) Overall assumptions… "Tied access to Austral Softwoods incremental capacity on time will significantly improve TKB's competitive capability; ensuring that new softwood volume can be produced and sold through market at levels which will return satisfactory EBITs for both organisations." · (page 14) Strategy for mill production cost/description of strategy "maintain limitations on range, size and specification to allow Austral's mill unit costs to remain at par with industry best practice." · (page 15) Strategy for resource access/description of the strategy "Secure 100% of Austral Softwood's incremental mill capacity by negotiating take and place contracts for mills at Holbrook, Tumbarumba and Bombala." [Exhibit HW 10 of Wolthuizen.] Post October 2000 Significant downturn in timber industry commences as result of GST and conclusion of Olympic Games. [Para 28 of Wolthuizen.] About late September 2000 Mr Frost assures Mr Wolthuizen that Tasman can market whatever product the Austral Group produces and that any problems Tasman is having in moving product is only a temporary setback. Mr Wolthuizen refers to accumulated stock because Tasman hasn't taken it and obligation of Austral Group to pay approximately $1.25 million to Metway at the end of September and December 2000. Mr Frost says that he will lend the money and Tasman will get it out of the Group's future cash flow when the stock moves. Tasman advances to Harmoni $1.5 million in late September and $200,000 in November to repay Suncorp Metway. [Para 29 and 30 of Wolthuizen.] 13 November 2000 Letter from Mr Wolthuizen to Mr Frost stating: "Clearly the current situation has the potential to create serious difficulties in our trading relationship. The status at Austral is such that we are carrying 4 to 5 times stock levels and we do not appear to be moving sufficient product to even keep up with current production. Indications are that this environment may continue through to late February 2001. If this were to be the case then we would need to look very closely at our options and seriously consider a prolonged shutdown over the Xmas period. This is certainly not our preferred option but clearly without sales and cash flow we could not continue to operate at current levels." [Annex C of Wolthuizen.] 14 November 2000 Meeting between Mr Wolthuizen and Mr Frost. Para 31 and annex D of Wolthuizen. 15 November 2000 Internal Austral Group memorandum from Glenn Hodges to Mr Wolthuizen in relation to the meeting with Mr Frost on 14 November 2000 stating: "Bob wishes to approach his Bank (Westpac) to arrange for a temporary facility of up to $2.5 million…the purpose is to fund his trading arrangements with Austral over, the period to end February 2001….In support of his application he wants us to advise the Bank that he has advanced moneys to Austral by way of a "pre payment for stock"….(I think the logic is that the paid up front for Austral to secure additional supplies during the recent loan in the market)…I am confused as to how he proposes to explain this to the Bank…In order for Bob to trade on he requires the additional funding and appears to have no other avenues open to him…Our position should be that we are prepared to assist but only to the extend that it does not compromise our operations…." "On the basis that Bob continues to take and pay all on going production at agreed prices Austral could allow the current stock holding to flow through and apportion the proceeds to reduce its commitment to Bob…It can only work if Bob commits to take minimum quantities of new production (450,000-500,000) per week to ensure Austral can trade itself out of its current position." [Annex D of Wolthuizen.] 15 November 2000 Handwritten letter from Mr Wolthuizen to Mr Frost stating: "The other issue is the Tumbarumba saga. It was my understanding that the moneys involved in the proposed acquisition would be available for up to 12 months….This was an investment by all concerned in a potential expansion program and was enthusiastically supported…While I recognise the deal did not proceed as planned, I believe that the process was necessary. However, as you know we are now looking at a potential delay of up to 12 months for the return of the deposit funds….." "I appreciate the type mark conditions, however you will recall that during your last visit to Holbrook we were agreed that this stock would move by end October or early November…Clearly this stockholding is a major contributing factor to our type cash flow situation and with the green mill back on line, I am concerned that we might experience further cumulation…Whilst it is true that TKB does not trade with Austral in isolation, I would assume that failure to move this stock must have similar cash flow repercussions at your end…." "Our enthusiasm for the Tumbarumba acquisition and your unbridled support was clearly driven by the market conditions at the time. The subsequent downturn was certainly beyond all our control and has obviously impacted on our views…. However, no matter how enthusiastic or supportive we might be of each other, our respective organisations must trade on and survive on a commercial basis." [Para 31 and annex E of Wolthuizen.] November 2000 Mr Wolthuizen tells Mr Frost that without the moneys previously mentioned by Mr Frost the purchase of Tumbarumba Mill could not proceed. Mr Frost indicates that he is not in a position to provide the money. Mr Wolthuizen says he will have no alternative but to rescind the contract but that they are still having problems in meeting obligations to Suncorp Metway out of cash flow unless Tasman increases purchases in accordance with the supply agreement and the mill moves back to full production. [Para 32 of Wolthuizen.] 17 November 2000 Letter of variation to facilities totalling $28.8 million from Suncorp Metway to ASP to include acquisition of equipment to be utilised in capital works by ASB at Bombala. [Exhibit HW6 of Wolthuizen.] 28 December 2000 Deed of assignment between Softwood Development Corporation Pty Limited, Tasman and ASB pursuant to which Softwood assigned its rights and responsibilities under the supply agreement with Tasman to ASB. [Para 13 and annex C of Howley 1.] 5 February 2001 At request of Suncorp, Austral Group seeks copy of Tasman's management accounts as at September 2000 or at December 2000. [Para 33 and annex F of Wolthuizen.] 12 February 2001 Austral Group letter to Tasman. [Para 34 and annex G of Wolthuizen.] 13 February 2001 Harmoni letter to Tasman stating: "I understand the production at Austral Holbrook mill is really starting to perform and with the completion of the Bombala upgrade the Group will be in a much better position to service the markets….It is of some concern however that given the current level of production there seems to be a significant build up of stocks particularly at the Holbrook site….It appears with my discussion with Bill Howley that TKB is approaching the marketing more in the manner of agent rather than customer….by this I mean that the production team is doing its utmost to produce product line with agreed specifications and volume. However, they are not being provided the orders and delivery schedules in line with these arrangements…Whilst we appreciate there are logistical issues and significant savings to be made by delivering directly from the mill to the customer, it is not rational for Austral to carry the cost of stock build ups in order to TKB with the ultimate savings." [Para 34 and annex H of Wolthuizen.] 16 February 2001 Letter from Harmoni on behalf of the Austral Group to Tasman stating: "The $1.25 million that was provided for the Tumbarumba acquisition, which is still very much a "live" issue, was not on my understanding meant to carry interest. In effect, the interest component could be regarded as a payment for TKB receiving a marketing agreement for the majority or all of the wood out of the Tumbarumba mill….." "As to the remainder of the funds, I acknowledge the equity of the cost of those funds being passed through us. However, the payment of this interest is much like the repayment of the advance itself. The borrowing entities are reliant on income by a flow of funds through sales achieved by the trading entitles. Without a consistent and even flow of sales it would be responsible of me to make any formal proposal. We have in the past put proposals which have been underlined by minimum sales being achieved and maintained on a weekly or monthly basis." [Para 35 and annex I of Wolthuizen.] 19 February 2001 Meeting between Messrs Wolthuizen, Frost and McLeod at Sheraton Hotel in Sydney. Mr Wolthuizen states he is prepared to consider documenting loans on the basis that it is confirmed that the repayment of funds is linked to the performance of Tasman in respect of the supply agreements. Mr Frost states that won't be a problem and they will buy what is produced. [Para 36 and Exhibit HW11 of Wolthuizen.] 21 February 2001 Letter from Harmoni to Tasman stating: "As we have previously raised, Harmoni only has the ability to pay out of reimbursement of loans made to Austral…." Process for payment and acquisition of stock then outlined. [Para 34 and annex J of Wolthuizen.] 22 February 2001 Letter from Austral Group to Tasman stating: "Any ability to repay is linked, as repeatedly stated by you and us to minimum regular sales. What was spelt out in Glenn's fax yesterday was what I understood our agreement was, which would help you every bit as much as it would help us." "It is essential to resolution of this issue that you recognise the entities to whom the funds were advanced. I should also add that there is no stock at Heathcote and stock at Holbrook and Bombala is secured under the Suncorp Metway debenture. In any event Austral didn't borrow the money and I would rather be more focused on the appropriate entities repaying the advances so that security becomes a non issue." [Para 38 and annex K of Wolthuizen.] February 2001 Conversations between Mr Frost and Mr Wolthuizen and Mr Frost promises to lift levels of acquisition. [Para 40 of Wolthuizen.] February 2001 Mr Frost tells Mr Wolthuizen to tell his bank that Mr Wolthuizen has a guarantee from Mr Frost that Tasman will move sufficient product by 30 June in the next quarter not only to meet the June prepayment but to make up the shortfall for March 2001. [Para 41 of Wolthuizen.] Shortly thereafter Mr Wolthuizen approaches Suncorp Metway for deferral of repayment of principal of $1 million informing him that Mr Frost has given assurance that Tasman will move sufficient product. [Para 42 of Wolthuizen.] April 2001 Mr Frost informs Mr Wolthuizen that he has a real problem with his bank because of the market downturn. Tasman does not have the cash to purchase the stock and carry its debt. Mr Frost attributes fault partly to Austral because of money lent and effect on his business. [Para 44 of Wolthuizen.] 19 April 2001 Letter from Austral Group to Mr Frost stating: "Regardless of your attempts cloud the issue by your efforts to link various other transactions, it is a fact that Austral has not received payment for goods delivered and those payments remain outstanding….As you know the arrangements relating to these moneys reflect our agreement to assist your cash flows through the extremely difficult trading conditions over the past few months in recognition of your support to Austral in the past and the interest of a mutually rewarding long term relationship." "At no time were these contributions to form any part of the day to day trading terms between Austral and TKB. You seemed t have overlooked the fact that it was you who introduced some of these projects and it was certainly your unbridled enthusiasm and commitment of financial support, which drove us to pursue them with such vigour…. This support included your undertaking to fund up to $7 million of the Tumbarumba project if required. It was only when the market slowed dramatically late last year that your enthusiasm waned." "Notwithstanding the foregoing, the major issue for Austral remains the lack of revenues caused by the failure of TKB to perform for the period October 2000-March 2001. In fact, had TKB honoured its commitments, Austral's revenues would have in excess of $12 million as against $8 million actually achieved, a short fall of $4 million within 6 months…. Clearly the higher level of trade would have forestalled many of the problems now facing us." "It has been a feature of the relationship between Austral and TKB over the period that TKB continually assured Austral as to its capacity and subsequently failed to deliver….These issues have caused a great deal of embarrassment for Austral and at this time places the company in an extremely difficult position with its bankers…There is no doubt that the past 6 months have been extremely difficult for all parties and for its part Austral has tried its utmost to accommodate the ever changing demands put on it by TKB." "We also reduced the out put by nearly 40% for the first quarter of 2001 at TKB's request on the understanding that the volumes would progressively return during the second quarter and stabilise to pre down turn levels by the middle of the year.... However, it now appears that notwithstanding these initiatives, TKB is still finding it extremely difficult to move the volumes and maintain prices and there is no evidence of the up turn predicted by TKB. As you are well aware Austral's operations, as well as other processors, rely on a critical volume through put to maintain the cost base and the integrity of its revenue streams," "Historically, the arrangement with TKB always contemplated a secure market for Austral's production and was seen as a unique and major advantage over other producers. Whilst it was often suggested by third parties that there were risks associated with such an arrangement, you were always able to convince them and myself that TKB had the capacity to perform under the terms of the supply agreements regardless of market conditions." "The continuing practice of ad hoc and unrealistic sales projections and unrealistically low volumes serve only to exacerbate and already difficult environment and give rise to genuine concerns about the future….. At each of these meetings we have been assured of a turn around and TKB's ability to perform, however to date there has been no evidence of this performance and in fact volumes and prices have continued to decline." "Bob, it has been pointed out on numerous occasions that in order for any reconciliation of our arrangements to occur there had to be a significant improvement in TKB's performance. Nevertheless the representations appear to have fallen on deaf ears as TKB continues with its cavalier approach to its obligations to Austral." "To this extent Austral requires firm commitments from TKB as to volumes and product range for future. If TKB foresees any difficulties in meeting its obligations under the terms of the supply agreement then these need to be clearly understood…The point has been made repeatedly over the past 6-8 months that unless there is significant increase in off take volumes at fair market pries, Austral has no alterative but to further expand its distribution base and to this extent we are poised to progress our arrangements with orders forthwith." "Therefore we will need to clearly understand TKB's requirements going forward so that we may take this into account when allocating volumes from the increased production flows to other distribution areas." [Para 45 and annex L of Wolthuizen.] 1 May 2001 Meeting and agreement between Messrs Frost, Hodges and Wolthuizen that Tasman owed Austral Group $1,323,506.44. Discussion about minimum acquisition of $300,000 per week from Tasman. [Para 46 of Wolthuizen.] Shortly after 1 May 2001 Mr Frost meets with Mr Wolthuizen and says that his bank is refusing to advance him any further moneys unless he can demonstrate that the moneys which he has lent to Austral Group will be repaid. He notes the loans haven't even been documented. Mr Frost requests a personal guarantee from Mr Wolthuizen. Mr Wolthuizen agrees to ensure that Tasman meets its obligations to Austral and starts to take the volumes of product that it has contracted to take. Mr Frost gives his word that Tasman will be able to purchase all existing stock and all future production if he can get his bank to provide him with the moneys needed to fund the operations of Tasman and that he needs personal guarantees to convince Westpac. He states he never intends to call on those guarantees as Tasman will provide the cash flow to Austral Group to enable repayment of the loans. [Para 47 of Wolthuizen.] 4 May 2001 Fax from Tasman to Austral Softwoods stating: "Please accept confirmation that the recently reconciled trading account shows balance owing by this company to the Austral Group as at 30 April 2001 is 41,323,596.44." [Para 46 and annex M of Wolthuizen.] 5 May 2001 Fax from ASH to Tasman noting trading terms agreed on 1 May 2001: "Until the payment of the $1,323,506.44 currently due to Austral has been received, TKB will pay Austral in full (including GST) for all products delivered each week within 7 days of delivery…The payment to Austral of the $1,323,506.44 outstanding, net of any adjustments, will be completed on or before 30 June 2001." [Para 46 and annex N of Wolthuizen.] 5 May 2001 Letter from Mr Wolthuizen to Mr Frost stating: "It seems we have finally reached a position where we agree on the situation between us although I note that Doug has forwarded a second note, which refers to my guaranteeing an amount of $3,278,565 on behalf of the "Austral Group"…the documents I have agreed to execute relate only to moneys owing by Harmoni and Tumbarumba Investments and to this extent there are no further moneys owing by Austral to TKB. I understand that all parties, including Doug, were now fully aware of this arrangement therefore it remains an ambiguity I would appreciate if you would clear these up…As we have now resolved these issues and have in the process significantly enhanced TKB's arrangement with Austral, I hope we can look forward to a period of profitable trading between the parties." [Para 50 and annex O of Wolthuizen.] May 2001 Facsimile from Mr Wolthuizen to Tasman. [Para 50 and annex P of Wolthuizen.] Late May 2001 Following documents entered into: (a) loan agreement between Tasman and AST in respect of $1.25 million; [Exhibit HW 15 of Wolthuizen.] (b) loan agreement between Tasman and Harmoni in respect of $1.7 million; [Exhibit HW 16 of Wolthuizen.] (c) guarantee and indemnity of Mr Wolthuizen in respect of Tasman's loan to AST; and [Exhibit HW 14 of Wolthuizen.] (d) guarantee and indemnity of Mr Wolthuizen in respect of Tasman's loan to Harmoni. [Exhibit HW 13 of Wolthuizen.] 18 June 2001 Facsimile from Mr Wolthuizen to Mr Frost stating: "It is clear from these comments that despite the numerous meetings and discussions we have had on the subject of payments and production, there still remains a fundamental misinterpretation on your part as the financial arrangements between Austral and TKB. At the time of writing, it is my understanding that the total amount of moneys outstanding to Austral remain in excess of $1 million. The arrangements that were agreed some 6 weeks ago and subsequently confirmed on numerous occasions between us was for TKB to remit a minimum of $450,000 per week to Austral and that the deliveries for the week would be deducted from this amount leaving the balance of payment towards the aged debt…." "This was the basis upon which separate agreements incorporating personal guarantees were executed between the parties last month. It was my clear understanding that these agreements and guarantees were to isolate these transactions and to assist your banking arrangements…. You have now stated that you have informed your bankers that these agreements relate to future purchases of timber from Austral, which is clearly not correct and distorts the arrangements referred to above." "The critical issues are that to date TKB has not honoured its commitment to pay $450,000 per week and judging by your comments to Stewart McLeod you continue to misrepresent the arrangements in self serving manner. Further, the concept that Austral is not performing is a complete mistake as you will be well aware of the progress being made in meeting the production schedules agreed with TKB." "We cannot continue to operate under these circumstances and as I have outlined previously we have alternatives, which I have been reluctant to pursue in view of our long standing relationship. However given the current situation I do not see any option but to proceed with these alternatives in order to protect our business and restore our credibility." "Whilst I am completely in the dark as to why or on what basis you would be taking legal action, as referred to in your conversation with Stewart McLeod, but I can assure you that unless we receive some satisfactory resolution of the on going trading arrangements and the outstanding accounts that we will exercise our rights by issuing a Statutory Demand for all moneys outstanding and proceed forthwith to put in place alternate arrangements for distribution of our product." [Para 52 and annex Q of Wolthuizen.] To 30 June 2001 Tasman shortfall of $20,390,873 in payments due under ASH and ASB supply contracts with Tasman. [Exhibit B of Howley 2.] To 20 June 2001 Tasman causes ASH and ASB $3,499,621 loss of profit in respect of shortfall under supply contracts. [Exhibit A of Howley 3.] Up to June 2001 Tasman bought almost all product from Bombala facility of ASB. [Para 17 of Wolthuizen.] 3 August 2001 Tasman issues notice of default under Harmoni loan agreement and AST loan agreement purporting to rely on sub clauses 7.1(h) (indebtedness not paid) and 7.1(o) (insolvency) of related bodies corporate, being ASH and ASB. [Para 17(b) and annex H of Howley 1.] 13 August 2001 Creditor's statutory demands for payment of debt of Tasman against Harmoni and AST. [Annexed to originating process in both proceedings.] 14 August 2001 Plaintiffs receive Tasman's statutory demands. [Para 4 of Hodges.] As at 2 September 2001 Tasman indebted in respect of outstanding invoiced amounts totalling $687,706.26 (being $540,158.08 in respect of ASH and $147,548.18 in respect of ASB). [Para 20(a) of Howley 1.] 23 September 2001 Proceedings commenced. [Court file.] As at 25 October 2001 Tasman indebted in respect of outstanding invoiced amounts totalling $645,851.10 (being $362,848.48 in respect of ASH and $283,003.62 in respect of ASB). [Para 2 of Howley 2.]

RESOLUTION OF LEGAL ISSUES 7 The Plaintiff's principal witness was Mr Woltzhuizen whose affidavit is 8 November 2001. Brief cross-examination was permitted. But, as is well-settled, that cross-examination was not permitted to stray beyond the interlocutory level of testing for plausibility. 8 The other principal witness, Mr Howley, though present, was not in the end required for cross-examination. 9 The Plaintiff in each case relies upon what in the present proceedings can be taken to be undisputed evidence, though obviously it would be tested in any final hearing. I set this out as it appears in summary form in the Plaintiffs' written submissions in reply. (a) Tasman was very closely involved in a trusting business relationship with Austral Group. In 1997, Tasman almost became a substantial equity holder in Harmoni (para 9-12 of Wolthuizen). Until July 2001, Tasman was substantially the largest customer of the product of Austral Group (page 11 of Howley 1). Between 20 October 1997 and 24 February 2000, Mr Frost of Tasman was a director of ASH (paras 13 and 14 and Exhibit HW 3 of Wolthuizen). In late 1999, Tasman made loans of $250,000 and $400,000 to allow Mr Wolthuizen to purchase 50% interest in the Austral Group. The loans were also never documented, were repaid from cash flow of ASH and are not the subject of the dispute in these proceedings (para 19 of Wolthuizen). On 7 March 2001, Tasman expressly promised in writing to make payments of $300,000 per week as against projected sales (PX1). That promise was not honoured and had to be pursued in early May 2001 (para 46 of Wolthuizen). On 4 May 2001 (that is, days before the loan agreements were executed in late May 2001), Tasman acknowledged a balance owing "to the Austral Group as at 30 April 2001 is $1,323,596.44" (annex M of Wolthuizen); (b) Tasman had entered into binding and enforceable "take or pay" supply agreements with: (i) ASH on 1 January 1998 and continuing until 31 December 2010 for the annual supply of up to 90,000 cubic metres of structural lumber (para 12 and annex B of Howley 1) (see clause 4.4 and schedule for required volumes to be taken or paid by Tasman); and (ii) Softwood Development Corporation Pty Limited (subsequently assigned by ASB) commencing on 1 July 2000 and continuing until 11 June 2005 for the annual supply of up to 30,000 cubic metres of untreated sawn timber (para 13 and annex C of Howley 1) (see clause 3.3 and definition of "volume" for required volume to be taken or paid by Tasman). The undisputed and carefully calculated evidence of Mr Howley was that to 30 June 2001: (i) there was a shortfall of $20,390,873 in payments (that is, turnover) due under the ASH and ASB supply contracts with Tasman (Exhibit B of Howley 2); and (ii) the shortfall in turnover by Tasman caused ASH and ASB $3,499,621 loss of profit (Exhibit A of Howley 3). Further, the undisputed evidence of Mr Howley (para 2 of Howley 2) was that as at 25 October 2001, Tasman was indebted in respect of outstanding invoiced amounts totalling $645,851.10 being: (i) $362,848.48 in respect of ASH; and (ii) $283,003.62 in respect of ASB. (c) on 28 March 2000, Tasman entered into Tripartite Agreements with Austral Group's banker, Suncorp Metway Limited and: (i) ASH (then called Austral Softwoods Limited) (Exhibit HW7 of Wolthuizen) whereby Tasman agreed to duly and punctually observe its obligations under the supply agreement dated 1 January 1998 between Tasman and ASH (clause 4.1(a)); and (ii) ASB (Exhibit HW8 of Wolthuizen) whereby Tasman agreed to duly and punctually observe its obligations under the assigned supply agreement dated 1 July 2000 between Tasman and ASH (clause 4.1(a)). Mr Frost attended meetings with Suncorp Metway on a number of occasions and made representations, expressed to be made as a director of ASH and a director of Tasman, that Tasman would purchase whatever product was produced by ASH (para 21 of Wolthuizen); (d) the undated loan agreements entered into in late May 2001 between Harmoni and Tasman and AST and Tasman do not reflect advances actually made in or about May 2001 and concerned: (i) a $1.25 million advance to AST made in or about July 2000 by Tasman to assist in the then proposed acquisition of AST of the Tumbarumba saw mill from a Boral subsidiary, Hardy's Pty Limited. That advance was entirely undocumented. It was Mr Frost who raised the issue of the acquisition of the Tumbarumba mill in July 2000 and made representations concerning paying out the loan from the Group's cash flow (para 24 of Wolthuizen); and (ii) a $1.7 million advance to Harmoni made in late September and November 2000 by Tasman to allow payment to be made by Harmoni in respect of an obligation of the Austral Group to pay Suncorp Metway funds. This advance was necessitated by the failure by Tasman to meet Tasman's obligations to purchase timber pursuant to the supply agreements dated 1 January 1998 and 1 July 2000 and in relation to which Tasman had entered into the Tripartite Agreements with Suncorp Metway and ASH and ASB. When Mr Wolthuizen raised with Mr Frost the fact that the Austral Group had to pay Suncorp Metway and that the problem was cumulated stock which Tasman had not taken, Mr Frost stated that he was prepared to lend the money and would get it out of the Group's further cash flow when the stock moves (see paras 28 to 30 of Wolthuizen); and (e) Mr Frost of Tasman continuously made representations which were relied upon by Mr Wolthuizen to the effect that Tasman would take all stock produced from Austral Group's mills. When Tasman failed to comply with its contractual obligations under the relevant supply agreements and/or Mr Frost's representations, the Austral Group continued high levels of production and incurred large holding of stock. 10 I should at this point make specific reference to what is said in Mr Wolthuizen's affidavit at para 47 as it provides the principal specific representation relied upon in argument. In saying that I do not ignore the earlier factual context which is picked up in the factual narrative and which is supportive to some degree. I quote para 47 in full. "47. Shortly thereafter, Mr Frost and I had another meeting and had a conversation to the following effect;- Mr Frost said: "I have been to my bank. They are refusing to advance me any further monies unless I can demonstrate to them that the monies that I have lent you will be repaid. The loans haven't even been documented". I said: "I know they are not documented. What do you want to do?" Mr Frost said: "Well, if the loans are documented and you give me a personal guarantee for my bank, the bank will give me the cash to allow me to purchase and move your stock and increase my trading and by 30th June 2001, the whole problem will be resolved". I said: "I am prepared to assist in any way I can to ensure that Tasman meets its obligations to Austral and starts to take the volumes of product that it has contracted to take. Given the events of the past 12 months what assurances will I have that Tasman will perform going forward." Mr Frost said: "You have my word that Tasman will be able to purchase all of your existing stocks and all future production if I can get my bank to provide me with the monies I need to fund the operations of Tasman. I need the personal guarantees to convince Westpac that the monies lent to the Austral Group are going to be repaid but I do not intend to ever call on these guarantees as Tasman will provide the cash flows to the Austral Group to enable repayment of the loans." 11 The Defendant seizes on the words "do not intend" that appear in the last quotation from Mr Frost. Mr Frost was the principal of the Defendant who was well familiar with the Plaintiffs' affairs. The Defendant contends that those words render the statement no more than a mere representation of present intention. As such, it is said to be incapable of conveying that payment was only to be out of the cash flows provided to the Austral group from the assured performance of the relevant supply agreements, as the Plaintiffs contend. 12 I do not consider that, on the state of the limited evidence before me, that one could dispel the basis of a plausible contention requiring further investigation (of the nature put by the Plaintiffs) from use of the word "intend". It has to be understood in the context of the events that preceded it. Also, taking into account the apparent purpose of the much later formalised loan agreements, for submitting to the Defendant's bank. I agree with the Plaintiffs' contention that the Plaintiffs do not fail merely because there was no evidence either way as to whether the Defendant's bank did provide financial accommodation. That was peculiarly within the Defendant's knowledge. 13 In all the circumstances I conclude that the Plaintiff has done enough to establish at the modest level of a plausible contention requiring further investigation, that such representation was made. 14 There is however the further issue of whether it was relied upon, or capable of being relied upon by the Plaintiffs. Granted that it was made in a context where the Plaintiff was relying on a reciprocal assurance that the supply agreements would be carried out, the Defendant's argument is that a perusal of the relevant correspondence emanating from the Plaintiff, in particular letters dated 13 February 2001 and 19 April 2001 demonstrate that the Plaintiffs themselves took the loan arrangements to be entirely separate and distinct from the supply arrangements. 15 Clearly this is a matter that will be tested in any final proceedings. However, the passages relied upon, particularly the letter of 19 April 2001, occur in a context where it appeared that the Defendant was being pressed for payment under the supply agreements. The Defendant was seeking to claim that as the loan was in arrears this disobliged the Defendant from compliance with the supply agreements. Clearly the Plaintiffs were seeking to refute this. 16 I accept that the language of a lay person referring to the loan agreement being "separate and exclusive from the trading arrangements" could mean that the trading arrangements were to be treated as independent in the sense that their performance was not thereby to be excused. Admittedly that is not a matter that could be confidently concluded. But, it would be unsafe for a court in the present state of the evidence, to exclude that possibility for which the Plaintiff contends. 17 I should say at this point that though in the Defendant's written submissions reference is made to insolvency as an alternative ground, I could not conclude on the state of the evidence before me, that the relevant Plaintiffs were insolvent. Clearly enough they were under financial pressure. But much may turn on the future resolution of the contractual disputes between them. It thus follows that insolvency could not of itself be a basis that would defeat the Plaintiffs in these proceedings. 18 A further argument put by the Defendant is that whatever else the representations may have meant, they did not alter the fact that the relevant loan agreement in each case required repayment by September of this year. To this the Plaintiffs respond that repayment would indeed have been possible by then, but only if the Defendant had fulfilled the representation relied upon and complied with its obligations to pay under the supply agreements. 19 I turn now to the matters bearing upon the contention that even had the representation been fulfilled it would not have availed the Plaintiffs. That argument turns upon a mismatch between the period of the projected profit that would have been earned by the supply companies concerned and thus the group (over eighteen months) and the two to five months after the cash flow representation made in May 2001, according to Mr Wolthuizen's evidence. 20 The premise in that contention is that the representation was not that there should be any catch-up of past indebtedness under the supply agreements. Rather that the representation was merely for the future. However, that contention suffers in terms of credibility from the fact that there was a preceding history earlier recounted of earlier representations though not as clear as that said to have been made in May 2001. There was also the tripartite agreement where representations were undoubtedly made in writing by the Defendant to Suncorp Metway that it would carry out its obligations under the supply agreements. All of that, coupled with the fact that there was, as at 1 May 2001, $1.3m owing makes it intrinsically improbable that the May 2001 representation was without any requirement of catch-up of past supply agreement indebtedness. In other words, the representation as the Plaintiffs would put it was that the eighteen months profit, derived from what should have been buyer performance of the supply agreements, would have catered for the repayment of the loans. 21 It suffices that I accept that this is a plausible contention requiring further investigation. 22 I turn now to the argument that the Plaintiff in each case had no proper basis for treating the supply agreements as repudiated. That turns firstly on whether, pursuant to the variation of the supply agreements, there was not as at the date of the termination of those agreements the expiry of the necessary thirty days from the time that monies were due and owing from the supply of timber. Second, it turns upon the effect of the reconciliation to which I have made earlier reference. 23 As to the former, the terms of trade appear to have been varied after the variation agreement of February 2001 by a fax from Austral Softwoods Limited so that the following was required: "Until the payment of the $1,323,506.44 currently due to Austral has been received, TKB will pay Austral in full (including GST) for all products delivered each week within 7 days of delivery. To ensure a smooth cash flow to Austral, TKB will make a minimum payment of $300,000 each Wednesday with the balance by the Friday or in the case where TKB has not taken the full quota the balance will reconciled at the end of the month. So long as there remains a balance outstanding to Austral there will be no discounts allowed on these terms and once all outstanding balances owed to Austral have been paid the terms will be 30 days as set out in the variation to the marketing Agreement dated 4th May 2001. The payment to Austral of the $1,323,506.44 outstanding, net of any adjustments, will be completed on or before 30th June 2001." 24 Whether that letter was capable of varying the agreement by what appears to be a unilateral act will no doubt be tested in final proceedings. But again it would be unsafe to assume that there have not been even at the level of a plausible contention, a basis for concluding that the variation to seven days had occurred. 25 That letter needs to be read with PX1 which obliges payments of $300,000 per week; see fax of 5 March 2001 from the Mr Wolthuizen. 26 The Defendant then relies upon a reconciliation attached to the letter of 29 June 2001 as demonstrating several things. First, that the $1.3m owing must have been paid by around 31 May 2001. Second, that the invoiced payments, if they occurred over eight weeks (it is possible they occurred over nine) fulfilled the requirement of payments of $300,000 per week laid down by PX1. This is with the result that, though as at 29 June 2001 there was still $805,424.03 owing, the thirty days had been reinstated. It would follow that the Plaintiffs' treatment of the contract as repudiated was premature since the Defendant had not been allowed the 30 days to pay. In that sense it is said the Plaintiffs were responsible for the cessation of the cash flow upon which, according to their case, repayment of the relevant loans was predicated. 27 The Defendant cannot complain, if it be the case, that there is a hypothesis consistent with the seven day terms still operating if that hypothesis is not clearly refuted by the evidence. One such hypothesis, not refuted by the Defendant, is that the invoices post-date supply such that clause 4 of the variation agreement was not complied with, remembering that that clause requires one month payment from the last day of the month following delivery of product. There is no evidence as to when product was delivered, that was the subject of the relevant invoices. 28 In any event, on the state of the evidence before me, I could not conclude that there was not the basis for treating the contract as repudiated from the past history of failure to pay, more particularly under a regime that required payment within seven days. Even were the May/June period one in which there was compliance, there may well have been earlier breaches that were not waived. This sort of quasi interlocutory proceeding is not the forum for reaching any safe conclusion on that matter. 29 It remains to consider whether there is any alternative basis, in terms of an offsetting amount for the Plaintiffs' application. Given my earlier conclusion that there is a plausible contention to the effect contended for by the Plaintiffs and relied upon, it is not necessary for me to reach a concluded view on that. However, given the lack of identity between borrower and supplier on the Plaintiffs' side, I do not consider that there could be an offsetting amount. This is unless the Plaintiffs were successful in their first contention, as indeed I conclude they have been.

OVERALL CONCLUSION 30 The Plaintiffs succeed in setting aside the relevant statutory demands.

ORDERS 31 Taking into account the offer made by the Plaintiffs on Monday 12 November 2001 at 12.10 pm I make the following orders including as to costs:

(1) The applications by the respective Plaintiffs, Harmoni Pty Limited and Austral Softwoods Tumbarumba Pty Limited are granted and the relevant statutory demand set aside.

(2) The Plaintiffs in each case to be awarded their costs on a party and party basis up to 12 November 2001 at 12.10 pm and thereafter their costs on a solicitor and client basis, taking into account the offer made by the Plaintiffs in that behalf.

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