CT Money Pty Ltd & Ors v GJ & SG Thompson

Judgment 1The plaintiffs, CT Money Pty Limited (CT Money), CT Franchises Pty Limited (CT Franchises) and CT Lending Pty Limited (CT Lending) operate a mortgage origination business (the Business) purchased in 2005. In 2005, CT Franchises entered into Franchise Agreements, including with the former first defendant, Darranda Pty Limited (Darranda) and the only remaining defendant, GJ & SG Thompson Pty Ltd (the defendant), pursuant to which franchisees traded under the business name 'Capital Trust'. Franchisees procured applications for loans from clients who provided, inter alia, real property as security for the loans funds provided by a third party with whom CT Money was accredited. 2In 2008, Darranda terminated its Franchise Agreement with CT Franchises (the Darranda Franchise Agreement), and the loans that it had brokered, including the loan the subject of this litigation (the Nahas loan), were assigned to the defendant. The Nahas loan went into default and the security property was sold, leaving a shortfall of approximately $200,000. A claim was made on CT Money to indemnify the funder against the loss on the loan. The plaintiffs claim that CT Franchises is required to indemnify CT Money for the loss and the defendant is obliged to indemnify CT Franchises. The plaintiffs seek damages from the defendant. 3The litigious history between the parties is set out in CT Money Pty Ltd v GJ & SG Thompson Pty Limited (No 2) [2012] NSWSC 69. After delivery of that judgment on 15 February 2012 in relation to the defendant's application to amend its Defence, the parties were granted leave to file written submissions and judgment was reserved on 5 March 2012. Mr A Cheshire, of counsel, leading Mr D Steirn, of counsel, appeared for the plaintiffs and Mr J O'Connor, of counsel, appeared for the defendant. Purchase of the Business 4On 1 November 2005 CT Franchises and CT Lending, together as Purchaser, entered into an Agreement for the purchase of the Business with DC Corporation Australia Pty Ltd, Capital Securitisation Limited and ACN 110 802 938 Pty Ltd trading as The Capital Trust, together as Seller. 5The "Business" was defined as "acting as a mortgage originator and mortgage manager and of establishing, conducting and administering a network of franchisees which act as mortgage brokers and mortgage originators". The Business Assets were defined to include "the rights of the Seller under the Franchise Agreements" in Item 3 of the Agreement (including one with Darranda), the Loan Book and "the rights of the Seller under the Originator Agreements". 6The Loan Book was defined as "the rights to receive Commissions and margins accruing from the Business earned by the Seller as a result of loan applications having been submitted by it and Franchisees to various Lenders", the details of which were identified in Schedule 8 to the Agreement. The "Originator Agreements" were defined in part as "all agreements between the Seller and Lenders". "Lender" was defined as "a financial or other institution" that was party to an Originator Agreement with the Seller. Darranda Franchise Agreement - 1 November 2005 7On 1 November 2005 CT Franchises, as Franchisor, and Darranda, as Franchisee, entered into the Darranda Franchise Agreement. It appears that this Franchise Agreement was drafted in part by using clauses from other documents. The result is that the numbering of the clauses is not consecutive. For instance clauses 30 to 32 appear between clause 6 and clause 11. There are no clauses 7 to 10. Clause 30 has five sub-clauses numbered 7.1, 30.1, 1.1, 1.2 and 7.5. Clause 26 has five sub-clauses numbered 27.1 to 27.4 and 26.5. Clause 27 has three sub-clauses numbered 32.1 to 32.3. Clause 29 has four sub-clauses numbered 7.3 to 7.6. 8That Agreement included the following: RECITALS A.The Franchisor together with the Trustees of The Capital Trust have developed certain business procedures and systems together with a distinctive and valuable name, Image and reputation associated with the financial services industry. B.Numerous Franchisees have been granted Franchises by the Franchisor to operate the Franchised Business in various areas in Australia and a Network of businesses has been established. C.The System and the Image require and allow Franchisees to differentiate themselves from others supplying similar goods or services by offering, being capable of delivering and delivering the products and services of the Franchisor in accordance with the requirements of the Franchisor. D.The Franchisor has developed a further system to allow for sub-franchisors (AA Franchisees) to assist in the further development of the Network by recruiting, motivating, training, mentoring, supporting and supervising further sub-franchisees (AAA Franchisees), whilst also having the opportunity of carrying on the business of a Franchisee, namely that of a funding and finance origination business in accordance with the System and the Image. E.The AA Franchisee desires to carry on a business as described in "D" above F.The AA Franchisee and the Principals have requested that the Franchisor grant to the AA Franchisee an AA Franchise to operate as a Capital Trust AA Franchise for the Geographical Area referred to in this Agreement. G.The Franchisor has subject to the signing of this Agreement, agreed to grant the AA Franchise to the AA Franchisee on the terms and conditions set out in this Agreement, which terms and conditions the AA Franchisee and the Principals have accepted. ... 3.FRANCHISE 3.1Grant Subject to Clause 5, the Franchisor grants to the AA Franchisee, and the AA Franchisee accepts the right: (a)to operate the AA Franchise within the Geographical Area; and (b)to operate the Franchised Business within the Geographical Area and to participate in the Franchise Network for the Term and on the terms and conditions as set out in this Agreement. ... 17. DEFAULT (1)In the event of default by the AA Franchisee in the performance of its responsibilities or the payment of any moneys pursuant to this agreement the AA Franchisee shall, in addition to interest as prescribed in this agreement and without prejudice to any other rights of the Franchisor, pay to the Franchisor all costs, expenses or damages (including legal costs, expenses or damages on a solicitor-own client basis) incurred by the Franchisor as a result of the default. ... 18.INSURANCE AND INDEMNITY The AA Franchisee hereby agrees to fully indemnify the Franchisor in respect of any cost, expense, liability or claim, made against the Franchisor arising out of any breach by the AA Franchisee or any of the staff, employees or personnel of the AA Franchisee of its responsibilities under this Agreement or any other agreement referred to in this Agreement. ... 22.TRANSFER/ASSIGNMENT (1)The Franchisor may at any time transfer or assign its rights pursuant to this Agreement and this Agreement shall inure to the benefit of any transferee or assignee, and any subsequent successors in title. The AA Franchisee shall on request execute any assignment documentation requested by the Franchisor. ... 30.THE SCOPE OF THE FRANCHISE 1.1 Customer Service The AA Franchisee shall use best endeavours during the Term to efficiently and effectively provide support and service to AAA Franchisees and where necessary, to Customers. The AA Franchisee shall use best endeavours to ensure that either the AA Franchisee or the AAA Franchisees promptly attend Customers within the Territory, identify their needs and provide a consistent and reliant service. 1.2Income to AA Franchisee The AA Franchisee must attend to the requirements of AAA Franchisees and Customers in an efficient and timely manner, including consulting with them, the preparation of necessary documents and the submission to the Franchisor of documents and information necessary for the procurement of Approved Products or such other business as might be transacted on behalf of the Customer. In consequence the AA Franchisee shall be entitled to: (a)commission as stipulated in the Commission Schedule "A" attached to this Agreement; and (b)application fees (shared in the same manner and proportion as indicated for Commissions in Commission Schedule "A" charged by the Franchisor to Customers in relation to the supply of Approved Products, the amount of which shall be determined by the Franchisor in consultation with the AA Franchisee from time to time. 7.5Income to Franchisor The Franchisor shall oversee each Credit Transaction as referred by the AA Franchisee and/or the AAA Franchisees and conduct all communications with such Lenders as the Franchisor might choose from time to time. The Franchisor shall obtain payment of commission from such Lenders and account to the AA Franchisee and the AAA Franchisees. 31.ADHERENCE TO THE FRANCHISE SYSTEM AND IMAGE (1)The AA Franchisee shall at all times during the term strictly comply with the system and the Image, and will carry on business in accordance with the Standards. ... 34.ENTIRE AGREEMENT This Agreement: (a)excludes all conditions, warranties and terms implied by custom, general law or statute (except ones by law which may not be excluded); (b)constitutes the entire agreement between the parties about its subject matter; (c)in relation to that subject matter, supersedes any prior: (i)understanding or agreement between the parties; and (ii)condition warranty indemnity or representation imposed, given or made by a party. 9The "Approved Products" were defined as "those financial products and services currently being marketed, promoted, made available and sold by the Franchisor and existing Franchisees" (cl 1.1). The expression "Standards" was defined to mean "the service, competency, performance and conduct standards to apply to Franchisees including AA Franchisees, as set by the Franchisor from time to time". The "Franchised Business" was defined to include the following (cl 1.1): Income to the Franchised Business will be earned solely from the referral by the Franchisee of loan and other financial requirements of the Customers and clients of the Franchised Business, to the Franchisor. All business attended to by the Franchisee is to be referred to the Franchisor who will oversee the completion of the transaction and earn a commission or fee for the placement of such business. Defendant's Franchise Agreement 10The defendant entered into a Franchise Agreement with CT Franchises on 1 November 2005. It is a much more comprehensive document than the Darranda Franchise Agreement and does not have the numbering or contextual problems that are found in that Agreement. It contains additional provisions in particular the following: 6.3Income to AA Franchisee Income to the AA Franchisee will be earned solely from the referral by the AA and AAA Franchisees of loan and other financial requirements of the Customers and clients of the Franchised Business to the Franchisor. All business attended to by the AA Franchisee and AAA Franchisee is to be referred to the Franchisor, either directly or through the AA Franchisee as the case may be, who will oversee the completion of the Credit Transaction and earn a commission or fee for the placement of such business. Such commission or fee will then be shared with the AA Franchisees in the manner set forth in the Commission Schedule A. 22.INSURANCE AND INDEMNITY ... 22.3Indemnity ... (b)The AA Franchisee indemnifies and agrees to keep indemnified the Franchisor from and against any Claims upon the Franchisor if the Franchisor becomes liable to pay any amount arising out of or as a consequence of or incidental to: (i)the performance or non-performance by the AA Franchisee of the obligations and duties to be performed under this Agreement by the AA Franchise or by any person on behalf of the AA Franchise; (ii)the operation of the Franchised Business; (iii)any breach of any law by the AA Franchisee or its employees or agents; (iv)any negligent act on (sic) omission on the part of the AA Franchisee or its employees or agents; (v)the obligations of the AA Franchisee to any Customer; or (vi)to any person employed, engaged, hired or authorised to act on behalf of the AA Franchisee in the operation of the Franchised Business. 11Darranda assigned its rights under the Darranda Franchise Agreement to the defendant in respect of the Nahas loan. Accordingly the parties relied on the Indemnity provisions of the Darranda Franchise Agreement rather than the defendant's Franchise Agreement. The Manuals 12There are various Manuals in evidence that would appear to fall within what is envisaged by the definition of "Standards" in the Franchise Agreement. The "Capital Trust Policies and Procedures Manual (2005(ii))" includes a section entitled "Loan Submission Process". The steps as recorded include interviewing the applicant and receiving a completed loan application, undertaking a credit analysis of the applicant, ordering a valuation and if the valuation is satisfactory, completing an application and forwarding the application to "the funder". In this latter regard the Manual notes that the process would vary "depending on who the funder is". These provisions were replicated in the CT Franchises Operation Manual except that the word "franchisees" was replaced with the word "Correspondents". Paragraph 2 of the Operations Manual includes the following: The relationship between CT Franchises and a Correspondent is governed by the Agreement executed between the Correspondent and CT Franchises and the Operations Manual. Correspondents have two distinct roles in this Program: They originate mortgage loans in accordance with the approved guidelines, as outlined in the Operations Manual and the Agreement; and They manage those mortgages through to maturity or discharge. It is the Correspondent's role to manage its relationship with the approved solicitors. 13Paragraph 6 of the CT Franchises Operations Manual refers to CT Franchises forwarding information to "it's funders". The Manual also provides that the Correspondent is required to explain to the applicant the terms and conditions of the loan and contract documentation. 14The Operations Manual also includes a requirement that the Correspondent is to evaluate the credit worthiness of the borrower and then consider "carefully" the information provided in the loan application. It also provides that it is the Correspondent's responsibility to determine whether any information provided by the borrower warrants further enquiry. The CT Franchises Operations Manual includes the following: If sufficient enquiry is not made in circumstances where it is warranted, any loss or damage suffered as a result by CT Franchises will be the Correspondent's responsibility. Franchise Information 15Documents entitled "Franchise Information" produced on the letterhead of "Capital Trust" were issued to the Franchisees from time to time. The first is dated 7 November 2005 and is headed "Loan Book Acquisition". It records that CT Money had acquired the "Capital Trust Loan Book" from Capital Securitisation Limited. It advised that there would be a changeover period as franchises were assigned to CT Franchises. It also recorded that any new moneys, including application fees, valuation fees and payments, would thereafter be paid into CT Franchises' bank account, the details of which were provided. 16Franchise Information 2 issued between 7 November 2005 and 14 November 2005 included the following: As you are aware the CT Money Group has acquired the Loan Book, Trade Marks and rights to the Franchise network of The Capital Trust. CT Franchise P/L, which is part of the CT Money Group, will be contacting all of the franchisees, who are contracted to DC Corporation with an objective to agree on assignment of the Franchise, CT Money will then issue a Letter of Assignment for signature by both the Franchisee and CT Franchises. Certain liabilities will remain with DC Corporation and your rights to pursue DC Corporation will remain in place in the future. CT Money has committed to build on the current base. We will be introducing new products and will involving (sic) our Franchisees to allow them to help us expand the business together. 17That document included a chart of the "new Group structure" with CT Money as the "Holding Company for the Group", CT Franchises as the company that "Operates the Franchise Network" and CT Lending as the company that "Deals with Funders and develops new products". Licence 18On 20 December 2005 CT Money wrote to the Directors of CT Franchises in the following terms: CT Money Pty Ltd (ACN 116 882 636) grants to CT Franchises Pty Ltd (ACN 116 883 900) a license to use the "Capital Trust" Brand name for a period of 10 years form the date of this agreement. The Funders 19Australian Mortgage Securities Pty Ltd (AMS) and AFIG Wholesale Pty Ltd (AFIG) (previously known as Mortgage Asset Management Pty Ltd) described their business as managing and servicing one of the "leading mortgage backed securitisation programmes in Australia". AMS, under a securitisation program known as the "ARMS II Program", formed a trust, the principal assets of which consist of a pool of mortgages. Those mortgages are "originated and managed by Correspondents and/or AFIG". AMS has the overall responsibility for the origination and service of the loans but relies on the Correspondent to "originate only high quality mortgages satisfying all of the standards and other criteria" set out in its Correspondent Deeds and Operations Manual. 20The eligibility qualifications to become a Correspondent include sufficient financial resources to meet any obligations under the Correspondent Deed and the Operations Manual and minimum shareholder funds of $500,000 or as otherwise approved by AFIG. Invitation to become a Correspondent 21On 22 December 2005 AFIG wrote to CT Money referring to recent discussions about "branding" for CT Lending. That letter included the following: As per the Correspondent deed, CT Money Pty Limited, is responsible for all loans received from its chosen business partners. Therefore loan applications received from CT Lending Pty Limited that are lodged by CT Money Pty Limited under the AFIG Wholesale program will be the responsibility of CT Money Pty Limited. 22CT Money was invited to sign and return the letter to AFIG acknowledging agreement with these arrangements. The Correspondent Deed - 15 May 2006 23On 15 May 2006 CT Money, as Correspondent, AMS and AFIG entered into the Correspondent Deed. It is not clear why it took from 22 December 2005 to 15 May 2006 for CT Money to enter into this arrangement. The Correspondent Deed included the following: OVERVIEW 2.1General This Deed sets out the terms and conditions upon which the Correspondent agrees to exercise certain powers and discretions and perform certain obligations in relation to the origination and management of Loans and Mortgages. 2.2Required Degree of Skill and Care The Correspondent must originate and manage each Mortgage, and exercise the Powers and perform the obligations and functions of the Mortgagee under each Mortgage (including corresponding with the Borrower and Guarantor and enforcing the Mortgage), using the same degree of skill and care as would be used by a responsible and prudent mortgagee and in accordance with: (a)this Deed; (b)the requirements of any Enhancement relating to or covering that Mortgage; (c)the Operations Manual; (d)any requests or directions which AFIG Wholesale may make or give from time to time; and (e)all applicable Laws. 2.3Correspondent's Judgment The Correspondent must (upon and subject to the terms of this Deed) exercise its own judgment, skill and discretion in performing its obligations under this Deed. 2.4Operations Manual The Correspondent must comply and act in accordance with the Operations Manual in all respects. 2.5Role of AMS and AFIG Wholesale The parties acknowledge that: (a)under the Program, AMS has overall responsibility for the originating and servicing of Loans and AMS is relying on the Correspondent to perform its obligations under this Deed; (b)AMS has appointed AFIG Wholesale as its agent to manage this Deed, and to exercise all of its powers, rights and functions under this Deed, on its behalf; and (c)unless the context otherwise requires, a reference in this Deed to AFIG Wholesale is to AFIG Wholesale, acting as agent of AMS. ... 3.3Specific Indemnity The Correspondent must indemnify AMS and AFIG Wholesale for all costs, losses, damages, claims and expenses suffered or incurred by AMS or AFIG Wholesale (including any liability which AMS or AFIG Wholesale incurs or may incur to any Mortgagee) as a result of the Correspondent or any employee, agent or other person engaged by the Correspondent being, or being held to be, the agent, partner or employee of AMS, AFIG Wholesale or any Mortgagee. 4.ROLE OF CORRESPONDENT The role of the Correspondent includes (without limitation) the following: (a)sourcing and interviewing prospective Borrowers and Guarantors; (b)processing and assessing each Loan Application; (c)obtaining a valuation from an Approved Valuer using approved standard valuer instructions; (d)obtaining Mortgage Insurer Approval; (e)following AFIG Wholesale approval of the Loan, preparing and issuing a Loan Proposal; (f)instructing an Approved Solicitor to act for the Trustee; (g)co-ordinating settlement of Mortgages; (h)managing Loans after settlement, including correspondence, with Borrowers and Guarantors, requests for variations and managing loans in default; and (i)all other functions provided for in this Deed and the Operations Manual. 5.ORIGINATION PROCEDURES 5.1Sourcing and Processing Loan Applications (a)The Correspondent may from time to time solicit or source (directly or through Delegates) Loan Applications. (b)Prior to submitting a Mortgage Purchase Application under clause 5.2 in respect of a Loan Application, the Correspondent must take all action that it is required to take prior to submitting a Mortgage Purchase Application under the Operations Manual (including identifying and interviewing applicants, verifications, obtaining valuation, credit assessment, obtaining Mortgage Insurer Approval and sending out a Loan Proposal). (c)The Correspondent must ensure that all Loan Proposals issued are in the form required by the Operations Manual and that no changes are made to the form of the Loan Proposal without AFIG Wholesale's consent. ... 5.7Mortgage Documentation and Settlement Following acceptance by AFIG Wholesale of a Mortgage Purchase Application, the Correspondent must: (a)instruct an Approved Solicitor to prepare and send out the Mortgage Documents to be signed by the Borrower and Guarantor; and (b)co-ordinate settlement, including reviewing the Mortgage Documents signed by the Borrower and Guarantor prior to settlement to ensure that: (i)the Mortgage Documents are in the form required by the Operations Manual; (ii)no change has been made to the form of any Mortgage Document from that required by the Operations Manual without the prior written approval of AFIG Wholesale; (iii)all blanks and variables in the form of the Mortgage Documents have been completed in accordance with the Operations Manual and that the manner of such completion is consistent with the relevant Loan Application, Mortgage Purchase Application, Solicitor's Instructions and AFIG Wholesale's Solicitors' instructions pack; and (iv)the Mortgage Documents appear to have been duly executed. ... 8.DELEGATION 8.1Power to Delegate (a)The Correspondent may, subject to any conditions or restrictions which AFIG Wholesale may impose from time to time, appoint Delegates to exercise the powers and perform the obligations and functions of the Correspondent under this Deed. (b)However, no delegation may be made on terms that the powers and discretions of the Delegate exceed those conferred on the Correspondent under this Deed; (c)Correspondents must ensure that Delegates are appropriately qualified and act competently and professionally throughout the period such Delegates are appointed. 24A "Delegate" is defined as "any person from time to time appointed by the Correspondent as its attorney, agent or contractor to exercise any of the powers or perform any of the obligations or functions of the Correspondent" under the Deed and includes "any broker, introducer or originator who sources, or performs origination functions in respect of a Loan Application" (cl 1.1). 25The Correspondent Deed also included the following: 12.REPRESENTATIONS AND WARRANTIES 12.1Regarding Mortgages The Correspondent represents and warrants to AFIG Wholesale that except as disclosed to AFIG Wholesale in writing, and approved or waived in writing by AFIG Wholesale on or prior to the settlement or acquisition of a Mortgage, the following matters will be true and correct in all material respects in relation to that Mortgage: ... (g) (Origination Process) (i)the Loan Application has been fully investigated and assessed and the Borrower and Guarantor identified and interviewed by the Correspondent in accordance with the Operations Manual; (ii)all statements and information contained in the Loan Application are correct in all respects; (iii)no fraud or misconduct has been committed by the Correspondent, a Representative or any Borrower or Guarantor in connection with the origination of the Mortgage; ... (j)(Operations Manual): the Operations Manual has been fully complied with in relation to that Mortgage; and ... 12.2Repurchase of Non-Complying Mortgages (a)The Correspondent must purchase or cause to be purchased each Mortgage in respect of which any of the representations and warranties contained in clause 12.1 are untrue (each a "Non-Complying Mortgage") on the date (the "Completion Date") specified in a written notice from AFIG Wholesale, which must be not less than 30 days after the date of the notice. ... 13ACKNOWLEDGEMENT AND INDEMNITY ... 13.2Indemnity The Correspondent must indemnify AMS and AFIG Wholesale on demand for all Costs and Expenses which AMS and AFIG Wholesale may suffer or incur as a result of, or in connection with: (a)any negligence, fraud or breach of duty by the Correspondent or any Representative; (b)any breach by the Correspondent of this Deed; (c)any breach by the Correspondent or any Relevant Person of any representation and warranty contained in this Deed; or (d)the liability of a Mortgage Insurer with respect to a Mortgage insured, or required by the Operations Manual to be insured, under a Mortgage Insurance Policy being reduced, limited or avoided as a result of any act or omission of the Correspondent. 14 OPERATIONS MANUAL 14.1Acknowledgement The Correspondent acknowledges having received a complete copy of the Operations Manual which is in force at the date of this Deed. ... 14.4Inconsistency If there is any inconsistency between this Deed and the Operations Manual, the Operations Manual prevails to the extent of the inconsistency. ... 19ASSIGNMENT 19.1By Correspondent The Correspondent may not assign or transfer any rights under this Deed without AFIG Wholesale's prior written consent. AFIG Operations Manual 26The AFIG Operations Manual dealing with the Loan Submission Process required the Correspondent to take a number of specific steps including that "Each borrower/guarantor/mortgagor must be identified by the introducer during a face-to-face interview". However in the same section of the Operations Manual, the following appears: In all instances, the Correspondent (not the introducer or another third party) is to interview the borrower(s) or any other party whose income has been used to calculate the debt serviceability. This interview may be conducted by phone or in person. Termination Deed - 2008 27CT Franchises as Franchisor, Darranda as Franchisee and the defendant as Assignee, entered into a Deed of Termination of Franchise Agreement (the Termination Deed) in 2008. It included the following: RECITALS (a)The Franchisee has conducted a business under the name of "Capital Trust - Blackburn" pursuant to a Franchise Agreement with the Franchisor commencing 1 November 2005 ("Franchise Agreement"). (b)By mutual consent, the Franchisor and Franchisee have agreed to terminate the Franchise Agreement and the Franchisee has agreed to assign to the Franchisor its entitlements under the Franchise Agreement other than its obligations and entitlements with respect to the Loans which it agrees to assign to the Assignee. 28The "Loans" were defined as those loans in Schedule 1 to the Termination Deed. The Nahas loan was part of that Schedule. The Termination Deed also included the following: 3.ASSIGNMENT OF OBLIGATIONS AND RIGHTS 3.1Assignment to Assignee The parties hereby agree that in consideration of the Assignee paying the Assignment Price the Franchisee hereby assigns to the Assignee the rights and obligations of the Franchisee under the Franchise Agreement with respect to the Loans and the Assignee accepts such Assignment and the Franchisor consents to such Assignment. 3.2Administration of the Loans The Assignee and the Franchisor hereby agree that upon assignment of the rights and obligations with respect to the Loans pursuant to 3.1 above the entitlement to Trail Commissions by the Assignee will be subject to the same terms and conditions as under the Assignee Franchise Agreement and it is acknowledged by the Assignee that such commissions are not payable by the Franchisor unless they are received by the Franchisor from the lender with respect to the relevant loan. The Franchisor and the Assignee further acknowledge that the obligation of the Assignee to service the Loans shall be subject to the same terms and conditions under the Assignee Franchise Agreement. 3.3Referral of Clients ... (e)The Assignor agrees to indemnify and keep indemnified the Assignee against any and all liability arising from breach or non-performance of their obligations relation (sic) to the Client's credit transactions occurring on or before the Settlement Date. The Assignor will take out appropriate insurance policy to protect the Assignee. The Nahas Loan 29Darranda did not interview the applicant for the loan, Mrs Nahas, either in person or on the telephone, before lodging the application for the loan. The interview was with her husband, Abe Nahas. It is not in issue that the information provided to Darranda was inaccurate in a number of respects. That information included that there were no dependents, when there were at least three children, and that Mrs Nahas worked as a chef with an annual income of $77,000, when in fact she was not in paid employment. 30Darranda's employee, Jarrod Cahill, met with Mr Nahas and filled out the application documents that included a document headed "Loan Interview Diary" (the Diary). That is a Pro Forma document provided to Franchisees. It has CT Franchises' name on it. Mr Cahill's description of what he did in relation to the Diary included the following (paragraph 31 of his affidavit of 8 August 2011): In that document there was a section which read "names of customers present at interview". I intentionally left that section blank because on 8 October 2006 I had only met with Mr Nahas. Further down the document there was a section which read "Were all customers interviewed in person? If not - indicate who was". To that section I answered "Abe Nahas". 31On 9 October 2006, Mr Cahill wrote by facsimile to Mr Boulden at "CT" in the following terms: Re Loan Scenario - URGENT Please find attached loan statements and explanation regarding a loan approval we are seeking urgently as the client has been offered [finance] via another lender at 7.70% under a full doc loan. We need to understand if the Mortgage insurer will accept the conduct which has been questionable. Presently the competing lender will offer mortgage documents at the end of trade today; that this is a referral from one of Kevin's friends and they would prefer for the loan to be with us. The client wishes to borrow 80% LVR and use the equity to inject into a new business her husband is purchasing. The contract will need to settle as on the 14th of October!! I know this is urgent, but your assistance and involvement is needed mate. 32The enclosed "explanation" that Mr Cahill provided to Mr Boulden purported to be a letter from Mrs Nahas to Darranda (albeit unsigned) and was in the following terms: I have had this loan with Homeloans Ltd for six years; I have always paid on time and been ahead on several occasions. I have also redrawn several times. I have always preferred to B-Pay my loan so I can pay as much as I want whether it be weekly or fortnightly. As you can see the late charges on the 13th February and the 13th March were both reversed, payment was made before the 10th of each month but not received until the 14th. I have had continuous contact with my credit manager at Homeloans on a regular basis, and they have seen that payments were made early, but it has taken them longer than expected to process, which is why they have always reversed the late fees. The other three fees totalling $6 over the six months have occurred due to the same circumstances, but I have not worried about calling to have them reversed because it would cost me more in a phone call. So I just let them go. I may have fallen behind for a week due to being ill, but I have always caught up immediately and then some. I have always used my loan as a savings plan, I like to pay as much as possible onto the loan and redraw if I need access to funds. I hope you are happy with my explanation, and hope to be a new customer in the near future. Thank you for your time. 33On 13 October 2006, Mr Cahill wrote to Mr Boulden in the following terms: Here is that loan I discussed with you earlier this week confirming the quick settlement. Let me know your thoughts on how quick we can move on it - I should have the val today or Monday. 34The "val" referred to in this communication was the valuation of Mrs Nahas' property that Mr Cahill had organised prior to his interview with Mr Nahas. 35The documents that Mr Cahill provided with this letter included a "Summary of Loan Application"; a "Loan Submission"; a "Loan Summary Checklist"; a "Capital Trust Employment Verification"; a "Residential Loan Application Personal details (Primary Applicant)"; a "Residential Loan Application Financial Position"; "Residential Loan Application Security details - Facility - Fees & Costs"; a "Consent and Acknowledgement"; a "Loan Interview Diary"; an "Identification Record for a Signatory to an Account 100 Point Check"; a copy of Mrs Nahas' Passport; a copy of a Certificate of Marriage; a copy of a Rate Notice; a copy of a number of payslips purporting to record Mrs Nahas' salary; and a letter from Trademark Cafe signed by Chris Tannous stating that Mrs Nahas had been employed for three years as a full-time chef at approximately 50 hours per week. 36The Diary included a section in which the following direction to the interviewer was given: Provide details which may be of interest to the bank, or any other pertinent information or any unusual circumstances obtained or observed during the loan interview. 37In this section Mr Cahill wrote "Please See Attached Page". It is not clear to which particular "Page" in the documents forwarded to the plaintiffs Mr Cahill was referring in this section of the Diary. It may have been the letter of explanation purporting to be from Mrs Nahas dated 9 October 2006 or it may have been the "Summary of Loan Application" that was in the following terms: REQUEST: The client wishes to refinance the property at Lalor The property's EMV is $490,000 The current borrowings are $212,000 The loan amount required is $392,000 The LVR Sought is 80% The additional funds will be used for future investment purposes The existing funder is Homeside Limited The product is VRAFIG The interest rate is 7.35% pa Variable AN UREGENT (sic) APPROVAL IS REQUIRED BACKGROUND: Elizabeth works as the Head Chef at Trademark Café in Clifton Hill Her annual income is $77,000 pa She has been employed there for 3 years Elizabeth is married to Abe Nahas. Currently the title is in the name of Elizabeth Zoukas so the application will fall under the same name: although her ID is in the name of Nahas. A stat dec will be provided to confirm she is One and the same person. CONDITIONS: Please approve the loan subject to the following conditions: Valuation Report Stat Dec confirming the applicant is of the same person accompanied by certified ID/ 38On 16 October 2006, an employee of the plaintiffs, Grace Fong, of "Capital Trust", wrote to Mr Cahill acknowledging the loan application and advising that, "We will assess the loan and get back to you with a response". There was also a request for Mr Cahill to load the application onto the software that the plaintiffs provided to Franchisees. On the same day, Mr Cahill wrote to Ms Fong requesting that she "express" the application and advising that he had spoken to Mr Boulden about the urgency of the matter as they were competing against Adelaide Bank for the mortgage. Mr Cahill advised Ms Fong that he had received verbal notification that the valuation was $450,000 and that: The client still wishes to proceed. The application is to be $405,000 which is 90%. The LMI is to be capitalised into the loan with Interest Only repayments aligned. I will send a serviceability sheet forward as well as amended product document. 39On 18 October 2006 Stuart Hayman of "CT Franchises Pty Ltd t/a the Capital" submitted a "Mortgage Purchase Application" to AFIG in relation to the Nahas loan. That document was in the following terms: Pursuant to the Correspondent Deed dated 12 May 2003 and the Indemnity Agreement dated 16 December 2003, both between CT Franchises Pty Ltd t/a The Capital and Australian Mortgage Securities Limited and/or AFIG Wholesale Pty Limited, we hereby request AFIG Wholesale Pty Limited to accept the purchase of the mortgage loan on the Settlement Date. Any capitalised term used in this Mortgage Purchase Application and not otherwise defined in this Application has the same meaning as in the Correspondent Deed. We hereby certify in respect of the loan that as at the date of this Application: 1.The information entered onto LoanAdvisor, the declaration and documents referred to at point 5 below are correct. 2.Each Mortgage to be purchased complies with the criteria set out in the Operations Manual (as amended from time to time) except for the registration, and upon registration, the mortgage loan will meet the criteria in the Operations Manual. 3.We are not aware, nor been able to ascertain by reasonable enquiries of any reason or circumstance under which the Borrower might be unable to pay in accordance with the terms set out in the Loan Contract or not without substantial hardship. 4.We are not in default under the Approved Correspondent Deed, or the Indemnity Agreement, and each mortgage loan is to be acquired by the Trustee pursuant to and in accordance with the Correspondent Deed. 5.The documents requested above (if any) will be faxed shortly. 40On 20 October 2006 AFIG wrote to "CT Franchises Pty Ltd t/a The Capital (Correspondent)" and confirmed acceptance of the qualifying mortgage/ loan detailed in the Schedule to the letter. The letter was also directed to the approved solicitors to prepare and serve the loan contract. AFIG advised the solicitors that the "Correspondent" and GE Money were responsible for their costs. The Schedule recorded "CT Franchises Pty Ltd t/a The Capital" as the "Mortgage Servicer". The Loan Agreement that was subsequently executed also recorded "CT Franchises Pty Ltd t/a The Capital" as the "Mortgage Servicer". 41It is not in issue that AFIG/AMG required CT Money to purchase the Nahas Mortgage pursuant to Clause 12.2(a) of the Correspondent Deed. It is the loss suffered by reason of that purchase and sale of the security property that is the subject of the claim made by the plaintiffs against the defendant. Other Evidence 42The plaintiffs relied upon a number of conversations at the time that the DC Business was purchased in 2005 in support of their contention that CT Franchises agreed to indemnify CT Money for any losses it suffered by reason of CT Money having to indemnify the funders for loans that went into default. The three people involved in these conversations were Ron Boulden, who was then the Sales Director of DC, Greg McKenna, the Finance Manager of DC, and Peter Frampton, who was at that time a consultant to DC. Mr Boulden and Mr Frampton gave affidavit evidence and were cross-examined. Mr McKenna did not give evidence. 43In 2005 there had been a number of unsuccessful attempts to sell the DC Business. Messrs Boulden, Frampton and McKenna then decided that they would purchase the Business. Mr Frampton gave evidence that although he could not recall precisely who said what, "one or more of us and assented to by the others" said words to the following effect: We will acquire shelf companies to buy the DC Corp business. CT Franchises will operate the franchise network and CT Lending will deal with funders and introduce new products. That's what we need to do at this stage in order to get the business up and running. We will set up a holding company for both companies, which we will call CT Money, and the three of them will form the CT Money Group. CTF will be answerable to CTM/CTL and CTM/CTL will be protected from any recourse from the funders by an indemnity from the franchisees under the franchise agreements. 44Mr Frampton gave affidavit evidence that after these conversations CT Franchises and CT Lending entered into the Agreement dated 1 November 2005 to purchase the Business. Mr Frampton claimed that after CT Money was set up and became the parent company to CT Franchises and CT Lending, he operated the three companies as "a single group" that was called the "CT Money Group". He claimed that CT Money is treated as the head of the consolidated group for income-tax instalment purposes and BAS returns for GST purposes. CT Money has filed a single tax return on a consolidated basis for the three companies. Mr Frampton claimed that shortly after the establishment of the CT Group, Mr Frampton had a conversation with Mr Boulden and/or Mr McKenna where one of them said words to the effect that "we will have intercompany invoices transferring the commission from CTL to CTF". 45In cross-examination Mr Frampton accepted that the "indemnity" referred to in the conversation referred to in paragraph [43] above, was not contained in any Agreements. His evidence was that the only explanation for that absence was that it must have been an "error or omission" (tr 106). However he gave evidence of a meeting of CT Money, CT Franchises and CT Lending that occurred at the companies' offices in North Sydney. Although the Minutes are undated they refer to the "Darranda Proceedings", being these proceedings as first commenced in the District Court of New South Wales. It is clear from the evidence that the meeting took place in approximately July 2009. Those Minutes include the following: Ron Boulden informed the meeting that he had withdrawn instructions from Bransgroves and instructed McLachlan Thorpe Partners, as he did not agree with the way the proceedings were constituted or being run. One aspect of that concern was the fact that the statement of claim prepared by Bransgroves included both CTM and CTF as plaintiffs, and treated them as indivisible entities. The flaw in this approach is that only CTF was a party to the Franchise Agreement, so that CTM had no contractual relationship with either defendant. On the other hand, it was CTM that was at risk in relation to the Nahas Loan, as it was CTM and not CTF that was a party to the AFIG/AMS Correspondent Deed. Both defendants in the proceedings were alive to this issue, as evidenced by letters from their lawyers to Bransgroves. However, pleading a claim against Darranda/Thompson having regard only to strict contractual relationships ignores the understandings agreed between the three companies at the time of formation and followed ever since. For the sake of good order Ron Boulden set out the main aspects of those understandings: (a)CTM is the holding company for the group. It holds the Property Lease and equipment leases and provides office infrastructure to CTF and CTL. It also pays Peter Frampton. (b)CTM entered into Correspondent Deeds with funders including AFIG/AMS. (c)CTM agreed to allow CTF the benefit of the Correspondent Deeds through the provision of Loan funds to the Franchise Network. In return, CTF agreed to establish and operate the Franchise Network and encourage the generation of new loans. (d)In consideration for receiving the benefit of the Correspondent Deeds, CTF agreed to indemnify CTM in respect of any loss, damage or claim suffered by it as a result of any claim made by a funder, against CTM, arising from any act or omission of the franchisee of CTF. The purpose of doing so is to make sure that CTF can pass on that claim to its franchisees through the franchise agreements. (e)CTM authorised CTL likewise to enter into Correspondent Deeds with funders for the purpose of receiving trail commissions from Lenders. CTL makes a monthly payment to CTF to allow it to pay staff and franchisees. (f)CTL also makes monthly payments to CTM for reimbursement of expenses and a services fee in respect of the continuing benefit for the Franchise Network of the availability of funding through the Correspondent Deeds. 46The Minutes then record that Mr Boulden had instructed McLachlan Thorpe Partners to prepare a document setting out the understandings in the form of a contract between CTM, CTF and CTL and that such document was then tabled at the meeting. It was noted that the directors reviewed the document and agreed it was an accurate reflection of the understandings referred to by Mr Boulden. It was resolved unanimously to sign the contract. The contract is dated 4 August 2009 and was signed by Mr Frampton (the 4 August 2009 Agreement). It is between CT Money, CT Franchises and CT Lending and provides as follows: WHEREAS: A.CTM is the holding company of CTF and CTL. B.CTM, CTF and CTL have been conducting a mortgage broking business on the basis of certain understandings in place at the time of commencement of the business. C.The companies now wish to formally record those understandings for the purposes of greater certainty and to clarify the legal rights and obligations of the companies to each other for the purposes of current and potential legal proceedings involving one or more of the companies. Now this Agreement witnesses as follows: 1.Obligations of CTM 1.1CTM, having entered into various correspondent deeds with lenders for the purposes of the group, shall continue to remain a party to those correspondent deeds as long as it is able to do so, with a view to securing the benefits of such deeds for the purposes of the group. 1.2CTM, having entered into the premises lease and certain equipment leases for the purposes of the group, shall continue to remain a party to those leases and perform its obligations thereunder, for the purposes of the group. 1.3CTM, having provided office infrastructure for the purposes of the group, shall continue to do so and to upgrade and keep in good repair such infrastructure as and when it needs to do so in its discretion. 2.Obligation of CTF 2.1CTF, having established and operated a franchise network generating mortgage advances for the benefit of the group, shall continue to administer and operate same, and shall pay staff and do all such other things necessary to administer effectively all franchisees part of the CTF network. 2.2In consideration of CTF receiving the benefit of CTM's involvement as a party to various correspondent deeds, by virtue of the provision of funding through CTL which can be made available to borrowers generated by the franchise network, CTF shall indemnify CTM in respect of any loss damage or claim suffered by it as a result of any claim made by a funder against CTM, arising from any act or omission of a franchisee of CTF. The purpose of doing so is to ensure that CTF can pass on any such claim to its franchisees by virtue of the operation of franchise agreements. 3.Obligations of CTL 3.1CTL, having entered into various correspondent deeds with CTM for the benefit of the group, shall continue to remain a party to such deeds as long as it is able to do so, and shall receive all trail and other commissions paid by lenders, and distribute such commissions as may be necessary throughout the group for the payment of staff, franchisees, and to CTM in reimbursements of its costs together with such amount as shall be agreed from time to time between CTM and CTL, as a service fee for CTM securing various correspondent deeds with lenders. 4.Effective Date 4.1This agreement states more formally but not differently in effect arrangements and understandings put in place between the Boards of the three companies at the time of formation and commencement of the business they now conduct. The effective date of this agreement is the date of such formation. 47Mr Frampton agreed in cross-examination that he was in Paris, France on 4 August 2009 but he said that the meeting occurred before August 2009 (tr 113). There was no real explanation as to how the Agreement was signed on that date. However I infer from Mr Frampton's evidence that he probably signed it whilst in Paris. 48Mr Frampton was cross-examined about the company structure as follows (tr 104-105): Q.What I put to you then was that the reason you set up three separate companies was because you wanted each company to perform a separate and distinct function in the operation of the mortgage management business, that's correct? A.No Q.Why did you set up three companies instead of setting up one? A.If we go back, all this was done over a very, very short period because of the pending collapse of the DC Corporation and we set up three companies because we had a provisional structure as you can see in a franchise information of the holding company and the two other companies. Now, I didn't have a lot of experience at that time of running mortgage businesses and DC Corporation itself had a lot of companies within its organisation. So it seemed logical to keep the funding, the franchisees and bring it together under the group CT Money, that was the thinking at that time because it was done under a lot of pressure within seven days from being DC Corporation to being owned by us. Q.Isn't it the case that you wanted the role to be performed by CT Money would enter into agreements with funders? A.No, CT Lending, it was really considered as a group of companies, I always have been chairman of the group, chairman of CT Money and it was, I had to deal with the funders over here (indicated), which I actually did myself and I had to deal with franchisees which I did, it was a vehicle to sell franchises, which was CT Franchises. Q. You used CT Franchises as a vehicle to sell franchises? A.Absolutely. Q.What did you use CT Money for? A.CT Money was, pull the whole thing together and made it a single group. Q.Which company entered agreements with funders? A.In fact either CT Money or CT Lending, initially some was CT Lending, some was CT Money. Q.Did CT Franchises ever enter into agreements with funders? A.Not that I understand. ... Q.Do you agree within the corporate group known as the CT group or the CT group, CT Money performed a different function that CT Franchises, CT Money entered into agreements with funders? A.Yes. ... Q.CT Money entered into agreements with funders and CT Franchises entered into agreements with franchisees? A.When it started CT Lending entered into agreements with funders and CT Franchises entered an agreement with franchisees. 49Mr Frampton was cross-examined about the conversation in 2005 relating to the indemnity as follows (tr 119 - 120): Q.You say that it was necessary that CT Money be protected from any recourse from funders by an indemnity from the franchisees under the franchise agreements? A.Yes Q.Why would that indemnity be necessary if it wasn't a requirement in the agreement between AFIG and CT Money? A.Because that related to the loans. If the loans went wrong and they claimed on us, we could pass the claim through. HER HONOUR Q.To? A.To the franchisee. If it was their error. O'CONNOR Q.Why didn't you just have one company doing all of this? That is, why didn't you have one company in a relationship with AFIG and the same company in the relationship with the franchisees? A.With hindsight that would probably have been the best thing to have done. We didn't and this is how the - if we just operate as a group, that was probably an error on our part at the time. HER HONOUR Q.He is asking you why you did it that way? A.Why we did it that way. I have said because-we had to -this was done over a period of seven days. We instructed our accountants to get three shelf companies. We called one CT Franchise and we put that structure over it, so we did it that way because we thought it was the easiest way to operate at that time. It very quickly within 14 days became - operated as a group. O'CONNOR Q.What I am suggesting is that the reason you set up the company structure in the way that you did is that you wanted to protect CT Money from any liability that might flow through from the franchisee and so you put the company in between CT Money and the franchisee and that company was CT Franchises, do you agree with that? A.There was a company certainly - CT Franchise (sic) looked after the franchisees. That's correct. Q.Yes? A.But the reason I am saying - there was two issues here. CT Franchises paid the - not only have a - may have a liability from the franchise, they also paid the franchisees. The franchise - CT Franchises received no money. If the liability didn't flow up, the claim couldn't - the money couldn't flow back so we assume it operated as a single entity. That may be an error but that's what we assumed. Because basically CT Franchises under the franchise agreement had to pay the franchisees the commission they received. CT Franchise received in no commission. Had no right to any commission because it had no relationship with the funders of CT Money. It couldn't work. You can't have a liability flowing one way. I understood - I don't know if I am right. So you had a situation where CT Franchise had no money. We have talked about that. So how do the franchisees get paid? They had to by having the right to receive the money through CT Money, CT-- Q.Are there any agreements confirming what you have just described? A.Absolutely. The franchise agreement tells - they say the agreement - the franchise agreement says that they will be paid by CTF, the money CTF receives. Q.I will ask my question again. What I am putting to you is this: the reason you set up the structure in the way you did was because you wanted to protect CT Money from any liabilities or losses it would suffer from a franchisee in that relationship so you created a separate company, CT Franchises, to enter into the franchise agreement so any losses would be protected, that is the losses wouldn't be felt by CT Money, is that correct? A. No. Q.I am putting to you that that is the whole basis of why you set up the structure? A.No, and I am saying that's no, definitely not. 50Mr Boulden's affidavit evidence was that at the time the conversations took place in about late 2005 it was either Mr Frampton or Mr McKenna who said: We will structure the business with CT Franchises to operate the franchise network and CT Lending to deal with the lenders. Those two companies can acquire the loan book and CT Money will be the holding company. 51His recollection was that he then said: As I have dealt with the funders on previous occasions, I understand their application processes and their funding requirements. Some of them are going to have a problem dealing with a company that has franchisees attached to it because of the unknown ability, skill and financial status of those franchisees. It will have to be a clean arrangement with the funders with stable identities where their circumstances won't change and the best way for that to happen is through CTM and CTL as CTF is going to operate the franchise network. 52Mr Boulden's affidavit included evidence that CT Money and CT Lending entered into agreements with funders in order to be able to originate loans in the trading name of "Capital Trust" using the funders' money. As part of the application process, CT Money and CT Lending had to disclose to the relevant funder any other agreements or business relationships. Accordingly they were required to disclose the existence of CT Franchises and the fact that it was a wholly owned subsidiary of CT Money operating a franchise network. Mr Boulden said that if the applicant for the funding had been operating the franchise network, there would be an obligation to disclose all of the various franchise agreements for scrutiny by the proposed funder. He expressed the view that this would have been "commercially unworkable". His affidavit included the following: 17.The funders imposed certain requirements on granting of funding, not only in the initial agreement but on an ongoing basis. If the franchise network had been included as part of the business of CTM/CTL, this would have significantly impacted upon issues such as the financial status of the company dealing with the funders and the relevant financial covenants, again not only in the initial application but also on an ongoing basis. 18.The franchisees would not have met the funders' requirements for a direct relationship because of matters such as lack of experience and insufficient net worth. I therefore believe and believed at the time that if the company applying to the funders had also operated the franchise network, the applications would have been unsuccessful. It was for this reason that I believed it to be commercially imperative for the company operating the franchise network to be separated from the company entering into agreements with funders. 53Mr Boulden also gave affidavit evidence that at the time that CT Money was set up as the holding company he had a number of conversations with Mr McKenna and Mr Frampton, during which one of them said: Within the group structure, CTF sits at the bottom and operates the network. It is really controlled by CTM and CTL. As far as the franchisees are concerned, the only relevance of CTM and CTL is that they have given those companies an indemnity under the franchise agreements. We will have to be mindful in the setting up of the drafting of the franchise agreements that the indemnity flows back to CTM or CTL from CTF in the event of the franchisee making a mistake in a finance application. 54Mr Boulden also claimed in his affidavit that the 4 August 2009 Agreement "accurately reflects what I understood" to be the position from when the CT Group was set up. 55Mr Boulden was cross-examined about the content of paragraphs 17 and 18 of his affidavit as follows (tr 89-91): Q.The reason you set up three companies was because you wanted to protect CT Money from any losses that CT Franchises suffered in respect of its agreements with the franchisees? A.No, that's not my understanding. Q.Well, isn't that what you are saying in paragraph 17 and 18? A.No, what I am saying is the financial status of the company, because you get into situations where, you know, liabilities, networks of the companies, all that would have to be disclosed of each company and that's what I was referring to because the losses of CT Franchise, as you put it, would have been sheeted back to CT Money anyway because it was fully owned subsidiary of it. Q.But just because it is a fully owned subsidiary doesn't mean in an ordinary arrangement that CT Money would be liable for CT Franchises? A.No, but that was our intention, that it was. Q.I am just putting to you from the perspective of what you are saying in paragraph 17 and 18, you agree that there is financial covenants CT Money had to meet to maintain the funding from AFIG? A.Yes. Q.And what I am further putting is that the reason you kept this company separate was that so any losses from CT Franchises in respect of its dealing with franchisees would not impact upon CT Money's financial standing and its ability to maintain a relationship with the funders? A No, that wasn't my understanding. ... Q.Where you say "it was for this reason", you are referring, aren't you, to the fact that had the companies been, or had it been one company that was dealing with funders and franchisees, the funders wouldn't have accepted that arrangement; the applications to the funders would have been unsuccessful? A.It would have been more difficult. I can't say either way. Q.I think you say in the middle sentence of paragraph 18 that the applications would have been unsuccessful? A.Could I have the question again, please? Q.Is the reason the three companies were set up to perform different functions in the CT Group was because had it not been set up in that way, any applications that the group made or the one company made, if I can put it that way, to the funders for funding would have been unsuccessful? A.Not necessarily. Q.But isn't that what you are saying it paragraph 18? A.I don't believe so HER HONOUR Q.Just have a look at the second sentence? A.I am saying for - sorry, the direct relationship. Q.Yes, but so I understand your evidence, Mr Boulden, you have told me in your affidavit that the reason that CT Franchise was set up as a separate company was not to put any impediment effectively in the way of CT Money or CT Lending obtaining funds, isn't that right? A.That's correct. Q.So that if you had put CT Franchise into a direct relationship and not hived it off into a separate company, then your applications for funding probably, as you have put it, would have been unsuccessful? A.Possibly - sorry, possibly would have been - it would have been much more difficult. Q.Well, you have said there "the applications would have been unsuccessful"? A.Yes. 56Mr Boulden's explanation was quite clear. Once a funder had to consider the wherewithal of numerous franchisees in different business circumstances the application for funding would be unsuccessful. The funder wanted to ensure that the company that it dealt with had the required minimum shareholder funds of $500,000 and the capacity to meet its obligations under the Correspondent Deed. I am satisfied that one of the reasons that CT Franchises was set up as a separate company was so that CT Money and/or CT Lending could obtain funding from various financial institutions without the impediment of having to disclose and have scrutinised the numerous franchisee agreements. Matters for determination 57The plaintiffs made numerous claims against the defendant. However, during the course of the trial, most of those claims were abandoned. The only claim pressed is a claim in contract that the defendant is liable to indemnify CT Franchises under the Indemnity provision of the Darranda Franchise Agreement for the loss suffered by CT Money on the Nahas loan. There is no issue that, pursuant to the Darranda Franchise Agreement, the defendant was obliged to indemnify CT Franchises for "any cost, expense, liability or claim" made against CT Franchises "arising out of any breach" by Darranda in respect of the Nahas loan. However the defendant contends that CT Money suffered the loss in respect of the Nahas loan and there is no proper basis upon which CT Money can require CT Franchises to indemnify it for that loss. In those circumstances the defendant contends that it is not liable to CT Franchises for that loss. 58The plaintiffs accepted that there is a "gap" in the documentation because there is no written agreement whereby CT Franchises agreed to indemnify CT Money and there is no written agreement between CT Franchises and Darranda (and thus the defendant) whereby Darranda (or the defendant) agreed to indemnify CT Money. However the plaintiffs put their claim on five bases (having abandoned a claim of conventional estoppel as the sixth basis). The first is that there was an oral agreement between the plaintiffs entered into at the time the Business was established in 2005. The second is the 4 August 2009 Agreement that post-dates the relevant events in these proceedings. The third is a claim that CT Franchises acted as CT Money's agent in entering into the Franchise Agreements with its franchisees and that CT Money entered into the Correspondent Deed with AFIG/AMS as agent for CT Franchises (the agency claim). The fourth is a claim that CT Franchises held the benefits of the Franchise Agreements on trust for CT Money and/or that CT Money held the benefits of the Correspondent Deed on trust for CT Franchises (the trust claim). The fifth basis is a claim that CT Franchises took the benefit of the Correspondent Deed held by CT Money and therefore ought to bear the burden of indemnifying CT Money in respect of any liability caused by CT Franchises or its franchisees (the benefit and burden claim). 59The preliminary issue is whether Darranda was in breach of the Franchise Agreement with CT Franchises in failing to interview Mrs Nahas before the application for the Nahas loan was submitted and approved. Mr O'Connor submitted that Mr Cahill (on Darranda's behalf) did all that he was required to do, in particular having regard to the content of the Diary and the Operations Manual. This submission was based in part on the proposition that the wording of the Diary that required the franchisee to answer the question "Were all customers interviewed in person? If not - indicate who was", allowed for the loan application to be lodged without the applicant having been interviewed. This submission cannot be sustained. Mr Cahill accepted in his cross-examination that he was required to speak to the applicant in relation to the application process. He also accepted that part of his job was to ensure that the information he had been given was correct. Mr Cahill failed to interview the applicant either in person or on the telephone. He failed to follow up with the applicant either in person or on the telephone to check with her that the information that had been provided to him by her husband was correct. 60The defendant also claimed that either CT Franchises or CT Money failed to require Darranda to interview Mrs Nahas when it must have appeared obvious to either or both of them that she had not been interviewed personally. This was in part the basis of the defendant's unsuccessful late application to amend its Defence to plead acquiescence: CT Money Pty Ltd v GJ & SG Thompson Pty Limited (No 2) [2012] NSWSC 69. The Loan Package that Mr Cahill completed for the Nahas loan would not have alerted the recipient of it to the fact that Mrs Nahas had not been interviewed prior to the time the loan application was submitted. Accompanying that application was an outline of material in relation to Mrs Nahas' circumstances. The irresistible conclusion to be drawn from that material was that Mrs Nahas had been interviewed at some stage. 61I am satisfied that Darranda was in breach of the Franchise Agreement in failing to interview Mrs Nahas either in person or on the telephone prior to the loan application being submitted and approved. I am also satisfied that Darranda was in breach of the Franchise Agreement in failing to check with Mrs Nahas the accuracy of the information that her husband had provided to Darranda. It is not in issue that if accurate information had been obtained about Mrs Nahas' circumstances the loan would not have been approved. It is also not in issue that Darranda's rights and obligations in respect of the Nahas loan were assigned to the defendant. In the circumstances the defendant is obliged to indemnify CT Franchises under the Franchise Agreement for a relevant loss. The real issue is whether the loss suffered by CT Money can be sheeted home to CT Franchises and the defendant. The oral agreement claim 62In the Further Amended Statement of Claim the plaintiffs claim that an oral agreement was reached in or about November 2005 between CT Money and CT Franchises, an implied term of which was that CT Money would allow CT Franchises the benefit of deeds with mortgage originators, including the Correspondent Deed, and CT Franchises would indemnify CT Money in respect of any claims arising out of any act or omission on the part of any franchisee of CT Franchises. It was alleged that at a meeting between Mr Frampton, as a director of CT Money, Mr McKenna, representing CT Franchises, and Mr Boulden, as general manager of the Capital Trust Group, words were said to the effect that the company structure would be that CT Money would have agreements with funders, CT Franchises would run the franchise network and be answerable to CT Money, and CT Money was protected from any recourse from funders by an indemnity from the franchisees under the franchise agreements (paragraph 14 (b)). 63In support of this claim the plaintiffs relied upon the evidence of Mr Frampton and Mr Boulden. There was no evidence from Mr McKenna. Mr Frampton's evidence was that in a conversation in 2005 it was said that there would be "indemnity from the franchisees under the franchise agreements" so that CT Money and CT Lending would be "protected". Mr Boulden's evidence was that the franchisees had "given" CT Money and CT Lending "an indemnity under the franchise agreements" and that they (meaning the plaintiffs) would have to be "mindful" in the drafting of the Franchise Agreements so that the indemnity "flows back" from CT Franchises to CT Money and/or CT Lending. 64There was no evidence that any of the franchisees had "given" CT Money and CT Lending an indemnity under the Franchise Agreements. The only indemnity in the Franchise Agreements was between the franchisees and CT Franchises. It is clear from Mr Boulden's evidence that he was of the view that it would be necessary to draft the Franchise Agreements to ensure that an indemnity was given in favour of CT Money and/or CT Lending. Although the concept of the indemnity flowing back to CT Money or CT Lending was not explored with Mr Boulden in his evidence, it is apparent that it was his desire that the franchisees were to agree to terms in the Franchise Agreement to provide an indemnity for losses suffered by CT Money and/or CT Lending caused by their breaches of the Franchise Agreement. No such clause was included in the Franchise Agreements. 65The plaintiffs' written submissions included a contention that the oral agreement was to the "similar effect" of the written agreement. As can be seen from the analysis of the written agreement below, that was an agreement for a direct indemnity between the plaintiff companies. The oral agreement alleged by Mr Frampton and Mr Boulden was not to a "similar effect", but rather focused on the need for the franchisee to be a party to an agreement whereby the franchisee agreed to an indemnity to cover any losses suffered by CT Money and/or CT Lending, by reason of a breach of the Franchise Agreement by the franchisees. Mr Cheshire submitted that the oral agreement was between "Mr Frampton and himself" to the effect that he was "granting the rights" from CT Money to CT Franchises and "the price for that understandably is that the indemnity will flow back up" to CT Money (tr 142). This was not how the matter was pleaded. 66One of the difficulties for the plaintiffs is that there is no documentation that would suggest that there was any such oral agreement. It is not in issue that although each of the plaintiffs was invited to become an accredited correspondent with AFIG/AMS in December 2005, it was only CT Money that became so accredited by entering into the formal Correspondent Deed in May 2006. There was no evidence of what specific arrangements were made with AFIG/AMS between December 2005 and May 2006, but at the time that the Darranda Franchise Agreement was entered into in December 2005, CT Money had not entered into a formal arrangement with AFIG/AMS. 67It appears that everything was done very quickly when the Business was established. There was no documentation setting out how any of the funds obtained by CT Money and/or CT Lending would be provided to CT Franchises for the purpose of the loans brokered by CT Franchises' franchisees. Indeed the loan documentation in evidence in respect of the Nahas loan suggests that the funder dealt directly with CT Franchises in respect of that loan. 68The absence of the indemnity in the Darranda Franchise Agreement to reflect what Mr Boulden claims he informed his colleagues they would have to be "mindful" to include militates against the existence of the oral agreement as claimed. Although Mr Frampton's evidence was that the absence of the indemnity was an "error or omission", I am of the view that it is probable that such an agreement was not reached at this time 69I am not satisfied that there was an oral agreement as claimed. At best the evidence establishes that it may have been anticipated that CT Franchises would obtain an indemnity from the franchisees that they would indemnify CT Money and CT Lending. The fact that CT Franchises did not do as was anticipated does not amount to a circumstance that would render the franchisee liable for the loss suffered by CT Money. CT Money may have a cause of action against CT Franchises for failing to obtain such an indemnity, but not against the franchisee. The written agreement claim 70The plaintiffs contended that there was a written agreement that CT Money would allow CT Franchises the benefit of the agreements with funders, including the Correspondent Deed, and that CT Franchises would indemnify CT Money. The written agreement relied upon is the 4 August 2009 Agreement prepared after the litigation was commenced. It refers to CT Franchises receiving the benefit of CT Money's involvement as a party to "various Correspondent Deeds" and records the indemnity as follows (paragraph 2.2): In consideration of CTF receiving the benefit of CTM's involvement as a party to various correspondent deeds, by virtue of the provision of funding through CTL which can be made available to borrowers generated by the franchise network, CTF shall indemnify CTM in respect of any loss damage or claim suffered by it as a result of any claim made by a funder against CTM, arising from any act or omission of a franchisee of CTF. The purpose of doing so is to ensure that CTF can pass on any such claim to its franchisees by virtue of the operation of franchise agreements. 71Mr Boulden's affidavit evidence that the 4 August 2009 Agreement accurately reflected what he understood to be the position from the time the CT Group was established is at odds with his claim in respect of the conversations he had in 2005. He claimed that in 2005 someone said that, "as far as the franchisees are concerned, the only relevance of CTM and CTL is that they have given those companies an indemnity under the franchise agreements". As I have said there was no evidence of any such indemnity, but the point of referring to the conversation here is that such an indemnity - directly from the franchisees - is not reflected in the 4 August 2009 Agreement. I do not accept Mr Boulden's claim about the 4 August 2009 Agreement in this regard. 72Although the 4 August 2009 Agreement recorded that the "purpose" for "doing so", meaning the purpose of CT Franchises agreeing to indemnify CT Money, was to "ensure" that CT Franchisers could "pass on any such claim to its franchisees by virtue of the operation of franchise agreements", that is not the agreement referred to in the conversations that allegedly occurred in 2005. The conversations were for indemnities from the franchisees under the Franchise Agreements. Mr Frampton accepted in his cross-examination that the indemnity about which they spoke in 2005 was not included in the Franchise Agreements. 73The 4 August 2009 Agreement post-dates the events the subject of this litigation and does not provide for an indemnity between CT Franchises and CT Money at the time the claim was made on CT Money in respect of the breach by Darranda. The Agency Claim 74The Further Amended Statement of Claim includes a claim that CT Franchises acted as agent for CT Money in entering into the Darranda Franchise Agreement. It also includes a claim that CT Money entered into the Correspondent Deed as agent for CT Franchises. The particulars to these claims are as follows: The structure under which the Capital Trust Group operated was that CTM entered into deeds and contracts with mortgage originators, such as AFIG and AMS, and CTF entered into franchise agreements with franchisees such as Darranda. It is this arrangement, of which the particular agreements with AFIG/AMS and with Darrand were only a part, that gives rise to the inference of an agency agreement. Further or in the alternative, at a meeting between Frampton (director of CTM), McKenna (CTF) and Boulden (general manager of the Capital Trust Group), words were said inter alia to the effect that the company structure would be that CTM would have agreements with funders and CTF would run the franchise network and would be answerable to CTM; and that CTM was protected from any recourse from funders by an indemnity from the franchisees under the franchise agreements. 75The plaintiffs submitted that CT Money entered into agreements with funders and CT Franchises entered into agreements with franchisees in order to operate the single mortgage business. It was contended that each was therefore an essential part of a single business that could not operate without the agreements with funders and the agreements with franchisees. It was submitted that in order to give effect to this business structure, agency should be inferred. It was contended that given CT Money's position as head of the CT Group, it makes most sense if CT Franchises entered into the Franchise Agreements and performed under those Agreements as agent for CT Money. It was submitted that in granting the rights to franchisees, CT Franchises was acting on behalf of CT Money and was dealing with rights held by CT Money. In the alternative, the plaintiffs submitted that in order to give effect to the business model of the CT Group, CT Money entered into the Correspondent Deed with AFIG/AMS as agent for CT Franchises. 76The plaintiffs also submitted that the CT Group was operated without "defined boundaries" between the three plaintiffs and that they were often used "interchangeably", although CT Money was in fact the parent company and reported for tax and GST purposes on behalf of the CT Group as a whole. It was submitted that this is not a case where CT Money and CT Franchises had separate and distinct spheres of operation where it could be said that there was a deliberate intention to use the corporate veil to separate rights and responsibilities as between members of the CT Group. 77Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389 was a case in which the Court of Appeal (Bathurst CJ, Allsop P and Campbell JA) considered, inter alia, the corporate structure and lending arrangements between various entities including Tonto Home Loans Australia Pty Limited (Tonto) in which Tonto was a mortgage originator or mortgage manager. In dealing with the question of whether one of the entities in the arrangement (referred to as "S Loans") was the agent for Tonto, and after referring to the relevant authorities, Allsop P, with whom Bathurst CJ and Campbell JA agreed, concluded that the agreements and other arrangements did not provide for an arrangement under which S Loans would act on behalf of and in the interests of Tonto. 78In that case the primary judge had elevated the organisational or enterprise structure of the relevant business and activity as a key factor in determining the question of agency. The learned President concluded that this approach deflected attention from the correct task, that is, to ascertain the legal content of the consensual agreement between the parties: [192]. His Honour also concluded that such an approach failed to take into account the commercial context in which the parties had entered into their contractual arrangements. In that case it was an agreement between two entities each of which had its own business. One was to endeavour to introduce business from its own customer base for the mutual commercial advantage of both. The President said at [194]: Agency is to be determined by an analysis of the consensual legal relations between the parties, it is not merely a conclusion drawn from the performance by A of a function important, even necessary, to the operation or functioning of the business enterprise of P in question. 79The commercial context in which CT Franchises entered into its Franchise Agreements in November 2005 included the need to have regard to the requirements of the funders. The availability of funding was integral to the success of the Business. The evidence is that CT Franchises knew that if it had sought the funding or accreditation for the funding, with the need to disclose its numerous Franchise Agreements with its franchisees, the applications would not have been successful. This made it imperative that the applicant for funding be free of such impediments. Accordingly CT Franchises' operations were kept separate and CT Money and/or CT Lending sought the funding. I am satisfied that it is neither consistent with commercial common sense, nor the intention of the plaintiffs that on the one hand the plaintiffs would seek to cocoon CT Money and/or CT Lending from the impediments of obtaining funding and on the other re-introduce those impediments by making the applications as agent for CT Franchises. 80There is no written agency agreement between CT Franchises and CT Money. There is no issue that the onus is on the plaintiffs to prove the existence of an agency relationship by reference to facts from which the proper inference can be drawn that CT Money and CT Franchises carried on the business of the other and on behalf of the other: Tate v Freecorns Pty Ltd [1972] WAR 204 at 208. One of the matters relied upon by the plaintiffs to suggest that agency would be inferred is Mr Frampton's claim, referred to earlier, that CT Money is treated as the head of a consolidated group for income tax instalment purposes and BAS returns for GST purposes. Additionally CT Money has filed a single tax return on a consolidated basis for the three companies. Although the defendant sought to obtain the plaintiffs' financial documents during the course of the trial, it encountered some difficulties. However tax returns for CT Money for the years 2008 to 2010 were produced and tendered (Exhibit 1). 81The plaintiffs emphasised that in describing the "Status of the Company" in the 2008 Tax Return, CT Money referred to itself as "Consolidated head company". In the following years that description was not adopted, but rather the description "Private" was adopted. It is not clear from the documents in Exhibit 1 that the profits of the subsidiary (CT Franchises) are treated as the profits of the parent (CT Money). However even if that were so, the sharing of profits between a parent and a subsidiary is not itself evidence of an agency relationship where the subsidiary company has real existence and a valid reason for its incorporation: Hobart Bridge Co Ltd v Commissioner of Taxation (1951) 82 CLR 372. 82The commercial context in which CT Money entered into the Correspondent Deed with AFIG/AMS included that it could, from time to time, "solicit or source (directly or through Delegates) Loan Applications": cl 5.1. The power to appoint a Delegate under clause 8.1 of the Correspondent Deed was conditional upon such appointment being on terms that the powers and discretions of the Delegate did not exceed those conferred on the Correspondent: cl 8.1(b). That power was also subject to any conditions or restrictions that AFIG might impose from time to time: cl 8.1(a). The commercial context of the arrangement between CT Money and AFIG under the Correspondent Deed in particular, having regard to the express power to appoint an agent or a Delegate, militates against CT Money entering into the Correspondent Deed as agent for CT Franchises. AFIG wanted to know the identity of any agent or Delegate and reserved to itself an entitlement to impose any specific conditions that it might have thought appropriate on the proposed Delegate or agent. 83There was some evidence that CT Franchises dealt directly with AFIG in respect of the Nahas loan. The Mortgage Purchase Application in relation to the Nahas loan was signed and lodged by CT Franchises directly with AFIG. AFIG responded directly to CT Franchises. The loan documentation referred to CT Franchises as the "mortgage servicer". No claim was made directly by AFIG on CT Franchises. There was no evidence of any delegation of CT Money's obligations or rights under the Correspondent Deed to CT Franchises, nor was there any evidence that CT Franchises purported to operate as a Delegate under the Correspondent Deed. However AFIG's notification to the Approved Solicitor referred to CT Franchises as a "Correspondent". There is no evidence that this nomenclature recognised any contractual arrangement between AFIG and CT Franchises. Rather it appeared to be a matter of commercial convenience. 84Mr Boulden's evidence that, but for CT Franchises being established as a separate company to operate the franchise network, the Business would have been "commercially unworkable" is powerful evidence against an inference being drawn that CT Franchises entered into its Franchise Agreements as agent for CT Money. Equally it is powerful evidence against an inference being drawn that CT Money entered into the Correspondent Deed as agent for CT Franchises. 85I am satisfied that the plaintiffs' agency claim is not made out. The trust claim 86It is not controversial that an entity may hold the benefit of an agreement on trust for another entity. It is also not controversial that one has to look at the objective intention as to whether CT Franchises was to hold its agreements on trust for CT Money and CT Money was to hold its agreements with the funders on trust for CT Franchises. 87There is no evidence to support a finding that any plaintiff was to hold the benefit of their respective agreements "on trust" for the others. The conversations relied upon in 2005 make no mention of the intention to establish a trust. Indeed CT Money granted a Licence to CT Franchises to use the "Capital Trust" Brand name for a period of 10 years from 20 December 2005. The grant of that Licence made no reference to any restriction on the use of the Brand, or that CT Franchises was to act as a trustee in using the name. 88The 4 August 2009 Agreement made no mention of any intention to create a trust. The language used in that Agreement is against such a conclusion. That language is that contracts were entered into and things were done "for the benefit of the Group". That does not equate to an intention to create a trust. The commercial context of the entry into the Correspondent Deed was that it was necessary for CT Money to present to the funder as an entity separate from CT Franchises with its numerous Franchisee Agreements, not as a trustee for CT Franchises. 89The plaintiffs have failed to make out their trust claim. 90The plaintiffs accepted that if findings were made against them in respect of their agency and trust claims they could not propound the benefit and burden claim. Additionally there is no need to consider the submissions in relation to proportionate liability. Conclusion 91The claims in the Further Amended Statement of Claim are dismissed. Should the parties be unable to agree on a costs order I will hear argument on a mutually convenient date to be arranged with my Associate.