Currabubula Holdings & Paola Holdings v State Bank of NSW

Currabubula Holdings Pty Limited (First Plaintiff) PARTIES : Paola Holdings Pty Limited (Second Plaintiff) State Bank of New South Wales Limited (Defendant) JUDGMENT OF : Einstein J

COUNSEL : Plaintiffs: D.E.J. Ryan Defendant: R.B.S. Macfarlan QC and C.M. Harris SOLICITORS : Plaintiffs: Gadens Lawyers Defendant: Mallesons Stephen Jaques CATCHWORDS : Banker and Customer - Credit Facility Agreement - Suspicion by Bank of insolvency of company within corporate group of borrower customers - Banks concern to avoid allowing further drawings on current accounts arguably capable of being attacked as preferential payments - Bank without notice, freezing customers current banking accounts and determining that no further drawings would be permitted on current accounts - Whether Banks conduct constitutes breach of facility - Implied term of facility that Bank give reasonable notice in event that it determines to vary its customary mode of providing general banking services, and in particular a finance facility, to customer group - Obligation to give reasonable notice is part of general contract basic to all banker customer transactions - Obligation extends to any variations to accounts to be operated with Bank; to any requirement that overdraft facilities in place in relation to current accounts would no longer be permitted to be drawn upon; to any requirement that customer open new accounts - Obligation to give reasonable notice of variations implicitly embraces correlative obligation to be precise and accurate in communicating what the variations involve and of effect, if any, of variations on the continued operations of the facility - Tampering by Bank with mechanics of customers operations of a facility may vitally affect customers business relationships and other dealings - Special significance of precision in Banks mode of communicating to customer group what a new regime would entail and whether it involved any suggestion of restructuring or varying the facility or of holding the position while the Bank determined in what way to restrict or vary the facility - Special significance of directing such communications to the customer group at a level within the customers hierarchy commensurate with significance of Banks decision.; Banker and Customer - Credit Facility Agreement - Construction - Corporate group of borrowers - Events of default - Default by whom? - Duration of facility.; Banker and Customer - Credit Facility Agreement - Whether act of freezing and not permitting further drawings on customers current accounts amounts to termination or withdrawal of finance facility.; Banker and Customer - Credit Facility Agreement - Customer Group drawn to limit of facility - Alleged wrongful dishonour - Dishonour by Bank of cheques drawn on frozen current accounts continues notwithstanding that borrower group brings itself back within facility limit.; Banker and Customer - Credit Facility Agreement - Breach - Payment of cheques drawn on frozen current accounts and met from new accounts - Whether wrongful dishonour.; Contract - Banker and Customer - Suspicion by Bank of insolvency of company within corporate group of borrower customers - Banks concern to avoid allowing further drawings on current accounts arguably capable of being attacked as preferential payments - Bank without notice, freezing customers current banking accounts and determining that no further drawings would be permitted on current accounts - Whether Banks conduct constitutes breach of facility - Implied term of facility that Bank give reasonable notice in event that it determines to vary its customary mode of providing general banking services and in particular a finance facility to customer group - Obligation to give reasonable notice is part of general contract basic to all banker customer transactions.; Contract - Banker and Customer - Credit Facility Agreement - Construction - Corporate group of borrowers - Events of default - Default by whom? - Duration of facility.; Contract - Banker and Customer - Credit Facility Agreement - Whether act of freezing and not permitting further drawings on customers current accounts amounts to termination or withdrawal of finance facility.; Contract - Banker and Customer - Credit Facility Agreement - Customer Group drawn to limit of facility - Alleged wrongful dishonour - Dishonour by Bank of cheques drawn on frozen current accounts continues notwithstanding that borrower group brings itself back within facility limit.; Contract - Banker and Customer - - Credit Facility Agreement - Breach - Payment of cheques drawn on frozen current accounts and met from new accounts - Whether wrongful dishonour.; Defamation - Bank Statements bearing notation 'in liq' - Imputations that customer insolvent and that liquidator appointed to customer.; Limitation of Actions - Leave to amend to join additional plaintiffs - Representative parties - Courts power to grant leave to amend pursuant to Part 20 Rule 1 Supreme Court Rules - Courts power to add new parties to be exercised within the constraints and subject to the provisions of Part 8 Rule 11(3) Supreme Court Rules.; Locus Standi - First plaintiff member of corporate group of borrowers - All companies in group are parties to Credit Facility Agreement entered into with Bank - Interlocking network of securities to support group borrowings - Plaintiff is a promisee as is each of group borrowers in respect of Banks obligations to observe express and implied terms of facility agreement - Holding that Bank breached obligation imposed upon it by implid term of contract to give reasonable notice in event that it determined to vary its customary mode of providing finance facility carries with it entitlement in first plaintiff to recover in respect of loss or damage suffered by plaintiff by reason of banks breach of contract.; Practice and Procedure - Limitations - Leave to amend to join additional plaintiffs - representative parties - Courts power to grant leave to amend pursuant to Part 20 Rule 1 Supreme Court Rules - Courts power to add new parties to be exercised within the constraints and subject to the provisions of Part 8 Rule 11(3) Supreme Court Rules. Bankruptcy Act 1966 (Com) s 122(2)(a) Cheques and Payments Orders Act 1986 (Com) s 69 ACTS CITED : Defamation Act (1974) NSW s 13 22 Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 Aspro Travel Ltd v Owners Abroad Group plc [1995] 4 All ER 728 Australian Coastal Shipping Commission v Curtis Cruising Pty Ltd (1989) 17 NSWLR 734 BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 52 ALJR 20 Burnett v Westminster Bank Ltd [1966] 1 QB 742 Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 Chapell v Mirror Newspapers Ltd (1984) AustTortsR 80-691 Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 Dixon v Bank of New South Wales (1896) 17 NSWLR 355 Fernance v Nominal Defendant (1989) 17 NSWLR 710 Fosters Brewing Group Ltd v Elliott (Unreported Supreme Court of Victoria 10 August 1995 Beach J) Gould v Vaggelas (1985) 157 CLR 215 George Fischer (Great Britain) Ltd v Multi Construction Ltd [1995] 1 BCLC 260 Hadley v Baxendale (1854) 9 Exch 341 Halesowen Presswork & Assemblies Ltd v Westminster Bank Ltd [1971] 1 QB 1 Industrial Equity Ltd v Blackburn (1977) 137 CLR 567 King & Mergen Holdings Pty Ltd v McKenzie (1991) 24 NSWLR 305 Koufos v C Czarnikow Ltd (the Heran II) [1969] 1 AC 350 Kyra Nominees Pty Ltd (in liq) v National Australia Bank Ltd (1986) 4 ACLC 400 Ley v Hamilton [1935] 153 LT 384 March v E & M H Stramare Pty Ltd (1991) 171 CLR 506 Mirror Newspapers Ltd v World Hosts Pty Ltd (1979) 141 CLR 632 Morgan v John Fairfax & Sons Ltd (No 2) (1991) 23 NSWLR 374 National Westminster Bank Ltd v Halesowen Presswork and Assemblies Ltd [1972] AC 785 CASES CITED : Parras Holdings Pty Ltd v Commonwealth Bank of Australia [Unreported Federal Court of Australia 12 June 1998 Davies J ] Potts v Miller (1940) 64 CLR 282 Prudential Assurance Co Ltd v Newman Industries Ltd [No 2] [1982] Ch 204 Pullman v Walter Hill & Co [1891] 1 QB 524 Qantas Airways Ltd v AF Little Pty Ltd [1981] 2 NSWLR 34 Qintex Australia Finance Ltd v Schroders Australia Ltd (1990) 3 ACSR 267 Reardon Smith Line Ltd v Yngvar Hansen - Tangen (trading as HE Hansen Tangen) [1976] 1 WLR 989 Rouse v Bradford Banking Company Ltd [1894] AC 586 Sargent v ASL Developments Ltd (1974) 131 CLR 634 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 Shepherd v Whittaker (1875) LR 10 CP 502 Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322 Re Southard & Co Ltd [1979] 1 WLR 1198 South Hetton Coal Co Ltd v North-Eastern News Association Ltd [1894] 1 QB 133 Theaker v Richardson 1[962] 1 WLR 151 Theophanous v Herald & Weekly Times Ltd (1993-94) 182 CLR 104 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] 165 CLR 107 Walker v Wimborne (1975-76) 137 CLR 1 Wenham v Ella (1972) 127 CLR 454 Wenham v General Credits Ltd (Unreported Supreme Court of New South Wales 16 December 1988 McLelland J) Wimborne v Brien (1997) 23 ACSR 576 Wright v Australian Broadcasting Commission [1977] 1 NSWLR 697 DECISION : Orders will be made following further submissions.

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION - COMMERCIAL LIST EINSTEIN J 30 March 1999 50268/95 - CURRABUBULA HOLDINGS PTY LTD & PAOLA HOLDINGS PTY LTD V STATE BANK OF NEW SOUTH WALES LIMITED

JUDGMENT The Proceedings 1 These proceedings concern an 8.5 million dollar multi-option banking facility ('the facility') provided by the State Bank of New South Wales Limited ('the Bank') to companies associated with Mr Anthony Paola and his wife, Mrs Lynette Paola. The plaintiffs are Paola Holdings Pty Limited ('Paola Holdings') and Currabubula Holdings Pty Limited ('Currabubula' or Currabubula Holdings'). The borrowers identified in the facility letter dated 1 February 1990 from the Bank addressed to the plaintiffs were Paola Holdings; ABE Holdings Limited ('ABE Holdings'), ABE Telecommunications Pty Limited ('ABE Telecommunications'), ABE Fax Pty Limited (receivers and managers appointed) ('ABE Fax'), ABE Travel Service Pty Limited ('ABE Travel'), ABE Jet Charter Pty Limited ('ABE Jet'), Currabubula Holdings, Campbell Rixon and Graham Pty Limited ('Campbell Rixon'), Northern Rural Services Pty Limited ('NRS'), Franxton Pty Limited ('Franxton') and Pyojit Pty Limited ('Pyojit'). For convenience the companies will together be referred to as 'the Paola Group Companies' or as 'the Group'. 2 The proceedings were commenced on 23 December 1995 by Currabubula Holdings as sole plaintiff. 3 Limitation questions and questions as to the standing of the plaintiffs to bring the proceedings as representing Paola Group Companies otherwise than the plaintiffs, are included in the issues for determination. By a judgment dated 29 September 1997, Hunter J granted leave to amend the summons to permit Paola Holdings to be joined as second plaintiff. It is convenient in outlining the issues raised by the pleadings to leave these questions for later consideration. 4 Essentially, the dispute concerns whether the Bank breached the terms of the facility by its conduct on and after mid-February 1990, following meetings and communications by the Group to the Bank of 12 and 13 February 1990, inter alia, proposing that the Bank place ABE Holdings into receivership. The Bank, without prior notice, informed the Group that it had 'frozen' all current accounts operated by Group Companies and that no further drawings would be allowed on the accounts. A number of cheques were dishonoured. The detail of these events which necessarily require to be viewed in context against the history of the banker/customer relationship, will be referred to below. 5 The plaintiffs also claim that the Bank is estopped from contending that it had a legal right to freeze the facilities following precontractual representations. 6 Other issues include the effect of the Bank sending out bank statements to members of the Group with the words 'in liq' appearing upon the bank statements. The sending of the statements is relied upon in the plaintiffs' contract case as 'an essential part of the Bank's communication of the freezing decision'. [Plaintiffs' submissions in reply, paragraph 22] The statements with the 'in liq' notations form the basis of the cause of action in defamation pursued by Currabubula. An issue also arises as to whether the Bank is entitled to rely upon a Deed of Release entered into on or about 6 September 1990 as extinguishing any antecedent liability of the Bank to Currabubula Holdings which may otherwise have existed. 7 The bulk of the documentary tender was admitted as Exhibit PX. It is convenient to refer to that material as for example 'PX 1/1' being a reference to Exhibit PX Volume 1 Page 1. Likewise 'PX 1000' is reference to Exhibit PX at page 1000. Outline of the Plaintiffs' Contentions and the Bank's Defence 8 The following is a broad outline of the plaintiffs' contentions and the Bank's defence. It is not intended to repeat every word of the detailed pleadings. Cause of Action for Breach of Facility Agreement 9 Paragraphs 2 through to 31 inclusive of the Plaintiffs' contentions contain a cause of action pleaded by Currabubula Holdings for breach of the facility agreement. (I interpolate that in paragraph 27A, Currabubula pleads that it, in the alternative, brings the proceedings as representing all Paola Group Companies and/or for itself and as trustee for all Paola Group Companies). 10 The facility agreement is pleaded as in writing and the terms are said to be set out in the letter from the Bank addressed to Paola Holdings and to Currabubula Holdings dated 1 February 1990. That letter is in turn said to incorporate terms set out in earlier letters from the Bank addressed to Paola Holdings dated 4 September 1987 and 18 November 1988, except to the extent that the provisions in the letter of 1 February 1990 were inconsistent with those earlier letters. 11 The plaintiffs' case is that the agreement was entered into between the Bank and the companies earlier referred to, which in the summons are together called 'the Paola Group of Companies'. 12 The Bank's pleading accepts that there was what is termed a 'Credit Agreement' between the parties, constituted by the three letters. The Bank, however, asserts that there was a 'Final Arrangement' whereby there would be a new facility agreement with only one company in the group. The Bank puts that the agreement was conditional upon the Paola Group Companies appointing one company to enter into a new facility agreement with the Bank, upon the facility agreement being executed by the Bank and by the company to be appointed by the Group for that purpose, and upon Mr and Mrs Paola executing guarantees of the obligations of the company to the Bank in the new agreement. The Bank asserts that these conditions were not fulfilled and in consequence, asserts that the Final Arrangement did not come into operation. 13 Paragraph 3 of the plaintiffs' contentions set out the terms alleged to be part of the facility agreement. These terms are set out below. In each case the Bank's pleaded response is set out.: (a) That the Bank would increase the existing multi-option facility provided to the Group from $6.8million to $8.5million. The Bank agrees that it was a term that there would be such an increase but alleges that it 'promised to increase the individual credit facilities available to some of the relevant Paola Group Companies'. (b) That the Bank would provide the financial accommodation totalling not more than $8.5million to such of the Paola Group Companies and in such a amounts and in such forms (whether commercial bill acceptance/discount or overdraft limit or fixed and floating rate term loans or documentary letter of credit) as was requested of it by the Paola Group Companies. The Bank admits this agreement but says that it was subject to the occurrence of the conditions earlier referred to that were never fulfilled and asserts that for this reason, the terms never became operative. (c) That the $8.5million multi-option facility would be available for so long as was desired by the Paola Group Companies subject only to four limitations set out in sub-paragraphs (d), (e), (f) and (g) below. The Bank denies this allegation. (d) That the multi-option facility was to reduce to $7.5million by 31 May 1990. The Bank admits this allegation. (e) That the multi-option facility was subject to a review immediately financial accounts for the Paola Group Companies for the half year ended 31 December 1989 became available, such review to be completed by 31 March 1990. The Bank admits this allegation. (f) That an immediate review was to be conducted in the event of a material adverse change in the financial condition of any of the Paola Group Companies. The Bank admits this allegation. (g) That the defendant was entitled by notice in writing to the Paola Group Companies to declare that the facilities may be cancelled forthwith and/or to declare the facilities immediately due and payable together with all interest accrued thereon and all other amounts payable thereunder if any of eight events of default specified in the letter of 4 September 1987 occurred and were continuing (the last of which events was any circumstances arising which give reasonable ground in the opinion of the Bank that there has been a material adverse change in the financial condition of the Paola Group Companies). The Bank admits this allegation. (h) That the Paola Group of Companies promised to pay the fees specified in the letter of 1 February 1990 and the Bank's legal fees. The Bank admits this allegation. (i) That each of the Paola Group Companies (other than ABE Fax and Automated Business Equipment Pty Limited) agreed to be responsible to the Bank for a payment of all moneys advanced to any of the Paola Group Companies under the Facility Agreement. The Bank admits this allegation. (j) That the Paola Group Companies promised to provide securities already in place which were specified in the annexure to the 1 February 1990 letter. The Bank admits this allegation. 14 The plaintiffs rely upon four related implied terms which are put as confining the powers of the Bank in the conduct of the reviews provided for by the agreement. The Bank denies that such terms can be implied. The suggested terms to be implied are pleaded by the plaintiffs as follows: 'On the proper construction of the facility agreement, if circumstances arose entitling a review of the facility, in the carrying out of the review: (a) the Defendant was not entitled unilaterally to vary any of the terms of the Facility Agreement and (b) the Defendant was not entitled to declare that the facilities may be cancelled forthwith or declare the facilities immediately due and payable unless an event of default under the letter of 4 September 1987 was established; Alternatively, (b) the Defendant was not entitled unilaterally to vary any of the terms of the Facility Agreement unless the variation was fair and reasonable between the parties; Alternatively, (c) the Defendant was obliged to give the Paola Group Companies reasonable notice of any intention to vary any of the terms of the Facility Agreement.' 15 Factual issues arise in relation to sub-paragraphs 5 and 6 of the notice of contentions as to the balance of the facility as at 11 and 12 February 1990. 16 Paragraphs 5 and 6 of the summons plead as follows: '5. In performance of the Facility Agreement, as of 11 February 1990: (a) The Defendant had provided accommodation to the Paola Group Companies by way of overdraft limit and other facilities totalling $8,335,507.23. (b) The Paola Group Companies had provided securities to the Defendant as required in the annexure to the letter of 1 February 1990. 6. On 12 February 1990 the Defendant honoured further cheques drawn on the accounts of the Paola Group Companies such that the total accommodation provided by the Defendant by way of overdraft limit and other facilities was $8,518,348.43.' 17 Paragraphs 5 and 6 of the amended defence plead in response: '5. As to paragraph C5 of the further amended summons, the defendant: (a) admits that the total drawings on overdraft accounts held by the various companies within the Paola Group as disclosed by the Bank Statements in respect of such accounts as at 11 February 1990 amounted to $8,335,507.23 (subject to funds deposited to those accounts which were not cleared funds at that time subsequently becoming cleared) but otherwise does not admit sub-paragraph (a); (b) admits that the pre-existing securities referred to in the annexure to the letter of 1 February 1990 from the defendant to the plaintiff remained in place as at 11 February 1990, but otherwise does not admit sub-paragraph (b); and (c) denies that the additional accommodation referred to in sub-paragraph (a) of the further amended summons, or the securities referred to in sub-paragraph (b), were provided in performance of the Facility Agreement and says that the additional accommodation was provided in anticipation of the Final Arrangement and the securities were pre-existing and continuing. 6. The defendant admits that the total drawings on overdraft accounts held by the various companies within the Paola Group as disclosed by the Bank Statements in respect of such accounts as at 12 February 1990 amounted to $8,518,348.43 (subject to funds deposited to those accounts which were not cleared funds at that time subsequently becoming cleared) but otherwise does not admit paragraph C6 of the further amended summons.' 18 Paragraph 7 introduces important allegations in terms of the overall issues about the communications to the Bank by the Paola Group Companies on or about 13 February 1990. 19 The plaintiffs there plead that on 13 February 1990 the Paola Group Companies communicated to the defendant: (a) The information contained in a letter from ABE Holdings to the defendant dated 13 February 1990. (b) The information contained in a letter from Ferrier Hodgson & Co to the defendant dated 13 February 1990. (c) Oral communications from Mr Tony Paola on behalf of the Paola Group Companies to the defendant to the effect that it was proposed that the defendant place ABE Holdings Pty Limited into receivership, but that if the defendant chose not to do so Currabubula Holdings would continue to give ABE Holdings Pty Limited sufficient support to meet its debts. 20 No issue is raised as to the receipt on 13 February 1990 of the 13 February 1990 letters by the Bank. 21 An issue is however raised in relation to the alleged oral communications by Mr Paola to the Bank. The Bank does not admit that such communications occurred. The issue is significant in terms of the proceedings as the plaintiffs allege that Mr Paola indicated to the Bank that if the Bank did not consent to the proposal, then Currabubula Holdings would 'continue to provide' financial support to ABE Holdings sufficient to enable that company to pay its debts. The nature of such support said to have been earlier provided, is dealt with below. 22 Paragraph 8 pleads that the substance of the information contained in the two 13th February 1990 letters was known to the Bank prior to 13 February 1990. The Bank denies that it had this information save that it asserts that it was aware of concerns that creditors of ABE Fax might seek recourse from ABE Holdings. 23 The Bank does not admit the further allegation pleaded in paragraph 7 that even after receiving the letters it formed the view that the Paola Group Companies were still solvent. It does however concede that at all material times it had the view that there was sufficient security for the indebtedness of the Group to ensure that the Bank would be repaid. 24 An issue arises as to whether the events set out in paragraphs 7 and 8 of the notice of contentions, alone or in combination, amounted to a 'material adverse change' in the financial condition of ABE Holdings or to circumstances giving reasonable grounds for the formation of an opinion by the Bank that there had been a material adverse change in the financial condition of the Group. 25 The plaintiffs then plead a number of alleged breaches of the facility agreement. Put shortly, the breaches alleged are: . The advice in the Bank's letter of 15 February 1990 ['the freezing letter'] that all current accounts operated by Group Companies were 'frozen', and that no further drawings would be allowed on these accounts. [The case was conducted on the basis that the Bank on 15 February in fact also communicated the advice that the accounts had been frozen by facsimile to managers of the Group's several branches. Hence references in the Judgment to the 'freezing letter' should be taken to embrace both sets of communications.] [Until June 1992, when the facilities were repaid, the Bank is said to have continued to 'freeze' the accounts and not to have permitted any drawings thereon.] . The dishonour, by the Bank, of the cheques listed in the first part of Schedule 1 to the summons, which are said to have been presented on 15 February 1990. The Bank admits that it dishonoured these cheques. [The plaintiffs assert that honouring 'all or some' of the cheques would not have led to the facilities exceeding $8,518,348.43 or $8.5million. It is further alleged that as at the close of business on 16 February 1990, the proper figure for this facility provided by the Bank was $8,482.747.70 and that from 16 February to 31 May 1990 the total amount advanced did not exceed $8.5million. In its defence, the Bank takes issue with the proper balance for the accounts relying upon the failure of the plaintiffs' figures to take into account cheques banked to the various accounts where the funds had not yet cleared.] . The dishonour by the Bank of cheques listed in the second part of Schedule 1 as being presented on and after 16 February 1990. The Bank admits that it failed to pay from the number one accounts upon which they were drawn such cheques, but does not admit that this constituted dishonouring the cheques. . The refusal by the Bank to permit Currabubula Holdings to take $390,000 from the proceeds of sale of Durhambone East in late 1990. This is alleged as a discrete breach in paragraph 25 of the contentions. This failure is said to be a breach of the promise to provide accommodation pleaded in paragraph 3(b) of the contentions and the promise that the facility would be available as long as the Group desired - paragraph 3(c). 26 The issue therefore raised, is whether or not the freezing of the accounts was a breach of contract by the Bank. The plaintiffs' case is expounded in paragraph 24 of the contentions. Critically the plaintiffs assert that: (a) There was no exercise of the right of review and no such right had arisen in any event. (b) No notice was given. (c) There had been no event of default as defined in the 4 September 1987 facility letter. (d) The Bank was not in a position where it could declare the facilities to be cancelled and/or declare them to be immediately repayable. (e) In any event, the Bank did not even purport to cancel the facilities. 27 The Bank denies that its actions constituted a withdrawal of the facility. It's stance is that it was not obliged to grant further credit to the plaintiffs beyond the credit limit established by the facility. It asserts that its actions were no more than a conventional response to a situation in which a customer notifies a Bank that it is insolvent, or as in this case, that one or more company members within the group is/are insolvent. The Bank points out that it agreed to the opening of Number Two accounts to be operated in credit and to a notional set-off of credit balances in the Number Two accounts against debit balances in the 'frozen' Number One accounts. Hence the Bank asserts that it's action did not impact adversely upon the plaintiffs whose obligations under the facility agreement to pay interest were not, in the result, varied. 28 In the alternative and if the February 1990 actions of the Bank amounted to a withdrawal of the facility, the Bank asserts that a term of the Credit Agreement entitled the Bank to withdraw the facility upon the occurrence of a material adverse change in the financial condition of any of the companies in the Paola Group. The Bank asserts that such an adverse change took place in the financial condition of ABE Holdings when: (a) that company admitted in its letter to the Bank of 13 February 1990 and in the letter of the same date from its financial adviser, Ferrier Hodgson & Co to the Bank, that it was unable to pay its debts as they fell due; (b) the Statement of Position accompanying the Ferrier Hodgson letter stated that the operating businesses of NRS and Campbell Rixon had no value. [Defence paragraph 39G] 29 The question of the relevance in these proceedings of the Bank's assertion that events of default had taken place, should be made clear. The Bank's central submission is that its conduct in the matter of sending the so-called 'freezing letter' on 15 February, did not amount to a cancellation or withdrawal of the facilities. It is only if that submission is not accepted and if the letter is held to have constituted a termination or withdrawal of the facility, that questions of events of default are raised by the Bank. In short, if contrary to the Bank's central submission, the sending by the Bank of the 15th February letter constituted a termination or withdrawal of the facility, then the Bank submits that its actions were justified and that events of default having on the Bank's case occurred, the 'freezing letter' should be regarded as an exercise by the Bank of its right, by notice, to declare the facilities as cancelled. A considerable part of the hearing was concerned with evidence primarily concerned with the event of default issue which inter alia, raises questions as to the subjective states of mind of Bank officers at material dates. 30 The plaintiffs addressed submissions in support of the proposition that after 15 February the Bank's conduct constituted an affirmation of the facility, such that on Sargent v ASL Developments Ltd (1974) 131 CLR 634 grounds, the Bank could not thereafter rely upon the occurrence of the earlier events of default. The plaintiffs appear to have regarded the Bank's case of the happening of events of default as asserting that, on a day by day basis after 15 February, there were continuing events of default, such that the Bank sought in some way to rely upon the continued occurrence of those events of default, as a means of minimising the plaintiffs' entitlement to claim for loss or damage suffered to the plaintiffs by reason of the suggested repudiation of the facility by the plaintiffs. This was not however how Mr Macfarlan QC put the Bank's position in relation to the events of default issue. 31 Mr Macfarlan did however make plain that a continued relevance of the Bank's perception that events of default had been committed or may have been committed, is that it was for this reason that the Bank became concerned at the financial position of the companies and adopted its attitude in the middle of 1990 concerning the sale of Durhambone. 32 The 'event of default' question thus arises only in the event that the Court would, contrary to the submissions of both parties, hold that the so-called 'freezing letter' constituted a termination of the facility. Estoppel Claim 33 The plaintiffs submit that prior to entering into the facility agreement, officers of the Bank represented to Mr Paola on behalf of the Paola Group Companies (or alternatively Currabubula Holdings) that the Bank would not exercise any legal rights to withdraw the facility prior to giving the Group or Currabubula Holdings reasonable notice of its intention to exercise such rights so that the Group (or Currabubula Holdings) could refinance the liabilities to the defendant with another banking entity. 34 The plaintiffs plead reliance to their detriment upon the representations in entering into the agreement; that the facilities were frozen without notice and without the provision of a reasonable opportunity to refinance, and that the Bank is estopped from contending that it had a legal right to freeze the account. 35 The Bank denies the representations and the estoppel. Defamation Claim 36 The plaintiffs plead that bank statements were sent by facsimile machine to Currabubula Holdings and other Paola Group Companies bearing the words 'in liq'. Schedule 2 to the summons [corrected in accordance with letter dated 12 March 1999 from Gadens Lawyers to my Associate and copied to Mallesons Stephen Jaques which I mark for identification 'SCH2'].provides particulars as to the statements and as to those to whom the statements are said to have been sent. They are: (a) To NRS on nine occasions between 16 February 1990 and 21 March 1990. (b) To Currabubula Holdings on seven occasions between 21 February 1990 and 28 March 1990. (c) To ABE Holdings on 21 February 1990. (d) To Pyojit on 15 and 22 February 1990. 37 The plaintiffs plead that the natural and ordinary meaning of the Bank's use of the words conveyed imputations which were defamatory of Currabubula Holdings, namely that Currabubula Holdings was insolvent and that a liquidator had been appointed to Currabubula Holdings. 38 The plaintiffs then plead that Currabubula Holdings suffered loss of business reputation, loss of cash flow and dividend income and a reduction in the value of its shareholding in Paola Holdings. Damages 39 A number of issues are raised in relation to damages. 40 The plaintiffs assert loss to have been suffered by the Paola Group Companies and assert there to be seven heads of loss: (i) Loss of the opportunity to refinance the debt without there being any interruption to the business or trade of the Group. (ii) Losses caused by the 'fire sale' of the business of NRS, with the business being hampered by the requirement to operate on a 'cash sale only' basis. (iii) Loss caused by the 'fire sale' of Durhambone East in September 1990. (iv) Loss caused by the sale of the Gabo property by Currabubula Holdings in November 1991 at an undervalue; but for the breach by the Bank, the plaintiffs assert that this property would have not had to be sold. (v) Interest charges that would not have been incurred but for the Bank's alleged breaches. (vi) Loss said to be suffered by the inability of the Paola Group to acquire the shares in U-Bix N.Z. Limited. The shares are said to have been shares which were to have been acquired by a New Zealand company, Leman Enterprises Pty Limited ('Leman Enterprises'), owned as to 99 shares by Paola Holdings and as to the remaining share by Currabubula Holdings. (vii) As a further or alternative head of loss, the Paola Group claims for approximately $1.1million raised by a mortgage on the property 'Currabubula Station' in about June 1992 to pay out the balance of the debt to the Bank, which otherwise would have been paid out already. Deed of Release 41 Currabubula Holdings on or about 6 September 1990, executed a Deed of Release with the Bank. Currabubula Holdings' case is that the Deed was brought about by duress and illegitimate pressure of the Bank and is voidable. Currabubula then asserts that it has avoided the Deed. These allegations are denied by the Bank. Additional Issues Raised by the Bank's Defence 42 In addition to its various denials and non-admissions, the Bank has raised the following defences: (a) It pleads the terms of the agreement entitling it to 'cancel the facility' and seek repayment of moneys outstanding. (b) It asserts that ABE Holdings admitted on 13 February 1990 that it was unable to pay its debts as they fell due. (c) It asserts that Paola made the same admission on the same date in the 'Statement of Position' document. (d) The consequence of the above is said by the Bank to be that the Bank was entitled to cancel the facility and call for repayment. (e) Additionally, the Bank pleads that circumstances arose, impliedly on 13 February 1990, which gave reasonable grounds in the opinion of the Bank that there had been a material change in the financial condition of ABE Holdings and that the Bank was thereupon entitled to cancel the facility. (f) Similar circumstances allegations are made for Paola and for the Paola Group. (g) The Bank seeks to make a case on alleged breaches of the representations and warranties said to be found in the Bank's letter of 1 February 1990, which are said to have 'repeated' the representations and warranties made in the Bank's letter of 4 September 1987. (h) The Bank alleges that through a combination of events, being those set out in paragraph 40 through to 42 of the defence, the Bank would, in any event, not have caused any loss to the plaintiffs since the plaintiffs would have had to sell the business of NRS, Gabo and Durhambone. (i) Finally, the Bank relies upon the Deed of 6 September 1990. The Plaintiffs' Amended Reply 43 The plaintiffs, by amended reply, plead: (1) That the conditions relied upon by the Bank were severable from the facility agreement and should be severed. (2) That the Bank cannot rely upon the conditions. (3) That the Bank was at all times aware that creditors of ABE Fax might seek recourse against ABE Holdings. (4) That the Bank had not formed any relevant opinion for the operation of the matter relied upon in the defence at paragraph 38(c) [circumstances said to have arisen giving reasonable grounds in the opinion of the Bank that there had been a material adverse change in the financial condition of any of the Paola Group Companies]. (5) That the warranties and representations were true when made. (6) That the Bank at all times possessed sufficient information to form a view as to the solvency of Paola, ABE Holdings and the companies in the Group. Limitation and Standing Questions 44 As already indicated, these issues will be addressed in detail below. Live issues for determination - Liability 45 On the plaintiffs' submissions, the central issues for determination by the Court with respect to liability are as follows: I. Whether the Bank's conduct in 'freezing' the Group's accounts on 15 February 1998 amounted to a breach of contract. II. Whether the Bank's failure to pay the cheques listed in Schedule '1' to the further amended summons constituted dishonour of the same and, if so, whether such dishonour amounted to a breach of contract. III. Whether the Bank was entitled to cancel or terminate the Facility Agreement by virtue of the existence of an event of default being the alleged admission of insolvency of ABE Holdings and/or Paola Holdings at the meeting on 12 February 1990 and in the correspondence dated 13 February 1990 from ABE Holdings and Ferrier Hodgson to the Bank. IV. If so, it being accepted by the parties that the Facility Agreement was never cancelled or terminated by the Bank, what flows from any such entitlement. V. Whether the Bank was entitled to cancel or terminate the facility, on or about 12 February 1990 by virtue of there having been a material adverse change in the affairs of the borrowers - either by virtue of such change being an event of default under the 4 September 1987 letter or pursuant to the right of review of the facility enjoyed by the Bank. VI. Whether it was necessary for the Bank, in order to be able to rely on any such adverse change, to form any opinion that the borrowers, or one or more of them, had suffered such a change in their financial affairs. VII. If so, whether the Bank formed such an opinion at relevant times. VIII. If the Bank had any entitlement to cancel or terminate the facility whether it waived such right or elected not to pursue it. IX. Whether, at 15 February 1990, there had been a breach of warranty by the borrowers within the meaning of the 4 September 1987 letter with respect to any of the 'representations and warranties' therein contained. X. If so, what flows from that. XI. What if anything, is the consequence for the respective plaintiff's cases in damages against the Bank, of any entitlement by the Bank, on 15 February 1990 to terminate the facility. XII. The effect of the Bank sending out bank statements to members of the group with the words 'in liq' on them, both in terms of the plaintiffs' defamation case and in terms of the breach of contract alleged. XIII. The proper construction of the deed of release entered into between the Bank and Currabubula on 6 September 1990. XIV. Whether the Bank is precluded from reliance upon the deed of release by virtue of economic duress worked upon Currabubula. XV. Whether the plaintiffs are entitled to prosecute the action in the absence of all the borrowers as defined in the 1 February 1990 letter. XVI. Whether, in relation to causes of action alleged by Paola, such causes of action are statute barred in any event. XVII. Whether the Bank is estopped, arising from conversations between Mr Paola, Mr Brennan, Mr Tansley and Mr Swinburne, from asserting that it had a right to withdraw the facilities without notice. Witnesses 46 It is appropriate before dealing with the detailed facts to identify the relevant witnesses and then to deal with the Court's assessment of their respective reliability. Mr Alan Booth and the Hierarchy Within the Bank 47 Mr Alan Booth joined the Bank as an Account Manager ('account manager') in January 1986 and in about July 1988 became the account manager responsible for the Paola Account. He was responsible for most aspects of the administration of the account of the Group and reported to Mr Swinburne, his immediate superior. Mr Swinburne was, in 1989, a senior manager within the Corporate and Financial Institutions Division, later called the Corporate Finance Group ('corporate/financial institutions division') of the Bank. [T 446.15] Mr Booth also worked with Mr Ken Owens another Account Manager who was involved in the administration of the account at relevant times and who also reported to Mr Swinburne. Mr Swinburne in turn reported to Mr Peter Brennan or Mr Peter McClennan who were chief managers of the corporate/financial institutions division and who occupied a like level in the hierarchy. 48 Mr Booth was effectively in day to day contact with representatives of the Group at material times and attended the meeting of 12 February 1990 referred to below. 49 Mr Booth completed a Bachelor of Business at the University of Technology in 1979 and completed a Master of Business Administration Degree with the University of New South Wales, graduating in 1986. That Degree was obtained through the Australian Graduate School of Management within the University of New South Wales. 50 At the time he completed his MBA he regarded himself as qualified to undertake financial analysis of company financial statements, cash flows and the like. 51 He had never received any specific training in relation to dealing with rural accounts of the Bank. 52 He saw it as part of his responsibility to familiarise himself as accounting manager for the Paola Group in July 1988 with the standing operating instructions of the Bank and in particular in relation to matters within his area. [T 403] Mr Mark Bryant and Mr Brendan Halligan 53 Mr Bryant is a partner in Arthur Anderson who has, since 1975, been involved in auditing investigations and advising on accounting and financial reporting issues. He is the partner for the world wide auditor of one of Australia's largest multi-national companies. Since 1985, he has specialised in accounting, valuation and other business issues in litigation and other disputes. He is the partner in charge of Arthur Anderson's litigation services group in Sydney and the Asia Pacific Region. 54 Mr Brendan Halligan is a Senior Manager in the litigation services practice of Arthur Anderson Sydney office with professional experience in the valuation of businesses and shareholdings, the administration of corporate and personal insolvencies and the financial investigations of distressed businesses. 55 Mr Bryant and Mr Halligan prepared reports on the instructions of the defendant which were admitted into evidence. Mr David Diamond 56 Mr Diamond is a chartered accountant, having practiced predominantly in the areas of insolvency and corporate reconstruction since 1983. Between 1983 and 1985 he was with Deloitte Haskins and Sells and from 1985 through to 1996 with Ferrier Hodgson. 57 In about October 1989, he was a director of Ferrier Hodgson and of its offshoot company National Consulting Group Pty Limited when he received instructions from the directors of ABE Fax, per medium of Mr Paola, through the Company's external accountants Williams Hatchman and Keane. At the time he was asked to review the position of ABE Fax prior to the appointment of a receiver to that Company. He prepared that report, following which a receiver and manager was appointed to ABE Fax in early November 1989. 58 At that time, his involvement was limited to the receivership of ABE Fax and he did not involve himself in the affairs or financial position of any other member of the Paola Group or Currabubula Group other than to the extent that they touched upon the affairs of ABE Fax. 59 He was employed by the receiver and manager to conduct the receivership of ABE Fax and prepared reports which were provided to the State Bank in relation to ABE Fax. 60 During the course of the receivership, he became aware that ABE Holdings had provided guarantees in favour of ABE Fax in respect of certain debts. Upon the appointment of the receiver of ABE Fax, a report as to affairs being a Statement of Assets and Liabilities was prepared by the directors which included provision of the extent and nature of the contingent liabilities and outstanding commitments all referred to in Mr Diamond's report of 26 October 1989. 61 Mr Diamond's evidence was that the existence of any guarantee provided by ABE Holdings or any other third party to support the contingent liabilities of ABE Fax was not relevant to the receivership of that company nor was it relevant to the discharge of the obligations of the receiver. His evidence was that the only relevant issue for the purpose of the receivership was the existence of the contingent liability owed by ABE Fax which was reported to the Bank. That liability would have had a bearing upon the ultimate recovery and realisation of assets of ABE Fax following any receivership. 62 Mr Diamond became aware of guarantees having been provided by ABE Holdings in favour of debts due by ABE Fax some time in December 1989 through February 1990, and in early February 1990 he was asked by the officers of ABE Holdings to assist in determining a strategy to protect the Company and the secured creditors in the first place from the contingent unsecured guarantee claims flowing from ABE Fax to ABE Holdings. In that capacity, he became involved in the important events of early to mid February 1990 and attended the 12 February 1990 meeting referred to below. Ms Janet Hamblin 63 Ms Hamblin commenced employment in about 1989 as an assistant to Mr Plante who was at the time the Financial Controller of the Paola Group of Companies. She assisted Mr Plante in relation to the companies but was not involved in the day to day operations. She and Mr Plante were located in the same offices as NRS at Tamworth. The office was a 'reasonably open plan office' with partitions between offices [T 287]. Mr Paola described it as 'the general office at Northern Rural Services' [T 51].She also acted as Mr Plante's secretary and looked after ABE Finance Pty Limited and was responsible, as Mr Plante's assistant, for looking after the pastoral operations which were mainly Currabubula Holdings Operations. She was present in mid-February 1990 in the office when the bank statements with the 'in liq' wording were received and when telephone calls were being received in the office relating to cheque dishonours and the like. Mr Allan Hardy 64 Mr Allan Hardy is an accountant with extensive experience in working in the accounting profession both in Sydney (for 12 years) and since 1982, in Tamworth. From 1982 to 1984 he was with Carpenter Owens, Chartered Accountants, Tamworth. 65 From 1985 to 1991 he was with KPMG Peat Marwick, becoming a partner in the State and National Partnerships of that firm. KPMG Peat Marwick acquired Carpenter Owens. 66 From 1991 to 1994 he was with the firm Forsyths Chartered Accountants which acquired the Tamworth practice back from Peat Marwick. From 1991 to 1994 Mr Hardy set about developing a larger multi-disciplined business in the regional area and subsequently merged or acquired two other accounting practices through Forsyths and a computer consulting business operating from centres at Tamworth, Armidale and Gunnedah. 67 From 1985 until the present time, Mr Hardy, through Allan Hardy Pty Limited, has carried on business under the name 'It's Your Business' concentrating on business and strategic planning and development for enterprises looking to grow their businesses. During his professional life he has presented a number of business development and taxation papers to industry groups (cotton farmers, pharmacists, medical profession and the like), has attended regional conferences for bank managers (Westpac) and has been an occasional presenter to workshops operated by the Financial Management Research Centre Armidale, for small business groups from around Australia. 68 He was a former auditor of Currabubula. 69 He gave evidence in chief to the effect that he had worked in the country for about 15-16 years and in his capacity as an accountant, had been involved in giving advice to businesses in that region, that is to say the Tamworth region and other regions, also advising in Orange, the Central Coast and Sydney. He was asked in giving evidence in chief whether he had had occasion in his 15 years of experience in the country, to form a view about the rapidity or otherwise with which bad news about a business travels in the countryside. His answer was: 'Yes. I guess when I did all my training - I started working in 1970 and I probably trained for 25 years in Sydney. It came as a bit of a shock to me when I moved to Tamworth what a small community propensity for news to travel in a small community is . . . I think that is [sic] a high likelihood of bad news travelling in the country further than and becoming known to other businesses and people in the community than is the case say in Sydney. Q. . . . Have you had experience where bad news about a particular business and its financial strength is used by other competitors in the bush in a particular way? A. Difficult to answer. I guess there is a range of things come to mind. I had an experience of a manager of a financial institution sharing bad news of a client, one of my clients was the competitor. I have seen the experience of a real estate agent distributing bad news to the legal profession about a competitor. Generally I have experienced the apparent keenness of some people to explain to whoever will listed bad news of competitors or other people in the community. It's something that is, I think simply because it is a smaller community people are aware more of each other's businesses and like to talk about it.' [T311 - 312] Mr Brian Holgate 70 Mr Holgate is the Compliance Manager, Risk and Operations with the Bank. He was provided with bank statements for a number of the Currabubula and Paola Group companies and prepared a number of spreadsheets from his examination of those bank statements. Mr Ian McLennan 71 In 1990 Mr McLennan was Chief Manager of the Corporate Finance Group of the Bank. He was appointed into that position in about April 1990, taking the position over from Mr Michael Cambridge. In his role as Chief Manager of the Corporate Finance Group, he was responsible for supervising the conduct of various corporate accounts held with the Bank at that time. The accounts of the various Paola companies became subject to his supervision in about April 1990. 72 He relied upon Mr Booth and Senior Manager, Mr Swinburne, to administer the day to day affairs of the accounts of the various Paola companies and to formulate recommendations. He was not closely involved in administering the accounts of the various Paola companies at the time. Mr Anthony Paola 73 Mr Paola is a director of Currabubula Holdings and Paola Holdings. From June 1987 until May 1990 he was a director of the companies comprising the Paola Group. From 1987 to 1991 he was also a director of the two wholly owned subsidiaries of Currabubula Holdings. 74 Mr Paola's relevant business history is summarised in a number of bank manager diary notes and memoranda to be referred to below. Mr Roger Partridge 75 Mr Partridge is a barrister and solicitor of the High Court of New Zealand who gave evidence in relation to the relevant New Zealand law considerations of a hypothetical acquisition by Currabubula Holdings in 1990 and sale in 1993 of a substantial parcel of shareholding in U-Bix Copiers (N.Z.) Limited. Mr Duncan Plante 76 Mr Plante is a public accountant who in February 1989 became group company secretary of the Paola Group of Companies. As such, he was responsible for the company secretarial functions for all the companies except ABE Fax. Mr Terrey was company secretary and financial accountant for ABE Fax. 77 Mr Plante was also responsible, as company secretary, for negotiating and administering the facilities held with the State Bank, preparing statutory returns and the financial reporting and all accounting requirements of the Group. He was also responsible for bank reconciliations. He attended many meetings with bank officers. He attended the 12 February 1990 meeting referred to below. Mr Peter Simpson 78 Mr Simpson is a financial consultant with extensive experience in the banking industry. His expert report sought to be relied upon was the subject of an interlocutory judgment which rejected the statement in large measure but allowed on a limited basis segments of the statement. Mr Peter Spackman 79 Mr Spackman is a registered valuer who prepared a number of reports on the value of rural properties, known as Durhambone East, Durhambone West and Gabo on the instructions of the Bank. Mr Stenhouse/Ms Osborne 80 Mr Stenhouse was the principal solicitor to the corporate/financial institutions division. Miss Osborne was a solicitor reporting to Mr Stenhouse. Mr Garry Tansley 81 During 1987 Mr Tansley was employed by the Bank as a Manager, 'Corporate and Financial Institutions' in which role he was responsible for managing a portfolio of commercial 'pty limited' accounts. He reported to Mr Brennan. During 1987 and 1988 for approximately a 12 month period, he was responsible for the client relationship and management of the Paola Group of Companies. Mr Ross Taylor 82 Mr Taylor was a founder of the Northern Rural Services business which he commenced in Tamworth and in respect of which he later caused branches to be opened in Moree, Gunnedah and Narrabri. The business was financed from 1987 by Mr Paola and the Paola Group Companies. Mr Taylor's arrangement was that he would operate the business and Mr Paola would provide the finance and own the company NRS. 83 Mr Taylor was general manager of NRS from the time Mr Paola became involved and was in charge of day to day operations for all branches. This involved Mr Taylor in ordering supplies, being responsible for all sales, supervision of staff including hiring and firing, purchase of stock, control of debtors and creditors and maintaining customer and supplier relationships. Mr Taylor made a statement on 17 October 1996 and died in December 1996. An interlocutory judgment dealing with objections to the admission of Mr Taylor's statement was handed down and sections of Mr Taylor's statement were allowed and sections disallowed. Mr Peter Terrey 84 Mr Peter Terrey is an accountant who commenced employment with ABE Copiers in March 1975. He became financial accountant for the Paola Group and the Currabubula Holdings companies up to the beginning of 1989 when Mr Plante took over as financial controller of those companies. In April 1990, Mr Terrey again assumed the role of financial controller of the Paola Group and of the Currabubula Holdings companies after Mr Plante departed. There was a short break in Mr Terrey's earlier employment from February to June 1987. The Credit of Witnesses 85 Counsel for both parties accepted, as I understood their submissions, that as the events in question had occurred some nine years prior to the hearing, it could be and should be accepted that the recollections of witnesses would be relatively imprecise. Hence the significance of contemporaneous documents and the Court's concern to look at objective and common sense factors in assessing conflicts of evidence. 86 Mr Macfarlan submitted that in relation to Mr Paola's credit, in each of the areas where credit might be of importance, contemporaneous documents and objective and common sense factors would be seen as inconsistent with Mr Paola's version of events. The submission was that Mr Paola, not necessarily consciously, but at least subconsciously, has come to see the past events relating to this case in a perspective which favours himself and that this colours his evidence. The number of years passing since the occurrence of the events leaves room, so Mr Macfarlan submitted, for distortion to a considerable extent. 87 Mr Macfarlan did refer to the evidence given by Mr Paola in relation to the letter from Paola Holdings to Blake Dawson Waldron of 12 September 1990. [PX 1614] as detracting from Mr Paola's credit. The matter is dealt with below. 88 In my view, Mr Paola was a reliable witness with a reasonable recall of the material events and whose memory may be relied upon as generally accurate. This is not to say that in every instance his evidence is accepted. From time to time his recollection was successfully challenged in cross-examination. However, those occasions were few and when matters which were inconsistent with Mr Paola's recollection were put to him, he immediately accepted the propositions put to him. I formed the view that whilst his interest in the case is obvious, he was at pains to do his level best to recall the events of some nine years ago as clearly as he could. He was clearly affected by the events in question which represented matters of very high moment to his interests. Where his evidence is rejected, I accept that he has come to believe that the events in respect of which his evidence is rejected in fact occurred and/or that the circumstances which obtained at the time were as he has stated in giving evidence. Save as expressly indicated in the judgment, I accept his evidence as accurate. 89 In relation to the evidence given by Ms Hamblin, Mr Macfarlan submitted that the Bank had no particular problem with her credit and sought to address no special criticism of her having carried out her best efforts to recall accurately the position as it obtained at the time. This represents my own assessment of Ms Hamblin's evidence. I was impressed by her demeanour in the witness box. To my mind, her evidence may be accepted as reliable. The events of February 1990 obviously left a real impression upon her. Her evidence was given clearly and in a straight forward manner. Her recollection of the events at the time seemed to me to be particularly good and she seemed to be quite sure of herself. Taking into account the fact that she was not involved in the day to day operations of the Paola Group, she was still plainly able to give reliable evidence of what had occurred at the time when the bank statements with the 'in liq' notations were received and within the next few days. 90 Mr Macfarlan addressed no particular submissions in relation to Mr Plante's credit. 91 Mr Plante's evidence may be regarded as reliable. 92 In relation to Mr Taylor who was not able to be cross-examined, the submission was that no weight should be given to his evidence at all, at least to the extent that his evidence was inconsistent with other evidence before the Court. Mr Macfarlan pointed out that Mr Taylor had not in his statement adverted anywhere to the mid-January 1990 circumstances which had led to his resignation, or to the directions which he had been given by Mr Paola and which he had opposed. He had sought, so Mr Macfarlan submitted, to put forward a picture of NRS having in January/February 1990, developed into a viable and thriving business. This was, Mr Macfarlan submitted, inconsistent with the evidence, and for this reason, Mr Taylor's evidence generally should be given no weight at all, or no weight at all at least to the extent that it was inconsistent with other evidence. The matter is dealt with in the Judgment. 93 In relation to the evidence given by Mr Terrey, Mr Macfarlan drew the Court's attention to what I accept was the unwillingness of Mr Terrey to accept that there had been a transfer of the pastoral division from Currabubula to ABE Holdings. And this, notwithstanding, Exhibit 'D4' being the February 1990 minute of Meeting of Directors of ABE Holdings at which Mr Terrey attended, which had resolved that the pastoral operations be undertaken by Currabubula Holdings Pty Limited from 1 July 1989 'thus rescinding the previous arrangement that they be undertaken by ABE Holdings Limited'. Ultimately the reliability of Mr Terrey's evidence, save in relation to this issue, was not seriously challenged. In the result, Mr Terrey's evidence is accepted as reliable, but is not accepted on this specific issue. The passage of time has no doubt clouded his recollection on this issue. 94 In relation to Mr Hardy, the plaintiffs' submissions were that Mr Hardy had approached his reporting and the giving of evidence from an emotional disposition towards Mr Paola and his Group, having been associated with the plaintiffs since the late 1980's. Mr Hardy, it was submitted, was not to be seen as a disinterested expert. The matter is dealt with in the Judgment. 95 In assessing the credit of the different Bank witnesses, the Court is assisted to a considerable extent by the contemporaneous banking records in evidence. Ultimately, there were only a few discrete areas where the credit of bank witnesses could be said to be in issue. As appropriate, those matters are dealt with in the Judgment. The Facts January 1984 - Initial Credit Facility $4.2 million - Term of 2 Years 96 In January 1984 Mr Paola, the then Managing Director and principal shareholder of ABE Holding Limited [who held approximately 37 percent of the capital of that company] and intended to make a takeover bid for the balance of the outstanding shares, applied to the bank to provide finance to enable the acquisition to be effected. A credit facility of $4.2million was made available only to Paola Holdings as borrower. This was a bill acceptance/discount facility for a term of two years. The security to be provided comprised a registered first mortgage over Currabubula Station near Tamworth, being a 9,000 acre property; a registered first mortgage over Durhambone Station, being a 22,000 acre property at Narrabri; a registered second mortgage over 'Orlando', being a 10,000 acre property at Narrabri; a personal guarantee by Mr Paola for $4.2million; a first ranking charge over 8.8 million shares in ABE Holdings and a letter of comfort from Okura & Co Limited in respect of its intention to continue to distribute products manufactured by Konishiroku Photo Industries Co Limited to ABE Holdings [PX pages 16-17]. 97 It appears that the Bank's facility of $4.2million was utilised to allow the acquisition by Paola Holdings of the outstanding shares in the publicity listed company Automated Business Equipment Limited and that upon successful takeover, that company was delisted. 98 U-Bix Copiers N.Z. Limited ('U-Bix N.Z.') was publicly listed on the New Zealand Stock Exchange. A substantial shareholding in U-Bix N.Z. was held by ABE Holdings and ultimately sold in the late 1980's when some A$6.2 million was utilised to reduce group debt. February 1984 - Come and Go Facility for Currabubula Holdings - $250,000 99 By mid-February 1984, the Bank had established a 'Come and Go' overdraft facility of $250,000 in the name of Currabubula Holdings at the Tamworth Branch to meet the various working capital demands of Currabubula Holdings' rural activities. 100 Mr Booth did not know what the meaning of a 'Come and Go' overdraft was and could not recall ever reading any bank instruction in respect of this term not being used for overdrafts. He recalled that the words 'on demand' were generally used with overdrafts. He could not recall whether or not it was his understanding whilst he was account manager, that it was a bank instruction that overdrafts be either identified by a fixed term or that the term be identified as on demand. 101 Mr Booth could not recall ever reading banking instructions as to the term for overdrafts and the description of overdrafts to be used in communication with customers. [T 408 and 409] September 1985 - Conversion of Remaining Bill Facility to Foreign Currency Facility 102 In September 1985, Paola Holdings' then remaining A$2.1 million bill facility was converted to a foreign currency [PX 28] facility. 6 January 1986 - Increased Facilities to Currabubula Holdings and Paola Holdings 103 By letter dated 6 January 1986 from the Bank to Mr Paola, the Bank confirmed its approval to provision of increased facilities to Currabubula Holdings by way of an increased 'Come and Go' overdraft facility from the then $350,000 to $450,000 and a term loan of $1.4million to permit the purchase of two properties. At the same time, a facility granted to Paola Holdings was identified as a Bill Acceptance/Discount Facility of $485,000 and the Bank granted an extension of the then existing 'Multi Currency' Facility of $4.2million and 'overdraft' facility of $50,000 to 30 November 1986. [PX 34 and following] 12 May 1987 104 Mr Booth accepted that when he became account manager, he would have read a financial analysis entitled 'ABE Holdings Limited and Subsidiary Companies Financial Analysis', which had been prepared on 12 May 1987 and in particular the section reading: 'Liquidity Both current assets and current liabilities have been significantly reduced due to the Group's disposal of its subsidiary, U-Bix Copiers. As a result of the transactions involved in the disposal, the Group's liquidity position has been substantially improved as evidenced by working capital, current and liquid ratios.' [PX 39] End March 1987 - Paola Group Structure 105 At the end of March 1987, the Paola Group structure as recorded at PX 69 was as follows:

106 It was, however, common ground that at all material times Mr and Mrs Paola each held one of the two issued shares in Currabubula and that the three issued shares in Paola Holdings were held by Mr Paola, Mrs Paola and Currabubula Holdings. August 1987 107 A convenient summary of the Group's background is to be found in PX at page 65 and following, which is an August 1987 summary of the Group up to that point in time as known to the Bank. 108 The summary reads, inter alia: 'On 13 February 1984, Bank assistance of $4.2million was provided to allow the Paolas to acquire the outstanding shares in the public listed company, Automated Business Equipment. Upon successful takeover, the Company was delisted. Mr and Mrs Paola, the principals of this Group were major shareholders of Automated Business Equipment (ABE) since incorporation in 1972. Following privatisation under the Paola's entrepreneurial but prudent management, the Group became one of the largest distributors of plain paper copiers in Australasia. As a consequence of this growth the company developed a reputation for its reliability and quality of service. Subsequently the corporation who manufactured the copiers distributed by ABE, namely "Konishiroku Photo Industry Co Limited" negotiated to purchase the copier business. Completion of the purchase was effected in January 1987 for the sum of $A10million. Sale proceeds were used to repay intercompany borrowings, establish a facsimile business, purchase a rural property and reduce State Bank debt. Mr Anthony Paola has been the driving force behind the success of U-Bix Copiers and for this reason he has been retained as a Director and is under a restrictive trade agreement to act in this capacity for a minimum of two years. Prior to the sale of the copier business the Paolas invested in farming properties. Their attraction for their country retreat has seen their interest blossom into livestock and pastoral production under the name of "Currabubula Station". Their properties have a combined area of over 27,000 hectares. The properties are situated at Collarenebri, Tamworth and Narrabri, New South Wales. Each property has its own manager all of whom are experienced rural people. The properties have been cultivated for wheat and wool production and the grazing of beef capital. The following is a brief profile of the activities of all the companies within the Paola Group . . . Paola Holdings Pty Limited Ultimate Holding Company Currabubula Holdings Pty Limited Rural properties, primarily sheep and wheat Magnetic Sound Industries Pty Ltd Name to be changed to ABE Travel Pty Ltd in due course and will act as a travel agency. ABE Holdings Limited Investment arm and Holding company of ABE group of Companies including "Campbell, Rixon and Graham" (CRG) and Northern Rural Services (NRS) ABE Credits Pty Ltd Responsible for leasing of copiers to corporate clients Automated Business Equipment Pty Ltd Non-trading company, only receives dividends from U-Bix Copiers (N.Z.) Limited U'Bix Copiers (N.Z.) Limited Imports/distributes copiers from Japan ABE Data Systems (Aust) Pty Ltd Trading vehicle for distribution of Olivetti typewriters and ribbons ABE Telecommunications Pty Ltd Imports/distributes fax machines from Japan ABE Charter Pty Ltd Charter of jet aircraft Northern Rural Services (NRS) Rural produce store based in Tamworth Campbell, Rixon & Graham (CRG) Stock and station agent based in Tamworth ABE Telecommunications (N.Z.) Ltd N.Z. arm of fax business, not trading at this stage.' 109 The same banking summary at PX 68 reads: ' Management The success of this Group can be attributed to Tony Paola's industrious nature and business acumen. ABE's line management are long-term employees who are experienced in their respective areas of responsibility. The managers of the pastoral, live stock properties are "country people" who have earned a high reputation for farm management ability. Tony Paola supervises the group's activities by "hands-on management" and acts positive if any area is not performing to predetermined targets.' 110 The same document at PX 66 includes the following: ' Serviceability Previously, the Bank has relied almost entirely on U-Bix Copiers Australasia to service debts. With the sale of the 'Copiers' business and the increased emphasis on primary production, it is important the changes in sources of cash flow be noted, particularly in the next 12 months. This is considered necessary to allow the ABE Telecommunications (Facsimile Machines/Supplies) operations to develop to replace the "Copiers" contribution to cash flow and profits. Whilst the copiers business has been sold, it does not involve a move to a new industry. Therefore we believe the experience gained by our client will be a benefit in quickly establishing the new business. The Paolas predict the facsimile business will be larger and more profitable than copiers.' 111 Mr Booth accepted that when he had become account manager, his understanding from his perusal of the files was that 'at least until August 1987 the Bank had relied almost entirely on the income generated by the Group's photocopying business' and he became aware on or shortly after he became account manager, that that business had been or was in the process of being disposed of. [T410] 112 Mr Paola gave evidence that prior to entering into the facility, the subject of the 4 September 1987 letter he attended a meeting with the State Bank at which were present Mr Brennan and Mr Tansley and possibly, although he could not be certain, Mr Swinburne. This took place on his evidence, just prior to and no more than a month before the letter of 4 September 1987 from the Bank. 113 Mr Paola's evidence was that at the meeting he said in substance: 'As I have mentioned to you previously the sale to the Japanese of Konica has occurred. I am now gearing up into the country.' 114 Mr Brennan in substance is said to have replied: 'Tony, we helped you with privatisation of your copying business and you didn't give us the trading business for ABE Copiers, you kept that with Westpac, so we'd like to be involved in the businesses you are undertaking now in the country. As you recall, the State Bank used to be the rural bank, we know all about the country and we already do a lot of business up that way (namely the Tamworth area). We can do a better deal than any other bank. We could charge you .25% margin on our reference rates for overdrafts.' 115 Mr Paola gave evidence that the proceeds which he was to receive from the ABE Copiers sale were earmarked for the purchase of further properties and that with the bank facility being offered by the State Bank, the acquisitions could be accelerated. 116 On Mr Paola's evidence, he also stated at the meeting: 'I'm looking the develop the trading operations out in the country. I've got a few companies which are doing things. For the time being I am going to concentrate on the primary production side. I am trying to develop a business which is drought proof, has cash flow and can make sizeable capital gains. I am drought proofing the business by acquiring irrigation property. I've got an exposure to inexpensive dry land farming towards Collarenebri and I am also developing inexpensive land for cropping. I am also developing a cash flow business in Northern Rural Services which is a rural merchandise business and a stock and station agent. I'm doing that because based on Currabubula's own business with merchants and stock and station agents, it could feed a business on its own. I have also a couple of the companies left over from the copier business, namely the Jet Charter and the ABE Telecommunications and ABE Finance and Credits which I will ultimately get rid of and wind them up while I focus primarily on the agricultural business.' [Mr Paola's Statement, December 1998 paras 3 to 7 inclusive.] 117 Neither Mr Brennan nor Mr Tansley gave evidence disagreeing with or denying the correctness of Mr Paola's evidence of this early meeting. 118 I accept Mr Paola's evidence as to the meeting. 4 September 1987 Facility Letter - $2.14 million 119 Reference has earlier been made to the Bank's facility letter of 4 September 1987 addressed to Paola Holdings Pty Limited. The letter is set out in Appendix 1. 120 Mr Booth accepted in cross-examination that he recalled when reading this letter having become account manager, that seven borrowers were identified in the letter and that there were various facilities that were allocated between the borrowers. He noticed that the document did not use the word or phrase 'on demand' in relation to any of the overdraft components of the facilities. 121 The facility letter probably remained 'a marked letter' in Mr Booth's files because of its clear importance. Alleged Conversation with Mr Tansley 122 Mr Paola's evidence was that subsequent to his receipt of the 4 September 1987 letter, he met with and had a conversation with Mr Tansley and said to Mr Tansley words to the effect: 'I am concerned about the Bank withdrawing this facility for any reason if it decides to change it's mind'. 123 Mr Paola's evidence was that he showed Mr Tansley the 'events of default' clause and the clauses which gave a discretion to the Bank to form an opinion and in particular clause (viii). On his evidence, Mr Tansley then said words to the effect: 'That's a standard clause of the Bank in the Bank's documentation. I don't know of any circumstance where the Bank has actually used it. In your case we're only interested in the security. We are providing the funding to you based on the security only because we know that the businesses you've got are just starting off and really there's no track record on any of them.' 124 Mr Paola gave evidence that after this meeting with Mr Tansley, he arranged for the Facility Letter to be signed by the Company. [Paras 10, 11 and 12 - Statement of December 1998] 125 Mr Tansley gave evidence that he did not recall the discussion with Mr Paola but may have said to Mr Paola words to the effect 'That's a standard clause of the bank in the bank's documentation. I don't know of any circumstances where the Bank has actually used it.' ['It' being a reference to default clause (viii) in the Bank's letter of 4 September 1987] 126 Mr Tansley denied that he would have said words to the effect: 'In your case we're only interested in the securities. We are providing the funding to you based on the security only'. 127 Mr Tansley volunteered in giving evidence that his knowledge was 'very vague in a lot of areas' [T 540]. I accept Mr Paola's evidence as to the meeting. 8 September 1987 128 On 8 September 1987, Mr G.R. Plummer a Senior Manager in the Risk Policy Unit, commented on the loan quality assessment in respect of Paola Holdings, Currabubula Holdings and ABE Holdings. Mr Plummer's comment was: 'LQ2 Assessment confirmed and decision noted, in view of the security level provided and reported financial strength, although the Group will need to be carefully monitored in view of its recent move from photocopiers to facsimile machines.' [PX 84] 129 Mr Booth accepted that the loan quality assessment was one of the things which he always had to comment on in his submissions and that when he made submissions, he had to address the question of whether or not a customers loan quality assessment should be varied up or down. He accepted that this was a qualitative assessment and that various factors were looked at. He recalled as familiar that during his time as account manager for the Paola Group, loan quality assessments ran from LQ1 through to LQ4. Initially he recalled as familiar and appeared to accept the proposition that as to LQ3 and LQ4 these were loan quality assessments which would involve the Bank in deciding not to advance further funds to a company. [T 412] Later he said as to LQ3 and LQ4, that he could not recall whether the Bank had a policy that it would not lend new money to customers with those gradings. 130 Mr Booth also recalled that the Bank had a system called risk rating, where alpha-numeric records of risk assessments would be recorded. He recalled that when he had become account manager, the account had been rated as LQ2 and that he had noticed when he had become account manager that Mr Plummer had awarded the LQ2 grade to the Group because of the security level provided and reported financial strength. 131 His understanding of the LQ1 assessment was that it was awarded to a blue chip borrower, namely a borrower with very strong liquidity, very strong asset bases and very good ratios of debt to net assets. As to LQ2, he accepted that it was an assessment which meant that the borrower was entirely satisfactory to the Bank. He believed that LQ3 and LQ4 were probably customers who had weakening financial ratios or some identified or potential problem. 132 Mr Booth accepted that he was at all times aware of a need to carefully monitor the Paola Group and that to the best of his ability he did carefully monitor the Group. To the best of his ability, he had obtained relevant information for the Bank about the Group and analysed that information as carefully as he possibly could as part of his duties. [T 414] 133 Mr Booth recalled that the risk policy unit of which Mr Plummer was a Senior Manager, was a unit that was separate from the lending unit of the Bank of which Mr Booth was a member and he believed that although arrangements changed from time to time, this was because of a Bank policy to have independent loan quality assessments made of customers and borrowers. [T 414] November 1987 134 On 23 November 1987, a bill of sale and an equitable mortgage and floating charge was provided by a number of companies in the Paola Group to the Bank. The relevant Paola Companies, parties to the document were ABE Travel Service, Campbell, Rixon, Paola Holdings, ABE Telecommunications, ABE Holdings, Currabubula Holdings, Automated Business Equipment and ABE Jet. 25 February 1988 - Financial Position of Paola Holdings and Subsidiaries Considered Satisfactory 135 Mr B.J. Sullivan of the Corporate and Financial Institutions Division, prepared a note on 25 February 1988 which was approved by Mr Gary Heath, an Account Manager within the division. The note reported that: 'Further discussions with Paola have disclosed that they cannot guarantee any profits this year (1987/88) even though sales should substantially increase. The reason being that there have been large start-up costs for the facsimile business which are likely to continue throughout the year . . .' 136 The note included the following: '. . . it is acknowledged that there have been large changes to the Group's structure over the past 12 months. This has led to a substantial inflow of funds (due to the sale of subsidiaries',) however these funds have been reallocated to new ventures. Profits are not likely this year due to the high start-up costs of the ventures in an effort to gain a large portion of the market. There is no doubt that Paola is constantly changing in response to the market with Tony Paola as Managing Director. He has sound entrepreneurial skills and quickly capitalises on the opportunities presented. Overall, the financial position of Paola is considered satisfactory .' [PX 123] 137 Mr Booth recalled examining this document and noting from it, under the sub-head 'Negative', that an operating loss of $1.853million had been made during the period. 138 He accepted that while he was account manager for the Group, an assessment of Mr Paola's abilities and skills was important in assessing the safety of the loan to the Paola Group and that Mr Paola was a person who constantly changed his business activities in response to the market. He was also aware at least as at February 1988 of the Bank's view that Mr Paola had sound entrepreneurial skills and quickly capitalised on opportunities presented. [T 420] 139 At the time Mr Sullivan wrote the note, he was, to the best of Mr Booth's recollection, a financial analyst for the Corporate Loan Group. March 1988 140 On 16 March 1988, Mr Moore who was Chief Manager, Corporate and Financial Institutions Division, made a note in relation to the division's recommendation for an additional $1.7million by way of increase in facilities. That note was as follows: 'This account is to receive a higher degree of management and facilities are not to be exceeded. Account Manager is to report in writing each month on status of Group and its adherence to financial budgeting. This report to be in Section Head's hands by 21st day of each month.' [PX 124] 141 Mr Booth could not recall whether when he became account manager, he received instructions that the Paola Group Account was to receive a higher degree of management than other accounts and he had paid no part in the preparation of Mr Moore's note. He did not recall a requirement when he became account manager, that he report in writing each month on the status of the Group. 16 March 1988 - LQ2 Assessed Rating 142 On 16 March 1988, Mr Martin Meldrum of the Bank, assessed Paola Holdings and its subsidiaries at LQ2, under the heads 'Default Risk', 'Credit Risk', 'Management' and 'Special Characteristics'. This assessment was approved by Mr Moore at the time. [PX 135] 22 March 1988 - Additional Facility Letter - Increase to $2.217 million 143 Additional facilities were then approved in terms of a letter from the Bank to Paola Holdings of 22 March 1988. This letter is set out in Appendix 2. 144 Mr Booth's evidence was that he saw the facility letter when he became account manager but he probably would not have noticed that there were fewer borrowers referred to than on the 4 September 1987 letter. He was asked: 'Q. And you wouldn't have noticed because in your mind the borrower was the Paola Group and its constituent companies? A. I think yes. Q. And that was your understanding throughout the entirety of your dealings as account manager of the Paola Group relationship wasn't it? A. Yes.' [T422] July 1988 145 In July 1988, Mr Alan Booth became the Bank's account manager responsible for the Paola account. When Mr Booth became account manager, he read the documents relating to the history of the facility. 146 Mr Booth's evidence was that for the period 1988 until later in 1989, he was not overly concerned with the exposure of the Bank to the Paola Group of Companies. It appeared to him that adequate security was held. However, the financial material and information he was receiving from the Paola Group of Companies was not, he said, detailed or particularly regular. His evidence was that he was never certain at any time whether or not the significant increases in borrowing by the Paola Group were for the purposes of business expansion, or because of problems with cash flow arising from one or more of the companies within the Group. [Statement 20 November 1996 paragraph 15] 147 Mr Booth signed a 'call minute' on 8 July 1988 which reads inter alia as follows: ' Remarks Meeting requested by Paola. Management are of the view that the Bank is not servicing the Group adequately in spite of all Paola assets being held as security. Consequences of this are that Paola is unable to fund growth adequately and is missing growth opportunities. Specific examples of opportunities missed in the ABE Group and in Northern Rural Services were raised. In the case of Northern Rural, sales of $6 million only were achieved against budgeted $10million and three new branch openings were postponed. At the commencement of the meeting, Paola was of the view that better banking arrangements would be possible if individual entities were responsible for securing their own funding. Much of the meeting was spent convincing them otherwise, that on individual entity bases, Paola companies would lose bargaining power and the flexibility to move funds within the Group. It was also conceded that more innovative arrangements could be made under the existing security which could possibly significantly increase loanable funds to the Group. It was agreed that if Paola could provide cash flows and projected balance sheets for the next twelve months a review of banking facilities would be conducted and facilities renegotiated. Other disclosures made during the meeting included: - Paola's rural programme is being scaled down. One property was sold recently, another sale is currently being negotiated. - The jet charter operation is changing focus with aircraft ownership being scaled down and replaced by management of aircraft owned by others. Follow up action: 1. On receipt of future cash flows and balance sheet projections prepare review of banking facilities. More innovative approach needs to be adopted re security valuations i.e. include WIP values of farm produce . . .' [PX 173] 148 In being tested in cross-examination with what precisely he said to Mr Paola about the flexibility to move funds within the Group, the following evidence was given by Mr Booth: 'Q. You said words to the effect, didn't you, that if the Paola companies went to dealing with facilities on an individual basis he would lose the flexibility to move credit with the Bank from company to company. That was what you put, wasn't it? A. The words to lose flexibility to move funds within the Group, yes, that would be what I was thinking . . .' [T 423] 149 Mr Booth also accepted under cross-examination on being shown this note, that he had been told that the jet charter operation was being scaled down in July 1988. He was aware of this from that time on. 150 He accepted that as account manager, he did not consider that the jet charter company was as large as the rural operation or facsimile businesses. He was asked and answered as follows: 'Q. You knew from virtually the inception of your role as account manager that the Jet Charter operation was being scaled down and eventually in 1989 the jets were sold or were put on the market? A. Subsequently, well, events took that course yes.' [T 424] 151 In about late August/early September 1988, Mr Booth prepared a recommendation for release of certain securities. That document included the following comment by Mr Booth: 'Tony Paola has recently successfully negotiated the sale of the majority of his shareholding in U-Bix Copiers (N.Z.) Limited to Fernbank Industries Limited . . .' It is understood that approximately 2.6 million shares have been sold at N.Z. D3 per share which at current value represents in excess of AUD$6 million. Mr Paola's stated intention for the proceeds of this sale is to repay all secured banking facilities of his companies. (The remaining shares will be sold as necessary to cover any shortfalls) . . . ' [PX 178[ 152 Mr Booth recalled that the assets were sold and that he believed some of the proceeds went to reduction of bank debt. He accepted at transcript 425 that it was perfectly normal in the operation of the account, for the borrower to repay bank debt not by regular servicing but by intermittent asset sales. August 1988 10 August 1988 - Loan Quality Assessment Rating of 'Management' Raised to LQ1 153 On 10 August 1988, Mr Plummer approved a further overall loan quality assessment rating of Paola Holdings at LQ2 but which raised the 'management assessment' rating to LQ1, leaving the 'default risk', 'credit risk' and 'special characteristics' ratings at LQ2. 154 Mr Booth was unable to recall whether his views were sought by the persons who made this assessment. He could not, however, recall any occasion where any officer or officers of the Risk Policy Unit inspected documents or files for the Group and produced a loan quality assessment sheet without talking to him. [T 426] 155 Mr Booth accepted that the loan quality assessment of 'management rating' as LQ1, effectively referred to Mr Paola, and that Mr Paola was so rated in light of all the information the Bank had as at 10 August 1988 about the conduct of the facilities between the Bank and the Group. Mr Booth accepted that Mr Paola was rated as LQ1 as a result of the Bank's assessment of Mr Paola's skills as a businessman. 11 August 1988 - Additional $1.1 million Overdraft 156 On 11 August 1988, approval was given by the Bank for the provision of an additional $1.1million overdraft for Paola Holdings on the basis that the facility was to be reviewed along with all other facilities available to the Paola Group by 31 August 1988. The security comprised a first registered real property mortgage over a property on the Liverpool Plains, known as 'Gabo', which was being acquired; a second registered real property mortgage over a property known as 'Bombargo' which was being acquired, as well as all other security already held on behalf of the Paola Group. [PX page 174] 157 Exhibit PX 183 is a memorandum from Mr Peter Terry to Mr Paola of 29 September 1988 setting out the current bank balance under heads 'Balance'; 'Limit'; and 'Variance'. The document includes the following:

I am arranging that $250,000 be transferred from A.B.E. Holdings to Paola Holdings. ' 158 On being shown this document, Mr Booth accepted that whilst he was account manager, credit was transferred from one company to another within the Paola Holdings by adjustment of overdraft limits. He was also asked and answered as follows: 'Q. And I also want to put this, it happened from time to time, did it not, whilst you were account manager that the Paola Group of Companies would go over their approved overdraft or facility limits? A. Individual companies I believe, yes. Q. Yes, and that happened on a relatively regular basis, did it not, whilst you were account manager? . . . A. I do recall it happening. Q. And that position was tolerated by the Bank wasn't it . . .? A. I don't understand the meaning of tolerated. We would have been required to report any excess drawings. I can't recall the approval process, but an approval was required. Q. Yes and approval was given wasn't it to your understanding during that period for excess from time to time? A. Where individual companies exceeded their limits yes.' [T 425] 18 November 1988 - Facility Letter increase to $4.65 million 159 The terms of a further temporary facility agreement were then documented by letter dated 18 November 1988 from the Bank to Paola Holdings. That letter is set out in Appendix 3. 160 The total overdraft limit achieved by the temporary facility agreement then became $4.65million. Late 1988/Early 1989 - Alleged Representations 161 It will be recalled that the plaintiffs in their estoppel claim assert that, prior to entering into the February 1990 facility agreement, officers of the Bank represented to Mr Paola that the Bank would not exercise any legal rights to withdraw the facility prior to giving the Group or Currabubula Holdings, reasonable notice of its intention to exercise such rights so that the Group (or Currabubula Holdings) could refinance the liabilities to the Bank with another banking entity. 162 This allegation is grounded upon evidence given by Mr Paola in his statement of 21 October 1996, paragraphs 9 to 11 inclusive. He there alleges that some time in late 1988 or in 1989, he had a conversation with Mr Swinburne where they were discussing 'the spectacular failures of various entrepreneurs in the late 1980s'. Mr Paola alleges that during that conversation, Mr Swinburne raised 'the problems the State Bank were having as a result'. On Mr Paola's evidence, during that discussion the following conversation took place: 'Mr Swinburne: There has been a lot of high profile people falling over recently. This is not a good time to be falling in love with assets business-wise. Take for example Russell Goward and the shortfall in the assets that was discovered there. Mr Paola: I mean if the bank was having difficulties, is there any likelihood that the bank would pull the rug out and withdraw its facilities without giving me notice? The bank wouldn't do that to me would it Jim? Mr Swinburne: No no Tony, in your case, the bank is very happy with the security. There is not much likelihood that that would happen to you.' 163 Mr Paola also gave evidence that he recalled an occasion when he was driving with Mr Peter Brennan of the Bank to Durhambone Station from Tamworth and that during this trip, Mr Brennan said words to the effect: 'The Bank is more than happy with its security. The Bank wouldn't withdraw its facility without giving you plenty of notice'. 164 Mr Paola's evidence was further that the trip to Durhambone with Mr Brennan took place in late 1988 or early 1989 and that: 'After this and other similar conversations with Peter Brennan and Jim Swinburne, I believed that if the Bank were to seek to withdraw the facilities to all the various companies, it would give me adequate time to refinance the outstanding borrowings with another institution. I did not seek to find another bank as a result of these conversations. Because of statements made to me by Brennan and Swinburne concerning the State Bank, I was concerned that the State Bank may demand its money because it needed it.' [Statement paragraph 11] 165 Mr Swinburne in his statement of 18 November 1996, gave evidence that he had no recollection of any conversation with Mr Paola in the terms alleged by Mr Paola either in 1988 or 1989 or at any other time. Further, he gives evidence that to his recollection it was he who visited Mr Paola's property, Currabubula, in late 1988 or early 1989 and that to his recollection Mr Brennan visited the property some time earlier than he did. He cannot recall any conversations of the type referred to in paragraph 11 of Mr Paola's statement. 166 Mr Brennan, who was at the time employed by the Bank as the chief manager of its corporate and financial institutions division, gave evidence by statement of 19 November 1996 that he recalls visiting Currabubula Station, to the best of his recollection in about 1988 although he is unable to say exactly when the visit took place. He cannot recall any conversations which he had with Mr Paola at the time, nor whether he informed Mr Paola that the Bank was more than happy with its security and would not withdraw its facility without giving him plenty of notice. 167 The recollections of both Mr Swinburne and Mr Brennan appeared extremely vague. I accept Mr Paola's evidence of these conversations. January 1989 168 On 23 January 1989, the Bank's Coordinator, Statistics and Weekly Reports, sent a memorandum to the Bank's manager at Gunnedah in respect of overdraft limits, stating the overdrafts which had been established but indicating that no approval for the limits appeared to have been received on an agenda and asking whether the records could be checked 'to see if you have scheduled any of the overdrafts and forward it on to your regional office'. The particular account in question was that of NRS and the amount as at 14 December 1988 identified as $75,000'. [Exhibit PX page 206] 169 Mr Booth wrote a handwritten note at the end of this memorandum reading as follows: 'No approval involved, this ODL is the result of a re-allocation of ODL's already existing for the Paola Group of Companies over which the Bank holds interlocking EMFCs. Please note a $350 ,000 limit was also established for NRS at Moree under the same circumstances.' 170 Mr Booth was asked whether he would agree that this was an example of the re-allocation of overdraft limits and his answer was: 'My comment refers to a re-allocation of overdraft limits, yes, it could be that.' [T 427] Late January, Early February 1989 171 In February 1989, Mr Plante became the financial controller and company secretary of the companies in the Paola Group. 172 In late January/early February 1989, a corporate/financial institutions division submission signed by Mr Booth, recorded the Bank's approach to an application by Paola Holdings and Currabubula Holdings for an increase in facilities to $5.8million. That document (PX 207) which Mr Booth accepted was a significant document comprising his best efforts to accurately set out the position, reads inter alia: 'Paola's operations are now substantially based on a Fax business, sheep, wheat and cattle farming as well as a farm service operation based in the north west of New South Wales. The growth in Fax sales in Australia is strong and expected to expand by 400% over the next five years. The outlook for wool, wheat and beef is also very favourable in the short/medium term. This outlook should underpin Paola's cash flows and importantly also support property values which represent a large proportion of the Bank's security. While . . . Tony Paola intends to reduce total borrowings to $3.1million in the near future following the sale of a property and some more U-Bix shares, his track record is one of frequent changes in direction at short notice usually prompted by opportunities for trading in real estate. Mr Paola has however shown himself to be astute in his real estate operations. In view of the above and the strength of our security position (which is probably undervalued), I am prepared to approve the increase in facilities to $5.8million.' 173 That submission was approved by Mr Swinburne and by Mr Brennan. 174 The document contains Mr Booth's conclusion that there was a coverage in terms of secured facilities in terms of a ratio of assets valued and loanable sum of 2.79 times. The 2.79 represented the division of the total value of the securities by the proposed final debt. The total valuation was recorded at $16,341,253. 175 The profit and loss analysis under the head 'financial position' at PX 209 recorded net profits after tax for Currabubula Holdings for the year 1988 on the basis of unaudited figures, of $2,100,000 and recorded for ABE Holdings and subsidiaries, net losses after tax for 1988 of $772,000. 176 The same document in the financial commentary at PX page 210 stated inter alia: '. . . the preceeding (sic) financial summaries provide the best picture of the financial position of the Paola Group. No accounts have been provided for PHL as it is a passive holding company whose assets and liabilities consist almost entirely of inter-company debts . . . Over the year, the group had been developing 2 new businesses, Northern Rural Services. . . the farm supplies operation and ABE Fax, a facsimile sales and service operation. Both of these have incurred considerable start-up costs and only now are beginning to show positive returns. As a result of this and of the loss of revenue of ABE Copiers which was sold in January 1987, the accounts of the ABE Group as at 30 June 1988 show a marked deterioration in terms of gearing, liquidity and general performance. Subsequent to balance date however, this has been effectively reversed as a result of the sale (at a considerable profit) of much of the Group's shareholding in the U-Bix Copiers (N.Z.) Limited . . . ' [emphasis added] 177 Under cross-examination, Mr Booth accepted that his view as at January 1989, was that Paola Holdings was a passive holding company and that this view about Paola Holdings never changed through his period as account manager for the Paola Group. [T 429] 178 Under cross-examination, Mr Booth also accepted that to his perception the importance of Currabubula Holdings was that it owned the rural properties in the Group having, through mortgages and other securities, pledged its property to repayment of the Bank debt should that be necessary. He also accepted that he always understood that all the assets of Currabubula were secured by the relevant mortgages and other securities including the equitable mortgage and floating charge to repay the Bank's debt if necessary and that that position never changed, had always been his understanding and was his understanding in 1990. [ T 429] 179 At transcript 431, Mr Booth was asked as follows: 'Q. Do you tell his Honour that you came to form a view that there was not ample security to cover the borrowings from the Bank? A. There were times when that was a possibility. Q. Did you form the view at any stage that there wasn't ample security to cover borrowings from the Bank? A. I would have formed a view that there was a possibility that was the case. Q. When did you form that view? A. Exactly I am not sure. 1990, at possible times.' 180 I do not accept that at any point in time Mr Booth formed such a view. 181 Under cross-examination, it was put to Mr Booth that at no time during his employment as account manager for the Paola Group account did he think that there was insufficient security to cover all proposed or actual borrowings. His answer was that he did not agree. [T 432-433] I do not accept this evidence as accurate. 182 The same document includes under the head 'Risk Assessment', the following: ' Pros . Industry outlooks for all of Paola's Group's core businesses are good - High growth expectations for the facsimile business, given industry predictions, are not unrealistic. - The rural sector outlook is positive for the '88/'89 financial year, the industry is experiencing the best conditions for many years. . Paola Group management is considered very experienced. Many of the senior people have been known to the Bank in excess of four years. . Ample security is held to cover all proposed borrowings. . Due to Tony Paola's entrepreneurial style which includes continually changing plans and similarly changing requests to his bankers the Paola account continues to be a high maintenance account. Accordingly, the pricing structure instituted last year is to remain unchanged.' Mr Booth's evidence was that the last paragraph may have been intended as a 'con'. [T 433]

183 Mr Booth's interpretation of why the last paragraph was a 'con' was 'because it led to the account being high maintenance and the Bank having to spend a lot of time and energy on this customer.' [T 433] 184 Mr Booth did not, however, agree that it was his understanding that early in 1990, Bank officers to whom he reported, had formed the view that Mr Paola was really not worth it as a customer in terms of what the Bank was getting for its efforts. [T 433 and 434] Nor did he accept that in 1990 it was his understanding that the Bank wanted Mr Paola to move his business to another financial institution. [T 434] 185 Under the heading 'Remarks' at PX page 210, the same document includes the following: 'Events of recent months have seen a significant reduction in group debt. By December 1988 the level of Bank debt had exceeded $9million however, Tony Paola had in earlier months successfully negotiated the sale of most of his shareholdings ($2.6million of his $3.6million shareholdings) in U-Bix Copiers (N.Z.) limited to Fernbank Industries Limited, a subsidiary of Development Finance Corporation of New Zealand. The sale realised some $A6.2million, all of which was put to the reduction of group debt. Mr Paola is currently rationalising both the group operations and the company structure. Likely future developments include the winding down of the Jet Charter business and the grain trading and the stock and station agency of the NRS group to enable the group to concentrate on the more profitable businesses. In the longer term Mr Paola is considering inviting a new equity participant in ABE Fax. He is also considering relisting ABE Holdings as a vehicle for further new equity raising.' 186 At PX 213 under the heading 'Term', the following appears: 'Annual review of all facilities to be conducted by 31 October 1989 or earlier on availability of audited annual financial statements of the Group. - 113,000 guarantee to expire 30 June 1989 - Immediate review in the event of a material adverse change in the financial condition of ABE PHL or CHL, or of shareholding therein.' 187 The following was put to Mr Booth: 'Q. Now you didn't include in your proposal or your paper a specific term for these facilities did you? A. Specific term? The term was defined by that review as 31 October '89, I think that is a specific term in my mind. ' [T 434] 188 A profile of the activities of all of the companies within the Group as at 23 January 1989 is to be found at PX page 216 in the following terms: 'Paola Holdings Pty Ltd Holding company Currabubula Holdings Pty Ltd Rural properties, primarily sheep and wheat ABE Holdings Pty Ltd Investment arm and holding company ABE group of companies ABE Credits Pty Ltd Responsible for the leasing of equipment to corporate clients Automated Business Equipment Non-trading company, only receives dividends Pty Ltd from U-Bix Copiers (N.Z.) Ltd U-Bix Copiers (N.Z.) Ltd Imports/distributes copiers from Japan ABE Telecommunications Pty Ltd Imports/distributes fax machines and paper and ABE Fax Pty Ltd from Japan ABE Telecommunications (N.Z.) Ltd New Zealand arm of fax business, not trading at this stage ABE Jet Charter Pty Ltd Charter of jet aircraft ABE Travel Pty Ltd Travel agency Northern Rural Services Pty Ltd Rural produce stores based in Tamworth, Narrabri, Gunnedah and Moree Campbell, Rixon & Graham Pty Ltd: Stock and station agent, based at Tamworth 189 At that time the real property security description was as follows:

190 The loan quality assessment sheet gave Mr Booth's assessment rating 'LQ2' to 'default risk' ('capacity to service or repay'); 'credit risk' ('security or financial structure) and to 'management' ('personal factor or management expertise'). [PX page 227]] Mr Brennan approved the assessment as Chief Manager of the Corporate/Financial Institutions Division. [T436] 191 By facsimile letter dated 9 February 1989, Mr Booth advised Mr Paola that an annual review of facilities available to the Group had been formally approved, which included approval being given to an increase in overdraft limits by $1.5million, making overall facilities $5.848million. This was the facility the subject of the 23 January 1989 credit precis appearing at PX 208 earlier referred to. 192 On the covering facsimile enclosing the letter, Mr Booth added the words: 'The reporting requirements are unchanged from last year's but these have never been adhered to. I will be looking to significantly improve that this year. Please advise if you see any problems with this.' [PX 247] 193 Mr Booth accepted under cross-examination that he saw it as part of his responsibility to obtain such information as the Bank required to be able to assess the customer's performance on the loan. 194 Mr Booth was asked on 16 February 1989 to assist with respect to a Bank opinion sought qua Currabubula Holdings and whether it was good for $50,000 on demand. The request had been received from Westpac at Tamworth. Mr Booth's handwritten note was: 'Relationship with Bank over 4 years. Management of company considered reliable and would not enter into any commitment the company could not meet - considered safe.' [PX 279] 195 At about the same time, the Bank was extending the offer of a further $1.5million by way of an increase in the facility. Mr Booth under cross-examination, accepted that in that context, he would not have had a hand in the Bank making that offer if he thought that the money was unsafe. [T 438] 196 Valuations of the secured properties were conducted from time to time by the Bank's valuers in Tamworth and at other places. [T 436] 197 At all material times the Bank had a regional valuer at Tamworth. Initially this was a Mr John Miller as far as Mr Booth could recall. From time to time Mr Booth corresponded with Mr Miller about the valuation of secured property. Ultimately the Bank also had a valuer in the area called Mr Yeo. April 1989 198 Mr Plante recalled making on a number of occasions, requests to Mr Booth, the substance of which was as follows: 'Mr Plante: How about we look at the bills facility and do something about restructuring them and move the overdrafts to bills. Mr Booth: Well lets just wait until the annual review. We will when we do the review.' [Paragraph 22 Mr Plante's Statement, 27 October 1998] 199 In late April 1989, Mr Plante spoke with Mr Paola and later with Mr Booth. In the latter conversation, Mr Plante said 'We don't want to increase the limits. Tony is taking steps to reduce the overdraft. We would like to convert some of the overdraft to bills' and Mr Booth said 'It's possible but the Bank would like to do the security review which is due at the end of June before altering the facilities'. [Statement para 24 of 27 October 1998 statement] 200 In about June 1989 Mr Plante recalled that property valuations were prepared and forwarded to the Bank in preparation for the security reviews. 28 June 1989 - Group Restructuring 201 At a meeting of directors of Paola Holdings, held on 28 June 1989, the need for a restructuring of the Group so as to facilitate the public float of ABE Holdings as soon as economic conditions and interest rates improved, was discussed. The outlined restructuring included the desirability for inter-company debts to be removed from the various balance sheets 'so that they would not distort analyses of the companies' accounts'. The inter-company debts listed as proposed to be forgiven were as follows: 'ABE Holdings indebtedness to Automated Business Equipment of $4.7million. Paola Holdings indebtedness to Automated Business Equipment of $5.4million Currabubula Holdings indebtedness to Automated Business Equipment of $4.5million Currabubula Holdings indebtedness to ABE Holdings of $1.5million ABE Fax's indebtedness to ABE Holdings of $394,000 Currabubula Holdings indebtedness to Paola Holdings of $1.5million Currabubula Holdings indebtedness to ABE Fax of $88,000 Automated Business Equipment indebtedness to ABE Fax of $304,000 Northern Rural Services indebtedness to Currabubula Holdings of $282,000 Campbell Rixon indebtedness to Currabubula Holdings of $50,000' [The amounts are given in approximate terms only] 202 Mr Paola also recommended to the meeting that Automated Business Equipment be placed into voluntary liquidation, following the forgiveness of the debts and the transfer of the shares owned in U-Bix (N.Z.) to Paola Holdings, stating that Automated Business Equipment 'would then have no operations and would be of no further use to the Group'. 203 The directors resolved that the company forgive a loan to Currabubula Holdings of $1.5million effective as at 31 May 1989 and the resolution included that the forgiveness of the debts be ratified at an extraordinary general meeting of the company to be held forthwith. 204 Mr Booth was aware that the voluntary liquidation of Automated Business Equipment was taking place and had been told that it was part of the restructuring of the Paola Group of Companies. His evidence was that he was not concerned by the liquidation because it was a voluntary liquidation for commercial reasons and because the solvency of Automated Business Equipment was not in question. Further, Mr Paola had informed him that this was not an operating company. [Booth's statement 20 November 1996, para 21] 205 The financial statements of NRS for the financial year ended 30 June 1989 show an operating loss for that period of $218,057 as against an operating profit for the year ended 30 June 1988 of $146,629. [PX page 412] June 1989 206 A file minute appearing at PX 327 and following, signed by Mr Booth on 29 June 1989, deals with Mr Booth's recommendation that an approval be given to a temporary increase in the Group's overdraft limits by $500,000 on particular terms. The recommendation also was for the Bank to note a proposed restructure of the Paola Group of Companies. 207 The file minute reads inter alia: ' Restructure Arrangements During conversations in recent weeks covering the future requirements of the Group I have been informed of the following proposed developments: Prior to June 30, 1989 the entire Group of Companies is to be reorganised as follows (a diagram of existing structure is attached): - Automated Business Equipment Pty Limited is to be liquidated and all its assets transferred to Paola Holdings Pty Limited. These include ABE Fax Pty Limited, ABE Jet Charter Pty Limited and others. (Jet Charter will shortly also cease operations). - All inter-company loans made by Automated Business Equipment are to be forgiven, these include the following: - $5 million to ABE Holdings, $7 million to Paola Holdings and $4.5million to Currabubula Holdings. - ABE Holdings is to take on the management of all properties owned by Currabubula Holdings (Currabubula Holdings will remain the owner of all rural properties, all other assets are to be transferred to and all leases assigned to ABE Holdings). The resultant group will thus be organised as follows: . Paola Holdings will be the holding company of all the Paola telecommunications/facsimile and photocopier sales and service business. . ABE Holdings will be the holding company of all the Paola rural operations. . Currabubula Holdings will be the rural property owning company. The reasons for the restructure are primarily to consolidate the Group in preparation for a planned public float of ABE Holdings. It is also intended to reorganise the Group's debt requirements along similar lines. Mr Paola is currently negotiating vendor finance arrangements with Konica (ABE Faxes' supplier) which will eliminate the need for Bank debt facilities for that company (currently at $1.5 million). It is expected that when this occurs the Bank will be asked to release from its interlocking EMFC's the companies which comprise the reorganised Paola Holdings Group. With regard to the rural operations represented by the new ABE Holdings Group it is anticipated that Bank facilities will be continued however I have been asked to consider releasing these companies also from our EMFCs so they too can negotiate more advantageous vendor finance arrangements. Should we concede to these requests the Bank will be relying solely on existing RP mortgages on the properties owned by Currabubula Holdings. It is noteworthy that Mr Paola recently commissioned independent valuations of all the Currabubula Holdings properties which value the properties at in excess of $22.5 million; bank valuations as at 1987 were $9.6 million. Either way we are assured that considerable cover exists in the properties alone to support both the present and future debt requirements of the Group. . . .' [Exhibit PX 327 and 328] [emphasis added] 208 Mr Booth could recall that in the middle of 1989, there was a proposed restructure of the Paola Group and he agreed under cross-examination that Mr Paola was a person 'who was constantly doing what he could to take advantage of business opportunities . . . and that involved . . . for one thing buying and selling assets'. [T 439] 209 Mr Booth was asked questions in relation to his note recording that ABE Holdings was to take on the management of all properties owned by Currabubula Holdings, and agreed that he had an understanding at the date of this memorandum that that was something that was going to happen in the future. He could not recall whether he received any copies of documents such as contracts, or other documents, relating to any taking over by ABE Holdings of management of the Currabubula properties. It was put to him that he never received any such contracts or similar documents whereby there was any formal agreement between ABE Holdings and any other Group company that it would take over Currabubula properties management and he answered "Yes. I can't recall.' [T 440] July 1989 210 By letter dated 6 July 1989, the Bank advised the Paola Group of Companies that approval had been given to the provision of additional overdraft limits of $500,000 for a three-month term, all other terms and conditions as described in the Bank's letter of offer of 6 February 1989 to apply to this additional accommodation. [PX page 445] 211 By letter dated 10 July 1989, Mr Plante wrote to Mr Booth at the Bank requesting a re-allocation of facility limits to be effective immediately. The letter is a clear example, as Mr Booth accepted, of the Group asking for the particular overdraft limits and in this case also bill limits, to be reallocated amongst the Group. Mr Booth's handwritten note, part of Exhibit PX 234 reads: 'Please amend the limits as requested', which information was then sent to Loans Administration at Tamworth, Gunnedah and Moree. Mr Booth accepted that he had acceded to the request and that from time to time such requests were made and were acceded to by him. [T 436] 212 A facsimile from Mr Booth to Mr John Miller, the Bank's Regional Office Valuer earlier referred to, appears at PX 475 and is an example of a number of requests in 1989 by Mr Booth to Mr Miller to consider valuation of security properties. [T 441] 213 On 26 July 1989, Mr Booth prepared a file minute dealing with a request for a $500,000 overdraft for 'ABE Holdings Pastoral Division'. The note includes the following: 'Reference is made to a submission dated 29 June 1989 in which requests were made for increased overdraft limits of $1 million for the Group - $500,000 of which was necessary to carry the Group through a temporary liquidity shortage resulting from difficulties encountered by ABE Fax with an earlier supplier and delays in summer crop proceeds experienced by the rural operation as a result of persistent rains over the past 6 months. The remaining $500,000 was required to provide working capital finance for a newly created division of the Group (ABE Holdings, Pastoral Division ) whose purpose is to expand the rural trading operations of the Group. Whilst approval was given to the former request, the latter was refused due to lack of supporting information being available (at the time the request was made the Chief Executive of ABE Holdings Pastoral had not yet joined the firm and no specific plans/requirements had been formulated) . . .' [PX 478] [emphasis added] 214 Mr Booth accepted under cross-examination, that he understood as recorded on the note, that the ABE Holdings Pastoral Division was simply a newly created division of the Group and that he did not place any significance on the fact that the new division was to be entitled 'ABE Holdings Pastoral Division'. [T 442] 215 The same note at PX 178, referred to the proposed sales as including a jet aircraft operated by ABE Jet Charter. 216 On 26 July 1989, Mr Booth prepared a further loan quality assessment sheet report again giving the Paola Group of Companies the assessed rating LQ2 for all categories. September 1989 217 Mr Booth prepared a call note dated 6 September 1989, summarising a meeting of 5 September 1989 attended by Mr Paola, Mr Plante, by Mr Booth and Mr Owens. According to the file note, the purpose of the meeting was 'general discussions regarding present arrangements and future plans'. 218 The file note read as follows: 'REMARKS Group Performance Unaudited group accounts for the year ended 30 June 1989 are now available and will be received shortly (audited accounts will follow when available). The consolidated accounts indicate an operating loss for the group of approximately $2 million. This is due primarily to the poor performance of ABE Fax which turned in an operating loss of $1.9 million (profit before tax however is expected to exceed $2 million as a result of the successful sale last year of the group's shareholding in U-Bix Copiers (N.Z.) Ltd). Other entities of the group to also record operating losses included ABE Holdings and Northern Rural Services. These however were offset by net returns from the farms of in excess of $0.5 million. The operating loss of ABE Fax was due to supply problems being experienced with its supplier over much of that time (Mitsubishi). Since then ABE Fax has successfully resourced its supplies through an alternate source and is negotiating a compensation claim with Mitsubishi. NRS's operating loss was a result of establishment costs in setting up two new branches during the year in Gunnedah and Moree. With regard ABE Holdings whilst it earned no profit, it was required to make payments on various transactions including ABE Jet's aircraft repayments Budgeted profits for 1989 are as follows: $ ABE Pastoral 600,000 Currabubula Holdings 300,000 NRS 450,000 ABE Fax not yet determined ABE Holdings (722,470) Settlement of claims with Mitsubishi is now imminent and is expected to result in Mitsubishi forgiving ABE Fax's outstanding debt (approximately $3 million). Upon completion of this the company is expected to embark on a new growth phase which could involve increased Bank funding being required. Whilst details of the future developments are unavailable at this stage this was given as the major reason why Paola would prefer the account to continue to be managed from Sydney rather than Tamworth as we recently proposed. Given the reluctance of both the Tamworth region and now of Paola himself to agree to a transfer it would be advisable that this be considered. In the interim a submission is to be prepared recommending increases in facilities in the order of $1.7 million to a total of $7.87 million. These increases are required to. 1. increase the group's DLC limit from $100,000 to $300,000 to enable more economical facsimile orders to be made; 2. provide seasonal working capital funding for the new pastoral division ($700,000); 3. enable repayments to be made on properties previously acquired on terms (total payments to be made this year amount to $875,000); 4. fund increases in working capital requirements of ABE Jet Charter ($100,000) and NRS ($345,000). Cash flow projections for the remainder of this financial year have been provided which support these requirements. The loanable sum of security currently held by the Bank amounts to in excess of $9 million ($7 million of which is directly attributable to properties). As current accounts operated by the group are now overdrawn some $800,000 in excess of present arrangements this submission is to be prepared as a matter of urgency. ' [emphasis added] 219 Mr Booth accepted in cross-examination on this call note that he had been told that the poor performance of ABE Fax had resulted in it turning in an operating loss of almost $2 million and that a profit before tax was expected to exceed $2 million as a result of the successful sale of the U-Bix Copiers (N.Z.) shares. He was then asked and answered as follows: 'Q. You remember I took you to that and the proceeds were approximately $6 million Australian. Do you remember that? A. I do. Q. Now if you knew that profit for the year was expected to exceed $2 million because of the successful sale of the shares you were well aware, weren't you, that the operating company's performance, the operating divisions of the Group, had been very poor. You knew that? A. The operating companies had incurred losses, yes. Q. Yes. And it took the very large amount of money produced by the sale of the U-Bix (N.Z.) shares to turn it into a profit? A. Yes. Q. I suggest to you you weren't overly concerned about that because it was part of the normal way Mr Paola did business to sell assets, earn a profit and reduce debt? A. Yes.' [T 444] 220 Mr Booth also accepted under cross-examination that he was aware that during the year ended 30 June 1989, two new branches of the NRS business had been set up and that he knew that the operating loss for NRS was being ascribed to the costs of setting up those two new outlets. He also, under cross-examination on this note, accepted that he knew that he was being told that ABE Holdings had not earned a profit and that he had recorded that budgeted profits were as set out at PX 512. He also agreed that he drew a distinction between ABE Holdings and its budgeted loss of $700,000-odd, and ABE Pastoral, and that he did this because he understood that ABE Pastoral was simply the rural operations of the Paola Group. [T 445] 221 Mr Plante's evidence was that from about August 1989 it became apparent to him that ABE Fax was not performing and was causing a large drain on the financial needs of the Group. At the same time to his recollection, Currabubula Holdings held a number of non-performing assets in the nature of land which was not producing a significant amount of cash. [Statement para 31] 222 Under cover of facsimile letter dated 7 September 1989, Mr Plante forwarded to Mr Booth, consolidated profit and loss accounts and balance sheets for Paola Holdings, ABE Holdings and Currabubula Holdings. The NRS budget/cash flow for '89/90 was also enclosed.. 223 In referring to these documents, Mr Plante said: 'Those accounts show that for the Paola Holdings subsidiary companies there was a reduction of non-current assets of receivables and investments of approximately $6 million with minor changes to other liabilities and asset items. This is reflected in the reduction in net assets from $4.7 million to -$1.8 million. In that position, Paola Holdings Pty Limited and the subsidiary companies are, in the absence of any support from Currabubula Holdings to provide security for the deficit, technically insolvent. It also means in reality that at that point Paola Holdings itself was technically insolvent.' [Paragraph 9 Statement 14 December 1998] 224 On 14 September 1989, Mr Plante forwarded to Mr Booth group figures which had apparently been requested. The document at PX 530 through to 532 was divided into a section dealing with the 1988/89 financial year and a further section dealing with the 1989/90 budget. 225 Apropos the financial year ended 30 June 1989, the document recorded an operating profit for the Paola Group of $1.73million and for the Currabubula Group of $0.51million, representing a total operating profit of $2.24million. 226 Apropos the 1989/90 budget figures, the document forecast an operating profit for the Paola Group of $0.89million and an operating profit for the Currabubula Group of $0.24million, resulting in a total estimated operating profit of $1.13million. 227 A credit precis for the Group, prepared by Mr Booth and dated 13 September 1989, appears at PX 533. This precis deals with a proposed increase in the bill acceptance/discount facility/overdraft limits from $5.5million to $6.8million, taking a total of existing facilities from $6,134,760 through to $7,634,760. The proposed increase was supported by Mr Booth. [T 446] 228 The cover sheet to the credit precis at PX 533 includes the following: 'Fundamentally, we are quite comfortable with the proposed increased facilities to the group. We believe Mr Paola to be an astute businessman, who has done well with most of his ventures and faced decisions to "cut his losses" when this becomes necessary. However I believe our debt will be full enough against security cover, which is, after all quite specialised and not particularly diverse. We must retain our comfort level. Also, Mr Paola has a lot of deals going at any point in time. I am anxious to avoid situation (sic) where we are requested to change the terms of our approval several more times after this annual review. With the above points in mind, the proposal carries my support subject to: - Letter of offer containing a clause to the effect that the bank would not expect to be approached for release of any further security other than that referred to in this submission during the term of facilities.' 229 The above was written by Mr K.N. Owens as Acting Section Head Corporate Finance Group. [PX 533] Mr Booth received back a copy of Mr Owens' comments with the Credit Precis. 230 Under cross-examination, Mr Booth accepted that he knew that following the work he had done in producing the Credit Precis, Mr Owens had said that 'we are quite comfortable with the proposed increased facilities'. Fundamentally as he recalled it, it was business as usual in relation to the account. He took Mr Owens' comments as information from a senior officer about concern as to the way Mr Paola carried on business. [T 446] 231 The 'facilities required' section on PX 534 included the following:

• Existing facilities to be combined into a multi-option facility incorporating over cash and bill acceptance/discount options. Related Exposure: Nil' 232 Mr Booth was asked under cross-examination in relation to this section: 'Q. . . . I want to suggest to you that for the first time you introduce under the heading "Facilities required" reference to a multi-option facility? A. I think that was one of the purposes of this submission yes. Q. Yes. And the existing facilities were to be combined into a multi option facility. To your understanding what was a multi option facility? A. A facility that incorporated various drawing options within its limit. Q. In relation to these various options, whose options were they? A. The borrowers. Q. The customers or the Bank's? A. The customers . . .' [T 447] 233 The recommendation at PX 539 included: 'Approval be given for the conversion of the group's existing bill acceptance/discount facility and Overdraft limits to a Multi Option Facility with drawing options including overdrafts, Cash Advances and Bill Acceptance Discount Options.' 234 Under cross-examination on the document, Mr Booth was shown the line entry for working capital at PX 535 and the deficiencies in working capital for Currabubula Holdings and for Paola Holdings, recorded under the working capital heading 'For the years 1988 and 1989'. For 1989, Currabubula Holdings is recorded as having made net profit after tax of $7.862million but the Paola Holdings Group was recorded as having made a net loss of $5.588million. 235 The financial position commentary made the point that the financial summary included in the document, had been provided from unaudited draft accounts of the primary holding companies of the Group and that insufficient detail was available to enable a consolidation of the accounts at that time. 236 The financial commentary made the point that: '. . . these accounts are however considerably distorted as a result of inter-company transactions including inter-company loans (a significant amount of which were forgiven last year under a restructure which is described below). They have also been distorted by the transfer of extraordinary profits between companies within the group . . .'. 237 Remarks at PX 536 include: 'Analysis of the group's budgets and projected cash flow requirements indicates the group will be unable to service all operating expenses (including of course, borrowing costs) and capital/expansion commitments at the same time. This is the fundamental reason for the proposed increase in facility arrangements.' 238 Under cross-examination in relation to so much of the document as referred to the accounts being distorted, Mr Booth was asked as follows: 'Q. You knew did you not in September 1989 that there had been a very significant reordering of inter-company loans within the Paola Group? A. I think I knew at the time of a - yes, I would have known at that time I think of the liquidation of the company that included forgiving a number of inter-company loans. Is that the question you are asking? Q. I am specifically asking about your knowledge of the inter-company loans restructure. As you say, in your paper, it is described the loan. You knew that in the middle of the year there had been a significant rearrangement of inter-company indebtedness within the group? A. Yes. Q. You referred to that as one of the factors supporting your view that the financial position statement on PX 535 was considerably distorted? A. Yes. Q. And in this passage coupled with the financial position you were telling your senior officers, weren't you, that the accounts and the accounting picture was distorted, the accounting picture on the previous page/ that was clear? A. Yes. Q. And yet of course the paper recommends, does it not, the increase in facilities referred to on PX 534 from facilities of $5.5million to $6.8million? A. In terms of the bill acceptance overdraft, yes. Q. And I am suggesting to you that you felt comfortable recommending approval of that increase to your superiors notwithstanding that the accounts for the Group showed or contained considerable distortions? A. Yes. Q. And you felt that comfort I suggest to you because you viewed the operations of Mr Paola's company as a group? A. In terms of measuring the performance of the operations yes, I did view it as a group. Q. And thus if there was an inter-company forgiveness of a debt A to B it didn't really matter to your mind if A forgave the debt owed to it by B because the total picture would remain the same? A. Yes. Q. You also referred to distortion of the financial statements and accounts by the officer of extraordinary profits, do you see that, between companies, page PX 536? A. Yes. Q. And you conclude that any ratio analysis would be misleading? A. Yes. Q. That was a ratio analysis of the financial statements wasn't it? A. Yes. Q. And notwithstanding that the application of such an analysis would be misleading, you felt comfortable in recommending the increase? A. Yes. Q. Again, won't you agree with me that this is because viewed in the global you were happy or content with the position of the Paola Group? A. Yes.' [T 453-454] 239 Mr Booth was asked as follows: 'Q. And did you note there for your superiors that Mr Paola's success was due more to profits on sale of strategic investments than from business profits? A. That is the comment I made. Q. And you made that comment did you not to assist your superiors in the Bank to approve the further advance being sought? A. Yes. Q. And you made that comment because you wanted to point out to your superiors that relevant fact to assist them to understand the financial position set out on PX 535? A. Yes . [T 454] 240 The same document stated that as at that week, Mr Paola had appointed Dalgety's as agents to handle the sale of Durhambone and that he hoped to achieve a price of at least $15million. 241 In Annexure 'C', being a summary of recent activities of the Group and its future plans and funding requirements, there is a reference to ABE Holdings as 'the group's new chief rural operations organisation'. 242 Under the heading 'ABE Holdings Limited', the following inter alia appears: 'Under a restructure conducted last year ABE Holdings became the holding company of all the Group's rural operations which comprise the following: - Northern Rural Services Pty Limited, the Group's farm service and supply organisation - Campbell Rixon and Graham Pty Limited, a stock and station agency; - ABE Holdings Pastoral Division, which is responsible for the management of all the Group's rural properties. Under this arrangement it is expected ABE Holdings will achieve operating profits for the year ended 30 June 1990 in excess of $1million . . . Future plans for ABE Holdings Limited include plans to relist the company next year . . .' 243 The cash flow annexed to the Bank's approval dated 13 September 1989, recorded an estimated reduction in drawings to take place between 30 November 1989 and 30 June 1990 from a facility of $6.8million to a facility of $5.9million, that is to say was suggestive of a positive cash flow and a reduction in total facility of some $850,000. 244 In short, the Bank considered the application to increase the overall level of borrowings of the Group by a further $1.5million, the Bank's review being based upon unaudited draft accounts showing an after tax profit for the 30 June 1989 financial year of in excess of $2million and showing projected profits for the year ended 30 June 1990 as $1.13million after tax. The additional facility was required because the cash flow could not both provide capital for expansion as well as service the debt. 245 The proposal was also to combine existing facilities into a multi-option facility incorporating overdraft, cash and bill acceptance/discount options. [PX 534] 246 In September 1989, Mr Booth received from Mr Brennan a note on the Paola Group of Companies, reading inter alia: 'Whilst we remain well covered in a security sense on traditional lending margins we are always reacting to rather than planning with Mr Paola. I understand the difficulties of communication with country clientele but we need to place more emphasis on relationship management of this account, which may limit future surprises . . .'' [PX 578] 247 By letter dated 22 September 1989, addressed by the Bank to Paola Holdings and to Currabubula Holdings, the Bank advised inter alia as follows: '. . . an interim review of facilities to Currabubula Holdings Pty Limited, Paola Holdings Pty Limited and its subsidiaries ('the Group') . . . has been noted as satisfactory and approval has been given for the following variations to existing arrangements: 1. The conversion of the Group's existing Bill Acceptance/Discount Facility and Overdraft Limits to a Multi-Option Facility with drawing options including Overdrafts, Cash Advances and Bill Acceptance/Discount Options. 2, Approval be given for an increase in existing facilities by $1,500,000 making the proposed Multi Option Facility limit $6,800,000 and the DLC limit $300,000. 3. The bank to release from its equitable mortgage and floating charge the property known as 'Camelon'.' 248 Mr Booth was asked whether he remembered that Mr Plante had asked on a number of occasions to convert overdraft facilities into bill facilities and he accepted that this had occurred. The purpose of paragraph 1 he said was to give the Paola Group the option to draw the funds currently in overdraft in other forms within those forms described. [T 455-456] 249 The facility letter advised that the facility amounts were to be: Multi Option Facility $6,800,000 DLC Limit $300,000 Leases (current balance) $519,175 Guarantees (current balance) $15,585 $7,634,760 250 The letter provided that all facilities were 'to be subject to annual review next due by 31 October 1990 or earlier on availability of audited accounts of the group'. 251 The facility letter included as a term and condition 'immediate review in the event of a material adverse change in the financial condition or change in ownership of the Group'. 252 The letter included the following: 'All other terms and conditions as described in the Bank's Letter of Offer dated 18 November 1988 and 4 September 1987 are to continue to apply unless the provisions herein are inconsistent. In such case the provisions herein shall prevail.' 253 In September 1989, Mr Paola negotiated the purchase of the Maxi Yacht 'Condor of Bermuda' to be financed through Barclays Bank. The property Camelon was released to permit this acquisition. [Mr Booth's statement 20 November 1996 para 20] 254 The Property Manager of Dalgety Winchcombe FGC wrote to Mr Paola at ABE Travel by letter dated 26 September 1989 referring to a meeting with Mr Paola in Sydney since which there had been quite a bit of action on the Collarenebri properties', and referring to a video then being completed. The Collarenebri properties included Durhambone. 255 On 12 October 1989, a meeting took place between Mr Paola, Mr Plante, Mr Swinburne and Mr Booth. Mr Booth's call note reads as follows: 'The primary purpose of the meeting was to verify whether Paola's forecast funding requirements were about to change given variations already apparent from budgetted (sic) cash flows for the 1988/89 financial year and the likelihood of diminished farm revenues later in the year as a result of current condition. [sic] Detailed budget revisions were not available at this time but summaries prepared for the meeting indicated the following: 1. Despite current seasonal conditions Mr Paola sees no reason to amend the farming budgets. The wheat harvest, whilst now expected to be well below optimum level, will still produce the revenues forecast in the earlier budgets. All wheat production on the farms is on a long fallow basis and accordingly is not expected to suffer moisture stress to a significant extent. It is however too early to tell whether the summer crops now being planted (sunflowers, maize, soybeans and sorghum) will be affected by the current dry spell. 2. ABE Fax sales however are continuing at levels well below forecast resulting in a neutral cash flow as against the positive flow forecast. As a result ABE Fax's level of debt remains approximately $600,000 above forecast. It is the Fax business where Mr. Paola is now focusing most of this attention. In fact he will be contacting us within 2 weeks to inform us of the results of an independent account's investigation upon which he will be making a decision on the future of that company. Because of ABE Fax's continuing under performance revised forecasts now indicate group debt requirements of up to $660,000 above current Bank limits by January (current limits are $6.8 million and are now fully drawn). This of course depends on Mr Paola's decision next week. Should ABE Fax continue in its present form overall group borrowing will however be back within existing limits come February next year. This is because Mr Paola now has in train the following proposals: - The sale and leaseback of industrial properties in Narrabri and Moree (expected to occur by end December). - The sale of the jet aircraft which is now planned to occur by end February. - The sale of "Elimatta" a 1,700 acre property at Bellata which has been sold for $460,000 (50% of which is on a delayed repayment basis). - Mr Paola is already negotiating with parties interested in Durhambone which he hopes to sell within the year for around $15 million. Dalgety's has been appointed as agent. Whilst the first 3 of the above will ensure borrowings stay within existing limits the latter will of course have the capacity to repay the Bank in full. Other matters of interest included: - Discussions appear to be underway between Northern Rural Services and Seed & Grains Sales over possible mutually beneficial opportunities that may exist. - Mr Paola at this time has not yet finalised negotiations with Mitsubishi however budgets now include a $1.2 million payment being made in March 1990 in full repayment of the present $ 3 million debt. - Further meetings being planned include a visit to Currabubula early November. Follow-Up Action Annual review to be undertaken on receipt of audited 89 accounts and detailed revised budgets. By that time Mr Paola's decision on the future of ABE Fax will have been made. [Exhibit PX pages 616-617] [emphasis added] October 1989 - Voluntary Winding Up of ABE 256 On 6 October 1989, a liquidator was appointed to Automated Business Equipment, a non-operating company through a voluntary winding up. Insolvency of ABE Fax 257 Mr Booth recalled that in about mid-October 1989 on a date he could not precisely recall, he learned that ABE Fax was in serious financial trouble. He could not recall attending the meeting referred to in paragraph 18 of Mr Paola's affidavit but recalled that at about this time he was informed that ABE Fax was in serious trouble and that the Bank should consider appointing a receiver. [Para 22 Booth's Statement, 20 November 1996] 258 At that time Mr Booth was not overly concerned with the apparent insolvency of ABE Fax in respect to the Bank's security position at the time. 259 Mr Booth had noted that the Paola Group was at all material times set up so that ABE Holdings which later became ABE Holdings Pty Limited, was a non-trading, but holding company for other companies and properties in the Paola Group of Companies. On the other hand, he recalled that ABE Fax was neither a holding company nor one which he at any time considered to be one of Paola's 'core' companies which were those companies concerned with Mr Paola's farming businesses. [Mr Booth's statement 20 November 1996 para 25] 260 None the less, Mr Booth's evidence was that the insolvency of ABE Fax was a surprise to him. His evidence was that he was aware that the business had some troubles but that until being informed by Mr Paola or Mr Silvia of Ferrier Hodgson that ABE Fax was insolvent, he had not known how serious its problems were. He recalled speaking to Mr Paola about the insolvency of ABE Fax on a day he could not precisely recall but in or about November or December 1989 when Mr Paola said to him words to the effect 'I regret not staying active in Fax. I had hired other managers to take it over but they let it go'. [Booth's Statement 20 November 1996 para 26] 261 At about the same time as this conversation, namely in about November or December 1989, Mr Booth gave evidence that he recalled feeling concerned about the Bank's relationship with the Paola Group and that his concern was that the Bank was not being fully informed at all times of significant financial decisions being made within the Group. His evidence was that he often learned what Mr Paola was doing after the event. 262 On the day following the meeting, Mr Booth wrote to Mr Chris Smith, Corporate Finance Solicitors of the Bank, advising inter alia as follows: 'Following a meeting with Paola yesterday, we are now assured he is prepared to accept our letter of offer of 22 September '89 . . . I have however discovered a flaw in my offer. The latest approval contains a multi-option facility but the letter of offer and the previous letters on which I also relied do not adequately cover these options (note present drawings are bills and ODLs only). I believe an amending agreement or even a full facility agreement should be now considered. Could you advise? . . .' [Exhibit PX 618] 263 Under cross-examination, Mr Booth accepted that he first reviewed the offer letter of 22 September before writing the minute, then formed the view that there was a flaw in the facility letter and the opinion that the flaw was such that the offer letter was inadequate. He further agreed that the inadequacy was such that he felt that the terms of the offer letter of 22nd September and previous offer letters were inadequate to deal with the Multi Option Facility, and that this was why he suggested in the last paragraph of his memorandum to Mr Smith, that an amending agreement or full facility agreement should be considered. [T 457] 264 On 25 October 1989, a meeting took place between Mr Plante and Messrs Owens and Booth, following Mr Paola's announcement during the previous week of an intent to wind up ABE Fax. 265 The Bank's Call Report [PX 622] identified the purpose of the meeting as 'to discuss banking arrangements in light of Mr Paola's announcement . . . to wind up ABE Fax' and included the following: 'The possibility of winding up ABE FAX was first disclosed to the Bank on 12 October 1989. The decision however was not made til 20 October 1989. This decision was based on the conclusions of recent investigations by both Mr Paola and external accountants which revealed that despite improved performance over the past five months the company was unlikely to return satisfactory profits in the foreseeable future especially in view of outstanding claims of a certain creditor who in Mr Paola's view was partially responsible for ABE Fax's recent performance . . . Book debts to Mitsubishi presently amount to $3.045million and whilst Mr Paola has negotiated a reduction to $1.208million it is now Mr Paola's plan to wind up the company before this payment falls due. To manage the winding up Mr Paola has retained the services of Brian Silvia of Ferrier Hodgson & Co . . . Future Arrangements Whilst no conclusions can be drawn at this stage it is possible that the bank will be asked to continue funding the group at present facility levels ($7.6million in total) over the remainder of the financial year. Whether or not the group can adequately service this level of borrowings from the remaining operations depends entirely on how the season progresses in north-west NSW. A continuation of the current dry spell past mid-November will necessitate a review of all the rural operations budgets and should this occur it is unlikely the Group will be able to service debts of this magnitude. . . .' 266 Under cross-examination in relation to this document and the relevant meeting, Mr Booth conceded that he knew at the meeting that the Paola Group was considering winding up ABE Fax; that he knew that this was because an external accountant's report had revealed that although its performance had improved in recent months, it was unlikely to return satisfactory profits; that he knew that there was a creditor who was causing 'trouble'; that he knew that the company had returned an operating loss as recorded of $1.9million; that he knew in October 1989 that ABE Fax had been one of the two new businesses which he had referred to in January and September 1989 in his credit precis, the other being the NRS business; that he had recorded that those were in effect the two new businesses which it was hoped would replace the photocopier business that had formerly been operated; that he knew that the only operations producing any significant revenue were the ABE Fax operation, NRS and the pastoral operation; and that he knew in October 1989 that there was significant trouble in relation to one of the revenue producing businesses of the Group. He agreed that he had recorded the view that whether or not the Group could adequately service the level of borrowings, that is to say the present facility from the remaining operations, depended entirely on how the season progressed in the north-west of New South Wales. As a general statement he agreed that, when he used the words 'the season progresses' he meant whether it was a successful or unsuccessful season for wheat and other rural products. He agreed that his opinion in October as at the date of this meeting, was that ABE Fax was obviously in considerable trouble and not producing significant revenue and that the ability of the Group to service its current loans depended on how the rural season 'panned out'. He agreed that in October 1989 notwithstanding the above difficulties 'It never crossed [his] mind to appoint receivers to the Group or to recommend the same'. His evidence was 'No, we would not have contemplated it then'. [T 458-460] 267 ABE Fax (by Mr Plante) wrote to the Bank on 26 October 1989 advising that Mr Silvia of Ferrier Hodgson & Co had been appointed to advise 'in relation to the trading and cash position difficulties that the company is currently facing'. 268 Mr Plante advised that after receiving Mr Silvia's report, a copy of which was enclosed, 'we are of the opinion that a controlled downtrade is no longer feasible'. Effectively the appointment of a receiver was viewed as the only alternative left to the company. 269 Mr Silvia's report in the form of a letter from the National Consulting Group of 26 October 1989, noted that Mitsubishi was attempting to have a provisional liquidator appointed to the company, the effect of which might be to the detriment of the company's secured creditor, being the State Bank. The recommendation was that the company approach the State Bank 'as a matter of urgency and request the immediate appointment of a receiver'. [PX 631] 270 On 27 October 1989, the additional facilities outlined in the Bank's letter of 22 September 1989 were formally accepted by a signed notice of acceptance. 271 Mr Booth's evidence was that in and about November and December 1989, the then existing Facility Agreement with the Paola Group of Companies of $7.634million was being overdrawn and that this, coupled with the receivership of ABE Fax had several effects: (a) first, by overdrawing the overdraft, penalty interest was being incurred on the Paola accounts, and (b) second, the receivership of ABE Fax required the Bank to reassess its security position and reconsider its exposure to the entire Paola Group before implementing a Bill Facility Agreement. 272 Mr Booth gave evidence that at about that time Mr Paola said to him 'When are you going to put us on a lower interest rate structure' and that he replied 'We still have to sort out problems with the Bank's security arrangements, in terms of the current position of the Paola Group'. [Para 28 of Mr Booth's Statement of 20 November 1996] 273 Mr Booth's further evidence was that he was also concerned about a chain reaction, where the collapse of one company may trigger the collapse of others within the Paola Group and that he wanted to ensure that the Bank was in a position to cope with this if it occurred. [Statement para 29] November 1989 274 On 3 November 1989, Mr Booth recommended the appointment of a receiver to ABE FAX, noting the lodgment by Konica as major unsecured creditor of a Section 364 Notice, returnable on 16 November 1989. Mr Booth's note includes the following: 'We believe that ABE Fax is not in a position to defend the application and accordingly the likely effect of such a move will be the appointment by the courts of a provisional liquidator. In the interests of the bank maintaining some control over the realisation of ABE Fax's assets it is recommended that the bank commence recovery action. Such action to include the immediate service of a letter of demand in accordance with the Bank's Solicitors' recommendations then, if appropriate, the appointment of a receiver/manager . . .' 275 Exhibit PX page 654 makes plain that it was the Group's request that a receiver be appointed to ABE Fax. 276 On 7 November 1989, the Bank forwarded a formal notice of demand to ABE Fax identifying the facilities then in place, and identifying clause 2 of the Equitable Mortgage under which the moneys were payable on demand and clause 24.1 of the Equitable Mortgage under which the Bank was entitled to demand payment of the moneys secured by the Equitable Mortgage if a petition was lodged for the winding up of ABE Fax. 277 The Bank advised inter alia: 'Under the Facility Agreement the Bank is entitled to declare the facilities immediately due and payable should certain events occur and be continuing. The Bank has determined that the events set out in sub-paragraph (vi) and (vii) on page 5 of the Bank's letter of 4 September 1987 have occurred and are continuing. By virtue of the occurrence and continuance of the events of default set out in the previous paragraph the obligations of the bank under the Facility Agreement to provide any further facilities to Fax are hereby cancelled. The bank hereby demands repayment under both the Facility Agreement and the Equitable Mortgage for the facilities provided to Fax . . . Unless the sum of $1,515,405 together with interest costs and fees accruing from 2 November 1989 to the date of payment is paid to the Bank . . . on or before . . . 8 November 1989 the Bank will pursue such rights and remedies as are available to it.' 278 The letter of demand was signed by both Mr Booth and Mr Swinburne. 279 By letter dated 8 November 1989, ABE Fax wrote to the Bank stating that Mr Plante believed the company to be in default of its borrowings from the Bank and confirming that the company would not be able to comply with the request for repayment of the facility by 3pm on that date. ABE Fax in Receivership 280 On 10 November 1989, a receiver and manager (Mr Brian Silvia) was appointed to ABE Fax. 281 It was put to Mr Booth in cross-examination that on the appointment of a receiver to ABE Fax in November 1989, the receiver opened a bank account in the State Bank for ABE Fax In Receivership. The answer was 'I can say they would have done'. 282 It was put to Mr Booth that it was normal practice for a Bank appointed receiver to open an account in the Bank appointing him or her for the benefit of their use pending on transmission. Mr Booth accepted that this was normal. 283 It was put to Mr Booth at transcript 474 that the receivers of ABE Fax received as time went by, considerable sums of money from their efforts in relation to the receivership and Mr Booth said that this had occurred from realisation of assets by the receivers. He accepted also that those funds were put into the receivers account for ABE Fax within the State Bank. [T 474] Mr Booth also accepted that funds received by the receiver were not deposited into the ABE Fax account at North Ryde that had been used by the Company prior to the appointment of the receivership. 284 Mr Plante recalled that after ABE Fax had gone into receivership, he was aware that ABE Fax was carrying a balance of drawings which effectively gave the Group a 'credit' of unused drawings. [Statement 27 October 1998, para 34] 285 Up until the end of 1989, many accounts had of course been prepared in respect of different companies in the Group and in respect of the Group itself and Mr Plante had a role in relation to many of those if not all. [T 241-242] 286 Under cross-examination, Mr Plante accepted that leaving aside ABE Fax which had particular problems, all of the accounts were prepared on the basis that the company or group was a going concern which to his mind necessarily implied that Currabubula Holdings would be supporting the company or group. [T 242] 287 On 15 November 1989, Mr Booth recommended that ABE Fax, then in receivership, have a 'W3 Watch List' classification. Mr Booth accepted that in considering a recommendation for ABE Fax in this way, he did not think it necessary to recommend a W3 classification for other companies in the Group. [T462] 288 That recommendation by Mr Booth was supported by Mr Owens as Acting Section Head and confirmed by Mr Cambridge, then Chief Manager of the Corporate Finance Group. 289 Mr Booth accepted that in November 1989, there was a system in place for watch list reporting. He was taken through Exhibit P17, a State Bank confidential memorandum to managers, entitled 'Lending - Watch List Reporting', dated 16 March 1990 and accepted that he would have had a document similar to that to guide him in his recommendation for W3 status for ABE Fax. 290 Exhibit P17 includes the following: ' W3 Classification - Actual Problem Loan W3 accounts are those which have defined problems that have the potential to jeopardise repayment. The loan is under regular review and corrective action has been initiated. Action Required Appropriate action as described for W2 classification must have been undertaken. [I interpolate that this action for W2 classified accounts was - "Evaluation of the risks should be undertaken and a recommendation for appropriate action implemented or made to line management."] At this stage the account manager must recommend (or have recommended when the account was categorised as W2) which of three broad strategies are to be adopted i.e.: 1. request repayment or refinance; 2. attempt restructure of the loan; or 3. liquidate. Security documentation should have been checked for enforceability and security valuations are to be updated wherever appropriate. Both aspects are to be confirmed in watch list reporting procedure.' 291 The W4 classification was, so Mr Booth accepted, where there was a perception that the debt could be a doubtful debt for recovery and the W5 classification was where the account has been classified as a bad and doubtful debt. Specifically, Exhibit P17 in referring to W4 accounts read: 'W4 accounts are those which have been confirmed "non-performing" by line management'. 292 Mr Booth agreed that the W3 classification he was recommending for ABE Fax was simply that it was an account with defined problems that had the potential to jeopardise repayment leading to the loan being under regular review. His recommendation in November 1989 was not for a W4 or W5 classification for ABE Fax and his superiors accepted his recommendation and confirmed it. [T 463] 293 On 16 November 1989 the Regional Valuer, Mr Miller, prepared a document by way of revised valuations of Currabubula Holdings Pty Limited properties which, in relation to Durhambone at PX 711, said: 'Said to comprise approximately 25,000 ha. This aggregation of properties has not been inspected by the writer however, it is known to be first class country with all necessary improvements with grain storage terminals adjacent and nearby. Mr Paola is attempting to sell this holding for $17 million WIWO. Due to his method of marketing a figure in this vicinity may even eventuate, however, for Bank purposes it would be wise to adopt a figure of $10 million (ex stock and plant). It is recommended that this amount be adopted.' [PX 712] 294 Mr Booth recalled having paid fairly close attention to communications about security values from Mr Miller. [T 464] 295 By letter dated 23 November 1989 from the Bank to the Paola Group, the Bank advised that its solicitor had recently recommended a structural change to the present facility arrangements and included in the proposal currently being prepared, so the Bank advised, would be: 'A requirement that all future facility arrangements be made through a single borrowing entity.' 296 The letter advised that in the meantime, Mr Booth had made arrangements for overdraft limits to be increased in line with the amounts approved, the relevant approval constituting an increase from $4.7million to $6.1million. [PX 718] 297 In being referred to this letter, Mr Booth gave the following evidence: 'Q. I want to suggest to you that that is another expression of your concern that the offer letter of 22 September 1989 was not sufficient to fully deal with all the issues between the borrowing group and the Bank? A. Are you asking that the letter being referred to individual companies and individual facilities did not encompass a single facility to the Group? I think I would agree with you on that, yes. Q. Yes. Didn't you also feel that the arrangements put in place by the letter of 22 September 1989 were not sufficiently detailed for a multi option facility? A. Yes .' [T 464] 298 By late 1989, a mini drought was experienced in the area serviced by NRS. By this point in time debtors of NRS were increasing and sales reducing. 299 In his statement of 5 November 1998, Mr Paola gave the following evidence: 'Towards the end of 1989, the stock and station agent business operated by Campbell, Rixon and Graham had closed. The Group had also closed the grain trading division of Northern Rural Services at Moree and looking to reduce the debtors of both those companies in order to reduce the need for bank funds. The bank was aware of a proposed restructure of Northern Rural Services business which was taking place at about the end of 1989 which arose as a result of a mini drought leading to a poorer than expected trading result . . . the intention of the restructure was to match trading stock levels to sales and reduce the level of stock managed by ABE Pastoral Division on Currabubula lands to reduce the amount of demand on bank debt to reduce the debt to $7.5 million by the end of May 1990. It was becoming apparent at the end of 1989 that Northern Rural Services may be a drain on the resources of the Group in that its debtors were beginning to increase in circumstances where the area was suffering a mini drought which would affect peoples' ability to pay. The debtors in turn had to be funded by increased borrowings from the bank. This was part of the reason why the group borrowing increased to a level of $8.5 million in February 1990.' 300 Mr Owens' comments on a corporate finance group submission of 27 November 1989 includes the following: 'As outlined in this submission, Mr Paola's ABE Fax business failed absolutely and unsecured creditors will receive nothing, apart from one particular Japanese trading company which is in possession of a personal guarantee from Mr Paola. In effect, we are being requested to fund Mr Paola's liability in this regard. He is attempting to retain his business reputation by compensating unsecured creditors in some way. As these plans are yet to be formulated he is unable to divulge details to us at this stage, but assures us that there will be no impact at all upon his borrowing arrangements with the bank. Whilst we feel he might have taken appropriate action earlier, events did appear to move very quickly and he made the necessary decision himself and asked the Bank to appoint a receiver/manager after first appointing Brian Silvia to investigate the company, its value, prospects and options. The sale of ABE Fax and the aircraft should, in due course, remove what was a very considerable drain on cash flow and management resources. With respect to the remaining rural businesses capacity to generate sufficient cash flow to service proposed borrowings, the Regional Valuer has inspected relative budgets and is confident that projections will be comfortably achievable. I take considerable comfort from Mr Paola's decision to personally re-examine expenditure budgets for all his ongoing business operations . . . Ultimately, sale proceeds of Durhambone should reduce borrowings to a level which is very comfortably serviceable.' [PX 720/832] 301 Mr Cambridge, the chief manager corporate finance group added in handwriting, the following to the submission at PX 720/832: 'The bank is going into a transitional phase while we await the restructuring of Mr Paola's group. Mr initial reaction was to decline his request for funds, but (illegible) this may have endangered the group's situation. Supported.' 302 The credit precis, the subject of these remarks prepared by Mr Booth, identifies the application for increased facility as a proposed increase of the 'Multi-Option Facility' from $6.8million to $9 million resulting in a total facility increase from $7.6million to $9.5million. [PX 833] 303 It seems clear enough from the Bank's internal document at PX 721/833 that the Bank at this point in time was regarding the facility as a Multi-Option Facility. 304 The general remarks at PX 724/836 included the following: 'There is however another issue which will effect present funding arrangements. A Japanese trading company by the name of Okura is another of the major unsecured creditors.' ABE Fax presently has outstanding debts to the order of $1.65million to Okura. As a result of Mr Paola's longstanding relationship with that company Mr Paola has personally guaranteed this debt and consequently has asked the Bank to consider funding the obligation under the existing interlocking security arrangements covering most of the companies of the Group. Note, repayment is to be made by another of Mr Paola's companies (ABE Holdings) and there is no danger of it being deemed a preference payment by other ABE Fax creditors. The combined effect of the above will require a net increase of $1million on present facility levels. However in the intervening period until the remaining assets of ABE Fax can be realised an increase of $2.6million could be necessary on the Multi-Option Facility.' 305 Under the head 'Projected Performance', the following appears: 'Adjustments to present budgets have been made as a result of: . . . - Changes to expected farm returns Seasonal conditions presently being experienced in the North-West have necessitated changes to the crop programme originally budgeted for the farms . . . The Bank's Regional Valuer has reviewed the budgets and has recommended a downward revision of expected revenue from $2.9million to $2.6million. This will result in operating profits for the Pastoral Division of around $300,000 for the year ended 30 June 1990. - Poorer than expected performance from NRS. Seasonal conditions have also affected sales of the farm supply division. Current revenues are down 15% on budget and have resulted in a break-even result for the quarter to 30 September 1989. Original budgets indicated an operating profit of $400,000 over the year. Given a return to more normal conditions it is expected that profits will return to budgetted [sic] levels and a profit of $300,000 will be achievable. . . .' 306 The same document included inter alia the following: Future Arrangements 'It is not expected that the Bank will be asked to provide facilities of this magnitude in the longer term past 30 June next year. In recent discussions Mr Paola has expressed concern about the level of debt the remaining companies will be carrying. To remedy this situation he has announced his intention to sell his major rural property, 'Durhambone', which was placed on the market two weeks ago. Durhambone is a 25,000 ha prime farming property located near Collarenebri. The Bank's Regional Valuer considers this property (ex stock and plant) to be worth at least $10million. Whilst the complexities of marketing such a property make it difficult to set a firm sale date Mr Paola is confident the property will be sold within 12 months. In the meantime Mr Paola has introduced stringent borrowing controls on all his businesses including centralised account management and purchasing and limitations on authority of branches to make payment for goods and services (existing decentralised borrowing arrangements are to be replaced by a single centralised loan facility with each of the divisions/borrowing companies operating on an impress system).' [Emphasis added] 307 The same document under the heading 'Projected performance' included the following: A detailed analysis of the Group's budget and cash flow projections was done in the review of September 1989. These budgets have been adjusted in view of subsequent developments which are detailed below. Overall however it is expected the Group will achieve at least a break-even result for the year ended 30 June 1990. 308 It was pointed out to Mr Booth that the paper contained the above-described references to projected performance for the Group and he accepted that he adjusted budgets that had been provided to him as a result of the matters he set out and had noted immediately the decision to wind up ABE Fax and then that there was an expected sale of the jet aircraft for March 1990. He accepted that he had then referred to seasonal conditions being experienced in the north-west and was then asked as follows: 'Q. [As to the seasonal conditions] which you say necessitated changes to the crop programme but they were changes which were deleterious to the profitability of those operations. It wasn't an improvement in short? A. I am not sure. Q. Well if you read the rest of the paragraph to help you you will see that there was a tour by the corporate finance group and the valuer and then a downward revision was recommended do you see that? A. Yes. Q. The other matter was the poorer than expected performance from RNR that you recall? A. Yes. Q. Revenues of 15% down on budget, Yes? A. Correct. Q. Finally you note that the costs of borrowing had increased. Now won't you agree with me Mr Booth that notwithstanding all those matters you recommended the increase in the facility? A. Yes. Q. And I want to suggest to you that the reason why you did that was that you were perfectly comfortable because of the value of the securities being provided by the Group? A. I - no. I can't agree. Q. Did you have enough confidence in the trading operations of the Group producing enough revenue to service the debts as at 27 November 1989? A. No.' [T 466] 309 At transcript 467 Mr Booth accepted that he knew perfectly well that the comfort which the Bank felt in approving the increase at this time was based upon the ability to sell assets to reduce debts and ultimately repay the Bank. He also accepted that his November 1989 review concluded with his recommendation for a loan quality rating of LQ2 which was made notwithstanding all of the matters referred to in the report, including NRS being down on budget and the like. [T 467] 310 In the same document under the heading 'Risk Assessment', the 'cons' included: 'Should the companies of the group experience a further deterioration in financial condition the Group will be unable to service the proposed level of borrowings from internally generated funds. Should this occur however we are confident that Mr Paola will be prepared to renegotiate the sale of sufficient assets to remedy the situation.' 311 The document at PX 722 set out the financial position which included a deficiency in working capital for the combined Currabubula Holdings and Paola Holdings companies of $3.335million which was up from a deficiency in 1988 of $0.995million. 312 The recommendation in the document was that annual review of facilities 'to Currabubula Holdings Pty Ltd, Paola Holdings Pty Ltd and its subsidiary companies' be noted and that approval be given for an increase in the Group's Multi-Option Facility to $9 million making overall facilities $9,519,175. 313 The 'Security' section of the document included a suggestion that existing facility documents be replaced by a facility agreement to be prepared by the Bank's solicitor. 314 Annexure 'C' to the document was described in the document as 'Revised Forecast Cash Flow'. It had been received from the Group. Mr Booth accepted that he had closely studied this cash flow forecast and had factored in the conclusions he drew from that analysis in his report. He had no difficulty understanding the document in the light of his training. The document was in the form set out in Appendix 4. 315 It relevantly recorded total drawings in December 1989 of $8.241million and total drawings in June 1990 of $6.616million. It showed a positive cash flow from December 1989 through to June 1990. 316 Mr Booth was asked to look at the third last line from the bottom of the page entitled 'ABE Jet'. He was asked to agree that the figures on that line represented the sale of the aircraft that was discussed in the body of the credit paper proper. He had some difficulty in recollecting his understanding at the time but did accept at transcript 471 that as at November 1989 he had no expectation that the ABE jet operation was going to be a producer of significant revenue from its own operations. He had of course recorded the jet charter business as being wound down. [PX 724] 317 Mr Booth accepted that it was his analysis of the cash flow projections and the budgets he referred to in the paper that produced his conclusion that a break-even result was likely for the year ended 30 June 1990. [T 471] Mr Booth could not immediately or quickly reconcile the line entry for ABE Jet on PX 731 with the passages in the text of his credit summary about ABE Jet. [T 472] 318 The loan quality assessment sheet prepared at 27 November 1989 identified the Group as having an assessed rating under the 'Default Risk' - (capacity to service or repay debt) of LQ3. The 'Credit Risk' and 'Management Rating' remained LQ2 as previously. 319 In the result, the Group's Multi Option Facility was increased to $8.5 million making overall facilities: Leases 519,175 Multi Option Facility 8,500,000 9,019,175 320 The Credit Committee's decision is reported in PX 831 which reads as follows: 'Credit Committee views the position of the account with concern; and after considering the submission it was RESOLVED to APPROVE: . to note the annual review of facilities to Currabubula Holdings Pty Ltd, Paola Holdings Pty Ltd and its subsidiary companies; . to provide an increase in the Group's Multi-Option Facility to $8.5 million making overall facilities as follows: AUD M Leases 519,175 Multi-Option Facility 8,500,000 9,019,175 SUBJECT TO: . a complete review by 31 March 1990; . LQ3 rating. Mr Cambridge advised members that the Bank's Senior Solicitor is to confirm that the new security arrangements do not put SBN in a position where SBN would be vulnerable to preference claims.' 321 Mr Booth recalled reading this document. 322 It was put to Mr Booth that the LQ3 rating was one which indicated that an account bore close examination. He could not recall precisely what that rating then meant. 323 It was put to Mr Booth that the Bank had procedures at all times while he was an account manager for the classification of a loan as 'non-accrual' and he agreed that classifying a loan as non-accrual meant that the Bank no longer accrued interest on the principal and interest then outstanding. Mr Booth accepted that if an account was classed as non-accrual then it was in serious trouble. He was asked and answered as follows: 'Q. If an account was classed as non-accrual? A. That it is in serious trouble yes. Q. Yes, and the Bank in effect is saying we can't expect the payment of any more interest or principal perhaps as well by this borrower and we should stop treating ourselves as having earned interest on this loan? A. I don't think that is accurate. I think not expecting it. It is possible that it won't be received. Q. Yes. One hopes for the best and perhaps one sues the borrower and gets all the money back, but would you agree with me classifying a loan as non-accrual means that certainly for the present time in terms of the Bank's accounting and thus its own profit the Bank treats the non-accrual loan as no longer earning interest? A. That's correct. Q. And none of the loans to these companies were ever classified as non-accrual were they? A. I don't think so, no. Q. No and you would be likely to remember because you would have a role in it wouldn't you that classification? A. I would have yes.. ' [T 475] 324 Returning to deal with the revised forecast cash flow document Annexure 'C' referred to above, Mr Macfarlan QC cross-examined Mr Paola, Mr Terrey and Mr Hardy in relation to this document. The cross-examination from time to time treated also with a document tabled on 23 January 1990 at a Paola Holdings board meeting entitled 'Paola Holdings Pty Limited/Currabubula Holdings Pty Limited - Cash Facilities 1989/90' which appears at PX 989. Detail of this further document is set out in Appendix 5. 325 Mr Macfarlan put to Mr Paola that the revised forecast cash flow document Annexure 'C' was an example of a document prepared by the Group in late 1989 upon the basis that there had been a restructure involving ABE Holdings conducting the pastoral operation. Mr Paola stated that it was intended that this would take place. 326 It was put to Mr Paola that this was a document prepared in late 1989 by the Group upon the basis that the pastoral division/operations were being conducted by ABE Holdings and Mr Paola accepted this proposition. [T 86 and 87] 327 It was put to Mr Paola that the forecast cash flow document showed a positive cash flow for the Group in the period from December 1989 through to June 1990. It was put that this appears from the total drawing of $8.241million in December 1989 compared to the total drawings of $6.616million in June 1990. 328 It was also put to Mr Paola that if one added the December 'bank' figures shown for ABE Pastoral Division and ABE Head Office the total was approximately $3 million as compared with the total of the like figures for June 1990 which was approximately $2.7million. It was put to Mr Paola that this indicated a positive cash flow for ABE over that period of some seven months of some hundreds of thousands of dollars and he accepted this proposition. [T87] 329 The cross-examination of Mr Terrey on the document dealt inter alia with the proposition that there were many cash flow documents which treated the pastoral division as referable to ABE Holdings. Mr Terrey's evidence was that his recollection was that it was the intention that some pastoral operations were going to run through ABE Holdings but in fact he did not believe that this had actually occurred. [T 252] 330 On being shown the minutes of a Meeting of Directors of ABE Holdings, held on 23 February 1990, which resolved that the pastoral operations be undertaken by Currabubula Holdings thus rescinding the previous arrangement that they be undertaken by ABE Holdings, Mr Terrey agreed that he recalled this. He was then asked: 'Q. And does that remind you that up until that date at least the pastoral operations had been undertaken by ABE Holdings? A. No it doesn't. I take that that in fact retrospective to 1 July - in fact right through - that they were undertaken by Currabubula Holdings and that's my recollection of how the accounts were reflected. Q. Could I be summarising the effect of what you said correctly by suggesting that you're saying that you understood the decision made on 23 February 1990 to be that retrospectively back to 1 July of the previous calendar year the operations be treated as having been conducted by Currabubula Holdings? A. That's my understanding yes. Q. Despite the fact that in that period up until 23 February 1990 they had in fact been conducted by ABE Holdings? A. I take it that - I understand that the minute was dated 23 February 1990, and I take it that the minute reflected the retrospectivity back to 1 July 1989. Q. Well let me just ask you to postulate yourself being back at 1 February 1990. If someone had asked you on 1 February 1990 which company in the Group conducts the pastoral operations you would have given the answer "ABE Holdings" wouldn't you? A. I can't say that I would, in as much as that minute may well have reflected a decision that may have been taken some time previously and was in the minute as was recorded in February 1990. As I said before, my understanding was that it was the intention at some stage that pastoral and cash flow would reflect that there was some pastoral operations to be carried out through ABE Holdings, but my understanding is - and I believed the accounts reflected it - that they were always shown as being conducted through Currabubula Holdings . . .' [T 251-253] 331 Mr Hardy was shown Appendix '1' to his fourth report, being a letter from Mr Plante to Mr Booth of 21 December 1989 enclosing a profit and loss account for the period 1 July 1989 to 30 November 1989. That profit and loss account read as follows: 'Profit and Loss Account - 1 July '89 to 30 November '89 Operating loss 1 July '89 to 30 November '89 ($1,350,000) Add : ABE Fax accumulated losses 30 June '89 $3,357,000 Less: Provision for payment to ABE Fax creditors ($3,000,000) ($993,000) Retained profits at beginning of the financial year $3,461,000 Retained profits at 30 November '89 $2,468,000 Note: The operating loss of $1,350,000 for the period, consists mainly of expenses incurred in preparing the farming operations for lambing, shearing and cropping. Those costs are $61,000 below budget. Income from these activities will be received progressively from December through to May.' 332 Mr Hardy accepted that the profit and loss account showed a suggested operating loss of $1.3 million for the five month period to 30 November 1989. He accepted that there was no projection contained in the profit and loss account or in the letter in relation to the full year. He accepted also that there was nothing in the letter or its attachment which would indicate to the reader or to Mr Booth at the Bank that the break-even projections that he referred to in his November report, no longer represented a projection for the full year for the Group. 333 Mr Hardy was then tested in relation to documents received by the Bank. He referred to "the cash flow statement that the company, that Mr Booth said he relied upon in his November credit precis and the cash flow projection for the period December to June 1990". 334 On then being taken to the adjusted forecast cash flows, Mr Hardy's evidence was that this was the only document that he could find where the Bank had been advised of the trading loss through to November. [T 365] 335 The cross-examination of Mr Hardy included the following: 'A. Do you remember the question from which we were moving Mr Hardy, namely, were you aware of any documents before the Bank which indicated that the break-even result referred to in the November credit precis was now projected to be a loss, being some document that was dated prior to 31 January 1990. You have referred to the December document and you have now referred to this cash flow document? A. Yes. Q. Is that the sum total answer yes to my knowledge? Q. Now in this cash flow document . . . what do you say that indicates? A. Well, it is a cash flow document. It has income and expenses listed there for the different companies. That gives an indication. In fact in my report I used the words "suggested the following profit and loss results" because that is a cash flow statement, it's not a profit statement, but it suggests results that the company expects for that period. Q. But from a cash flow point of view it indicates that there is going to be a considerable improvement in cash flow as between December 1989 and June 1990 doesn't it? A. Yes mainly, I think, from the sale of ABE Aircraft down the bottom. So the main improvement in cash is from asset sales, especially asset sales that are necessarily reflected in the figure above. [T 365 - 366] 336 At transcript 366, Mr Hardy's evidence was summarised in the cross-examination in the following terms: 'Q. Let me just try and summarise it. The first document you referred to, the December document, you agree didn't contain any full year projections, correct? A. No, it wasn't a projection. That's the actual result from June to November. Q. It didn't contain a full year projection did it? A. No. Q. It wasn't inconsistent with the information recorded by Mr Booth in his November credit precis that he expected the Group to break even for the year was it? A. I don't know that. I don't know what year he had on the first part. I can't recall. Q. The December letter that we have gone to? A. Yes. Q. Doesn't indicate that the Group would not break even for the full year - does it? A. No, it didn't indicate it would. Q. And now the second document you have referred to, which is at 845, you have agreed for one thing it's a cash flow? A. Correct. Q. And not a profit forecast? A. Yes. Q. And the two don't necessarily go together? A. No. Q. And the document doesn't purport to give any profit or loss figure for the Group for the remaining seven months of the year does it? A. It suggests what the profit and loss would be. Q. Well if there is anything in it Mr Hardy it is, at most, a suggestion, it's no stronger than that is it? A. It's indicative, is perhaps a better word, of what the profit or loss would be for those companies.' [T 366] 337 At transcript 367, Mr Macfarlan addressed questions to Mr Hardy seeking to put that the document at PX 845 is not inconsistent with the projection of a break-even profit result, being a projection made at or about the time the cash flow was prepared. The cross-examination continues: 'A. Are we talking about a break-even result for the year? Q. Yes? A. Yes, you're referring to the document, the cash flow document from December to June only? Q. Yes? A. Whether it is inconsistent or not with the break-even result for the year, I need to understand how you arrive at the break-even, his determination of a break-even. What I said in my report is that I couldn't see where the company had represented to him that it was a break-even result. So I wasn't sure whether Mr Booth determined that, or the company had represented to him. Q. Let me ask you to assume that the company had informed him that the company expected to achieve at least a break-even result that year. The cash flow document at 845 that you have referred to was not inconsistent with that inform, was it? A. If I was in the Bank's position I would have taken the loss determined. Q. Was it inconsistent or not? A. I can't answer that. His Honour: Why can't you answer that? A. Well, because this is a cash flow projection for the remaining seven months of the year. You would need to know what the profit result is. It's indicative of profit. That was what I was suggesting. You would need to know what the rest of the year was projected to the Bank to see whether the two combined to give the impression to the Bank that a break-even result was expected. Q. That means it's neither consistent nor inconsistent until you get to see some further material? A. Yes, I think so. What I said in my report is I was unable to determine how this break-even proposition came about and who represented this to see whether it was a determination by the Bank.' [T 367] 338 At transcript 368 the following appears: 'Q. Let me ask you again. In November 1989, if you were sitting in the position of Mr Booth at the Bank and you were told by the company that the company expected a break-even result for the Group for the full year and you were given a number of documents including the cash flow, which is at 845, you wouldn't have immediately jumped to the conclusion that the information that the company had given you about a break-even result was wrong, would you? A. Not in November. Q. Nor would you have done so when you received the letter of December that you had earlier referred to? A. Yes I would have. Q. I suggest you wouldn't because that related only to a six month period and said nothing about the full year. A. Yes, generally, but when you add the two together, when you look at the document for the actual results to November and when you add it to the projected budget, it suggested to me that a loss in excess of $1 was expected . . . Q. Mr Hardy the information being the cash flow in the five months profit and loss account came at different points in time? A. Yes. Q. And that would be one reason for not readily jumping to the conclusion that they could be put together? A. I'm not sure of the bank's practice and I'm not sure how they - my understanding, the bank was in daily contact what the management of this account.. I'm not sure the internal workings of the bank. All I can answer is, if I receive that document, I would have drawn superficially the conclusion that I draw in my report and I would seek a clarification of it. Q. I will put it this way, you would have suspected that the company might be going to incur a loss for the full year? A. Yes I would have enquired further if my perception previously had been to break even and now I saw they were going to lose in excess of $1 million, I would have made further enquiries. Q. Yes, a million dollars for five months? A. I am not suggesting that. When you added the two together, I still have a position that is suggesting a loss in excess of a million dollars for the full year. Q. But you can't add a cash flow forecast to a profit and loss account can you? A. They are in the [sic] directly compatible, but, as I said they are indicative.' [T 368 and 369] 339 In being cross-examined on the document at PX 989, Mr Paola was taken to the total figure for 31 January and asked whether there was some discussion of that figure at the meeting. He could not recall. He denied that there was some discussion at the meeting that the debt to the Bank would rise to some $9 million or be likely to do so by 31 January. [T 105] 340 At transcript 106, it was put to Mr Paola that what had happened at the 23 January meeting was that he found that the cash requirements of the company or of the Group were considerably greater, that is some $9 million as against $8.3 million at the end of January and he said that he did not believe that this was so. [T 106] Letter of Comfort 341 ABE Holdings wrote on 29 November 1989 to Peat Marwick Hungerfords in the following terms: 'We hereby undertake to continue to provide financial support to our related company ABE Jet Charter Pty Limited.' The letter falls short of creating an enforceable legal obligation. December 1989 Overdraft Limits increase to $6.8 million 342 By letter dated 12 December 1989 the Bank wrote to the Paola Group, advising that the relevant branches of the Bank had been instructed to amend their overdraft limits so that the total facility had become $6.8million as opposed to the earlier $5.5million. [PX 829] 343 A note entitled 'Addendum' appearing at PX 827, made by Mr Booth on 8 December 1989, comments in relation to the valuation position inter alia, as follows: 'The Bank's Regional Valuer has since advised valuations on these properties totalling $2.3million. This makes the total value of property now secured by the Bank $17.6 million and the loanable sum of all assets (as at 31 October 1989) $12.8 million.' 344 Mr Booth accepted in cross-examination at transcript 473, that he had been advised by Mr Miller by this point in time that the total value of properties secured to the Bank was $17.6 million. Multi-Option Facility Increase to $8.5million 345 On 13 December 1989 the Bank approved an increase in the Group's Multi-Option Facility to $8.5million. [PX 831] The approval was subject to a complete review by 31 March 1990 and gave a credit rating of LQ3. 346 The 13 December 1989 document at transcript 831 includes the following: 'Mr Cambridge advised members [of the Credit Committee] that the Bank's Senior Solicitor is to confirm that the new security arrangements do not put SBN in a position where SBN would be vulnerable to preference claims.' 347 On 14 December 1989, Ferrier Hodgson & Co wrote to the Bank in their capacity as receivers of ABE Fax. In dealing with a schedule of repayment of Bank debt, they said inter alia: 'To date the realisation of assets has produced a bank balance of approximately $450,000 which is currently being held at call with the Macquarie Branch of the State Bank. I enclose an initial repayment of your debt of $150,000.' [PX 852] 348 That document suggested as Mr Booth accepted at transcript 476, that the receiver had an account with the Macquarie Branch of the Bank. 349 Mr Booth's cross-examination continued as follows: 'Q. Do you see there that as at 14 December 1989 that account held $450,000? A. Yes. Q. And the receivers were sending a cheque to the State Bank for $150,000? A. Yes. Q. It is the case that as the receivership went on from time to time cheques would be paid across by the receiver from that account? A. Yes. Q. And when they were paid across they were credited, were they not, to the North Ryde account of ABE Fax which had been its operating bank account prior to the receivership? A. That would have been the case I think, yes. Q. Yes. I don't know if you noted at the time but if you would turn to PX 859 please, you will see that there was a cash flow forecast for receipts by the receivers? A. Yes. Q. Although I am not suggesting that this necessarily was written in stone or proved to be completely accurate, the receivers were advising you that they expected money to come in in this cash flow up until the end of February? A. Yes. Q. And you knew that the receivers were confident of recovering significant sums. It records potential payments of $930,000? A. Yes. Q. And they did in fact recover significant sums on into 1990 didn't they? A. Yes.' 350 Mr Booth was also asked at transcript 477 whether he remembered that the Credit Committee had expressed some concern about the possibility of preferences in relation to the Paola Group and he answered that he did not recall this. 351 On 15 December 1989, Mr Booth prepared a handwritten inter-office memorandum addressed to Mr John Lyel, Regional Lending Manager at Tamworth, attaching a copy of a submission approval of 13 December 1989. In that note, Mr Booth said inter alia: 'The Bank's solicitors are presently investigating credit committee's concerns regarding preferences and I am hopeful that favourable acknowledgment will be forthcoming. In the meantime I will be requiring Paola to meet initial drawings at present levels.' [PX 831] 352 Under cross-examination Mr Booth had no recollection as to whether in December 1989 he was discussing with the Bank's solicitors the question of preferences and the Paola Holdings Group. [T 478] 353 On 21 December 1989, Mr Plante wrote to the Bank enclosing a consolidated Profit and Loss Account and Balance Sheet for the Paola Group and the Currabubula Group. The accounts showed an anticipated loss from 1 July 1989 to 30 November 1989 of $1.35million and a provision of $3million for ABE Fax creditors. [PX 873] 354 Mr Booth accepted under cross-examination, that he examined the profit and loss account and the balance sheet attached to the 21 December 1989 letter and that since he had requested the information, he paid a considerable amount of care to that exercise. His evidence included: 'Q. And you had asked for the consolidated profit and loss account for the purpose of assessing how the Group was performing in its trading operations and how the picture looked from an assets and liability perspective? Yes. Q. When you looked at the profit and loss account appearing at PX 873 you realised of course that it applied from 1 July to 30 November 1989? A. Yes. Q. And you realised that the period had disclosed according to the group an operating loss of $1.35million? A. Yes. Q. And you understood, did you not, that when it said Paola Consolidated, it meant the whole group including the Currabubula operations? A. I would have realised that it included the operations of the farm. Whether that was Currabubula I'm not sure. Q. . . . So it was your understanding, if I could put it this way, that all revenue items earned either through the operations on the pastoral properties or otherwise, all revenue earned by the Group was recorded in this profit and loss? A. Yes. Q. And you immediately appreciated that a very significant operating loss was being recorded? A. Yes. Q. When you looked at the note you did note I suppose that income would be received from rural operations from December to May : Yes? A. Yes. Q. And you knew of course that that was with no detail being given a projection of income from the pastoral operations referred to; it is a projected figure of course December to May of the following year? A. The words here were income from its activities be received progressively. Q. Yes, but you knew that it was a forecast or projection? A. In terms of that statement . . .yes. Q. You had received of course other information from the Group including the annexure C document about projected cash flow? A. Yes. Q. To June 1990? A. Yes.' [T 478-479] 355 Mr Booth was then cross-examined on the cash flow document which appears at PX 845 and 849. His evidence was : 'Q. See that's a copy of the cash flow that we discussed yesterday and what I wanted to ask you was whether when you got the profit and loss accounts at PX 872 whether you went back and reconsidered the cash flow that appears at PX 849. Did you do that? A. I'm not sure. I would have considered documents that I had been given in the past. Whether it was this cash flow I can't recall. Q. . . . I want to suggest to you Mr Booth that the cash flow at PX 849 is indicative - only indicative - of likely profit problems for the Group in the period from January to June 1990? A. You say it is indicative of? A. A likely profit problem for the Group for the period January to June 1990? A. I don't see that. Can you be more explicit. Q. Well, do you see that there is the line entry for ABE Jet that we spoke of yesterday? A. Yes. Q. And do you see that the entries there for ABE Jet become positive from February? A. Yes. Q. And won't you agree with me that your understanding in December 1989 was that those positive cash flows would be derived from the sale of assets? A. I think my comment yesterday was I wasn't sure and I didn't understand those positive numbers that occurred for ABE Jet for those following months.' 356 Also on 21 December 1989, ABE Holdings wrote to the Bank confirming that Automated Business Equipment Pty Ltd was placed in liquidation on 6 October 1989. ABE Fax had in fact had a Receiver and Manager appointed on 10 November 1989. 357 The letter of 21 December 1989 [PX 875] stated: 'This is to advise that appointment may require other companies within the group to complete some of the commitments of ABE Fax, eg lease guarantees.' 358 At the end of 1989, the stock and station agent business operated by Campbell Rixon was closed. 31 December 1989 - Group Structure 359 Annexure 'H' to Mr Booth's statement of 20 November 1996 records that by 31 December 1989, the Group structure had become as follows:

360 As earlier noted [Judgment para 106] ] the shareholding in Paola Holdings stated in the above structure was incorrect. 361 Mr Booth was not certain of the date when he moved within the Bank from the corporate area to a unit called Group Asset Management. He believed this was possibly in 1990 or 1991. Group Asset Management was a division of the Bank, set up to engage in work outside of primarily bad corporate lending. 362 Mr Booth accepted that the Group Asset Management Unit was established as a result of a large increase in the Bank's potential and actual bad debt problems for corporate customers involving some hundreds of millions of dollars. [T 415] 363 Mr Booth could not recall during the period when he was account manager, whether he had had dealings with bank officers from the Risk Policy Unit about the Paola Account or whether or not he had ever sought or obtained from the Risk Policy Unit, independent advice about assessment of the Paola Group's account. [T 415] 364 Mr Booth accepted at transcript 416, that whilst he was account manager for the Paola Group, Mr Paola bought and sold assets and repaid debt to the Bank from time to time from asset sales. [T 416] January 1990 Forecast Deficiency in Paola Holdings Group 365 On 5 January 1990, a meeting of directors of Paola Holdings took place at which the directors present were Mr Cameron of Blake Dawson Waldron, Mr Herring, Mr Paola, and in attendance Mr Plante. 366 The meeting resolved that the Secretary be directed to investigate with the Blake Dawson Waldron insolvency partner, Mr Harmer, the following matters: '- Pros and cons of the company appointing a liquidator versus an appointment as a result of the section 364 notice issued by Mitsubishi. - The continuation of the action against Mitsubishi. - The security status of any group company which contributes to the shortfall in the State Bank debt.' 367 The secretary tabled a number of sets of accounts at the meeting and a Forecast Reconciliation of Shareholders' Equity as at 30 June 1990 for Paola Holdings Pty Ltd Consolidated. 368 The meeting noted that the Forecast Reconciliation had forecast a deficiency of shareholders' equity of $1,060,686 in the group 'if a payment of $1,750,000 was made to Okura under a personal guarantee provided by Mr Paola on behalf of ABE Fax Pty Limited ($405,828 has already been paid)'. 369 The meeting further noted that the deficiency did not take into account: '1. Any other payments which may need to be made on behalf of ABE Fax Pty Limited under any other guarantees or similar commitments. - $567,315 of intangible assets - $223,186 of loans to ABE Fax.' 370 It was resolved that the Secretary be directed to provide further financial information on individual companies at a board meeting scheduled for 23 January. [PX 944 and 945] Mr Paola's Diary Note 371 On 9 January 1990, Mr Paola made a note in his diary reading as follows: 'Decision made 1. to extend payment to creditors by 30 days and avoid the need for additional bank facilities. 2. Repay suppliers by returning saleable stock which was not moving. 3. Reduce ordering to replace stock items which were fast moving only.' [T 167] Mr Taylor's Letter of Resignation 372 By letter written on approximately 15 January 1990, Mr Ross Taylor, who had been a founder of Northern Rural Services business resigned as a director of NRS and also resigned from his position as General Manager of NRS. 373 In his letter of resignation, Mr Taylor said inter alia: 'I sincerely regret having to take this action. However matters that have taken place within this company and in particular the direction that no creditors are to be paid, left me with no alternative.' 374 Mr Taylor indicated a preparedness to continue in the employment of NRS otherwise than in a managerial capacity for four working weeks. [PX Volume 5, 1885] 375 Under cross-examination, Mr Paola was referred to Mr Taylor's letter. The cross-examination continued as follows: 'Q. Did you, Mr Paola give a direction of the character referred to at the end of the third paragraph, namely a direction that no creditors are to be paid? A. . . . that was one of the directions that I gave yes. Q. And you did that in early or mid January 1990 didn't you? A. Yes. Q. . . . What was the direction that you gave? A. Well the direction I gave was that in the first instance where the company was overstocked it had to return stock that would not be required in the next 30 days . . . I can't be one hundred percent accurate of what I'm saying but basically this is the substance of it and that until we were satisfied that all the stock that was returnable was returned there were no creditors to be paid . . at that point it was a temporary condition. Q. But a temporary condition brought about by a serious cash position that NRS was in? A. No, that wasn't the consideration at all. The consideration was that Mr Taylor had and other managers had overstocked and this was a discipline on the management of Northern Rural Services to bring things into shape. Now the fact that they didn't want to ring up their friends and ask them to take things back and give a credit resulted in actions such as this, which Mr Taylor subsequently withdrew . . . Q. The reason for this was a cash flow problem wasn't it? A. the main reason for this . . . was a discipline on the management to get the stock into order . . . The next reason why is that we had a requirement on the facility which was about to be put in place that meant we had to reduce the overall borrowings by a million dollars at the end of May and we were taking action as early as we could . . . [Transcript 163 and following] 376 At transcript 174, Mr Paola gave the following evidence: 'Q. The upshot of your communications with Mr Taylor was that he resigned as a director on about 17 January was it? A. Yes. Q. But that he stayed on a general manager for a period of weeks thereafter? A. I believe that he actually stayed until the end of February, possibly end of March. I'm uncertain of the date. Q. And you made it clear to him in January, did you, that, despite his reticence to do so, you as managing director required him to convey that information to the major suppliers? A. To the suppliers, yes. There was one company in particular that he was concerned about. Q. Yes. And as far as you know Mr Taylor did convey the substance of that direction that you'd given to the suppliers ? A. It was conveyed. I think Mr Taylor was mainly responsible. The other managers I think had some involvement. Q. As you understood it, someone on behalf of the company - probably in many cases Mr Taylor - conveyed to the suppliers that there was going to be a delay in payment; is that right ? A. Well, let me just qualify what I'm saying here. My understanding of it was that the ones that were due for repayment at the end of January would be notified , but not necessarily would everybody be told. It was just a matter of as required. Q. The major suppliers of yours were ones who supplied every month were they? A. The major suppliers are not necessarily every month. In the case of fertiliser, for instance, there are two gaps, which is preplanting time of winter and summer crops, where fertiliser is purchased in very big lots, but for eight months of the year there are hardly any fertiliser pack purchases. Chemicals are similar. The business is really based on planting time - preplanting. Q. Well you don't have any records from which you could determine or provide information about when particular debts due to particular suppliers were due at about this time? A. Not in front of me no . . .' [emphasis added] 377 Mr Paola under cross-examination, gave evidence that the note in his diary was for the benefit of his meeting with Mr Taylor. He then gave the following evidence: '. . . my discussion with Ross Taylor was - and this formed the notes for that discussion - they were all in relation to the overstocked position. There was the other motivation to reduce the borrowings or limit the borrowings of the Northern Rural Services, but that wasn't an overall group thing, it was purely Northern Rural Services that we were discussing. There was one particular aspect which was the Moree Branch which had gone beyond any reasonable stock levels and the purpose of that meeting was simply a discipline on the management of Northern Rural Services.' [Transcript 166] 378 At transcript 167, Mr Paola was asked what Mr Taylor had said to him, if anything, about his reasons for resigning as a director and answered as follows: 'Yes. One of the reasons was - well the reasons were : one, that he didn't agree with the delaying payments to creditors and suppliers. His second reason that he gave was there was a particular supplier that he had been paying outside the normal terms of credit that we had with them. By that, he was paying far too quickly because of the friendship that he had with this particular supplier and the supplier's cash flow difficulties. They were a couple of the reasons that I recall.' [Transcript 167] 379 Under cross-examination, Mr. Hardy gave the following evidence: 'Q. If a direction of the sort referred to in Mr Taylor's letter had been given, news of that would have travelled very quickly around the community wouldn't it? A. Depends on how it was delivered. If it was - I mean what normally happens . . . what normally happens where a company is taking that action is, if your suppliers are not paid in 30 days, you just don't pay them on the 30 day figure. They might ring up in a couple of weeks saying "Where is our cheque". You might say "It's coming". It's something that you just don't magnify to your suppliers, so I guess it is dependent on how well that was carried out by management as to whether that was a distinct view out there in the community or not. Q. Well, if it leaked outside the company, you would expect it to spread very fast, wouldn't you? A. If it is - if the major suppliers were aware of that direction, that a formal direction had been given for not paying in 30 days, I think there would be - the salesmen of those suppliers would probably like to talk a fair bit. So it depends on how well it was delivered, I guess . . . Q. . . . You said a few moment ago that it depends on how well it is delivered? A. Yes. Q. What were you referring to being delivered would depend on . . . A. That advice from - that I read from Mr Paola not to pay creditors for another 30 days. Q. How that advice was delivered to whom? A. To the suppliers. Q. Yes I understand. You have assumed, have you, that it was delivered to the suppliers in some method in your answer? A. I believe that this isn't a formal message that's delivered to the suppliers like that. It's something that's managed by the company to try to not tell them, if I was in that position to try. . . Q. I rather understood what you have been saying to me is this, correct me if I am wrong, you don't know how, or when or whether by word of mouth, or simply because they weren't paid in time, any particular creditor may have learned, if at all, that there had been some sort of direction given about delaying payment or not paying, is that what you have been saying? A. Yes that's what I am saying. . . Q. Mr Hardy, what I want you to assume is that the creditors or some of them, came to know of that direction being given, you do agree, I think you have agreed, that words would spread quickly through the community, if that were the case. A. If the direction was known, I think the words could spread quickly amongst other suppliers. Q. It would spread quickly around the community, wouldn't it, in your view? A. Not - by itself its not revolutionary news, so, no, I think that sort of news would only be limited to suppliers to creditors, to people who deal with that sort of - it would have to be people not being paid for a lengthy period of time before people start talking about. Q. If a direction were given as suggested by Mr Taylor's letter, namely, a direction simply not to pay creditors, you would agree wouldn't you, that if a supplier became aware of that, that would be news likely to spread very quickly through the community. A. Yes. Q. And if going back to the type of directions suggested by Mr Paola's diary, you remember those directions, not to make payments to creditors for 30 days? A. Yes. Q. If that had been accompanied by the company returning stock to suppliers and reducing its orders, words, in your view, would very quickly have got around, at least amongst suppliers? A. It depends on how its done. Q. Well, if the stock was being returned and orders were being reduced and payments were not being made, it wouldn't take a very perspicacious supplier long to realise the problem? A. I am trying to recall the words Mr Paola used. I thought what he said was: "To return slow moving stock, to reorder in the areas of fast moving stock and the third point is to delay creditors' payments by 30 days. In those circumstances that would not be unusual to return. Q. Let me remind you of what he said. The first entry related to payments; the second was repay suppliers by returning saleable stock which was not moving; three, reducing orders to replace stock items which were fast moving only. Now, if that was what the company came to do, it would not take a very perspicacious supplier long to realise that the company had a problem, would it? A. I disagree. I don't - I mean, I would consider that as a prudent business. Q. Prudent business if you are in financial trouble? A. Well, probably prudent. Some of it is prudent business. The issue relating to the stock would be prudent business. The issue in relation to delaying creditors, payments 30 days would indicate there are cash flow difficulties. Q. So also would be the return of stock to effect payment on account, wouldn't it? A. It depends on the magnitude of it.' [T 353 - 356] 380 On 15 January 1990, Mrs Lyn Paola was appointed as a director of NRS. 381 By letter dated 15 January 1990, Ferrier Hodgson & Co wrote to the State Bank with respect to ABE Fax (Receiver and Manager appointed) by way of further reporting on the progress of the administration of ABE Fax as at 9 January 1990. [PX 948]. 382 On 16 January 1990, Mr Booth had a meeting with Mr Paola. Mr Booth's summary includes the following: '. . . we were informed of additional steps being taken to contain levels of debt within the group. In summary, Mr Paola has extended the list of possible asset sales to include all but his home property (Currabubula). His strategy is to reduce bank debt to less than $5million as soon as possible and assets will be realised until this is achieved. Judging by the levels of interest being shown, Mr Paola predicts that the jet aircraft will be the first asset to sell (expected by end February 1990). This will realise some $800,000 (after prior commitments). He believes that the next asset in line to sell will be Northern Rural Services Pty Limited, the Group's farm service and supply organisation. Whilst only recently listed for sale the organisation is, according to Mr Paola being favourably considered by at least two organisations (Dalgety and Primac). Mr Paola is hopeful the sale of NRS will realise a net $3million. Sale proposals for Durhambone (the Group's largest property) are continuing but with the asking price presently set at $15million (bank's valuation is $10million) Mr Paola is not confident the property will sell quickly. To speed up the process, it is proposed to list the property for auction in late April. The sale price of Durhambone is supported by the property's potential to produce a $5million wheat crop. Most recently Mr Paola has received enquiries for the 'Breeza' properties. Whilst it is too early to gauge the level of interest, Mr Paola will sell if a realistic offer materialises. (Bank's valuation is $3.3million).' [Emphasis added] 383 During the same meeting, Mr Paola requested an alteration to present facility arrangements, namely the interest payment requirements of the cash advance option which at that time required interest payable monthly in arrears. Mr Booth's note of the meeting includes the following: 'As the Group's revenue base is now substantially reliant on the properties , Mr Paola has asked that interest payments under this option be allowed to occur at intervals more in line with Group's cash flows (proceeds of crop and wool sales tend to occur at half-yearly intervals). Mr Booth's recommendation was that the interest requirement for cash advance drawings be amended to allow interest to be payable at maturity of any draw-down or roll-overs on the basis that drawings under that option be limited to 185 days or such other tenor as approved by the chief manager corporate finance group.' [Annexure H to Mr Booth's first statement of 20 November 1996] [Emphasis added] 384 Mr Swinburne supported Mr Paola's request to enable interest payment dates to more closely align his revenue streams by a note of 17 January 1990. [PX 966] That note which Mr Booth read [T 488], includes: 'Mr Paola is very concerned about the level of his borrowings and recognises that this is primarily the result of the failure of ABE Fax. The situation has been compounded by high interest rates and a smaller than expected wheat crop. Never the less the Paola Group has a diverse asset base which is conservatively valued at $30million. The pastoral division which is now the major source of income is not capable at present of supporting a debt of $8million at current high interest rates. The immediate objective is to substantially reduce that debt level through the sale of assets. Mr Paola is very confident that the range of assets presently on the market will achieve tangible results commencing as early as next month with the sale of his jet aircraft .' [PX 966] 385 By letter dated 18 January 1990, the State Bank wrote to the Managing Director, Paola Holdings and Currabubula Holdings, advising that approval had been given to increase the existing Multi Option Facility from $6.8 million to $8.5 million. [PX 956] The letter appears to be almost word perfect to that of 1 February 1990 appearing at PX 1047. Mr Booth recalled that the later letter had been sent as it appeared that Mr Paola made a request to vary facility arrangements. [T 487] This appears to be the explanation as the handwritten words 'Pyojit Pty Limited' are added under the list of borrowers on PX 1047, being the only change to the letter in fact sent. 386 On 19 January 1990, ABE Holdings wrote to Mr Swinburne outlining the way in which the Group proposed to structure the new facilities. The new overdraft in this letter is identified at $8million. Mr Booth saw the letter on or about 19 January. [T 482] 387 The proposal in the letter was that as the ABE Fax overdraft decreased, the excess limit would be transferred to other companies. 388 Mr Booth accepted under cross-examination at transcript 483, that in fact there had been an agreement reached between himself and Mr Plante that as the ABE Fax overdraft decreased the Group could transfer the excess limit to other companies in the Group. 389 At transcript 484-485, Mr Booth accepted in cross-examination that from time to time the receiver of ABE Fax paid funds to the Bank. He was asked and answered as follows: 'Q. And those funds were transferred from an account of the receiver to ABE Fax account in the Bank? A. Are you saying that the funds provided by the receiver from the receiver's account were put to the old ABE Fax debt? Q. Yes, to reduce the debt? A. Yes. Q. Now from time to time of course you understood there was a balance of cash in the receiver's Fax account? A. Yes. Q. And you understood from time to time the cash would be paid across to reduce the overdraft limit in the Fax account? A. I think that's the same answer as before, yes. . . . Q. Do you have any recollection now of discussions with Mr Plante about whether moneys received by the receiver would be taken into account in determining the extent of the group's use of its facilities with the Bank? A. No. Q. I want to suggest to you that you had a discussion with Mr Plante in which you agreed that the computation of the group's use of its facilities with the Bank would include consideration of money received by the receiver of ABE Fax? A. I disagree with that. Q. In disagreeing with that do you accept that there was an arrangement whereby the Bank would consider the balance in ABE Fax's account, meaning the one that operated prior to going into receivership, that the balance of that account would be considered when the Bank was assessing the use of the facilities by the group? A. Are you asking that the old debt that was held in the old account was still considered part of the group debt? Q. Yes? A. Yes, it was. Q. And funds as they came across would be recognised as having reduced that? A. As they were received yes. Q. What I want to suggest to you, just to make it clear - and I think it is clear now - I want to suggest to you that that arrangement extended to moneys held by the receiver for the State Bank in the receiver's account for ABE Fax? A. I disagree. Those moneys were not held for the Bank. Q. Do you recall having any discussion with Mr Plante one way or the other about that? A. No there was no discussion with him. Q. You're quite sure about that? A. I'm quite sure.' [T 486] 390 On 19 January 1990, Mr Cambridge, the Chief Manager, Corporate Finance Group, refused the recommendation to amend the Paola Group interest dates from monthly in arrears to six months. In his statement of reasons, he added 'I see no need to penalise the bank, which is what we would be doing by changing the interest payment cycle, to accommodate Mr Paola's problem'. Mr Cambridge did, however, approve allowing draw-downs under the fixed rate option of the multi-option facility up to two years from 19 January 1990, subject to the borrower meeting break costs should the facility be repaid early, acknowledging that the current interest rates were a major factor facing Mr Paola's workout. [PX 967] 391 On 23 January 1990, a further Paola Holdings board meeting was held at which were present Mr Cameron, Mr Herring, Mr Paola, and which Mr Plante attended as secretary. 392 The minutes of this meeting record the tabling by the Secretary of Paola Holdings Consolidated estimate of Shareholders' Equity at 31 December 1989 which appears at PX 985. The minutes also record that Mr Paola was 'asked to consider what assurances he could provide as to the satisfaction of liabilities of the group, in particular to confirm that Okura, a major creditor, was prepared to await the sale of Durhambone and not to press for payment at that stage'. 393 In relation to ABE Holdings, the directors resolved that the Secretary be directed to examine the ramifications of 'either transferring the pastoral division back to Currabubula Holdings or, alternatively, to receive a management fee from that company in order to eliminate any deficiency in ABE Holdings Shareholders' Equity'. [PX 983] 394 The above described resolution appears plainly to recognise that ABE Holdings had a deficiency in shareholders' equity. 395 One of the documents tabled at the meeting is that already appended as Appendix 5. 396 It was put to Mr Paola under cross-examination at transcript 104 that at the time the document was tabled he understood it to indicate the total level of facilities that would be drawn or required to be drawn from time to time by the Group from the Bank. He could not recall the document specifically and endeavoured to put off an explanation of the document until Mr Plante would give evidence. He did accept in cross-examination that the document purported to be a cash facilities document but did not accept that it was a cash flow as he understood it. He denied that there was some discussion at the meeting that the debt to the Bank would rise to some $9 million or be likely to do so by 31 January 1990. [T 105.40] 397 He accepted that it appeared, looking at the handwriting near the figure $9,069,000 that there was some discussion at the meeting to the effect that the limit would be, that is the bank facility limit would be $8.5million by then but the actual facilities required would be some $9 million. He then indicated that he could not answer on that matter. [T 105.45] 398 He could not deny that there was a discussion to this effect at the meeting but accepted that the last information he had given to the Bank suggested that there would be a peak of $8.5million in the facilities required as at January, which information had been given as he recalled in November. [T 106.15] 399 He did not accept the proposition put to him that what had happened at the 23 January meeting was that he had found that the cash requirements of the Company or of the Group were considerably greater, that is some $9 million as against $8.3million at the end of January. [T 106.34] 400 It appears that the summary of cash facilities at PX 989 contemplated the Okura debt being paid out of bank funds. That document as will be noted, records the current facility at $5.5million and recorded the estimated debt to the Bank as at 31 January 1990 at $9.069million which is to be compared to and is higher than the figure shown on the October/November 1989 cash flow, previously submitted to the Bank at $8.3million as at January 1990. [See PX 989 as compared to PX 843] 401 Mr Cameron's notes of the board meeting of 23 January 1990, appear at PX 991 and include the following: 'Paola - not as bad as it appears . . . Problem is under-viability of heavy borrowing . . .' Questions as to Paola Group's Continuance as a Going Concern 402 By letter dated 31 January 1990, KPMG Peat Marwick (Mr Hardy), wrote to Paola Holdings. In this letter Mr Hardy advised Paola Holdings that the Paola Group may not be able to continue as a going concern. Under cross-examination, Mr Paola gave evidence that he believed he received the 31 January 1990 letter from Peat Marwicks within a few days of 31 January 1990. [T 108] The letter further noted that the Group would have a negative cash flow of $1.5million and that Currabubula Holdings refused to support the Group. The letter is particularly important in the light of evidence given by Mr Booth that the first time he saw the letter was in April 1990 and that at no time did Mr Paola, Mr Plante or Mr Terry discuss the matters set out in the letter with him. His evidence was that had he seen the letter, he would have withdrawn his recommendation that the facilities be increased. 403 Bearing in mind the importance of the letter, it is set out hereunder in full: ''We have been provided by you with group accounts for Paola Holdings Pty Limited and subsidiaries for audit for the year ended 30th June, 1989. The group accounts comprise the consolidated accounts of Paola Holdings Pty Limited and subsidiary companies excluding the accounts of A.B.E. Fax Pty Limited ("the Paola Group"), together with the separate inclusion of the accounts of A.B.E. Fax Pty Limited ("FAX"). The accounts of FAX have not been consolidated in the group accounts of Paola Holdings Pty Limited since a Receiver was appointed to FAX on 10th November, 1989 and the Receiver has estimated FAX will have a deficiency of net assets of approximately $5.6m. You have advised us that the Paola Group does not intend to provide continuing financial support to FAX and hence it is inappropriate to consolidate the accounts of FAX in the consolidated accounts of the Paola Group. Subject to the exclusion of the FAX accounts from the Paola Group accounts, the Paola Group accounts have been prepared on the basis of the going concern convention of accounting. For the reasons set out below we have formed the opinion that this may not be appropriate for the Paola Group accounts . Our assessment of the position for your review is as follows: $ 000 (i) The net assets of the Paola Group (excluding assets of or claims on FAX) as detailed in the group accounts as at 30th June, 1989 are 919

(ii) We sought to review budgets and profit forecasts of the Paola group for the year ending 30th June, 1990. The group's projections indicate a projected loss for the year of $475,000. We have reviewed the projections and have had the benefit of reviewing actual trading results to November/December, 1989. On the basis that A.B.E. Jet Charter Pty Limited has not yet sold the jet aircraft owned by it, the lease portfolio of A.B.E. Credits Pty Limited has not been sold (or the company sold by the group) and the new refinancing loan arrangements with the State Bank we have estimated the group loss to be, as set out below; (1,044)

We are unsure of the specific nature of the liabilities that may arise from the receivership of FAX. We have previously requested that directors provide us with their assessment of these liabilities, whether contingent (leases) or current (shortfall of secured creditor). Further we require your advice on what effect the letter of comfort, dated 29th November, 1988, issued by A.B.E. Holdings Pty Limited to the firm in respect of FAX, may have on the group's affairs. We note that a similar letter has been issued in respect of A.B.E. Jet Charter Pty Limited dated 29th November,1989. The cash flow results of the above projections would indicate a negative cash flow to the group of approximately $1,500,000 (items (ii) & (iii) during the 1990 year which would require the support of shareholders or third party creditors . We understand the Paola group has received additional bank overdraft finance based on security over freehold properties provided by Currabubula Holdings Pty Limited, a company owned by the Paola family. This security is not available to other group creditors. In view of the above projections we have sought advice as to whether Currabubula Holdings Pty Limited would provide agreements of financial support to the Paola group of companies. We have been advised that such agreement of support will not be given . Accordingly it is necessary to review the financial state of affairs of the Paola Group as an independent group without the financial support of any other party. We have formed the view that on this basis the Paola Group may not be able to continue as a going concern . In view of this assessment we have prepared our audit report on the group accounts on this basis and attach a copy of the proposed report for your consideration. After you have had an opportunity to consider the contents of this letter we should be grateful for your advice on the matters raised. Mr John Richardson of our Sydney office has been involved in the consideration of these issues and is also available for discussions if required.'

[Emphasis added] 404 In paragraph 7 of his statement of 14 May 1998, Mr Booth had given some evidence in relation to a copy of the 31 January 1990 letter which was annexure 'H' to the statement. That annexure comprised only the 3-page letter. In fact the materials in evidence at PX 1026 and following include a version of the 3-page letter to which is appended a 2-page document across which a stamp reading 'Preliminary Draft for Discussion Purposes Only' prominently appears. The draft reads as follows: 'Because of the material uncertainty referred to above, we are unable to form an opinion as to whether the consolidated accounts of Paola Holdings Pty Limited and subsidiaries (excluding A.B.E. Fax Pty Limited) are properly drawn up in accordance with the Companies (New South Wales) Code and so as to give a true and fair view of: (i) the state of affairs of the group at 30th June, 1989 and the result of the group for the year ended on that date; and (ii) the other matters required by section 269 of that Code to be dealt with in the accounts; or whether the accounts have been drawn up in accordance with Australian Accounting Standards and applicable Approved Accounting Standards. A qualified audit report has been issued on the accounts of A.B.E. Jet Charter Pty Limited and A.B.E. Fax Pty Limited for the year ended 30th June, 1989. The particulars of these qualifications are as follows: The accounts of A.B.E. Jet Charter Pty Limited have been prepared on a going concern basis, which contemplates continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business. The company incurred an operating loss of $928,310 during the year ended 30th June, 1989, and as at that date the company's current liabilities exceeded current assets by $509,890 and total liabilities exceeded total assets by $730,457. Subsequent to balance date the company has continued to trade at a loss and the company's principal asset, a jet aircraft, is listed for sale. The directors believe the aircraft will realise its book value on sale. The company has received a letter of undertaking from a related company, A.B.E. Holdings Limited, to continue to provide financial support. We are unable to determine whether that letter is a legally enforceable commitment of the related company. Further, we are unable to determine, based on profit forecasts and other information provided by the directors of the related company, whether that company could meet the demands made upon it under the letter of support, if required. The accounts of A.B.E. Fax Pty Limited have been prepared on a going concern basis, which contemplates continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business. The company incurred an operating loss of $2,151,616 during the year ended 30th June, 1989, and as at that date the company's current liabilities exceeded current assets by $3,644,444 and total liabilities exceeded total assets by $3,764,372. Subsequent to the 30th June, 1989 the company continued to incur operating losses and a Receiver was appointed on10th November, 1989. At that date, a "Report as to Affairs" was completed by the Receiver which disclosed an estimated deficiency in net assets of $5,639,912. Accordingly, the company has incurred a loss of $1,875,540 from the 30th June, 1989 to 10th November, 1989. We are unable to determine what proportion of this loss relates to either trading or the write down of assets to their realisable value. Furthermore, the directors have not made any provision for any losses which will be incurred on realisation against the amounts that the assets are currently recorded in the balance sheet, reclassified non-current liabilities as current and provided for closure costs and contingencies that could be expected to crystallise on cessation of the company's operations.' [pages 1030-1031] 405 In paragraph 7 of his statement of 14 May 1998, Mr Booth had said: 'The first time that I saw that letter [being annexure 'H' to his statement] was in April 1998. At no time did Paola, Plante or Terrey discuss with me the matters which are set out in that letter. The letter makes reference to matters which are contrary to the understanding that I had between October 1989 and February 1990 of the position of Paola Holdings' companies. [I interpolate that this sentence was only admitted as indicating a reference to what follows in the following two sentences.] In particular, the letter states that the Paola Holdings Group would have a negative cash flow during the 1989 to 1990 year of $1.5 million whereas the documents presented to me by Mr Paola indicated a positive cash flow of for the first six months from January to June 1990 of $1.6 million. The letter also states that Currabubula Holdings had refused to provide financial support to the Paola companies, and that the Paola companies might therefore not be able to continue as a going concern . . . If I had seen this letter or been informed of the matters set out in it I would have withdrawn the submission which I had made in support of the application for the increase in facilities and I would not have signed the letter of offer dated 1 February 1990 . . . If I had seen the letter after 1 February, I would have withdrawn the offer or recommended that the increase in facilities be withdrawn.' 406 Under cross-examination, Mr Booth recalled that he had expressed two views in relation to the letter. 'One was surprise on the profit position of the Group and a statement that Currabubula would not be made available to support the position of the other companies'. [T 490] 407 Under cross-examination, Mr Booth accepted that he appreciated that the letter was a letter from the auditor raising concerns about the Group and that he knew that the accounts of the Company were prepared by the Company and not by the auditor. He accepted that he knew that the underlying information was marshalled by the Company and put into the final accounts and that it was common for auditors to have discussions with the audited company and its management about concerns which the auditors had about certain matters. On being shown the document entitled 'Preliminary Draft for Discussion Purposes Only', Mr Booth indicated that he was not certain whether that additional document was part of the material that he was aware of when he made his statement of 14 May 1990. However, he said 'given that this was the only part of the document annexure to the statement, I'm concluding that was the case' - suggesting as I understood him that although he was not certain, his conclusion was that he had made his statement of 14 May 1990 without being aware of the 2-page 'Preliminary Draft for Discussion Purposes Only' document. [T 490-493 generally] 408 Mr Booth's reading of the letter was that it was a fairly conclusive statement that the auditors were going to give an opinion, that the opinion was not as a going concern. His view was that the letter did not seem to invite further discussion on the topic and it was upon that basis that he made his statement on 14 May. [T493] 409 The cross-examination continued: 'Q. And its on the basis that further discussion wasn't being invited, as you understood it, that you gave the opinion that you would have withdrawn the offer, as you put it, of the increase facilities? A. Putting myself as the account manager at the time, had I received this letter I believe that's what I would have done.' Q. As I say, that's because you formed the view the letter didn't invite further discussions of the matters referred to therein. A. That's my reading of it. . . . Q. And I suppose you noticed . . . the reference to ABE Jet intending to sell the aircraft . . . ? A. The words in that point are on the basis that ABE Jet had not yet sold the jet aircraft. Q. Yes and you knew though they were trying to sell the aircraft? A. Yes. Q. And you knew they were relatively confident that the aircraft would be sold in the first half of 1990? A. That was the information we were receiving yes. Q. So don't you think if you'd received this letter, . . . .you might have talked to Mr Paola upon the basis upon which they thought they'd be able to sell the jet? A. That's not a question I can answer with a yes or no. . . . Yes, we would have spoken to Mr Paola but not, I think, with the current offer still in place. Q. But you wouldn't withdraw the offer would you? You wouldn't prevent it being put into effect because it was an approval of the Credit Committee, without first making serious efforts to talk to the management of the customer about the matters set out in the letter? A. Yes. . . Q. And did you see . . . that the Group, Paola Holdings including ABE Holdings, would incur liabilities out of the guarantees given to the creditors of Fax; did you notice that? A. Yes . . . Q. . . . Do you see . . . an additional $500,000 figure there was being discussed in relation to claims by creditors of Fax. Do you see that? A. Yes. Q. And you understood when you read that last year that they were claims made against ABE Holdings? A. Yes. Q. And you understood didn't you at least at the time you made your statement that in February 1990 Mr Paola was proposing a mechanism to the Bank to quarantine the Group from claims from those very creditors? A. You're talking here of the meeting of 12 February? Q. Yes? A. Didn't you think then, before you made your statement on 14 May last year that in relation to that figure also you would have had to have talked to Mr Paola? A. Prior to that meeting yes. Q. And in relation to whether or not you would withdraw the offer, certainly if you learned of this letter after the meeting you'd think well, hang on, that's what Tony Paola was talking about, I'd better talk to him further before I take any dramatic action on this auditor's letter? A. This is a very difficult issue for me to answer. It's a hypothetical situation. Can I rephrase what I had said earlier, the Bank would not have approved the settlement of that facility on the disclosure given in that letter without significant variations to the arrangements for those facilities. Q. . . . You knew didn't you in the early part of 1990 that Mr Swinburne had formed the view - and you agreed with it apparently - that this Group could not service its then debt level with the Bank from its operations you knew that? A. Correct, yes. Q. You knew from December that a $1.3 million loss had been made to the end of November? A. Correct. Q. You hadn't been told anything up to and including 12 February to suggest that that picture had in some way got significantly better? A. No. Q. You knew that the Group could only satisfactorily operate if it sold assets and reduced debt levels to levels that it could service from its operating income; you knew that didn't you? A. That was our view yes. Q. And there is nothing in this letter I suggest to you that changes that perception of the Group - nothing at all? A. But for one very significant issue. We now have an independent accountant in informing us officially. Q. Informing you officially of what? You never got this letter. A. Well you asked me what I would have done had I got this letter . . . Q. So you say of course the view expressed in your statement had you seen it is on the basis that you were provided it by the auditor? A. Yes . . . the emphasis being on the provision of an official notification by an independent authority yes. Q. Because until it was so provided, especially when you've seen the discussion payment element, you would accept, wouldn't you, that it's a private communication between the auditor and the client about a possible qualification to the accounts? A. I agree that it's a private communication between the auditor and the client about a possible qualification to the accounts? A. I agree that that it's a private communication. I think "possible" is not an accurate word in that instance . . . Q. Did you notice when you carefully read this letter before making your May 1998 statement that it referred on two occasions to support from the Paola Group, or from Currabubula Holdings? A. I recall that it referred to support from Currabubula. Q. And you noticed I suppose that the auditors were saying in effect without a guarantee of that support the Paola Group may not be able to continue as a going concern? A. Yes. Q. You say that you would have taken the action his Honour has referred you to in paragraph 7 had you seen this letter, and you've said the basis of that, but you, of course, took action to secure the interests of the Bank, that was your job? A. Yes. Q. You weren't a flag bearer for other creditors or other people Mr Paola did business with, your concern was with the position of the Bank? A. Yes. Q. You knew that the auditors' concern addressed only the Paola Group proper - Paola Holdings and its subsidiaries didn't you? A. My reading of this letter was it included all companies other than Currabubula Holdings. Q. And it was your understanding certainly in February 1990 that the Bank had security over Currabubula's properties to which it could look if it had to? A. Yes. Q. And therefore won't you agree with me that the basis of concern expressed by the auditor in the paragraph "in view of the above" was really only of academic interest at best to the Bank? A. . . . I can only repeat what I've already submitted. The Bank had it seen this letter would have reacted. Without going into great length as we are now about what the possible interpretations of the paragraphs were, an auditor was saying that the Group could possibly not meet its commitments, that that would have raised alarm bells. Q. That's something that you of course knew in January from Mr Swinburne's note - you knew it? A. Knew it? I don't know if "knew it" was an accurate word, certainly suspected it; were concerned about it, yes.' [T 493-498] February 1990 410 On Mr Paola's evidence in February 1990, he became aware that Fernbank Industries intended to set its shareholding in U-Bix (N.Z.). 1 February 1990 - Facility Letter - Increase to $8.5million 411 By letter of 1 February 1990, the Bank wrote to Paola Holdings and to Currabubula Holdings offering to extend its facility to $8.5million together with a facility for leases of $500,000. That letter, which for the first time included ABE Fax, ABE Travel, Franxton and Pyojit in the list of borrowers, is set out in Appendix 6. 412 In early February 1990, Mr Diamond was asked by Mr Peter Terrey of ABE to approach, on behalf of ABE Holdings as guarantor, Mitsubishi, a major contingent creditor of ABE Fax, with a view to compromising its claim. That approach proved to be unsuccessful. 413 Following that meeting with Mitsubishi, it became apparent on Mr Diamond's evidence, that the contingent liability of ABE Holdings, the detailed affairs of which at that time he was not completely aware, was becoming a real issue affecting ABE Holdings. He was then asked by officers of ABE Holdings to assist in determining a strategy to protect the company and the secured creditors in the first place from the contingent unsecured guarantee claimants flowing from ABE Fax to ABE Holdings. 414 He gave evidence that in that regard he had met with Mr Paola and Mr Terrey on a number of occasions to discuss various strategies in the early part of February 1990. 415 His evidence was that the strategy which was determined, was effectively that set out in the letter of 13 February 1990 from Ferrier Hodgson to the State Bank. 416 On 5 February 1990, a meeting of the directors of Paola Holdings took place. At this meeting the letter from the auditors was tabled. The minutes record the auditors' expressing an opinion in the letter that the going concern convention may not be appropriate for the audit report in respect of the 1989 year, and that the directors 'discussed some of the options available to rectify the problem'. The minutes include the following: 'The directors discussed some of the options available to rectify this problem, including a letter of support from Currabubula Holdings and the sale of ABE Jet Charter Pty Limited to Currabubula Holdings. It was noted that the auction of Durhambone was set down for 4 April and that Okura Australia was seeking head office approval to defer their claim at present. ' [PX 1075] 417 On 5 February 1990, Mr Cameron and Mr Herring both resigned as directors of Paola Holdings and on the same day Mr Hardy was advised by Mr Richardson of KPMG Peat Marwick, Sydney, that there would be no guarantee from Currabubula to support the Paola Group as the 'other' shareholders of that company would not agree. Mr Hardy's note of 5 February 1990, appearing at PX 1078 and 1079, includes the following: 'John Richardson met with Tony Paola and Duncan Plante in Sydney today to discuss letter to directors and qualification. . Basically, they wanted . . . take appreciable action to avoid qualification, if possible. The other directors had recommended a conservative approach (?) but Tony believed problems could be solved. . Could not give a guarantee from Currabubula to this Group as the 'other' shareholders of that company would not agree. (Who are they?)' [This does not make sense as they did it with the Bank?] PX 1078 418 On 7 February 1990, the Paola Group companies accepted the letter of offer to extend the facilities. 12 February 1990 419 Mr Booth's evidence was that the drawings of the Paola Group exceeded $8.5million on or about 12 February 1990 at which time the account was overdrawn and outside of even the revised facility. His evidence was that the drawings of the Paola Group were monitored closely by him at that time and he would review the total drawings each day. His evidence was that the figures were a day old because the accounts would be updated each night to take account of the transactions that occurred during the day and that for this reason he would have learned that the account became overdrawn on 12 February 1990, on the following day, being Tuesday 13 February 1990. [Statement 20 November 1996 para 34] Meeting of 12 February 1990 420 On 12 February 1990, a meeting took place between Mr Paola and Mr Plante and representing the Bank, Messrs Booth, Swinburne and Ms Osborne. Mr Diamond of Ferrier Hodgson was also present as was Mr White of Blake Dawson Waldron. Evidence of Mr Paola 421 Mr Paola had in his first statement stated that the meeting took place on 13 February 1990. In evidence, he accepted that the meeting in all likelihood took place on 12 February 1990. 422 In his statement, he had stated that the purpose of the meeting was to discuss the options open in relation to the imminent claims against ABE Holdings and that it was proposed that Currabubula Holdings was to purchase all the plant and equipment and land of ABE Holdings at book value in order to protect the assets of the company. 423 In his statement, he had asserted that he recalled saying to the Bank at the meeting words to the effect: 'If you don't like the idea of putting ABE Holdings into receivership we won't do it. Currabubula will give it the support it needs.' 424 He had also said in his statement that during the course of the meeting, there was considerable discussion as to whether the suggestion was to be actioned. He recalled in his statement that at the end of the meeting he had a conversation with Mr Swinburne in which words to the following effect were said: 'Mr Paola: Jim what do you think? Mr Swinburne: It sounds alright Tony we will just have to sit down and talk about it amongst ourselves now. Mr Paola: Just keep in mind that if the bank for some reason doesn't want us to do it, then we won't. What we're doing is purely trying to protect the assets and not pay the full amount on leases for premises we no longer occupy. Mr Swinburne: She'll be alright Tony just leave it with us.' 425 In his evidence in chief, Mr Paola said as follows: 'Q. . . . I want you . . . to recall . . . the conversation that took place at that meeting as best you can . . . A. I said that we wanted to put a proposal to the Bank which involved ABE Holdings and that Ferrier Hodgson's representative would explain the mechanics. I further said that this was a proposal and we were seeking the Bank's approval. Mr Diamond said words to the effect that they had come to the conclusion that the best way to achieve our objectives was to put a - for the Bank to put a receiver into ABE Holdings and Diane Osborne said after Mr Diamond completed his explanation that - she said something like, "What you are asking us to do is agree to us, your company in committing a fraud on the unsecured creditors of ABE Holdings". I said "No, that's not what we're trying to achieve but just simply - but we are looking to isolate - isolate ABE Holdings so it doesn't have any - doesn't have to pay those creditors which are flowing through from guarantees provided by - provided on behalf of ABE Fax". I then further said "Of course we are not looking to do anything which the Bank is not happy with and we wouldn't do this if the Bank doesn't agree. Currabubula Holdings would continue to support ABE Holdings". At the end of the meeting, I can recall on the way out that I said words to Jim Swinburne "Jim, if for some reason the Bank doesn't want to do this, then we won't do it" and he said words to the effect that "She'll be right Tony. Just leave it with us. We will talk about it amongst ourselves and get back to you" and the meeting ended.' [T 50] Evidence of Mr Booth 426 Mr Booth gave evidence on statement that he did not recall Mr Paola stating words to the effect that if the bank did not like the idea of putting ABE Holdings into receivership this would not be done or that Currabubula would give ABE Holdings the support it needed. 427 Mr Booth's evidence was as follows: 'At the meeting, I recall that the Bank was informed that ABE Holdings, a holding company for several other important companies within the Paola Group of Companies, was insolvent. The representatives of the Bank were informed that it had approximately $1million shortfall from total debts to the Bank of approximately $4.8million. A request was made to place ABE Holdings into receivership. I recall there was discussion about creditors to whom ABE Holdings had a liability by reason of it guaranteeing the debts of ABE Fax, however I cannot recall the size of the debts referred to at the meeting. These debtors could take steps to wind up ABE Holdings. It was proposed by Paola or his representatives that all the assets of ABE Holdings be sold to other members of the Paola Group of Companies at market value prior to placing the Company into receivership. We were also told that a report from Ferrier Hodgson would be submitted to the Bank within the next day.' [Para 36 Statement of Mr Booth of 20 November 1996] 428 Under cross-examination, Mr Booth gave the following evidence: 'Q. And I just want to ask you a number of questions about what was said at that meeting [the 12 February 1990 meeting] if you can recollect. Now during the course of that meeting I want to suggest to you that the position of ABE Holdings was obviously discussed? A. Yes. Q. And the idea of putting ABE Holdings into receivership was raised with the Bank? A. Yes. Q. Now I want to suggest that Mr Paola said words to the effect, if the Bank didn't like the idea of putting ABE Holdings into receivership, he wouldn't do it. And that he said "Currabubula will give it the support it needs" do you recall that ? A. I can't recall those words, no . Q. But it certainly possible, isn't it, that Mr Paola said something to that effect? A. He could have, yes . Q. Now, do you recall any discussion between Mr Swinburne and Mr Paola at the end of the meeting? A. No. Q. And you don't recall being party to any discussion between Mr Swinburne and Mr Paola as the meeting was breaking up? A. Oh, no, no recollection. Q. Now, do you recall whether there was any discussion of the position of unsecured creditors of ABE Holdings? A. I think there was. Q. And do you remember Ms Osborne saying anything about their position? A. No. Q. Can I put something to you and see if it stirs any memory. Would it be the case that Ms Osborne said something like "What you're asking us to do is to agree to your company committing a fraud on the unsecured creditors of ABE Holdings"? A. I don't think so, I think - no, I can't recall. Q. And I want to suggest to you that at some stage Mr Paola said - in the context of unsecured creditors - "no, that's not what we're trying to achieve, but simply we are looking to isolate ABE Holdings so it doesn't have to pay those creditors which are flowing through from guarantees provided on behalf of ABE Fax"? A. Again, I can't recall. Q. But it's your recollection, isn't it, that the thrust of what you were being told at the meeting by Mr Paola was that they wanted a receiver appointed to ABE Holdings to isolate that company from claims of contingent creditors in relation to guarantees given by ABE Holdings for some of the debts of ABE Fax . . . A. The question is that did Mr Paola wish the Bank to appoint its receivers to ABE Holdings because of claims by creditors of ABE Fax that had rights against ABE Holdings? Q. Yes that's a much better way of putting it? A. I think the answer is yes. Q. And I want to suggest to you that Mr Paola made it entirely clear that he wouldn't press the issue of an appointment of a receiver to ABE Holdings if the Bank wasn't perfectly happy with that course of action? A. Yes, the answer is yes .' [T 488-489] [Emphasis added] 429 A later information paper written by Mr Booth stated inter alia in relation to the 12 February 1990 meeting, the following: 'During a meeting with Paola Group Management on 12 February 1990 we were advised of concerns held for potential claims by creditors of ABE Fax whose arrangements give them recourse to ABE Holdings. (These creditors are primarily lessors of equipment to ABE Fax whose lease documents contain guarantees from ABE Holdings). Whilst offers had been made by other Paola companies to continue meeting the lease commitments it appears these offers will not be accepted and the leasing companies will shortly foreclose. Whilst the amount involved is less than $500,000, Mr Paola does not want to allow claims to be made in ABE Holdings. In a report prepared by Ferrier Hodgson (who is advising Mr Paola) it was reported that whilst the company's assets exceed liabilities, a large proportion of the assets are in the form of inter company loans which will not be readily repayable.' [PX page 1150] Ms Osborne's Note 430 Ms Diane Osborne's note of the 12 February 1990 meeting, Exhibit PX pages 1095 to 1096 is in the following terms: 'Paola 2.50 pm 12/2/90 Stop 3.45 pm ABE Holdings Ltd on an isolated basis has approx. a $1 million shortfall in debt to the bank of approx. $4.8 million. ABE Holdings is a major wholly owned shareholder of several companies already lint lent to by the bank. Northern Rural Services P/L (OP), Campbell Rixon & Graham P/L (NOP), Pyojit P/L (OP), Automated Business Equip. P/L (in liquidation), ABE Credits P/L (OP) & ABE Finance (30% owned).

NB No creditor's claims at this time - However there are $300,000 trade debtors who could take steps to wind-up. Gds for receivership. Co. is insolvent. It is proposed that all assets of ABE's assets be sold to other members of the other group at or above market value prior to placing the Co. into receivership. ABE Jet Charter. (Bke debt $500,000). Only assets plane ($2.2 million) and boat ($? ). Plane being sold. It is not viewed as necessary as placing into receivership the Co. at this time. A report will be submitted by Ferrier Hodgson within next day to enable Bank to determine avenues. F.A should only be completed after prob. with ABE Holdings is resolved. GIO ( unsecured lessee of property to Co.) intends making demand for payment next week.' To my mind there is nothing in the note which is materially inconsistent with Mr Paola's evidence as to the events at the meeting. Evidence of Mr Swinburne 431 In his statement of 18 November 1996, Mr Swinburne gave evidence that he recalled attending a meeting at which Mr Paola, Mr Silvia and others were present at or about 12 February 1990. He recalled that at the meeting he and other bank officers present were informed that another company in the Paola Group company ABE Holdings was probably insolvent because of the guarantees he had given to the creditors of ABE Fax Pty Limited. He could not recall Mr Paola saying words to the effect: "If you don't like the idea of putting ABE Holdings into receivership, we won't do it. Currabubula will give it the support it needs". 432 In so far as Mr Paola had given evidence as to the conversation he had with Mr Swinburne at the end of the meeting referred to above, commencing "Jim, what do you think" and finishing "with us", Mr Swinburne in his first statement said that he did not recall specifically this conversation but "certainly do not believe I said . . . 'she'll be alright Tony, just leave it with us'". His recollection was that he said very little during the meeting and that what he said was very non-committal. This was because he regarded the news of the second company being possibly insolvent which was a more significant company in the Group as a very serious matter. 433 In his second statement, Mr Swinburne in relation to the 12 February 1990 meeting, gave evidence that he recollected that at the meeting Mr Paola and/or Mr Silvia had said to the bank officers who were present words to the effect "ABE Holdings Pty Limited is insolvent". 434 Under cross-examination, Mr Swinburne accepted that he did not have a precise recollection of everything that was said at the meeting. He was asked: 'Q. And is your recollection generally poor, apart from the words "ABE Holdings Pty Limited is insolvent", do you have any other recollection of what was said? A. I recall it was a reasonably long meeting. It wasn't short. But the significance of insolvency was the issue that was uppermost in my mind. Q. And in the meeting I want to put this to you and see if it rings a bell. Did Mr Paola say words to the effect to the bank officers: "If you don't like the idea of putting ABE Holdings into receivership we won't do it. Currabubula will give it the support it needs." I don't recall that. Q. You wouldn't deny it was said though; you just have no recollection? A. Yes, I can't deny it but I don't recall it.' [T 532] 435 Also under cross-examination, it was pointed out to Mr Swinburne that in paragraph 11 of his first statement, he had only specifically taken issue with Mr Paola's evidence that, at the end of the meeting Mr Swinburne had said to Mr Paola "She'll be alright Tony, just leave it with us". It was put to Mr Swinburne at transcript page 533 that he did not take issue with the first part of Mr Paola's evidence of what had been said between himself and Mr Swinburne because Mr Swinburne is not in a position to deny that this may have been said. Mr Swinburne accepted that he thought this was true. [T 533] 436 In short, Mr Swinburne could not deny that Mr Paola had said "Jim what do you think" and Mr Swinburne had said "It sounds alright Tony we will just have to sit down and talk about it amongst ourselves" and Mr Paola had then said "Just keep in mind that if the Bank for some reason doesn't want us to do it, then we won't. What we're doing is purely trying to protect the assets and not pay the full amount on leases for premises we no longer occupy". Evidence of Mr Diamond 437 Mr Diamond in his statement gave evidence that the minutes of the 12 February 1990 meeting taken in Ms Osborne's handwriting, reflected to the best of his recollection the gist of what was said at the meeting. 438 In his statement Mr Diamond had further stated as follows: 'I recall at that meeting Paola said words which I do not recall but effect (sic) of which were that it was indicated ABE Holdings was insolvent and in order to best protect the position of the bank and the company it was recommended that a receiver be appointed. Mr Paola also indicated he did not wish to do anything that was out of step with the bank and did not wish to precipitate an action from the bank which was inconsistent with his best interests or the interest of his companies . . . At the meeting . . . Mr Paola suggested that I would prepare a report and I agreed to assist the bank to consider what avenue it would take.' [Statement para 20] 439 Under cross-examination Mr Diamond said that he could recall the atmosphere of the meeting and recalled there having been discussed at the meeting a proposal put on behalf of the Paola Group which involved the sale of certain assets to Currabubula. The other part of the proposal raised for consideration at the meeting which he could recall was: 'Mr Paola was explaining to the Bank that his Company, ABE Holdings, was insolvent and that the Bank should, in his opinion, take action to protect its position by the appointment of a receiver and following on from such an appointment, he canvassed the concept of acquiring some of the assets at a later time from the receiver to enable him to retain control of his assets.' [ T 228.25] 440 Under cross-examination, Mr Diamond said that he recalled something being said by Mr Paola to the effect that he wouldn't go ahead with the proposals if the Bank was not happy with them. He was then asked: 'Q. And is that really the extent of your recollection about what was said at the meeting" A. That's the content of what was said at the meeting, yes as I recall . . .' [T 228] 441 Mr Macfarlan did not put to Mr Diamond that this recollection was incorrect or that Mr Paola had not said that he would not go ahead with the proposals if the Bank was not happy with them. 442 It will be noted from the above extract from Mr Diamond's statement that in paragraph 20 of his statement he had used the words 'Mr Paola also indicated he did not wish to do anything that was out of step with the Bank and did not wish to precipitate an action from the Bank which was inconsistent with his best interests or the interest of his companies'. 443 Mr Diamond, having given an answer to the effect that what was really the extent of his recollection about what was said at the meeting was something being said by Mr Paola to the effect that he wouldn't go ahead with those proposals if the Bank wasn't happy with them, was not further tested on his evidence that Mr Paola had referred to not wishing 'to precipitate an action from the Bank which was inconsistent with his or his company's interests'. 444 Mr Diamond was also asked to explain what he had meant when he had referred to the gist of the proposal as being 'to protect the viable assets of the Group on behalf of the secured creditor and the Group from the effective unsecured claims'. His answer was as follows: '. . . The proposal which was made in that report was made in the context where one of the unsecured creditors - a major contingent unsecured creditor was threatening to wind up the company - that would give rise to, if it was left to run its course - because I didn't believe anybody had the cash to pay them or the desire to pay them at that time, in priority to the Bank - that would give rise to the appointment of a liquidator to ABE Holdings and the gist of the report was to provide the company and the Bank with a mechanism whereby it, as the secured creditor and having a priority position as a secured creditor, could control the sale process as opposed to an external party who was not their agent, but who would be the agent of the unsecured creditors taking control for the purpose of sale.' Evidence of Mr Plante 445 Mr Plante had, in his statement of 27 October 1998, also recalled the relevant meeting as taking place on 13 February 1990. In his statement, he had said: 'At that meeting a proposal was floated to the State Bank that ABE Holdings Limited which was a member of the Group, should have a receiver appointed to the company to quarantine it from potential creditors' claims arising from guarantees it gave in support of ABE Fax Pty Limited. I recall conversations took place to the effect that the proposal was part of the same restructure which involved ABE Fax Pty Limited. I recall words were said to the State Bank to the following effect by someone present: "We just want to take ABE Holdings out of the group equation and we are just bouncing this idea off you. What do you think?" I recall that the representations of the State Bank responded to that question to the following effect: "We will be thinking about it." I do not now recall the words spoken at the meeting but recall that the meeting proceeded on the basis that the bank was aware of the cash issues and the trading position of the group that I have described above and that the meeting was discussing how to best work over the problem to protect the Bank in its secured position, keep the group viable and to meet continuing obligations. It was in that context that this proposal was floated.' 446 Mr Plante was not cross-examined on his recollection of the events at the meeting. 447 Ultimately, there was no serious divide as to what had in fact occurred at the meeting. Mr Paola's evidence was in the main, not inconsistent with that given by Mr Plante or Mr Diamond. To the extent that Mr Paola's evidence as to the events at the meeting is inconsistent with that given by any of the witnesses who gave evidence as to these events, I accept Mr Paola's evidence as to what occurred. 13 February 1990 448 By letter dated 13 February 1990, ABE Holdings wrote to the Bank, attention Mr Booth, as follows: 'Following a recent examination of the accounts of ABE Holdings Limited as at 31 December 1989, the directors of the company have determined that the company is insolvent. That insolvency is before consideration of contingent liabilities which might amount to $500,000. The directors have therefore directed me to request that the State Bank appoint a receiver to the company and this letter is to request that Mr Brian Silvia be appointed as the receiver. As discussed at our meeting yesterday it is important that such an appointment be made as soon as possible. Please let me know if you require further information.' 449 The letter was signed by Mr Plante as Company Secretary. 450 On the same day, Ferrier Hodgson wrote to the Bank, attention Ms Osborne. The terms of the letter are set out in Appendix 7. 451 An information paper written by Mr Booth, appearing at Exhibit PX page 150 records that the Ferrier Hodgson letter was served upon the Bank on 14 February 1990. The plaintiffs however accept that both letters were served on the Bank on 13 February. [T 498] The difference is immaterial. 452 Under cross-examination, Mr Booth at transcript 499 recalled that when he had received and read the letter from Ferrier Hodgson, he formed a view that there was concern about the loan recorded to Paola Holdings. He was asked whether he remembered that at the time he read the letter, the restructure of the Group in June 1989 whereby large amounts of inter-company debt had been extinguished. His answer was 'Whether I remembered it specifically at the time, no. I think my recollection was more along the lines that were a number of inter-company debts. I was aware that a number had been forgiven. I was therefore from that point on not sure what the actual situation was between the company. Q. . . . Well would this be an accurate summary of your understanding of the inter company debt forgiveness that we're speaking of : that it was designed to remove debts owed by Currabubula Holdings to operating companies within the Paola Holdings Group? A. I honestly can't remember but I suspect that that may have been the case . . .' [T 499] 453 Also Mr Booth as at 13 February 1990 understood that Paola Holdings Pty Limited was still only a passive holding company. [T 500] 454 At transcript 500, under cross-examination of Mr Booth, the following appears: 'Q. What I want to suggest to you is when you read them [the two 13 February letters] it was clear in your mind that they were part of Mr Paola's proposal on 12 February 1990 for the appointment of receiver to ABE Holdings? A. Yes. Q. And you knew that that proposal, in term, had been advanced on the basis that if the Bank didn't go along with it the proposal would not be pressed and Currabubula would provide financial support to ABE Holdings? A. No, I don't think so. Q. I want to suggest to you that you knew that the letters were advanced in that context? A. I don't think so.' [T 500] 455 It was suggested to Mr Booth in cross-examination that when he spoke to Mr Stenhouse, the Company Solicitor, the discussion was on the basis that a formal statement of insolvency had been made by ABE Holdings. Mr Booth's answer was that he believed that that was what the letter of 13 February was as well. 456 It was suggested to Mr Booth at transcript 501 that the discussion was on the basis that there had been a formal statement of insolvency about ABE and he accepted that the Bank had been formally notified of the insolvency. 457 Mr Booth then accepted that his perception was that the notification had become formal. [T 501] 458 The cross-examination continued: 'Q. You knew didn't you on 12 February that there was a high likelihood that without the financial support of Currabubula Holdings, ABE Holdings would be insolvent? A. I didn't know. I wasn't sure. Q. When you say you weren't sure you were pretty much convinced that was the case weren't you? A. No I wasn't sure. Q. I suggest to you that you spoke to Mr Stenhouse not because something of striking significance had been told to you - that is the insolvency of ABE Holdings - but for legal advice about the formal communication of that position to the Bank? A. My answer is I spoke to him for both purposes. Q. I suggest to you that Mr Stenhouse said that the formal notification meant that there shouldn't be further operations on the existing accounts? A. We sought advice in response to that formal notification. I think that was one of the issues . . . Q. You were advised by Mr Stenhouse that to remove any risk of payments made by Group members to the Bank being found to be preferences, there shouldn't be any further operations on the Number One accounts, as they came to be called, and that new accounts should be opened? A. Yes. Q. And they should operate on a credit basis? A. Yes. Q. In your experience with the State Bank did you ever encounter a case where an operating company in a group came to the Bank and said it was insolvent and the Bank then opened new accounts for it to trade in credit? A. Perhaps not before, but certainly since. Q. I want to suggest to you that certainly at that time that was in your experience unique? A. It's the first time I was directly involved in anything like that yes. Q. Because, just moving ahead slightly, when the Number Two accounts were set up the companies operated freely on them as long as they were in credit? A. Yes. Q. And the Bank didn't try and force the transfer of moneys in credit in the Number Two accounts back into the Number One accounts? A. No. Q. And indeed the Bank in relation to sums of money approaching $150,000 permitted the reverse; that is, to say the transfer of moneys put into the Number One accounts after 15 February into the Number Two accounts? A. I can't recall the amounts but I agree it did occur.' [T 502] 459 Mr Diamond gave evidence under cross-examination in relation to the Ferrier 13 February 1990 report to the Bank, inter alia in the following terms: 'Q. And amongst the assets of ABE Holdings appearing in that Statement of Position was the item "loans to related companies"? A. Yes. Q. Having a book value of $5.725million and an estimated realisable value of $625,000? A. Yes. Q. The total estimated deficiency shown in respect of that Statement of Position was $874,000? A. Yes. Q. And there is an explanation is there not on page 1107 of the item relating to shares in related companies? A. Yes. Q. 1106 - loans to related companies, correct? A. Yes. Q. And amongst those loans was one recorded in the books to Paola Holdings, $4.454million? A. Yes. Q. And the conclusion expressed by this Statement of Position was that that had an estimated realisable value of nil? A. Yes.' [T 230.40-.57] 'Q. And a reader of this statement of position of ABE Holdings Limited could reasonably come to the conclusion that the view was being expressed by this document that Paola Holdings Pty Limited was worthless? A. Yes, potentially. Q. Perhaps let me put another alternative before you agree to that - or that the loan was irrecoverable for some other reason such as the lack of legal enforceability? A. Or if I could suggest that the recoverability was, in the context of this report, circular and didn't add anything to the equation. Q. Yes, well perhaps you could just explain that. A. Because Paola Holdings . . . had loan accounts coming in the other direction, so it had debits and credits through - within the Group, which on a net group basis didn't add anything to it.' [T 231 lines 1-21] 460 Mr Diamond under cross-examination said that the purpose of the report 'was to advise the Bank that the Company was insolvent and could not meet its creditors. It didn't have sufficient liquidity to meet its creditors, and for that reason was under attack by a contingent creditor, being a guarantee for a creditor of ABE Fax, so I was trying to convey to the Bank that if they did not take control of the process, the process would go to the appointment of a liquidator, who would be the agent of the Company and the unsecured creditors and not of the Bank. And therefore, that was the thrust of this report.' [T231.50-232.5] 461 In his statement, Mr Diamond had stated: 'Regarding the Statement of Position in relation to Paola Holdings . . . the insertion of a nil estimated value of Paola Holdings does not say anything either for or against the solvency of Paola Holdings. Since Paola Holdings is part of the Group of Companies, it had circular dealings with the other Group companies, Currabubula Holdings and the Bank. Because of the circularity, it did not add anything to the net estimated realisable value of the particular asset being a loan from ABE Holdings to Paola Holdings. [Para 27] The Statement of Position does not say either way whether or not Paola Holdings was able to pay its debts as they fell due because the Statement of Position was prepared for the purpose of determining the solvency or otherwise of ABE Holdings only. The effect of the Statement of Position is to say that ABE Holdings in the absence of third party support being provided by way of security and cash was unable to pay its debts as and when they fell due.' [Para 28] 462 Mr Diamond also accepted under cross-examination as to the Statement of Position, that what it purported to be was an expression of view about the financial situation of ABE Holdings when looked at in isolation and that no distinction was sought to be drawn in the lists of assets and liabilities between ones that were current and ones that were long term. He also agreed that the conclusion expressed in the Statement of Position was that there was an estimated deficiency approaching a million dollars and that there would have been no such deficiency for ABE Holdings if the debt owed to it by Paola Holdings had been recoverable. He also agreed with the proposition that the recoverability or otherwise of Paola Holdings' debt was a matter of considerable importance in determining what the bottom line position would appear to be from this statement. [T 232-233] 463 He was also asked and answered the following questions: 'Q. And do you not accept that to look fairly at the position of ABE Holdings in isolation one would need to form a view about the recoverability or otherwise of the loan due to it from Paola Holdings? A. Yes. Q. And would you not agree that the view expressed about that issue in this document is that the loan had a nil realisable value? A. Within the context of this report, yes. Q. And would you not agree that a reader of this statement could justifiably reach the conclusion that the author of it was expressing the view that Paola Holdings was worthless? A. One could come to that conclusion, yes. Q. Well there's nothing on the face of this document anywhere is there to suggest that the conclusion would be unjustified? . . . A. No there's not. Q. And the same considerations apply don't they in respect of the item ABE Jet Charter Pty Limited which is shown there in the list of loans to related companies? A. That's correct yes.' [T 233] 14 February 1990 464 Mr Booth's evidence was that as at 14 February 1990 the facility for the Paola Group was still overdrawn and stood at $8,535,577.18 and that he had a meeting with Mr Paul Stenhouse on that day. To the best of his recollection, he was at the meeting together with Mr Swinburne and Mr Owen. 465 Mr Booth's evidence was that the Bank did not at that stage rely upon the default of ABE Holdings to call up the entire amounts then due and owing. [Paras 40 and 41 Statement of 20 November 1996] 466 In the same information paper already referred to, Mr Booth said at PX 1150: 'On Wednesday 14 February 1990 Ferrier Hodgson served us a letter stating inter alia that ABE Holdings was insolvent and requesting the Bank to appoint a receiver to that Company. That request was not complied with for the following reasons: 1. Because of the interlocking nature of our security and of the inter company commitments such action we believe would have made it necessary for the Bank to place all group borrowing companies and group companies providing security to the Bank in receivership also. 2. Some concern expressed by the Bank's solicitors that our placing ABE Holdings in receivership could leave the Bank open to charges of deliberately acting to thwart the claims of other creditors. 3. Our understanding that, even though we are aware that its liquidity position is tight, the Paola Group is solvent. Proposed sales of our security over the next few months should comfortably repay the Bank and all known creditors However, the formal statement of ABE Holdings' insolvency naturally meant that we had to immediately freeze all group accounts and operate separate working accounts on a strictly credit basis. At one point during these recent developments we became concerned as to the group's solvency. We had heard several rumours that section 364 notices had been taken out against various group companies. After discussion with Mr Paola late last Friday we became satisfied that his creditors are all paid up according to arrangements and therefore these rumours were without substance. In conclusion, we see no reason for the Bank to initiate any receiverships at this time. Nevertheless, should the leasing creditors of ABE Holdings be successful in winding up the company or if it is placed in voluntary liquidation, we may have to assume control per medium of receivership. Mr Paola is however, extremely confident this will not happen. He assures us he will be able to pay these creditors before they are able to complete any action. We therefore propose to take no action for the present other than to monitor the position closely. CASH FLOW/ASSET SALES Whilst the present level of debt is not in excess of approved limits, drawings did exceed $8.5million over the latter half of last week. The situation however, was remedied when all the above overdrawn accounts were placed in reduction and all cheques subsequently presented were returned. The approval of 13 December 1989 included cash flow projections to June 1990. The total debt projected for end February was $7.65million. This however, was dependent on the sale of two assets (a small property and the jet aircraft) the net proceeds of which would have amounted to approximately $1 million. Neither of these assets have as yet been sold. The jet however is still expected to sell by the end of the month but at a reduced price. In view of all of the above developments revised cash flow projections have been requested. In the meantime preliminary figures released on Friday indicate the group will be able to continue to trade. Net cash inflows expected this month and in March amount to $330,000 (jet sale not included). A further $1.2 million is expected over the remaining months to June 1990. Offsetting this of course, will be the need to provide for payments to the ABE Fax creditors who were the cause of the present difficulties and whose commitments were not included in the projections. In view of our reluctance to comply with Mr Paola's request we should now be prepared to continue to fund the group's cash flow requirements which will likely now include provision for payment to these creditors. Above all however it is noteworthy that we are now looking to the sale in April of the property 'Durhambone' (bank valuation $10million) to significantly reduce present debt.' [PX 1151] [emphasis added] 467 Under cross-examination, the following was put: 'Q. Does the use of the word "formal" by you there, jog your memory that you were well aware that ABE Holdings could be insolvent, but it was the formal statement of it that caused you to take action? A. No. Q. Why do you, looking back now, think you used the word "formal"? A. That it was provided by an independent matter. Q. Well is that a formal statement? A. That was my definition of it in that case . . .' [T 504] 468 The information paper appears to have been addressed and/or copied to Messrs Swinburne and Cambridge and to the creditor committee and to the agenda clerk. [See Exhibit PX page 1148] 469 Mr Booth had no recollection of Mr Paola or any other person raising with him the use of the words 'in liq' on statements sent to companies in the Paola Group of Companies at any time relevant to these proceedings. [Statement 20 November 1996 para 48] 470 Mr Booth's evidence was that even prior to the Bank being informed of the insolvency of ABE Holdings Limited, the Bank had been pressing Mr Paola to reduce the Paola Group of Companies' indebtedness to the Bank. In that regard he referred to the facility letter of 1 February 1990 requirement for the Group debt to be reduced from $8.5million to $7.5million by 31 May 1990. His evidence was that Mr Paola had been telling him for approximately 4 or 5 months prior to February 1990, that he was intending to sell the Durhambone property. This, as Mr Booth recalled, was a large property and its sale he believed would very substantially reduce the indebtedness of the Paola Group of Companies to the State Bank. Accordingly, his evidence was that the Bank was very keen for Paola to realise the Durhambone and other assets. [Statement 20 November 1996 para 49] 471 Mr Stenhouse gave evidence that although he may have attended the meeting together with Mr Booth, Mr Swinburne, Ms Osborne, Mr Paola and Mr Diamond and others, he has no recollection of doing so or of the events described in paragraphs 35 and 36 of Mr Booth's statement. 472 In a supplementary statement, Mr Stenhouse gave evidence that on many occasions whilst he was employed by the State Bank, he was asked to advise by a Bank Officer as to what he should do following upon receipt of information indicating that a customer was insolvent. Mr Stenhouse gave evidence that it was his practice to advise that no further drawings should be allowed on existing operational accounts and any further deposits should be made to new accounts, against which drawings could be made. His evidence on statement was 'I am aware that it was the Bank's practice in such circumstances to mark the 'frozen' accounts as 'in liq' or 'in reduction' on the bank statements and other documents relating to them'. [PX D17A] 473 Under cross-examination, Mr Stenhouse was shown PX 2388, being a Bank document entitled 'Lending Administration - In liquidation'. Across the top of this document, as admitted into evidence, are the handwritten words '1990 Instructions'. Mr Stenhouse recalled seeing this document before and accepted that it was an instruction of the Bank relating to the placing of overdrawn accounts in liquidation. It was an instruction with which he recalled being familiar. It was an instruction which applied, he accepted to his thinking, when a Bank Officer advises or seeks advice about an insolvent company. His evidence was that he was intending to rely upon this instruction when he spoke of Bank practice in his statement. He could not, however, indicate any part of the document which referred to insolvent companies. He was then confronted in cross-examination with a page of the document at PX 2392 reading, inter alia: 'Advice to borrower. The borrower, except in the case of insanity, is to be advised promptly when his/her account has been placed "in liquidation". Where the advice has been conveyed verbally it is to be confirmed by letter which should cover: . Overdraft account placed "in liquidation" . Future banking operations to be transacted through a Number Two or Working Account. . Number Two or Working Account to be conducted on a credit basis.' 474 Mr Stenhouse accepted that these were the Bank's instructions, including that advice should be conveyed verbally or by letter and that the letter was to say the overdraft account had been placed in liquidation. It was put to Mr Stenhouse that in fact the placing of the words 'in liq' on a bank account would be a very rare event but he said this was not the case to his knowledge. He was asked: 'Q. And would you agree with me that the Bank's policy contemplated the borrower being advised, not by some notation on the statement, but by a letter clearly referring to the account being placed in liquidation. Would you agree with that? A. In terms of that, yes. Q. But your advice as an experienced man, familiar with the Bank's instructions in 1990, would have been, wouldn't it, write the customer a letter clearly explaining that the account has been placed in liquidation? A. That's putting words in my mouth. Q. Well that's the essence of cross-examination, I'm afraid. Do you agree with it or not? A. Yes in principle.' [Transcript 554] 15 February 1990 and the 'Freezing Letter' 475 Mr Booth accepted at transcript 504 that there were a number of cheques drawn on the Number One accounts which were presented after the freezing date which were not immediately paid. [T 504-505] 476 On 15 February 1990, Mr Booth forwarded to Mr Plante a facsimile enclosing copies of a number of cheques 'returned'. 477 The materials enclosed under cover of this facsimile appear at PX 1153-1160. 478 Copies of a number of the cheques are legible and copies of other of the cheques are difficult to decipher as to all details. It does appear, however, that a number of the cheques can be correlated with cheques originally part of the first part of Schedule 1 in the summons filed on 23 December 1995 and not pressed in the final summons on the cheque dishonour cause of action. Hence, in respect of the cheques originally pursued on the dishonour cause of action and said to have been presented on 13 February 1990, it seems clear that although presented on 13 February 1990, cheques numbered 563607, 563627, 563619, 563610 and 563632 were all dated 31 December 1989. It also seems clear that of the cheques presented on 13 February 1990, cheques numbered 563681, 563678 and 563673 were all drawn on 30 January 1990. In short, it appears that ABE Holdings had held back a number of cheques. 479 At approximately 3pm on 15 February 1990, Mr Booth forwarded a further facsimile to the managers, Tamworth, Moree, Narrabri, Gunnedah and Macquarie Centre. 480 The message read: 'As advised in my telephone calls today all current accounts for the Paola Group of Companies are to be frozen forthwith. For details of accounts see attached listing (note ABE Travel which is in credit is not to be included for this action). A request to open number 2 accounts for certain of these entities is attached. Could the relevant branches arrange new accounts as requested. I believe specimen signatures are already held. Note: 1. All further drawings on the existing current accounts are to be returned. 2. All the new number 2 accounts are to be operated on a credit basis only.' [PX 1163] 481 At approximately 5.30pm on 15 February 1990 a letter was forwarded by Mr Booth by facsimile to the Paola Group - addressed to the Managing Director, Paola Group of Companies; reading as follows: 'As advised in our telephone conversation with Duncan today all current accounts operated by the companies of the Paola Group (see list attached) have been frozen. No further drawings are to occur on any of these accounts. The above action was necessary in order for the Bank to "crystallise" present debt levels in view of the disclosure of 13 February 1990 regarding the solvency of ABE Holdings Limited. I should add that it has already been necessary to return certain cheques presented to the Bank on 14 and 15 February 1990 in order to keep overall drawings of the Group within the $8.5million limit. Your request that the Bank appoint a receiver to ABE Holdings is presently being considered. In the meantime, in order to enable the Paola Group to continue to trade, it was recommended to Duncan that new accounts be opened and this is now being carried out in accordance with Duncan's faxed request (please note these accounts are to be operated on a credit basis only). Discussions as to how the Bank will respond to your request (to appoint a receiver to ABE Holdings Limited) and how the Bank will fund the Paola Group in the immediate future will be made following a further meeting with Ferrier Hodgson & Co which is presently planned to take place tomorrow. We will contact you as soon as possible after that meeting to relay our decisions.' 482 The letter was signed by Mr Booth and was copied to Mr Plante; the facsimile to Mr Plante requesting him to relay the letter to Mr Paola. 483 The list attached to the letter was headed 'Detail of Current Accounts Frozen as at 15 February 1990' and named the accounts as those of ABE Jet Charter; ABE Holdings (Office); ABE Holdings (Pastoral); Currabubula Holdings; Piojit; Northern Rural Services Tamworth; Northern Rural Services Narrabri; Northern Rural Services Gunnedah; Northern Rural Services Moree. 484 A note at the end of the attachment reads: 'Note: - Current account for ABE Fax . . . is already frozen - Current account for ABE Travel is in credit funds and is therefore not included.' 485 Schedule 1 to the amended summons identifies the detail of cheques said to have been drawn by Currabubula Holdings and by NRS on its accounts at Narrabri, Moree, Tamworth and Gunnedah, all of which are alleged to have been presented on 15 February 1990. 486 By letter also dated 15 February 1990, ABE Holdings (Mr Plante) wrote to Mr Booth in the following terms: ' Further to our telephone conversation earlier, would you please open the following new accounts:- A.B.E. Jet Charter Pty Ltd (No. 2 A/c) A.B.E. Travel Service pty Ltd (No. 2 A/c) A.B.E. Holdings Limited (No. 2 A/c) Northern Rural Services Pty Ltd (No. 2 A/c) (Tamworth only) Pyojit Pty Ltd (No. 2 A/c) Currabubula Holdings Pty Ltd (No. 2 A/c)

The signatories for all accounts, except Pyojit, will be any 2 of : A M Paola L D Paola D D Plante P R Terrey

The signatories for Pyojit will be any 2 of :- A M Paola P J Middlebrook L D Paola or D D Plante J A Middlebrook in conjunction with one of the first 3 signatories. Would you please arrange for the Macquarie Centre branch to prepare cheque books for Jet Charter and Travel Service and for Tamworth in respect of all other accounts. Could you ask the managers of both branches to call me this afternoon in order to discuss our cheque book requirements. Note that the NRS accounts in Moree, Narrabri, and Gunnedah will no longer be required. Could you also direct all branches to charge monthly direct debits to the new accounts.' 487 Mr Paola gave evidence that on 15 February 1990 he had a telephone conversation with Mr Swinburne to the following effect: ' Mr Paola: Jim, Duncan [referring to Duncan Plante] rang me last night telling me that the bank accounts had been frozen. What's it all about? Mr Swinburne: Well the bank's taken the action and decided to freeze all your bank accounts. Mr Paola: For what reason? Mr Swinburne: Because of your disclosure. Mr Paola: What disclosure. Mr Swinburne: That ABE Holdings is insolvent. Mr Paola: But you knew that Jim. Mr Swinburne: Yeah but we hadn't seen it in writing before. Mr Paola: Jim you realise of course what you have just done to us. Mr Swinburne: Yes we realise it was a grave step to take . What are you going to do now Tony? Mr Paola: Where are we going to bank the money that comes in to pay our suppliers? Mr Swinburne: Look you'd better get someone in to come and see us about setting up new accounts so you can bank your money so you can trade and pay your bills. Mr Paola: What's wrong with banking them in the old accounts and just using that limit as a base? Mr Swinburne: No you can only bank money into those accounts but you can't draw on them. Mr Paola: Jim we are paying interest, we are below the limit, we've got a viable business. From what basis can they come to that decision. The bank is over-secured to hell. How can you let them make that decision? Mr Swinburne: Look Tony, they may have made a mistake, call in and see them and set up some new accounts so you can carry on and we might be able to get this straightened out.' [Statement 31 October 1996, paragraph 51] [Emphasis added] 488 Mr Swinburne gave the following evidence in cross-examination: 'Q. . . . Now I want to suggest to you that you did say those words, "Look, Tony, they may have made a mistake. Call in and see them and set up some new accounts so that you can carry on . . .' A. I don't recall saying that. Q. Is it possible you said it? A. It's possible that I was talking in terms of coming into the Bank to organise the accounts, but not the suggestion that the Bank has made a mistake. Q. It is possible though isn't it, you would have said that? A. I don't believe so because at that stage I would have been acting under advice, including legal advice from the Bank. So I would then have been precluded from making a statement of that nature. His Honour. Q. It is not suggested that you said to Mr Paola that they had made a mistake, just they may have had a mistake do you follow? A. I feel, your Honour, that at that stage having been through a fairly lengthy and serious internal discussion with the Bank that had more or less issued instructions as to what we were to do. We were at that stage, following those instructions.' Ryan Q. It's not possible you would have said it just to temporarily placate Mr Paola while he set up his Number Two accounts? A. I don't believe so.' [T 533 and 534] 489 Mr Swinburne's evidence was that after the meeting of 12 February and after inspecting the letters of 13 February, he turned his mind to the question of whether there had been a default or an event of default on the part of the customer. His evidence was that he formed the view 'that notification of insolvency was a serious event' and that he then sought advice within the Bank as to what course of action he should follow. 490 Mr Swinburne's evidence was that he formed the view that Notice of Insolvency was an event of default. 491 Mr Swinburne recalled the letter sent by the Bank on 15 February which referred, amongst other things, to the freezing of various accounts and although he could not recall exactly whose decision it was to send that letter, he recalled that it was a decision of a meeting. He was not able to recall exactly who was present at the meeting but he believed that at least one of the Bank's solicitors was present, he thought this to have been Diane Osborne but he could not be certain. He recalled that there were several other persons at the meeting and believed that Mr Booth was present. He could not recall whether or not Mr Stenhouse was there but recalled that there were four or perhaps five persons at that meeting. [T 531] 16 February 1990 492 The plaintiffs allege that on 16 February 1990 the Bank dishonoured a number of cheques presented to the Bank on 15 February 1990. 493 The plaintiffs also allege that cheques presented on 16 February and thereafter were dishonoured during ensuing months. 494 From 15 February 1990, the bank statements referred to in paragraph 36, were sent by the Bank to various group companies including NRS and Currabubula with the words 'in liq' appearing at the end of the balance column. 495 Mr Paola gave evidence by statement that bank statements bearing the words 'in liq' were received from about 16 February 1990 and that some were sent by facsimile and other by ordinary mail. 496 In relation to the bank statements which were faxed to the general office at NRS, being where Mr Paola said the bulk of the statements were sent, his evidence was that his first knowledge of those statements was on attending the offices of NRS which he believed was on 16th February. At that time Mr Greg Giblet, the Tamworth agronomist for NRS, brought the receipt of the bank statements to Mr Paola's attention and he then physically examined the statements in the presence of Mr Giblet. He then had a number of discussions with particular employees of NRS, namely Mr Giblet and Mr Taylor and with Ms Thornton and Mr Plante who were employed by the Group and with other persons including NRS managers. 497 His answer, recorded at page 52 of the transcript reads inter alia: 'I had a conversation with Mr Giblet. Mr Giblet's words - Mr Giblet said, "Anyone can see that you're in - you're in liquidation", I believe it was. I said, "What? How could you say that" and he said "Well, you only have to walk in there to see what problems you've got". We walked into the computer - into the fax room and Mr Giblet picked up a handful of statements. All of them had the words "in liq". I said "This can't be right". He said "Well its there and all the companies are in the same - in the same boat". I said "But we are not in liquidation". He said, "Well, the Bank doesn't lie and I would rather believe them than you" and that was pretty much the conversation with him. I then had a conversation with Mr Plante, said - I said, "Duncan, do you know anything about these". He said, "Yeah, yes, I saw those" and that was basically the end of the conversation with him. The conversation with Ross Taylor was, "Ross, I guess you have seen these". He said, "Yes, I have seen those". He says, "And like I told you last night, we have got problems with the staff because of the - because of the frozen accounts and cheques" and at that point, he mentioned something about the cheques that were bounced, suppliers had been calling him and I said, "Look, Ross, I will try and do something about finding out what in the hell is going on here so please don't - don't panic". He says, he said words, "I think you will find it might be a little bit late now" so I then tried to call the managers of the various branches. On the way towards the phone, I ran across Janet Thornton . . .' [Emphasis added] 498 At this stage in his evidence in chief Mr Paola broke down and the Court adjourned for a short time. 499 The evidence continued at page 55 inter alia as follows: 'On the way to the phone I spoke to Ms Thornton, I said that "Janet, there is no truth in this. Don't be concerned about it". I then rang the branch managers of NRS and explained the situation to them, and that's basically what happened.' 500 Mr Paola's evidence was that the branch managers of NRS whom he telephoned were the branch managers of Gunnedah, Narrabri and Moree and in each case he spoke to the three individuals who ran those branches and that at that point in time he did not believe that they had received copies of bank statements. 501 Mr Paola's evidence was that Mr Steve Thornhill was, as at 15 February 1990, the Administration Manager of Tamworth at NRS and that he resigned on that day. 502 Mr Paola had, in his first statement of October 1996, given evidence that Mr Giblet stated to Mr Paola that he was worried that Mr Paola would let down the Agro Services accounts because Mr Giblet had said : "You're in financial strife", then suggesting that anyone with brains would know as all one had to do was walk into the fax room and see. 503 In his first statement, Mr Paola had given evidence that he then informed Mr Giblet, after he looked at the bank statements: "This is wrong. None of these companies are in liquidation". Mr Giblet responded: "Yeah, Banks don't make those sorts of mistakes, Tony, and I would rather believe them than you". 504 In relation to Mr Giblet, his role within NRS had been as agronomist, operating from the Tamworth Branch to look after the larger clients of that branch. The night before Mr Paola had been referred to the facsimile room by Mr Giblet, Mr Paola had had a heated discussion with Mr Giblet following Mr Paola having learned that Mr Giblet had started making contact with clients in order to set himself up in business with accounts which belonged to NRS. This was reported to Mr Ross Taylor. 505 In his first statement, Mr Paola had said that on about 16 February he spoke with Mr Plante, who said to him words to the effect: "I've been through a liquidation before, Tony. I don't want to go through another one. I am resigning" and that Mr Plante in fact resigned from the company on about 27 February 1990. In giving evidence in chief, Mr Paola placed his conversation with Mr Plante as occurring after he had spoken with Mr Giblet. At transcript page 52, Mr Paola recalled his conversation with Mr Plante as one in which he had said "Duncan do you know anything about these" and Mr Plante had said "Yeah, yes, I saw those" and that was basically the end of the conversation with Mr Plante. 506 In giving evidence in chief, Mr Paola also set out a conversation which he recalled having with Mr Ross Taylor. In his statement, he had said that he had had conversations with other members of NRS including Mr Taylor to the effect that the statements of 'in liq' on the bank statements were incorrect and that the companies were not in fact in liquidation. 507 Mr Paola's evidence was that on or about 16 February, after learning that the Bank had summoned cheques, he instructed Ross Taylor, Duncan Plante and he believed Dave Stefferson, to identify the cheques and to call the people concerned to let them know that the cheques had been bounced by the Bank and that we would be doing something about replacing those. 508 In cross-examination in relation to the freezing letter, Mr Paola accepted that there was no written correspondence with the Bank involving an assertion on behalf of his Group that the Bank was wrong in the view it took that the facility was duly drawn and somewhat over the limit at the time the cheques were dishonoured. [T 139] 509 Mr Paola was then asked: 'Q. And if the accounts were overdrawn you would accept that your company wasn't entitled to draw any more on the account? A. If the accounts were overdrawn the bank was entitled to withhold payment on cheques, which would take the account over the limit, yes. They were entitled to do that. Q. And you understood by this letter that the Bank was saying that if you had any further funds coming in they could be put in fresh accounts and they could be drawn against? A. Yes, I understand that all debtors' payments coming in from that day were to be banked in different accounts, yes. Q. And you understood that they could be drawn against? A. Well, with credit funds it's not a matter of understanding, we could have banked those anywhere. Q. And there wasn't any particular problem you saw in that procedure that was proposed by the Bank, was there? A. There was no problem with that procedure no.' [T139 - 140] 510 In giving evidence in chief, Mr Paola said that he personally spoke to a number of suppliers. As to Australian Wire Industries, he said in evidence in chief that the conversation took place within the days following the 16th February and that he had asked why the company was not supplying NRS and that the person he spoke to who was responsible for supplying north west New South Wales dealers said: "We've closed your account. However you can buy on COD if you wish". 511 Under cross-examination at transcript page 149 Mr Paola accepted that in reality the conversation with Australian Wire Industries took place approximately two months later. 512 In giving evidence in chief, Mr Paola at transcript page 59, said that he had spoken with Australian Fertilisers Limited within days of the 16th February. However, at transcript page 146 he conceded that he had been thinking in terms of 20, 21 or 30 days in short, less than a month. He conceded that he could have been talking of approximately early March rather than within days of 16 February. [T 147] 513 In chief, Mr Paola gave evidence that he spoke to someone from Bettington Commodities about supply to NRS and that he did so 'within days of 15 February'. He recalled speaking to Mr David Bettington who said to him "Tony we have had to close your account because one of your cheques bounced. We are only a small company. Is there any likelihood that we are going to get paid" and that Mr Paola had responded "David just leave it with me. We have a question and we are straightening it out". His evidence in chief was that this account was never reopened and that Bettington Commodities had insisted on cash from that point on. 514 Under cross-examination at transcript 148.26, Mr Paola conceded that the conversation with Bettington Commodities was not within days of 15 February but embraced a period that could have extended up until 20 March. Mr Paola said that this conversation happened on 20 March. 16 February 1990 515 By letter dated 16 February 1990, Ferrier Hodgson & Co as receiver and managers of ABE Fax forwarded to the State Bank a cheque for $50,000 being in further reduction of the debt owed to the Bank by ABE Fax. [PX 1170] 19 February 1990 516 On 19 February 1990, Mr Booth and Mr Swinburne signed a memorandum addressed to the Manager, CFG Loans Administration and to managers of Macquarie Centre and Tamworth, confirming that all current accounts with overdrawn balances had been placed in reduction the previous week and that to enable the Group to continue to trade, new accounts had been opened, in each case identifying the old account and the new account and asking branches to provide full set-off between the old and new account numbers. [PX 1171] 26 February 1990 517 By letter dated 26 February 1990, Russell McVeagh McKenzie and Bartleet & Co., Barristers and Solicitors wrote to Mr Paola as Managing Director of ABE Telecommunications, giving advice on various legal issues which would arise should he increase his shareholding in U-Bix Business Machines Limited. [Exhibit PX 1176] 27 February 1990 518 On 27 February 1990, Mr Duncan Plante resigned as secretary of inter alia, Paola Holdings and NRS. March 1990 519 Mr Paola at transcript 58 accepted that on 8 March 1990, the Group decided to close the merchandising division of NRS in Moree. The reason was that there was a requirement to reduce the cash that was being utilised throughout the Group and that this was one of the divisions that was not operating at an acceptable level of profit and it was a cash drain on the business. [T 58] 520 At transcript page 60, Mr Paola gave evidence that in February 1990 his strategy as Managing Director in order to achieve the reduction of the total of the facility to $7.5 million by the end of May 1990 was: 'To reduce the stock and debtors, primarily to reduce the stock and debtors of Northern Rural Services and Currabubula who had a substantial livestock. That was step number one as we saw that as being the easiest component to achieve. The second step was to refinance on lease-back the premises that Northern Rural Services occupied, and the third step of course was property sales which we had already put on foot. But a combination of those we felt would easily achieve that objective. ' [T 60-61] 521 Mr Paola's evidence as to his impressions when he first looked at the 'in liq' statements was as follows: '. . . I looked at the statement. On the statement there is an index of abbreviations. This abbreviation did not appear on the statement so I wasn't sure what it meant. Q. You are familiar with the expression "liquidator (the transcript should read 'liquidated') debt" aren't you? A. I'm familiar with that expression yes. Q. And are you familiar with the expression "liquidator (again the transcript should read 'liquidated') company"? A. Of course. Q. And you know the word 'liquidate' can be used with reference to a number of different things? A. I do . . . of course. Q. When you looked at this statement you didn't think that the words "in liquidation" were used, or "in liq" were used, with reference to the company as distinct from the debt, did you? A. At the time I looked at the statement I looked at the abbreviation. It didn't appear on there, I didn't know what to think. I have never seen "in liq" on a statement ever before. I really had no idea at that point. The man caught me off guard. I was just stunned. Q. You did say to those to whom you spoke about these statements that the company was not, in fact, in liquidation, didn't you? A. Oh this is right after the . . Q. Did you say that or not? A. Yes I did yes. Q. And you said that the statements . . A. Are wrong. Q. Were wrong? A. Yes I said that. Q. And what you were saying that with reference to was any suggestion that the company was in liquidation? A. Well, yeah, on thinking about it I thought "how can that possibly happen", because there is no notices, there was nothing. It couldn't possibly be that we were in liquidation. But I'm not talking to business people, you must appreciate that, we're looking at the statement. Q. Well Mr Giblet is a business person isn't he? A. Mr Giblet was an agronomist, a young man. I don't know of any business that Mr Giblet ever ran . . .' [T 144-146] 522 Mrs Janet Hamblin gave evidence that in the first quarter of 1989, she worked at Currabubula Station doing farm secretarial work but that when Mr Paola had had the Tamworth Northern Rural Service business working, to the best of her recollection, in mid to the second half of 1989, she came to work in the Tamworth office and she was there every day. Her work in the Tamworth office was maintaining the books for Currabubula Holdings and she also looked after ABE Finance and assisted Mr Plante, who was at the time financial controller for all of Mr Paola's other businesses. Her work in relation to NRS involved folding statements once a month, answering the telephone on occasions and serving out in the shop on occasions. Mr Taylor, who was the General Manager of NRS did not have a secretary and she did a lot of secretarial work in the sense of typing and related activities. Her qualifications before she commenced the job included an Associate Diploma of Rural Business Administration and she had undertaken a financial accounting course at the local technical college and other secretarial courses. 523 Her evidence was that in the period up to February 1990, the mood in the office in which she worked was very positive. Her evidence included: 'It was very positive . . . I was working from the offices of Northern Rural Services. They were a new business. Tamworth was at that stage and still is growing a bit, but new businesses were always good to have in the town. Prices were competitive. People were coming to the shop. It was a very positive happy, yes, happy place. Everybody was very friendly and got on well and enjoyed themselves . . . we had a lot of people coming in and out. That was the start during one of the many droughts that we had so there was a lot of work supplying or selling stock feed to farmers and then the associated paperwork with that.' [T 287] 524 Ms Hamblin recalled receipt in the office of bank statements bearing the words or notation 'in liq' and to the best of her recollection such receipt occurred in the early part of 1990. She said that they came into the centre part of the office and arrived in the only facsimile machine in the office which was in the centre of the office. That was an area where, because a lot of faxes were received, namely orders, and a lot of the NRS's outside orders were sent, all the paperwork went to. Her evidence included: 'Q. When they arrived and I am talking about the bank statements, did you see Mr Taylor looking at the statements? A.. Yes. Q. Did you see whether Mr Taylor did anything with those statements? A. They were always to be left there. He did look at them as did Steve Thornhill and Natalie Sykes. Q. Did you see Mr Taylor speaking to any members of staff while he was holding the statements? A. Not long - just after Mr Thornhill and he went into his office and he shut his door and that was something he never did unless he wanted a private conversation. . . . Q. You recall the statements coming in on this fax machine and this conversation did you say between Mr Taylor and Mr Thornhill taking place, but you didn't hear what they said to each other? A. I didn't hear what they said no. Q. And they actually first spoke and then went into the room? A. As I tried to recall, they didn't both go there at the same time, so as soon as Mr Taylor had seen it he went back to his office. Mr Thornhill then followed him and they closed the door. Q. Mrs Hamblin, after the statements were received did you have a telephone conversation or conversations with creditors of the business about the position of the Paola companies? A. Yes. Q. Can you remember when that conversation or conversations occurred? A. It was only a day or two after the statements came because the cheques started being dishonoured almost immediately and then obviously any creditors that we had paid when the cheques were dishonoured they started ringing. Q. Can you remember the names of any creditors or officers of creditors who were ringing you up? A. Not precisely. There were obviously fertiliser, one of the fertiliser companies. Q. Was there more than one creditor? A. Yes. Q. Do you remember how many. Could you tell his Honour . . . A. there would have been at least - we had creditors - we had a lot of creditors obviously for the amount of stock that was in Northern Rural Services. There would have been at least 10 or 12. Q. Can you remember any particular conversation or can you give his Honour the substance of what was said in these conversations? A. The substance - sorry - 10 years ago, I am sorry. My memory is that not - it is failing. The substance of it was wanting to know why the cheques had been dishonoured and then wanting or demanding cash on delivery if they were to provide any further goods. Q. Mrs Hamblin, following receipt of the bank statements in these conversations did the mood or operation of the business change? A. Yes. Q. Could you tell his Honour in what way and what your observations about how it changed? A. It went from being very positive because there was a new business in town and there was employment for a lot of people, to one of almost dismay because there were going to be - automatically people started wondering or worrying about their jobs . . . They were worrying about the loss of their jobs. They were also worried about their name within the industry. People like Ross Taylor was held in high esteem as was Steve Thornhill and they worried about what impact that would have on their name in the town and their chance of future employment.' [T289] [emphasis added] 525 Ms Hamblin was asked whether after the events she had given evidence of, the conversation with creditors and the receipts of the statements, she had spoken to other business persons in Tamworth about Mr Paola's business. She said at transcript 290 that within one or two weeks after the receipt of the bank statements, she spoke to three or four companies including Tamworth Cooperative, Fielders Farm Centre. The Cooperative was in direct competition with NRS. Doing the best she could to recall the substance of what was said to her, she said: 'A. They were interested to see that Northern Rural Services were going to, they would say go bust and it was just a general conversation about it going bust and Tony's or the Company's lack of ability to pay its bill. Q. And the conversation that you say you think you had with someone from Fielders, can you give us that? A. Along the general same lines. Q. And the person from the Farmers Centre . . . that is Fielders. A. Yes Fielders Farmer Centre. Q. Can you recollect whether you had other conversations about Mr Paola's business with other people other than those you have told his Honour about? A. Yes. Q. Can you recollect the names of those people? A. Yes. There was one with a neighbour who also is a farmer, Mr Ernie Ranclaud. Q. Can you recollect what Mr Ranclaud said to you? A. He was another neighbour of Tony's and his words were along the lines of Tony Paola has gone bust . Q. And can you recollect the names of any other persons you spoke to about Mr Paola and his business in that period? A. There were others but not offhand no. Q. After February 1990 did you observe whether activity in the office was as busy as it was in the early part of 1990? A. No. It certainly wasn't. Q. Can you tell his Honour what you observed about the level of business going on in the office? A. It had diminished because the products had diminished. We had no ability, our cash flow was greatly reduced. We had no ability to supply or to have the supplies necessary for farmers . . .' [emphasis added] 526 Ms Hamblin accepted under cross-examination that she was not involved in the day to day operations of the Paola Group of Companies. She said that she certainly did not remember learning of any decision being made within the Paola Group that creditors of NRS not be paid and she could not recall a stage which Mr Taylor became very upset and complained of being told not to pay creditors. Mr Taylor had not confided to her about business matters relating to NRS. She did not recall that at the beginning of 1990 and in particular in January, very difficult trading conditions were experienced by NRS. She denied that the events concerning the creditors speaking to other persons that she had mentioned could have occurred in January 1990. When asked why, she had said that it could not have occurred in January 1990 with such definiteness, her answer was 'Because the phones - I would have had no need to answer those phone calls prior to when it was so busy that everybody was answering phone calls and that happened after the bank statements arrived' . [T 294] [Emphasis added] 527 Ms Hamblin accepted in cross-examination that the conversations she had described about creditors being anxious about their debts would be the sort of conversations that she would expect to occur if creditors had been told that their debts were either not going to be paid or going to be delayed in payment. [T295] 528 On being shown the bank statements, she was asked whether she had ever heard of the expression in relation to a debt, of liquidating a debt and answered in the negative. She had not heard of that expression back in 1990 and she was asked: 'Q. So what did you make of the form of statement when you first saw it? A. That the company was in liquidation . Q. It didn't say that in relation to the company did it, the company's name . . . the words in liq . . . didn't appear next to the company's name did they? A. I wasn't aware that they had to. Q. You were confused when you saw the statement; is that right? A. No, no. Automatically I saw that statement it said ABE Holdings was in liquidation . Q. Well did a statement that the companies were in liquidation seem very confusing to you ? A. Yes . Q. Because you knew the companies weren't in liquidation didn't you? A. Yes. Q. I suppose you asked either Mr Plante or Mr Taylor did you? A. Mr Plante. Q. You asked Mr Plante and he said that the companies weren't in liquidation? A. He appeared as confused as I. Q. He told you that the companies weren't in liquidation didn't he? A. Yes.' [emphasis added] 529 Later in her cross-examination Mrs Hamblin was asked the following question: 'And you don't know whether the trouble started in January, February or March?' 530 Her answer was effectively that she counted the trouble starting as when the bank statements came out with the words 'in liq' on them and people started looking elsewhere for employment. 531 She recalled creditors talking to her on the telephone about dishonoured cheques and not about bank statements because as she recalled it, they would not have been aware of the bank statements. [T 298] 532 At transcript 299 the following evidence was given by Ms Hamblin: 'His Honour Q: . . . The question is this, you used the words "the trouble". At any time before, as you best recollect it, these bank statements were arriving with the words "in liq" did you observe any difficulties with the NRS business insofar as you were involved in answering telephones or otherwise having a somewhat, I understand, limited involvement including sometimes being in the shop . . .? A. No.' 533 On 16 February 1990, ABE Holdings (Mr Plante) wrote to the State Bank referring to an earlier discussion of the same day, identifying a number of cheques which had been drawn on accounts which the bank had frozen and asking the Bank to pay them from the new number two accounts. The accounts in question were in the names of Piojit and NRS. [PX 1169] The letter also asked the Bank to note that the Northern Rural Services cheques were drawn on the Moree Branch. 534 As earlier pointed out, on or about 16 February 1990 Mr Plante said to Mr Paola words to the effect: "I've been through a liquidation before. I don't want to go through another one. I am resigning." 535 Approximately eleven days later, on 27 February 1998 Mr Plante resigned. March 1990 536 On 2 March 1990, Paola Holdings (Mr Paola) wrote to Mr Booth asking that the Bank convert the frozen bank accounts 'to the new lower interest facility' - this was a reference to the term facility. [PX 1199] 537 On 5 March 1990, ABE Holdings wrote to the Bank pointing out that the Bank had in certain instances, ignored the fact that a set-off should be allowed on credit funds in the number two account. The earlier letter from Paola Holdings to the Bank of 2 March 1990 had awaited confirmation that credit balances in new accounts would be off-set against old accounts before interest was calculated. 538 By letter dated 6 March 1990 from the Bank to the Paola Group, the Bank confirmed the set-off arrangements having been arranged between the old and new current accounts of each of the companies for whom new current accounts were opened. [PX 1203] 539 From time to time, amounts were deposited inadvertently into old accounts and the Bank arranged to transfer those deposits to the new number two account. An example of this occurred in early March 1990 in relation to an amount of $178,634 deposited to the account of Currabubula Holdings and by arrangement with the Bank, transferred to Currabubula Holdings number two account. [PX 1210] 7 March 1990 - Part Facility converted to Term Loan $7 million 540 On 7 March 1990, the facilities were converted to a term loan of $7 million, - the draw down being effected on that date. [PX 1208] $1.5million of the Multi Option Facility was distributed amongst the current accounts operated by the Group. [PX 1217] 541 The term loan draw-down was for a term of 180 days to 3 September 1990 as confirmed in the letter from the Bank to the Paola Group of 7 March 1990. [PX 1208] 8 March 1990 542 A memorandum from Mr Booth to managers of the Bank's branches at Moree, Narrabri, Gunnedah, Tamworth and Macquarie Centre of 8 March 1990, confirms that in accordance with the approval of 13 December 1989, there was at that time $1.5 million 'of the Multi-Option Facility' to be distributed amongst the current accounts operated by the Group. The memorandum identifies the new overdraft limits totalling $1.5 million by account and company detail. 9 March 1990 543 By letter dated 9 March 1990, Mr Plante wrote to the Bank confirming that there were still some deposits being credited directly to the frozen bank accounts and asking the Bank to arrange for all such deposits to be immediately transferred to the new Number Two account as they were received. In particular, a deposit of about $50,000 was indicated as expected to be lodged in the Currabubula account on 19 March and a request was made that the deposit be transferred to the relevant Number Two account. [PX 1218] 29 March 1990 544 A letter dated 29 March 1990 from the Bank to the Paola Group, was admitted into evidence as PX 1239. A handwritten note across the top of the page reads 'not sent'. Whether the letter was ultimately sent or not it is signed by Mr Booth and by Mr Swinburne. It refers to the various discussions in February concerning the Group's request that the Bank appoint a receiver for ABE Holdings. The Bank indicated that in answer to the request it was not prepared to comply at that time and listed the reasons why this had been the case. In giving the reasons, the letter states inter alia as follows: 'Firstly, because of the interlocking nature of our security and of the significant inter-company commitments that were evident in the accounts of ABE Holdings the appointment of a receiver to ABE Holdings at that time would, we believe, have made it necessary for the bank to place all group borrowing companies and group companies providing security to the bank in receivership also. Further to this, some concern had been expressed by the bank's solicitors that our placing ABE Holdings only in receivership could have left both the bank and yourself open to charges of deliberately acting to thwart the claims of other creditors. Finally, whilst it was agreed the company (and the group as a whole) was experiencing liquidity difficulties it was our understanding that asset sales planned for the ensuing months would comfortably repay the bank and all known creditors. Unfortunately being formally notified that ABE Holdings was 'insolvent' did necessitate the bank having to take action in the form of placing all overdrawn current accounts operated by group companies in reduction. This had to be done without warning or delay. We nevertheless regret having to have taken this action. We are of course well aware of the inconvenience this must have caused .' [Emphasis added] 4 April 1990 545 By letter dated 4 April 1990, Mr Plante wrote to Mr Booth confirming that although the Group had still not received a formal response to its letter of 13 February, Mr Booth had advised verbally that the Bank was not prepared to appoint a receiver to ABE Holdings Limited. Mr Plante confirmed that the directors of ABE Holdings Limited believed that the company should be placed into voluntary liquidation and advised that the directors intended selling most of the assets of ABE Holdings at a total price at least equal to market value to Currabubula Holdings. [PX 1244] 546 On 4 April 1990, the auction which was to have taken place on that day of Durhambone was postponed to 25 May. 11 April 1990 547 On 11 April 1990 the Bank, having received a further request for advice as to whether it had an objection to the appointment of a liquidator to ABE Holdings, responded by advising that under existing interlocking security, ABE Holdings Limited would remain liable inter alia for any debts of Currabubula Holdings to the Bank as well as for group debts to the Bank. The Bank advised that proceeds of sale of any assets which might have remained in ABE Holdings would be applied in reduction of group liabilities and generally stated that decisions, the subject of communications, were a matter for the companies' directors. 548 An office minute position paper dated 20 April 1990 signed by Mr Booth on 3 May 1990, deals with a meeting held with Tony Paola and Peter Terrey on 1 May 1990 (probably a mistake for 1 April 1990), to learn of developments within the Group over the past two months. The document dealing with the sale of 'Durhambone' states that due to recent heavy rains in the area, the planned action of Durhambone has been delayed one month to 27 May 1990. 549 Mr Booth recalled many conversations with Mr Paola from May to September about the sale of Durhambone and accepted as correct the proposition that the Bank insisted that Durhambone be sold as soon as possible. [T 507] He thought that 'the bank began writing round as early as May 1990'. [T 507] 550 The position paper at PX 1283 stated inter alia: 'Should the sale of Durhambone not occur, the Paola Group's liquidity problems are set to worsen. . . . In subsequent discussions with Mr Paola the following directives have been given: 1. The Bank is not prepared to provide any additional funding and all present loan facilities are to remain in reduction. 2. All other current accounts are to continue to be operated on a strict credit basis. 3. The sale of Durhambone should be pursued as a matter of urgency.' [Emphasis added] 551 Mr Booth accepted at transcript 507, that he had given a 'directive' to Mr Paola in respect of the sale of Durhambone and had used that word in his own note summarising the requirement. 552 The position paper concludes with the words 'In the meantime it is recommended the account be reclassified RR50 (the Group is presently rated RR40). A further report on the status of the account will be prepared at the end of the month recommending appropriate action'. 553 Mr Booth was shown in cross-examination a banking manual/document extract dealing with risk rating system issued in July 1992. He accepted that generally there was a system within the Bank by May 1990 of a formal risk rating for clients' accounts and that his risk rating recommendation was made on the basis of a document similar to the July 1992 document. The July 1992 document at page 100 stated inter alia: 'The risk rating is with regard to: . Facility conduct . The strength of the repayment source and capacity to service. . The financial standing of the client. . The security position. . The client management strength.' [Exhibit P21] 554 The same document identified there being eight categories in the Bank risk rating system described as: 'RR10 Highest quality RR20 Strong RR30 Satisfactory RR40 Watch list RR50 Deteriorating RR60 Substandard RR62 Non-accrual, substandard RR70 Doubtful RR72 Non-accrual, doubtful RR80 Loss RR82 Non-accrual, lost provision.' 555 The same document at page 209 gave the policy in relation to risk rating responsibility as 'you are responsible for insuring risk ratings are kept current in relation to all accounts under your control'. 556 Under the heading 'RR40 - Watch list rating' the following inter alia, appears: 'An account will be transferred to the Watchlist rating under a number of different circumstances. Often it is an emerging problem which requires investigation with the expectation that the problem will be resolved and moved off the list. It will usually be a potential problem which requires above normal monitoring. The account is unlikely to be on the watch list for more than 90 days. Its rating would be reclassified if this were the case . . .' 557 Under the heading 'RR50 - Deteriorating - Possible Problem Loan' the following inter alia, appears: 'Deteriorating accounts result when Watchlist loans do not improve. These accounts have breached facility requirements, or the strength of cash flow has weakened such that the ability to service is likely to be impaired. Often the potential problems which caused the RR40 classification have worsened and jeopardised the Bank's prospects for repayment. The Bank however, is not looking to exercise its security nor does it expect a loss to occur. RR50 accounts require remedial action. 558 It was put to Mr Booth that notwithstanding everything he had been told on 12 February 1990, notwithstanding the Ferrier Hodgson and the ABE Holdings letters, at least until May 1990 the beginning of it, he was content that the account remain or be classified RR40 Watchlist. This was the case according to his note on 3 May. [T 508] 559 The transcript then includes: 'Q. You recommended the account be reclassified RR50 deteriorating? A. Yes. Q. What I'm saying to you is notwithstanding all those matters I raised with you but a moment ago you were content until 3 May not to recommend a reclassification for a worse rating than RR40? A. That wouldn't necessarily be true, no.' However Mr Booth did accept that he took no steps to seek a reclassification from RR40 until 3 May 1990. [T 509] 560 In cross-examination Mr Booth's attention was drawn to the section in the document under the heading 'RR40' which envisaged the transfer to the Watchlist when there was an emerging problem which required investigation with the expectation that the problem would be resolved and moved off the list. It would usually be a potential problem requiring above normal monitoring. Mr Booth was then asked: 'Q. Now won't you agree with me that that is to be distinguished from the RR50 rating which is described two pages further on, do you see that? A. Yes. . . . Q. Well you knew there was a system in the Bank for risk rating at least in 1990? A. Yes. Q. You knew it was your duty to apply it as carefully and properly as you could? A. Yes. Q. Would you agree with me that at least until 3 May you recommended a risk rating for this account which contemplated there would be no loss at all of the Bank's principal and interest? A. I'm very concerned about making judgments on this particular risk rating. I noticed that in my submissions of December '89 referred to a different risk rate; the LQ2 and 3 still applied in those times. Q. And the Watchlist we looked at? A. It was, was it. I'm trying to remember. Q. Both? A. The Watchlist was a written note below . . . A. What I'm getting at is I'm still not sure how that 40 was first arrived at and that would help me answer this question . . . Q. Can I ask you to go back to volume 2 to page 729 - A. Yeah, this 729 refers to W1, W3, we're now talking risk rating systems. I think - I can't prove it - but I think the risk rating system was new at that time. Q. Well you think the watch list system may have continued to some time in 1990 when the new risk rating system was introduced? A. I suspect so. Q. Now of course when a new system was introduced I suppose which required classification of accounts, somebody - and I suggest it was you - had to work out which new appellation should apply to the risk rating? A. Yes.' [T511] 4 May 1990 561 On 4 May 1990, Mr Owens forwarded a memorandum to Mr Swinburne attaching a number of papers and details and referring to 'our strategy to encourage Mr Paola to sell assets and pay out his creditors and reduce his debt'. Mr Owens said inter alia: 'To be realistic, there are only three things that can happen as far as I can tell. 1. Mr Paola succeeds in putting off his creditors for long enough to sell assets (other than those securing our debts, of course). His arrangements with them might be expected to involve his giving specific charges until sales can be arranged. We should expect that he would 'take a bath' on these sales , but in my opinion he should pursue them as a matter of extreme urgency. 2. Mr Paola's creditors force him into bankruptcy and his group into liquidation. This would be a disaster for him; much of what he has worked to build would be lost, with asset values being what they are at present. 3. We agree to provide additional funds (i.e. a 'rescue' package) ($3.5 million? bringing our total debt to $12 million?) Most of additional security to be put up would be broadacres - which would give us little extra comfort in today's market (a 'dog' of a deal, in my view). It goes without saying that we would have to virtually control the group's financial function: very expensive. We have commenced an interim strategy to: 1. Have all debt accounts work in reduction (No "2" accounts to work strictly in credit - we returned a cheque ' present again' on my instructions during your absence and, presumably, Paola is now in no doubt what we mean). 2. Get details of all his unencumbered assets plus his full asset/liability/income/expenses position so that we can work with him in selling assets (clearing debts). 3. A letter is to be sent to him on Monday to leave him in no doubt as to how serious we regard his position and the urgency of action needed to sell assets. We shall also include an instruction to him that 'Durhambone' must be sold within two months (he simply has to meet the market). Allan has drafted the appropriate letter. . . .' [PX 1289] [emphasis added] 562 The same document signed by Mr Owens at PX 1291 includes detail of Mr Owens having been requested by Mr Paola during Mr Booth's absence, to provide the Bank's written acknowledgment that it would raise no objection to the appointment of a voluntary liquidator to ABE Holdings Limited. Mr Owens' comments are that he could find no valid reason for the Bank to object but did not and still does not believe that customers understand fully the ramifications of such proposed actions. According to Mr Owens' note in response to his questions, Mr Paola stated: 1. That he would pay out all unsecured creditors of ABE Holdings. 2. That all assets of ABE Holdings would be transferred to Currabubula Holdings as with the Bank's debt. 3. That as a result of 1 and 2 the liquidation of ABE Holdings would become a procedural matter only. 563 Mr Owens notes that Mr Booth has informed him that Mr Paola does not have the cash to pay out these creditors. Mr Owens notes that he is not sure exactly what Mr Paola plans to do about them but is sure that Mr Paola intends to pay them eventually. Mr Owens adds: 'How can we allow the transfer of our debt and the assets of the holding company to another group company in what we now know beyond reasonable doubt to be a deliberate manoeuvre to defeat the legitimate claims of unsecured creditors? If he insists upon proceeding, would not the bank have no option other than to place all or most group companies into liquidation and/or receivership to protect its own position from potential litigation initiated by unsecured creditors? I'm sure it won't come to that but, unless I have completely misunderstood the situation, voluntary liquidation of ABE Holdings Limited is no answer at all.' [PX 1291] 564 It appears that heavy rains in the area delayed the planned auction of Durhambone from 3 May 1990 by one month to 27 May 1990. 565 Mr Booth of the Bank wrote to the Paola Group on 4 May 1990 to confirm the Bank's position in regard to a number of matters raised in discussions over the past weeks. The letter stated inter alia: 'The Bank is also viewing with concern the general cash position of the group and that no significant steps have as yet been taken to reduce borrowing levels. Terms and conditions of the existing approval require a reduction in overall bank debt to $7.5 million by end May 1990. All borrowing facilities are to continue in reduction at least until this level of debt is achieved and all other current accounts are to continue to operate on a strict credit basis. Cheques presented on these accounts will only be honoured if sufficient 'cleared' funds are held within the accounts on which they are presented. According to cash flow projections provided by you it appears that subject to any significant immediate asset sales a reduction of bank debt can only be achieved in the short term if other arrangements are made with Okura and all vendor finance creditors, payments to whom are programmed to occur over the next month . . . With regard to the sale of Durhambone the auction for which has been delayed until 25 May 1990, whilst the need for delay due to poor seasonal conditions is accepted, the sale of the property, at the earliest possible convenience, is strongly urged. The bank expects to receive news of a completed sale by end June 1990 . All proceeds of this sale will of course be required in permanent reduction of bank debt . . . ' [PX 1305 and 1306] [Emphasis added] 566 Paola Holdings wrote to the Bank on 7 May 1990 stating inter alia: 'I understand that the State Bank is committed in its resolve that the Paola Group facility be reduced to $7.5 million at the end of this month. Bearing in mind the Bank's stance, positive action has been taken to effect asset sales, indicated by yourself as being the Bank's preference. Asset sales currently being proposed are: Sale of NRS building Narrabri Sale of NRS Narrabri Sale of NRS building Tamworth Sale of NRS Tamworth Sale of NRS Gunnedah Sale of Durhambone property Sale of Elimatta property' 567 In relation to Durhambone, the Group advised inter alia: 'The auction for Durhambone is not set down for 25 May. As indicated to you last week, it is not expected that the property will sell. However, it is our commitment that this property be sold as soon as possible, ensuring that a realistic price is attained, avoiding at all costs a "fire sale". To this end confidence in the group's overall financial position will need to be restored in the market place, particularly the country areas .' [PX 1308] [Emphasis added] 9 May 1990 568 On 9 May 1990, the Bank wrote to Paola Holdings reiterating previous advices 'that the undertaking given to the Bank to the effect that Durhambone was to be sold with total proceeds reducing the Bank's debts by 30 April 1990 has not been complied with. The market price must be met'. [PX 1311] 23 May 1990 569 On 23 May 1990, Mr Paola wrote to the Bank to express the Group's concern at developments that had taken place over recent weeks and outlining events between May 1 and May 22. The letter inter alia stated that the Group believed that the Bank's stance was totally unreasonable given that no claim had been made that the Group was in default of its obligations and that it had been a client of the Bank for a number of years. [PX 1320] May/June 1990 - Sale of Portion of NRS businesses 570 In May/June 1990, the Gunnedah, Narrabri and Tamworth businesses of NRS were sold and sale proceeds were $691,000.00. July 1990 - Sale of Durhambone East 571 In mid-1990, Durhambone East was sold and although marketed at the same time, Durhambone West failed to sell. Durhambone West ultimately sold in June 1994 to the same purchasers who had purchased Durhambone East. Durhambone East with 'Oreel', 'Belarra' and 'Braeside' were sold. Detail at PX 1404 is given as: Land $3,550,000 Stock 225,000 Plant 237,000 Interest on mortgage 173,000 Crop preparation 1,215,000 $5,400,000 572 Durhambone West sold for $1,304,000. Details are also furnished in Mr Spackman's several reports. August 1990 573 Leman Enterprises was incorporated in New Zealand for the purposes of acquiring the shareholding in U-Bix. 574 On 17 August 1990, Mr Booth and Mr Terrey met to discuss the distribution of the proceeds of Durhambone East. A request was made that a part of the sale proceeds of Durhambone East be released for 'working capital requirements of $1.205 million'. That request appears as part of a document at PX 1507. The analysis of working capital requirements the subject of the request, includes an entry 'Down payment - U-Bix shares, $390,000'. 575 Mr Booth's summary of the 17 August meeting comprises the August 1990 section of a note entitled 'Recent Events' dated 31 August 1990. The note reads inter alia: 'Recent Events November 1989 - Appointment of receivers to ABE Fax Pty Limited by the Bank at the request of Mr. Paola. As at 27.8.90 Bank debt outstanding in ABE Fax consisted of an overdrawn account balance $266,425.00. According to the receivers (Ferrier Hodgson) there is insufficient realisable assets in ABE Fax to meet this commitment. We will therefore be relying on the other entities of the group to repay. April 1990 - Request by Mr. Paola for the Bank to appoint receivers to ABE Holdings Limited. This was denied on the grounds that receivership of ABE Holdings would (in our view) have precipitated a liquidation of the entire group. Whilst the company was no doubt facing liquidity difficulties ABE Holdings was at the time the primary holding company of all Mr. Paola's rural operations. It was also our view that the primary motive for this action was to thwart the claims of certain contingent creditors (unpaid ABE Fax creditors who had been guaranteed by ABE Holdings). The Bank however was compelled to respond by placing all overdrawn current accounts in reduction . That arrangement is continuing. May 1990 - Pressure brought to bear to ensure sale of "Durhambone ". Mr Paola had previously undertaken to sell this property in order to reduce Bank debt which he had agreed for some time is excessive. Whilst not a condition of the current approval our increasing concerns for the Group's liquidity position resulted in pressure being brought to bear to ensure the sale . - Multi Option Facility reduction from $8.5 million to $7.5 million in accordance with the approval dated 13 December 1989. This was achieved primarily via the sale by Mr. Paola of the business of Northern Rural Services Pty Limited. (Mr Paola's farm service and supply organisation) and of the last remaining jet aircraft. June 1990 - Details of proposal to sell 2/3 of Durhambone Station disclosed indicating a total sale price of $5.4 million, $4.5 million of which would be received at settlement in late August; - Revised cash flow projection produced indicating Group Bank borrowing requirements of less than $2.5 million by end September 1990. July 1990 - NW Region approached to consider taking over administration of the Paola Account. The Region is prepared to do so once debt is reduced to the abovementioned $2.5 million mark. (Note, as a result of the abovementioned sales/liquidations Paola Group operations are now primarily farming oriented albeit on significant rural holdings in North West of New South Wales).' 'August 1990 - Revised cash flow projections indicate borrowing requirements to the order of $4.5 million (increase due largely to continuing difficulties in harvesting crops from properties still flooded and failures to sell other properties namely the premises of NRS. Requests to allow part of the proceeds of the Durhambone sale (now imminent) to meet other commitments are being denied. This is the basis behind Mr Paola's recent complaints). ' Concluding Remarks The administration of this account has never been an easy task. Mr Paola's entrepreneurial style has resulted in the Paola Group lending requirements being very unpredictable and facility planning and administration difficult. Management of this account has since been made all the more difficult as a result of recent events which have led to concerns being raised for the manner in which Mr. Paola wishes to deal with his creditors (including the Bank) and the need for the Bank of late to return cheques presented on accounts overdrawn without arrangements (as those accounts are domiciled at Tamworth this must also be affecting the Region's readiness to accept this account). Mr Paola has not yet been asked to take his business elsewhere. Given however the inordinate amount of time that is continuing to be required for this account that option is now being seriously considered and will be dealt with in a review of the account to be conducted next month.' [Annexure 'Z' to Mr Booth's first statement] [Emphasis added] 576 Mr Terrey gave evidence that at his meeting with Mr Booth on about 17 August 1990, he said to Mr Booth "We need the funds and the proceeds (at which time he showed Mr Booth a document dated 17 August 1990) to meet our specific commitments except for the $390,000 for the purchase of U-Bix shares. We need the other money to continue trading basically. The Group can't pay these commitments from its cash flow". 577 Mr Terrey's evidence was that at the time, the Group commitments included a commitment to repay vendor finance owing on properties purchased by the Group previously, ABE Holdings guarantee commitments arising from the ABE Fax business and interest on bank borrowings. 578 Mr Terrey's evidence was that it was likely that the failure to meet any of these commitments, including the commitment to pay ABE Fax's guarantees, could have led to an application for the winding up and dissolution of any one of the companies in the Group. 579 Mr Terrey's evidence was that at the meeting he said to Mr Booth words to the effect: 'The group relies on the cash flow from the harvesting operations to meet its commitments outside of the Bank funds. We have vendor finance commitments on some properties, ABE guarantees and interest owed to the Bank. The group can't meet these commitments from its own cash flows at the moment but the coming crop will be able to meet a large part of them. The Group needs part of the Durhambone sale to meet these expenses. The coming harvest is important to maintain the group's future cash flow according to the projections we've given you before. We can't get the harvest unless we pay the contractors. As you know the very nature of rural operations is that there is a very large up front payment and commitment in respect to sowing, preparing and harvesting and the proceeds of sale are not released until the actual harvest and sale of the crop. That's why we need the funds released. Can you agree to the proposal?' 20 August 1990 580 By letter dated 20 August 1990, the Bank wrote to the Paola Group referring to the imminent sale of much of Durhambone which it was understood would realise a total of some $5.4 million, $4.5 million of which was to be received on the following day at settlement. 581 The Bank did not accede to the proposal that proceeds of Durhambone to be paid to the Bank be reduced by $390,000 saying: 'With regard to the proposal to acquire a significant shareholding in U-Bix N.Z., we believe this to be an entirely new issue which will involve separate detailed consideration of both the transaction and its future cash flow effect. The envisaged payment does not follow the intent of the original transaction and therefore we cannot agree to the proceeds of Durhambone being reduced by $390,000. ' [PX 1512] 23 August 1990 582 On 23 August 1990, Mr Terrey prepared an alternative proposal to deal with the concerns raised by Mr Booth. The proposal related to the sale of part of the Durhambone property. The property was due to settle on 31 August 1990 and conversations were taking place between the companies and the Bank at the time. 583 By letter dated 23 August 1990, Mr Paola wrote to Mr O'Neill, the Chief Executive of the State Bank seeking an urgent meeting with him to discuss: '(a) The Bank's total unwillingness to consider what, on objective grounds are reasonable propositions for continuing reduced facilities following the agreed sale of certain rural assets and the application of proceeds as agreed to the Group's facilities. (b) The Bank's demands for the wholesale reduction or elimination of our facilities involving the sale of rural properties, buildings, crops and other assets. (c) The conduct of officers of the Bank involving the dishonour of various cheques of companies in the group which, understandably, has caused considerable damage to those companies while, at the same time, other accounts of those companies with the Bank stood in credit; and (d) The recent decision of officers of the Bank without notice to us to alter established practice with regard to the administration of the group's banking facilities, thereby causing further damage to the group . . .' [PX 1525] [Emphasis added] 27 August 1990 584 By letter dated 27 August 1990, Mr Booth and Mr Swinburne wrote to Mr Paola advising that they had been asked to reply to his letter to Mr O'Neill of 23 August. This response inter alia stated: 'You have on several occasions confirmed your intentions to significantly reduce debt through the sale of assets. Durhambone was central to that plan. However, your several cash flow projections over the past three months have fallen well short of being realised. Despite this, you now appear to be inferring that the bank has agreed to accept less than the full proceeds of sale of assets. The matter of the dishonour of some cheques is in accordance with our letter to you of 4 May 1990 which required all current accounts, not already overdrawn, to operate on a strict credit basis. The fact that some other accounts may have been in credit at the time cheques drawn on other accounts were dishonoured is not relevant for various legal reasons . . .' [PX 1533] 30 August 1990 585 On 30 August 1990, a settlement of part sale of Durhambone was postponed by Mr Paola because the Bank would not agree to the disbursement of funds to provide for costs of his Group. 586 On 31 August 1990 Mr Paola directed that the settlement of sale of part of the Durhambone property be postponed for the above reasons. The Bank made it clear from its correspondence that the full proceeds of sale of Durhambone were to be applied to reduce the Bank debt. 587 This was unacceptable to the Paola Group as the sale proceeds of Durhambone were said to be required for the continuing operations of the company and to meet specific commitments of the company. These commitments included commitments to the Bank as to interest and the commitment set out in the company's letters of 17 August 1990 and 24 August 1990 to the Bank. 3 September 1990 588 The fixed term loan facility was due to expire on this date. Mr Terrey requested the Bank to roll over $3,050,000 in the name of Currabubula to expire on 3 December 1990. 4 September 1990 589 Following the postponement of the settlement of the Durhambone property, Mr Terrey attended a further meeting with the State Bank on 4 September 1990 where the issue of the release being provided by the Paola Group was raised for the first time by Mr Booth. 590 On 4 September 1990, the Bank's solicitor Mr Stenhouse, wrote to Blake Dawson Waldron confirming that settlement which was to have taken place of the sale of Durhambone on 31 September did not proceed as the Bank was not prepared to hand over release documentation without receipt of the full net proceeds of sale of the property. The letter advised that the Bank would still be looking to receive full net proceeds of sale at any future contemplated settlement and in addition would require a deed of release from Currabubula Holdings in relation to any contemplated legal action against the Bank. The letter enclosed a draft of such deed of release. [PX 1570] 591 The Bank's request for a release was thus made in circumstances where the 4 September 1990 meeting was held between representatives of the Paola Group and representatives of the Bank. The meeting is summarised in a record of meeting signed by Mr McLennan at PX 1581 and 1582 which stated inter alia: 'The meeting was called by us to effect a resolution to the matter of disbursement of funds from the partial sale of Durhambone. It should be recalled that as far back as May 1990 the Bank had insisted that all the proceeds from the sale of Durhambone were to be utilised in reduction of the group's debts. It is only now that Paola wants a number of disbursements made primarily: Vendor finance of - $242,148.33 - $422,000.00 - Purchased shares in U-Bix N.Z. - $390,000 In previous conversations our intentions remained solid in that we sought all the funds. In his attempt to resolve the matter Paola had his lawyer Peter Stapleton of Blake Dawson Waldron instigate legal proceedings against the Bank if it did not comply with his request for his proposed disbursements. In fact settlement of part of Durhambone was deferred on this very matter. After much discussion and evaluation with Messrs Terrey and Stapleton, it was agreed to comply with Paola's demands with the exception of the $390,000. In coming to this conclusion we took into consideration the following facts: 1. If settlement did not proceed the Bank would not have its debt reduced by $3.4 million and Paola's debts would be unacceptably high levels for a further extended period. 2. The Bank would be involved in a litigious position with what we believe to be an emotionally charged situation and could drag on for some time. 3. Durhambone if sold later probably would not achieve values being received now, in fact it would be sold at potentially deflated prices. 4. Should debt remain at present levels it would be increasingly difficult for Paola to service interest costs . . . Paola's methods in seeking a resolution to this issue leave a lot to be desired. He has made baseless accusations in the media (The Land) about the Bank, he has refused to meet personally, he has threatened legal action and in fact instructed his lawyers that if we had not agreed to this request he would proceed with litigation. His business acumen has become very irrational and one gets the impression he is experiencing severe credit pressure. It was mentioned at the meeting that we believed the time would come when Paola should consider seeking alternative financing for his group.' [PX 1582] 592 Following that meeting, Mr Terrey received the letter dated 4 September 1990 from the Bank. In that letter the Bank confirmed that following discussion, it had agreed to comply with the Group's request to disburse the funds in accordance with the particular schedule provided by Mr Terrey. The Bank completed this letter by stating: 'I might add that this was in total contravention to the Bank's intentions conveyed to you as far back as early May 1990 and on a number of other occasions since wherein the Bank sought all proceeds from the sale to be utilised in the reduction of your Group's debts. It was further agreed with Mr Terrey that the Bank would only comply with this request on the basis that: I. The properties known as "Willow Vale", "Woodleigh", "Bungaloon" and "Mill Ridge" would be mortgaged to the Bank once they become unencumbered and II All current and proposed litigation against the Bank be immediately withdrawn. In agreeing to these requests, it cannot pass without stating that the methods employed by you in seeking a resolution to this issue have left us with a great deal of discomfort and do not fall within the precinct of what we believe to be a mutually beneficial customer/banker relationship.' 593 On 4 September 1990, Blake Dawson Waldron amended the draft Deed of Release on behalf of the first plaintiff and provided the Bank's solicitors with revised figures for inclusion in that document. 6 September 1990 - Deed of Release 594 On 6 September 1990, the Deed of Release was executed. It is set out in Appendix 8 Sale of Durhambone 595 Mr Booth under cross-examination accepted that in relation to the decision-making process within the Bank which led to the decision that the Bank would insist upon retaining the entirety of the proceeds of sale of the Durhambone property, he would have written a recommendation although he would not have acted without approval of his superiors, and in making that recommendation he did not he said, have occasion to examine any security documents relating to Durhambone. [T406] 12 September 1990 596 Under cross-examination, Mr Paola accepted that the Durhambone East sale settled in early September 1990. He recalled that the upshot of his discussions with the Bank was that it was not content to allow funds to be withheld from the proceeds of that sale for the purpose of his Group purchasing shares in U-Bix. 597 Mr Paola was shown a letter written on about 12 September 1990 by Mr Terrey with Mr Paola's authority to Blake Dawson Waldron. The letter appears at PX 1614. The letter requests Blake Dawson Waldron to instruct solicitors in New Zealand to acquire a shelf company in New Zealand in relation to U-Bix, New Zealand, and inter alia states as follows: 'We confirm the funds are in a short term deposit account awaiting payment. We believe payment should be made simultaneously to the signing of the agreement and subject to written approval being granted from the OIC.' 598 That letter was written in relation to the possible purchase of shares in U-Bix. 599 The letter makes plain that there were still unresolved matters which were outstanding. At transcript 197, Mr Paola accepted that certain matters were unresolved and he could not assist with identifying the significance of such matters. 600 Mr Paola accepted that notwithstanding that he had known without doubt on or prior to 6 September 1990 that the Bank was not going to release funds for purchase of U-Bix shares, within a week or so after that date Mr Terrey on his instructions, gave instructions to Blake Dawson Waldron to acquire a shelf company which indicated that he had in mind that the purchase of U-Bix shares could and would proceed, notwithstanding that funds were not available from the sale of Durhambone East. 601 In relation to the statement in the letter written by Mr Terrey that the funds that were required to provide the deposit, being an amount of some $A394,000 were in a short term deposit account awaiting payment, the following evidence was given under cross-examination: 'Q. Was it the fact that the funds that were required to provide the deposit, being an amount of some $394,000 Australian dollars, were in a short term deposit account waiting payment depending inclusion of an agreement? A. No, there is no truth in that statement. Q. Did you approve this letter? A. Yes I did. Q. Was it a statement you believe to be true when you approved the letter? A. No, that was our attempt to hold on to those shares. I must admit, there were no funds on deposit for this purpose. Q. Are you saying it was a false statement? A. In as much as the way it's expressed therein yes. Q. And was it a statement made for the purpose of deterring the prospective vendor from selling to other people? A. No, they were not negotiating with other people at the time, but we were buying time, there is no question about that. Q. What do you mean by 'buying time'? A. Well, we were trying to stop them from putting - we were attempting to retain the option on those shares at the time. Q. And that would have been the situation you saw as to your group's financial advantage? A. Well, Mr Macfarlan this was a company that I founded . . . Q. Was it something that you saw as likely to be to your group's financial advantage? A. Oh absolutely. Q. And the statement that was made in the letter that I've referred you to was not only false, but it was false to your knowledge, wasn't it? A. It was, yes. Q. And it was made for the purpose of your group obtaining a distinct financial advantage, wasn't it? A. Yes, you could say that. Q. It was a lie made for the purpose of obtaining a financial advantage to your company, wasn't it? A. Yes. Q. And are you accustomed to telling lies for the purpose of obtaining financial advantage for your companies? A. No, I'm not. Q. Why did you tell this one? A. Because I didn't believe it was causing anybody any harm. Q. Do you regard that, as in general terms, a justification for telling a lie? A. No, I don't. Q. Well, why did you regard it as a sufficient justification in this case? A. In this particular case you have to understand that it was a company that I founded and there was a desire. There was a desire to rebuild what had been basically destroyed. Q. Isn't it the fact that you did have funds available? A. We did not have funds available. Q. Were the funds in the No. 2 accounts at the Bank which would have met the description in that paragraph? A. I don't believe so . . .' [T 195-196] The matter does not reflect well in terms of Mr Paola's conduct. I do not, however, view the incident as requiring a finding adverse to Mr Paola's general reliability on most matters as a witness. Whilst it does not of course provide any acceptable excuse for Mr Paola's conduct, I accept that he did not believe that he was causing harm to anyone on the occasion in question. He was, I accept, desperate to keep open his options in relation to acquiring the U-Bix shares at this time, when Group asset sales had fallen far short of his expectations. He believed, I accept, that the Bank had acted and was acting outrageously in relation to his requests to release funds to permit the U-Bix share purchase deposit to be paid. Ultimately, the Court's assessment of Mr Paola's credit is determined upon a view based on his demeanour in the witness box, based upon the whole of the evidence spanning his conduct over a number of years, based upon matching his evidence against that given by other witnesses and importantly based upon the general consistency of his evidence with contemporaneous documents. 14 September 1990 602 On 14 September 1990, share transfers were executed transferring the shares in Leman Enterprises Limited to Paola Holdings (99 ordinary shares) and Currabubula (1 share held in trust for Paola Holdings). 19 September 1990 and following - U'Bix Share Negotiations 603 Mr Paola continued to negotiate for the purchase of the U-Bix shares during this period notwithstanding that the Bank had indicated that it would not make finance available for this purpose. 604 Settlement of the Durhambone East sale took place in September 1990 11 October 1990 605 The Paola Group wrote to the Bank about the U-Bix opportunity on this date. 15 October 1990 606 On this occasion, a meeting took place following which the Bank wrote to Mr Paola. At the meeting the Bank had been requested to consider funding an option to purchase shares in U-Bix. The Bank advised Mr Paola that it was not prepared to consider any amendments to existing arrangements. 31 October 1990 607 A provisional liquidator was appointed to NRS on 31 October 1990. By this time the only part of the business still operating was the seed grading business located at Moree. 28 November 1990 608 Fernbank offered an option to Mr Paola for the purchase of 3,245,778 shares in U-Bix at NZ$2 with the purchase of the shares to be completed by 31 August 1991. The option fee required was NZ$300,000. Shares were then selling on market for NZ$1.30. 12 February 1991 - NRS Winding Up 609 NRS was wound up by the Court on 12 February 1991. February 1991 610 Gabo was passed in at an auction at $5.6 million in February 1991. 611 Paola engaged Southpac Corporation to advise in the acquisition and privatisation by Paola of U-Bix. 612 A preliminary review dated 27 February 1991 by Southpac Corporation, stated that Mr Paola was considering the acquisition of a 42 percent stake currently held by Fernbank Industries Limited in U-Bix and also the acquisition of the balance of shares, being 58% held by institutions, members of the public and staff of U-Bix. 613 The same Southpac Corporation report states: 'We have been informed that Mr Paola will realise free cash of NZ $3.0million from the sale of an Australian property. The sale is due to take place on or before 28 February 1991 with settlement due 60 days after sale. In addition, we believe that a further NZ $3.0million free cash will be realised from the sale of a second Australian property during the next 24 months.' 614 At transcript 212, it was put to Mr Paola that in February 1991 he believed that he had the financial means to purchase a 42 percent stake in U-Bix if he considered that appropriate and if he could negotiate that purchase. He disagreed, stating that he did not believe that he had the financial means but believed at that point in time that there may still be possibilities of funding it. It was put to Mr Paola that he would not have engaged Southpac Corporation unless he was confident that he had the financial means to go ahead with the purchase if he could negotiate it, but Mr Paola answered that he did not have the financial means and that the retainer of Southpac was predicated on a management buy-out of the company. [T 212] March 1991 615 In early March 1991, Heath Oliver & Associates reported to Mr Paola, advising that they were 'pleased to accept a mandate from Currabubula Holdings . . . to assist Currabubula in arranging acquisition and working capital of up to A$5.2 million'. 616 In mid-March 1991, Heath Oliver wrote to FAI Insurances Limited seeking to interest that company in the proposal by Mr Paola in relation to the subject purchase. Heath Oliver advised, inter alia: ' Our client was a successful businessman in automated office equipment. He retired from the business to concentrate on building up a number of rural properties. A major institutional shareholder is in the position where it is forced to dispose of 42% of an automated office equipment company (the target). Our client has had a close business relationship with the target since 1981. He owns a small parcel of shares in that company and has maintained a connection with the business through a non-executive directorship and consulting agreement. Our client wishes to acquire the institution's shares and proceed to make a full bid for the target. We have been informed that a major bank has indicated interest in providing the take-over finance. To enable the transaction to proceed our client wishes to borrow against the equity in his rural properties which are valued in the region of $15million to acquire the institution's shares.' 617 Ultimately, FAI Insurances were not prepared to proceed. April 1991 618 In early April 1991, Mr Paola gave instructions to Cavill White Securities Limited, members of the New Zealand Stock Exchange, to put a proposal for the joint purchase of the shares. That proposal by Mr Paola and the Maori Development Corporation comprised an offer for the 3,245,778 U-Bix shares to be acquired as follows: '1. Maori Development Corporation offered to purchase for cash 1,298,311 shares (16.9% of the total shares on issue) at NZ$1.30 a share. 2. Paola offered to purchase: (a) For cash 246,154 shares at NZ $1.30; and (b) On a deferred payment basis, 1,701,313 shares at NZ $1.30. This would give the relevant Paola entity a total of 1,947,467 shares (25.3% of the total).' [PX 1888] 619 The firm Doyle Patterson Brown Limited, acting on behalf of both the Maori Development Board and the Paola interests, on 22 April 1991 submitted an offer to DFC New Zealand Limited ('DFC') for the purchase of $3,245,778 shares in U-Bix at a price of NZ $1.40 per share. 620 At this time the offer was well below the figure that the vendor had indicated to Mr Paola that it wanted. May 1991 621 Cavill White Securities Limited on 6 May 1991, submitted a further offer to DFC by way of the joint purchase, this time at a price of NZ $1.40 per share. The response of DFC was that this offer was too low. 622 In late May 1991, DFC rejected a further offer, this time made at NZ $1.55 per share. A few days later, Cavill White Securities wrote to DFC submitting a further offer made on behalf of the Maori Development Corporation and the Paola interests, this time at NZ$1.80. Mr Paola gave evidence that this offer was in fact accepted and that the Maori Development Board decided that they would take the shares, disregarding Mr Paola's previous involvement. Mr Paola was not able to put forward any evidence of any acceptance of the offer which had been made for the purchase at NZ $1.80 per share. July 1991 - U-Bix Shares Sold to Maori Development Corporation 623 On 3 July 1991, U-Bix confirmed that the shares in question had been sold to the Maori Development Corporation at NZ $2.00 per share. [PX 2044] 624 In essence, Mr Paola's cross-examination was directed at suggesting that he was never prepared to pay NZ $2.00 for the subject shares and that the real situation involved offers being made from time to time well below the figure that the vendor had indicated that it wanted, although the offers had inched up but ultimately always been insufficient to achieve a purchase. 625 Mr Paola put forward no evidence to suggest that any proceedings had been commenced by his Group or himself against the Maori Development Corporation to pursue any claim which might otherwise have been held in relation to the suggestion that the ultimate purchase was in breach of any arrangement or agreement with the Maori Development Corporation relating to the share purchase. Limitation and Standing Questions 626 It is convenient before proceeding further, to turn to the limitation and standing questions. 627 Currabubula Holdings was the sole plaintiff upon the filing of the Summons on 23 December 1995. 628 Section C2 of the plaintiff's contentions pleaded the entry into of the Facility Agreement on or about 1 February 1990 by 'the plaintiff together with Paola Holdings, ABE Holdings, ABE Telecommunications, ABE Travel, ABE Jet, Campbell Rixon, Franxton Pty Limited, Pyojit ("the companies in the Paola Group of Companies") . . .' 629 Paragraphs 12, 13 and 14 pleaded that 'the plaintiff and other companies in the Paola Group of Companies encountered identified difficulties and lost opportunities and were forced to sell assets in forced sale circumstances. 630 Paragraph 15 pleaded that 'by reason of the provisions of the Facility Agreement the plaintiff was forced to meet not only its own liabilities to the defendant but also the liabilities of other members of the Paola Group of Companies to the defendant'. 631 Paragraph 16 pleaded that 'the plaintiff is unable to recover moneys paid out by it to the defendant for liabilities incurred by other members of the Paola Group of Companies'. 632 The plaintiffs claimed damages, interest and costs in the Summons. 633 By order made on 29 September 1997 Hunter J, upon application made by Currabubula Holdings, granted leave to amend the summons in terms of annexure 'E' to the affidavit of A. Koumoukelis of 15 September 1997. 634 The amendments are summarised in the judgment of Hunter J delivered on 29 September 1997. Effectively, the three categories of amendments were: (a) Amplification and greater particularisation of Currabubula's damages claim. (b) Joinder of Paola Holdings as second plaintiff. (c) Addition of causes of action by Paola Holdings. 635 The limitation and standing questions presently in focus deal only with categories (b) and (c). 636 As Hunter J pointed out at pages 3 to 4 of his judgment, the proposed amendments included alternative allegations, namely that: (i) The defendant owed its obligations under the Facility Agreement to the Paola Group Companies jointly. [Paragraph 26] (ii) The defendant owed its obligations under the Facility Agreement to the Paola Groups severally. [Paragraph 29] 637 The consequential claims, following the joint promisee allegation as well as the several promisee allegation, were that: . By reason of the breach of contract the Paola Group Companies had suffered loss or damage. [Paragraphs 27, 30] . In the premises Currabubula was entitled to recover the entirety of the loss or damages suffered by Paola Group Companies. [Paragraphs 28, 31] 638 Section H of the contentions pleaded Paola Holdings' claim. 639 Paragraphs 42 to 47 read as follows: 'H Claim by Paola Holdings 42. Paola Holdings Pty Limited is duly incorporated. 43. Paragraphs 2-28 hereof are repeated. 44. In the premises, Paola Holdings Pty Limited joins with its co-contractor Currabubula, in seeking to recover from the defendant the entirety of the loss or damage suffered by the Paola Group Companies . . . 45. Alternatively, the defendant owed its obligations under the Facility Agreement to the Paola Group Companies severally. 46. By reason of the defendant breach of contract, Paola Holdings Pty Limited has suffered loss or damage in that: (a) Paola Holdings Pty Limited lost the opportunity to refinance the debt owed to the defendant without interruption to its business or trade. (b) NRS, which was owned by ABE Holdings Pty Limited, which in turn was owned by Paola Holdings Pty Limited, was required to be sold immediately on a fire sale basis, resulting in a sale at an undervalue. (c) Paola Holdings Pty Limited lost the opportunity to acquire shares in U-Bix (N.Z.) Limited . . . which shares would have been resold at a substantial profit which would have come to Paola Holdings Pty Limited in the first instance. 47. Paola Holding is entitled to recover the loss or damage which it has suffered by reason of the defendant's breach of the facility agreement . . .' 640 In the amended summons, both plaintiffs claimed damages, interest and costs. 641 Hunter J in his judgment said inter alia: 'I think the significance of the amendments which are not in issue, namely the alternative bases of claim by Currabubula as a joint or several promisee, is that the method of quantifying the damages claimed involves in each case quantifying the damages suffered by the Paola group. That is best illustrated by the claim in respect of the U-Bix share transaction in which the total damages are established and then apportioned as to one third to quantify Currabubula's alleged loss. That alternative basis of claim also gives rise to the question as to the nature of the damages that Currabubula is entitled to recover as a joint promisee. Arguably, Currabubula is entitled to recover the whole of the damages suffered by the Paola group as joint promisees, holding that portion of recovered damages suffered by others in the Paola group on trust for those others (see Australian Securities Ltd v Western Australia Insurance Co Ltd (1929) 29 SR 571 at 573; Cunningham v Fitzgerald (1864) 3 SCR 72 at 80-81 and Peabody v Baron (1884) 5 LR (NSW) 72 at 76-77.) The importance of those features on this application lies, in my opinion, in the operation of Pt 20 r 1 of the Supreme Court Rules which, so far as is relevant, provides as follows: "[20.1] General 1. (1) The Court may, at any stage of any proceedings, on application by any party or to its own motion, order that any document in the proceedings be amended, or that any party have leave to amend any document in the proceedings, in either case in such manner as the Court thinks fit (2) All necessary amendments shall be made for the purpose of determining the real questions raised by or otherwise depending on the proceedings, or of correcting any defect or error in any proceedings, or of avoiding multiplicity of proceedings." That discretion has been described as one "unfettered by any rules of practice" and is of such a general nature as to permit the raising of a statute barred cause of action "whenever justice so requires" (see McGee v Yeomans (1977) 1 NSWLR 273 at 280 and Proctor v Jetway Aviation Pty Ltd (1984) 1 NSWLR 166 at 173.) That position was reached on the basis that the combined effect of Pt 20 r 1 and r 4 was to displace the rule in Weldon v Neal (1887) 19 QB Division 394 and proceeded on the premise of the applicability of the principle of relation back of Baldry v Jackson (1976) 2 NSWLR 415. In this application Currabubula sought recourse to Pt 20 r 4(4) on the basis that, as a joint promisee, Paola Holdings should be joined as a plaintiff (see Pt 8 r 3) and should be permitted to raise a claim by way of amendment under Pt 20 r 4(4) based on its entitlement to sue in an alternative capacity, namely, that of a several promisee. I do not think subrule (4) in speaking of "capacity" is addressing such a situation. I think subrule (4) is concerned with status of the party and not with that party's capacity to formulate causes of action on alternative bases. Reliance was also placed upon the operation of Pt 20 r 5. That is the basis upon which the expanded relief sought by Currabubula has been shown to be justified. It has no application to relief sought by Paola Holdings, in my opinion. It was also argued that Currabubula's case was in the nature of a representative action within the ambit of Pt 8 r 13. I do not think that the action as originally formulated in the summons or in the proposed amendments falls within the category of a representative action. (See Carnie v Esanda Finance Corporation Ltd (1994-1995) 182 CLR 398). As a claim by a joint promisee, the claim is simply a cause of action in which all co-promisees should be joined. The failure to join co-promisees does not result in a representative action on behalf of parties who should have been joined as plaintiffs. As a claim by one of several promisees the damages sought to be recovered are those only suffered by Currabubula and in respect only of its several cause of action. The advantage sought to be derived by the applicant from resort to Pt 8 r 13 lies in the contention that the bringing of a representative action has the effect of time ceasing to run under the statute of limitations in respect of the claims of the represented entities. I am satisfied that Currabubula's claim is not a representative action either as originally formulated or in the proposed amendment. Currabubula has also sought recourse to Pt 8 r 3 to have Paola Holdings joined as a joint promisee. I do not think it is doing the applicant's case an injustice, in that respect, in describing it as more in the nature of a device than one seeking to remedy an omission in the platform of Currabubula's cause of action. Pt 8 r 7, I think, makes it clear that a failure to join Paola Holdings to satisfy the requirements of Pt 8 r 3 is not fatal to Currabubula's right of action as a joint promisee. However, I think there are quite special and distinctive features about Currabubula's claim, as expanded, which calls for some favourable response by the court to this application to satisfy the requirement of justice. As stated earlier in these reasons, the peculiar nature of the damages claimed by Currabubula, whether as a joint or several promisee, for practical purposes, requires Currabubula to prove the whole of the damages which it could be said were suffered by the Paola group, the only difference, in terms of recovery, being the limitation of Currabubula's claim as a several promisee to approximately one third of the damages relating to the U-Bix share transaction said to have been suffered by the Paola group, in particular, by Paola Holdings. In those circumstances I fail to see what possible prejudice could arise or any unfairness be occasioned to the State Bank by allowing the proposed amendment, notwithstanding that it includes claims by Paola Holdings both as a joint promisee and as a several promisee. As a joint promisee, the damages to be proved by Paola Holdings would be the same as those proved by Currabubula in its joint promisee claim. I think the focal point in this application is that the claim by Currabubula, whether as a joint or several promisee, calls for proof of damage suffered by the Paola group. In the case of the claim as a several promisee there is involved the further step of dissecting from the damage suffered by the Paola group the damage suffered by Currabubula. The claims by Paola Holdings as a several promisee in the proposed amendment involve the same process of separating Paola's loss from that suffered by the Paola group: a process indistinguishable from the exercise required to establish the Currabubula separable loss. No question of prejudice to State Bank through effluxion of time arises in the bringing of a separate claim by Paola Holdings at this stage of the proceedings. It will have to meet exactly the same evidence as it is required to meet in Currabubula's claim as amended in the uncontentious paragraphs of the proposed amendment.: including the evidence of the separable damages suffered by Paola Holdings in relation to the U-Bix share transaction from which are to be extracted Currabubula's loss. It has not been argued that Currabubula's derivative loss as a shareholder in Paola Holdings is an unrecoverable head of damage. It has also been argued on behalf of Currabubula that, by reason of the allegation in paragraph 24 of the proposed amendment, the breach alleged against State Bank was a continuing one between February 1990 and June 1992, so that in any event, the claim by Paola Holdings as a several promisee was not statute barred in its entirety. However, I think that, while that may be so, and will achieve the immediate objective of an amendment to include a cause of action by Paola Holdings as a several promisee, its efficacy may ultimately be of limited value. Similarly, the joinder of Paola Holdings to satisfy the requirements of Pt 8 r 3 may have little utility, although, I am prepared to make such an order. It should be noted that the application has been argued on the basis that Paola Holdings consents to being joined for the purpose of Pt 8 r 3. In any event, I think it should be made clear that, in granting leave to amend in terms of the proposed amendment, if I had power to do so, as an added source of power I would exercise the general discretion to grant such leave pursuant to Pt 20 r 1 with the objective of ensuring that causes of action by Paola Holdings as a several promisee would date from the institution of these proceedings and so defeat any limitations defence which may have been available to State Bank if the cause of action was deemed to commence from the date of the amendment. The difficulty in having recourse to Pt 20 r 1 for this purpose of allowing the Paola Holdings amendments lies in the provisions of Pt 8 r 11(3) which requires that the joinder of a plaintiff, except in the case of joinder pursuant to Pt 8 r 10 or Pt 20 r 4(3), neither of which exceptions apply to this case, dates from the order of joinder. If Pt 8 r 11(3) is to apply, the result in this case borders upon the absurd. As stated earlier, the contentions to be raised by Paola Holdings under the proposed amendments will result in proving the same damages of the Paola group which Currabubula is entitled to prove, indeed, is required to prove both as joint or several promisee. Similarly, their respective claims for damages simply call for the separation out of those damages of the Paola group those damages respectively peculiar to Currabubula and Paola Holdings. When the basis of the claim and the capacity in which Paola Holdings sues is so understood, there is some affront to one's sense of reasonableness, dare I say justice, in being required to treat Paola Holdings' cause of action, both as joint and several promisee, as dating from the date of the amendment. Accordingly, although Currabubula and Paola Holdings are clearly entitled to the amendments sought, in the case of Paola Holdings, notwithstanding the operation of Pt 8 r 11(3), to the extent that it is within my power to do so validly , I would grant leave so to amend upon the further power conferred by Pt 20 r 1 to the extent that the amendment will operate from the institution of proceedings as distinct from the date of this order.' [See pages 7-19, Hunter J judgment] [Emphasis added] 642 On 2 October 1997, the plaintiffs sought to propound short minutes of order before Hunter J in the following terms: 'The Court orders that: 1. Paola Holdings Pty Limited be joined as second plaintiff to the proceedings. 2. The first and second plaintiffs have leave to amend the summons in terms of annexure marked E to the affidavit of AG Koumoukelis sworn 15 September 1997 save for the proposed paragraph 27A(a). 3. The joinder of Paola Holdings Pty Limited have effect from [ ] 4. The plaintiff is to pay the defendant's costs of the plaintiffs' motion and the defendant's costs of, incidental to and thrown away by the subject amendment.' 643 In a short judgment delivered on 2 October 1997, Hunter J said as follows: 'In this matter on 29 September 1997 I granted leave to the plaintiff to amend the summons . . . In doing so I expressed views concerning the special circumstances which I think were presented by this application. The matter has been listed today as a result of an inquiry on behalf of the defendant as to the form of order, and in that respect there has been submitted a minute of order dated 2 October 1997 which I have initialled and placed with the papers. It will be seen from those minutes that it is proposed that there be included an order specifying the time from which the subject amendment is to take effect. I have deliberately avoided making any such decision in the reasons for judgment . I have expressed the view in those reasons that the interests of justice call for the amendment to operate from the institution of the proceedings, while at the same time I think indicating the difficulty confronting the making of such an order. I think it was also made clear in those reasons that it is my view that the granting of leave to amend will not affect the evidence to be led in these proceedings. That is so whether the amendment operates from the institution of the proceedings or from the date of the order granting leave to amend, and that is so in relation to any issue by way of a defence based upon limitations. It is my understanding that the defendant, in seeking clarification of this aspect of the order, desires to give consideration to seeking leave to appeal from any order having the effect of dating the amendment to the time of institution of the proceedings. In my view, it is quite inappropriate at this stage of the proceedings to have that question determined by some appellate procedure., having regard to the fact that, whether or not the amendment dates from the commencement of the proceedings or from the date of the order, the evidence in this case will be unaltered. I see no prejudice at all to either party in declining to make any further order other than that the plaintiff be granted leave to amend the summons in terms of the annexure marked E to the affidavit of Mr Koumoukelis of 15 September 1997, and I confirm that order. I think the question that the defendant seeks to have aired at this stage can be dealt with by the trial judge, and that question and any other question that might be the subject of appeal can be dealt with appropriately at that time .' [Emphasis added] 644 In the result, the formal order simply granted leave to the applicant to amend in terms of the annexure to Mr Koumoukelis' affidavit. 645 In final submissions at the hearing, the plaintiffs sought an order, 'if otherwise necessary . . . backdating the date of [Paola's] joinder to the date of commencement of the proceedings, if the Court forms the view that Hunter J did not deal with that issue in any conclusive way'. [Submissions in reply paragraph 34] 646 Hunter J clearly left that matter open for determination by the trial Judge in his reasons delivered on 2 October 1997. 647 Hunter J discusses the relevant rules of the Supreme Court in relation to the application. These are Part 8 rules 2, 3, 8, 10, 11 and Part 20 rules 1 and 4. 648 Part 8 rule 11(3) is of crucial significance in the scheme of these rules in relation to the present question. This provides: 'Where in any proceedings a party is added otherwise than pursuant to an order made under Rule 10 or Part 20 Rule 4(iii), the date of commencement of the proceedings so far as concerns him shall be - (a) where he is added as a defendant - the date on which the amendment adding him as a defendant is made or the date of entry of his appearance or the date of filing his defence, whichever is earliest; (b) otherwise - the date on which the amendment adding him as a party is made. 649 Plainly Part 8 rule 10 dealing with death or bankruptcy of a party or transmission of the interest or liability, was inapplicable. 650 As Hunter J held, Part 20 rule 4(3) was inapplicable. Part 20 rule 4(3) deals with situations in which there is a mistake in the name of a party and the Court is satisfied that the mistake was not misleading nor such as to cause reasonable doubt as to the identity of the person intended to be made a party. 651 Part 20 Rule 1 is the general provision dealing with the Court's power to amend. Part 20 Rule 1(i) provides: 'The Court may, at any stage of any proceedings, on application by any party or of its own motion, order that any document in the proceedings be amended, or that any party have leave to amend any document in the proceedings, in either case in such manner as the Court thinks fit.' 652 Rule 1 Sub-rules (2), (3), (3A) and (4) are then machinery provisions identifying amendments said to be 'necessary' for the purpose of determining the real questions raised by or otherwise depending on the proceedings or of correcting defects or errors in the proceedings or of avoiding multiplicity of proceedings and also deal with where there has been a mistake in the name of a party. 653 Importantly, Part 20 Rule 1(3A) provides: 'An order may be made, or leave may be granted, under sub-rule 1 notwithstanding that the effect of the amendment is, or would be, to add or substitute a cause of action arising after the commencement of the proceedings, but in such a case the date of commencement of the proceedings, so far as concerns that cause of action shall, subject to sub-rule 4, be the date on which the amendment is made.' 654 Hunter J appears to have had some doubt as to whether or not the Court had power to grant leave to amend pursuant to Part 20 rule 1 so as to ensure that causes of action by Paola Holdings as a several promisee would date from the institution of the proceedings and thus defeat any limitations defence which may have been available to the Bank if the cause of action was deemed to commence from the date of amendment. 655 For that reason his Honour indicated that if 'it is within my power to do so validly I would grant leave so to amend upon the further power conferred by Part 20 Rule 1 to the extent that the amendment will operate from the institution of proceedings as distinct from the date of this order'. 656 Before the enactment of Part 8 rule 11 in 1989 (an amendment made following the decision of the Court of Appeal in Fernance v Nominal Defendant (1989) 17 NSWLR 710), questions arose as to whether there was power to add parties both under Part 8 and under Part 20. See Qantas Airways Ltd v AF Little Pty Ltd [1981] 2 NSWLR 34 at 45; Australian Coastal Shipping Commission v Curtis Cruising Pty Ltd (1989) 17 NSWLR 734; Fernance (supra). 657 In my view, the Court's power to add new parties must be exercised within the constraints and subject to the provisions of Part 8 rule 11(3) of the Rules. 658 The same view was expressed by McLelland J (as his Honour then was) in Wenham v General Credits Ltd (Unreported, Supreme Court of New South Wales, 16 December 1988). In that case, an application was made to join two additional plaintiffs to existing proceedings. At the time, Part 8 rule 11(3) of the Supreme Court rules provided: 'Subject to sub-rule (2), where a party is added pursuant to an order under rule 8 or rule 10, the date of commencement of the proceedings so far as concerns him shall be the date of filing of the originating process amended so as to add him as a party or, where an amended originating process is not filed, the date of the amendment adding him as a party.' 659 McLelland J said: 'Limitation Act 1969. In my opinion, except to the limited extent permitted by Pt20 r4(3) (which has no present application), and subject to the question of the existence of any inherent power in the Court to grant leave to a non-party to intervene (which has no present relevance), the Court's power to add new parties must be exercised within the constraints, and subject to the provisions, of Pt8 of the Supreme Court Rules . The rules in Pt8 permitting the addition of new parties are r8 and r10. Pt8 r11(3) provides, subject to a presently immaterial qualification, that "where a party is added pursuant to an order under r8 or r10, the date of commencement of the proceedings so far as concerns him shall be the date of filing of the originating process amended so as to add him as a party or, where an amended originating process is not filed, the date of the amendment adding him as a party". The position would probably be the same even without an express provision to this effect - see Ketteman v Hansel Properties [1987] AC 189. Accordingly the amendment of an originating process by the addition of a party pursuant to Pt8 does not relate back to the date of commencement of the proceedings for the purpose of a statute of limitations, unlike an amendment under Pt20 (as to which see Baldry v Jackson [1976] 2 NSWLR 415, McGee v Yeomans [1977] 1 NSWLR 273, Proctor v Jetway Aviation (1984) 1 NSWLR 166). It follows that the addition of either Aston or RAW as a party to permit the proceedings to be enlarged to include a claim by or on behalf of it would be futile if such a claim would be statute barred if brought now. ' [at page 8] [Emphasis added] 660 To my mind it is quite clear that the effect of the amendment procured from Hunter J so as to join Paola Holdings as an additional plaintiff to the proceedings, is that the amendment takes effect not from the date the original summons was filed, but from the date of the joinder. In this way, the general power of amendment afforded by Part 20, cannot be invoked to circumvent Part 8, dealing specifically with the relevant date of joinder. 661 In so far as the plaintiffs have pleaded that Currabubula is entitled to bring the proceedings as a trustee for the other Paola companies, in my judgment there is no evidence, either oral or written, that a trust existed and no basis on which a constructive trust would be imposed. As Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 makes plain, the basis on which the implication of a trust may in certain circumstances be found, rests on the fact that the person for whose benefit the contract has been made, that is to say the beneficiary, would not otherwise have had a cause of action for the very reason that the beneficiary is not a party to the relevant contract. 662 Nor is Currabubula Holdings able to maintain the proceedings in a representative capacity as it seeks to do in paragraph 27A of the amended summons. A representative action cannot confer a right on a party which that party would not have been entitled to maintain in a separate action. There is further no joint right but a joint and several right. Currabubula therefore requires to establish its own loss and its claim to sue representing all Group companies or as a trustee for all Group companies is rejected. 663 I dismiss the application made in the plaintiffs' submissions in reply. 664 In the result, Paola Holdings' claims in these proceedings take effect from the date of joinder of Paola Holdings.

DEALING WITH THE CASES The Group's Proposals to the Bank 665 Before turning to deal with the issues before the Court it is convenient to make clear one matter which was not an issue. I refer here to the fiduciary obligations of directors of the Group to outside creditors. It is important to bear in mind that the Court, in assessing the events of mid February 1990, is not called upon to deal and does not deal with the content, nor application, of those principles to proposals put to the Bank by the Group. Overview of the Plaintiffs' Submissions 666 The plaintiffs submit that in essence the case is a simple one which centres upon alleged breaches of contract by the Bank and damages said to flow therefrom. 667 The plaintiffs point out that in dealing with that case the Bank has raised a large number of defences, many of which centre upon the idea that it is relevant to the issues that the Bank, as at February 1990, had a right to terminate the facility agreement for various events of default. The plaintiffs in submissions address those defences but submit that the Court should find that the Bank has not made them out and further submit that those defences are ultimately irrelevant to the real issues. 668 The plaintiffs submit that it is clear and accepted by both sides that the facility agreement was never in fact terminated. Accordingly, on the plaintiffs' submission, at best the Bank enjoyed a right to terminate the facility agreement in February 1990 had it chosen so to do. It chose not to terminate the agreement. The plaintiffs then submit that this was an unequivocal act of election which bound the Bank. The plaintiffs submit that the Bank could not and indeed did not purport to simply save up any breaches in February 1990 for later use if the Bank saw fit. The plaintiffs submit that the Bank decided for its own reasons to continue with the facility agreement and to insist upon performance of its terms. The plaintiffs point as a graphic example of this, to the ongoing requirement that the Group reduce the outstanding amount of the facility to $7.5 million by May 1990. The plaintiffs submit that another example of this was the translation of $7 million of the facility into a term loan in March 1990. 669 On the plaintiffs' submissions, it follows that an enormous amount of evidence, and in particular cross-examination, relating to the position of group companies over the 1989 to 1990 financial year, becomes completely irrelevant. The plaintiffs deal with that evidence in submissions, but in the final analysis submit that this material has nothing to do with their breach of contract case. 670 The plaintiffs accept that there are real issues in relation to the quantum of loss suffered but submit that when the plethora of defences thrown up by the Bank are set aside, there is simply little or no issue as to the breaches of contract alleged. 671 The plaintiffs submit that their new Number 2 accounts cannot be regarded as forming any part of the facility. The submission was that the plaintiffs needed no assistance from the Bank if the plaintiffs were merely spending their own funds which may just as easily have been deposited with another bank or building society or been retained in cash. 672 With respect to the issue of loss, the plaintiffs submit that there is an air of unreality about much of the Bank's argument. The first is that 'freezing' the trading account of operating companies, and in particular NRS, causes no loss or difficulty to such companies. The plaintiffs submit that such an argument flies in the face of the very reason why such companies obtain credit in the first place and is commercially unsound. There was, so the plaintiffs submit, a very real, immediate and permanent effect upon NRS caused by the Bank freezing the accounts by the sending of the 'in liq' statements and resulting from the dishonour of the cheques. Mr Ryan's submissions were that the Bank's actions 'had a calamitous effect' on NRS. The submission was that the natural and probable result of the Bank's action was to cause the 'almost instant demise' of NRS as a trading entity. Staff had left. Customers [that is the retailers and wholesalers supplying to the Group] refused to supply goods on credit. At the same time NRS is said to have been unable to put farmers who purchased from NRS on to cash terms. Hence Mr Ryan submitted that the Bank's actions had had a significant, immediate and permanent effect upon NRS. 673 The plaintiffs further submit that the Bank witnesses accept that there was unrelenting pressure upon Mr Paola to dispose of Durhambone at any price from the date of the 'freezing' to the completion of the sale in September 1990. The submission is that the sale of Durhambone in 1990 must be seen in the context of it having become common knowledge that the Bank had 'closed down' Mr Paola. On the plaintiffs' submissions, even on the evidence of Mr Spackman, the Bank's valuer, there was a shortfall between the forced sale value struck by him and what was actually achieved for the Durhambone land. Further, so the plaintiffs submit, the Bank insisted upon the provision to it of the proceeds of sale of stock, plant and the sum provided for crop preparation, when it was not entitled to such funds under any of its securities. 674 The plaintiffs submit that the loss claimed in respect of the alleged sale at undervalue of Gabo is a further natural and probable consequence of the other breaches of contract. The submission is that had NRS and Durhambone been sold for proper value, there would have been no extant Bank debt and hence Gabo would not have had to be sold. 675 As to the U-Bix transaction, the plaintiffs accept that there are real issues as to the quantum of loss suffered which are dependent upon considerations of when and under what circumstances Mr Paola would have sold the U-Bix shares, but submit that the Court ought find, without difficulty, that Mr Paola genuinely wished to acquire those shares, and was prevented from so doing by the refusal of the Bank to release the A$390,000 from the proceeds of sale from Durhambone, its plant, equipment and the payment for crop preparation. 676 Ultimately, the plaintiffs' submission is that much of the Bank's stance in the case is based upon a 'confess and avoid' approach to the case, in circumstances where the Bank did not purport to actually avoid liability to the plaintiffs. Overview of the Defendant's Submissions 677 The defendant's submissions were in summary as follows: 1. The actions of the Bank did not constitute breaches of the agreement. 2. There were, in any event, events of default by the plaintiffs entitling the Bank to take the actions that it did. 3. Those actions did not, in any event, cause the losses complained of: (i) Mr Paola had decided to sell NRS and Durhambone before the Bank's action and had in fact already had them on the market for some time. (ii) The purpose of their sale was to raise funds to: (a) service the Bank debt; (b) reduce the Bank debt to $7.5 million by the end of May as was required by the agreement; and (c) make further significant reductions to the Bank debt. (iii) NRS and Durhambone would have been sold in any event at about the times they were sold and for the amounts for which they were sold. (iv) Any loss on the sale of Gabo is too remote and is, in any event, the result of the plaintiffs' not having accepted an offer to purchase that property made in February 1991. 4. Any loss in relation to the sale of the NRS business was incurred by NRS not by either of the plaintiffs and so is not recoverable in these proceedings. 5. Any loss on Durhambone was released by the plaintiffs in the deed of release. 6. The loss of profits on the U-Bix shares is not recoverable: (i) The Bank was contractually entitled to refuse to release the $390,000. (ii) The plaintiffs, in any event, released the Bank from any liability by deed and there was no economic duress exerted on the plaintiffs when they did so. (iii) The evidence does not show that the refusal by the Bank to finance the purchase of the shares caused the plaintiffs to be unable to purchase the shares. (iv) Currabubula Holdings had no beneficial interest in the company which was to purchase the shares: of the 100 issued shares in that company, one was held by Currabubula Holdings on trust for Paola Holdings and the remaining 99 were held by Paola Holdings. Paola Holdings is statute barred in any claim it makes. (v) The claim is, in effect, a 'loss of opportunity' claim where there is no significant prospect that the profits claimed would have been realised. (vi) The loss of those profits was too remote to be recoverable. 7. The plaintiffs have no entitlement to maintain these proceedings as representatives or trustees. 8. Currabubula Holdings has no entitlement to an estoppel or to equitable compensation. 9. (i) The material relied upon in relation to the defamatory cause of action was not defamatory. (ii) To the extent that the material was defamatory: (a) It was not likely to cause the plaintiffs to suffer harm. (b) It was published under qualified privilege. (c) There was, in any event, publication to only five or six people and no loss flowed from publication to them. (d) Each statement was defamatory only of the company which owned the account and, only Currabubula Holdings commenced proceedings within the limitation period and is therefore the only party which might be entitled to compensation for defamation. . . . 10. The quantum claimed by the plaintiffs in respect of each item of loss greatly exceeds any loss suffered. 678 The Bank addressed detailed submissions by way of a close examination of the plaintiffs' cheque dishonour case. It is convenient to set these submissions out. Close Examination of the Plaintiff's Cheque Dishonour Case 679 The Bank submitted that immediate attention requires to be paid to the precise breaches of the facility agreement pleaded by the plaintiffs. As already noted, there are two such categories of breach relating to cheque dishonours, namely: (a) On 16 February 1990, the dishonouring of cheques presented on 15 February. (b) Following 17 February 1990, the dishonouring of further cheques listed on the further amended summons. The Bank's answers to the First Category of Schedule 1 Dishonoured Items, namely those presented on 15 February1990 680 As to the first category of breach dealing with dishonour of cheques presented on 15 February 1990 and dishonoured on 16 February 1990, the Bank pointed out that the plaintiffs in final submissions do not assert that on 15 February they had sufficient funds to pay such cheques. In short, the plaintiffs accepted that the Bank was not obliged to honour those cheques as the plaintiffs were then overdrawn. [See plaintiffs' submissions para 22 essentially accepting Mr Holgate's schedules]. 681 The Bank submitted that the summons commencing the proceedings filed on 23 December 1995 had in the first part of Schedule 1, identified approximately 79 cheques totalling $178,200 said to have been dishonoured but presented on 13 February 1990, 14 February 1990 or 15 February 1990. The Bank submitted that the amended summons upon which the plaintiffs ultimately moved at the commencement of the hearing had removed many of those items from the first part of Schedule 1, so that the only cheques presented on 15 February 1990 and dishonoured on 16 February 1990, which remained the subject of the plaintiffs' claim, were some 28 cheques totalling $75,012.87. Hence the Bank submitted that in respect of approximately 48 such cheques presented on or before 15 February 1990 and not honoured, no complaint was pressed. Whilst my count does not agree with the Bank's count, the schedules do clearly make the point that a number of cheques which were presented on at least 13 and 14 February are recognised by the plaintiffs as having been dishonoured and are cheques in respect of which no remaining claim is pressed. As earlier pointed out, a number of these cheques were held back. 682 Mr Macfarlan QC for the Bank made plain that the Bank accepted, for the purposes of the proceedings, that from 22 February 1990 the facility was not overdrawn. That was not, however, on his submissions to say that thereafter cheques could have been drawn on the Number One accounts. Mr Macfarlan's submission was that cheques could not thereafter be drawn on the Number One accounts because those accounts had been rendered inoperative either by the Bank's letter making plain that the Number One accounts had been frozen, or as a result of a consensual arrangement. 683 On Mr Macfarlan's submissions, it was thus permissible for the Bank to decline to pay items drawn on the Number One account on and after 22 February 1990. 684 In opening submissions it appeared that the question of fact presented, would require consideration of a banker's duty to pay customer's cheques in the order of presentation, where a number of cheques are presented simultaneously. 685 In Weerasooria, Banking Law and the Financial System in Australia , at paragraphs 21.78-79, the matter is put as follows: 'In the absence of specific instructions to the contrary, a banker is under a duty to pay a customer's cheques in the order in which they are presented, whether by post or otherwise. If two cheques are presented simultaneously, for example, by the same mail or through the same clearing and there are only funds sufficient to pay one, it is doubtful whether both may be returned. Unnecessary damage would be caused to the customer's credit if both are returned. Nevertheless, it is hard to say which is the preferable course but the smaller the amount of the cheque, the greater may be the damage to the customer's credit: Halsbury, 4th ed, vol 3, para 52. The better opinion seems to be that the banker should pay as far as possible: Paget, p 301. Lord Chorley seems to agree with Paget when he states that no rule has been established by the courts for dealing with the practical problem of simultaneous presentation of cheques, and it does not appear that any settled practice is followed by the banks. 'Clearly, any cheques for sums greater than the balance can be disregarded, and in dealing with the others, probably the simplest plan is to pay them in the order they come to hand until there are not sufficient funds to pay the smallest one left. In the event of the customer complaining, the banker could possibly contend that as his instructions were ambiguous he was entitled to exercise a reasonable discretion': Chorley, p 72; Westminster Bank Ltd v Hilton (1926) 43 TLR 124. A bank is, however, not entitled to dishonour cheques already presented because it knows of others to be presented shortly, unless it was so acting on the special instructions of the customer. In Sednaoui Zariffa Nahas & Co v Anglo-Austrian Bank (1909) JIB Vol XXX p 413, cheques presented for payment to the defendant bank were marked 'effects not cleared - please present again'. The bank contended that it was justified in refusing payment because it had been advised of a number of cheques to be presented and it did not have sufficient funds to meet all of them and it was therefore entitled, without paying any of them, to ask the holders to re-present them. It appeared that on the day when the cheques were presented the bank had sufficient funds to pay one or more of them but not all of them. It was held that the bank was liable in damages since it had a duty to honour the first cheque presented which was within the amount of the funds in the bank: see also Caldwell v Merchants Bank of Canada (1876) 26 CP 294.' 686 Ultimately in the way the case was presented by the plaintiff, no submissions which descended to this form of detail appear to have been pressed, the plaintiff being content to leave the matter resting with the defendant's acceptance that from 22 February 1990, the facility was not overdrawn. 687 As earlier noted, the Bank admitted that on 16 February 1990, it dishonoured cheques referred to in the amended summons Schedule 1 which were presented to the Bank on 15 February 1997. [Defence paragraph 14] 688 In contradistinction to the above described admission of dishonour, the Bank admitted that between 16 February 1990 and 12 April 1990, it failed to pay from the Number One accounts upon which they had been drawn, items identified in Schedule 1 to the amended summons. That failure to pay cheques so presented between those dates was put as not amounting to a dishonour. [Defence paragraph 18] 689 A number of schedules were relied upon by Mr Ryan and by Mr Macfarlan to explain the position which obtained with respect to presentation of the relevant cheques, and the honouring or dishonouring of those cheques, generally during the period between approximately 28 January 1990 and the end of March 1990. 690 Mr Holgate's statement included as schedules, certain flow charts which he had prepared. Annexure 'B' to his statement recorded the daily net balances in terms of the actual position in the real world with items which had been regarded as dishonoured. 691 It is apparent from Schedule 'B to Mr Holgate's statement, that the balances, taking into account a recognition of dishonoured items, were as follows: 12 February 1990 - $8,518,348.43 13 February 1990 - $8,576,773.16 14 February 1990 - $8,535,577.18 15 February 1990 - $8,522,619.95 16 February 1990 - $8,432,724.48 17 February 1990 - $8,432,724.48 18 February 1990 - $8,432,724.48 19 February 1990 - $8,381,813.55 20 February 1990 - $8,334,485.50 21 February 1990 - $8,311,705.25 22 February 1990 - $8,271,271.27 23 February 1990 - $8,079,501.74 24 February 1990 - $7,982,230.78 25 February 1990 - $7,982,230.78 26 February 1990 - $7,780,046.69 27 February 1990 - $7,893,807.37 28 February 1990 - $7,858,608.15 . . . 7 March 1990 - $6,539,533.78 8 March 1990 - $1,124,975.24 . . . 31 March 1990 - $1,107,690.05 692 The total of these balances shown on Annexure 'B' to Mr Holgate's statement reflects the fact that drawings by way of cheques (and to some extent bank authorities) were rejected to ensure that the limit remained below $8.5 million. 693 The above description of these balances shows that cheques were dishonoured. Hence the balances ran down. Some reductions occurred because there were credits in the Number Two accounts. 694 The reduction as between 7 March 1990 and 8 March 1990, occurred by reason of the $7million conversion of part of the facility to a term loan. 695 Annexure 'D' to Mr Holgate's statement shows detail of the Number One and Number Two accounts. Schedule 'D' was a reworked schedule, again dealing with daily net balances but now doing so on the basis that the cheques and bank authorities which had been reversed by the Bank had been met by the Bank on presentation. In short, Schedule 'D' includes reference to both the Number One and Number Two accounts and assumes that the dishonoured items had in fact been paid. The balances in the total column for 12 February through to 25 February are as follows: 12 February - $8,525,810.52 13 February - $8,584,518.25 14 February - $8,616,425.07 15 February - $8,632,319.57 16 February - $8,629,228.63 17 February - $8,629,228.63 18 February - $8,629,228.63 19 February - $8,598,927.47 20 February - $8,562,238.87 21 February - $8,547,989.72 22 February - $8,511,379.32 23 February - $8,321,346.57 24 February - $8,197,527.87 25 February - $8,197,527.87 696 The same balances then show that dishonours did take place on 13 and 14 February. 697 Those balances show that had cheques been honoured, the balances on 23 February would have been $8,321,346.57. 698 On the basis of this schedule, the Bank asserts that if the cheques had all been paid, there would have been an excess over the facility limit up until 22 February and hence that the Bank was contractually entitled to dishonour cheques to the extent of the excess up to that date. 699 Annexure 'D' to Mr Holgate's statement also records the occasion of the $7million conversion to the term loan earlier referred to and referred to. 700 Hence, one can use Annexure 'D' to Mr Holgate's statement to see what the position was in the Number One accounts and the Number Two accounts in globo. The total draw down reduces to below $8.5 million principally due to credits accumulating in the Number Two accounts. 701 The Bank further relied upon Exhibit D36 which records total balances for the period 13 February 1990 to 6 March 1990 and is a reworking of Mr Holgate's Annexure 'B'. Exhibit D36 groups the Number One and the Number Two accounts which contribute to the total. This exhibit is in the following terms:

NOTE: There are no statements for account numbers 582 690 18100 and 560 100 92201 after 23 February 1990. As at that date the accounts were in debit for respectively ($49,013.03) and ($48,257.93). In his total of the daily net balances (annexure B) Mr Holgate has assumed that without any statements to work from, these debit balances were reduced to zero as and from 24 February 1990. In fact the evidence is that they remained at or about the debit levels recorded as at 23 February 1990 until 7 March 1990 when the debit balances were reduced to zero at the time of the term loan restructuring (see annexure F to Mr Holgate's statement).'

702 The first entry in the Number One account debit column of 13 February 1990 shows that the $8.5 million had been drawn. The Bank asserts that it permitted the Paola Group, if it had any more money coming in, to draw it back by putting it into the Number Two accounts. The Bank asserts that the facility had more to it than the overdraft limits and refers to the request a few weeks thereafter to exercise one of the options, that is term loan which was given effect to. What the Bank accepts is that there was a freezing of operations on accounts drawn on the Number One accounts to $8.5 million. 703 It will be seen from Exhibit D36, together with Exhibit PX 1230, and also from page 4 of Annexure 'A' to Mr Holgate's statement, that on 15th and 16th February, deposits of two separate amounts of $50,000 each to ABE Fax's account occurred. Taking into account that the relevant figures in the 'Debits Number One Account' column of Exhibit D36 for 15 and 16 February also show debits, the reason for reduction of the balance in the Number One accounts debit column from 15 February 1990 of $8,525,266.11 through to 16 February 1990 of $8,482,757.70, being largely attributable to those two deposits. 704 The only other occasion when Exhibit D36 records a significant deposit into the Number One accounts is as between 4 March 1990 when the balance is $8,437,084.47 and 5 March 1990 when the balance becomes $8,263,521.04. This is attributable to the amount of $178,634 being deposited into the Number One accounts - see Exhibit PX 1210. As earlier noted, at the Companies' requests this figure was transferred across to the Number Two accounts and that is why the debits in the 'Number One Account' column for MFI S3 returns on 6 March 1992, to approximately the 4 March 1990 balance. 705 The Bank relies upon the balances in the Number Two accounts shown on Exhibit D36 as increasing quite steadily through to 6 March 1990. The Bank asserts that all the money to the credit of the Number Two accounts were available to be drawn on by Mr Paola or his Group, for example, to pay NRS suppliers COD, which the Bank asserts may have quickly restored any damage to NRS's reputation. 706 The Bank asserts that when one looks at Exhibit D36 in the Number One accounts, it is clear why there were fluctuations and why they got to below $8.5 million. The maximum amount below the $8.5 million, apart from the 4 and 5 March deposits, show that by and large the balance did not come down more than about $60,000 or $70,000 below the $8.5 million figure. That reduction of some $60,000 or $70,000 below the $8.5 million figure is attributable on the Bank's case, to the two $50,000 deposits to ABE Fax. 707 On the Bank's case, the evidence proves that at the request of the company, the Bank readily transferred to the Number Two accounts, moneys deposited to the Number One accounts, there being on the Bank's case, no suggestion in the evidence of any request by the customers to transfer the two $50,000 deposits of ABE Fax into the Number Two accounts. This was, Mr Macfarlan said, because the companies had substantial amounts in the Number Two accounts. 708 ABE Fax had never opened a Number Two account. Its account had been frozen for some time. Mr Macfarlan also pointed out that the ABE Fax receipts of $50,000 were not treated by the Bank or customer as permanent reductions. He relied upon one of the letters as showing the Bank still treated the full $8.5 million as available [PX 1217 dealing with the $7million and $1.5 million segmentation, of what was recognised by the Bank then as a continuing $8.5 million facility]. 709 In support of the proposition that Mr Paola believed throughout 1990 that the facility was still available, and of the further proposition that Mr Paola could have utilised balances standing in the Number Two accounts to pay suppliers and for other business purposes, Mr Macfarlan relied upon cross-examination of Mr Paola at pages 156 to 158. This was inter alia to the following effect: '. . . Q. . . . the question I want to put to you is to suggest to you that as at the beginning of March 1990, and in fact throughout 1990, you believed that the facility described in the letter of 1 February 1990 from the Bank was available to your group? A. I believe so yes. Q. Then 1210 please in the bundle. Do you recall that there was a deposit made to the account of Currabubula that had been in existence for some time which was the subject of a request for a transfer to the Number Two account, the new account at Currabubula? A. Yes I recall that. Q. And that request was complied with? A. Yes it was. Q. And you understood that if there were any such deposits to the old accounts then it was open to your group to contact the Bank and arrange for their transfer to the new ones? A. Yeah, with some difficulty. Q. Well there wasn't any difficulty in having this transfer effected, was there? A. There was some difficulty, yes. Q. What was the difficulty? A. Oh several arguments on the phone. Q. It was done immediately the request was made in writing wasn't it? A. It was done once the request was put in writing yes. Q. And 1218 of the bundle, do you recall that a further request for transfers were made as indicated in this letter? A. Yes. Q. And 1219 is an example of the same situation? A. Yes. Q. Mr Paola, there came to be in the weeks and months following the middle of February substantial credits in the new account, is that right? A. Yes. Q. And to some extent those credits were drawn against, correct? A. The new accounts? Q. Yes? A. The Number Two accounts? Q. Yes? A. Yes. Q. And to some extent substantial credit funds remained in the accounts? A. Yes. Q. Which could have been drawn against by your company - by your group? A. Well, naturally. Q. And if you'd look at 1257 please. Was there a point in time at which you requested a bank balance for various accounts? Do you remember this memorandum? A. Yes I remember this yes. Q. And you were supplied with information such as is in the following pages; is that right? A. Yes. Q. And in particular 1260 was information concerning the Northern Rural Services account, correct? A. Yeah, this is - yes. Q. And do you remember the position in respect of the Northern Rural Services accounts was that before the events of mid-February there were four accounts - one in respect of each of the four branches? A. Yes. Q. And that after, or from mid-February, there came to be just a single No. 2 account? A. Yes. Q. And you were informed in April when you made this request that there was a $230,000-odd credit in the No. 2 account? A. Oh, well, if it's here, yes. Q. And that could have been utilised for such business purposes of NRS as you thought appropriate? A. Yes. Q. And if you wished to cause suppliers for NRS to be purchased on a C.O.D. basis, funds were there to enable that to be done? A. When? Q. Well let's take this date as an example; as at about 17 April? A. Yes. Q. May I suggest to you that one consideration that was playing on your mind was a desire not to increase the overall debt owing the bank any more than was absolutely necessary because of the very high interest rates that were applicable? A. There had to be a surplus in those accounts to accommodate interest. If I recall correctly there was substantial interest payments that had to be made. Q. Well what was the approximate amount of the overall monthly interest payable? A. Something around $120,000 or thereabouts . . . Q. For the whole group? 710 A. For the whole group yes . . .' [T 157-158] The Bank's Answers to the Second Category of Schedule 1 Dishonoured Items namely those presented between 16 February 1990 and 12 April 1990 711 The Bank furnished six alternative responses in submission to the plaintiffs' case in respect of the second category in Schedule 1 of the summons of cheques presented [including Bank authorities] on presentation dates from 16 February 1990 to 12 April 1990. These submissions in point form were as follows: Point 1 If the subject items had been paid, at least up to 22 February 1990, the facility would have been exceeded. There was then a simple justification in the Bank for not paying those cheques or items. Point 2 Those cheques were drawn on the Number One account. The Bank asserts that it was perfectly entitled to freeze those accounts and did so by its letter. Alternatively, the Bank asserts that the Number One accounts were no longer able to be used as a result of a consensual arrangement of 15 February, reached between the plaintiffs and the Bank. The Bank also refers to the fact that in so far as the Moree, Gunnedah and Narrabri NRS accounts were concerned, the company had said that the accounts were no longer required. Point 3 In relation to this particular category of cheques, there was no dishonour in relation to a number of them because they were paid from the Number Two accounts. Here Mr Macfarlan accepted that the strength of the submission varied considerably depending on how soon after the reversal from the Number One account, payment occurred from the Number Two account. The submission is strong where the payment occurred on the same or the following day. In short, if there was, for example, a six week period which passed between the two events, the Court may infer dishonour on day one and that the cheque went back to the supplier who complained and that the plaintiffs then provided a new cheque which was paid from the Number Two account. Hence the focus is on just how soon after the reversal from the Number One account one can find a payment taking place from the Number Two accounts. It was accepted by both parties that an inherent part of a dishonour involves the Bank communicating to someone that an item is not to be paid - [see Section 69 of the Cheques and Payments Orders Act 1986 (Com)] which provides: 'A cheque is dishonoured if the cheque is duly presented for payment and payment is refused by the drawee institution, being a refusal that is communicated by the drawee institution to the holder or the person who presented the cheque on the holder's behalf.' The Schedule conveniently prepared by the plaintiffs appearing on the 4th, 3rd and 2nd last pages of the plaintiffs' written submissions, lists the plaintiffs' cheques and bank authorities reversed in Number One accounts on or after 16 February 1990 but paid from NRS's Tamworth Number Two account. From that schedule it is clear that bank authorities or cheques reversed in the Number One account but paid on the same day or on the following day from the Number Two account, are to be located in the reversal entries for 1 March 1990, 19 February 1990, 20 February 1990, 21 February 1990, 8 March 1990, 15 March 1990, 13 March 1990 and 21 February 1990. Point 4 The Bank's next submission was that the Schedule Exhibit D35 records, many of the items from 1 March through to 5 June involved bank authorities. It cannot be assumed so the Bank submitted, that this involved any communication to the customer because, of its nature, there is nothing which the payee presents to the Bank seeking payment to the customer where a bank authority is involved. The bank authority is simply a standing arrangement in respect of which the most that could be inferred, even where there was a lapse of time between non-payment from the Number One account and payment from the Number Two account, was that the payee just would not receive the money in the meantime. The Bank submitted that one cannot infer a communication from the Bank in that instance by way of saying something adverse to the financial standing of the drawer of the cheque. Point 5 The Bank's fifth submission was that in the absence of any evidence as to what answers were communicated where cheques were dishonoured, to the extent to which any such communications did take place, the Court could only assume that an accurate answer would have been given. The accurate answer which the Bank suggested would have been given would have been to the effect that the account in question was no longer operative. In short, all items having been drawn on the Number One accounts, such an answer would have been entirely accurate and so the Bank submitted, would not have reflected on the Company's financial standing. Here again the Bank points out that on 15 February for example, the company said that the accounts from Moree, Narrabri and Gunnedah were no longer operative. Mr Ryan had given certain references in the evidence to statements concerning answers given. Those references were Exhibit PX Volume 4 pages 1282 and 1283.5 and Exhibit 4 page 1289.7. Mr Macfarlan pointed out that these references were to answers given when cheques were much later drawn on the Number Two account at a time when those accounts were overdrawn. Hence the answer there would have been in all likelihood 'present again' or something similar. Those answers, so Mr Macfarlan submitted, did not then shed any light on what was said when cheques in the second part of Schedule 1 to the summons were not honoured. I accept that the reference on Exhibit PX Volume 4 page 1283 to cheques having been returned marked 'present again' is in all likelihood referable back to the same volume at page 1281 where the Number Two accounts are referred to. And in the case of Exhibit PX Volume 4 page 1289, the reference to the return by the Bank of a cheque 'present again' clearly also refers to the Number Two accounts. Point 6 The sixth answer in the Bank's submission was that there is no evidence as to who the payees of the cheques or bank authorities may have been and in that circumstance, those may have concerned inter-company payments or payments to persons from out of town, the amounts often being very small items and there being very few of them compared to the vast numbers dishonoured on approximately 15 February. In short, the evidence of suppliers telephoning the office was, Mr Macfarlan submitted, highly consistent with the dishonours occurring on or about 15 February rather than the smaller and much later amounts. Dealing with the Case in Contract 712 The plaintiffs' case in contract requires a close examination of both the express and implied terms of the subject contract. In so far as each alleged breach of contract is concerned, this requires a close investigation into the precise circumstances which obtained in or around 15 February 1990 and during the ensuing days on the subject of loss. 713 It is convenient to proceed by initially turning to the subject contract. The Contract The Parties 714 The parties to the contract were the Bank, the eleven named borrower companies referred to in the Bank's Facility Letter of 1 February 1990 and the three named guarantors referred to in that letter. Express Terms 715 It is common ground that the express terms of the contract constituting the Facility Agreement are to be found in the Facility Letter of 1 February 1990 which incorporates the terms and conditions set out in the earlier Facility Letters of 4 September 1987 and 18 November 1988, save to the extent that those terms and conditions were inconsistent with the terms of the 1 February 1990 letter. In the event of and to the extent of any such inconsistency, the terms of the 1 February 1990 letter are to apply. The Proper Construction of the Three Facility Letters 716 The identification of the terms of the three facility letters has to be made in the light of the objective facts and surrounding circumstances known to both of the contracting parties. It is here important to bear in mind the words of Lord Wilberforce in Reardon Smith Line Ltd v Yngvar Hansen - Tangen (trading as HE Hansen Tangen) [1976] 1 WLR 989. He said at 995: 'No contracts are made in a vacuum; there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as the "surrounding circumstances" but this phrase is imprecise; it can be illustrated but hardly defined. In a commercial context it is certainly right that the Court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.' 717 Later, Lord Wilberforce added at 996: '. . . it is often said that, in order to be admissible in aid of construction, these extrinsic facts must be within the knowledge of both parties to the contract, but this requirement should not be stated in too narrow a sense. When one speaks of the intention of the parties to the contract, one is speaking objectively - the parties cannot themselves give direct evidence of what their intention was - and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Similarly when one is speaking of aim, or object or commercial purpose, one is speaking objectively of what reasonable person would have had if placed in the situation of the parties. It is in this sense and not in the sense of constructive notice or of estopping fact that judges are found using words like "new or must be taken to have known" . . .' Cf excerpts from these passages cited by Mason J in Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 350-351. 718 The three facility letters, properly construed in the light of the objective facts and surrounding circumstances known to both of the contracting parties contain the following terms: The Content of the Financial Accommodation 719 The Bank was to make available a Multi Option Facility with a limit of $8.5 million, effectively increasing the $6.8 million limit of an existing Multi Option Facility. The facility obliged the Bank to provide financial accommodation totalling not more than $8.5 million to such of the eleven Paola Group Companies identified as borrowers and in such amounts and in such forms (whether commercial bill acceptance/discount or overdraft limit or fixed and floating term loans or documentary letters of credit) as was requested of it by the Paola Group Companies. Reduction in the Facility Limit 720 The facility was to reduce to $7.5 million by 31 May 1990 Review of the Facility 721 The facility was subject to a review immediately financial accounts for the Paola Group Companies for the half year ended 31 December 1989 became available, such review to be completed by 31 March 1990. 722 An immediate review of the facility was to be conducted in the event of a material adverse change in the financial condition of any of the Paola Group Companies. Cancellation of Facilities and/or Declaration that Facility Immediately Due and Payable 723 The Bank was entitled by notice in writing to the Paola Group Companies to declare that the facilities may be cancelled forthwith and/or to declare the facilities immediately due and payable together with all interest accrued thereon and all other amounts payable thereunder if any of the eight events of default specified in the letter of 4 September 1987 occurred and were continuing (the last of which events was any circumstances arising which give reasonable grounds in the opinion of the Bank that there has been a material adverse change in the financial condition of the Paola Group Companies). Fees 724 The Paola Group of Companies promised to pay the fees specified in the letter of 1 February 1990 and the Bank's legal fees. Liability of Group Companies for Moneys Advanced to Other Group Companies 725 Each of the Paola Group Companies (other than ABE Fax and Automated Business Equipment Pty Limited) agreed to be responsible to the Bank for a payment of all moneys advanced to any of the Paola Group Companies under the Facility Agreement. Securities 726 The Paola Group Companies promised to provide securities already in place which were specified in the annexure to the 1 February 1990 letter. Duration of Facility 727 Subject to the reduction of the facility to $7.5 million by 31 May 1990, the facility was to continue: (a) Until cancelled by notice in writing given by the Bank to the borrowers upon the occurrence of one or more of the events of default specified in the 4 September 1987 Facility Letter. (b) Until terminated by agreement between the parties. (c) Until terminated by operation of law. 728 Outside of cancellation by notice following the occurrence of an event of default, the facilities were neither repayable on demand nor repayable on reasonable notice. 729 The position may be contrasted with the January 1984 facility which was expressly stated as covering a 2-year term [PX 1/17], and with the February 1984 'come and go' overdraft which expressly provided 'the loan, being by way of overdraft, is payable on demand . . .' [PX 1.26]. 730 The 4 September 1987 letter did contain a subheading 'Term', but the only words thereunder were 'facilities to be reviewed 31 December 1987 to establish suitable reduction conditions'. To my mind, this is inconsistent with the facilities being on demand. Indeed I accept the plaintiffs' submission that the presence in the letter of events of default and detailed provisions relating to the Bank's power to terminate the facility on the occurrence of the same is inconsistent with the facility being on demand. 731 The 22 March 1988 letter also referred to 'term', but then simply continued 'review of 6-monthly cash flow projections by 30 June 1988 to determine future requirements - annual review - next due 31 December 1988'. [PX 1/137] 732 The 18 November 1988 letter was silent as to the term of the increased facilities [PX 1/188]. 733 The 6 February 1989 letter [PX 1/241] contained a section headed 'Term' [PX 1/243]. It provided for annual review of the facilities, a review of proposed security arrangements and 'immediate review in the event of a material adverse change in the financial condition of ABE Holdings Limited and subsidiaries, Paola Holdings Pty Limited or Currabubula Holdings Pty Limited, or of shareholders therein'. The letter importantly did provide for a fixed term for one part of the facilities, namely a $113,000 guarantee facility provided to Paola. [PX 1/241 and 1/243] This makes it clear it seems to me that the remaining facilities were not on demand. 734 The 22 September 1989 letter made no reference to 'term' at all. It did include a section headed 'Review' which read: 'All facilities to be subject to annual review next due by 31 October 1990 or earlier on availability of audited financial accounts of the Group. Immediately review in the event of a material adverse change in the financial condition or change in ownership of the Group. 735 The 1 February 1990 facility letter also made no reference to 'term'. However, the letter did require a reduction in the multi-option facility limit, to $7.5 million, by 31 May 1990. This is inconsistent with the facility being on demand, as was the customer's option to choose a variety of funding instruments, including term loans [PX 3.1047], bill facilities [PX 3/1047 and 3/1049], and the reference, under 'TENOR' to the fact that 'fixed rate drawings may be drawn for a maximum term of two years'. [PX 3/1049] 736 Mr Macfarlan submitted that the words 'immediate review is to be conducted in the event of a material adverse change in the financial condition or change in ownership of any of the companies comprising the borrower', properly construed gave the Bank an entitlement to peremptorily and without notice withdraw the facility upon the happening of such material adverse change. 737 I reject that submission as without substance. 738 On one view, it might be possible to read into the sentence a term which would, upon the occurrence of a material change of the character described, entitle the Bank to conduct an immediate review, following which the Bank might have the right: (a) To seek to renegotiate aspects of the facility. (b) If such renegotiation proved abortive: (i) to then transform the facility into a facility with a defined term, or (ii) to terminate the facility on reasonable notice. 739 To my mind, the sentence does not permit of any such radical surgery or reconstruction. The construction of the sentence has to be carried out in a context which takes into account all the parts of the document importantly including: (a) That the events of default include 'any circumstances arising which give reasonable grounds in the opinion of the Bank that there has been a material adverse change in the financial condition of the borrowers'. (b) That upon the happening of such an event of default the Bank was entitled by notice to declare the facilities as cancelled forthwith or as immediately due and payable. 740 The Bank's power to conduct an immediate review is likely to have been seen by the parties as a simple precursor to the Banks, having first satisfied itself on such review of its entitlement to do so, then exercising its said rights to declare the facilities cancelled or immediately due and payable. Event of Default - Default by Whom? 741 A question arises as to whether an event of default under the agreement would occur when any of the circumstances defined as 'events of default' in the letter of 4 September 1987 applied: (a) To any one of the borrower companies; or (b) To all of the companies; or (c) To the Group as a whole. 742 Submissions were advanced by the plaintiffs in support of the proposition that the relationship between the Bank and the Paola Group Companies was a group relationship by which, whilst facilities in set sums were listed for companies in the group, the Bank agreed to provide those facilities 'for the group'. Emphasis was placed in support of this submission upon the Bank's early attempts to persuade Mr Paola that the companies might be better off with separate facilities, which proposition he did not accept. [1/1173; T 423.17; plaintiffs' submissions para 52] 743 The Bank submitted that the parties to the agreement were the Bank and the several Paola companies identified in the 1 February 1990 letter as 'borrowers', each of those companies having individually executed the Notice of Acceptance. 744 This is not the first case in which difficulties have been encountered on the question of whether or not companies should appropriately be regarded as a single group. In Wimborne v Brien (1997) 23 ACSR 576, one of the parties argued that the liquidator should treat various companies, because of their interlocking and related ownership, as essentially a single entity and that it did not matter which assets or liabilities were in which company. In rejecting that approach the New South Wales Court of Appeal said: 'However to treat the companies as a single group without regard to their separate assets and liabilities would have breached a fundamental concept of company law - namely that except in respect of limited statutory exceptions . . .there is no such thing as a "group" and each company must be treated as a separate entity . . . and it was the duty of the liquidator of (one group company) to have regard only to its interests being the interests of its shareholders and its creditors as such'. Per Dunford AJA with whose reasons Handley JA agreed and with whose reasons for conclusion Powell JA agreed. 745 In Walker v Wimborne (1975-76) 137 CLR 1, Mason J (as his Honour then was) at 6 said inter alia: 'To speak of the companies as being members of a group is something of a misnomer which may well have led his Honour into error. The word "group" is generally applied to a number of companies which are associated by common or interlocking shareholdings, allied to unified control or capacity to control. In such a case, the payment of money by company A to company B to enable company B to carry on its business may have derivative benefits for company A as a shareholder in company B if that company is unable to trade profitably or realise its assets to advantage. Even so, the transaction is one which must be viewed from the standpoint of company A and judged according to the criterion of the interests of that company . . . The emphasis given by the primary judge to the circumstance that the group derived a benefit from the transaction tended to obscure the fundamental principles that each of the companies was a separate and independent legal entity . . . The creditor of a company whether it be a member of a "group" of companies in the accepted sense of that term or not, must look to that company for payment.' [at 6 - 7 per Mason J] [ Cf Industrial Equity Ltd v Blackburn (1977) 137 CLR 567, per Mason J at 577] 746 In Qintex Australia Finance Ltd v Schroders Australia Ltd (1990) 3 ACSR 267, Rogers CJ Commercial Division, referred to the desirability of Parliament considering whether the distinction between the law and commercial practice reflected in the above cases, should be maintained. 747 Of course, if applied inflexibly, the common law can have unsatisfactory consequences in the context of groups: 'Company law possesses some curious features which may generate curious results. A parent company may sporn a number of subsidiary companies, all controlled directly or indirectly by the shareholders of the parent company. If any of the subsidiary companies, to change the metaphor, turns out to be the runt of the litter and declines into insolvency to the dismay of its creditors the parent company and the other subsidiary companies may prosper to the joy of the shareholders without any liability for the debts of the insolvent subsidiary.' Re Southard & Co Ltd (1979) 1 WLR 1198 at 1208 748 None of this should serve to deflect from the clear necessity to have regard to the surrounding circumstances setting in which the subject contract was made in the light of the objective facts and surrounding circumstances known to both the contracting parties. 749 The acknowledgment by the parties in the 1 February 1990 letter that pending an 'amendment' to the facility agreement proposed by which one borrowing company was to represent the borrower, the facility agreement in place was one entered into by the Bank 'with individual companies in the Group', lends strong support to the conclusion to which I have come that upon its proper construction an event of default under the agreement occurred when any of the circumstances defined as 'events of default' in the letter of 4 September 1987 applied to any one of those companies. 750 It does not, however, follow that the individual companies in the Group were not joint and several co-promisors in respect of the indebtedness to the Bank for all moneys advanced to any of the Group Companies. In my view, the individual Group Companies were joint and several co-promisees in respect of that indebtedness. Standard Incidents of the Banker - Customer Contract 751 It is axiomatic that in the case of a current account, 'a bank is bound to pay a customer's cheque drawn on such current account in as much as the relation of banker and customer as also that of debtor and creditor exists'. [Cf Dixon v Bank of New South Wales (1896) 17 NSWLR 355 at 368.] The same position obtains where a facility agreement is in place which obliges the Bank to pay a customer's cheque drawn on a particular account up to the credit limit the subject of the facility agreement 752 The Bank was obliged by an implied term of its contract with the Paola Group to give reasonable notice in the event that it determined to vary its customary mode of providing general banking services, and in particular the finance facility, to the Group. This obligation extended to any variations to the accounts to be operated with the Bank. The obligation embraced any requirement that overdraft facilities in place in relation to current accounts would no longer be permitted to be drawn upon. The obligation embraced any requirement that current accounts previously used for the operation of overdraft facilities could only be operated in reduction. The obligation embraced any requirement that the Group open new accounts. In the case of a determination by the Bank to vary its customary mode of permitting operations on the finance facility, the obligation to give reasonable notice implicitly embraced a correlative obligation to be precise and accurate in communicating what the variation involved and the effect, if any, of the variation on the continued operations of the facility. 753 Each of the five conditions necessary to ground the implication of a term summarised by the majority in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 52 ALJR 20 at page 26 as repeated by Mason J in Codelfa Construction Pty Ltd v State Rail Authority NSW (1982) 149 CLR 337 at page 347 were satisfied. 754 In the case of a finance facility in place, it would be plain to a Bank that it's customer's business relationships and other dealings could well be vitally affected by the Bank's tampering with the mechanics of the customer's usual operations on the facility. Hence the special significance of precision in the Bank's mode of communicating to the customer what a new regime would entail and whether it involved any suggestion of restricting or varying the facility or of holding the position while the Bank determined whether and if so, in what way, to restrict or vary the facility itself. Hence also the special significance of directing such communications to the customer [here a corporate group of inter-related companies] at a level within the customer's hierarchy commensurate with the significance of what the Bank had determined upon. 755 The obligation to give reasonable notice may be viewed as part of a general contract which is basic to all transactions: 'The relationship of banker to customer is one of contract. It consists of a general contract, which is basic to all transactions, together with special contracts which arise only as they are brought into being in relation to specific transactions or banking services. The essential distinction is between obligations which come into existence upon the creation of the banker - customer relationship and obligations which are subsequently assumed by specific agreement; or, from the standpoint of the customer, between services which a bank is obliged to provide, if asked, and services which bankers habitually do, but are not bound to provide . . .' [Pagets Law of Banking 11th Edition, Butterworths 1996 edited by Mr Mark Hopgood at page 110] [Cf Parras Holdings Pty Ltd v Commonwealth Bank of Australia [Unreported, Federal Court of Australia, 12 June 1998] where Davies J at page 34 makes the point that the grant of an overdraft facility provides a contractual relationship in the context of which moneys are lent by the banker to the customer but that 'there is more to the relationship than the making of a simple loan'.] 756 Burnett v Westminster Bank Ltd [1966] 1 QB 742 provides an example of a case where a bank was unsuccessful in its contention that a new practice utilising the introduction of magnetic ink characters seeking to restrict cheques to the particular account for which they had been prepared, had been consensually agreed to by the customer. The plaintiff had a cheque account at the Borough Branch and drew a cheque on the cheque forms which had been provided. He crossed out the word 'Borough' and put in 'Bromley'. He altered the address and he initialled the cheque. Later he decided to stop payment on the cheque, telephoning the Bromley Branch and informing them of this decision. The cheque had passed through the computer system which could not 'read' the alterations made by the plaintiff. The cheque itself was forwarded to the Borough Branch at which the employees were unaware of the stop-payment instructions. At the end of the suspense period, the amount of the cheque was debited to the plaintiff's account at the Borough Branch. 757 In an article by Robin Edwards entitled 'The Rights of Banks to Contract out of Common Law Liabilities Arising in the Banker/Customer Relationship' (1989) 63 ALJ 237, the author at 243 summarises what then occurred as follows: 'The plaintiff sued the bank for acting without his authority and the bank's defence was that the plaintiff had agreed to the restriction appearing on the cheque book. The bank failed to prove that the customer had read the restriction or signed anything accepting the new conditions. The court held that cheque book covers had never been previously tested for the purpose of spelling out contractual terms and it was reasonable to assume that they contained no contractual terms which varied the existing contractual arrangements between the customer and the banker.' 758 The author expresses the view that if the account in that case had been a new one, the bank's position may have been stronger, but that it seems clear that such conditions are only enforceable if it can be shown to have been agreed upon at the time of opening the account. 759 Obligations similar to that described above and also imported as part of the banker - customer relationship would no doubt extend to numerous matters routinely the subject of banking business, such as the days and hours during which business may be transacted, the use of sundry standard authority and other forms, the particular branches at which particular types of banking transactions may be conducted and the like. In all these cases the contractual relationship must be looked to in discerning the obligations of both banker and customer. 760 A convenient summary of the position is to be found in Weaver and Craigie 'Banker and Customer' 2nd ed., the Law Book Company, 1990 at page 2514-2516 which is, inter alia, in the following terms: 'The customer must also be taken to contract on the basis that both he and his banker will observe and be bound by any relevant legislation including in particular the Bills of Exchange Act 1909 (Cth) as amended from time to time, and now, more relevantly, the Cheques and Payment Orders Act 1986 (Cth), together with legislation or subordinate legislation dealing with such matters as bank holidays and exchange control. In essence, therefore, it appears that the standard incidents of the banker-customer contract are: 1. The relationship is not one of trustee and cestui que trust: Foley v Hill (1848) 2 HL Cas 28; R v Davenport [1954] 1 WLR 569; it requires some "special feature", eg the facts in Commonwealth Bank of Australia v Smith (1991) 102 ALR 453 . . . to give rise to a situation where a fiduciary relationship will be held to exist between a bank and its customer: Golby v Commonwealth Bank of Australia (unreported, Fed Ct of Aust, No NG 205 of 1995, Hill J, 24 December 1996, transcript of judgment, pp 44-45). 2. The bank undertakes to receive money and to collect bills for its customer's account: Joachimson v Swiss Bank Corp [1921] 3 KB 110. 3. The bank borrows the money and proceeds from the customer and undertakes to repay them: (i) on demand, (ii) at the branch of the bank where the account is kept (Woodland v Fear (1857) 7 E1 & B1 519; 119 ER 1339; Clare & Co v Dresdner Bank [1915] 2 KB 576), (iii) during ordinary banking hours: Joachimson v Swiss Bank Corp [1921] 3 KB 110; Parker v Gordon (1806) 7 East 385; 103 ER 149, and see Arab Bank Ltd v Barclays Bank (Dominion Colonial and Overseas) [1954] AC 495. . . . 6. Any written order by the customer which requires the bank to pay a greater amount than the balance standing to the credit of the customer (Bank of New South Wales v Laing [1954] AC 135) or, as the case may be, his agreed overdraft limit, may be declined in toto. 7. The bank will not cease to do business with the customer except upon reasonable notice: Joachimson v Swiss Bank Corp [1921] 3 KB 110; Prosperity Ltd v Lloyds Bank Ltd (1923) 39 TLR 372 . . . . 10. The contract will embody, and the customer will be bound by, the practice and usage of bankers: Hare v Henty (1861) 10 CBNS 65; 142 ER 374; Commercial Bank of Australia Ltd v Hulls (1884) 10 VLR (L) 110. 11. The relationship between the parties presupposes that both will be entitled to any privileges conferred, and any disabilities imposed, by all relevant statutory and subordinate legislation and by the orders of any court of competent jurisdiction. The relevant statutes now include the Trade Practices Act 1974 (Cth) and in particular ss 51AA, 51AB, 51A, 52, and 53 dealing with misleading or deceptive conduct, unconscionable conduct, and false or misleading representations including (under s51A) representations with respect to future matters. Additionally, s 74 of the Trade Practices Act implies certain warranties when services are supplied to a "consumer", and the services in relation to which warranties are so implied are defined in a way which expressly includes rights, benefits, privileges and facilities that are, or are to be, provided, granted or conferred under a contract between a banker and a customer entered into in the ordinary course of the carrying on by the banker of the business of banking.' 761 The Bank was plainly not obliged to honour cheques drawn beyond the limits provided for by the facility. That is not however, to say that the Bank was entitled to unilaterally vary the contract by refusing to permit the Group to resume operations on its banking accounts once it had deposited sufficient funds to bring the credit facility back into place. 762 As I understood the submissions of Mr Macfarlan QC for the Bank, the Bank asserts that a term is to be implied into the subject contract that, providing the Bank's requirements of a customer may be described as reasonable, standard and 'usual having regard to normal banking procedures', the customer will be obliged to comply with such requirements. In support of this proposition the Bank sought to draw upon statements in an article entitled 'Insolvency' by J. O'Donovan in 1987 Companies and Securities Law Journal page 50. That article deals generally with the subject of preferences and in particular the entitlement of a preferred creditor, following a liquidator's challenge to a transaction as a preference, to invoke the so-called 'protective provisions' in section 122(2) of the Bankruptcy Act 1966 (Commonwealth). That section imposes upon the creditor the burden of proving the three conditions in section 122(2)(a), namely that he took the benefit of the impugned transaction in good faith, for valuable consideration, and in the ordinary course of business. The article discusses closely the decision in Kyra Nominees Pty Ltd (in liq) v National Australia Bank Ltd (1986) 4 ACLC 400 the central question in relation to which was whether the debtor company's state of mind was relevant in determining whether a particular transaction took place in the ordinary course of business. 763 The article discusses, inter alia, whether or not the bank in the Kyra Nominees case had discharged the burden of proving that it had received payments in the ordinary course of business. 764 The author says inter alia: '[Banks] may, . . . be able to protect themselves against the impact of the Kyra Nominees case by changing the way in which they allow an arguably insolvent company to operate it's accounts. As soon as a bank suspects that one of its corporate customers might be insolvent, it should require the company to open a new current account. All the companies receipts should then be deposited in this new account, which should always be maintained in credit. The company could also be required to freeze its overdraft or loan account . . .' [At page 53] 765 No evidence was adduced proving that the practice and usage of bankers was to approach a suspected insolvency of a customer in the manner suggested by O'Donovan. 766 The question of the steps which a bank is contractually entitled to take in the event that it suspects that one of its corporate customers might be insolvent is by no means a simple one. The matter may be dealt with by an express term. No such express term was relied upon in the present proceedings. Certainly the occurrence of a material event of default as defined in a relevant contract between the bank and its customer, will often give the bank, as in the present case, the right by notice in writing to declare that the facilities are cancelled forthwith and/or to declare the facilities immediately due and payable. But absent the bank taking such action and in the absence of any express term dealing with such circumstances, the bank may only achieve a variation of its customary mode of providing general banking services or of providing a particular finance facility to a customer or group, either by obtaining the customer's consensus to the proposed variation, or by giving reasonable notice of the bank's determination to impose the variation, as for example by requiring the customer to open new current accounts. The latter entitlement is conferred by an implied term of the contract. To my mind, a justifiable suspicion by a bank of a customer's insolvency is simply only one of possibly many circumstances which may in fact motivate a bank to exercise its contractual entitlement, upon giving the customer reasonable notice of the requirement, to require the opening of new accounts. What period of time will or will not prove sufficient to satisfy the requirement to give reasonable notice must depend on the circumstances of the individual case. The point is that in adjudicating what period of time is reasonable, the Court must look beyond the Bank's concern that preference payments may be made. All the circumstances must be taken into account. Importantly, the customer's legitimate business and commercial interests must also be taken into account. The Bank after all, may be proven to have misread the situation entirely, mistaking as indicators of insolvency, circumstances which, on proper examination, do not and never did justify any such suspicion, and indeed never could have justified any such suspicion. The point is that the Bank in failing to elect to treat the customer as having committed an act of default and in failing to exercise its rights upon the occurrence of such act of default, to call up or cancel a facility, is still to be taken as treating the facility as on foot. 767 In Halesowen Presswork & Assemblies Ltd v Westminster Bank Ltd [1971] 1 QB 1 at first instance and in the Court of Appeal: [1972] AC 785 in the House of Lords sub nom National Westminster Bank Limited v Halesowen Presswork and Assemblies Limited , aspects of the general law relating to the combination of bank accounts were dealt with, as were detailed interpretations of the law of bankruptcy. The following brief summary of the facts taken from Weaver and Craigie at paragraph 7.960 is sufficient for present purposes: '. . . The company had two accounts with the bank. The No. 1 account was in debit £11,339 and was "frozen" at that figure, i.e. it was treated for all purposes as a fixed loan account. The No. 2 account was a current working account kept in credit at all times. On 20 May 1968 the company gave the bank and its other creditors notice of a meeting to be held on 12 June 1968 with a view to winding up. On the latter date, but before the passing of the winding up resolution, the company paid to the credit of the No. 2 account a cheque for £8,611 received from one of its customers. The dispute between the company (represented by its liquidator) and the bank was whether the liquidator could claim the balance of the No. 2 account (consisting almost entirely of the proceeds of the cheque for £8,611) thus forcing the bank to prove in the winding up as an unsecured creditor for the £11,339 debt in the No. 1 account, or whether the bank could combine the two accounts and prove for the balance. In April 1968 the bank had entered into an agreement with the company that "in the absence of materially changed circumstances" the bank would continue the existing arrangements, i.e. permit the two accounts to be conducted in the manner described above.' 768 At first instance, Roskill J found in favour of the bank. This was reversed by a majority in the Court of Appeal (Lord Denning MR and Winn LJ, Buckley LJ dissenting). The House of Lords restored Roskill J's judgment in favour of the Bank. As Weaver and Craigie point out, the ultimate decision turned largely on interpretations of the laws of bankruptcy. Roskill J had however, clarified a number of aspects of the general law relating to the combination of accounts, not all of which were dealt with as fully in the two appeals. 769 In the Halesowen case, the agreement between the bank and the customer was that the arrangements should continue for four months 'in the absence of materially changed circumstances'. There was no real issue but that the notice of the creditors' meeting was a material change in circumstances which would have entitled the bank to put an end to the arrangement, but the bank had not done so. Weaver and Craigie at paragraph 7.990 question whether, if the bank had put an end to the arrangement, it would have been obliged to give the company notice of the termination, and to pay cheques drawn before receipt of the notice by the company. The authors expressed the view that the answer would be in the affirmative because the notice of the creditors' meeting was not of itself a circumstance which precluded the bank from paying further cheques. That view is the view which was supported by Buckley LJ the dissentient in the Court of Appeal [1971] 1 QB 1 at page 47. The House of Lords however left this question open because it did not require an answer in the circumstances: [1972] AC 785 at 807, 810 and 820. 770 The passage from the judgment of Buckley LJ reads as follows: 'The notice of May 20 1968, in my opinion occasioned a material change in the situation. At any time after the receipt of it I think that the bank could have determined the agreement by notice, and I am inclined to think that a notice taking immediate effect might have sufficed, subject to the bank being obliged to honour any drafts on the No. 2 account made by the company before receipt of the notice ; but no such notice was given. The agreement, I think, remained in force until and after the passing of the winding up resolution. Consequently, in my judgment, at the commencement of the winding up the liability of the company on the No. 1 account and the liability of the bank on the No. 2 account were distinct.' [1971] 1 QB at 47 [Emphasis added] 771 Here it is crucial to keep in mind the fact that the bank did not elect to regard any of the Paola companies or the Group as having committed any event of default. The bank did not purport to cancel the facility. The Bank did not declare the facility immediately due and payable. In my judgment the bank, without giving reasonable notice, determined to and in fact froze all current accounts and determined to prevent any further drawings on any of those accounts. It then communicated that decision to the Group. It did not obtain the Group's consensus to its actions. Faced with the Bank's pre-emptive actions, the Group had no alternative other than to open the new accounts in order to continue trading. The bank clearly determined to alter its customary mode of providing the finance facility through existing accounts which, subject to the customer bringing the balance in the accounts under the $8.5million limit, would absent the Bank's directive, have entitled the customer to continue to draw on the account. 772 That conduct of the Bank was in breach of the above described implied term. The critical questions in the case are, as it seems to me, whether that conduct of the Bank in the particular circumstances of this case resulted in any, and if so what loss to the Paola Group or to particular Group companies; whether even if causally connected, losses claimed were too remote from the breach of contract; which plaintiffs have locus standi to recover in respect of losses, and which plaintiffs are barred by limitations legislation from recovering in respect of losses sustained by them. My decision as to limitations and standing questions has already been set out. Causation - The Events of Mid-February 1990 Seen in Perspective 773 The events which took place on 15 February 1990 and on the immediately succeeding days require close examination. As already made plain, these events were the subject of extensive submissions by the parties. 774 On the plaintiffs' case, the Bank's conduct during those days and in particular the combination of the sending of the freezing letter, the dishonour by the Bank of cheques presented on those days and the submission of the 'in liq' bank statements, constituted a 'death blow' to the business of NRS and created a general stigma in respect of the whole Group. The cause of action in respect of which the plaintiffs rely in relation to the dishonour of cheques and the sending of the freezing letters is the cause of action in contract. The 'in liq' statements have a bearing upon the contract case as factual matters in that such statements in part communicated the Bank's freezing decision. The independent cause of action on which the plaintiffs rely in respect of the 'in liq' statements is the cause of action in defamation. 775 Shortly stated, the plaintiffs say that on the evidence, the Court should infer, particularly in the country setting in which the plaintiffs' businesses were placed, that news of the Bank's general withdrawal of support to the Group and/or of the fact that the Bank had frozen the Group's entitlement to draw on certain accounts and/or was referring to the Group as 'in liquidation', would spread like wildfire through the community and did so with such rapidity as to prevent the Group from thereafter being able to restore confidence in the viability of the Group. 776 The plaintiffs' case is that the business of NRS had not yet matured and was still suffering from initial starting costs but had proven to be very promising. The case is that NRS had several branches and by and large excellent prospects for the future. 777 The plaintiffs rely upon the evidence given by Mr Taylor that: ' During 1989, the business of NRS was travelling well and was growing. It was beginning to have a strong reputation and was certainly a viable business. The success of the business was based upon its personnel making business and exhibiting understanding and trust to its customers. Customers during that time generally preferred to deal with independents rather than conglomerate merchandisers such as Elders and Dalgety.' [Statement paragraph 11] 'The business operated on a high cash flow, payment with delivery basis. There were very little, if any, bad debts.' [Statement paragraph 12] 'Suppliers provided reasonable credit terms . . . The support of suppliers and the usual credit terms of supply were critical to the operation of NRS as without their support, supplies could not be purchased for sale.' [Paragraph 13] 'In late 1989 NRS employed approximately nineteen people in the four branches at Tamworth, Narrabri, Gunnedah and Moree. . . . ' [Paragraph 14] Coming into 1990, the economy became somewhat tougher. The business of NRS was still progressing though the business environment was difficult with high interest rates as I recall, of approximately 24%. In spite of those rates, the business of NRS was sound enough that it could still meet its commitments. There were very little problems with clients, very few if any bad debts and business was growing with increased turnover and the number of clients increasing. Activity was continuing to grow . Suppliers were also at that time very positive and supported NRS.' [Paragraph 16] 'It was an important part of NRS success that suppliers provided credit and their support to the Company.' [Paragraph 19] [Emphasis added] 778 The plaintiffs' case is that Mr Paola's instructions to Mr Taylor of mid-February 1990 should not receive undue emphasis. The case is that such instructions seeking to have payment to creditors extended by 30 days, to have suppliers repaid by return of slow moving saleable stock, and to reduce ordering to replace only stock items which were fast moving, whilst perhaps causing some difficulties with certain suppliers, could not be suggested as necessarily signifying to the commercial community that NRS was no longer viable and would obviously not prosper. The plaintiffs further submit that the direction is unlikely to have been communicated otherwise than to suppliers who were due for repayment at the end of January, and that those are not necessarily on the evidence, all or even the vast bulk of major suppliers. 779 To my mind, the fact that Mr Taylor had not adverted in his statement to the mid-January 1990 circumstances which had led to his resignation as a director of NRS and as general manager of NRS, whilst a matter of significance, should not be taken too far and should not result in his evidence being given no weight. The instruction which he had objected to had in part been adverted to in Mr Paola's discussions with the Bank [see paragraph 306]. The matter was explained by Mr Paola in cross-examination. Mr Taylor had stated in his statement that coming into 1990, the economy had become somewhat tougher than in 1989. I see no reason not to give weight to the above excerpts from Mr Taylor's statement. The picture painted is consistent with the contemporaneous documents and with Ms Hamblin's recollections. The tightening up of credit procedures in terms of the not uncommon practice of small businesses with cash flow difficulties could have dramatic and drastic results in some cases, and in others may well have a less potent immediate effect and simply amount to a hiccup for a few weeks or months in the trading terms of the business. NRS on Mr Hardy's evidence, was 'in its prime' at the time when it was cut off. His evidence accords with Mr Taylor's evidence as to the state of the rural economy being tough in the early 1990's. He saw the outlook for rural merchandising being quite good for 1991. This is also consistent with Mr Taylor's views of activity within NRS 'continuing to grow'. Importantly Mr Taylor's evidence was that the business was beginning to have a strong reputation and was 'certainly a viable business'. 780 In my judgment, Mr Taylor's unavailability to be cross-examined does not require the Court in all of the circumstances not to give weight to Mr Taylor's evidence given by statement, as long as the matters accepted as having occurred in mid-January and thereafter as proven and accepted by Mr Paola, are included in the overall assessment of all the evidence. 781 The plaintiffs' case is that the evidence of Mr Hardy should be read as suggesting that the effect which conduct of this general type would have, must depend upon how the matter is managed. His evidence was, it will be recalled, that a great deal would depend upon precisely how such information was communicated to the commercial community. What would normally happen he said, where a company was taking such action, was that if its suppliers were not being paid in 30 days, they would simply not be paid on the 30-day figure and when they would telephone possibly a few weeks later asking for their cheque, they may receive a reply 'its coming'. In short, the effect of a decision by a particular company not to pay creditors for some 30 further days would depend upon how that message was delivered to suppliers. It could be managed. However, if creditors learned in terms of a direction being given simply not to pay creditors, that would certainly be news likely to spread very quickly through the community. 782 On the plaintiffs' case, the Bank has failed to prove detail of the cheques dishonoured and presented on 13 or 14 February 1990, which had been the subject of Schedule '1' to the original summons, but no longer formed part of the plaintiffs' claim. In that circumstance, the plaintiffs assert that there is no evidence of the circumstances or effect of the dishonour of any of such cheques, or as to whether the cheques were paid from other sources, or as to who the payees of such cheques were. I have, however, already pointed out that there is some limited evidence in respect of these cheques. 783 On the plaintiffs' case as I understood it, the mere fact that certain suppliers' cheques may have been dishonoured, being cheques presented on 13 and 14 February would, in the ordinary course of events, have led to questions from suppliers, but such questions could have been deflected by the Group in seeking to keep its good offices with such suppliers, as for example by stating that there may have been some mistake and that a new cheque would be forwarded to the supplier shortly. 784 The plaintiffs' case is that, but for the Bank's above described conduct in sending the freezing letter, dishonouring cheques which ought to have been honoured and sending the 'in liq' bank statements, NRS would have weathered such difficulties as it would have encountered by reason of its own actions in overdrawing its accounts for a few days, and in delaying payment to certain of its suppliers and creditors for a short time. 785 In short, the plaintiffs suggest that the events properly viewed in perspective point up that it was the Bank's actions which formed the crucial integer and which should on the evidence, be inferred, one way or another, to have had the net result that, from one day to the next, creditors with whom the Group dealt, and the commercial community generally, came to view the Paola Group as 'in trouble', and the NRS business in particular as, to use the colloquial, having 'gone broke'. 786 The Bank on the other hand submits that its conduct was unexceptional in the circumstances and that it did no more than exercise rights which it was perfectly entitled, within contract, to exercise. The Bank points out that it was contractually entitled to dishonour cheques to the extent of the excess up to 22 February. In respect of the period after 22 February, the Bank asserts that the only live questions on the dishonour aspect go to those cheques which were drawn on the Number One accounts and were not very shortly thereafter paid from the Number Two accounts. Only in respect of that category of cheques could it be said on the Bank's submissions, that the payee was likely to have been informed that the cheques were not being honoured through the Number One account. Even here, the Bank submits that the correct inference as to what communications would have been given to payees would have been that the account in question was no longer operative. Here the Bank submits that such an answer would have been entirely correct. The Bank submits that such an answer would not have reflected adversely on the Company's financial standing. 787 The Bank submits that the Group in its 15 February 1990 letter appeared not to take exception to the suggestion that new Number Two accounts should be opened, and indeed gave appropriate instruction in that regard, noting at the same time that NRS accounts in Moree, Narrabri and Gunnedah were no longer required. That was confirmed by Mr Booth on 16 February 1990. [PX 1162] 788 The Bank submits that there is no evidence that any person within the Group communicated the fact of the 'in liq' bank statements, or the fact that any persons within the Paola Group had formed the view on reading the 'in liq' references, that the Bank had placed companies in the Paola Group into liquidation, to any person in the commercial community. Nor, on the Bank's submissions, can the Court infer these matters. The Bank submits that there is no evidence that the Group reacted to the Bank's freezing letter, or to the Bank's dishonour of cheques, otherwise than by determining to keep this information 'in house' and to carry out such steps as were possible to 'quarantine' that information. 789 Importantly the Bank submits that on Ms Hamblin's evidence, on and about 15 February 1990, the phones were ringing hot with complaints which were coming in about dishonoured cheques within the Paola Group's offices. It is submitted that on the evidence such complaints were being received from creditors who included suppliers, or whom the Court should infer must have included suppliers.. 790 The Bank submits that there is hardly room for the Group to complain in circumstances where the Group, having agreed in its letter of 15 February 1990 to open the new Number Two accounts, the Bank thereafter failed to honour cheques drawn on the old Number One accounts, insisting on all cheques to be honoured being drawn on the new Number Two accounts. 791 The Bank submits that the business of NRS was clearly in cash flow difficulties for some considerable time prior to February 1990 and that steps had already been taken by the Group to suggest to the Bank that NRS was likely to be sold. 792 The Bank submits that on the evidence the Court could not find that NRS was a healthy company with excellent prospects as at 15 February 1990, but on the contrary should hold that the NRS business was in severe financial difficulty and was suffering from a severe cash flow problem. Little or no weight should, so the Bank submits, be placed on Mr Taylor's evidence as all, or at least to the extent that it is found to be inconsistent with other evidence before the Court. 793 Further the Bank submits that Mr Paola's conduct following the 15th February, clearly indicates that what he was about was building up credit in the Number Two accounts, not for the purpose of paying NRS suppliers, but for the dual purposes of being able to meet interest commitments to the Bank and looking towards building up sufficient credit to enable the Group to discharge its obligation to repay $1 million of the facility by 31 May 1990. Hence the Bank submits that, even had the Bank's freezing letter not been sent, and even had the Bank on and after 22 February 1990 continued to honour cheques when the Group had brought itself within the overdraft limit, in the ordinary course of events, the fortunes of NRS would not have been any different. This is because Mr Paola would have been likely to have acted in exactly the same way as he in fact acted, namely by permitting a rupture of relationships with NRS' suppliers in order that interest commitments to the Bank could be met out of the scarce moneys coming into the Group, and in order to enable a build up of funds with a view to using those funds to discharge the $1 million reduction due at end May. 794 The case raises an important question in terms of causation. Clearly the question of whether an act or omission is a cause to which legal responsibility attaches is to be determined by common sense principles: Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 at 357 per McHugh JA. 795 The question is one of fact. It stems from 'The common law tradition . . . that what was the cause of a particular occurrence is a question of fact which "must be determined applying common sense to the facts of each particular case . . .". [ March v E & M H Stramare Pty Ltd (1991) 171 CLR 506 at 515 per Mason CJ] 796 J.W. Carter, the editor of the Contract Section of Halsbury's Laws of Australia , Butterworths, 1992, puts the matter as follows: ' Causal connection required The onus is on the plaintiff to prove a sufficient connection between the breach and the loss suffered. Causation does not depend on remoteness or immediacy in time, nor is it concerned with philosophic speculation; it is only concerned with ordinary everyday life and thoughts and expressions. Causation is a question of fact and it is sufficient for the plaintiff to prove that, but for the defendant's breach, the loss or damage in question would not have been suffered. However, this is not the exclusive test, and in most cases the relevant question is whether the defendant's breach was so connected with the plaintiff's loss or damage that, as a matter of ordinary common sense and experience it should be regarded as a cause of it.' [Volume 6 paragraphs 110-11150] Authorities cited for the last proposition include March v E & M H Stramare Pty Ltd 797 Applying common sense to the facts here proved, requires one to stand back from the events in question and to gain a proper perspective of those events. 798 The focus is as to the effect of a number of contributing causes on the goodwill and reputation of NRS. The focus is also as to the effect of a number of contributing causes on the goodwill and reputation of the Group as a whole. 799 Multiple causes of a loss are treated with in Halsburys Laws of Australia : ' Multiple causes The mere fact that there is more than one cause of the plaintiff's loss is not a sufficient reason to deny the plaintiff recovery. If there are concurrent causes of the plaintiff's loss, it suffices that one of these is the defendant's breach. In cases where one factor has more relevance than others it is sufficient for the defendant's breach to be the 'material', 'substantial', 'decisive' or 'dominant' cause. However, the object of such descriptions is to exclude cases where the contribution of the breach is minimal and they do not require the breach to be the dominant cause of the loss or damage. Thus, most modern formulations of the principle state that the requirement of causation is satisfied if the breach was a cause of the loss or damage. It may also be relevant to consider the knowledge of the parties.' [Volume 6 paragraphs 110-11160 of the Contracts section of Halsbury's Laws of Australia] 800 There is a subtle but important distinction to be kept in mind between on the one hand, what the Bank in fact did, and on the other hand, the content of the Bank's notification to the Group of what it had done and/or was proposing to do. In gaining a proper perspective by applying common sense to the facts here proven, and in assessing whether the Bank's breach of contract was a cause of particular loss or damage, it is thus necessary to look closely at the precise communications to relevant persons from the Bank, whether oral or in writing, of what the Bank had determined to do and was doing. 801 Ultimately, it does appear that notwithstanding the communications of 15 and 16 February 1990, the Bank elected not to withdraw the credit facility. As has already been noted, the Bank later permitted set-off arrangements between the old and the new current accounts and in early March permitted part of the facilities to be converted into a term loan of $7 million, and the balance of $1.5 million to be distributed among the current accounts. However, what the Bank would ultimately determine to do, was not communicated to the Group on 15 or 16 February 1990. In contradistinction to what the Bank ultimately determined to do, there was no statement on 15 or 16 February which confirmed that the facility would be continued. To the contrary, the oral and written communications of those days made quite plain that all current accounts had been frozen and that no further drawings would be permitted to occur on any of those accounts. The Bank's subsequent decision to permit the set-off arrangements, and to permit the facility to continue, took place during following weeks. 802 The facsimile forwarded by Mr Booth to the managers of the several branches at 3pm on 15 February, did not refer to whether the Bank was prepared to fund the Paola Group in the immediate future, or thereafter, and if so on what basis. It simply confirmed advice in earlier telephone calls, that all current accounts for Group Companies were 'to be frozen forthwith' that all further drawings on existing current accounts would be 'returned', and that all new Number Two accounts were to be operated 'on a credit basis only'. None of the persons receiving that facsimile and drawing their relevant information from the content of the facsimile would have assumed or should be inferred to have assumed, that the facility would in later days and weeks, be simply continued by the Bank. 803 The letter sent at 5:30pm on 15 February and addressed to the Managing Director of the Group included a sentence, stating that questions as to how the Bank would 'fund the Paola Group in the immediate future' would be dealt with following a further meeting presently planned to take place on the following day. That letter includes no positive statement that the Bank would fund the Paola Group in the immediate future, and could reasonably have been read by Mr Paola and by any other person who read the letter, as simply signifying that the Bank's decision as to whether, and if so how, to fund the Paola Group in the immediate future, was still to be determined and would be addressed thereafter. It was not possible for a reader to read into the letter precisely what the Bank might or might not propose to do in relation to a continuance of the facility. The letter simply left any reader of the letter with the impression that the Bank's arrangements with the Group had been generally frozen until further notice and that the only mode in which the Group could thereafter operate would be by opening new accounts which would have to be operated on a credit basis only. 804 In substance, the Bank's notifications to the Group at least involved the following parameters: (i) That the Bank had determined to prevent the Group from further drawings on its current accounts, which determination was in place. (ii) That the Bank had determined to require that if the Group wished thereafter to operate cheque accounts, new Number Two accounts would have to be opened and operated on a credit basis only, and that this requirement was also in place. (iii) That all further drawings on current accounts were to be returned. 805 The Bank's conduct fell far short of compliance with its contractual obligations. No notice at all was given, let alone reasonable notice. Such information as was given was neither precise nor accurate. The Bank's communications did not affirm that the facility was to be continued. The communications in fact suggested the contrary. And as for the possibility that the Bank's tampering with the mechanics of the customer's usual operations on the facility could vitally affect the Group's business relationships and other dealings, this appears to have been ignored - the Bank on the evidence, apparently having in mind only the question of protecting itself against the possibility that it might be adversely affected by further drawings on existing accounts, being later held to amount to preferential payment. And as for the special significance of the Bank directing its relevant communications to the Group at an appropriate level, the flurry of activity particularly on 15th and also on 16th February which included the sending of the 'in liq' bank statements, paid no regard to this parameter - and indeed became an immediate cause of the panic within the Group's and NRS's offices and a cause of the events and resignations which followed, which events are generally referred to in more detail below. It is not difficult to discern that a 'confidential' letter addressed to Mr Paola explaining the Bank's position in clear terms and giving him time to explain to Group employees what the position was, would have averted the panic and prevented the subsequent events. 806 In my judgment, there is no doubt that by reason of the Bank's communications of mid February 1990, the impression gained by employees within the Group and by those dealing in business with the Group and by the local community was that the Bank had withdrawn support for NRS which was seen as no longer viable and as likely to fail. In my judgment, the impression gained by reason of the same communications, by employees within the Group and by those dealing in business with the Group and by the local community, went beyond NRS, and was that the Bank had withdrawn support for the entire Group which was likely to be no longer viable and may well fail. It should not be forgotten that on 15 February Mr Booth had followed up his earlier telephone calls with the facsimiles to which I have referred, sent to the Managers of the Tamworth, Moree, Narrabri, Gunnedah and Macquarie Centre Group branches. There was plainly a flurry of activity on the 15th February. It continued on the following day. Mr Paola was 'stunned'. Ms Hamblin was 'confused'. Mr Plante appeared to her to be just as confused. The Bank fails in its attempt some nine years later to minimise the effect of what occurred by suggesting that calm prevailed because it soon became clear that the Group was not in liquidation and that Number Two accounts were opened. The evidence clearly establishes that an atmosphere of the highest anxiety and panic erupted. Immediate concerns arose as to the need for staff to look for new jobs. The whole state of affairs could not have been and on my findings was not quarantined from the outside community. 807 Focussing first on the 15th and 16th of February 1990 and upon the Bank's submissions relying upon: (a) the fact that altogether outside of the freezing letter and outside of the sending of the 'in liq' bank statements, the Group had already placed into circulation a number of cheques which were dishonoured as going outside the Group's facility balances, so that, as it were, news of the Group's financial difficulties had already to an extent, been gleaned by payees of such cheques and (b) the decision by NRS, in part implemented, to defer payment to creditors, it is to my mind, simply incorrect to view the effect of the Bank's freezing letter and the effect of the sending of the 'in liq' statements as not adding, and not adding very significantly, an entirely new dimension to a situation which NRS is likely to have been able to weather or, using Mr Hardy's term, to 'handle'. In the events which happened, the Group was in fact able, albeit by being obliged to include the Number Two bank accounts in its banking operations, to bring itself under the facility limit within but a few days. Mr Paola, who appears to have been previously regarded by the Bank as an astute businessman and whose strategy to the Bank's knowledge, included endeavouring to procure an early sale of NRS, is unlikely in the extreme to have permitted the business to lose the reputation it had established over its first years during the lead-up to such sale, if that matter was within his control. I do not regard the cash flow difficulties of NRS as evidencing that the matter was no longer within Mr Paola's control. He was endeavouring as he in fact told the Bank, to tighten up the Group's approach to credit and he obviously had as a key objective, an endeavour to build up a fund so as to be able to repay the Bank $1million by the end of May. His advice to the Bank of new controls was summarised in Mr Booth's November 1989 Credit Precis remarks: '. . . in the meantime Mr Paola has introduced . . . centralised account management and purchasing and limitations on authority of branches to make payment for goods and services . . .'. [PX 726] 808 I cannot accept that such evidence as there is of the cash flow difficulties of NRS and of the deferral of payment to creditors, is to be read as equating to the NRS business 'gasping for breath', or more importantly, as so gasping to the knowledge of the business community with which it dealt. Mr Hardy in fact gave evidence that it is not uncommon for small businesses to use the strategy of holding back on payments to creditors [T 354]. He referred at transcript 355 to news which would 'have to be to people not being paid for a lengthy period of time before people start talking about it'. From time to time, a business may often have surges of growth and at other times suffer from cash flow difficulties. In a time of a mini drought, the ability of NRS to service debts owed to its suppliers would be dependent on payments being received by it from its own customers. Delay in receipt of payments from the latter would be expected to lead to delay in being able to immediately discharge its obligations to make payments to the former. And the dishonour by 15 and 16 February of a number of cheques drawn by NRS, was not necessarily a telegraphing to those with whom NRS dealt, to the effect that the business was in its death throws. The message which suppliers would take, as Mr Hardy indicated, would depend at least to a degree upon precisely how they were 'dealt with' by NRS when enquiries would come in. I infer that plainly enough, suppliers would take from the dishonours, a message that the NRS account would require careful scrutiny. I infer that the message which such suppliers would take would be that the matter should be investigated quickly. Some of them may well have been persuaded in the short term to think that some form of mistake may have been made as the reason for the dishonours. Some, possibly all, may well come to immediately believe that the business was suffering from a short-term cash flow. Some may go further and read the dishonours as giving an early insight into NRS as experiencing major financial difficulties. As I have said, precisely what message those suppliers who had received dishonoured cheques would take from the fact of the dishonours, must depend at least to some degree, upon how the matter was dealt with generally by NRS. Of particular importance is the fact that only limited evidence was adduced as to the identity of suppliers with whom NRS dealt. The few suppliers mentioned during cross-examination should not be inferred as comprising anything like the majority of suppliers. 809 To my mind what the Bank achieved by sending the freezing letter, and by the 'in liq' statements, was to take out of the hands of the Group, the ability to regain the good offices of such suppliers or creditors as had received cheques with 'present again' or 'dishonour' endorsements, and was to take out of the hands of the Group the ability to deal in any manner with such of the suppliers and creditors who's confidence required to be regained. Quite simply, the Group was rendered powerless to respond, having lost all ability to be proactive. It could not redress the blow to the Group's reputation and in particular to NRS's reputation. Mr Paola's entrepreneurial skills and abilities had in the past been assessed by Mr Booth and by the Bank as 'sound'. He had been regarded as 'a person who constantly changed his business activities in response to the market'. He had been regarded as a person who quickly capitalised on opportunities presented. Mr Paola's Group had plainly had it's ups and downs over the period mid 1989 to early February 1990. Whatever may have been his skills as a businessman, Mr Paola could not, in the face of the Bank's actions, restore the genie to the bottle. It is not necessary to go so far as accepting Mr Ryan's colourful submission that the effect of the leaking in a small country community of the news that a bank had so acted, ought be read as not dissimilar to raising a 'typhus' flag on a ship awaiting passenger interest. All that the Court need find is that the effect of the Bank's conduct was highly material to the reputation of the Group and in particular of NRS. That finding is made. 810 Extending the focus to the days and weeks after the 15th and 16th February, it becomes necessary to take in the following facts: (i) The fact that number of cheques drawn on the Number One accounts were dishonoured from those accounts and after a period of a few days or longer, paid from the Number Two accounts, in circumstances in which payees would have received a communication that the cheques were, to use a neutral phrase, 'not to be paid'. In my judgment, the likelihood is that the 'present again' marking would have been used by the Bank on such cheques. [Cf 4 May 1990 - PX 1289] These are the situations where payments from the Number Two accounts did not take place on precisely the same day nor within two or three days of the Number One account reversal. The schedule attached to the plaintiffs' submissions clearly makes the point that the periods of time during which dishonours took place and ultimately cheques were honoured from Number Two accounts, runs through dates from 19 February to the end of February and continues into March as well. (ii) The fact that the Bank's actions in freezing the Number One accounts, and the 'in liq' bank statements was in one way or another, communicated to the commercial and local community. 811 I reject the Bank's submission that there is no evidence that, or from which the Court can infer that, any person within the Group communicated the fact of the 'in liq' bank statements to any person in the commercial community and I reject the submission that on the evidence the Court must find that the information relating to the freezing letter and the 'in liq' statements was quarantined within the Group. Ms Hamblin, for example, recalled that within one or two weeks after receipt of the bank statements, she spoke to three or four companies including one which was in direct competition with NRS. The substance of what was said has been set out in paragraph 525 above, generally put in the following terms: 'They were interested to see that Northern Rural Services were going to, they would say go bust and it was just a general conversation about it going bust and Tony's or the Company's lack of ability to pay its bill'. 812 Ms Hamblin also recalled having other conversations about Mr Paola's business with other persons including at least one whom she was able to name as a neighbouring farmer, Mr Ranclaud. He said to her words along the lines that Mr Paola had 'gone bust'. She could also recall the names of other persons she spoke to about Mr Paola and his business in that period, and although she said that there were others, she could not recall their names. The difficulties of proof in this area have of course long been recognized. Back in 1935 Lord Atkin adverted to the problem: 'It is impossible to track the scandal, to know what quarters the poison may reach . . .'. Ley v Hamilton [1935] 153 LT 384 page 386. 813 Ms Hamblin recalled that the mood or operation of the business changed and went from being very positive because there was a new business in town and employment for a lot of people, to one of almost dismay because as she recalled, automatically people started wondering or worrying about their jobs and the loss of their jobs. They were also she recalled, worried about their name within the industry. They were worried she recalled about what impact it would have on their name in the town and their chance of future employment. 814 Mr Thornhill, the Administration Manager at Tamworth, resigned on the 15th February. Mr Plante resigned 12 days later. Mr Taylor left his position as general manager at the end of February or early March. 815 Mr Taylor's evidence was: 'The effect of the dishonouring of the cheques was that staff morale was greatly affected.' [Paragraph 27] 'Staff morale and the confidence in the business of NRS was further damaged when in the day or so after I was notified that cheques had been dishonoured that bank statements were sent to NRS from the State Bank with the words 'in liq' printed on their face. The statements had been sent by facsimile to NRS.' [Paragraph 28] 'When I received these bank statements, I recall that I had a conversation with Duncan Plante to the following effect: Duncan: NRS shouldn't be in liquidation. Taylor: Well it is; it says so here on the statement'. [Paragraph 29] 'Following receipt of the bank statements and recognising that cheques had been dishonoured, I recall that I said to all of the staff words to the effect: "It looks like it's all over, I suggest you all get another job if you can. The company is in liquidation." [Paragraph 31] 'NRS could not obtain product without cash and therefore could not sell anything and therefore NRS could not trade. Once that occurred the business ceased. It became a business trading at a reduced level, operating on a day to day for survival without any significant profit.' [Paragraph 34] 'As a result of the bank statements and the dishonouring of the cheques, I also formed the opinion that NRS was in liquidation and that the business had ceased.' [Paragraph 38] 816 Mr Taylor's reaction to the bank statements, namely that the company was in liquidation, does not constitute an act of intervention by the plaintiffs or by a third party which can be said to have broken the chain of causation between the Bank's breach of contract and the plaintiffs' loss. The reaction was closely related to the Bank's breach of contract. A parameter of that breach was the manner in which the Bank communicated it's decisions to the Group and it's employees. The sending of the bank statements so read by Mr Taylor simply constitutes conduct of the Bank in execution of it's breach of contract. 817 On my findings, Mr Paola's evidence in relation to his conversations with Mr Giblet, Mr Plante, Mr Taylor and Mr Thornton should be accepted as correct. Clearly, Mr Giblet had also come to believe from the bank statements that relevant companies were in liquidation and preferred to regard the Bank, rather than Mr Paola, as requiring to be believed. 818 Mr Paola's concession that particular suppliers took up to three or four weeks rather than days to advise that they had closed the account of NRS, is not to be read as proving that the Bank's conduct of 15 and 16 February was not highly material to NRS losing the confidence of suppliers. Nor is it to be read as proving that NRS suffered no loss by reason of the Bank's conduct which it would not have suffered anyway absent such conduct. 819 A question arises as to whether it is or is not appropriate in examining the causation question here and in applying common sense to the facts here proved, to separately examine the events of 15 and 16 February 1992, and to then examine the events thereafter, or whether on the other hand, the correct approach is simply to look at the erosion of NRS's reputation and goodwill which took place in the first few months of 1990 and then to assess the effect of the Bank's conduct. There is also the question of the significance to be attached to the date 22 February 1990 emphasised by the Bank. 820 To my mind, there is much to be said for the proposition that the matter is not to be measured in 'coffee spoons', so that the whole of the facts and circumstances running say from the end of 1989 through until the sale of NRS, should be taken into account. Regardless however, of whether or not it be appropriate to focus independently on the 15th and 16th of February 1990, and then in a separate exercise, to focus on the later days and weeks, the result to my mind is the same. Applying common sense on the facts here proven, to each of those periods of time treated with separately, or to the period of time running from late 1989 through until the business of NRS was sold, it is clear that notwithstanding that the business of NRS did have a cash flow problem, the Bank's relevant conduct , played a very real and tangible part in an immediate impression being communicated both within the Group and without the Group to the effect that the Bank had withdrawn support for NRS and that NRS was no longer viable, or was likely to fail, and indeed that the Bank had withdrawn support from the Group, which itself was no longer viable or was likely to fail. By no means could the effect of the Bank's conduct be described as minimal, insignificant or minor. The support of its banker to a going business concern may as a general matter be regarded as one of the first matters of interest to those dealing with such a concern. Withdrawal of that support, and even a suggestion of the real possibility of such withdrawal, may in the hypothetical case, be expected to have a marked impact on the reputation and goodwill of such a business, and in this case in fact had such a marked impact on the reputation and goodwill of NRS. 821 I use the term 'the Bank's relevant conduct' to emphasise a factual distinction. In assessing the effect of the Bank's conduct following 22 February 1990, the integers involve first, the sending of the freezing letters without notice, second the submission of the 'in liq' bank statements and third, the dishonour of cheques drawn on the Number One accounts. In assessing the Bank's contractual entitlement up to 22 February, the Bank was however clearly entitled to dishonour the cheques drawn up to 22 February, and its dishonour of those cheques cannot per se amount to a breach of contract. It's dishonour of cheques thereafter does constitute a breach of contract. But the number of cheques involved is not large. And the relevant dishonours are, I accept, only to be regarded as having occurred where payment did not take place on the same day or on the day following the reversal from the No. 1 Account [see paragraph 711- point 3]. 822 It should not, however, be overlooked that the Bank's freezing letters communicated a decision, regardless of whether or not the Group brought itself back within the facility limit, to refuse to honour cheques drawn on the current accounts. Hence the sentence 'all the further drawings on the current accounts are to be returned' in the 3pm, 15 February facsimile. In Rouse v Bradford Banking Company Ltd [1894] AC 586 Lord Herschell LC said in relation to an overdraft: ' This I think at least it does; if they have agreed to give an overdraft they cannot refuse to honour cheques or drafts within the limit of that overdraft, which have been drawn and put into circulation before any notice to the person to whom they have agreed to give the overdraft that the limit is to be withdrawn' . [at p 596] 823 Hence one has the situation where up to 22 February, the Bank was contractually entitled to refuse to honour cheques drawn outside the facility limit. But what those reading the Bank's communications were entitled to infer, was that the Bank was advising that even if the customers brought themselves back within the limit, the Bank would not pay the customers' cheques from the current accounts on which they had been drawn. 824 Examining the significance to be attached to the date 22 February 1990, it is again important, it seems to me, to stand back from the respective sets of submissions, to stand back from the several sets of schedules detailing the fate of particular cheques and bank authorities, to stand back from the somewhat beguiling picture which the Paola Group sought to paint in terms of the cash flow position in early 1990 of the Group and particularly of NRS, and to stand back also from the somewhat beguiling picture which the Bank in turn sought to paint in terms of the pre and post 15/16 February 1990 and pre and post 22 February 1990 dates. 825 It is clear that the Bank determined on 15/16 February not to pay any cheques drawn thereafter on the bank accounts which had been, up to that point in time, operated by the Group. It is also clear that absent the Bank cancelling the facilities and/or declaring the facilities to be immediately due and payable, there was no justification in contractual terms for such conduct of the Bank. It is further clear that the Bank's conduct went well beyond its legitimate entitlement to dishonour cheques drawn on the Group's accounts which took the limit beyond $8.5million. 826 In order to put in place a variation of the Bank's customary mode of permitting operations on the facility [here by permitting the current bank accounts to be used for that purpose], the Bank would have had to give the Group reasonable notice of its requirements so as to enable the Group to make its own appropriate internal and external arrangements by way of meeting the Bank's requirements. Clients and customers would need to be informed. Bank authorities would need to be changed. Managers and employees would need to be informed. And the Group would have been able in a quiet and measured way, to move into the new arrangements with a minimum of disruption to ongoing business. 827 If one posits a hypothetical fact situation, as one in which the Bank had not sent out its 'freezing letter', had not placed all existing accounts into reduction and had not sent out the 'in liq' bank statements, but simply, as it were, continued as before, then the Paola Group would have been entitled to assume that to overcome its cash flow difficulties at the time, its options included: (a) Making deposits into its accounts so as to bring itself back within the $8.5million and thence to ensure that its cheques would be honoured. (b) Seeking to persuade the Bank to increase the facility yet again. (c) Putting assets, for example NRS's business, on the market for sale. (d) Approaching certain of the creditors of the Group with a view to ameliorating any concerns such creditors might have or seeking, for example, to arrange altered credit arrangements. 828 Plainly enough, if the Group determined to make deposits into its accounts, the source of funds to permit such deposits was a matter for the Group and was not a matter for the Bank. 829 Granted that the Group had suffered and was suffering cash flow difficulties, granted that in a number of instances cheques had already been dishonoured and granted further that the decision had been taken and I infer, implemented, to defer payment to creditors for thirty days, yet still the Group in the hypothetical fact scenario so posited, would not have had to grapple with: (a) the Bank's decision to refuse further drawings on the Group's accounts; and (b) the Bank's continued, albeit 'dwindled' dishonouring of cheques drawn after 22 February when the accounts were within limit; (c) the difficulties in fact faced by the Group following the sending of the 'in liq' statements. (d) the reactions of Group employees to the communications made by the Bank on 15 and 16 February 1990. 830 Nor in the hypothetical fact situation so posited would the Group have had to weather the swift circulation in small country town environments of the 'news', and even rumours, that something dramatic and of significance had taken place in the Bank's dealings with the Group. News which I infer from the evidence 'got out' by virtue of employees passing the information to family and friends, of employees resigning and having to seek new employment, of the need to explain why the new accounts had had to urgently be opened, of the nature of the business, of the existence of competitors and of the fact that the events concerned small country communities. At least one identified neighbouring farmer specifically told Mrs Hamblin in the period of one to two weeks after the receipt of the bank statements, [T 290, 292] that Mr Paola had 'gone bust'. There were others. There is further support for the same finding in the 15th August 1991 report of the liquidator dealing with NRS's failure: 'In February 1990 . . . the State Bank froze the accounts of NRS. It has been stated to us that this action resulted in the withdrawal of support by a number of creditors of NRS along with a substantial reduction in staff morale. This made continuance of successful trading extremely difficult . . .' [PX 2071-2083] [Emphasis added] 831 I have returned several times to the schedules in evidence dealing with the cheques which were dishonoured in order to gain an impression of whether, as the Bank would have it, the schedules show a clear and sustained period of dishonours prior to 15/16 February and, on the other hand, relatively minimal dishonours after 22 February. 832 Close attention also has to be paid to the reversals shown in the schedules. When did each reversal take place and on occasions when the reversals did take place, was it the case that the reversals occurred after 22 February, and if so when were particular cheques and bank authorities paid from the Number Two accounts, and how many days had passed between that occurrence and the dates when those items had been reversed in the Number One account? 833 The immediate impression which I have from an examination of the several schedules is of the large number of reversals which took place on and after 15 February, generally up to approximately 22 February. Reversals continued thereafter, but as Mr Macfarlan submitted, the reversals after 22 February ultimately dwindled so that the case in respect of dishonoured cheques after that date does not involve a large number of cheques or a large number of amounts and in some cases includes failure to pay on bank authorities. The Bank authority problems ought not to have occurred and could also have been avoided had the Bank complied with its obligation to give reasonable notice, in which event the haste into which the Group was hurried and which accompanied the Bank's precipitous decision, would not have taken place. 834 The focus on 22 February is put by Mr Macfarlan as centrally relevant for the reason that, taking into account the debit balances in the Number One accounts and the credit balances in the Number Two accounts and assuming that all cheques drawn had been honoured, there would have been an excess over the facility limit up until 22 February but not thereafter. 835 I do not see 22 February in the same light. To my mind, the 22nd of February can and should be viewed as being a date some seven days after a far more important critical date - namely the 15th of February. It was on the 15th of February that the Bank communicated its determination, in blanket fashion, no further questions to be asked, never again to honour a cheque drawn on the Group's current accounts. It is that determination and the communication of that determination, including the sending of the 'in liq' statements, that caused a rupture in the Group's and in NRS's regular dealings on its bank accounts. It is that determination and the communication of that determination, and that rupture revealed to Group employees, which was a clearly material cause of the damage to staff morale and confidence within the Group possibly best evidenced by the resignations, and further, was clearly a material cause of the Group's and in particular NRS's, loss of reputation.. There is a clear difference between on the one hand the Bank simply dishonouring cheques drawn outside the facility limit, and on the other hand, the Bank in substance advising that notwithstanding that the Group might place itself within it's limit, the Bank had determined no longer to allow drawings on the Group's accounts. 836 The probable significance to the Group of the Bank's actions was recognized in the Bank's letter of 15th February where the words 'in order to enable the Paola Group to trade' are used in connection with the recommendation that new accounts be opened. 837 The rupture in the Group's and in NRS's dealings with its bank accounts to which I have referred, was clearly recognised, it seems to me, in the letter of 29 March 1990 from the Bank to the Group, at PX 1239, whether sent or not sent. That document, signed as I have said by both Mr Booth and Mr Swinburne, reads inter alia: '. . . whilst it was agreed the company (and the Group as a whole) was experiencing liquidity difficulties it was our understanding that asset sales planned for the ensuing months would comfortably repay the Bank and all known creditors. Unfortunately being formally notified that ABE Holdings was "insolvent" did necessitate the Bank having to take action in the form of placing all overdrawn current accounts operated by Group companies in reduction. This had to be done without warning or delay. We nevertheless regret having to take this action. We are of course well aware of the inconvenience this must have caused . ' [Emphasis added] Mr Swinburne, when first confronted by Mr Paola with the problem, had recognised what a 'grave step' the Bank had taken [paragraph 487]. 838 In that expression of regret, it is plain that Mr Booth and Mr Swinburne were aware of the inconvenience which the Bank's actions 'must have caused'. To my mind, the word 'inconvenience' represents a gross understatement of the dramatic effect on NRS which the Bank's actions in fact caused. [See also the terms of Mr Paola's letter of 23 August 1990 to Mr O'Neill, the Chief Executive of the Bank, referred to at Judgment paragraph 583, as emphasised]. 839 In the result, the Bank's breach of contract was a direct cause of the loss to the reputation and goodwill of NRS. 840 It is appropriate to immediately examine the claim pursued in relation to NRS and to then examine Currabubula's rights, if any, to recover damages in respect of any loss sustained by it in relation to NRS. NRS 841 I turn then to examine the claim in relation to NRS. 842 The plaintiffs claim damages in respect of the sale of the NRS business on the basis that the business was sold immediately, on a fire sale basis and with the business damaged because it is said to have had to operate on a cash only basis. The claim is in respect of an alleged loss of some $900,000, the business having been sold in May 1990 for $691,000. The $900,000 claim is based upon Mr Hardy's reports which value the business in June 1990 in the sum of $1.6 million. 843 The respective reports of Mr Hardy on the one hand and of Mr Bryant/Mr Halligan on the other hand were the subject of close cross-examination and detailed submissions, both sets of valuers accepting that it was appropriate to use the capitalisation of maintainable earnings methodology for the valuation. 844 The issues critical to the respective experts opinions on value turned on the assessment of maintainable earnings and the capitalisation rates. Mr Hardy adopted a maintainable earnings figure of $314,000 and a capitalisation rate of 20%. Messrs Bryant/Halligan expressed the view that the appropriate maintainable earnings figure was $68,000 and that the appropriate capitalisation rate figure was within a range of 25-30%. 845 There were many parameters in respect of which the experts differed and in respect of which Mr Hardy and then Mr Bryant were cross-examined. 846 Mr Hardy had of course been involved in an auditing capacity with the Group at the material time and in his 31 January 1990 letter (PX 3/1034) had included what was referred to as an 'allowance for possible goodwill value of Northern Rural Services operations not recognised in the Paola Group accounts - $300,000'. 847 Tasked under cross-examination with his treatment of the goodwill of NRS in that letter, his evidence was that when he prepared the letter he was by no means performing a valuation of NRS and had selected the value for goodwill arbitrarily. [T 344.50.] This statement is borne out by his subsequent letter of 16 March 1990 [PX 1220], wherein he explained: 'In our letter of 31st January 1990 we included an arbitrary and possibly optimistic figure of $300,000 for goodwill for Northern Rural Services operations.' 848 The 31 January 1990 letter had estimated a Group loss for the year of $1,044,000 including an estimate of $146,000 as the trading profit for NRS. Mr Hardy's report had however estimated an NRS profit of $314,000 for the year. 849 His evidence at transcript 343.1, was that '[the figures] are determined under different circumstances. The $314,000 is a derived figure. What we were trying to determine there was the future maintainable profits for the company, and it happened that we adjusted the 1990 year to arrive at such a figure. In the course of the audit, I would not have given anywhere near the consideration to profit projections as I would have done for this evaluation' . [Emphasis added] 850 After a close cross-examination by Mr Macfarlan on working papers indicating the way in which the figures in the letter of 31 January had been derived, Mr Hardy was asked and answered as follows: 'Q. How do you account for the large differences between the figures in your report and the figure that you described in March 1990 as an arbitrary and possibly optimistic figure? A. For the very reasons that the figures that were used in my audit letter were arbitrary, and I didn't in any way do a proper valuation of what the company in - in fact, that letter goes on to ask the company for details of operating plans, budgets and valuations. It indicates that in no way did I do anything other than arbitrary assessment for audit purposes and I was not performing a valuation. ' [T 346] 851 Under cross-examination, Mr Bryant accepted that essentially the difference between his report and that of Mr Hardy lay in the maintainable earnings figure struck by the two reports and the choice of capitalisation rate. [T 565] 852 Mr Bryant also accepted that in forming a view as to maintainable earnings and the appropriate capitalisation rates, the valuer's task is permeated with judgment, being a judgment based upon first factual knowledge of the company in question and secondly knowledge of the appropriate valuation theories to be applied to the company. [T 565] 853 Mr Bryant accepted that in relation to maintainable earnings, as a general observation it is the case that an auditor of a company would be expected to be familiar with its operations and trading results; that if he was performing his duty he would be tasked each year to talk to management of the company, to discuss the accounts of the company, to discuss actual problems that the company might be having and in some circumstances to discuss potential problems that the company might be having. [T 565] 854 Mr Bryant accepted that an auditor's task is to opine at the end of the financial year whether the accounts are true and fair, and that the auditing standards require the auditor to get to know the business of the audited company. He also accepted that in terms of knowledge relevant to the formation of valuation opinions being the maintainable earnings figure and the capitalisation rate, that an auditor performing that valuation task, if otherwise qualified, is in a very good position to inject both the factual knowledge and then to apply the valuation theory to that company. [T 566] Mr Bryant accepted that this would extend to a valuation of the business of that company. 855 Mr Bryant gave evidence that, as he thought was indicated in several places in his report, this valuation 'is particularly difficult, partly for the reason . . . that it was a relatively new business . . . [and] . . . secondly, because there is very little information about the business and certainly not enough to do a valuation which, for example, a valuer would want to advise somebody to buy or sell the business'. [T 567] Mr Bryant accepted at transcript 567 that very little information had been made available to him, or appeared, so he said, to have been used by Mr Hardy, at least as expressed in Mr Hardy's report. 856 Mr Bryant accepted at transcript 568 that it is very important when one is determining the maintainable earnings for a business, to understand in what phase of its life the business is in. 857 Mr Bryant accepted that he had not valued a rural business similar to NRS before, and had not worked in the country. [T 569] He had never audited 'such rural enterprises'. [T 570] 858 The defendant was granted leave to read section of a supplementary statement of Mr Halligan in which he states that between 1985 and 1992 he was employed by Pannell Kerr Forster in Adelaide and during this time was involved in rural matters by way of Part X Administrations for Farmers and formal insolvency administration of a rural franchise selling cars, trucks and tractors. He also states that between 1988 and 1990 he worked in the Official Management of a rural merchandising business in Strathalbyn in South Australia. The business consisted largely of supply to the wheat and cropping farmers in the surrounding area. For about six months during that period, he had worked closely with the owners of the business and had daily contact with them. 859 The supplementary statement also includes evidence that during 1998, Mr Halligan carried out valuations of a milk processing business and an insurer of agricultural businesses. 860 Notwithstanding Mr Halligan's said experience, there was no evidence that he had valued a rural business similar to NRS before. To my mind, it is plain that neither he or Mr Bryant had anything like Mr Hardy's knowledge in relation to the affairs of the Group and the rural economy at the material times. They had nothing like Mr Hardy's 'on the ground' advantage in familiarity with the operation and trading results of the Group. They included no list of comparable sales of businesses and their capitalisation in their report. They did not know how the customers and suppliers regarded the NRS business at the time and they were unaware of the position of the business in relation to its reputation in early 1990 in the market place. 861 At transcript 572 Mr Bryant was asked whether in his report he gives any detail of the position of the business 'in relation to its reputation in May 1990 in the market place'. His answer was: 'No. That is one of the many items which we have indicated a valuer would like to know and was not information that was available to us' . [Emphasis added] 862 The cross-examination at transcript 572 includes the following: 'Q. Would you agree with me that your report is silent on any detail of whether or not anything done by the bank to NRS or the Paola Group had any effect upon the reputation or standing of that Group in May 1990? A. Thats correct. Q. But, of course, it would be important, wouldn't it, in valuing the business to know how its customers and supplier regarded it? A. Yes . . .. Q. If a business is regarded as untrustworthy and unreliable, people won't use it? A. Yes .' [T 572] 863 Mr Bryant accepted at transcript 580 that his report did not include a list of comparable sales of businesses and their capitalisation. 864 At transcript 580 he was cross-examined on paragraph 78 of his report which had read: 'There are a number of factors that affect the choice of a capitalisation rate. In our opinion, in the case of the business, the most important issues are the basis of the maintainable earnings (i.e. whether before or after interest and tax), the riskiness of the maintainable earnings, and the prospects for growth in earnings. . . .' 865 In the following paragraphs of the report, he had commented briefly on each of these matters. He was asked: 'Q. Don't you think that in respect to NRS the prospects for growth and its actual growth deserved a bit more than a brief comment? A. Possibly, yes. Had there been more information, yes . His Honour: I was going to ask, if I may Mr Ryan. Mr Bryant, how would you be able to say anything at all in relation to this business about its prospects for growth in earnings in the light of the information which you received and I understand there are limitations in that regard? A. Yes. Well, it is very hard your Honour . Obviously one can look at the growth that had already occurred which was quite strong , but it obviously wouldn't make sense simply to draw a line and plot that growth going upwards. The real difficulty is a large proportion of new businesses fail in their first five years and so you could certainly say any new business has the potential for growth but a valuer also knows that it has the potential to fail and it is very difficult. It is very difficult to balance those factors, but one of the significant factors is that buying a business that is just starting is risky.' [T 580] [Emphasis added] 866 Generally and from the further evidence given by Mr Bryant at transcript 583.25-45, I gained the impression that the valuation exercise here in point was very much a matter of judgment and gaining impressions and that there were particular difficulties inherent in the exercise of the subject valuation by reason of the lack of records, by reason of the fact that the NRS business was still essentially 'starting out', and by reason in the case of Mr Bryant and Mr Halligan, that they had not had any 'on the ground' involvement with the business or Group at relevant material times. This is of course not a criticism of Mr Bryant or of Mr Halligan and is a parameter which is only to be expected where an independent expert is years after a relevant business has been sold, asked to give an opinion as to the valuation of that business at an earlier point in time. 867 Mr Hardy referred in his report to the fact that NRS had commenced operations in the North-Western New South Wales towns of Tamworth and Narrabri in July 1987 and that the business had opened further branches in Gunnedah and Moree in July 1988. He referred to the fact that this coincided with a growth period in the rural merchant industry in New South Wales as evidenced by the sales growth experienced by the company in its first two years of operation, namely $6.36million in 1988 and $9.7million in 1989 and $5.5million for the first half of 1990. 868 He commented that individual store operations were being conducted profitably with the exception of Moree Merchandising which incurred losses in both 1989 and 1990. He commented that the company was a healthy take-over prospect for competitors in the industry because of its expanding market share. In his view, a market characteristic which continues even until the present time, is several large players dominating the market place, acquiring smaller operations to increase their market share and profitability per unit of sales. He commented that NRS held excellent prospects for increased profitability on the back of its expanding sales and its steady gross profit margin. 869 Mr Hardy had referred to an industry 'rule of thumb' for the valuation of rural merchants being a maintainable profit stream providing a return on investment of 20-25%, the investment consisting of three components valued as follows: (i) Inventory - valued at cost. (ii) Plant and equipment - valued at the agreed market value; and (iii) Goodwill - valued at 1-3.5 times maintainable earnings, having regard to the size of the operation (for example single or multi-branch operation) and the amount of goodwill attributable to the owner of the business in the local market place. 870 The Bryant/Halligan report also criticised Mr Hardy's use of the 'rule of thumb', and expressed the opinion that 'rules of thumb' for valuations ought be treated with scepticism because they failed to take into account the particular characteristics of the business being valued. 871 Mr Hardy expressed the view that freehold land and buildings was a separate issue. This may or may not be incorporated into the purchase price, having regard to factors such as the purchasing company's management policies (for example to lease premises only), or whether it had a branch already open in the same location in competition just a suitable for trading. 872 He expressed the view that this valuation approach was utilised by larger merchandising groups in determining prices for acquired businesses in the early 1990's. 873 One of the documents which had been made available to Mr Hardy in furnishing his report and which was tendered as part of Exhibit PX was a report to creditors as at 15 August 1991 of Ferrier Hodgson & Co., the liquidators of the company. That report had, in paragraph 6 on PX 2075, included the following: '6.00 reasons for the NRS's failure : In our opinion, NRS' liquidation was a result of a number of reasons which included: . The significant increases as stated above in the various expenses for 1990 financial year. . The poor seed and grain harvest in late 1989. This resulted in lower than expected sales for the financial year 30 June 1990. . In February 1990 the secured creditor, State Bank of New South Wales, froze the accounts of NRS. It has been stated to us that this action resulted in the withdrawal of support by a number of creditors of NRS along with a substantial reduction in staff morale. This made continuance of successful trading extremely difficult. . . .' [PX 2071-2083] 874 In calculating the maintainable profit stream, Mr Hardy expressed the view that the company's actual gross profit margins compared favourably with the industry benchmark, whilst the overhead structure needed review. He expressed the view that it was unclear on the information available, how much 'related group company overhead' was borne by this business because of its cash flows. 875 Maintainable earnings had been determined by Mr Hardy after adjustments to a number of financing, non-recurring or excessive expenditures. Detail was given in a schedule to Appendix 'B' to his valuation. 876 Mr Hardy took into account the following factors in determining maintainable profits of the business: '(i) 1988 and 1989 were start-up years. (ii) The figures included unprofitable Moree merchandising operations. (iii) The company, having suffered as a result of other Group companies problems - its bank account having been frozen and cheques returned to suppliers without notice in February 1990 . (iv) As a result of these actions, credit was withheld by the company's suppliers from February 1990. (v) The business only traded for eleven months of the financial year following the forced sale of retail operations on 31 May 1990 .' [I note that the matters referred to in (i) - (v) were only admitted into evidence as assumptions relied upon by Mr Hardy for the purpose of his report.] 877 Pages 14 to 17 to Appendix 'B' to Mr Hardy's first report and his business valuation schedule are appended to the Judgment as Appendix 9. 878 In Mr Hardy's second report of 12 June 1997, he expressed the view that 'the company was denied the opportunity to either pursue the development of the multi-branch strategy or sell the Group in an orderly fashion (say) to IAMA who was developing such a strategy'. The industry, he said, 'was rationalising itself at the time with fewer larger players with some interest in gaining market share'. 879 In paragraph 2.14 of his second report, Mr Hardy said: 'The judgments made in my valuation concerning maintainable sales, industry profit margins and capitalisation rates reflected that industry activity, the forced nature of the sale, and the fact that the opportunity to rectify early growth problems were denied by the Bank's actions. My valuation ($1.6million which was $0.9million above value actually received) also indicated that the result achieved by the sale was probably the worst case scenario for NRS.' 880 In commenting on Mr Bryant/Mr Halligan's report, paragraph 23 which had expressed the view: '. . . on the basis of the information available, the maintainable earnings are not as high as assessed by Mr Hardy and the capitalisation rate he uses is too low. In our opinion, the likely value of the business would not have exceeded the actual sales proceeds ($700,000) and there is not a loss', Mr Hardy in his second report said: 'It is noted that the Defendant's accounting expert concluded at paragraph 23 that the precipitous action taken by the Bank and the resulting forced sale of the business resulted in no loss being suffered at all. Such a view is not commercially realistic.' 881 Under cross-examination and in explaining his approach, Mr Hardy indicated that he was prepared to apply a valuation methodology to NRS, as at May 1990 because of his knowledge of the Group as auditor and because he was aware of the sale, in 1993 or 1994 of the very same businesses to IAMA. [T 337.25] 882 Both parties accepted before me, as I understood it, that one of the elements in a valuation is to consider the growth potential of the business, and the risk of the business succeeding or not. 883 After close cross-examination on a number of topics such as why he had not made any allowances for bad debts, Mr Hardy had answered as follows: 'There are a number - there is, I guess, one compelling reason to me why the treatment of some key determinants in preparing my valuation statements are more lenient than Arthur Anderson's appear to be, but my views have been in the back of my mind in a range of these issues. Am I allowed to tell you what that is?' The following questions and answers are as follows: 'Q. Is this the reason why you didn't include any amount in respect of bad debt? A. It helped shape my opinion on that and other issues that queried me on, yes. Q. I think you'd better indicate what it is? A. The difficulty that I had in valuing this business is, or I should say, one of the key factors that I used in valuing this business is my knowledge of the market place for these types of businesses, the buying and selling of these types of businesses, my specific knowledge of that and the opportunities that were available to Mr Paola had he continued to operate these companies. In other words, there were specific opportunities that were available to him that I considered deeply before I decided to adopt his format of valuation. Specifically, to give you an instance, specifically, there was an opportunity in '93/'94, I think it was, where a large number of similar companies came together. Eight companies, 50 were retail outlets, came together in an SBS armour float. The circumstances surrounding that, and in fact the two companies that bought Mr Paola's Northern Rural Services form part of that float. The values that they received for these businesses was substantially more and was in the order of $2-3million at least. These same businesses Mr Paola sold them at $659,000. What was difficult for me in assessing the loss suffered by Mr Paola is to what extent should I rely upon that specific market opportunity, and others that would have been available to him if he had been allowed to continue to trade and to what extent I should have regard to that when I did my valuation? What I did was to adopt what I felt was more conservative. To fall back to the standard form of valuation I had regard to those specific market opportunities, but my way of implementing those opportunities was to be more favourable to the company in the key components of valuation than I might otherwise have been. So I was more prepared to accept management projections. I was more prepared to accept a higher gross profit rate. I was more prepared to be lenient on the adjustments that I made to gross profit to arrive at a net profit, and I was more lenient in the selection of the capitalisation rate because I was aware of the specific opportunities that Mr Paola would have had if the businesses continued. So therefore, in all of these things that you are querying me on, I have been more favourable to the company but for what I believe to be a specific market knowledge that I have that I think was reasonable that Mr Paola may have availed himself of if the businesses continued . . .' [T 337-338] 884 In forming the views that he did, Mr Hardy obviously considered appropriate matters, such as the actual and projected results of the company and the proper capitalisation rates. I do not accept that Mr Hardy's report should be categorised as having adopted a valuation based on what happened in 1993 to 1994. His evidence was that having considered this matter he decided to revert to a more conservative and standard form of valuation. Quite legitimately, he had regard to market opportunities but only in the sense that this translated into a more favourable view of key elements in the valuation process than he might otherwise have applied. [T 337.46] Nor could it be said that events which happen after the date as at which property is to be valued cannot throw light on the real value of the property at the time. Gould v Vaggelas (1985) 157 CLR 215 per Gibbs J at page 220; Potts v Miller (1940) 64 CLR 282 at 289 and 297. 885 Mr Hardy was able to give a personal insight into the relevant operations of the rural economy at the time. It was put to him in cross-examination that as at June of 1990, the outlook the vendor and purchaser would have seen would have been bleak so far as the rural economy was concerned. His answer was: 'No, I think that there was - I mean, what I said in my reports is that there was a clear opportunity for a rationalisation of the rural merchandising industries and I think that was known by the larger groups including Mr Paola. There was, despite the fact that it might not have been the most buoyant of times although it wasn't too bad, there was clearly I believe a mood among some people to build and to expand their market share in this area .' [T 339] 886 To my mind, Mr Hardy's evidence suggests that rural conditions were not in early 1990, so depressed that NRS was either doomed or worthless. 887 At transcript 379.55-380, Mr Hardy gave evidence of the basis of his treatment of growth of NRS and its potential for further growth. This shows and is supported by the accounting records of NRS, a very significant growth from 0 - $6million-odd in the first year of operation, in the second year growth to $9.7million and in its third year, in the first half of that year, sales of approximately $5million having been achieved. 888 Mr Bryant/Mr Halligan's report emphasises the lack of sufficient data for the conducting of a valuation with any degree of certainty with a resultant decision to raise the suggested capitalisation rate and to take a more pessimistic view of matters such as reliance on forecasts, which in turn ultimately produces a lower figure for maintainable earnings. Paragraph 51 of the Bryant/Halligan report reads: 'In our opinion, in light of the fact that all of the profit and loss accounts relied upon by Mr Hardy are unaudited and in the light of the liquidator's comments concerning the lack of reliability of the 1990 accounts, we are of the opinion that the capitalisation rate should be increased to take into account the uncertainty attaching to this information. We take this into account below in our commentary on the choice of a capitalisation rate.' 889 Under cross-examination, Mr Bryant accepted that the business was a relatively new business (T 567]; agreed that it was important in determining maintainable earnings for a business to understand in what phase of its life it was [T 568], as start-up businesses could have characteristically high costs [T 568.40]; effectively accepted that the criticism of NRS' record keeping had to be viewed in the context that the businesses were sold in May 1990 and the liquidator was speaking of August 1991 [T 573]. 890 In dealing with Table 3 on page 11 of the Report and the criticism of use of management forecasts, Mr Bryant had some difficulty in explaining why net profit would be out by 110% but revenue figures only by 19% [T 575]. 891 Table 3 on page 11 of the Bryant/Halligan report was in the following terms:

892 The cross-examination of Mr Bryant included the following: 'Q. You have got a comparison of budgeted and actuals? A. Yes. Q. And you come down to net profit and loss being out according to your calculations by a factor of 110%? A. Yes. Q. That is a figure that his Honour has heard before, but would you also have a look at the revenue figures and the gross profit figures? A. Yes. Q. Do you see the revenue figure is only out by 19%? A. Yes. Q. And the gross profit figure was out by 25 percent? A. Yes. Q. Can you help his Honour with why the net profit and loss forecast was out then by 110 percent? A. I suppose the explanation your Honour is that because the net profit is obviously comprised of revenues less expenses. If I could give an example - if you take a company which is budgeting a profit - sorry - is budgeting revenue of 100 and costs of 90 and a net profit of 10, if its revenue reduces by 10, which is a decrease of only 10 percent, but its expenses remain the same, its net profit has moved by 100 percent. It has moved from ten to zero. Q. And it would be the case therefore that revenues were out by19 percent, but do you know whether it was, for example higher than predicted start up costs which actually produced the disparity for net profits? A. No. I don't know.' [T 575] 893 Much of the Arthur Anderson report focuses upon the missing facts and documents relating to NRS' business and the difficulties in consequence involved in expressing an opinion as to valuation. 894 Mr Bryant/Mr Halligan in commenting on the historical financial statements relied upon by Mr Hardy, focus on the fact that although the accounts for the year ended 30 June 1988 were audited, the auditor stated that he did not express an audit opinion on the detailed profit and loss account included in the financial statements. Likewise although the accounts for the year ended 30 June 1989 were audited by Mr Hardy, he had stated that he did not express an audit opinion on the detailed profit and loss account included in the financial statements. Hence Mr Hardy's statements that the profit and loss accounts for the years ended June 1988 and June 1989 were audited, are said to be incorrect. 895 Again the financial statements for the 6-month period ended 31 December 1989 and the financial statements for the period ended 30 June 1990 are referred to by Mr Bryant/Mr Halligan as not containing any notes and as not being audited. 896 In relation to the 1990 financial statements, the report notes that the liquidator of NRS in his report to creditors dated 15 August 1991, referred to their investigations as having indicated that maintenance of the company's records was poor. 897 Hence, the Bryant/Halligan first report in paragraph 51 states: 'In our opinion, in light of the fact that all of the profit and loss accounts relied upon by Mr Hardy are unaudited and in light of the liquidator's comments concerning the lack of reliability of the 1990 accounts, we are of the opinion that the capitalisation rate should be increased to take into account the uncertainty attaching to this information . . .' 898 On being tasked with these issues, Mr Hardy in cross-examination, gave the following evidence: 'Q. Mr Hardy, as a general matter, valuers of businesses regard unaudited accounts as less reliable than audited ones; would you not agree? A. I would agree. Q. Sorry, you would? A. I would agree, but can I - you refer to the word accounts, these accounts being the balance sheet, profit and loss, the statutory profit and loss statement and notes are audited. What is never audited, what accountants do is put a standard disclaimer on the detailed P and L at the back of those accounts because whilst we have confirmed the profit or loss as being part of our audit, we have not confirmed the allocation of expenses, classification of sales, so we make this standard statement. It doesn't - that company had good accounting systems at that time. There was no reason to suggest the figures were unreliable . And my position as auditor, I was aware of the accounting systems, the calibre of the accountant preparing them and whilst we still put this standard disclaimer on the detailed P and L because we have not gone through that, verified the individual expenses, items or the gross profit rates or the allocation of other income, but the final figure, profit or loss is audited as part of the balance sheet and statutory profit and loss account.' [Transcript 321] [Emphasis added] 899 Under cross-examination, it was put to Mr Bryant that the purchasers of the business would be likely to have taken the documentation relating to the business with them, so that a liquidator's report of August 1991 in respect of a period when only the Moree grain business was operative and dealing with lack of documentation, could not necessarily be extrapolated from to support the proposition that maintenance of company records had always been poor. 900 Messrs Bryant/Halligan criticise Mr Hardy's report on the basis that his reliance upon figures forecasted by management should only have been permitted where there was adequate evidence that management had a successful record of making reasonably reliable forecasts and where the basis for each of the forecasted figures was adequately explained. 901 A number of details are put by Messrs Bryant/Halligan in criticising Mr Hardy's estimate of maintainable earnings and his estimate of a capitalisation rate. These matters, together with Arthur Anderson's opinion as to the alleged loss are generally set out in paragraphs 60 through to 92 of Arthur Anderson's first report. 902 In dealing with Mr Hardy's estimate of maintainable earnings, the Bryant/Halligan report at paragraph 61, expresses the view that 'no reliance should be placed on management forecasts' and that 'the figures in the 'adjusted potential 1990' column [used by Mr Hardy] should not be used'. 903 The Bryant/Halligan report comments in detail on the adjustments which Mr Hardy made to the 'adjusted potential 1990' net loss to derive his estimate of 0.314million for the maintainable earnings. In a number of instances the Bryant/Halligan report accepts, or accepts with some minor amendments, adjustments made by Mr Hardy in their entirety or in part, as reasonable in concept but continues with the words 'but we do not have the information to judge whether it is supported by the facts. [See the references to Messrs Bryant/Halligan not having information to judge or assess whether adjustments are or are not reasonable to be found in paragraphs 64, 66, 67, 68, 70 and 71 of the first report.] 904 In paragraph 71 of the first report Messrs Bryant/Halligan in dealing with a number of specific items of income say 'Our understanding of these items of income is limited, of course, because little explanation of them is given in the accounts . . .' 905 Ultimately, the opinion given by Messrs Bryant/Halligan in paragraph 83 that 'a capitalisation rate in the range of 25% to 30% is more reasonable for the business than the capitalisation rate of 20% used by Mr Hardy' has to be accepted as a judgment, and as a judgment in respect of which the difficulties usually faced by a valuer, and the particular difficulties which Messrs Bryant and Halligan accept they faced in the present situation, have to be taken into account. 906 In paragraph 84 of their report, Mr Bryant/Mr Halligan summarise the values for the business that result for using the method of capitalisation of maintainable earnings based on different assumptions concerning the capitalisation rate and the maintainable earnings. That table is as follows:

907 At the commencement of paragraph 85 of their report, Mr Bryant/Mr Halligan reiterate 'That the quality of information available may have a significant effect on the resulting values. This is because the value is highly sensitive to changes in the estimates of the capitalisation rate and the maintainable earnings . . .' 908 Mr Bryant/Mr Halligan state in paragraph 86: 'Mr Hardy's estimate of the adjusted net profit for the year ended 30 June 1990 is 0.173million. By adjusting sales revenue in accordance with management forecasts, he further adjusts the adjusted net profit of 0.173million upwards by 0.141million to 0.314million, which he then takes as the maintainable earnings. Hence Mr Hardy's value of 1.571million for the business includes an amount of 0.706million (i.e. 0.141million divided by his capitalisation rate of 20%) that is dependent on the accuracy of management's forecasts of future sales. In other words, about 45% (i.e. 0.706million divided by 1.571million) of the assessed value is based on management forecasts. Mr Hardy clearly places a high degree of reliance on those forecasts. However, as we have earlier explained, it is our opinion that the evidence, such as it is, shows that management were not reasonably accurate forecasters and that it is, accordingly unreasonable to rely on the forecasts.' 909 Here again the divide between the respective experts emphasises the question of the forecasts and their reliability. 910 In paragraph 87 of their report, Messrs Bryant/Halligan say: 'In our opinion, on the basis of the information available, the value of the business appears to have been in the range of 0.272million to 0.226million using the method of capitalisation of maintainable earnings. This should be viewed in the context of the fact that the business only made a net profit before tax in 1988, and that for 1989 it made a net loss of 0.214million and for 1990 it recorded a net loss of 0.888million. The business was, in fact, unprofitable. After making many adjustments, we estimate that the net loss converts to a small maintainable earnings of about 0.068million. When valued at capitalisation rates of 25% and 30%, the value falls in the range of 0.72million to 0.226million. We note, however, that the business was sold for a total 0.691million in what we understand were arms-length transactions (although we note that we have not seen any documentary evidence of the transactions). The total consideration of 0.691million probably represents, partly or wholly, the value of the stock, plant and equipment sold. Accordingly, in our opinion, the value of the business in May 1990 was probably about 0.691million and there is no evidence we have seen to suggest that the value exceeded that amount.' 911 Mr Bryant/Mr Halligan point out in paragraph 89 that Mr Hardy's opinion implicitly assumes that all of the loss he has calculated is caused by alleged damage to the reputation of the business and its alleged forced sale. They state that Mr Hardy does not consider the possibility that the loss, if any, was partly caused by other factors. In this regard they note that the liquidator of NRS attributed the failure of the company to a number of causes including 'for example, a poor grain and seed harvest in late 1989 resulting in lower than expected sales'. Notwithstanding this, Messrs Bryant/Halligan state that in their opinion the reasonable value of the business, based on the information available, did not exceed the sale proceeds of 0.691million and that there is no loss to NRS. They also express the view that Mr Hardy should have taken into account the taxation consequences to NRS of realising a capital gain on the sale of its business. 912 In paragraph 91 of their report Mr Hardy/Mr Halligan note that the liquidator had reached agreement, subject to obtaining approval from the Bank, for the sale of the plant, equipment and stock of the Moree branch to Currabubula Holdings for about 0.075million - in which regard they refer to the liquidator's report to creditors of 15 August 1991. They then say 'Mr Hardy has not taken into account the proceeds from this sale in his calculation of the loss. If the sale did occur then the loss, if any, in respect of NRS should be reduced by 0.075million'. 913 In terms of the very close attack on Mr Hardy's report, based upon his letter of 31 January 1990 and Exhibit 'D5', to my mind Mr Hardy's evidence should be accepted, namely that he was not performing a valuation at the time, and that in asking the company for details of operating plans, budgets and valuations, he was seeking information which he plainly did not have. An arbitrary assessment for audit purposes is not a valuation. 914 It seems to me important to note that Mr Bryant fairly conceded that one of the many items which a valuer would have liked to know, but which was information not available to himself or Mr Halligan, was detail of the position of the business in relation to its reputation in May 1990 in the market place. Likewise, as he accepted, it would be important to know in valuing a business, how its customers and suppliers regarded it. [See transcript 572] 915 As I have said, the Bryant/Halligan report from time to time expresses quite frankly that the authors understanding of particular items is limited. This is often because little explanation of these items is given in the accounts. One such item referred to in paragraph 71 is for example the opinion of Mr Bryant/Mr Halligan that an adjustment should be made to Mr Hardy's schedules in relation to 'wool press rental'. Mr Bryant/Mr Halligan expressed the opinion that an adjustment in respect of wool press rental requires to be made; "wool press rental should . . . be removed as being non-recurring or abnormal and not connected to the core business". However, they express the view that the value of the wool press itself should be added to the valuation obtained by capitalising earning, which they say they are unable to do 'as we do not have any details of the wool press and do not know its value (we assume that the value of the wool press would be small relative to the value of the business).' 916 Under cross-examination on this paragraph, Mr Bryant accepted that he had never valued wool presses. He was asked why it was: '. . . that you assumed the value would be relatively small? You don't know whether it is a very expensive machine or a very cheap machine? A. I think I am right in saying that the income that it appears to have generated is not great, but I will [not] [the word not is obviously a mistake which should not be in the transcript] say that I am not an expert in valuing wool presses.' 917 On the issue of Mr Hardy's reliance upon management forecasts, he was closely cross-examined. The cross-examination included the following: 'Q. Mr Hardy, would you agree that as a general principle a prudent valuer should only take some account of management forecasts where management has a successful record of forecasting? A. If that's desirable, but that opportunity is not always available. Q. Well, in your reports have you set out any examination of past forecasts of management here and examined management success rate? A. No, but in preparing my figures I had regard to - Q. The question is whether you've got anything in your reports about that Mr Hardy? A. About? Q. Whether in your reports you have set out any analysis of the extent to which management forecasts have been proven correct or incorrect? A. No. I didn't put anything in my reports to that effect. Q. Well, that is an essential part of the reasoning of a prudent valuer, isn't it, to show that there has been a testing of the reliability of management forecasts? A. You've got to understand my reasoning for formulating the conclusions I did here. Q. Well, do you agree with my proposition or not? Q. [The above question commencing "Well, that is an essential part" was then put again]? A. It is part of the consideration. Q. It is a critical part of a prudent valuer's reasoning isn't it? A. It depends on the circumstances. it is part of what I do. Q. Do you say that you weren't able to do it in this case? A. There is a limited track record of testing managements' budgets against the actual results because the business was cut off in its prime . Q. But you have read Arthur Anderson's report in this matter have you not? A. Yes I have. Q. And Arthur Anderson sets out such a comparison of managements' forecasts and the actual results don't they? A. Yes. They do. Q. And you have put on some four reports since that Arthur Anderson report and you haven't seen fit to in any way join issue with what Arthur Anderson said about that, have you? A. I differ with the degree of emphasis that Arthur Anderson put on historical results versus my considerations in this matter. I think they put too heavy a reliance on historical results and given the limited time that this business has operated I think there are other considerations that need to have weight as well. [T 322-323] 918 Mr Hardy was then asked questions in relation to Arthur Anderson reports suggesting an error of 110 percent as between budgeted and actual results to 31 December 1989. In being asked about the margin of error, he was asked: 'That margin of error is a matter that was highly relevant to take into account when deciding whether or not to have regard to the budgeted sales figures; wouldn't you agree? A. It's one of the elements that are taken into account but, as I said to you before, Arthur Anderson generally place greater emphasis on historical results and the limited management projections that were done for this company than I have done.' [T 324] 919 Mr Hardy 's further evidence was as follows: 'Q. You weren't surprised in those circumstances that Arthur Anderson did suggest that a higher degree of emphasis be placed on the historical figures rather than the projections . . .? A. Well, I was a little surprised that Arthur Anderson placed so much emphasis on historical results and didn't look to what that business might have done in the market place. Q. Well, you hadn't done any other analysis of comparing budgeted and actual results such as is contained at the top of page 11 of Arthur Anderson's report have you? A. No. Q. Well, if that is the only information the valuer has as to the reliability of budgeted figures a prudent valuer would be driven to the historical rather than the projected figures wouldn't he? A. No. Driven - you would have regard for it. I am not sure driven is the right word. I go back to - perhaps because of my understanding of what happened for this business and these businesses in the market place specifically I was more prepared to rely upon management projections than what Arthur Anderson were. Q. Let me just give you the opportunity to explain Mr Hardy. How can you rely upon company projections when an analysis of the budgeted and actual results to the last completed period showed an error of 110 percent? A. What I actually did in my sales projections . . . A. The way - what I used was - sorry - the sale projections that I used in my figures were calculated by - I took - I looked for the first six months of the year where there was actual of 1990 year where there was actual trading took place. I think in the case of the sales revenues the actual sales were 85 percent of the budgeted sales. When I looked at how we would determine what should have been the sales results for the 1990 year. I took management projections and discounted them by a similar sum. So I had regard to what took place actually and I discounted the management projections by a similar sum and the reason I did that is because the management projections indicated quite correctly from my knowledge that the second half of the year should have been a higher sales period than the first half. Q. And why do you say that? A. Because of the pattern of trading if you like on a rural company, generally the sales are concentrated in the second half of the year a little more than the first half.' [T 325] 920 At transcript 325 to 326 Mr Hardy gave evidence that he had not assumed, prior to February 1990, that the company was 'sailing along quite splendidly' but assumed 'that the business was in its infancy. We had a situation where there were four retail outlets. Two had only been operating for about two years and two for only eighteen months. I took the view that there were certain specific results on the board, that the company was very much in a what I would call, an embryonic stage as far as it's development was concerned and its - yes.' 921 To my mind, Mr Hardy took a justifiable position in terms of going back to his own understanding of what had happened for the business and similar businesses in the market place in his assessment of the reliability of management projections. His answer at transcript 325 line 20 and following included the fact that he had taken management projections and discounted them and the reasons for this. 922 It is clear from his evidence that he took into account the number of retail outlets and how long they had been operating and the specific results which had been obtained and the embryonic stage that the company was in at its infancy. 923 At transcript 326, Mr Hardy also referred to the state of the rural economy as being tough in the early 1990's and the outlook for rural merchandising being quite good for 1991 as being matters he took into consideration. 924 Mr Hardy's knowledge in relation to the affairs of the company and the rural economy and the failure of the defendant to make good, to my mind, any particular fundamental misconception in the approach taken by Mr Hardy. My view of Mr Hardy in the witness box, a close examination of the respective reports and a close consideration to the respective contentions as to the respective merits and demerits of the respective reports has led me to the view that Mr Hardy's assessment should be preferred. At the end of the day the question of valuation principle and application is, as all parties seem to accept, ultimately a judgmental issue. To my mind and having observed him in the witness box, Mr Hardy should not be assessed as having done otherwise than his best to give an objective opinion as to the valuation of the subject businesses. At the end of the day it was he who had the 'on the ground' advantage in familiarity with the operation and trading results of the Group to be in the best position to value the business. I reject the submission that his evidence ought be rejected as unreliable by reason of his past association with the Paola Group. I was impressed by his frankness and candour in giving evidence. He is accepted as a creditworthy witness whose evidence is reliable and whose views were given honestly. 925 In the result in my view, the value of the NRS business in June 1990 on a going concern basis, was $1.6million. The actual value realised, having been $691,000, this was $909,000 under fair value. This is the measure of the loss caused by the Bank's breach of contract. The loss suffered by NRS by reason of the breach of contract was clearly not too remote. The test renders a defendant liable for those losses which are of a type that the defendant should (or a reasonable person in the defendant's position would) have realised were sufficiently likely to result from the breach of contract, in the light of the information available to the defendant when the contract was made, so as to make it proper for the court to hold that the losses flowed naturally from the breach or that losses of that kind ought to have been within the contemplation of the defendant at the time the contract was made. [ Hadley v Baxendale (1854) 9 Exch 341; [1843-60] All ER Rep 461; 156 ER 145; Koufos v C Czarnikow Ltd (The HeranII) [1969] 1 AC 350 at 385; per Lord Reid. See also Wenham v Ella (1972) 127 CLR 454 at 471-2; per Gibbs J; Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 at 667; per Wilson, Deane and Dawson JJ; Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 98-9; per Brennan J; Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310 at 363-6; per McHugh JA.] 926 Here, the full extent of the loss suffered by NRS flowed according to the 'usual course of things' from the breach. The loss was of a type that the Bank should, or a reasonable person in the Bank's position would, have realised was 'not unlikely to result' from the breach in the light of the information available to the Bank when the contract was made, so as to make it proper to hold that the costs flowed naturally from the breach. Wenham v Ella at pages 471-472 per Gibbs J; Burns v MAN Automative (Aust) Pty Ltd at page 667 per Wilson, Deane and Gaudron JJ; Simonius Vischer & Co v Holt and Thompson [1979] 2 NSWLR 322 at page 363 per Samuels JA; Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310 at 315 per Glass JA and at 364 per McHugh JA. The Bank well knew of the Group's plan to sell NRS. In mid January 1990 the Group had informed the Bank that following the hoped for sale of the jet aircraft, NRS was the 'next asset in line' to be sold. Hence, the first limb of Hadley v Baxendale was satisfied. But does Currabubula have a right to recover in respect of loss to it? To this subject I now turn. Currabubula Holdings' Rights to Recover Damages 927 In Gould v Vaggelas (1985) 157 CLR 215, Gibbs CJ, cited Prudential Assurance Co Ltd v Newman Industries Ltd [No 2] [1982] Ch 204 at 210; as authority for the following elementary proposition: 'A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C. C is the proper plaintiff because C is the party injured, and therefore, the person in whom the cause of action is vested.' 928 Gould involved a husband and wife ('the Goulds') being induced by misrepresentations to purchase, on behalf of a company to be formed and controlled by them (ultimately being Gould Holdings Pty Ltd), a tourist resort on terms which included the transfer to the vendors of valuable property and a mortgage back to the vendors to secure the balance of the purchase price. The three components of the purchase price of $2,315,000 were: Deposit $5,000 Cash on completion $957,000 Mortgage back to the vendors $1,352,500 929 The parties agreed that the obligation to pay cash on completion be met by the transfer, by Mrs Gould, of a Gold Coast shopping centre for $300,000 and the sale by Mr and Mrs Gould to the vendor companies of the issued capital in Talle Downs Pty Ltd for a net consideration of $657,500. Talle Downs owned a shopping centre at Palm Beach. 930 After two years of unprofitable trading, the company defaulted. The vendors exercised their power of sale as mortgagees to recover a deficiency and sued Mr and Mrs Gould as guarantors. The Goulds counterclaimed for damages for deceit. The liquidation had no funds with which to take proceedings against the vendors. 931 The issue of damages was complicated by a number of considerations including the fact that Gould Holdings was not a party. 932 The trial judge sought to determine a figure which would in practical terms, restore the Goulds to the position they would have occupied if there had been no fraudulent misrepresentations and no acquisition of the resort. Gibbs J summarised the trial judgment on this issue as follows: 'The learned trial judge rejected a claim by the Goulds for damages for losses sustained by Gould Holdings in the course of trading and for the decline in the value of their shares in that company. He was clearly right in doing so. There were four elements in his award of $1,427,500. First, he assessed at $733,212.12 the true value, as at the date of sale, of the property sold by the Goulds under contracts made on 29 October 1975 and treated by the contract for the sale of the South Molle Island Resort made on that date as cash paid on completion of that contract of sale. Secondly, he assessed at $266,273 the value of property mortgaged by the Goulds to banks and sold either by the mortgagee or by the Goulds themselves under pressure from the mortgagee. Until July 1977, when one of the vendor companies, South Molle Pty. Ltd. ("South Molle"), entered into possession under its mortgage, Gould Holdings continued to trade, and to enable it to do so it was necessary to raise capital for repairs, improvements and working capital. In order to raise the money the Goulds gave personal guarantees - the dates on which they were all given do not appear very clearly from the evidence, but some were given in February 1976, and it has not been established that Connolly J. was wrong in thinking that all the guarantees to the banks were given in or about that month. These guarantees were supported by the mortgages of the properties which the Goulds lost when the banks took action under the mortgages. Thirdly, the learned trial judge allowed $27,983 which represented the amount which remained owing by the Goulds under the guarantees which they had given to raise money for Gould Holdings. Fourthly, having rounded off the total of the three preceding amounts to $1,227,500, he added $200,000 by way of interest.' [157 CLR at pages 224-225] 933 His Honour then dealt with the first item of damage, giving reasons for the holding that the loss which the Goulds had in fact suffered of $733,212.12, was a direct consequence of the fraud and holding that the Goulds were entitled to recover that amount by way of damages. 934 Gibbs CJ then continued: 'Once it is held that the carrying on of the business was a direct consequence of the inducement, and was not the result of a supervening cause such as the Goulds' unreasonable decision to continue trading, it must follow that the respondents are entitled to recover also the second and third items of damage which Connolly J. assessed. The direct consequence of buying the resort was that Gould Holdings had to procure the necessary funds to enable the business to carry on and for that purpose to obtain the necessary guarantees from the Goulds. It was foreseeable that this would occur. For the reasons I have given, it cannot be held that it was unreasonable to give the guarantees. Further, as I have said, the right of action against Gould Holdings which the Goulds obtained in return for giving the guarantees can be regarded as valueless. ' [157 CLR at page 228] [Emphasis added] 935 Brennan J (as his Honour then was) said at page 253: 'The question raised by the appeal is the measure of the Goulds' damages. They did not purchase the resort. Can they recover damages except through the company which suffered loss as the purchaser? The Goulds cannot sue in their own names for the company's loss (Prudential Assurance Co. Ltd. v Newman Industries Ltd. [No. 2]); they can recover only the loss suffered by them in acting upon the fraudulent misrepresentations which Mr. Vaggelas made. They did not act upon those representations by becoming the purchasers of the resort but by forming the company, by providing it with funds to complete the contract to purchase the resort and by guaranteeing the company's borrowings needed to improve the resort and provide working capital. No doubt it was a matter of indifference to the Vaggelas interests whether the Goulds chose to buy the resort personally or by forming a company to be the purchaser, but the terms of the contract show that the formation of the company to complete the purchase and conduct the resort was contemplated by the parties. The representations were calculated to induce the Goulds either themselves to buy or to form a company to do so and, in the latter case, to provide to or procure for the company the funds it would need to complete the purchase of the resort and to conduct the resort. It is the loss, if any, suffered by the Goulds in acting in this way which is recoverable in this action. The Goulds' loss is the loss suffered by a creditor of the company which, apart from its cause of action in deceit, is worthless. ' [Emphasis added] 936 It is clear that in the present case Currabubula Holdings cannot recover damages merely because of its interest as one of three shareholders in Paola Holdings, which was in turn the intermediate holding company of ABE Holdings, which held the issued shares in NRS. This is not necessarily to accept that a company can never recover damages in respect of the diminution of the value of it's shares in a wholly owned subsidiary. [Cf George Fischer , (Great Britain) Ltd v Multi Construction Ltd [1995] 1 BCLC 260; Fosters Brewing Group Ltd v Elliott (Unreported, Supreme Court of Victoria, 10 August 1995, Beach J)] 937 In George Fischer , the plaintiff was the holding company of a number of wholly owned operating subsidiaries. Multi Construction Limited which was the defendant, entered into a contract with the plaintiff to install equipment at the subsidiary which sold the products of the other operating subsidiaries of the plaintiff. The equipment installed by the defendant was defective and the plaintiff claimed damages for, inter alia, the loss of sales and increased operating costs of its subsidiaries caused by the defendant's negligence. The plaintiff claimed that those losses, although suffered directly by its subsidiaries, were suffered indirectly by it and that it's losses were measured by the loss of a profit to its subsidiaries. The defendant argued that such losses were not recoverable since a shareholder suffered no recoverable loss by diminution in the value of his shareholding or reduction in distributions to him as a member of the company. The trial judge held in favour of the plaintiff. An appeal was dismissed. The Court of Appeal (Glidewell, McCowan LJJ and Sir Michael Kerr) held that the plaintiff had an unquestioned right of action against the defendant for breach of contract and was entitled to claim damages for the loss caused to its operating subsidiaries. 938 Importantly, evidence had been adduced at the trial to the effect that a £1 loss to the subsidiary company as a result of a breach of contract would result in a £1 loss to the balance sheet or profits of the holding company, unless some other extraneous factor produced a different result. The judge accepted this evidence as admissible and as proving the plaintiff's loss. [See Glidewell LJ at 269] 939 The critical evidence given by the expert was as follows: 'Every £1 loss in a subsidiary company represents £1 loss in GF (Great Britain), since each of these companies is 100 percent owned by GF (Great Britain). GF (Great Britain) is therefore entitled to the whole of the profit earned by a subsidiary. Thus, if the profits of a subsidiary are reduced by £1, the value of GF (Great Britain's) investment in the subsidiary is also reduced by £1. This remains true whether the profits of the subsidiaries are distributed to GF (Great Britain) by way of dividend or whether they are retained within the individual subsidiaries own working capital. It is by virtue of this relationship within the Group companies that I have included the subsidiaries' losses in my quantification of the claim for damages. ' [1995 1 BCLC at 268] 940 Currabubula's case is very different to that dealt with in George Fischer. Currabubula called no evidence to the effect of a particular quantifiable loss to NRS as a result of breach of contract resulting in a particular quantified loss to the balance sheet or profits of Currabubula as one of the ultimate shareholders. 941 I do not see Currabubula as having, by reason of its indirect shareholding in NRS any locus standi which would permit it to recover in respect of the loss suffered by NRS following the so-called fire sale of its businesses. 942 To my mind, Currabubula has an entirely discrete locus standi permitting it to recover in respect of the losses sustained by NRS. Currabubula was a party to the agreement with the Bank, constituted by the facility agreement. NRS was also a party to that agreement. The Bank owed joint and several contractual obligations under the facility agreement to Currabubula and to the other borrower companies. Currabubula was a co-promisee, as was each of the Group borrower companies, in respect of the Bank's joint and several obligations to observe and not to breach any of the express or implied terms of the facility agreement. The Court's holding that the Bank breached the obligation imposed upon it by an implied term of its contract with the Paola Group to give reasonable notice in the event that it determined to vary its customary mode of providing general banking services, and in particular the finance facility to the Group and failed to comply with all the requirements which such obligation embraced [see paragraph 752], carries with it an entitlement in Currabubula, to recover in respect of loss or damage suffered by Currabubula by reason of the Bank's breach of contract. This is of course providing that it is able to establish that the loss or damage was caused by the Bank's breach and that the loss or damage was not too remote. 943 The loss suffered by Currabubula by reason of the Bank's breach of contract was not too remote. This is a question of fact. It was always plain to the Bank that the security it was taking from Currabubula extended to borrowings by any of the companies in the Group. It must always have been clear to the Bank that in the event that any breach of contract by the Bank would lessen the value of any assets held by any of the Paola Group of Companies which also secured the loan to the Bank, each other of the Paola Group of Companies, and in particular bearing in mind its substantial asset base, Currabubula Holdings, if and when called upon in terms of the interlocking network of guarantees and securities, would suffer a loss equivalent to the amount of such lessening in value of other Group Companies' assets. This is what occurred here. Given the particular unusual circumstances and virtual certainty that Currabubula, as the 'asset rich' branch of the Paola Group, would be called upon to meet Group indebtedness, Currabubula's loss may well be described as having flowed according to the 'usual course of things' from the breach of contract. This is a matter which is not altogether clear. However, bearing in mind the terms of the Group's communications to the Bank of its financial position, difficulties and proposals, clearly evidenced by the Bank's contemporaneous notes, it was, it seems to me, clearly loss which may reasonably be supposed to have been in the contemplation of both parties at the time the February 1990 facility agreement was entered into, as the probable result of the breach. Hence the second limb of Hadley v Baxendale was certainly satisfied. Currabubula in my judgment, suffered a loss in the sum of $909,000, and this because the business of NRS was sold at undervalue. Had the business been sold at market value, NRS would have been obliged to and would have paid that full purchase price to the Bank to procure a discharge of the securities encumbering NRS. In consequence, Currabubula would have had to pay $909,000 less than in fact it was obliged to pay in reducing the Group indebtedness owed to the Bank. A Group indebtedness heavily secured over Currabubula assets. 944 I turn next to deal with the claims pursued qua Durhambone East, Durhambone West, Gabo and U-Bix. Durhambone East 945 Mr Paola conceded in cross-examination that he decided for business considerations related to the financial position of his Group, to sell Durhambone. [T 180.17] 946 At transcript 208, he gave the following evidence under cross-examination: 'Q. . . . was it your view in the middle of 1990 that Durhambone needed to be sold in order to produce money for the company to enable it to continue trading - when I say 'company', I mean your Group? A. Yes. Q. Because I suggest to you, quite apart from commitments to the bank, there were other expenses and commitments that the group had that it was your view the group could not fund out of prospective cash flow? A. Yes. Q. And from your point of view therefore, in mid 1990 the sale of Durhambone was imperative? A. It certainly became that way, yes. Q. Well it became that way by mid 1990, didn't it? A. Yes, it did. Q. And not only imperative, but urgent? A. It became urgent.' 947 In or prior to September 1989, Mr Paola had arranged for a video to be taken of Durhambone referable to the prospective sale of it. Dalgety's were appointed as agents for sale in September 1989. Elders, the primary agent, was appointed to handle the sale in the second half of 1989 and commenced advertising the property for an auction to be held in February 1990. 948 In mid January 1990 Mr Paola told Mr Booth that his strategy was to reduce bank debt to less than $5 million 'as soon as possible' and that assets would be realised until that was achieved. [PX 850] 949 Tested as to what time frame he had in mind, his evidence was: '. . . our budget was to achieve that during the calendar year. Our objective was to achieve it as soon as possible. I felt that it could be done by some time shortly after the mid-year.' [T 95] 950 A further auction date for 4 April 1990 was fixed for the auction. Due to heavy rains that auction date was postponed to 27 May 1990. As at 1 May 1990 Mr Paola advised the Bank that whilst some interest had been shown, no worthwhile offers had as yet been made. Mr Terrey wrote to the Bank on 7 May 1990 also stating that it was not expected that the property would sell and adding: 'However, it is our commitment that this property be sold as soon as possible, ensuring that a realistic price is attained, avoiding at all costs a 'fire sale'. To this end, confidence in the Group's overall financial position will need to be restored in the market place, particularly the country areas'. [PX 1308] 951 In the result there were no bids at the auction of 25 May 1990. Mr Paola however negotiated with interested purchasers after the auction. [T 78.35] 952 At transcript 176-177 Mr Paola gave the following evidence under cross-examination: 'Q. And the fact is, Mr Paola, that unless Durhambone could be sold quickly, looking at the position in April 1990, you saw the group getting itself into a wholly unacceptable financial position later in the year. A. This was our projection. Q. Just try to concentrate on the question, if you could. A. I am. Q. All right. Well, I'll put it again. In April of 1990 your state of mind was that, unless Durhambone could be sold promptly, the group would get itself into a wholly unacceptable financial position later in the year? A. It would - the state of mind was that - Q. I'd prefer you to say whether or not the proposition put to you is an accurate one. A. Not entirely accurate. Q. It's partly accurate, is it? A. Partly accurate. Q. What part is accurate? A. It's accurate that we had these payments coming due, but the pressure was not so great because the vendors concerned I was confident those payments could be delayed. And we had a desire to meet those commitments on time. Q. For the group to get to a position where it required some amount of approximately $10.8 million in bank debt in November 1990 would have been a wholly unacceptable position in your view, wouldn't it A. Well, the bank debt would never have got to that. Q. If it had gone to that, you would have regarded that as wholly unacceptable, wouldn't you? A. I would have regarded it as unacceptable, yes, but it would never have gone to that; it couldn't go to that. Q. You say that because you don't think the bank would have advanced any more money; is that right? A. Well, I couldn't refinance because of the problems and the State Bank certainly wasn't going to go beyond the 7.5. Q. And that means, doesn't it, Mr Paola, that for the group to be in a position where it needed $10.8 million in bank debt would have been wholly unacceptable because it just simply wasn't going to be available, as you believed it? A. At what point in time? Q. In April of 1990 your state of mind was that there just wasn't going to be available something over $10 million in bank facility later in the year? A. Without the sale of Durhambone, yes. Q. And the sale of Durhambone, in your mind, was therefore imperative, I suggest? A. By that time, the sale of Durhambone was starting to become more important, yes. Q. It was imperative in your view, wasn't it? A. It was getting that way, yes . I'm sorry, it was imperative because of the pressure we had from the bank to sell it. Q. It was imperative because, unless it was sold, you'd need more bank debt than was available from the bank; that right, isn't it? A. Well, yes, to a certain extent that's right.' [Emphasis added] 953 Although Mr Paola in the following question and answer appears to have sought to qualify the answer emphasised in the above passage, Mr Paola's evidence as a whole satisfies me that he had seen the sale of Durhambone as urgent from 1989 and that by mid 1990 he saw it as fast becoming imperative to achieve a sale. Without such a sale he realised that, bearing in mind the indebtedness to the Bank and the interest commitments, the Group's financial position would be intolerable. The view Mr Paola had was that the property had to be sold to permit the Group to continue trading. It was Mr Paola's considered view that absent such sale, the Group could not fund out of it's prospective cash flow, it's commitments to the Bank and it's other expenses and commitments. 954 I accept the Bank's submission that the sale of Durhambone was a business decision made by Mr Paola as a result of the financial circumstances of the Group. 955 The plaintiffs' case is that the Bank placed relentless pressure on the Group to sell Durhambone. The Bank, as I understood it's case, does not deny that it pressured the Group to sell Durhambone. Mr Booth conceded this in terms at transcript 512.47. The Bank asserts however that on all the evidence the Bank did no more than press Mr Paola to do that which he had been promising to do since 1989. The Bank's case is further that on no view could it be said that any breach of contract committed by it in February 1990 (assuming for the argument that such breach took place), caused the Durhambone sale. 956 To my mind, the Bank's submissions should be accepted as having substance. The whole of the evidence requires to be viewed when determining the delicate balance in issue - was the Group pushed into the sale by reason of the Bank's freezing decision, or did it sell for it's own commercial reasons? Commercial reasons which importantly included the pressing contractual obligation to repay $1.5million of the facility by 31 May 1990. In my judgment, the evidence establishes that albeit in an environment of sustained pressure from the Bank to sell Durhambone, Mr Paola did not sell by reason of the Bank's breaches of contract earlier referred to, nor by reason of a call-up by the Bank of the facility. In fact what happened was that Mr Paola recognised that there was a pressing need to reduce the Group's indebtedness to the Bank both to honour the term of the facility which required the end of May reduction, and to alleviate the Group's overstretched financial situation. An overstretched financial situation which in Mr Paola's personal view was simply intolerable and had to be redressed. Hence the pressure from the Bank cannot be read as flowing from or caused by the Bank's breaches of contract, nor as a 'withdrawal of the facility', nor as equivalent to a calling up of the facility. 957 An important integer involves the time span. In my judgment, Mr Paola believed that the sale of Durhambone was urgent as far back as 1989 but did not sell the property until mid 1990 because he wished to ensure that he took the time necessary to ensure that he achieved the best price in the prevailing market. 958 An integer in the equation is the absence of any action by the Bank to call up the debt. Such pressure as was exerted was not causally connected to the Bank's February 1990 breach of contract which I have held took place. 959 The fact that, in my judgment, NRS received $909,000 less than it would otherwise have received upon the sale of NRS, does not convert the sale of Durhambone into a sale caused by the Bank's breach of the implied contractual term. Even had the plaintiffs received the additional $909,000 upon the sale of NRS, that would have been far from achieving the reduction in Bank debt below $5 million that in Mr Paola's view was necessary. 960 It is true that Mr Paola's evidence at transcript 92, in relation to his strategy to reduce bank debt to less than $5 million during the first half of 1990, outlined to the Bank in early 1990, was that from February to June 'the plan of reduction . . . swung out of [his] control. The management of the Group was lost. The strategies were to react to events'. 961 In my judgment, the evidence does not support the submission that it was the Bank's breach of contract which caused the sale. The market had been carefully and exhaustively tested over a long period of time. The sale did however take place in an environment of continued pressure by the Bank that the sale occur and that the Group meet the market. And it did take place in an environment in which the Group was known to be in severe financially straitened circumstances. But the suggestion of Mr Paola having lost the management of the Group 'due to the Bank's breach of contract' is rejected. Not only did Mr Paola fail to give evidence that if the proceeds of sale of NRS had been $900,000 higher, he would not have sold Durhambone East, but he in fact gave evidence that in June 1990 he was asking Dalgettys to submit an offer from him in excess of $1.1 million relating to two pastoral properties, in a context of putting properties together for possible sale. This does not bear out the suggestion of 'reacting to events', or a loss of all control. 962 The case in relation to Durhambone East has not been made out. 963 Were I to be wrong in my decision that the case in relation to Durhambone has not been made out, it would be necessary to reach a finding as to the proportion of the total purchase price of 'Durhambone East' attributable to the land content of the sale. This is a matter upon which the parties were divided. Upon a close examination of the subject sales, Mr Spackman gave evidence that the proportion of the total purchase price of Durhambone East attributable to the land content, was in the range of $4.26 and $4.36 million. [See his analysis on page 6 of his second report.] The parties addressed on the basis that this evidence should be regarded as attributing $4.3 million to the land content. 964 In Mr Spackman's first report, he had defined a forced sale as 'the estimated amount that a property should exchange for at the date of valuation between an anxious vendor and an unmotivated buyer after limited exposure to the market'. Those forced sales he said, are generally associated with a mortgagee seeking to recover outstanding loan amounts after taking possession of a property, or may well be a sale to wind up a partnership or family situation. 965 In the case of Durhambone, he applied variable discount factors with approximately 10% in times of better marketing conditions or after the market had dropped and settled with a 15% drop in uneasy or poorer marketing conditions. His calculations were set out on pages 36 and following of his first report. In relation to Durhambone East, his calculations recorded as at 27 July 1990, a market value of $4,760,000 and a forced sale value of $4,050,000. 966 The complications in relation to working through what was the land content of the Durhambone East sale are because the sale involved, in addition to the sale of land content, sale of plant, equipment and the payment of a 'crop preparation' fee to Currabubula. Detail of the agreement between the purchasers and Currabubula and between Currabubula and Limthono Pty Limited are recorded in the Deed dated 21 July 1990 between relevant parties. [PX 4/1444] 967 In the absence of the plaintiffs having adduced any evidence to contradict Mr Spackman's adjusted figures for the land component of Durhambone, it seems to me necessary for the Court to accept Mr Spackman's adjustments in relation to the land content of that sale. Hence, in my judgment, any loss which may have occurred in relation to the sale of Durhambone East, would have to take into account the component of the total purchase price which is properly to be allocated to the purchase of the land and the improvements at the figure $4.3 million. Accepting Mr Spackman's market value at $4,760,000, the loss on a 'forced sale' basis becomes $460,000.00. 968 Mr Spackman did in his second report, give evidence that valuation is, by its very nature, imprecise and that therefore there is a degree of margin and to the effect that the net result of the sale of Durhambone East falls within an acceptable margin of his valuation figures - this being, on his evidence, generally within 10 percent, possibly more in a poor declining market. He notes that the sale took place at a time of market uncertainty as prospects for wheat and wool, two of the major influences on the Merrywinebone/Rowena property markets, were deteriorating and eventually dropped dramatically after the sale and did not improve again for at least six years. 969 In those circumstances, Mr Spackman's evidence would suggest that no loss was sustained on the basis here of any 'forced sale'. As this was the only valuation evidence called, it seems to me that it must be accepted. 970 I note that although the plaintiffs did not call evidence from a valuer in contradiction of Mr Spackman's report, the plaintiffs sought to rely on a bank valuation [Exhibit PX 2/710], being a valuation of Durhambone by Mr Miller at $10 million, excluding plant and equipment, which valuation was dated 16 November 1989. 971 The plaintiffs' reliance upon that valuation runs into grave evidentiary difficulties. The $10 million figure in 1989 related to the whole of Durhambone and without valuation evidence in this regard, it cannot be translated into a 1990 figure qua Durhambone East. 972 Further, there was no attempt made by the plaintiffs' counsel in cross-examination to contradict Mr Spackman in terms of putting this 1989 valuation to him and suggesting that it was inconsistent with his valuation or indicated that the value in July 1990 should be different to that which Mr Spackman had stated it was in his report. Different Considerations Raised as Between the NRS and the Durhambone East Sales 973 The sale of NRS and the sale of Durhambone East on the evidence, raise quite different considerations. The circumstances in which the sale of NRS took place and the loss of confidence in NRS as a business have a real and obvious and direct connection with the Bank's breach of contract. On the other hand, the sale of Durhambone, has no such real, obvious or clear connection with the Bank's breach of contract. I regard the sale of Durhambone on the evidence, as a necessary event bearing in mind the Paola Group's financial position recognised from late 1989 and becoming steadily more urgent and critical into mid-1990. Durhambone West 974 The plaintiffs' claim here is that, had the Bank not exerted the pressure it did on Currabubula, Durhambone West would have been sold in one lot with Durhambone East. The basis for the claim is that Durhambone West was actually sold on 16 June 1994 for a purchase price of $1.304 million to the Harris Family. The plaintiffs submit that Mr Spackman's comment as to that value was that it appeared to reflect 'a distressed market as well as reflecting the very poor climatic conditions at the time of sale'. The plaintiffs point out that Mr Spackman's valuation did not provide a valuation for Durhambone West as at July 1990. The plaintiffs submit that Mr Spackman's valuation of Durhambone West in May 1989, was $2.5 million market value or $2.250 million on a forced sale basis. 975 In consequence, the plaintiffs submit that the pressure to sell Durhambone East which is said to have led to a splitting of the Durhambone aggregation, prima facie caused the Group not to recover the proper value of Durhambone West as it was in May 1989, even giving some discount for the change in the rural economy between that time and July 1990. 976 I reject the submission that the sale of Durhambone West was caused by the Bank's breach of contract. It had been proposed to sell the whole of Durhambone from late 1989/early 1990. It was not the Bank's breach of contract which caused the splitting of the Durhambone aggregation. The factors earlier referred to which led to the sale of Durhambone East were the same factors as led to the splitting of the Durhambone aggregation. 977 I accept the defendant's further submission that there is no evidence to support the claim to a 'forced sale' loss. The Court is unable, in the absence of evidence, to fix some figure to give 'some discount for the change in the rural economy between May 1989 and July 1990'. The Court cannot, in the absence of evidence, extrapolate from a May 1989 valuation of $2.5 million to some other valuation at July 1990. 978 In any event, I reject the plaintiffs' claim that the breach of contract caused any loss on the sale of Durhambone West. The chain of causation breaks down at threshold because I do not accept the proposition that the pressure to sell Durhambone was the cause of the splitting of the Durhambone aggregation. Mr Paola had to sell Durhambone for reasons earlier set out, as a business decision as a result of the financial circumstances of the Group and in a context in which it was necessary for Durhambone to be sold promptly or the Group would get itself into a wholly unacceptable financial position later in the year. That was the reason why the splitting occurred. Gabo 979 The plaintiffs' loss claimed on the sale of Gabo, derives from the fact that it was sold on 30 August 1991 for $3.5 million, including the then growing crops. The submission is that even on Mr Spackman's figures, this was below the fair market value which he found to be $3.9 million as at 30 August 1991. Accordingly, the plaintiffs submit that since the sale of Gabo was required by the Group in order to meet the demands of the Bank to repay the facilities, due to the shortfall in the sale of Durhambone East and the inability to sell Durhambone East and West as an aggregation, the plaintiffs pursue an entitlement to $400,000 for the sale of Gabo. The plaintiffs note again that in valuing Gabo, Mr Spackman excluded plant, equipment and growing crops. 980 This property had been on the market since at least February 1991. The Bank's actions of which the plaintiffs' complain occurred in February 1990. In my judgment, it cannot be said that the Gabo sale was caused by the Bank's breach of contract in February 1990 or by the events of February 1990. U-Bix 981 The plaintiffs' claim here is that refusing to allow Currabubula to take $390,000 from the proceeds of sale of Durhambone East, breached the Bank's promise that it would provide the financial accommodation promised in February 1990 up to $8.5 million for as long as was desired by the Group, subject to the limitations set out in the agreement. 982 The case is that the sale of Durhambone East was the result of a breach of contract by the Bank. That this was a continuing breach still operative in August and September 1990, which breach was comprised of the Bank failing to advance further funds and to honour the facility agreement. 983 The plaintiffs submit that the Court should categorise the refusal to provide the $390,000 sum from the proceeds of sale as a breach of the facility agreement. 984 To my mind, the U-Bix claim fails at threshold. Durhambone was part of the security furnished by the Group to the Bank to cover indebtedness of any of the Group companies. Where the secured creditor is approached to release any part of the security to the mortgagor, absent the secured creditor being paid out in its entirety upon the sale of the subject property, the secured creditor has a contractual entitlement to retain the whole of the proceeds of realisation of the portion of the security released. In substance, the mortgagor must be seen as simply requesting a variation to the contract. The mortgagee has no obligation to agree to such a request. The defendant was within its contractual entitlement in agreeing to release Durhambone East from its bank of security properties if, and only if, the whole of the proceeds of Durhambone East were paid to the Bank in partial discharge of the antecedent indebtedness. That the Bank here agreed to some small segments of the net proceeds of the sale of Durhambone East being made available to the Group, is simply a reflection of the Bank's entitlement to make that concession. 985 Hence, I accept the defendant's submission that the agreement between the parties contained an express condition that the facilities would be secured by registered mortgages over Durhambone; that Durhambone was by far the most valuable asset securing the facilities; that the plaintiffs could only obtain a variation to the agreement if the Bank consented to the variation; and that where the variation sought by the plaintiffs was the discharge of those mortgages, the Bank was entitled to impose a condition on its agreement to the variation, which required all the proceeds of sale of Durhambone to be paid to it. 986 Thus the refusal by the Bank to release the sum of $390,000 was not a breach of contract. 987 Even if the refusal to release the moneys had been a breach of contract, the plaintiffs face insuperable obstacles to success on the U-Bix claim. 988 I accept the Bank's submission that the losses claimed by the plaintiffs here do not come within either branch of the rule in Hadley v Baxendale (1854) 9 Exch 341. 989 Mr M.J. Lorimer, a Director of Grant Samuels & Associates, who is an investment banker and corporate adviser, gave evidence that from June 1991 to June 1993 the price of the U-Bix shares had risen rapidly. On 28 June 1991, the share price was $2.00 per share. On 28 June 1993, trading closed at a price of $9.35 per share, this representing an increase of 467.5% over the two year period or approximately 216% per annum. 990 On his evidence, by comparison the New Zealand Share Market did not grow as quickly. The NZSE40 Capital Index represented approximately 97% by market capitalisation of all the companies listed on the New Zealand Stock Exchange. The movement on that index, on Mr Samuel's evidence, is widely quoted and generally accepted as approximate for the movement in the New Zealand Sharemarket. On Mr Lorimer's evidence, on 28 June 1991 the NZSE40 Capital Index closed at 1,434.98 and on 28 June 1993 closed at 1667.54. This represents an increase of 15.9% over the same two year period or less than 8% per annum. 991 On Mr Lorimer's evidence, he having practiced as a merchant banker for at least 15 years including practice in the field of investment advice, the movement in the share price of U-Bix was exceptional and demonstrably well outside any expectation that the shares would rise in value through general market conditions. Mr Lorimer's evidence was: ' Based upon my knowledge and experience, it is my opinion that a buyer of shares in U-Bix in 1990 would have had no reason to expect that the share price would increase at an annual rate 27 times that of the market as measured by the NZSE capital index.' 992 In my view, the lost profits could not be said to 'arise naturally' from the failure to release the subject funds. 993 Damages for lost profit on share transactions, in particular of the magnitude of $20 to $30 million, I accept could not have been within the contemplation of any party at the time the facility agreement was entered into. There is no evidence or allegation of any communication between the parties which would then attract the second limb of Hadley v Baxendale . 994 The claim in respect of U-Bix shares is a claim for deprivation of a commercial opportunity. Damages must therefore be quantified by reference to the Court's assessment of the prospects of success of that opportunity. [ Sellars v Adelaide Petroleum NL (1994) 179 CLR 332] The alleged commercial opportunity was the opportunity to buy and sell U-Bix shares and to realise a profit. 995 The factors which have to be taken into consideration in determining whether or not the shares would have been purchased, include the following: (i) There was clearly no concluded agreement, or even an agreement in principle, as at the time of the Durhambone East settlement in early September. The letter of 12 September 1990 [PX 1614] shows that there were still unresolved matters. Mr Paola could not, at transcript 197.40, shed any light on what they were. Moreover, the vendors were still enquiring about Mr Paola's companies' credit. The upshot was, I accept, that a straight out sale was ruled out. [PX 1726] (ii) The vendor first offered the shares for sale at New Zealand $1.90 when they were selling on market for New Zealand $1.45. (iii) The vendor then in November 1990, offered an option to purchase the shares at New Zealand $2.00 when they were selling on market for New Zealand $1.30. (iv) The offers made by the plaintiff in 1991 to purchase the shares were consistently less than their market value. (v) The owner of the shares stated that it would only sell for a price that was equivalent to the market value. [PX 1945] (vi) The owner of the shares did not sell until an offer was made by the Maori Development Corporation, equivalent to the market value. As the Development Corporation had been Mr Paola's partner in the purchase negotiations, I accept that it should be assumed, in the absence of evidence being called from the Development Corporation, that Mr Paola had the opportunity to join in the final and successful bid at New Zealand $2.00 but declined to do so because the price was too high. 996 I further accept the Bank's submission that the factors which would have to be taken into account concerning a sale of the shares, assuming they had been purchased by the plaintiffs, would include the following: (i) There was no evidence at all that Mr Paola had the intention to or would have sold the U-Bix shares whilst the market price was high, or at all. The fact that evidence was not led from Mr Paola on this topic gives rise to the inference that he could not have given evidence that would have assisted his case. In those circumstances, I accept that it cannot be concluded that he has established that there was any, or at least any significant, prospect of earning the type of profit he claims on the sale of the U-Bix shares. Such material as there is, suggests I accept, that he was going to be a long term investor. The contention that he would have sold while the market price was high has been entirely left in the realm of speculation. (ii) The evidence does not establish that the holding costs of the shares would have been met from dividends alone. The existence of any firm arrangement for the payment of consultancy fees was not proved. (iii) I do not accept that the plaintiffs have proved that there would have been dividends/consultancy fees sufficient to take up rights, issues and the like. (iv) The reason assumed by Mr Hardy but not supported by evidence from Mr Paola, for the sale of shares - was that Mr Creighton was to resign and that a new capital raising was to be put into effect. The Paola Group relied upon Mr Paola's contention that he had a close relationship with Mr Creighton who was the Chief Executive of U-Bix and who sought Mr Paola's advice on company matters. Mr Paola's case was that he was aware in early 1993 that Mr Creighton was planning to leave the company as this was announced in the June 1993 Annual Report. This was a reason why, according to Mr Hardy's report, Mr Paola would have sold the shares in the relevant period. To my mind, the evidence does not sustain the proposition that Mr Paola would have sold the shares for reasons relating to Mr Creighton. Had Mr Paola purchased the subject shareholding, no inference can be drawn that Mr Creighton would have resigned anyway, Mr Paola on this hypothesis being on the Board, and their relations being good. (v) The turnover of shares was approximately $2.5million each six months and if an additional $3.5million shares had been sold within any six month period, it would have led to share prices being considerably lower. 997 There is further difficulty in relation to the U-Bix claim. The losses would in any event, only be available to Currabubula and Paola Holdings, the latter having become a party to the proceedings by the 29 September 1997 order, after the expiration of the limitation period. 998 The negotiations were being carried on by Mr Paola on behalf of a company to be formed. That company, Leman Pty Limited, was acquired as a shelf company on 14 September 1990 when 99 of the issued shares were transferred to Paola Holdings and the remaining share was transferred to Currabubula Holdings on trust for Paola Holdings. 999 I accept the Bank's submission that any cause of action in relation to a loss of opportunity to make a profit on the U-Bix shares arose on 4 September 1990 when the Bank, in its letter, unequivocally refused to release the $390,000 sum from the proceeds of sale of Durhambone. That request had been made by Currabubula (as the owner of Durhambone), and if the failure to release those funds was a breach of the agreement with the Bank, then Currabubula was the party entitled to damages. As it acquired 1% of Leman Pty Limited, any damages to which it would be entitled would only be 1% of what would otherwise have been payable by way of compensation. 1000 I accept the Bank's submission that the refusal to release the funds having taken place on 4 September 1990, any cause of action which Paola Holdings may have had, would have expired on 4 September 1996 which was before Paola Holdings was added as a plaintiff and would therefore be statute barred. 1001 The Bank also submitted that the Paola Group had not made good on the evidence the proposition that the refusal by the Bank at the beginning of September 1990 to release $390,000 to the Group was the reason why the subject shares could not be purchased. In this regard, the Bank relied upon the evidence that immediately after the sale of Durhambone had been completed, Mr Paola's solicitors had continued to negotiate for and work on the documentation for the sale of the U-Bix shares and that, as Mr Paola conceded, he would not have continued to incur legal costs if he had not thought he could obtain the necessary funds. [T205.5] The Bank also relies upon the evidence that Mr Paola continued to negotiate for the purchase of the shares throughout the remainder of 1990 and up to the middle of 1991. To my mind, there is substance in the Bank's submission that this conduct by Mr Paola is inconsistent with his assertion that the refusal by the Bank to release the $390,000 to him at the beginning of September 1990 was the reason why he could not purchase the shares. It is unnecessary however for the reasons earlier given that I reach a decision on whether as a matter of fact Mr Paola had the funds available for the deposit. He had of course recently purchased a property 'Cassels' for $200,000 which was not secured to the Bank. [T 199.1] That property may have been available to sell or mortgage in order to raise funds. Also, Mr Paola did concede that as late as September 1990, there was scope for additional security to be taken over Gabo. 1002 For all these reasons, the claim in respect of the U-Bix shares fails. Loss of Opportunity to Refinance 1003 The plaintiffs assert that loss of opportunity to refinance may be claimed where the Bank had no right to freeze the facility, or if it be found that it did have such a right, that there was either a binding contractual provision or alternatively, an estoppel to the effect that the plaintiffs would be granted time to refinance. 1004 To my mind, the plaintiffs' claim to loss of opportunity to refinance fails, there being no evidence to the effect that the freezing of the accounts prevented any opportunity to refinance or prevented any refinancing. Hence, the claim to damages for 'loss of opportunity' simply fails at a threshold level. Had Mr Paola been in a position to give evidence that the freezing of the accounts had prevented refinancing, no doubt such evidence would have been given. 1005 It is convenient to turn next to the Defamation case. Dealing with the Case in Defamation 1006 In paragraphs 40 and 41 of the amended summons, Currabubula Holdings seeks damages for defamation. No claim is made on this cause of action by any other company. 1007 Until the final day of the hearing, the amended summons had relied upon only one bank statement, issued to Currabubula Holdings, bearing the notation 'in liq' upon it. That statement was said to relate to account number 00183734 and to have been published on 14 February 1990. At the conclusion of the hearing on 22 February 1999, leave was granted to Currabubula Holdings to amend the second schedule to the amended summons by deleting the reference to the 14 February 1990 statement and by substituting references to seven bank statements issued to Currabubula Holdings on account number 29-0674-00 said to have been published on 21, 23 and 28 February 1990 and on 7, 14, 21 and 28 March 1990. 1008 Currabubula Holdings also presses its claim in relation to the publication of other bank statements issued to NRS, ABE Holdings and Pyojit. 1009 The statements in question are: NRS (Gunnedah) - Account 670983.00 - statement for 16 February 1990 NRS (Narrabri) - Account 690181-00 - statements for 16 and 23 February and 2, 6 March 1990 NRS (Tamworth) - Account 290420-00 - statements for 16 February and for 7, 14 and 21 March 1990. ABE (Holdings) - Account 29-0674-00 - statement for 21 February 1990 Pyojit - Account 64113900 - statements for 15 and 22 February 1990 1010 The Bank does not dispute the sending of the statements. They were received at the general office in Tamworth of NRS. This was the general office of NRS. It was also the general office at which Mr Plante worked and from which, as Group Secretary, he carried out his responsibilities on behalf of Group companies. The Bank routinely communicated with Group companies by sending correspondence and facsimiles to this office. The 1 February 1990 facility letter was, for example, sent to this office. The primary method of communication adopted by the Bank and the Group was by using facsimile. [T482-483] It will be recalled that Mr Giblet had picked up a handful of statements, all of which had the 'in liq' notation. Ms Hamblin gave evidence which I accept that Mr Taylor, Mr Thornhill and Ms Sykes as well as herself looked at the statements. There was only the one facsimile machine in the fax room which 'was in the centre of the office'. Her evidence was that this was an area where, all the paperwork went to because a lot of faxes namely orders, were received and sent. Her evidence was that the statements 'were always to be left there'. 1011 The Bank then submits that the only persons who saw the bank statements were Paola Group employees, each of whom knew or could be expected to know or be told, that the company was not in liquidation. The Bank submits that Mr Paola could have sought written confirmation from the Bank that it was the loan, rather than the company which was in liquidation, if he considered the statement created a difficulty. In those circumstances, the Bank submits that it was unlikely in the extreme that Currabubula would suffer any harm as a result of the publication and that the Bank is entitled to the defence under section 13 of the Defamation Act . 1012 The Bank then relies upon the fact that ABE Fax had in 1989, been placed in receivership which the Bank suggests is similar to liquidation and had its corporate title noted accordingly. The Bank submits that Mr Paola's proposal of 12 February 1990 would have resulted in similar steps in relation to ABE Holdings. These, the Bank submits, did not appear to cause Mr Paola or his Group any concern and yet the Bank submits they were clear indications to all who became aware of them, both inside and outside the Group, of insolvency within the Group. The Bank's submission is that in the light of Mr Paola's lack of sensitivity to these, the Bank could not reasonably have been expected to contemplate that marking bank statements which were purely for the Group's use with an indication that the loans were in liquidation, would cause Currabubula to suffer any harm. 1013 It is common ground that the statements complained of had the notation 'in liq' at the foot of the balance column of each statement. Examples of statements complained of are included as Appendix 10 to this Judgment. 1014 In a number of instances, the statements were addressed to the secretary of the company in whose name the account was operated. In some instances, the statements were addressed to 'the proprietors' of the company in whose name the account was operated. In certain instances the statements were addressed 'the directors' of the company in question. In a number of cases, the words 'Please hold statements' or 'Hold statements' appeared in the box showing the addresses, as in: 'The Secretary Northern Rural Services Pty Ltd Please Hold Statements Gunnedah Branch NSW 2030' 1015 The imputations said to arise from the sending of the bank statements are: (1) that Currabubula was insolvent and (2) that a liquidator had been appointed to Currabubula - paragraph 40 of the second further amended summons. 1016 Currabubula alleges that it suffered loss of business reputation and loss of cash flow and dividend income and a reduction in the value of its shareholding in Paola Holdings. 1017 The plaintiffs' submission is that the sending of the statements had a significant effect on the fortunes of the Paola Group. Mr Paola's evidence at transcript 144 to 146 has already been set out in the judgment. He had never seen 'in liq' on a bank statement before and was stunned by reading those words on the bank statements. He said to those whom he spoke about the statements that the company was not in fact in liquidation. Mr Giblet, as has already been mentioned, said to Mr Paola: 'Anyone can see you are in liquidation and that the Bank does not lie'. [T 55] 1018 Ms Hamblin's evidence in relation to being shown the bank statements has also been set out. As soon as she saw the bank statements, she believed that the company was in liquidation. The statements seemed very confusing to her and to her observation Mr Plante appeared as confused as she was. She counted 'the trouble starting' when the bank statements came out with the words 'in liq' on them and people started looking elsewhere for employment. She gave evidence that she had not observed any difficulties with the NRS business insofar as she was involved in answering telephones or otherwise, prior to the bank statements arriving with the 'in liq' notations. Mr Taylor recalled staff morale and confidence in the business of NRS being 'further damaged' when, in the day or so after he was notified of cheques being dishonoured, the bank statements were sent to NRS with the 'in liq' notations on their face. Employees such as Mr Plante said to him: "NRS shouldn't be in liquidation" and Mr Taylor, following receipt of the bank statements and recognising that cheques had been dishonoured, said to all of the staff: "It looks like it's all over, I suggest you all get another job if you can. The company is in liquidation ". Mr Taylor, as a result of the bank statements and the dishonouring of cheques, formed the view that NRS was in fact in liquidation and that the business had ceased. 1019 These reactions to the notations and the evidence of what then occurred are relevant to questions of causation and loss. The Court itself decides, however, whether the words used convey the imputations alleged. 1020 The essential elements of the tort of defamation are that defamatory words, of and concerning the plaintiff, have been published to third parties. I accept the plaintiffs' submission that there is little doubt that, if the words otherwise can bear the meaning that NRS, for example, was bankrupt or in liquidation, then this was defamatory, as it imputes a lack of business acumen to the entity. Shepherd v Whittaker (1875) LR 10 CP 502; Aspro Travel Ltd v Owners Abroad Group plc [1995] 4 All ER 728. 1021 It is of course the case that with regard to a company 'it is impossible to lay down an exhaustive rule as to what would be a libel on [it]. Cf Lord Esher M R in South Hetton Coal Co Ltd v North-Eastern News Association Ltd [1894] 1 QB 133 at page 139. 1022 At page 142, Lord Esher makes the point that it is clear that a corporation at common law may maintain an action for a libel by which its property is injured. 1023 Lord Esher goes on to make the point that statements may be made with regard to the mode of carrying on business of a firm or company, such as to lead people of ordinary sense to the opinion that the firm or company conducts their business badly and inefficiently. If so, his Lordship says: 'the law will be the same in their case as in that of an individual, and the statement will be libellous'. 1024 At page 141, Lord Esher makes the point that the words complained of must attack the corporation or company in the method of conducting its affairs, must accuse it of fraud or mismanagement, or must attack its financial position. 1025 Kay LJ in South Hetten at page 145, makes the point that the property or business of a trading corporation may be injured by defamatory statements, whether written or oral. Also that a trading corporation has a trading character, the defamation of which may ruin it: 'If, for example, an individual, a private partnership, or a corporation were carrying on a trading business, and someone wrote and published an untrue statement that they were insolvent, or any other statement which might destroy their credit or paralyse their business, it is obvious that such a statement, if untrue, would be a libel.' 1026 It is not necessary for the statement to be defamatory that there be any further imputation or implication that the directors are trading improperly whilst the company is insolvent or have contributed in some way to the company's insolvency. As Schiemann LJ observed in Aspro : ' . . . it can be defamatory to say of a man that he is insolvent or cannot or will not pay his debts or has delayed paying his debts . . . This is so notwithstanding that it requires no ingenuity to contemplate circumstances in which a man's insolvency is not attributable to any fault on his part . . . such an allegation would tend to injure a man's credit which the law protects as part of his reputation. ' [1995 4 All ER at 733] 1027 The Bank submits that the placing of the words 'in liq' underneath the balance of the account, as opposed to alongside the name of the company, makes plain that the natural and ordinary meaning of the words as here used, was that the loan, and not the company, was in liquidation. In short, the Bank submits that the material does not convey the imputations alleged and is not defamatory. 1028 On my finding, the words used convey each of the imputations complained of. The question is one for the Court's determination. An ordinary reasonable reader would come to the conclusion that both imputations were conveyed by the publications. Had this been a case with a jury, my finding would have been that it was clearly open to a jury to hold that reasonable persons would understand the words complained of in a defamatory sense. 1029 The bank statements were formal documents issued to the companies in question. In finding that the words used convey the imputations complained of, I rely upon the ordinary natural meaning of the words 'in liquidation' as used in relation to a company. As to the placement of the notation on the statements, I note that there is no natural tethering of the notation to the figures shown in the 'balance' column, nor necessarily to that column itself. The bank statements appear to have been prepared by a Bank employee instructed to include the words 'in liq' upon the bank statements, the instruction having been carried out by a prominent capitalised notation placed at the logical end of the five columns dealing with 'Date', 'Particulars', 'Debit', 'Credit' and 'Balance'. 1030 In relation to the question of the publishing of the statements, the Bank's submission is that there was no evidence of publication beyond the persons in the relevant Group offices. Currabubula on the other hand, submits that the statements were relevantly published to the staff of the companies who received the faxes as there was no attempt, it is said, to mark the letters as being confidential or private to, for example, the Board. In this regard, Currabubula Holdings cites Pullman v Walter Hill & Co [1891] 1 QB 524 at 527 where Lord Esher MR said : 'The first question is, whether, assuming the letter to contain defamatory matter, there has been a publication of it. What is the meaning of "publication"? The making known the defamatory matter after it has been written to some person other than the person of whom it is written. If the statement is sent straight to the person of whom it is written, there is no publication of it; for you cannot publish a libel of a man to himself. If there was no publication, the question whether the occasion was privileged does not arise. If a letter is not communicated to anyone but the person to whom it is written, there is no publication of it. And, if the writer of a letter locks it up in his own desk, and a thief comes and breaks open the desk and takes away the letter and makes it's contents known, I should say that would not be a publication. If the writer of a letter shows it to his own clerk in order that the clerk may copy it for him, is that a publication of the letter? Certainly it is showing it to a third person; the writer cannot say to the person to whom the letter is addressed, "I have shown it to you and to no one else". I cannot, therefore, feel any doubt that, if the writer of a letter shows it to any person other than the person to whom it is written, he publishes it . If he wishes not to publish it, he must, so far as he possibly can, keep it to himself, or he must send it himself straight to the person to whom it is written. There was, therefore, in this case a publication to the type-writer.' [Emphasis added] 1031 Pullman involved a libel contained in a letter respecting the plaintiffs, two of the members of a partnership, written on behalf of the defendants, a limited company, and sent by post in an envelope addressed to the firm. The writer did not know that there were other partners in the firm. The letter was dictated by the managing director of the defendants to a clerk, who took down the words in shorthand and then wrote them out in full by means of a 'type-writing machine'. The letter thus written, was copied by an office boy in a copying-press. When it reached its destination, it was in the ordinary course of business opened by a clerk of the firm, and was read by two other clerks. The Court of Appeal, reversing the judgment of the trial judge, held that the letter must be taken to have been published both to the plaintiffs' clerks and the defendants' clerks and that neither occasion was privileged. 1032 In dealing further with the question of publication, Lord Esher said: 'The letter was not directed to the plaintiffs in their individual capacity; it was directed to a firm of which they were members. The senders of the letter no doubt believed that it would go to the plaintiffs; but it was directed to a firm. When the letter arrived it was opened by a clerk in the employment of the plaintiffs' firm, and was seen by three of the clerks in their office . If the letter had been directed to the plaintiffs in their private capacity, in all probability it would not have been opened by a clerk. But mercantile firms and large tradesmen generally depute some clerk to open business letters addressed to them . The sender of the letter had put it out of his own control, and he had directed it in such a manner that it might possibly be opened by a clerk of the firm to which it was addressed. I agree that under such circumstances there was a publication of the letter by the sender of it, and in this case also the occasion was not privileged for the same reasons as in the former case . . .' [Emphasis added] 1033 Lopes LJ said, inter alia: 'The first question is whether there has been any publication of the alleged libel. What is meant by publication? The communication of the defamatory matter to a third person. Here a communication was made by the defendants' managing director to the type-writer. Moreover, the letter was directed to the plaintiffs' firm and was opened by one of their clerks. The sender might have written "Private" outside it, in order to prevent its being opened by a clerk. The defendants placed the letter out of their own control, and took no means to prevent its being opened by the plaintiffs' clerks . In my opinion therefore, there was a publication of the letter, not only to the typewriter, but also to the clerks of the plaintiffs' firm . . . ' [Emphasis added] [1891 1 QB at 529] 1034 Theaker v Richardson [1962] 1 WLR 151, was a case where the plaintiff and the defendant were both members of their local district council and candidates in an imminent council election. As a result of ill-feeling between them, the defendant wrote an abusive letter to the plaintiff in highly defamatory language. The letter was typed by the defendant, placed in a manilla business envelope and sealed by gumming down the flap, which was further secured with Sellotape. The envelope was addressed to the plaintiff in her married name with the addition of the appellation 'Coun.' before the word 'Mrs'. The defendant himself put the letter through the letter-box of the house where the plaintiff lived with her husband and married daughter. Shortly afterwards the plaintiff's husband entered the house, saw the letter on the mat and opened it, thinking it was an election address. 1035 Harman LJ said: 'A number of cases on publication was cited to us but each obviously depends on its own facts and no one is very pertinent to the instant case. In the leading case, Delacroix v Thevenot , the plaintiff's success depended on the facts that the libel was addressed to his place of business and that the defendant knew that a clerk employed there read his master's letters. To a similar effect are Pullman v Hill & Co and Gomersall v Davies, . . . In Huth v Huth the publication was said to be to the butler who opened the letter out of mere inquisitiveness, and the claim failed because this was a breach of the butler's duty not to be anticipated by the defendant. In Sharp v Skues the jury answered in the negative a question as to the knowledge on the defendant's part of the likelihood of the letter being opened by a clerk or partner of the plaintiff's. Lord Cozens - Hardy M.R. said this: "It would be a publication if the defendant intended the letter to be opened by a clerk or some third person not the plaintiff, or if to the defendant's knowledge it would be opened by a clerk; but the jury had negatived this in the clearest terms, and under these circumstances it was impossible to hold that some act done by a partner or a clerk of the plaintiff by his direction and for his own convenience when absent from the office could be a publication by the defendant under circumstances which the jury have found, in answer to question 2, the defendant knew could not possibly happen". [1962 1 WLR at page 157] 1036 Harman LJ continued at page 157: 'It thus appears that the answer to the question of publication of a liable contained in a letter will depend on the state of the defendant's knowledge, either proved or inferred , of the conditions likely to prevail in the place to which the liable is destined.' [Emphasis added] 1037 In the present case it was customary for the Bank to communicate with the subject Group by facsimile. I infer that the Bank would assume that the facsimile machine in the main office to which the bank statements were sent, would be manned by employees and not necessarily by the secretary or directors of the relevant company. 1038 On the Bank's submissions, the evidence shows that the bank statements were seen only by Mr Paola, who knew that the company was not in liquidation; by Mr Taylor who was told by Mr Paola and by Mr Plante that the company was not in liquidation; by Mr Giblet who was told by Mr Paola that the company was not in liquidation, by Mr Terrey, by Mr Plante who was familiar with liquidations and 'all things meant by liquidations' and who, on the Bank's submissions, presumably knew that the company was not in liquidation and by Ms Hamblin who the Bank submits 'knew that the company was not in liquidation which was confirmed to her by Mr Plante'. 1039 Hence, the Bank submits that except for Mr Terrey, the evidence shows that the persons who saw the statement either knew that the company was not in liquidation or were told by its senior executives that it was not in liquidation. 1040 The Bank then submits that there is no evidence that there was any publication of the defamatory material beyond those persons and importantly that there is no evidence of publication or republication to creditors, suppliers or the community. 1041 I reject this submission. I have generally dealt with the factual issue above. The quotation set out in paragraph 812 above, is taken from Ley v Hamilton (1935) 153 LT 384 at page 386, a defamation case where Lord Atkin stated that 'It is precisely because the "real" damage cannot be ascertained and established that the damages are at large. It is impossible to track the scandal . . .'. 1042 The Bank submits that publication was extremely restricted and that there is no evidence of damage, either special damage or otherwise and that no damages should therefore be awarded for defamation. I note in particular in relation to the submission that publication was limited, Mr Hardy's evidence in relation to the rapidity with which such news travels in country areas and to the evidence given by Ms Hamblin. Damages are dealt with below. 1043 I turn to examine the defences relied upon. 1044 Section 13 of the Defamation Act (1974) NSW provides: 'It is a defence that the circumstances of the publication of the matter complained of were such that the person defamed was not likely to suffer harm' . 1045 The section was generally examined by Moffit P in Chappell v Mirror Newspapers Ltd (1984) AustTortsR 80-691 and later by the Court of Appeal in King & Mergen Holdings Pty Ltd v McKenzie (1991) 24 NSWLR 305. 1046 In Chappell , Moffit P said: 'The quality of the circumstances of the publication must be the factor which renders it unlikely that the person defamed will suffer harm. Whereas a defamatory imputation is actionable per se, without damage (s 8-9), so that a defendant cannot defeat an action even if he were able to prove that there was no actual damage, the defence under s 13 is directed entirely to the circumstances of the publication. It does not change the general law so the defendant can raise an issue on the probabilities whether there is in fact harm caused to the person defamed. The issue is directed to the quality of the publication in respect of its proneness to cause harm. The words of s 13 are "was not likely to suffer harm" and "did not suffer harm" (meaning "probably did not suffer harm"). The quality of the circumstances of the publication determines at the moment of publication whether it is or is not actionable . Actionability does not depend upon an inquiry as to what thereafter happens and in particular whether or not harm in fact probably resulted from the publication. The defence depends entirely on the causative potency of the circumstances "of the publication" to produce immunity from harm. Hence it is not sufficient to establish a s 13 defence that a defendant merely proves "in all the circumstances" that it is unlikely the plaintiff will suffer harm and even less that the plaintiff has not in fact suffered harm. To regard s 13 as providing a defence in either of these cases would in a practical sense destroy the fundamental concept of the law of defamation earlier referred to. There would be substituted in any action for defamation no more than a rebuttable presumption of fact that damage flows from a defamatory imputation.' [At page 68947] Moffit P went on to discuss the purpose and operation of the section: The apparent purpose of s 13 and its predecessors, despite some difference in their terms and application, was to give a defence to and hence discourage actions for trivial defamation. This will arise in particular where there is a limited publication. This will more often be the case where the defamation is oral but will sometimes extend to a written defamation. Examples of written defamatory imputations of trivial impact published by letter or circular to a limited or particular class of persons can be readily thought of. . . . there should not be substituted for the circumstances "of the publication" the circumstances "concerning the defamatory imputation" or "concerning the person defamed". Further, the circumstances are "of" the publication and not "concerning" the publication. The word "of" more directly ties the circumstances to the acts of publication. "The circumstances of the publication" must admit some context, but that context must be such as will serve to define the circumstances of the publication and their relevant operation in relation to the likelihood of harm. There cannot be admitted under their umbrella circumstances which are not related to the publication. The second matter is that the circumstances as defined by the section must be the factors which operate to establish that the person defamed is not likely to suffer harm. The words "such as" require this causal relationship to exist in order that the defence be made out. This causal relationship is not established if it is other circumstances, not part of the context of the circumstances of the publication earlier referred to, which have to be relied on to produce likely immunity from harm, if such likely immunity would not have existed without these extraneous circumstances.' [At page 68, 947-8] 1047 In King & Mergen the defendant had relied on s 13 on the ground that the defamatory material was published to persons previously aware of its contents. The defendant submitted that, as a result, those persons to whom the material was published would not have taken a different view of the plaintiff after publication and so he was not likely to suffer harm as a result of the publication. The Court of Appeal considered that the defence should have gone to the jury on this basis. Mahoney JA (with whom Clarke JA and Meagher JA agreed on this point) stated: . . . the question considered and decided in Chappell's case was the meaning of "the circumstances of the publication . . ." and what was decided was that those circumstances did not include the fact that, prior to the publiction, the plaintiff already had a bad reputation. In the present case, the defendants did not suggest - at least there was no agreement at the trial - that the plaintiff, before publication of the notice, had a bad reputation. The nub of the defendants' case was that, prior to the publication, the persons to whom the defamatory matter was published already knew the material that was contained in the notice. The contention was that, because of this, they would not have thought differently of the plaintiff after the publication and so he was not likely to suffer harm. On this approach, the defendants' case under s 13 went to (to adapt the language of Moffitt P) "some quality concerning" the persons to whom the defamatory matter was published and not "some quality concerning" the plaintiff of whom it was published. Section 13 was therefore available in this case Mahoney JA then went on to consider whether this distinction as made in Chappell was a valid one: As, I think, the learned trial judge indicated by his judgment, a distinction of this kind is a fine distinction. His Honour adverted to the fact that a plaintiff's "bad" reputation will consist of or at least involve what other persons think of him: see, eg, Plato Films Ltd v Speidel [1961] AC 1090 at 1131-2, per Lord Radcliffe. Therefore, harm to his reputation is likely to be suffered insofar as something is published to persons which may lead them to think less of the plaintiff. That, at least in part, is true. And, the argument suggests, there would be incongruity in providing a defence under s 13 where there will be no harm because the publishee knows beforehand what is published but in not providing a defence where, as it is inferred, the publisher already has a bad view of the plaintiff. But, if there be such incongruity, it arises not from the terms of s 13 but from presuppositions as to what ought to be the defence available to a defendant. Section 13 might have provided that there was a defence if "in all the circumstances" the person defamed was not likely to suffer harm from the publication. In such a case, his prior bad reputation would be proved to show that he was not likely to suffer harm from the instant imputation. But, as Moffitt P pointed out in his judgment, the section did not so provide. It provided a defence only where, by reason of more restricted matters, viz, the circumstances of the publication, the plaintiff was not likely to suffer harm. If the restricted nature of the defence be recognised, then there is, in my opinion, no such incongruity. And, accordingly, the principle established by Chappell's case does not apply where that which the defendant suggests as the basis of the s 13 defence, viz, what the publishers already knew, falls within what, as Moffitt P explained, is the meaning of "the circumstances of the publication" . . . As I have indicated, Chappell's case decided that the s 13 defence exists only where the fact that the plaintiff "was not likely to suffer harm" arose because of "the circumstances of the publication . . .". And, in addition, it held that the pre-existing bad reputation of the plaintiff was not one of "the circumstances of the publication . . .". In my opinion, Chappell's case was correctly decided in respect of each of these matters. As a matter of statutory construction, it is I think clear that it is to be by reason of the circumstances of the publication that the plaintiff was not likely to suffer harm, for the purposes of the defence. There is no reason requiring departure from the ordinary meaning of the section.' 1048 The Section 13 defence fails. The circumstances of the publication into the facsimile machine situate in the main office manned by sundry employees likely to read the bank statements were clearly not 'such that the [companies] defamed were not likely to suffer harm'. If there be any pre-existing indications of cash flow difficulties and/or of the holding back or even dishonour of some cheques, these matters were not 'circumstances of the publication'. The defence runs when 'by reason of the circumstances of the publication the plaintiff was not likely to suffer harm'. 1049 Section 22 of the Act provides: '(1) Where, in respect of matter published to any person: (a) the recipient has an interest or apparent interest in having information on some subject, (b) the matter is published to the recipient in the course of giving to him information on that subject, and (c) the conduct of the publisher in publishing that matter is reasonable in the circumstances, there is a defence of qualified privilege for that publication. (2) For the purposes of subsection (1), a person has an apparent interest in having information on some subject if, but only if, at the time of the publication in question, the publisher believes on reasonable grounds that that person has that interest. (3) Where matter is published for reward in circumstances in which there would be a qualified privilege under subsection (1) for the publication if it were not for reward, there is a defence of qualified privilege for that publication notwithstanding that it is for reward.' 1050 The Bank submits that at the time it sent the bank statements to Currabubula Holdings (restricting its submission in this way as it asserts that it is Currabubula alone which pursues this cause of action), it believed that Currabubula had an interest in knowing both the existing balance in its account and that the account was in liquidation. The Bank asserts that this belief and its conduct in providing the information on the premise of this belief, was reasonable. The bank therefore claims the defence of qualified privilege in s22 above. [Defendant's overview submissions, paragraph 52] 1051 In Theophanous v Herald & Weekly Times Ltd (1993-94) 182 CLR 104 at 138, the majority of the High Court (Mason CJ, Toohey and Gaudron JJ) made clear that reasonableness is a question of fact in the circumstances. 1052 In Morgan v John Fairfax & Sons Ltd (No. 2) (1991) 23 NSWLR 374, the Court of Appeal considered at length the statutory defence of qualified privilege, and in particular, the requirement set out in subsection (1) (c), that the publisher's conduct be reasonable in the circumstances. 1053 Hunt A-JA, with whom Samuels JA and Mahoney JA agreed, set out the following propositions to be proved by the defendant in relation to the 'reasonableness requirement': '(1) The conduct must have been reasonable in the circumstances to publish each imputation found to have been in fact conveyed by the matter complained of. The more serious the imputation conveyed, the greater the obligation upon the defendant to ensure that his conduct in relation to it was reasonable. Of course, if any other defence (such as truth or comment) has already been established in relation to any particular imputation found to have been so conveyed, it is unnecessary to consider the reasonableness of the defendant's conduct in relation to the publication of that particular imputation. (2) If the defendant intended to convey any imputation in fact conveyed, he must (subject to the exceptional case discussed in Barbaro's case, and perhaps also that discussed in Collins v Ryan) have believed in the truth of that imputation. (3) If the defendant did not intend to convey any particular imputation in fact conveyed, he must establish: (a) that (subject to the same exceptions) he believed in the truth of each imputation which he did intend to convey; and (b) that his conduct was nevertheless reasonable in the circumstances in relation to each imputation which he did not intend to convey but which was in fact conveyed. If, for example, it were reasonably foreseeable that the matter complained of might convey the imputation which the jury finds was in fact conveyed, it will be relevant to the decision concerning s 22(1)(c) as to whether the defendant gave any consideration to the possibility that the matter complained of would be understood as conveying such an imputation, as will be his belief in the truth of that particular imputation and what steps he took to prevent the matter complained of being so understood: Evatt v John Fairfax & Sons Ltd at 13-14; Makim v John Fairfax & Sons Ltd (1990) 5 BR 196 at 209; see also Wright v Australian Broadcasting Commission at 712 (whether the defendant "knew whether he was likely to convey a misleading impression"); Austin v Mirror Newspapers Ltd (at 362) (Privy Council). (4) The defendant must also establish: (a) that, before publishing the matter complained of, he exercised reasonable care to ensure that he got his conclusions right, (where appropriate) by making proper inquiries and checking on the accuracy of his sources; (b) that his conclusions (whether statements of fact or expressions of opinion) followed logically, fairly and reasonably from the information which he had obtained; (c) that the matter and extent of the publication did not exceed what was reasonably required in the circumstances; and (d) that each imputation intended to be conveyed was relevant to the subject about which he is giving information to his readers.' 1054 Hunt JA then says at page 388: 'It is necessary to keep in mind that each of the matters referred to in par (4) are relevant to the reasonableness of the defendant's conduct; they do not raise questions independently of that issue.' 1055 In this way, s22(1)(c) is directed not at the extent of the interest of the recipient in knowing the truth, but to the reasonableness of the defendant's conduct in publishing the particular matter (Hunt A-JA at 389 in reference to the decision in Wright v Australian Broadcasting Commission [1977] 1 NSWLR 697). 1056 The basis of the plaintiff's argument is that given Currabubula already knew that the account had been placed in liquidation, on the prior advice of the Bank, it was unnecessary, and I infer unreasonable, for the Bank to then fax the bank statements to the general office area. [Plaintiff's overview submissions, para 217] 1057 In my view, proposition (3) as put forward by Hunt A-JA, which is relevant to these facts, has not been made out by the Bank. Whether or not the Bank intended to convey the imputations which I have found were in fact conveyed, the conduct of the Bank in publishing the matter was unreasonable in the circumstances. 1058 Further, to my mind, it is not open to the Bank to assert that as the statements were confidential, the Bank could not foresee that their contents would be made available to any persons other than senior officers of Currabubula Holdings. [Defendant's overview submissions, para 52] 1059 As I have previously set out, the statements were not marked 'confidential' and the Bank took no steps to ensure that the statements were not published to any persons other than those Senior Officers. 1060 In my view, the conduct of the Bank in publishing the matter was clearly unreasonable in the circumstances. The words used having conveyed the imputations pleaded, the Bank's conduct in all the circumstances was unreasonable. Use of the words 'in reduction' would have been a different matter. 1061 It is then necessary to focus upon the precise dates of the bank statements issued to Currabubula. 1062 It is to be recalled that the first statement issued to Currabubula with the notation upon it was published not on 15 or 16 February 1990, but on 21 February 1990. The statements published on 15 and 16 February were in respect of Pyojit (statement for 15 February); NRS Tamworth, Narrabri and Gunnedah (statements for 16 February). 1063 To my mind, it cannot be said that the publishing prior to 21 February 1990, of bank statements with the offensive notation addressed to companies other than Currabubula, conveyed qua Currabubula, the imputations alleged, namely that Currabubula itself was insolvent and/or that a liquidator had been appointed to Currabubula. 1064 The publishing of those earlier bank statements which conveyed the imputations alleged in respect of those companies, namely that they were insolvent and/or that a liquidator had been appointed to them, would have been actionable at the suit of those companies. However, only the publishing of the 21, 23 and 28 February and 7, 14, 21 and 28 March 1990 bank statements conveyed the imputations alleged in relation to Currabubula. 1065 It is perhaps a close question whether or not the publishing of the bank statements bearing the offensive notation here addressed to companies other than Currabubula, conveyed qua Currabubula, the imputations alleged, namely that it was insolvent and/or that a liquidator had been appointed to it. There was no imputation pleaded to the effect that the publication of the bank statements, bearing the offensive notation addressed to companies other than Currabubula, conveyed an imputation 'that Currabubula conducted its business badly or inefficiently'. The confined mode of pleading the imputations here seems to me to lead to the conclusion which I have referred to above, namely that Currabubula was defamed only upon the publishing of the bank statements in respect of itself. 1066 Hence, only in respect of the publications of the 21, 23 and 28 February and of the 7, 14, 21 and 28 March statements can Currabubula claim to have suffered damage. 1067 There was, however, no specific evidence devoted to examining what loss flowed from the publishing of the Currabubula statements, as opposed to the detailed evidence of what followed the publishing of the earlier bank statements. 1068 Here again the matter is not, in my view, to be looked at in isolation. The first statement was sent to Currabubula on the Wednesday following the 15th/16th [Thursday/Friday], close of the previous week. Currabubula was a shareholder of Paola Holdings. The shares in Currabubula were held by Mr and Mrs Paola who, together with Currabubula, held shares in Paola Holdings. The Group was plainly a closely held Group, usually referred to as the Paola Group. 1069 In my judgment, the Group as a whole suffered damage by reason of the publishing over a period of weeks, of the bank statements bearing the offensive notations. 1070 Currabubula suffered loss because the defamatory utterances occurred in respect to it, at a time when the news in respect of the Group and/or Mr Paola 'going bust', was rapidly circulating and now embracing Currabubula proper. 1071 Had the bank statements relating to Currabubula's account been published on 15/16 February 1990 and had all the Group Companies in respect of whom similar bank statements had been received on 15/16 February sued in defamation, the defamation case would have been a very different one. The difficulty here lies in determining what damages Currabubula alone is entitled to recover in respect of the bank statements published on the later date. As I have said, no specific evidence was adduced to examining what loss flowed to Currabubula by reason of the publishing of the later statements concerning it. This may well have been because throughout the hearing, the plaintiffs appear to have believed that a bank statement concerning Currabubula was sent on 14 February 1990. This was corrected on the last hearing day when the mistake was realised. 1072 The facts thus require scrupulous examination in terms of assessing Currabubula's claimed entitlement to damages. Some questions of the principles going to assessment of damages which were not addressed in submissions, require to be addressed. Again, this is probably because it was only at the last moment that the amendment to the pleading was made. In my view, it is appropriate to give the parties an opportunity to address submissions on the question of the precise relief to be granted in respect of the defamation cause of action in light of the Judgment. 1073 Before leaving the defamation cause of action, one further matter should be emphasised. 1074 I have set out above the reasons for my finding that Currabubula has locus standi to recover in respect of losses incurred by it caused by the sending of the 'in liq' statements. If that finding be incorrect, then the plaintiffs' case must be considered in contract only and as devoid of the cause of action in defamation. The plaintiffs do not become disentitled in their contract case from relying upon the fact of the sending of the 'in liq' statements as part of the matrix of fact which took place. It does not follow from the fact that the plaintiffs do not plead the sending of the 'in liq' bank statements as an independent breach of contract, that the sending of the statements is not to be regarded as an integer in the chain of events which followed by reason of the Bank's breach of contract. All that follows if the defamation cause of action is not made out is that no relief may be granted for any commission of that tort. The reactions, as a factual matter, of a group of employees and managers and of others, upon learning of the sending of the 'in liq' statements, remains part of the plaintiffs' breach of contract case. The statements become simply one of the modes adopted by the Bank to communicate it's decisions to it's customer group. That the 'in liq' notation was interpreted by many who saw or heard of the bank statements as signifying that the Group and/or NRS had gone into liquidation, is simply an event which is sufficiently proximate to the breach of contract to enable the plaintiffs to rely upon the matter as a step in proving their loss caused by the contractual breach. The plaintiffs claim that the Multi-Option Facility was not provided to the plaintiffs so that there was a denial of the facility 1075 In so far as the plaintiffs' claim was put as a failure by the Bank to provide the Multi-Option Facilities to the plaintiffs and a consequential denial of the facility, the Bank submitted that there was no denial of the facility in any fashion and that alternatively if there was a denial of the facility, there was a justification for that denial. 1076 Mr Ryan had submitted that credits had come into the Number One accounts and that the plaintiffs were not permitted by the Bank to draw against those credits. Mr Macfarlan's response was to point to the vast bulk of credits as having come into the Number Two accounts then being available to be drawn against. The only exception to that, Mr Macfarlan pointed out, was the two amounts of $50,000 which had come in from the receiver and had been deposited into the Number One accounts. 1077 Mr Macfarlan pointed out that to 'flesh out' the plaintiffs' submission, it would be necessary to say that the plaintiffs were denied the ability to draw on those particular two deposits. His submission was that this could not be so because the Bank made it clear that it would transfer any deposits to the Number Two accounts and that that was done upon request. In this regard, Mr Macfarlan relied upon Mr Paola's evidence in cross-examination at transcript page 150 to the following effect: 'Q. Mr Paola, I directed you to the heading document on page 1204, and the question I want to put to you is to suggest to you that as at the beginning of March 1990 and in fact throughout 1990, you believed that the facility described in the letter of 1 February 1990 from the Bank was available to your Group? A. I believe so yes. Q. Then 1210 please in the bundle. Do you recall that there was a deposit made to the account of Currabubula that had been in existence for some time which was the subject of a request for a transfer to the Number Two account, the new account at Currabubula? A. Yes I recall that. Q. And that request was complied with? A. Yes it was. Q. And you understood that if there were any such deposits to the old accounts then it was open to your Group to contact the Bank and arrange for their transfer to the new ones? A. Yeah, with some difficulty. Q. Well there wasn't any difficulty in having this transfer effected, was there? A. There was some difficulty yes. Q. What was the difficulty? A. Oh several arguments on the phone. Q. It was done immediately the request was made in writing wasn't it? A. It was done once the request was put in writing yes.' [T 156] 1078 The Bank submitted that there was an absence of any evidence of any request made for a drawing which was denied. 1079 Hence, in relation to the plaintiffs' submission that credit was denied, Mr Macfarlan's response was that the Bank's obligation was to provide $8.5 million worth of credit and to do so at the customer's option in different forms. As Mr Macfarlan pointed out, Exhibit D36 does demonstrate that credit was provided as to the $8.5 million subject only to the qualification as to part of the deposits from the receivers. As to those deposits from the receivers, the Bank's submission is that it was well understood that it was possible to have the Bank transfer the deposits to the Number Two accounts and to draw on them. 1080 In short, the $8.5 million was fully drawn from the Number One accounts and that, as Mr Macfarlan submitted, was the full extent of the credit to which the plaintiffs were entitled. His further submission was that the plaintiffs were entitled to come and go with other funds which they had and that this in fact occurred. 1081 The ABE Fax account, it should be recalled, was not a newly frozen account but had been frozen for some time when the company had gone into receivership in the previous year - PX 1166. 1082 Hence, Mr Macfarlan submitted that there was no denial of the $8.5 million credit - this was always provided to the plaintiffs. And as to the Multi-Option Facility - Mr Macfarlan's submission was that it was available also and was indeed exercised by a conversion of the $7 million in March 1990 to a term loan. 1083 To my mind the issue tendered may be answered in terms of the facts. The Bank did not in fact call up the facility. Outside of requiring the $1million reduction provided for by the Facility Letter, the Bank did not demand that it be repaid by a specified date. The Bank clearly placed considerable pressure upon the Group to reduce its indebtedness and to do so post haste, but it did not call up the facility. The Bank did, however, refuse to allow the proceeds of securities sold to be treated otherwise than in permanent reduction of Bank debt. [See for example Letter of 4 May 1990 PX 1305, 1306] The breaches of contract found do not include a calling up of the facility. Dealing with the Events of Default 1084 Mr Macfarlan made plain that the Bank only relied on the allegation that an Event of Default under the facility agreement had occurred if the Court was to hold contrary to the Bank's submissions, that the Bank had terminated or withdrawn the facility by its mid-February 1990 conduct. In that circumstance, the Bank's submission was that any such termination or withdrawal of the facility was justified. The Bank does not assert that it relied in later months on the occurrence of any events of default to terminate the facility and further does not assert that it withdrew the facility after mid-February 1990. The Bank did however seek to put forward in part, an explanation of its mid-year attitude concerning the sale of Durhambone, that the Bank had the view that an event of default had or may have been committed, and that it was for that reason, concerned and expressing views, about the financial position of the Group. 1085 It is clear from the judgment that the Court has made no finding that the Bank terminated or withdrew the facility in mid-February 1990 or thereafter. 1086 In those circumstances, it may be unnecessary to determine whether an event of default took place prior to the February 1990 communications from the Bank to the Group. In deference, however, to the submissions made, I set out hereunder my findings in that regard. 1087 In my view, an Event of Default occurred when ABE Holdings, by the letter of 13 February 1990, notified the Bank that 'the directors of the company have determined that the company is insolvent'. [PX 1110] I do not see the statements made by Mr Paola at the 12 February 1990 meeting that 'if [the Bank] don't like the idea of putting ABE Holdings into receivership we won't do it. Currabubula will give it the support it needs', as affecting the position. The letter was sent in unequivocal terms. No binding letter of comfort had been executed by Currabubula. Whether or not Mr Paola may have intended to cause Currabubula to execute a binding letter of confirmation, depending on the Bank's attitude to the Group's proposal, has no material relevance to that issue. In fact Mr Paola, at transcript page 133, accepted that all he intended to suggest at the meeting was that the support previously provided by Currabubula at it's discretion, would be continued. 1088 In my view, a further Event of Default occurred when, under cover of the letter of 13 February 1990 [PX 1100], the letter from Ferrier Hodgson of the same day [PX 1101] was sent to the Bank. The Ferrier Hodgson letter states: 'This statement was prepared in discussions with company officers and from the financial statements as at [31 December 1989]'. ABE Holdings and Paola Holdings had in common the company officers who conducted the negotiations on behalf of the Group with the Bank. 1089 Accordingly, the statement that the $4.454million debt owed by Paola Holdings to ABE Holdings was not recoverable, was an admission by Paola Holdings and ABE Holdings that Paola Holdings could not pay its debts. 1090 I note that Mr Diamond under cross-examination at transcript page 231, conceded that a reader of the Statement of Position which had accompanied the Ferrier Hodgson letter, could reasonably come to the conclusion that the view was being expressed by the document that Paola Holdings was worthless. Likewise, Mr Hardy at transcript 370, conceded under cross-examination that a reader of the letter and it's attachments would be entitled to conclude that the author of the Statement of Position had taken a view that Paola could not repay it's loan and was worthless. 1091 I further accept the Bank's submission that circumstances had arisen which would have given reasonable grounds for an opinion to have been reached by the Bank: (i) That there had been a material adverse change in the 'financial condition' of ABE Holdings; (ii) That there had been a material adverse change in the 'financial condition' of Paola Holdings; and (iii) That there had been a material adverse change in the 'financial condition' of the Paola Group of Companies. 1092 Whether such an opinion was in fact reached by a Bank Officer is a different question. 1093 The two letters from ABE Holdings and Ferrier Hodgson of 13 February 1990 expressly acknowledge, it seems to me, that ABE Holdings was insolvent. 1094 I note that on page 2 of the Corporate Finance Group's submission, [PX 721] relating to the application for the additional facilities, it was stated that the purpose of those facilities was for 'funding increased working capital requirements as a result of the ongoing liquidation of ABE Fax Pty Limited'. Page 5 of the same submission [PX 724] indicates that the fact which precipitated the application for the increase in facilities was the obligation that Mr Paola had undertaken personally to guarantee the repayment of a debt of $1.65million which was owed by ABE Fax to Okura, and Mr Paola's desire to have this obligation discharged by ABE Holdings. On page 6 of the same submissions [PX 725] it is anticipated that the total amount of additional debts which the companies in the Paola Group would incur as a result of the winding up of ABE Fax would be $2 million. 1095 The application was for a general increase in the multi-option facility although it appears that most of the additional funds were to be made available to ABE Holdings. The Bank points out and I accept, that by February 1990 ABE Holdings was the largest borrower from the Bank and had received the majority of the $3.2 million which had been advanced by the Bank at the end of 1989 and the beginning of 1990. It was against this background, that the Bank was informed on 12 February 1990, that notwithstanding the apparent receipt of a large proportion of the additional funds of $1.7 million, ABE Holdings was insolvent and could not pay its own debts, still less the debts of ABE Fax which it had guaranteed. At the same time, the correspondence received from Ferrier Hodgson [PX 1101] indicated that Paola Holdings was solvent. 1096 In those circumstances, I accept the Bank's submission that there had been an obvious 'material adverse change' in the 'financial condition' of ABE Holdings, Paola Holdings and the Paola Group of Companies generally. I do not, however, accept that the Bank had any or any reasonable grounds for believing that its overall securities would not amply cover the Group's indebtedness. 1097 I accept the Bank's submission that, even if the above events are not sufficient to constitute a 'material adverse change' in the financial condition of the borrowers, they do amount to 'reasonable grounds' that such a change may have occurred. 1098 I do not accept that the Bank has proven that it in fact formed the opinion in February 1990 that an event of default had occurred. Mr Booth at transcript 396 when asked whether he had turned his mind to the question of whether the Group had admitted an Event of Default in relation to the facility, gave an answer reading: 'Can I say I would have done?' At transcript 396 he accepted that he had no actual recollection and at transcript 396 called it 'more instinct than practice - it would have been my first reaction'. 1099 When pressed, Mr Booth said at transcript 397 as follows: 'Q. Can you recall whether you formed any view at the time about whether there had been an event of default? A. Yes, I can form a view. We would have been, in your (sic) minds, aware of an event of default. We were considering an option . . .' 1100 Finally at transcript page 398, Mr Booth was asked what was the event of default which he had formed the view had occurred, and his answer was: 'The events were two, material adverse change being one, the second being the admission of insolvency of ABE Holdings'. 1101 It was on his evidence, the insolvency of ABE Holdings which he thought had repercussions for the entire Group that gave rise, in his view, to a material adverse change. [T 398] 1102 On my findings, Mr Booth did not recall either reading the Events of Default list in the 4 September 1987 letter, or considering the same at all and had no actual recollection of concluding that an Event of Default had occurred. This is entirely consistent, it seems to me, with the documents produced by Mr Booth and the Bank at the relevant time and subsequently. No document in evidence records the formation of any such view, notwithstanding it's significance in the circumstances. Mr Booth, I accept, was a prolific note-taker and diarist and yet failed to record this, one would think seminal event, in the Bank's relationship with the Group. 1103 I reject Mr Booth's evidence that he formed a view that Events of Default had occurred at the relevant time. His several attempts to reconstruct a basis from which he might be able to infer that he 'would have' formed such a view, were weak in the extreme and fell far short of satisfying the Court that such a view was reached at the time. 1104 It is necessary also to refer to Mr Swinburne's evidence. In his statement of 7 May 1998, He furnished a reason for the 'freezing' of the accounts that made no reference to the formation of a view that an Event of Default had occurred. [Paragraph 15] In none of his three statements did he say that he formed such an opinion at any relevant time. However, in oral evidence at transcript 531.15 he was asked whether he had turned his mind to the issue and his answer was that he did, forming the view that 'notification of insolvency was a serious event. And I then sought advice within the Bank as to what course of action I should follow'. 1105 Mr Swinburne's evidence was that he 'felt' it was an Event of Default. 1106 Plainly, the advice that Mr Swinburne sought was from Mr Stenhouse. His supplementary statement dealt only with the 'freezing' of accounts where a customer stated it was insolvent. His statements do not record any consideration of the question of the existence of an Event of Default. There is no evidence from him about any consideration of the material adverse change issue. 1107 I do not accept that Mr Swinburne in fact formed an opinion that an Event of Default had occurred. Rather, he sought advice about the statement made at 12 February 1990 that ABE Holdings was insolvent. 1108 These events took place some ten years ago. Whilst Mr Booth and Mr Swinburne may be accepted as giving evidence of what they now believe to have then occurred, their evidence is rejected in the light of all of the evidence before the Court and particularly bearing in mind the material which had appeared in their statements, their cross-examination and my view as to the probabilities in the circumstances. 1109 It will also be recalled that under the sub-heading 'Other', the facility letter of 1 February 1990 provided: 'All other terms and conditions as described in the Bank's letters of offer dated 18 November 1988 and 4 September 1987 are to continue to apply unless the provisions herein are inconsistent. In such case the provisions herein shall prevail.' 1110 The 4 September 1987 letter had included under the sub-heading 'Representations and Warranties' the words: ' The borrowerss [sic] represent and warrant to the Bank as of the date of this letter of offer: . . . - That there has been no material adverse change in the business, assets or condition of the borrowers since the original application for finance facilities by the borrowers; and - the borrowers further represents [sic] and warrants that all statements made and documents provided in, or in connection with, the application to the Bank for the facilities specified in this Letter of Offer and all representations which the Borrowers have made or may (during the continuance of the Facilities as outlined in this letter of Offer) make to the Bank as to its financial position are true and fair. 1111 The same letter includes under the heading 'Covenants' the following: 'The borrowers have not, at the date as of which they most recently prepared annual accounts, have [sic] any liabilities (contingent or otherwise) which were not disclosed thereby (or by the notes thereto) nor were there at that date any unrealised or anticipated losses arising from commitments entered into by the borrowers which were not disclosed or reserved against'. 1112 To my mind, these representation and warranties were repeated in the letter of 1 February 1990. In my judgment, the admission of ABE Holdings' insolvency and the implicit admission of Paola Holdings' insolvency were material adverse changes in the 'business assets or condition of the borrowers' and thus, the representation to the effect that there had been no material adverse change, was either incorrect when made, or became incorrect during the term of the facility. 1113 I accept the Bank's submission that another material adverse change was the fact that it appeared that Currabubula was no longer prepared to support the Paola Group of Companies. Until the end of 1989, the accounts for all companies (except ABE Fax) had been prepared on the basis that the Group was a going concern, thus implying that Currabubula Holdings would support each company. Mere discretionary support to be exercised at the option of Currabubula, I accept, would not have been enough. As the accounts were prepared on a 'going concern' basis, they were consistent only with the existence of a commitment of support from Currabubula. Currabubula had indicated to the auditor however, that it would not provide support for those companies (PX 1024) and this had the effect of throwing those companies into insolvency (T 362.5). 1114 I further accept the Bank's submission that the accounts which had been provided to the Bank, and on which the Bank's consideration of the application of the facilities had been made [PX 720-732], failed to disclose liabilities and losses. The Bank's letter of offer of 1 February 1990 was not accepted until some days after 1 February, by which time the Group had the letter from the company's auditor of 31 January 1990 [PX 1034]. That letter makes clear that it was then expected that the companies would lose $1.044 million in the 1990 year rather than 'break even' as had been indicated by the material presented to the Bank [PX 724]. 1115 In those circumstances, the Bank's case that Events of Default had occurred by mid-February 1990, is made out. As I have indicated earlier, this finding is not strictly necessary, bearing in mind the reasons for judgment earlier given. 1116 There remain a number of discrete matters which may be dealt with fairly shortly. Crop Preparation Payments 1117 The sale of Durhambone East involved, in addition to the sale of the land, the sale of plant, equipment and the payment of a 'crop preparation' fee to Currabubula. The complaint made by the plaintiffs is that amounts paid in respect of crop preparation, stock and plant totalling some $1.6 million, were not secured by any of the security instruments held by the Bank in respect of the land - see the equitable mortgage and floating charge given by Currabubula to the Bank. 1118 The short answer to the plaintiffs' claim is the same answer as has been given in paragraphs 984 and 985 above. When the plaintiffs sought a variation to the agreement with the Bank which had included an express condition that the facilities would be secured by registered mortgages over Durhambone, the Bank was entitled to require, as in fact on analysis it did, that such conditions as it sought to impose in consideration for agreeing to that variation be complied with. One such condition was that the amounts paid for crop preparation, stock and plant be paid to the Bank in discharge of the overall indebtedness. The Estoppel Claim 1119 It is again not strictly necessary to deal with this claim as the plaintiffs have succeeded in establishing the relevant breaches of contract. The Bank had no legal right without notice, to freeze the Group's accounts. The plaintiffs have succeeded on their implied term case in contract in this regard. 1120 Had the estoppel case been required to be determined, to my mind the case was not made out. The representations were too imprecise to ground an estoppel. A statement in late 1988 or early 1989 that there was 'not much likelihood' that the Bank would withdraw its facilities without giving Mr Paola notice, gives no context and plainly does not address anything like all of the circumstances which would have to be addressed, to give the representations sufficient precise content upon which the plaintiffs could seek to ground an estoppel. Nor am I persuaded that the plaintiffs relied upon these statements as pleaded. The 6 September 1990 Deed of Release 1121 The plaintiff have not established that this Deed of Release was executed by reason of duress and illegitimate pressure from the Bank. For the reasons earlier given in the judgment, I do not consider that illegitimate pressure was used by the Bank which induced Currabubula to enter into the Deed of Release. Currabubula, by Mr Paola, was well aware of the commercial necessity that Durhambone be sold and the requirements of the Bank that the Deed of Release be executed, did not go outside of the bounds of matters which the Bank was entitled to require as a condition of discharging a security - here Durhambone. The Bank's 'Final Arrangement' Claim 1122 The Bank's claim, summarised in the Judgment at paragraph 12, is rejected. No submissions were ultimately addressed by the Bank on the issue. The facility was plainly in place for relevant purposes as at the date of the Bank's breaches of contract held to have taken place. The Plaintiffs' Claim Relating to the June 1992 Mortgage 1123 In the light of the above reasons, this claim [see Judgment paragraph 40 (vii)] is not made out. Short Minutes of Order and Further Submissions 1124 The proceedings will be relisted for further submissions in relation to any specific claims which either party contends have not yet been dealt with, such as interest, including claims for interest charges unnecessarily incurred, for submissions in relation to costs and for the making of final orders. I certify that paragraphs 1 - 1124 and additionally Appendices'1' to '10' inclusive are a true copy of the reasons for judgment herein of The Hon. Justice Einstein

      Judy Kleem
      Associate

30 March 1999 APPENDICES 1 - 10 FOLLOW on the hard copy of the Judgment [For the electronic transmission, only Appendices 1,2,3 and 6 have been typed and will appear following this page]. APPENDIX 1 4 September 1987 letter from the Bank to Paola Holdings [see para 119] 'We refer to our recent discussions and are pleased to advise that approval has been given to provide the following facilities for the group:- Borrowers Facilities $ - Paola Holdings Pty Limited - Dealing Limit 500,000 - Currabubula Holdings Pty Limited - Overdraft Limit 1,100,000 - ABE Holdings Limited - Overdraft Limit 100,000 - Documentary L/C Limit 100,000 - ABE Telecommunications Pty Limited - Overdraft Limit 50,000 - ABE Jet Charter/Travel Pty Limited - Overdraft Limit 40,000 - Campbell, Rixon and Grahame - Overdraft Limit 200,000 - Northern Rural Services - Overdraft Limit 50,000 In addition to the above, approval has also been given to release the existing mortgage the Bank holds over property at Tamworth, known as "Currabubula". The above is to be subject to the following terms and conditions: Security: To be subject to the Bank Solicitors's (sic) requirements and to include: 1) Existing Security . Registered 1st 3rd Party Mortgage over 8,665 ha property at Collarenebri, known as "Durhambone". . Registered 1st 3rd Party Mortgage over 3,923 ha property, West of Bellata, known as "Orlando". 2) Additional Security . Registered 1st 3rd Party Mortgage over 9,813 ha property at Collarenebri, known as:- a) "Oreel" b) "Belarra" c) "Braeside" (Deeds to be lodged). . Registered 1st 3rd Party Mortgage over commercial property and vacant land at Tamworth (Deeds to be lodged). 3) Registered 1st Interlocking Equitable Mortgage and Floating Charge over the assets and undertakings of Paola Holdings Pty Ltd and subsidiary companies within the group, i.e. - Currabubula Holdings Pty Ltd - Magnetic Sound Industries Pty Ltd - ABE Holdings Ltd - ABE Credits Pty Ltd - Automated Business Equipment Pty Ltd - ABE Data Systems (Aust) Pty Ltd - ABE Telecommunications Pty Ltd - ABE Jet Charter Pty Ltd - ABE Telecommunications (N.Z.) Ltd Equitable mortgage and floating charge to be drawn in such manner as to specifically grip 2.5 million shares of U-Bix Copiers (N.Z.) Limited. Shares scrip and signed transfer form in blank to be lodged. 4) Registered proprietors consent to additional borrowings. 5) Joint and several guarantee from Anthony Michael Paola & Lynette Denice Paola, for $5.8 million. N.B. All security is to be drawn on an interlocking basis or to provide for suitable cross guarantees. Pricing: . Foreign Currency facility :- - Interest at State Bank's cost of funds plus a margin of 0.75% p.a. - Line Fee 0.75% p.a. payable half yearly in advance. . Overdraft Limit - Interest at State Bank's reference rate plus a margin of 0.25% p.a. . Documentary Letter of Credit Limit - As determined by the Bank's Trade and Overseas Services Division, presently 0.375% per DLC with a minimum fee of $15. . Application Fee $2,500 All legal costs, stamp duty and out of pocket and professional expenses to be met by the Borrowers. Term: Facilities to be reviewed 31 December 1987 to establish suitable reduction conditions. Reporting Requirements Quarterly Basis - Level of stocks, plant and equipment. - Level of debtors, with aging - Level of creditors, with aging - Profit performance to budget - Actual against cash flow budget To be provided within 30 days of quarter end. 6 Monthly basis - Cash flow budget - Profit and Loss Statement - Balance Sheet To be provided within 45 days of half yearly end. Annual basis - Consolidated Audited Balance Sheets and Profit and Loss Statements. To be provided within 90 days of year end. Other: - Limit reduction of $600,000, to be effected by 31 December 1987 on overdraft limit of Currabubula Holdings Pty Limited. - Overdraft Limit of Paola Holdings Pty Limited to be cancelled on settlement of new facilities. - Borrowers to provide further security or a reduction in Bank debt should the AUD/USD rate of exchange fall below 0.6500, or the value of U-Bix Copiers N.Z. Limited shares fall below N.Z.$1. Company Indemnity and Bank's Rights: (a) The Borrowers by their acceptance of the Facilities, hold the Bank indemnified against all payments, losses, actions, claims or demands of any nature whatsoever on or against the Bank arising out of the Facilities or any payment thereunder and shall forthwith on demand pay to the Bank the amount or amounts so indemnified. (b) The Borrowers by their acceptance of the Facilities agree to; i) pay to the Bank on demand, the Bank's usual administrative and account keeping costs and charges as applicable from time to time. ii) Indemnify the Bank against any duties, charges or fees imposed by governmental authorities (including any liability with respect of or resulting from any delay or omission in paying same), all costs charges and expenses (including the fees and expenses of counsel and, on a solicitor/client basis, legal advisers) reasonably incurred in any further enforcement of or preservation of the rights of the Bank under the Facilities and any supporting documentation or any transaction contemplated hereby. iii) Irrevocably agrees that the Bank may at any time hereafter without notice to the Borrowers, withdraw from and/or set off against any deposits which the Borrowers may have with the Bank an amount equal to the amount paid hereunder and the Bank may receive and hold any amount so withdrawn and/or set off for its own account absolutely free and clear of any counterclaim, demand, encumbrance or other interest by any other party whatsoever. Representation and Warranties: The Borrowers represents (sic) and warrants (sic) to the Bank as of the date of this Letter of Offer. . The Borrowers are corporations duly incorporated and validly existing under the laws of the State of its incorporation and has the corporate power to own its own property and to carry on business as it is now being conducted. . The Borrowers have the corporate power to accept this Letter of Offer and to borrow and raise finance hereunder and have taken all necessary action to authorise and obtain authorisation of the borrowing and raising of the finance contemplated herein upon the terms and conditions of this Letter of Offer and to authorise the execution, delivery and performance of this Letter of Offer and the terms and conditions thereunder. The execution delivery and performance of this Letter of Offer and the terms and conditions thereunder by the Borrowers will not violate in any respect any provision of:- i) Any law or regulation or any order or decree of any Governmental authority, agency or court. ii) The Memorandum and Articles of Association of the Borrowers. iii) Any mortgage, contract, pledge or other undertaking or instrument to which the Borrowers are a party or which is binding upon it or any of its assets; or iv) That no legal proceedings have commenced or are threatened, the subject matter of which, exceeds an amount of A$50,000. . That there has been no material adverse change in the business, assets or condition of the Borrowers since the original application for facilities by the Borrowers; and . That there has been no documents, forms or otherwise lodged for registration and recording with the Corporate Affairs Commission within 30 days prior to the date of this Agreement of which the Bank has not been made aware. . The Borrowers further represents (sic) and warrants (sic) that all statements made and documents provided in, or in connection with, the application to the Bank for the Facilities specified in this Letter of Offer and all representations which the Borrowers have made or may (during the continuance of the Facilities as outlined in this Letter of Offer) make to the Bank as to its financial position are true and fair and without limiting the generality for the foregoing, that, other than as notified to the Bank in writing, no property held by it or in its possession is impressed with or subject to any trust and acknowledges that the Bank has relied upon the correctness of the above statements in entering into this Agreement and will continue to do so in dealing with the Borrowers and/or any person on the Borrowers behalf. Covenants: . The Borrowers covenant they are not in breach of or default under any Agreement to which they are a party or which is binding on them or any of their assets to an extent or in a manner which might have a material adverse effect of the Borrowers ability to comply with the terms and conditions of this Letter of Offer. . The Borrowers have not, at the date as of which they most recently prepared annual accounts, have any liabilities (contingent or otherwise) which were not disclosed thereby (or by the notes thereto) nor were there at that date any unrealised or anticipated losses arising from commitments entered into by the Borrowers which were not disclosed or reserved against. Events of Default: The Bank may by notice in writing to the Borrowers declare that the Facilities may be cancelled forthwith, and/or declare the Facilities immediately due and payable together with all interest accrued thereon and all other amounts payable hereunder if any of the following events shall have occurred and be continuing:- i) If the Borrowers fail to pay any monies owing hereunder when due and payable. ii) The Borrowers failing to observe or perform any of their obligations under this Letter of Offer and such failure is continuing for the period of ten (10) business days (or such longer period as the Bank may permit) next following the service by the Bank on the Borrowers of notice requiring the same to be remedied; or iii) Any representations or warranties contained herein shall prove to have been incorrect in a material particular when made or deemed to have been repeated hereunder or any such representations or warranties shall become incorrect in a material particular at any time during the term of the Facilities. iv) If without the Bank's prior written consent the Borrowers enter into any arrangement, reconstruction or composition with their creditors or order is made by any competent court or resolution passed by the Borrowers for the appointment of a liquidator (whether provisional or otherwise) and/or winding up of the Borrowers save for the purposes of amalgamation or reorganisation (not involving or arising out of insolvency); or v) Any encumbrancer taking possession or a receiver or trustee being appointed to the whole or a material part of the assets or undertakings of the Borrowers and is not paid out in full or discharged within fourteen (14) days; or a distress or execution is levied or enforced upon or sued against a material part of the property and assets of the Borrowers and is not discharged within thirty (30) days or the Borrowers apply for or consents to the appointment of a receiver or similar officer for them, or for all or a material part of their property and such receiver is not discharged within thirty (30) days; or vi) The Borrowers shall stop payment or shall admit inability to, pay their debts as they fall due, or shall be adjudicated or found bankrupt or insolvent, or shall enter into any composition or other arrangement with their creditors generally or any class thereof; or vii) The Borrowers cease, or threaten to cease, to carry on business or without the consent of the Bank disposes, or threaten to dispose, of a substantial part of their business, property or assets or a substantial part of their business, property or assets is seized or appropriated. viii) Any circumstances arising which give reasonable grounds in the opinion of the Bank that there has been a material adverse change in the financial condition of the Borrowers. Except as provided above, any amounts due to the Bank and unpaid or any other payments made by the Bank in default of payment by the Borrowers under or in respect of the Facilities shall be regarded as cash advances made on the due date or the date of payment by the Bank respectively, repayable on demand and shall until repayment to the Bank (both before and after judgment) bear interest calculated on daily balances of such advances at a rate equal to three percent (3.00%) per annum above the Overdraft rate from time to time charged by the Bank to its commercial customers, as determined by the Bank. Such interest shall be payable and compounded in arrears on the last day of each month and shall bear interest accordingly. The Bank reserves the right to cancel the approval if the approval loan is not taken up within three (3) months of the date of this correspondence. No part of the offered Facilities will be made available until all security and other documents have been executed and the Bank's Solicitor's requirements in respect of the security and the Facilities have been satisfied. If the terms and conditions of this Letter of Offer are acceptable to you, we should be pleased if you would confirm your concurrence by signing where indicated on the duplicate of this correspondence attached and returning same, together with a certified copy of the Board minute authorising acceptance of the Facilities, and the company's cheque for $2,500.00 representing the application fee. The Bank's legal fees and other professional costs will be debited to the company's account following settlement. Should you require any further information regarding the Facilities, please do not hesitate to contact us.' [PX pages 78-83] APPENDIX 2 22 March 1988 Letter from the Bank to Paola Holdings [see para 143] 'We refer to our recent discussions and are pleased to advise that approval has been given to various additional facilities totalling $2,217,853 for the Paola Group of companies and Currabubula Holdings Pty Limited. This approval is subject to the following terms and conditions:- Borrower Facility Currabubula Holdings Pty Ltd - Lease facility $32,660 - Lease facility $90,605 ABE Telecommunications Pty Ltd - Overdraft (additional) $450,000 - Bill Acceptance Discount $1,000,000 ABE Jet Charter Pty Limited - Overdraft (additional) $260,000 Northern Rural Services Pty Ltd - Overdraft (additional) $300,000 Campbell Rixon & Graham Pty Ltd - Overdraft (additional) $50,000 - Lease facility $34,588 $2,217,853 Security Bank's legal requirements including:- 1. Registered 1st 3rd Party Mortgage over property at Tamworth, known as "Currabubula Station". 2. Registered 1st 3rd Party Mortgage over property at Collarenebri, known as "Durhambone". 3. Registered 1st 3rd Party Mortgage over property, West of Bellata, known as 'Orlando". 4. Unregistered 2nd 3rd Party Mortgage over property known as "Oreel". 5. Registered 1st 3rd Party Mortgage over property known as "Belarra". 6. Registered 1st 3rd Party Mortgage over property known as "Braeside". 7. Registered 1st 3rd Party Mortgage over industrial property and vacant land at Tamworth. 8. Registered 1st Interlocking equitable mortgage and floating charge over all the assets and undertakings of Currabubula Holdings Pty Ltd, Paola Holdings Pty Ltd and the following subsidiaries:- - ABE Travel Pty Ltd - ABE Holdings Ltd - Automated Business Equipment Pty Ltd - ABE Telecommunications (Fax) Pty Ltd - ABE Telecommunications Pty Ltd - ABE Jet Charter Pty Ltd - Campbell Rixon and Graham Pty Ltd - Northern Rural Services Pty Ltd Equitable Mortgage and floating charge specifically grips 2,458,990 million shares in U-Bix Copiers (N.Z.) Limited. 9. Joint and Several Guarantees from Anthony Michael Paola and Lynette Denice Paola for $7,602,214 million (existing guarantee for $5.8 million to be cancelled). Term - Review of six monthly cash flow projections by 30 June 1988 to determine future requirements. - Annual review - next due 31 December 1988. Pricing - Foreign currency facility:- . Interest at State Bank's cost of funds plus a margin of 0.75% p.a., payable on each rollover. - ODL(1) facilities:- . Interest at State Bank's Reference rate plus a margin of 1% p.a., payable monthly in arrears. - Bill Acceptance/Discount facility:- . Acceptance fee 1% p.a. (facility to be fully drawn). - Lease facilities:- . Usual rate of interest as quoted by State Bank at time of settlement, presently 17.5% p.a. - DLC Limit . Usual scale of fee to apply, presently 0.375% flat (minimum fee $15.00 per transaction). . Application fee $10,000. - Line Fee 1% p.a. payable quarterly in advance, first due from date of approval and assessed on combined amount of foreign currency facility, ODL(1) facilities and Bill facility. All legal costs, stamp duty and out of pocket and professional expenses to be met by the borrower. Reporting requirements: i) monthly basis - - Level of stocks, debtors with aging and creditors with aging. - Profit performance against budget. - Actual against cash flow budget. Such reports to be received by the Bank within 14 days of month end. ii) 6 monthly basis - - Cash flow budget - Profit and loss statement - Balance sheet Such reports to be received by the Bank within 30 days of end of period. iii) Annual basis - - Consolidated audited annual accounts for the group incorporating profit and loss statement, balance sheet and source and application of funds statement. Such reports to be received by the Bank within 90 days of balance date. Other Conditions: - Cancellation of the group's dealing limit of $500,000. - Continued banking business. - Satisfactory insurance over all insurable assets, Bank's name to be noted on relevant policies as first mortgagee, and such policies to be held by the Bank. - Bills to be drawn for terms of not less than 30 days and no more than 185 days as determined by the Borrower and acceptable to the Bank. - The Borrower will notify the Bank with relevant details three (3) days prior to drawdown/rollover of the bills. - The Bank will arrange the discounting of all bills drawn under the facility if required. - Basic to this arrangement is that the Borrower will pay to the Bank, the face value amount of such bills on the due date thereof and as between the borrower and the Bank, the bills will not be taken to have been discharged by reason of the Bank becoming the holder thereof before or after bill maturity. - In the event of dishonour and/or payment by the Bank of the face value of bills the case may be, the Bank is authorised to debit the Borrower's account with amount of such bills plus commission, interest charges, stamp duty and expenses any, and charge interest on such amounts debited at the rate being charged by Bank from time to time on accounts of like nature until the date of payment. - All other conditions as per the Bank's letter of offer dated 4 September 1987 to continue. The Bank reserves the right to cancel the approval if the approved loan is not taken up within one (1) month of the date of this correspondence. No part of the offered facilities will be made available until all security and other documents have been executed and the Bank's legal requirements in respect of the security and the facilities have been met to the satisfaction of the Bank. If the terms and conditions of this Letter of Offer are acceptable to you, we should be pleased if you would confirm your concurrence by signing where indicated on the duplicate of this correspondence attached and returning same, together with the company's cheque for $10,000 representing the application fee. The Bank's legal fees and other professional costs will be debited to the Company's account following settlement. Each of the security providers should acknowledge and consent to the additional borrowings by also signing the duplicate of this advice.' [PX 136-140] APPENDIX 3 18 November 1988 Letter from the Bank to Paola Holdings [see paragraph 159] 'Approval has been given for the following arrangements with regard Bank Facilities available to the Paola group of companies (the borrower). 1. The proceeds of the recent sale of the shares in U-Bix Copiers (N.Z.) Limited being N.Z.D 7.8 million currently held on deposit with the Bank to be put to the reduction of Paola group debt to the Bank by 31 December 1988. 2. Overdraft limit to be established for ABE Holdings Limited for $2.2 million making total overdraft limits to the Paola group as follows: Limit ($) Paola Holdings Pty Limited1,100,000 ABE Holdings Limited2,200,000 ABE Telecommunications Pty Limited500,000 ABE Jet Charter Pty Limited300,000 Northern Rural Services Pty Limited Tamworth800,000 Northern Rural Services Pty Limited Narrabri50,000 Campbell Rixon Graham Pty Limited 200,000 4,650,000 The above increase in overdraft limits of $2.2 million is to be secured by a charge over the above cash deposit by way of a Security and Deposit Agreement in a form acceptable to the Bank's Solicitor. All other terms and conditions in place for overdraft limits to the Paola group of companies as described in the Bank's Letter of Offer dated 22 March 1988 to apply to this overdraft as well including pricing as follows: - Line Fee of 1 % p.a. payable quarterly in advance (the fee for the new limit ie. $2.2 million to be paid to 15 December 1988, the date the existing fees fall due. - Interest on drawings to be charged the Banks Reference Rate plus 1 % p.a. All facilities to the Paola group of companies are also to be subject to the following: Increased Costs If: (a) after the date hereof any change in or the making of any law, treaty, regulation, order or directive (whether or not having the force of law, the observance of which is practiced by bankers) or in the administration or interpretation thereof by any governmental authority or central banking or monetary authority charged with the administration thereof or by courts of competent jurisdiction affects directly or indirectly the Bank with respect to: i) payment of additional taxes hereon or on any arrangement, agreement, deed or whatsoever herein contemplated or in relation to any rights hereunder; or ii) basis of taxation of any rights or obligations hereunder or under any arrangement, agreement, deed or whatsoever herein contemplated or any receipts of moneys hereunder or thereunder (other than taxation on overall income); or iii) any reserve, capital, liquidity, special deposit or other requirement against assets held, deposits with, accounts of, loans or other financial accommodation (actual, contingent or prospective); or iv) payments of any moneys (including principal and interest) hereunder or under any arrangement, agreement, deed or whatsoever herein contemplated; of b) any guideline, policy, directive or request of any governmental body affects any or is complied with by the Bank directly or indirectly (whether or not having the force of law, the observance of which is practiced by bankers) and as a result the Bank: i) cost of funding or maintaining the facility is increased; or ii) receipt of any amount hereunder or under any arrangement, agreement, deed or whatsoever contemplated herein is reduced; or iii) rate of return whether on capital, assets, deposits or whatsoever is roduced [sic]; or iv) makes a payment, foregoes any interest or other return on or referrable to any amount receivable by it hereunder or under any arrangement, agreement, deed or whatsoever contemplated herein or as a result of funding or maintaining the facility; v) fees, margins, interest rates or other charges to borrowers of equivalent credit standing for like facilities are increased; then and in each case the Bank shall give notice to the Borrower and the Borrower shall: a) pay such additional amount as the Bank shall in its sole opinion certify as necessary to compensate if for the increased costs, taxes, reductions, foregone interest or returns and/or payments (it shall be no defence to payment of such compensation that the Bank could have avoided or mitigated such increased costs, taxes, reductions, foregone interest or returns and/or payments); and/or b) either upon demand or at its own election without penalty prepay the facility at the end of the next interest period/rollover date; and/or c) enter into negotiations with the Bank to find an alternative manner of funding or maintaining the facility (such negotiations to have been agreed upon within 30 business days of the date of notifications under this clause otherwise subclauses (a) and (b) above shall apply). Changes in Law Notwithstanding any other provision herein, in the event any applicable law, regulation, treaty, order, guideline, policy, directive or whatsoever or the administration or interpretation thereof by any governmental authority or courts of competent jurisdiction would make it contrary thereto or unlawful to fund or maintain the facility then upon notice by the Bank to the Borrower. a) The Bank's obligations hereunder or under any arrangement, agreement, deed or whatsoever herein contemplated shall be suspended; and/or b) The Borrower shall if required either by the Bank or any applicable law, regulation, treaty, order, guideline, policy, directive or whatsoever forthwith prepay the facility without penalty. All costs and charges incurred in providing these arrangements including legal fees and an establishment fee of $3,000 will be payable by the Borrower. It is also desirable that we settle the proposed future requirements of your companies before 31 December 1988. We look forward to discussing these requirements with you. If the above terms and conditions are acceptable please have the appropriate signatories sign the attached notice of acceptance and return it to us together with the establishment fee of $3,000 and line fee of $1,687.67 (the line fee has been calculated as follows $2.2 million x 1% x 28/365 = $1,687.67. This offer will expire of not accepted by 15/12/88.' [PX 188-191] APPENDIX 6 1 February 1990 Letter from the Bank to Paola Holdings and to Currabubula Holdings [para 411] 'We are pleased to advise that approval has been given to increase the existing multi-option facility from $6.8 million to $8.5 million making overall facilities as follows: Borrower: Paola Holdings Pty Limited ABE Holdings Limited ABE Telecommunications Pty Limited ABE Fax Pty Limited (receivers and managers appointed) for borrowings outstanding ABE Travel Services Pty Limited ABE Jet Charter Pty Limited Currabubula Holdings Pty Limited Campbell Rixon and Graham Pty Limited Northern Rural Services Pty Limited Fraxton Pty Limited Pyojit Pty Ltd [handwritten] Guarantors: Automated Business Equipment Pty Limited (in liquidation). A.M. & L.D. Paola Facility Type: Multi-option Facility comprising: * Commercial Bill Acceptance/Discount * Overdraft Limit * Fixed and Floating Rate Term Loans * Documentary Letter of Credit Facility Amounts Multi-option facility 8,500,000 Leases (approximate current balance) 500,000 9,000,000 This approval has been given subject to the following terms and conditions:- Reduction The multi-option facility is to reduce to $7.5 million by 31 May 1990. Review All facilities are subject to a further review immediately financial accounts for the Borrower for the half year ended 31 December 1989 become available. This review is to be completed by 31 March 1990. Immediate review is to be conducted in the event of a material adverse change in the financial condition or change in ownership of any of the companies comprising the Borrower. Security To be subject to the Banks Solicitors requirements and to include: Existing security as described in the Annexure attached. The present facility arrangement with individual companies within the group is to be amended to an arrangement with one borrowing company representing the Borrower and existing facility documents to be replaced by a Facility Agreement to be prepared by the Bank's Solicitor. This Facility Agreement to include all usual terms and conditions covering representations and warranties, bill reliquifactions, (sic) events of default, changes in law, cross default, increased costs, set off, reporting requirements, adverse changes, existing covenants restricting the transfer of secured assets to other companies of the Borrower not involved in this arrangement to be inserted and the principals of the Borrower (Mr. & Mrs. A.M. & L.D. Paola) to be included as guarantors. Guarantee to be provided by Mr. & Mrs. A.M. & L.D. Paola for $8.5 million Pricing Establishment Fee - $15,000 Line Fee: - 1% p.a. payable quarterly in advance. Usage Fees: Fixed Rate Term Loans - Interest payable to be the Bank's cost of funds plus 1.0% p.a. payable monthly in arrears. Bill Acceptance/Discount - Acceptance fee of 1.0% p.a. Overdraft and Floating Rate - State Bank of New South Wales reference rate Term Loans plus 1.0% p.a. Interest payable monthly in arrears. DLC - Bank's usual scale of fees to apply. Tenor: - All drawings under the Commercial Bill Facility to be limited to 185 days or such other tenors agreed to by the Bank. Fixed rate drawings may be drawn for a maximum term of two years. Reporting Requirements i) monthly basis: Individual company and consolidated reports detailing: - Level of stocks, debtors with aging and creditors with aging; - Profit performance against budget; - Actual against cash flow budget. Such reports to be received by the Bank within 14 days of the end of the month. ii) 6 monthly basis: Individual company and consolidated accounts of the Borrower and Guarantor including: - Cash flow budget; - Profit and Loss statement; - Balance Sheet Such reports to be received by the Bank within 30 days of end of period. iii) Annual basis - Consolidated audited annual accounts of the Borrower and Guarantor incorporating profit and loss statement, balance sheet and source and application of funds statement. Other All other terms and conditions as described in the Bank's Letters of Offer dated 18 November 1988 and 4 September 1987 are to continue to apply unless the provisions herein are inconsistent. In such case the provisions herein shall prevail. All legal costs and out-of-pocket and professional expenses in arranging these facilities are to be met by the Borrower. Usual State Bank of New South Wales break costs to apply if any facility is repaid prior to maturity of the drawdown. This letter of offer replaces the existing letter of offer dated 18 January 1990. If the above terms and conditions are acceptable, please have the relevant authorised signatories sign the attached notice of acceptance and return it to us. The Bank's legal fees, establishment fee and line fees (on the increased facility amount) will be charged following settlement. (Note, Line Fees for existing facilities have recently been charged for the three months to 15 March 1990. In order to conform with this arrangement the line fee due on the proposed $1.2 million increase will be charged from the date your acceptance of this Letter of Offer is received until 15 March 1990). The Bank reserves the right to cancel the approval if this Letter of Offer is not accepted within one (1) month of the date of this correspondence and to review the terms and conditions of the approval if the additional facilities are not taken up within three months from the date hereof.' [PX 1047-1052]

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