It is not necessary here to set out the background to the dispute between the parties. It is amply set out (some might well say at too great length) in the principal judgment. The underlying dispute was between the first defendant (re-named in the title to these proceedings as Q but to whom I will here refer simply as the first defendant) on the one hand and, on the other hand, his three sons (A, B and C) and two companies in which each of the four family members is involved (E Co and EM Co) (albeit the first defendant now only as a shareholder) and through which the family members had from 2002/2003 engaged in a joint family business venture (extending both to farming and non-rural activities).
Nor is it necessary here to set out the findings made in the principal judgment or the relief I then considered appropriate. Suffice it to note that I was then of the view that the proposed imposition of conditions on the acceleration of the sons' interest or expectations in the farms (for the payment of a sum by way of a notional market rent for the balance of the first defendant's life expectancy - the "market rent" condition and by way of a repayment of loan advances or payment for the book value of certain transferred cattle - the "book debts" condition) was appropriate to ensure so far as possible that the acceleration of the sons' interest or equity in the farms (which I considered, and the plaintiffs did not dispute, would go beyond making good their expectations) did not unduly prejudice the first defendant or render the relief to be granted wholly disproportionate in all the circumstances. In that regard I described this as a "constructed" element of the relief there proposed.
[2]
Summary of parties' submissions as to the appropriate orders
There is a plethora of written submissions (in volume by far the most from the plaintiffs) on which reliance was placed at the re-opened hearing. So, for example, the plaintiffs not only relied upon their submissions dated 31 October 2018 filed in advance of the re-opened hearing but also their submissions dated 4 August 2017 filed in advance of the principal hearing; submissions on relief dated 10 October 2017 at the close of the principal hearing; their closing submissions of 21 September 2017; their submissions in reply of 2 October 2017; supplementary submissions for the re-opened hearing dated 10 December 2018 and 18 November 2017 [sic] and closing submissions for the re-opened hearing dated 12 December 2018, respectively. There was, perhaps unsurprisingly, some development of the respective parties' positions in the course of their respective submissions. I have attempted in these reasons to encapsulate the gist of what was ultimately submitted by the respective parties' way of the appropriate final relief, without attempting to restate precisely all of those earlier submissions.
In essence, the plaintiffs argue that the fundamental premise of orders making good their respective expectations (emphasising the distinction between the expectations of the sons and those of E Co) is the recognition of the existence of a constructive trust over both the freehold (in the case of the sons) and leasehold (in the case of E Co) interest in the properties; and they seek declarations in this regard. Thus, their submissions are premised on the relief now to be granted commencing with a declaration of constructive trust (rather than, say, relief by way of equitable compensation, as the first defendant submitted both at the principal hearing and at the re-opened hearing would be appropriate course or, as the first defendant seeks in his now fallback position, a transfer to them of only some of the properties without any declaration of trust).
The plaintiffs submit that, since part of the expectations had a testamentary aspect, there are broadly two ways in which effect may be given to the constructive trust: first, to maintain this trust during the first defendant's lifetime (referred to in their closing submissions as Pathway A); and, second, to accelerate the position of the parties to achieve a "clean break" (referred to as Pathway B).
As I understand it, the plaintiffs do not oppose acceleration of the relevant expectations per se. Indeed, the sons seem to accept that the ongoing operation of the farms under the ownership of the first defendant would not be feasible (or at least "not ideal", in C's words). Rather, as adverted to above, what they oppose is the imposition of the market rent and book debt conditions as conditions placed on the acceleration of those expectations. They argue that what would be accelerated under Pathway B would be the rights and obligations of the parties arising from the constructive trust (i.e., the relief contemplated under Pathway A) and, hence, that when determining what conditions should be imposed to reflect the fact that the expectations are to be accelerated (and in determining whether the acceleration would be wholly disproportionate in the circumstances), regard must be had to those rights and obligations.
Broadly speaking, the position of the plaintiffs in that regard is that the first defendant, as a constructive trustee of the freehold and leasehold interest in the properties (for the sons and for E Co, respectively), has no legal or equitable right to profit by way of rent; nor to repayment of the amounts recorded as book debts in the accounts of E Co; nor to compel the purchase of the shares he holds in E Co and EM Co. Thus, they submit, the Court may not impose, as a condition for granting relief, that the plaintiffs make such payments. It appears to be accepted by the plaintiffs that if there were to be a accelerate of their expectations the first defendant "may have a legal or equitable right to a modest allowance for living expenses for the term of his natural life" but, despite having been the recipients of considerable generosity from the first defendant over the years, they are now what can only be regarded as parsimonious in the amount that they are prepared to concede would be appropriate in this regard (suggesting in their proposed orders an amount that would meet only around half of the first defendant's current annual rental payments, on the evidence before me). In earlier submissions the plaintiffs seemed to contemplate that the first defendant might receive a "commercial" rent after a "grace period" (of five years or more) from the final determination of any and all appeals in this matter (see [59]-[60] of their written submissions dated 31 October 2018) but the plaintiffs' proposed orders do not seem to reflect this.
In their closing written submissions on the re-opened hearing, it was submitted for the plaintiffs that, as the first defendant is the "sole effective cause" of the circumstances giving rise to the desirability of a clean break, it would be appropriate to provide the plaintiffs with an election between the two "pathways" referred to above (i.e., Pathways A and B). However, in oral submissions, the plaintiffs' position appeared to be that if their submissions as to the constructive trust being the fundamental premise of the relief to be granted were accepted (as in essence they are) then no such right of election would be sought by them. (The plaintiffs' submissions did not envisage that one or more of the farming properties might be "carved out", so to speak, of any declaration of constructive trust but, since a division of ownership of the properties was in effect put forward by the first defendant in his proposed alternative "pathway" (Pathway C), the plaintiffs have already had an opportunity to be heard against such a result in that context.)
The first defendant's position, in essence, is: first, that it is clear that there must be a "clean break" and that the conditions that I had envisaged in the principal judgment on the acceleration of the sons' interest in the properties are appropriate and should be imposed; and, second, that if that not be the case, then the relief granted should be that contemplated by his Pathway C, in effect that there be a division of the properties as between the first defendant and the sons (broadly speaking, that he retain the Main/7 Aggregation and Property No 11 and that the rest of the properties are transferred to the sons), with the sons to be liable for any CGT payable on the transfer of the particular properties that are transferred to them. The first defendant also argues, in effect, that acceleration of the sons' expectations in relation to the properties without conditions of the kind I had envisaged would cause significant detriment (not least, having regard to his potential CGT exposure).
[3]
Evidence at the re-opened hearing
As noted earlier, further evidence was adduced at the re-opened hearing as to a range of matters. While much of it is not ultimately of assistance, having regard to my acceptance of the plaintiffs' criticism of the basis on which I had proposed to impose the conditions to which they object, for completeness I summarise below that evidence and my conclusions in relation thereto. The evidence may conveniently be grouped into the expert evidence, evidence of a private stamp duty ruling, other statistical evidence and lay evidence.
[4]
Business Valuation evidence - Business Valuation Report dated 14 November 2018
The parties jointly retained an expert (Ms Fiona Bateman of Dolman Bateman & Co Pty Ltd), a chartered accountant qualified in the field of forensic accounting and business and company valuation, to provide an expert report as to the value as at 31 December 2017 of the shares owned by the first defendant in each of E Co and EM Co.
Ms Bateman was instructed to value the shares on the assumption that E Co was in a position to continue its farming operations on the properties but was liable to reimburse the first defendant the sum of $2.123 million (the recorded book debt, to which sum I will refer, consistently with some of the experts, as the "Loan Amount", though I was not satisfied that this amount was an advance repayable in the first defendant's lifetime (see [1234] of the principal judgment)) and to account to the first defendant for a sum representing the net present value of the market rent for the subject properties as valued by an independent valuer from the date of judgment for the period of the first defendant's life expectancy (see the letter of instruction dated 12 October 2018). Ms Bateman was provided with certain information relating to the companies and with the separate conclusions that had been reached by the respective real estate valuers (Mr Tremain, who was engaged by the plaintiffs, and Mr Donoghue, who was engaged by the first defendant) as to the estimated future rent for the properties. (The valuers had not met in conclave by that time and hence there was at that stage no agreed position between the experts as to the gross market rent for the properties.)
In her report dated 14 November 2018, Ms Bateman assessed the value of E Co, as at 31 December 2017, in a negative amount (-$699,967) and the first defendant's 25% share of E Co, as at that date, at -$174,992. She assessed the value of EM Co, as at 31 December 2017, also in a negative amount (-$641,764) and the first defendant's 25% share of EM Co, as at that date, at -$160,441 (see Ms Bateman's report dated 14 November 2018 at [4].) The valuation was made on a going concern basis ([9]) and on the basis of "fair market value" ([10]) (which Ms Bateman explained is the standard adopted in Australia and which valuation concept does not assume that the business would be sold).
Ms Bateman noted that the liabilities exceeded the book value of the assets in both of the entities valued but considered it likely that the market value of the livestock and the plant and equipment exceeded the book value applied in her valuation (see at [5]). In cross-examination by Senior Counsel for the first defendant as to the balance sheet position (for E Co) if the balance sheet were to be reconstructed to give a market value (rather than the book value) for stock, and assuming the average income per head of cattle in 2017 (of $1,271) remained the same, Ms Bateman confirmed that the market value would be $2.6 million (T 433.4) and that this number would then replace the $112,000 figure adopted in the report by reference to the book value of the stock (T 433.30).
Ms Bateman assessed the net present value of the future rent (the "Specific Market Rent" - a capitalised term in the letter of instructions at [7(b)]) of the subject properties, applying the market rent provided in the valuation reports of each of the expert valuers, as being: $5,915,755 (the future net market rental as per Mr Donoghue's report; and as $6,316,726 (the future gross rental as per Mr Tremain's report) (see [7] of Ms Bateman's report). (The respective Specific Market Rent figures were thus calculated on a different basis - net versus gross; and hence the two cannot readily be compared.)
Ms Bateman noted that, for the purposes of her valuation report, she had been instructed to exclude the outgoings related to the ownership of the subject properties in her calculation of future rent payable (see at [8], where Ms Bateman also noted that reference was made to the outgoings related to the ownership of the subject properties in Mr Tremain's report, to which she referred as the Opteon report, at p 121).
Ms Bateman was cross-examined by Senior Counsel for the first defendant as to the value placed by her on EM Co's interest in a particular holding company (R Co) that holds investments in two properties (not being any of the properties the subject of this litigation) and, in particular, as to her adoption of the "adjusted book value" of those properties as shown in the relevant financial accounts (rather than the market value of those properties) (see T 434-435). Ms Bateman explained that she had been instructed by both parties so to do (T 434.31; T 434.48); said that she had never seen the use (in accounting documents, as I understand her answer) of the term "fair value adjustment" (T 435.33) but said that that was not necessarily incorrect; and accepted that, if the true market value was the adjusted amount, then that was the appropriate adjustment to be made (T 435.35). Ms Bateman accepted that if the total of the "fair value assessment" were notionally added back into the 2017 accounts (and assuming Senior Counsel's arithmetic, as put to her in cross-examination, were to be correct) that would produce a positive net asset situation for R Co (T 435.46) and hence a positive value in respect of EM Co's half interest in R Co (T 436.1; 436.22) (though I note here that Ms Bateman also seemed to suggest that the difference would not be great - a proposition that Senior Counsel for the first defendant appeared also to accept (see T 436.30)).
As to Ms Bateman's consideration of which valuation method to use when calculating the net present value of market rent, Ms Bateman explained in cross-examination the reason for her view that goodwill could not exist in a business of the kind operated by E Co (T 436.37ff); namely, the value of the net assets employed in the business, being the cattle, are so high that "the figures are never going to work for a goodwill to occur in this type of business"; (and see the exchanges with Counsel at T 437.19-46).
Ms Bateman also explained the methodology for calculation of the net present value for future rent (T 440-441) and, in essence, said that the easiest way to calculate it would be to take the annual amount divided by 52 to reach a weekly amount "and then find a website including ours that has the discount tables on it and use that" (T 441.21ff) or, as was put to her by Senior Counsel for the first defendant, to take the weekly amount, to take the multiplier for an amount of $1 and to multiply it by ten "as at 11 years" (T 441.45).
In response to questions from Senior Counsel for the plaintiffs, Ms Bateman explained that the discount rate she had adopted when assessing the net present value of future rent (of 3% - see Schedule 8 to her report) was what she considered appropriate in circumstances where there was "basically no risk", stating that it was "really only the market value of the money" (T 442.14) or the "market value of the interest" (T 443.7) and, hypothetically, that if a 4.5% rate had been adopted by another valuer that would probably be "[the valuer] considering that there would be a higher return available to the person receiving the money" (T 442.45). (Pausing here, I note that a 4.5% rate was adopted in the Lonergan Edwards report - [157] and see the summary of those reports from [175]ff below.)
The first defendant, in his closing submissions on the re-opened hearing, opposed the evidence from Ms Bateman as to the appropriate discount rate to be adopted, on the basis that no reason had been given as to why the process provided for in the orders made in May 2018 was not followed but that objection was not pressed orally. The May 2018 orders amended the letter of instruction in the form proposed by the first defendant to allow for alternative assumptions as to the rent to be payable for the subject properties in accordance with the expert evidence of the real estate valuers to be appointed by the respective parties in accordance with the orders (see 7(b) of the letter of instruction); and to allow for the alternatives of a calculation by reference to forensic tables as proposed by the first defendant or a calculation by reference to any expert actuarial evidence relied upon by the plaintiffs (see 7(c) of the letter of instruction). Ultimately, however, the question of the appropriate discount rate was treated as a matter for submission.
Ms Bateman accepted that she had effectively adopted a balance sheet valuation approach for E Co (T 446.1). Asked by Senior Counsel for the plaintiffs to assume various matters (namely, that the stock of cattle for E Co is now 50% of what it was for the financial year ending 2017; that there were increased sales of cattle to meet legal expenses of the proceedings; that the properties on which E Co conducts the farming business require some capital works to be undertaken; that there will need to be a level of expenditure or some "inputs", such as fertilizer, to improve the pasture and measures taken for blackberry control, to bring the properties back to the condition they might have been in sometime prior to 2015-2017; and that it might take three to five years in order to get stock levels, by natural increase, back to the sorts of levels in which they were in the past - see T 443.17-444.34), and then asked as to how those matters factored into the methods of valuation (T 444.36), Ms Bateman's response (from T 444.42) was as follows:
A. Okay, so we're talking about this ‑ what I've done is basically 18 months old so there is stock value that is different than even the stock value ‑ the 2,012 or however many cattle they had on hand at 2017, so you'd be looking at the change in the net assets being whatever the new cattle amounts are. The fact that there is more expenditure to be incurred to get the property up to a certain level, that would really be ‑ I would expect to be in the value of the property because it's an expense of the company, the company will have to pay that, so it's, I suppose, a forward expense that's known or should be known, it's able to be calculated but wouldn't form normally a part of a normal balance sheet of a set of accounts, it can be a contingent expense that's going to be incurred but that would actually make the profit situation much worse because, clearly, the expenses of getting the pasture and the land up to its needed position is an expense that will be written off throughout the years. So, I mean, you can value it but all it does is ‑ I mean, you can value it at a point in time, so if you're saying, in 2018, the value's different to this because the cattle is valued at a different amount -
Q. Yes?
A. Fine, can do that, you're saying that the property needs to have $300,000 worth of expenses to put it back into a position, that's really the value of the property but it's calculable.
Q. When you say it's the value of the property, you're drawing a distinction between the landlord and the operating company who's the lessee?
A. Mm.
Q. If you assume there's no difference?
A. Yeah, well, it's just ‑ if I was the landlord -
Q. Making that assumption?
A. Yeah, if I'm the landlord, I'm operating the business too so the expenses just - it's just not normal to - it's normal but you look at your property and say, "Look, it's worth $1 million but not it's really only worth $950,000 because it's really in a poor condition."
Q. … what tools we need so that we can then conceptually take those tools and apply them to the facts when we know them to value [E Co]?
A. Being quite honest, I would take it off the value of the land, that's - it's like any sort of business, I'm just trying to conceptualise it into any sort of business, you've got a value that's not quite right because the land or the farm, it's not really worth quite that much, it's worth a little bit less because you've got to pay out something to bring back into a position, you need to fix up the fences, I don't know what it is you're talking about but you need to expend some capital to put it into a position that might make it the $17 million or whatever dollars the property is valued at. It's more of a property issue then, I would think. Of course, for profit and loss, it's going to be ‑ if I've got to expend 100, 200 grand each year into the next couple of years, my profits are going to be very poor.
Ms Bateman accepted that a balance sheet valuation approach was essentially a winding-up approach to assessment (T 446.4) - in effect, valuing the first defendant's shares as 25% of the value of the respective companies (as I noted earlier, in her report she said that she was valuing the companies on a going concern basis - see [9] of her report; and that the fair market valuation concept did not assume that the business would be sold - see [10] of her report). In response to some questions from me, Ms Bateman said that, if one approached the matter on a compulsory purchase order basis, there might need to be some adjustment to reflect that (see from T 447.5):
A. Sorry, I'm selling to somebody today, based on what it is, you know, it's the net asset value. I know the property's worth a million dollars, I know the business is worth the cattle and the other things and I probably know that I have to spend $300,000 to get it up to the next level, the person buying the business.
Q. Yes. So if you know that you're going to have a known capital expenditure you would expect that a willing but not anxious purchaser would be paying somewhat less to take that into account?
A. Yes, exactly.
Q. And a willing but not anxious vendor would assume that they would have to take that into account in lowering the price to meet the purchaser's expectations?
A. That's right.
Q. And that's how you would adjust for that on a compulsory purchase order basis?
A. Yes.
Taken back to that issue by Senior Counsel for the first defendant, there was the following exchange (from T 448.50):
Q. The question I had for you, madam, was you were indicating that when [you] were being asked about the impact of capital expenses, and I don't want to query your conclusion on that, but is it relevantly, if you were to take into account if you were a purchaser and you were taking into account needed capital expenditure, would it also at the same time be relevant for the purchaser in the method of valuation that might be relevant to consider the increased productivity or the increased value of the product being made as a result of that capital expenditure?
A. Look, you have to make an educated decision based on if you know you've got to spend another couple of hundred thousand a year or whatever, is it worthwhile me operating this business, and that's the bottom line, that the business comes to a point that it's not a viable business anymore.
In essence, Ms Bateman's opinion was that the value of the business could be no less than the net asset value of the business. She said that the rent had been factored into the balance sheet assessment approach (T 447.31); that she had probably assumed that cattle sales were normal in the years in question (T 447.48); and (from T 448.8) that:
A. Okay, when people buy businesses, you know, when somebody's buying something, so there can be no less value than what the value of the assets are. The value of the assets are what's on the balance sheet, adjusted for proper true values of assets and liabilities.
Q. Yes, so that if you're looking at the assets on the balance sheet adjusted for the proper true value, would you not take into account the amount of stock that there is today irrespective of how it got to be that amount?
A. Exactly and that's how I would look at it today, when I'm buying it I would look at that. Now, is the business valuable, maybe nobody wants to buy it, because the true value of the business might be negative, you know ‑ sorry, not the value of the business, the value of the business can be no less than the net asset value, we've already decided that, you know, so the net asset value has to be the value of the business, but I may not actually want to run the farm, I might just sell off the cattle because I can get $1,000 a head for the cattle and I can see all that off, but the farm itself might actually not be truly viable if the expenditure is so high that I can't make a profit, then it's not valuable, I don't want to keep using it, I don't want to keep doing it. So that's the other side of it, what's the ‑ it can be worth no less than the net asset value and maybe it's got ‑ the farm itself has no value other than the cattle and you sell that off if you buy it, but if I've got to pay 570,000 a year in rent and I'm not going to make enough profit to do so, then I won't do so, I won't continue. [my emphasis]
With no disrespect at all to Ms Bateman, who I considered to be an objective and careful witness who listened attentively to the questions and gave considered responses, and whose evidence I have no difficulty accepting, the proposition that a purchaser would not be likely to buy a farming business if the rent for the property on which the business was to be conducted was likely to be so high that no profit could be made therefrom seems to me to be self-evident as a matter of common sense (as Ms Bateman herself seems to have considered), at least unless there were some other reason for the purchaser to acquire what on that scenario would be assumed to be a property for a loss-making business. This highlights the difficulty I will come to with the evidence from the respective real estate valuers as to the likely market rent for the properties (namely, that each appears to have given weight largely to one side of the equation - the lessor's assumed wish to maximise investment returns or the lessee's assumed wish to conduct farming operations at a profit); although at least in the case of Mr Tremain, he had regard to some historical evidence of expenditure on outgoings, whereas Mr Donoghue's opinion as to investment return was based on no more than his generally stated opinion referable to what he considered to be "industry standard".
What I take from Ms Bateman's evidence, which I broadly accept, is that the value of the shares held by the first defendant in E Co and EM Co, on a balance sheet assessment approach, is a negative amount (or, at best, in relation to EM Co might be a small amount if the shares held by it in R Co have a small positive value by reference to the underlying market value of the investment properties held by that holding company). I also found helpful her explanation as to the easiest methodology by which to calculate the net present value of whatever might be the figure to be adopted as the notional future rent for the balance of the first defendant's life expectancy, though I propose to leave those final calculations to the parties. Relevantly, I did not understand Ms Bateman to cavil with the proposition that the value to be placed on a minority shareholding in a private company would be discounted to reflect the lack of control on the part of the shareholder (which I consider would be relevant if one were to be valuing the first defendant's shares in E Co on a compulsory purchase order basis).
[5]
Land Valuation evidence - Joint Valuation Report dated 22 October 2018
As adverted to above, expert valuation evidence was called from two real estate valuers: Mr Martin Tremain (called by the plaintiffs) and Mr Thomas Donoghue (called by the first defendant). Each prepared an individual report and, after a conclave, a Joint Valuation Report dated 22 October 2018 was prepared and signed by each of them.
In their Joint Valuation Report, the valuers agreed that: the market value for the properties in 2018 was $20,000,000; and the gross market rent for the properties in 2018 was to be calculated as 3% of the capital value (being $600,000) rising at 2% per annum thereafter.
Where the two valuers were not agreed was as to the calculation of "net" market rent (i.e., the gross market rent less outgoings).
Mr Donoghue (who the plaintiffs note was not provided with the reports of the expert agronomist, Mr Francis, or the expert financial analysts, Mr Lonergan and Dr Chu (see below at [100]ff and [160]ff respectively), nor with information as to the prior financial performance of the E Co farming business) adopted a methodology which valued net market rent at 2.5% of the capital value of the subject properties and produced a future net rental of $5,915,755.
Mr Tremain, on the other hand, was of the view that it was possible to have regard to comparable leases to determine the gross market rent, though he also acknowledged that "the apportionment of gross rental in terms of rental and apportionment of outgoings can vary considerably" (see Mr Tremain's report at [16.4]). Mr Tremain had regard to the actual outgoings paid in respect of the properties (see his 14 August 2018 report at [15.1]) and opined that the indicative net rental in respect of the subject properties was $166,245 for the period 2018-2022 and $185,611 for the period 2022-2026 (see Mr Tremain's report at [17.10]). The plaintiffs note that, included in Mr Tremain's costings, are amounts for fertilizer and pasture improvement (see Mr Tremain's report at [15.1]), which have not been undertaken in recent years (the plaintiffs' evidence being that the reason for this is a combination of drought and these proceedings).
Both Mr Donoghue and Mr Tremain expressed views as to the carrying capacity of the properties and the impact of the current drought (see Mr Donoghue's report at [4.1]; [4.3]; Mr Tremain's report at [12.2]; [15.1]). It is not necessary to dwell on those aspects of their reports.
Unfortunately, it was not possible for the two real estate valuers to give evidence concurrently, which obviously meant that (unlike the position with the tax experts) there was no opportunity for the first of the experts to be cross-examined, Mr Tremain, to comment on what Mr Donoghue said when he was later cross-examined.
Mr Tremain
Mr Tremain (the plaintiffs' expert) was cross-examined on 21 November 2018. Relevantly (as would seem to me unsurprising), he accepted that it was a matter of negotiation between lessor and lessee as to the respective responsibilities between them in relation to outgoings (T 266.44). He also accepted (again surely a matter of common sense) that, from a lessor's perspective, the lessor would be trying to achieve an acceptable rate of return on his capital investment in the land (see at T 266.49). (Equally, I might add, one would expect a lessee of agricultural or grazing land to be seeking to obtain a rental that would permit an acceptable profit from the operation of the farming business, assuming that the property was to be rented for the purposes of such a business and not simply as a residence.)
Mr Tremain was cross-examined as to the comparables referred to in his report as comparable market indicators (T 267.5ff), from which cross-examination it was apparent that some of the information was derived from the selling agent for the particular property in question and some was based on his understanding of the apportionment as between lessor and lessee in relation to the outgoings and operational costs - evidence that was not before me and that it is impossible for me here to test. His evidence was that agricultural leases were "often not even produced" (T 269.13) and may not be in writing; and that, in the region where the properties in this case are situated, 4.5% would be the upper end of the range of gross rent figures to determine the applicable rent (T 269.25). Mr Tremain confirmed that he had been instructed to assume that all outgoings would be paid from the gross rent (T 270.22; 26; 29).
Asked by Senior Counsel for the first defendant whether it was consistent with his experience that one way of dealing with the issue of outgoings, and who bears the other costs associated with the land, is that the higher the percentage applied for the gross rent the more the outgoings that are borne by the landlord, Mr Tremain gave the following evidence (T 269.31ff):
A. Agricultural leases are so variable. I'm not trying to miss your question, by the way, but they all come down to a negotiation on lease. Grazing leases in particular compared to a cropping farming lease, the conditions are a lot more straightforward. With grazing leases, regrettably, they can be very complex and on a one by one and often they can have a management plan and people will meet each year to discuss a new arrangement but, yeah, I couldn't agree there's a fixture between 2 and 4% in terms of waiting about going. It depends on the deal on the property at the time.
Q. Perhaps I put it too emphatically. Would you agree that one of the methods for setting a lease amount between a landlord and a tenant that's adopted in the rural grazing industry, if I can use that word, is to say pay the X% which might be on the lower part of the range and, in consideration for that, because it's lower than it might otherwise be, the tenant will bear some of the outgoings?
A. Yeah, they traditionally work on the gross and work backwards, so yep, if it's 3% and the outgoings are X and the net is the difference, it's traditionally based on gross and then work back to the net, as opposed to a net build up to a gross.
Mr Donoghue
Mr Donoghue was cross-examined on 10 December 2018.
In his report of 14 August 2018, he had valued the properties as at 1 July 2018 as $21,080,000 and had given his opinion as to a rental value of $527,000 for that year, a percentage of 2.5% of the value of the properties. He accepted: that his process of reasoning was to assess the value of the properties as a freehold concern and then to consider an appropriate percentage rental to the owner of the properties in order to discern an appropriate market rental value (T 496.7); that his opinion was that 2.5% was the appropriate percentage (T 496.18); and that this was simply an exercise of judgment on his part (T 496.22). He said that this was "industry standard" in his view (T 496.36).
Mr Donoghue did not refer in his report to any "industry standard" as such (simply to a percentage range that he said in the witness box was adopted in rural leases); nor did he refer to any source materials or documentation in support of his contention that 2.5% was "industry standard". The unsatisfactory nature of his evidence on this issue can be gleaned from the following exchanges in cross-examination by Senior Counsel for the plaintiffs (from T 497.4ff):
Q. … You have identified pages 91 and 92. Now, is there any reference on those pages to "industry standard"?
A. Look, it touches on it in terms of the percentage range adopted in rural leases.
Q. Well, I just want to make sure we're clear about it. You said that you were referring to an "industry standard."
A. Grazing rates tend to be on the lower side, ranging from between 2.5 and 3.5. I'm basing that on an industry standard.
Q. But am I right in saying that nowhere in your report do the magic words "industry standard," do you?
A. Look, I can't clarify it because I haven't read over my report thoroughly today, so -
Q. But if you were to put forward evidence about an industry standard, one would expect support from industry documentation, for example; correct?
A. That's correct. And also from industry knowledge. Like, I've leased properties myself. We speak to many landholders that are leasing country. I didn't actually have any leases in that vicinity, therefore, I didn't put any in. I based it on an industry standard that I know myself.
Q. But you haven't‑‑
A. As a professional, I'm aware of the percentage levels.
…
Q. Nowhere in your report do you bring forward any evidence for the Court where you identify any industry standard, do you?
A. Well, I just noted the last line on page 843. It gives a percentage range, which I classify as industry standard.
Q. Nowhere in your report do you put forward any evidence of an industry standard, do you? Meaning by reference to source materials or documentation?
A. No. Other than my percentage range, no.
Q. So from the terms of the Court assessing your opinion, you say 2.5% is industry standard. Why? Because I know. That's what it is; correct?
A. Yes.
Q. And you haven't provided any other support for it?
A. No, I haven't.
Q. So it's based on your judgment?
A. Yes. Which I was asked to give. [my emphasis]
In response to a question by me as to what he meant by his reference to "industry standard" (when he said that there were "industry standards" in place), he said (from T 504.50):
A. It's my knowledge of leasing country myself, and knowing many people are currently leasing, and that's - that's my industry knowledge.
My assessment of the expert valuation evidence
I regarded Mr Tremain as the more reliable expert, in the sense that he had at least applied his mind to a consideration of what might be regarded as comparable leases (although there was little by reference to which one might test the comparisons) and the basis on which he explained the methodology by which a net rent is traditionally struck for agricultural leases made sense. I accept that he had been instructed to work on actual outgoings (and hence that he was not expressing an opinion as to the likely outgoings in the present case, other than by reference to the agronomist (Mr Francis)'s report as to the significant inputs that would be required in relation to the properties).
Mr Donoghue, on the other hand, seems to have regarded the process of giving expert evidence as one in which all that was sought was his personal opinion ("as a professional") without the need to disclose any reasoning process by which he had reached or held that opinion. To the extent that Mr Donoghue invoked "industry standards", it was clear from his evidence in cross-examination that all he was doing was expressing a personally-held opinion as to what he considers is generally the practice in relation to agricultural leases, not any particular industry standard as such (in the sense, say, of an accounting standard). His approach seemed to be that he had been asked to give his opinion; he had given his opinion; and that was that. He displayed a degree of truculence when tested in the witness box as to the basis for that opinion; seemingly taking issue with the temerity of anyone who sought to challenge his stated opinion and resorting to broad brush statements of opinion, without any apparent consideration of the question being asked (when, for example, he proffered the opinion as to how his opinion would change, if at all, in the trust scenario there put to him). I do not share Mr Donoghue's confidence as to my ability properly to assess the weight to be placed on what is, in essence, no more than an assertion by him that I should accept his opinion because he has a "good handle on the rural market" - see [72] above.
It is well-established that, in order to fall within the exception under s 79(1) of the Evidence Act 1995 (NSW) (Evidence Act), evidence must satisfy two conditions: first, the witness must have specialised knowledge based on his or her training, study or experience (Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588; [2011] HCA 21 at [32] (Dasreef); Honeysett v The Queen (2014) 253 CLR 122; [2014] HCA 29 at [23]); and, second, the opinion must be wholly or substantially based on that knowledge (Dasreef at [32]; Honeysett at [24]). Relevantly, in Dasreef, the plurality (French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ), quoting Heydon JA, as his Honour then was, in Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705; [2001] NSWCA 305 at [85] (Makita) said (at [37]) that "the expert's evidence must explain how the field of 'specialised knowledge' in which the witness is expert by reason of 'training, study, or experience', and on which the opinion is 'wholly or substantially based', applies to the facts assumed or observed so as to produce the opinion propounded". Their Honours later observed that "[a] failure to demonstrate that an opinion expressed by a witness is based on the witness's specialised knowledge based on training, study or experience is a matter that goes to the admissibility of the evidence, not its weight" (at [42]).
[6]
Evidence from expert agronomist - report dated 17 August 2018 of John Francis
Before turning to the expert evidence as to tax and financial issues, it is convenient here to deal with the evidence of an expert agronomist (Mr John Francis) as to the present condition of the properties and what would be required in order to restore them to the condition in which they were prior to the events that gave rise to the present dispute (i.e., before the purported termination by the first defendant of the E Co lease in June 2013).
There was some toing and froing at the commencement of the re-opened hearing as to the position in relation to two reports that had been prepared by Mr Francis (collectively, the Francis reports), on the instructions of the first defendant, and served on the plaintiffs by the first defendant.
This arose in circumstances where the plaintiffs' solicitor had notified the first defendant's solicitor that Mr Francis was required for cross-examination. As I understand it, an issue then arose as to Mr Francis' availability to give evidence, he apparently being in Kangaroo Island at the time of the re-opened hearing (although there was no opposition to his cross-examination being taken by telephone link).
The plaintiffs' solicitor was advised not long before the commencement of the re-opened hearing by the first defendant's solicitor that the first defendant did not propose to call Mr Francis.
The plaintiffs then raised objections to the admission into evidence of the expert financial reports (the Lonergan Edwards reports) prepared by the financial analysts retained by the first defendant (Mr Lonergan and Dr Chu), the first of which reference was made to Mr Francis' first report. The plaintiffs maintained that the whole of the Lonergan Edwards reports should be rejected, as the reports were premised in part on Mr Francis' first report. The position taken by the first defendant was that there were two discrete passages in the Lonergan Edward's first report in which reference was made to Mr Francis' report; and that he would not read those passages in the first Lonergan Edwards report.
What was then, however, foreshadowed by the plaintiffs was that, if their objection to the entirety of the Lonergan Edwards report(s) did not succeed, then the plaintiffs might themselves seek to tender the first of Mr Francis reports, being the report dated 17 August 2018 (which is what ultimately happened and which became Exhibit BJ) (the first Francis report). (Although Senior Counsel for the first defendant foreshadowed a possible objection to the admission of only one of Mr Francis reports (and not the second report as well), ultimately that objection was not pressed.) Mr Francis did not give evidence at the re-opened hearing and was not examined on his first report.
The plaintiffs rely on the first Francis report as being relevant (and uncontested) evidence that, based on long term average pasture growth rates supported with the use of fertilizer (see [4.1] of the first Francis report), some 2,360 (PTIC) (i.e., pregnancy tested in calf) spring calving breeders can be reasonably and sustainably managed on the properties, which equates to 2,600 breeding females (heifers and cows) joined with trading livestock sold as weaners in April/May (at [4.1] of the first Francis report).
The plaintiffs note that Mr Francis prepared a model of a "spring calving, weaner production system" with projections for revenue and expenses (see [5.9] of the first Francis report) (which they submit is not significantly different to the one currently being managed by E Co). On the basis of this model (and based on 2017/18 pricing and benchmarking data), Mr Francis expressed the opinion that: the gross revenue from beef cattle business operations is $2,053,682 (equating to gross profit of $1,963,682 after adjusting for $90,000 in bull purchases and assuming no difference between opening and closing numbers or values) ([4.1]); total operating expenditure would be $1,249,361 ([4.1]); and operations exclusive of capital works on the properties could be reasonably managed with 3.345 labour unit equivalents assuming the number of days worked per labour unit is 240 days per year (equating to 803 labour unit days per year) ([4.1]); and see [7.1]ff.)
Mr Francis also expressed the opinion (see [4.1]; [9.1]) that the expenses relating to the land that are typically paid by the landlord include: Council rates but not local land services rates; insurance of fixed assets and infrastructure; public liability insurance; a proportion of the legal and preparatory costs of associated documentation; administration costs including accountancy fees and book keeping relating to the lease; and expenditure for capital improvements (typically only where prior agreed). Mr Francis stated that the landlord will pay only for insurance relating to the fixed assets on the leased land and public liability ([4.1]) and that, typically, the landlord would be responsible for the payment of insurance covering accidents relating to fixed farm assets and infrastructure including fences and gates, pumps, houses, buildings, sheds, storages and grain stores ([4.1]).
Mr Francis also expressed opinions as to: low stock numbers present at the time of his visual inspection of the properties ([5.5]); the species of grass in the paddocks ([5.5]); and that there had been a pasture improvement program at some time in the past but that fertilizer had not been applied in the past five years ([5.5])
As to the costs that Mr Francis considered would reasonably be expected on a beef operation of the scale projected of the properties (set out in Table 12 in the first Francis report at [7.4]), the plaintiffs emphasise that these included an amount of $52,299 for "rates and rent", calculated by indexing the rates and rents figure from the 2017 chart of accounts in the profit and loss statement ($42,062) by 2% compounding per annum. The plaintiffs calculate that if, for this figure, there is substituted a figure for rates in 2018 of $25,725.55, and the gross market rent of $600,000 agreed by the valuers, then the EBITDA (i.e., earnings before interest, tax, depreciation and amortization) for E Co under Mr Francis' spring calving model (i.e., what Mr Francis considers E Co should be earning on its current business if it were operating under optimal conditions, including yearly maintenance expense of fertilizer, pasture improvement and weed-control, and after an initial capital application to restore the properties, as well as the restoration to the herd to a size of 2,600 breeding cows) is $140,895. (The relevance of this, it is said, goes to the ability of E Co to make loan payments and for any interest, depreciation, amortisation and profit (i.e., profit for distribution to shareholders and investment in capital improvements); issues raised when considering the financial ability of E Co to comply with conditions of the kind I had proposed to impose on the acceleration of the sons' interests or expectations in relation to the properties.)
Ultimately, in my opinion little turns on the first Francis report. It is not disputed that no pasture improvement or development program has been implemented on the properties since the purported termination notice in 2013 (and probably since 2008 when the properties went into drought and rent was suspended); nor is it disputed that the cattle stocks have been sold down to approximately half the herd (although the first defendant disputes that the reason for this is of any relevance to the issues now before me and contests the manner in which the plaintiffs have calculated the so-called "out of cycle" sales of cattle - see from[254]ff below).
The first defendant criticises the sons for letting the farms run down (see, for example, what was put in the cross examination of B); the plaintiffs say in effect, that there was no point expending money on capital improvements once the termination notice was served due to the uncertainty of ownership. However, it does not seem to be seriously contested that it will be necessary for there to be some expenditure (at the very least in relation to pasture improvement and weed control) for the properties to be restored to an optimum operational level (although the quantum of capital required in this regard was disputed - see, for example, the challenge to the sons' evidence (in particular that of A) in cross-examination in this regard).
In any event, the reason that I say little turns on this is that, insofar as it goes to the financial ability of E Co (or the sons and E Co collectively) to comply with conditions of the kind I had proposed to impose, I am persuaded for other reasons that those should not be imposed (and Mr Lonergan's evidence amply supports the conclusion that there is not the financial capacity on the part of E Co and/or the sons to meet those conditions by way of lump sum payments at the present time irrespective of the need for capital improvement being undertaken in relation to the properties).
[7]
Capital Gains Tax - Mr Andrew Sneddon and Mr Andrew Lam
Each side adduced evidence on the question of the likely CGT consequences of the events that have occurred and in respect of the relief that might be granted: Mr Andrew Sneddon (a chartered tax adviser called by the plaintiffs) and Mr Andrew Lam (a chartered accountant called by the first defendant). Those experts were cross-examined concurrently.
Before turning to their evidence, it is useful here to restate the dates of acquisition of the relevant properties in respect of which the potential CGT liability is here being considered, namely: Properties No 3, 4 and 5 (acquired in 1993); Property No 6 (acquired in 1998); the Main /7 Aggregation (those properties being acquired in 1999); Property No 8 (acquired in April 2002); Property No 9 (acquired by contract dated 29 August 2002); Property No 10 (acquired by contract dated 10 September 2003); and Property No 11 (acquired 1 July 2005).
Relevantly, there are two CGT events under the Income Tax Assessment Act 1997 (Cth) (the 1997 Act) that may be applicable in the present case: a CGT E1 event (the creation or settlement of a trust) and a CGT A1 event (a change in ownership of a CGT asset) (see [9] of Mr Sneddon's affidavit sworn 16 November 2018). (I refer to these respective CGT events as CGT E1 or A1 events, respectively.)
Mr Andrew Sneddon
[8]
Application to ATO
On 2 November 2018, Mr Sneddon made an application for a private ruling from the Australian Taxation Office (ATO) as to the capital gains tax ramifications of the findings made in the principal judgment (see his affidavit sworn 7 November 2018 which annexes a copy of the application). This followed earlier discussions between Mr Sneddon and an officer in the ATO's Complex Issue Resolution Unit. As Mr Sneddon explained in cross-examination, a private ruling issued by the ATO is binding on the taxpayer, subject to the taxpayer making full and true disclosure to the ATO of the facts and circumstances for which the ruling has been sought (T 248.19).
Mr Sneddon notes that in the application to the ATO, he expressed the opinion that the establishment of the sons' claim against the first defendant in proprietary estoppel gave rise to novel tax questions (see at [18] of Annexure C to Mr Sneddon's 7 November 2018 affidavit). (As I apprehend it, those novel tax questions would include how the recognition, by way of a remedial order the subject of the grant of relief on a proprietary estoppel claim, of a constructive trust would be characterised for CGT purposes - see further below.)
In the application to the ATO, Mr Sneddon referred to authorities as to the meaning of a "change of ownership" (in the context of the question whether the coming into existence of a constructive trust over the farms constitutes a CGT A1 event) and as to the question of whether a CGT E1 event had arisen. In particular, reference was made to the decision of Jagot J (with whom Siopis J agreed) in Ellison v Sandini Pty Ltd (2018) 125 ACSR 249; [2018] FCAFC 44, where her Honour said (at [99]):
1. there is no change of ownership if a person continues to be a "beneficial owner" of an asset - so much is made express by the second sentence of s 104-10(2);
2. a "beneficial owner" of an asset has more than a mere proprietary interest in the asset. To be a beneficial owner the person must have rights which a court of equity would enforce involving full dominion over the asset;
3. if the original owner continues to enjoy rights to deal with the asset, including rights of disposal, then it could not be said that another entity is the beneficial owner of the asset, even if the other entity may have a beneficial interest in the asset.
Mr Sneddon's submission to the ATO on behalf of the sons (see at [31]-[32]) was that the imposition of a constructive trust, from the time that the first defendant sought to terminate the lease agreement (and evict E Co from the farms) (i.e., June 2013) constituted a change of ownership for the purpose of the 1997 Act and that the imposition of a constructive trust in favour of the sons over the farms with effect from 27 June 2013 is therefore a CGT A1 event.
As to the proposition that there has been a CGT E1 event on the facts of the sons' case against the first defendant (see [39]), reference was made to Kafataris v Deputy Commissioner of Taxation (2015) 243 FCR 291; [2015] FCA 874 (Kafataris) where the taxpayer had contended that a CGT A1 event occurred because the change in beneficial ownership of the property occurred pursuant to a constructive trust imposed over the property owned by the taxpayer in favour of a company, such constructive trust arising immediately upon the taxpayer accepting the company's written offer for the land. Mr Sneddon noted in the application that in Kafataris, Davies J had found that there was an express trust (and hence a CGT E1 event because there had been both a declaration and a settlement within the meaning of the legislation) but pointed to the reference by her Honour to the "uncontroversial" proposition that a constructive trust arises as soon as the conduct which has given rise to its imposition; and that her Honour had noted that a constructive trust arises by operation of law without reference to the intention of the parties concerned and without any need for a curial declaration (citing Jacobs' Law of Trusts in Australia (7th ed, 2006) at [1301]).
As far as the anticipated timing of any tax ruling is concerned, Mr Sneddon's evidence was that the ATO indicates a timeframe of six weeks from the time of the application, measured by the time the ATO has to consider all the information that might be relevant (so that if further information is requested by the ATO "the six‑week clock stops and starts again when that information is provided") (T 248.30). As at the time of the re-opened hearing there had been no ruling from the ATO (and as far as I am aware there has been none since); nor had Mr Sneddon received any requests for further information from the ATO.
In his application to the ATO, Mr Sneddon thus sought a ruling both as to the applicable CGT event and as to the time of that CGT event.
[9]
Mr Sneddon's opinion
In his affidavit sworn 16 November 2018, Mr Sneddon provides his expert opinion as to those CGT issues. He has expressed the opinion that "[t]he CGT event in relation to the properties may have happened on 27 June 2013 (as noted, this being the date on which the purported notice of termination was issued by the first defendant in relation to E Co's lease of the properties) and he considers that the ATO "may conclude that CGT event E1 happened on 27 June 2013". (See Mr Sneddon's affidavit at [10].) However, Mr Sneddon has calculated the capital gain and assessable income arising from either a CGT E1 event or a CGT A1 event (thus his opinion addresses either possible ruling by the ATO, albeit one based on a 27 June 2013 CGT event date).
As I understand his oral evidence, while Mr Sneddon considers that it is more likely that the relevant CGT event was a CGT E1 event, he considers that it is likely that the ATO will determine that it is a CGT A1 event, saying that the creation of settlement of the trust "is a sophisticated provision as far as the ATO is concerned, and by that I mean it's not one that they entertain lightly" (T 258.9).
Mr Sneddon referred in that regard to the decision in Truesdale v Commissioner of Taxation of the Commonwealth of Australia (1970) 120 CLR 353; [1970] HCA 27 (Truesdale), in which Menzies J held that a person who pays money to the trustee of an existing settlement trust (of which another person was the settlor) with instructions that it is to be applied subject to the trust did not "create a trust" within the meaning of s 102(1) of the Income Tax Assessment Act 1936 (Cth) in respect of the money or of the income of assets in which it is invested. Mr Sneddon referred to this simply for its consideration of the concept of creation of the trust in the context of the person who settled the sum that created the trust; contrasting this with the constructive trust situation which Mr Sneddon described as "not the simple case of somebody settling a sum and thereby creating a trust in respect of that settled sum". (I interpose to note that, in Truesdale, Menzies J considered that the words "created a trust" in the statutory provision there under consideration were not apt to describe the payment of money to a trustee to hold under a trust already constituted (see p 362); and held that the meaning of those words should not be expanded to cover the making of contributions to a trust already created (see p 363). It is not suggested that this authority assists in determining the issues here raised on the capital gains tax implications of a declaration of a constructive trust over property.)
In summary, Mr Sneddon has calculated the capital gain resulting from a CGT event (either E1 or A1) happening on 27 June 2013 in respect of the properties as totalling $7,752,473 (see at [115] of his 16 November 2018 affidavit). He then deducts from that amount a series of CGT concessions (totalling $6,958,075) which he considers would apply, as follows: a Division 115, 50% discount ($3,876,237); a Division 152-B, 15 years exemption ($1,287,442); a Division 152-C, 50% asset reduction ($1,294,397); and a Division 152-D, retirement exemption ($500,000); and calculates that the assessable/taxable income is $794,398.
Insofar as Mr Sneddon's calculations (as also was the ATO application) are based on the assumption that the happening of the CGT event (be it an E1 or A1 event) was on 27 June 2013 (the date on which the purported notice of termination of E Co's lease occurred), Mr Sneddon confirmed, in cross-examination by Senior Counsel for the first defendant, that his adoption of the 27 June 2013 date as the date of happening of the CGT event was something done on instructions, in the sense that the information with which he had been provided contained a statement that there was a finding that a constructive trust came into existence on or around 27 June 2013 (see T 247.10; 23). (That is consistent with the opening submission for the plaintiffs on the re-opened hearing to the effect that a constructive trust over the properties would be found to have arisen by "no later than" 27 June 2013; and, as I understand it, this was the basis for the instructions given to Mr Sneddon.)
While Mr Sneddon also said that he thought it more likely that 27 June 2013 would be the time of the CGT event (see T 246.34); as I understand his oral evidence this is based on his understanding of the findings that had been made in the principal judgment, namely his understanding that by the judgment the sons "acquired an interest in the properties on 27 June 2013" (see [8] of his 16 November 2018 affidavit), whereas I did not make any specific finding to that effect.
Thus, insofar as Mr Sneddon's opinion as to the capital gain and assessable income in the present case is based on an understanding that a constructive trust came into existence on or about that June 2013 date; and hence that there was either a change in the beneficial ownership of the property at that date (a CGT A1 event) or new interests in the property were created at that date (a CGT E1 event) (see T 246.49), his calculations are premised on a basis that, as I explain below, I do not accept to be correct.
There was some debate in the course of oral submissions as to the time at which, in accordance with the authorities, such a trust would be recognised as having arisen - to which I refer in due course (see [607]ff below). Suffice it here to note that I remain of the view expressed in Varma v Varma (2010) 6 ASTLR 152; [2010] NSWSC 786 (Varma), and cited with approval in McNab v Graham (2017) 53 VR 311; [2017] VSCA 352 (McNab v Graham), that such a trust would be recognised as arising at the time of the reliance on the relevant representation or promise (or in this case on the expectations encouraged by the first defendant in his sons) that makes it unconscionable for the relevant party later to resile from that representation or promise (or to act otherwise than in accordance with those expectations). Accordingly, I consider that any constructive trust that should be declared to have arisen in the present case is one that should be recognised as having arisen much earlier than 27 June 2013.
Hence, the calculations carried out by Mr Sneddon (while instructive as to the likely CGT consequences of the findings of constructive trust) will (as he accepted in the witness box) require some amendment (through no fault of his own), whatever the position the ATO may take as to the particular kind of CGT event that has here occurred. What both experts seem to agree with, however, is the proposition that there is likely to be at least some CGT liability on the part of the first defendant if relief of the kind contemplated in respect of the properties is now granted in favour of the sons.
Before turning to the way in which Mr Sneddon has calculated the potential CGT liability (based on a 27 June 2013 CGT event), I note that one relevant distinction between the two types of CGT events, as explained by Mr Sneddon in cross-examination, is as to whether the ATO would now be out of time to issue an amended assessment. Mr Sneddon explained that, where there is a CGT A1 event (i.e., a change in ownership), the ATO has unlimited time to issue an amended assessment (see T 256.36ff) but that, where there is a CGT E1 event (i.e., creation or settlement of a trust), the general amendment provisions in s 170 of the Income Tax Assessment Act 1936 (Cth) would generally apply (under which there is a four year time period within which an amended assessment can be made). That said, Mr Sneddon also pointed out that, even if there is a CGT E1 event, there would be power to amend an assessment at any time where there has been fraud or evasion (the latter, "evasion", being used in the sense of avoidance, Mr Sneddon giving as an example of this the scenario where the taxpayer knows there is a tax liability but does not report it) (see T 257.39ff).
Mr Sneddon's explanation as to the basis of his conclusion that the concessions referred to at [115] of his affidavit would be applicable in the present case is as follows.
As to the Division 115 concession, Mr Sneddon notes (at [23]) that this Division of the 1997 Act allows 50% of a capital gain derived by an individual to be disregarded where the CGT asset was acquired more than 12 months before the CGT event happened. (Pausing here, all of the properties in question were purchased more than 12 months before 27 June 2013, which means that this requirement is satisfied if that be the date of the relevant CGT event. However, if the relevant CGT date is 1 July 2003 then only the properties other than Properties No' 9, 10 and 11 were purchased more than 12 months before that date - Property No 9 was purchased just within that 12 month period - on 10 October 2002; Property No 10 was not purchased until about October 2003 and Property No 11 was not purchased until April 2005. Insofar as those last two properties were not purchased until after the July 2003 date, there cannot logically be a CGT event in relation to a particular asset before it is acquired. (For those later property acquisitions, which occurred after the date on which I have found there was detrimental reliance on the expectations engendered by the first defendant, it seems to me to follow from the findings I have made that those properties should be recognised as having been immediately impressed on acquisition with a constructive trust, in which case there would probably be no CGT liability at all. That issue was not, however, explored in cross-examination of the tax experts.)
As to the Subdivision 152-B (small business 15-year exemption) concession contained in the 1997 Act, Mr Sneddon says this is often described as the "15-year retirement exemption" (see [39] of his affidavit). He explains that, in general terms, this provides a total exemption for CGT on an asset which would otherwise be subject to CGT, if the taxpayer owned the asset for at least 15 years and the taxpayer is 55 years of age or over and is retiring or permanently incapacitated (see [40]). Thus, if it applies, and Mr Sneddon explains that the taxation legislation does not permit the taxpayer to choose whether or not to apply the 15-year exemption (see [44]) and that where the 15-year retirement exemption applies none of the other CGT small business relief concessions can be applied (see [45]), this exemption operates to allow the taxpayer to disregard the whole of the capital gain (as reduced by Division 115) derived by the individual from the CGT event (whether that be a CGT E1 event or CGT A1 event) (see [43]).
Mr Sneddon explains (see [46]) that, for the CGT small business 15-year exemption (i.e., the exemption under Subdivision 152-B) to apply, the following conditions must be satisfied: first, the four "basic conditions" in Subdivision 152-A; second, that the taxpayer continuously owned the asset for the 15 year period ending just before the CGT event happened; and, third, where the taxpayer is an individual, when the CGT event happened the taxpayer was 55 years or older and the event happened in connection with the taxpayer's retirement or the taxpayer is permanently incapacitated at the time of the CGT event.
Mr Sneddon then (from [47]-[84]) addresses the four basic conditions in subdivision 152-A (which included that the taxpayer is a small business entity for the income year and that the CGT asset satisfies the active asset test) before addressing the additional conditions for the exemption (as to age and retirement/incapacity) (at [85]-[104]).
Mr Sneddon, having expressed the opinion that the first defendant satisfies the conditions for the operation of Subdivision 152-B of the 1997 Act by the application of the small business 15-year exemption ([22]), concludes at [106] that the small business 15-year exemption will operate to exclude the whole of the capital gain from the CGT event happening in consequence of the disposal of both the 3/6 Aggregation and the Main/7 Aggregation ([107]) but that the exemption will not apply to Properties No 9,10 and 11 (as they have not been held by the first defendant for more than 15 years before the happening of the CGT event) (see [108]).
However, at [28] of his affidavit Mr Sneddon records the acquisition of the Main/7 Aggregation as having occurred in 1999 and, in the table of calculations at Annexure A, Mr Sneddon records the Main Property (by which he seems also to include Property No 7, which together with the Main Property, is referred to as the Main/7 Aggregation) as having been acquired in March 1999; therefore having been acquired less than the 15 year period before the CGT event (assuming for present purposes that to be 27 June 2013). In cross-examination (T 249.36) Mr Sneddon accepted that that was the case. Therefore, the small business 15-year exemption at best would only be capable of operation in relation to the pre-June 1998 acquisitions (of which there were only four, namely Properties No 3, 4, 5 and 6).
As to the Subdivision 152-C concession, this is referred to by Mr Sneddon as the "small business 50% active asset reduction" (or in his summary as the "50% asset reduction). Mr Sneddon explains (at [110]) that the small business 50% active asset reduction (by which I understand him to be referring to the Subdivision 152-C concession) applies (unless the taxpayer chooses for it not to apply) if the basic conditions (set out in Subdivision 152-A) are satisfied (namely, that a CGT event happens to a CGT asset; that the CGT event has resulted in a gain; that the taxpayer is a small business entity for the income year; and that the CGT asset satisfies the active asset test (see [49] of his affidavit) but that there are no further requirements (see [112]). (He also says that "[o]therwise the small business retirement exemption of [sic; query or?] the small business rollover (or both) may apply to the capital gain that remains after applying the small business 50% active asset reduction" (see [111]).)
As to the Subdivision 152-C exemption, Mr Sneddon explains that if the taxpayer satisfies the basic conditions, the capital gain that remains after applying any current year capital losses and any unapplied prior year net capital losses, and the discount capital gain concession of 50% (where the property has been held for more than 12 months) is reduced by a further 50% (i.e., effectively the capital gain is reduced by 75%).
Finally, as adverted to at [111] of his affidavit, Mr Sneddon applies the Subdivision 152-D small business retirement exemption (of $500,000) (see [26]). Mr Sneddon explained in cross-examination that the amount of $500,000 is the maximum (lifetime cap) permitted by the subdivision in relation to the application of that concession (that not being indexed) (see T 250.21ff).
In cross-examination by Senior Counsel for the first defendant, Mr Sneddon confirmed that "the best case scenario in terms of minimising the liability" is the conclusion at [115] of his affidavit (T 250.19), i.e., that the assessable or taxable income is calculated at $794,398.
I emphasise here that this, however, assumes that the relevant CGT date is 27 June 2013. If the relevant CGT date were to be, say, 1 July 2003, then none of the relevant properties had by then been held by the first defendant for the requisite 15 year period in order to enliven the 15-year exemption (and, as noted above, one of the remaining properties would not have been held for more than 12 months before the CGT event so as to trigger the Division 115 discount - Property No 9). (As also noted above, Properties No' 10 and 11 were not purchased until after that date so the relevant CGT event in relation to those properties was not made clear.)
The prospect of an earlier CGT event date was not explored in any real depth in the course of the concurrent hearing of the experts' evidence on the CGT issues. Mr Sneddon was asked about the position that the ATO might take if there were findings (made not until, say, 2018) that there was a trust arrangement in place from 2002 or 2003 but his response to that was to address this in the context of whether an amended assessment could now still be issued (there explaining the distinction between the CGT events E1 and A1). He said that (from T256.36):
WITNESS SNEDDON: So the first thing is if a CGT event took place in 2002 could the ATO take any further action. Section 170 of the 1936 Act generally limits the Commissioner to four years in which to make an amended assessment. There is an exception which, as set out in subsection (10)(aa) of section 170 [sic; s 170(10AA)] ‑ and my recollection is at item 10 of the table to that section, which allows the Commissioner an unlimited time to amend assessments in relation to certain CGT events. One of those CGT events for which there is an unlimited time of amendment is CGT event A1. I mention that particularly because you might recall that the application for a private ruling to the ATO was asking whether the relevant CGT event was A1 or E1. If the relevant event was CGT A1 then the Commissioner, pursuant to section 170(10(aa) [sic; s 170(10AA)] has an unlimited time in which to amend an assessment to give effect to the CGT event in 2002. Would the Commissioner impose penalties? The answer is that if the Commissioner issues the assessment ‑ in other words, if the taxpayer doesn't advise the Commissioner and requests an assessment and the ATO issues what's described as a default assessment, the legislation provides for a mandatory 75% penalty to be imposed. At the same time, where that penalty is imposed, it is open to the taxpayer to appeal to have the penalty remitted and naturally the ATO will take all circumstances in to account when determining whether to remit the penalty. I will be very surprised if the ATO did not charge interest on any additional tax that had been assessed in consequence of the CGT event of 2002. The ATO has unlimited time to amend the assessment if it's CGT event A1.
Mr Sneddon had earlier confirmed, in answer to a question as to what further action the ATO, on its own initiative, might take after a private ruling was made on the application, that he expected that the ATO would assume that the taxpayer concerned would lodge any amended returns that were necessary and, failing lodging those returns, that in the fullness of time the ATO might issue default assessments itself (T 248.1).
Questioned (at T 253.9) as to whether, on the assumption that the CGT event was the date on which the actual transfer of the properties occurs (i.e., if there were now to be an order for the transfer of properties some time in 2019), there would be any exemption applicable "beyond the 50%" (by which I understood Senior Counsel for the first defendant was referring to any exemption beyond the initial Division 115, 50% concession), Mr Sneddon said (at T 253.18ff), that in his opinion it was more likely than not that "the concessions" (by which I understand him, in the context of his answer, to be referring to the Division 152-C and 152-D concessions) would be able to apply. What he said was (from T 253.18):
Well, my opinion is that there probably - it's more likely than not, that the concessions would be able to apply, the reason being that the concessions ‑ to be eligible for the concession, you must satisfy either of two ‑ the four basis conditions, one of those conditions is that you satisfy either the net asset value test or the small business turnover test. Accepting your assumption that the time of change in ownership might be around now, approximately now, then it means that the parent ‑ the father, at this time, on the face of it, seems to be not carrying on a business, so the small business test would not be appropriate and that couldn't be satisfied. The alternative test would have to be considered and the alternative test is an asset value test, the market value of the assets less the liabilities that relate to those assets and I have expressed in my affidavit of 16 November that I would believe that I consider the market value of the properties should take into account the interests in those properties created by the judgment in consequence of the actions of 27 June 13 or, alternatively, if those circumstances don't change the market value but that has created a liability which relates to those assets and the consequence of that may be to bring the taxpayer, in this case, the father, to a position where his net assets were less than $6 million in which case the CGT small business concessions may apply, in which case the 15‑year exemption may apply.
The last comment (that the 15-year exemption may apply) is consistent with the assumption that the CGT event is only found to arise on the actual transfer of the properties (in which case all of the properties will have been held for the requisite 15 year period). Thus the issue that Mr Sneddon was addressing in the above answer, as I understand it, is that the first defendant would not now satisfy the third of the four basic conditions in Subdivision 152-A (namely, that he be a small business entity for the relevant income year); but what Mr Sneddon there seemed to be saying was that there was an alternative test (the net asset value test), and that, for the purposes of that test, the ATO would take into account (when determining the market value of the properties in the first defendant's hands) that, by reference to the findings made or which might be made consequent upon the principal judgment as to the existence of a constructive trust, that the value of the properties was considerably less or that there were liabilities (as constructive trustee) in relation to those properties that also had to be taken into account. He said (from T 254.45):
What I was raising was that if a person owns land in the capacity as trustee, then the value of the land may be one figure but the value of the land to the trustee could only be determined after taking into account the rights of the beneficiaries.
Mr Sneddon explained the active asset test in cross-examination (in the context of whether it was necessary to satisfy the affiliate requirement as at the time of the CGT event (for the best case result that he considered would arise - see [115]), Mr Sneddon explained the position as follows: (from T 250.46)
... If you like - I'm sorry that these provisions aren't as straightforward as they might be. In order for the small business concessions to apply four basic conditions have to be satisfied and one of those conditions which is sometimes the most important of those four conditions is either the turnover test or the net asset value test. The turnover test hinges on whether a person is carrying on a business and whether the ordinary income exceeds 2 million. The asset test turns on what's the market value of the assets less the liabilities that relate to those assets, then the other condition or one of the other three conditions is the active asset test, and that means that an asset must qualify as an active asset. In order to qualify as an active asset, briefly, the asset must have been used for more than 50% of the period of ownership in the course of conduct of business by the taxpayer or the taxpayer's affiliate. So strictly speaking, it is possible that an asset might be acquired in year 1 used for ten years in business, then rented up until year 15, then sold in year 15 but yet that asset would qualify as an active asset and if the property had been used in business by a company owned by the owner from years 1 to 10, then the asset would still satisfy the active assets test but it wouldn't be necessary that the company which conducted that business be an affiliate of the owner at the time of the sale. So, strictly speaking there does not have to be a coincidence between the affiliate and the time of the CGT event. [my emphasis]
Mr Sneddon explained that if the relevant CGT date was 27 June 2013 then, for the 15 year exemption to operate, the relevant property or properties would have to have been purchased by no later than June 1998 and, as to the active asset requirement, Mr Sneddon explained that the property has to be an active asset for more than half of its life and an active asset is an asset used in the course of business. He explained that it can be used by an affiliate of the owner; what is required is that for more than 50% of the period of ownership it is used in the course of business by either the owner or the affiliate of the owner (T 252.24). Thus, he explained, it is not essential that it be used by an affiliate for the period in which it qualifies as an active asset. Mr Sneddon gave the following example (from T 252.36):
So I could carry on business on a block of land, I could then have my company take over that business and continue to conduct the business on that same block of land so for part of the period of ownership I have conducted business, it's qualified as an active asset, for another part of the period of ownership my affiliate has conducted business, both terms contribute to the period it has been an active asset.
Mr Sneddon considered that if the affiliate relationship (the affiliate carrying out business on the land) was sustained to within seven and a half years of the 27 June 2013, the active asset test is likely to have been satisfied (see from T 253.1):
'-[T]he test for an active asset is that it must be used for half of the period of ownership or where the period of ownership is 15 years or more, seven and a half years is sufficient. So, if I own a piece of land and I use it in business for seven and a half years but, nonetheless, I rent it for another 12 and a half years, when I sell it, it will still qualify as an active asset because of that seven and a half years being used in the conduct of business either by myself or an affiliate.
As to how the ATO would take into account whether the first defendant had retired (it being put to him that, although on 27 June 2013 the first defendant was no longer on the property, this had nothing to do with the first defendant retiring), Mr Sneddon said that (T 260.10):
The ATO is reasonably generous in that area and I think you would have to include other factors and the ATO would probably consider other factors. The other factors would include the age of the taxpayer, the health of the taxpayer and also the provisions don't anticipate an immediate retirement of the taxpayer. In other words, a person can retire gradually over a period so I wouldn't like to say that what you have said is correct.
Mr Sneddon accepted that it would be relevant, that not long after that CGT event, there was a campaign to sell the properties, which would be consistent with the retirement proposition. He also accepted that if it was the expressed view of the person in question to take up their small business activity at a later time that would be another factor that ATO would take into account but said (from T 260.30):
It's a factor that the ATO would take into account. The ATO has, if my recollection is correct, issued private rulings which, in circumstances where the taxpayer has ceased to carry on what you might describe as large scale undertakings and continued with smaller undertakings and the ATO has accepted that the person has retired but it would be fair to say that there have been other circumstances relevant to that individual private ruling which assisted the ATO reaching that conclusion.
As I understand his evidence (at T 255.30; 38), Mr Sneddon confirmed that, for the purposes of the asset value test, the ATO takes into account, where land is held by a trustee, that the value of the land to the trustee (as trustee) might be a lesser value than the value of the land if it were held outright (i.e., if it were not impressed with a trust having regard to something that had happened many years ago). In that regard, Mr Sneddon said (at T 255.38ff):
Yes. It's the value of the assets of the taxpayer, so what is the value of the asset of the taxpayer? In this case the taxpayer may be in a position or role as a trustee, so what is the value of the taxpayer's interest as trustee in those properties.
The plaintiffs note that, in cross-examination, Mr Sneddon accepted that, when considering capital gains tax where the landowner was a trustee, "the value of the land may be one figure but the value of the land to the trustee could only be determined after taking into account the rights of the beneficiaries" (T 254.45ff).
I found Mr Sneddon to be an impressive witness. He explained logically the issues raised by the particular circumstances of the present case and gave considered answers to the questions he was asked in cross-examination. I have confidence in his assessment of the likely potential CGT liability (albeit that it proceeds, as he was instructed, on the basis that the CGT event occurred on 27 June 2013; a proposition which I do not accept insofar as I have found that the constructive trust arose from 1 July 2003).
Mr Lam
Mr Lam's opinion, as contained in his report dated 16 November 2018, differs markedly from that of Mr Sneddon (Mr Lam opining that the first defendant's liability for capital gains tax will be significantly greater than that estimated by Mr Sneddon). He estimated the net capital gain, based on Mr Donoghue's valuation of the properties (of $21,080,000), at $6,916,236 and, based on Mr Tremain's valuation (of $18,950,000), at $5,821,236. He said that the estimated capital gains applied the 50% general discount (on the basis that the first defendant had held the assets for more than twelve months) but concluded that the small business CGT concessions should not apply ("as the basic conditions appear to be incapable of being met") and was of the opinion that no other CGT concessions were available (see the executive summary to his report).
The main explanation for the difference between the two experts is largely based on the assumed CGT event. Mr Lam was instructed to assume that there would be a transfer of the properties following the outcome of these proceedings and he calculated the capital tax liability on the happening of that event. He had not been provided with either the plaintiffs' instructions or the reports of Mr Sneddon (see T 261.32-262.4). (There was also a difference of opinion as to whether the first defendant had retired as primary producer but that, as I understand it, followed from the different dates at which the CGT event was being approached.)
In cross-examination, Mr Lam accepted that he had been asked to assess the capital gain tax consequences of a transfer to happen at or after 23 October 2018, and was asked to assume that the first defendant had not been consulted by A, B or C in regards to the business of E Co since at least 2010.
Mr Lam also accepted in cross-examination that his understanding was that the calculation of the market net asset value of a taxpayer was to be done at the time of a CGT event and that the ATO would take into account the assets of the taxpayer, legally held or beneficially held, at that time. He accepted that if the CGT event is a transfer which happens now or at some point in the future (i.e., a CGT event A1) "the ATO would have regard to the correct characterisation of the taxpayer as the owner of the asset which is the subject of the A1 event as to whether or not that taxpayer at the time of the CGT event A1 was a trustee or they owned the property outright" (T 262.31ff). He confirmed that it would make a difference to the ATO's assessment if the taxpayer was the beneficial owner or a trustee.
Conclusion as to CGT evidence
Without intending any disrespect to Mr Lam, I found his evidence less helpful than that of Mr Sneddon. That is because the instructions on which Mr Lam's opinion was based did not address the real question thrown up in relation to the CGT issues, which is how the ATO would approach the CGT consequences of a declaration, made at the end of contested proceedings, that properties were held on constructive trust that had arisen at a date many years before. Further, the fact that he had not been provided with Mr Sneddon's report (or the plaintiffs' instructions in relation thereto) meant that Mr Lam was not able usefully to engage in discussion on the topics that I considered of most relevance.
I therefore regard Mr Sneddon's evidence as the most helpful on the issue as to the potential exposure of the first defendant to CGT liability but am still not confident that the extent of the CGT liability has been calculated on the correct assumptions. Without the benefit of submissions from the Commissioner, or the Commissioner being bound by any such finding (he not being a party to these proceedings), it is not appropriate for me here to express an concluded view about that issue.
The upshot of Mr Sneddon's evidence, as I understand it, is that the actual quantum of any potential CGT liability cannot be determined unless and until the nature and time of the CGT event is determined. The likelihood, however, seems to be that there will be significant concessions applicable to reduce the CGT liability - whether because the CGT event is taken to be 27 June 2013 and the concessions identified by Mr Sneddon are applicable; or because the CGT event is the date of actual transfer of the properties but at that stage the value of the assets in the hands of the first defendant must take into account the imposition (or declaration) of a constructive trust over those properties arising from conduct many years ago; or because the relevant CGT event is a CGT E1 event occurring back in 2003 but the Commissioner is out of time to issue an amended assessment; or, on what seems to me perhaps the most likely scenario, that the relevant CGT event is a CGT A1 event occurring back in 2003 (there then being an unlimited time in which an amended assessment might be issued) but at which time the capital gain would be significantly less (having regard to the values attributed to the properties by the respective valuers in 2003), nevertheless it is a liability in respect of which the Division 115 50% reduction would apply in relation to most of the properties, to which there might be added the Division 152-C reduction and the Division 152-D reduction. I readily accept that this may not cover the realm of CGT possibilities on what Mr Sneddon says is a novel tax situation. On none of those scenarios, however, is the total assessable income in the order of that estimated by Mr Lam.
There would, of course, be the prospect of interest and/or penalties. Mr Sneddon considered that it would be very unlikely that interest would not be charged but, as to penalties, he explained that the ATO would take all circumstances into account when determining whether to remit the penalty and one might well envisage an application for relief at least against the imposition of penalties if the relevant CGT event is one that no one appreciated had arisen (and that was not recognised by Court order until the making of orders at the conclusion of a long and bitterly fought case).
The first defendant relied on three reports prepared jointly by directors of Lonergan Edwards & Associates Ltd, Mr Wayne Lonergan and Dr Hung Chu, namely reports dated 12 September 2018, 19 November 2018 and 7 December 2018, respectively (Exhibits 19, 20 and 21).
Objections to the Lonergan Edwards reports
Objection was taken by the plaintiffs (perhaps rather ironically, since the ultimate conclusion reached in those reports is as to a present inability of the plaintiffs, individually or collectively, to pay amounts of the order there being considered if that were to be required as a lump sum following the making of final orders - a position with which one would not expect the plaintiffs to cavil) to the admission of the whole of the reports on various grounds. The general complaints made were: first, insofar as reference was made to the first Francis report that the first defendant was not proposing to read that report or to call Mr Francis for cross-examination; and, second, that the Lonergan Edward report, were jointly prepared (invoking what was said in Paino v Paino [2005] NSWSC 1313 (Paino); see below). There was also objection taken (at the conclusion of the re-opened hearing) to those portions of the Lonergan Edwards report in which reference was made to certain valuations obtained by the plaintiffs in 2016 as to the respective hotels (the C and P Hotels) (the Robertson Valuations) (see for example [170]-[178] of the first Lonergan Edwards report, where the combined adjusted/maintainable annual EBITDA (i.e., earnings before interest, tax, depreciation and amortization) of the hotels adopted in the Robertson Valuations was adjusted and an indicative valuation range was derived; and [60]-[61] of the third report, which applied the adjustments used in the 2016 Robertson Valuations to the FY17 adjusted EBITDA).
As to the plaintiffs' complaint in relation to the reliance placed by Lonergan Edwards on the first Francis report (dated 17 August 2018), the first defendant's response (as adverted to earlier - [98]) was to confirm that he would not read the passages in the first Lonergan Edwards report (see Exhibit 19 at [6(b)] and from [201]-[206] (or perhaps through to [209]) of that report), which referred to issues in the Francis report that were considered to be relevant to the assessment of the ability of E Co to raise additional interest bearing debt) (see T 36.15) (but to indicate that, if the plaintiffs chose ultimately to tender the Francis report(s) as had been foreshadowed, then the first defendant would seek to rely on the parts of the Lonergan Edwards report that referred to it - see T 38.40). Ultimately, after I had indicated that I was not proposing to reject the whole of the Lonergan Edwards first report on that basis, the plaintiffs themselves adduced into evidence the first Francis report (as outlined earlier). In those circumstances, nothing further need here be said about this first ground of objection (save to note that in the end the first defendant did not revisit the issue of reliance upon section IX ('Response to Issue 5') of the first Lonergan Edwards report but nothing here turns on it because the assessment of the capacity of one or more or any combination of the plaintiffs to pay the amounts I had considered requiring as a condition of the acceleration of their expectations in relation to the properties was ultimately dealt with by reference to the more up to date information then to hand by the time of the third Lonergan Edwards report).
As to the second ground of objection, reliance was placed on what was said by Barrett J, as his Honour then was, in Paino, in relation to the position where a report had been prepared by two persons but only one gave evidence. His Honour (at [6]-[8]) cited what had been said by Stone J in Cooke v Commissioner of Taxation (2002) 51 ATR 223; [2002] FCA 1315 (her Honour there noting that the requirement that an expert opinion be wholly or substantially based on the expert witness's specialised knowledge could not be met if it was partly based on the knowledge or opinion of someone else; and referring to the approach cited with approval in Rhoden v Wingate [2002] NSWCA 165 per Heydon JA, as his Honour then was, at [61]). Barrett J permitted the plaintiff to examine the expert witness, by means of non-leading questions so that he might inform the court of the parts of the joint report, if any, for which he has been solely responsible; and ultimately rejected the report.
The Court of Appeal subsequently held that the primary judge had erred in rejecting the expert's report (Paino v Paino [2008] NSWCA 276 at [70] (Paino (No 2)), drawing a distinction between the factual components of the report and those expressed as opinion of valuation ([69]) and emphasising that the question whether the report was based wholly or substantially on the expert's knowledge was to be determined on the balance of probabilities. The Court of Appeal (Hodgson JA, McColl JA and Young CJ in Eq, as his Honour then was) made clear (at [66]-[67]) that it was inherent in the process of preparing many expert reports that the factual basis for the opinion expressed is derived from third-party information (noting the necessity that the factual bases of opinions be clearly laid out so that the opinion can be tested) and that an expert is rarely the source of all the factual information in his or her report; and that an expert need not amass all the factual data on which an opinion is to be expressed but could delegate that task to another. Relevantly, for present purposes, at [67], their Honours quoted with approval what had been said by Austin J in Australian Securities & Investments Commission (ASIC) v Rich (2005) 190 FLR 242; [2005] NSWSC 149 (at [329]):
…There is nothing in the law to prevent such delegation from occurring. But it is necessary for the expert who is the author of a report to apply his or her mind to the analysis and reasoning processes that his or her subordinates have developed, so that when the report is finalised, the whole of the reasoning and conclusions that it contains have been adopted as the expert's own reasoning and conclusions. Were that not the case, the expert could not claim to be the author of the report.
The first defendant submitted that the Lonergan Edwards reports in terms made clear that they were prepared as joint reports (noting that the reports are written in the first person plural (see T 37.36) and jointly signed by both Mr Lonergan and Dr Chu (see T 37.46)) and thus that the Lonergan Edwards reports themselves indicated that the authors were jointly responsible for the opinions (and submitted that this could be tested in cross-examination if there were any issue as to this (see T 38.8)). I proceeded at the time on the basis that, if Mr Lonergan made clear, when he was made available for cross-examination, that he held all of the opinions set out in this report (or alternatively that he held some but not others, making it clear which ones he did hold), based on the information set out in the reports, then I would have no difficulty concluding that this was sufficient (in accordance with the principles articulated on appeal from the decision in Paino) for the report(s) to be admitted.
Although, when called, Mr Lonergan was not expressly invited to identify which of the opinions contained in the joint reports were his (as opposed to Dr Chu's) (as I had envisaged when provisionally ruling on the admissibility of the reports), it was in my opinion abundantly clear from the evidence he gave in cross-examination that the opinions expressed in the first person plural in the reports (based on the facts and assumptions set out in those reports) are opinions which he holds (and which he was able cogently to explain. That disposes of the second ground on which objection was taken to the Lonergan Edwards reports.
Finally, as to the objection (raised only towards the conclusion of the re-opened hearing) to those portions of the Lonergan Edwards' reports in which reference was made to the Robertson Valuations, the complaint made was that these valuations could not be relied upon as expert evidence (not having been adduced as expert evidence and the valuer in question not having been called to give evidence in the proceedings).
Senior Counsel for the plaintiffs informed me that the significance of the Robertson Valuations only became apparent when the third Lonergan Edwards report was received (it was served on the Friday before the commencement of the re-opened hearing) because it was only in that report (based on the assumption at that stage of a sale of the C Hotel), that the analysis of the security available by reference to the P Hotel became relevant (and, in that context, it was noted that Mr Lonergan had sought to rely on the adjustments contained in the Robertson Valuations). It was submitted that it was only then, for the first time in the proceedings, that the Robertson Valuations were sought to be relied upon by the first defendant as to the truth of their contents (as distinct from them being contained in a document which was shown to a witness and cross‑examined on during the principal hearing in 2017); and that the prejudice to the plaintiffs at that stage was that they were not able to test the Robertson Valuations (see T 636.31).
It was submitted for the first defendant that these reports had been relied upon by the plaintiffs in the past, from which it was said that the inference could fairly be drawn that the plaintiffs accepted the contents as being accurate (see T 492). This was a reference to the fact that, by letter dated 5 December 2016 from the plaintiffs' solicitor to the first defendant's solicitor (admitted provisionally on the re-opened hearing as Exhibit 22), copies of the Robertson Valuations were provided to the first defendant's solicitor in the context of a request that had been made that the first defendant agree to an extension of a Westpac facility that was in place in relation to the acquisition of the C Hotel (that being a loan to E Co which in turn on-lent the money to AH Co, as trustee for the CI Unit Trust, in relation to the said purchase). The letter stated that this (and other) financial information was provided "with the intent that [the first defendant] is then able to appreciate that financially he has little risk, that the status quo can be maintained without causing loss to either [the first defendant] or [the plaintiffs], and that no matter which [of the plaintiffs or the first defendant] wins the court case, the Westpac facility can be either discharged or maintained as the case may be". As indicated above, I provisionally admitted the letter dated 5 December 2016 from the plaintiffs' solicitor to the first defendant's solicitor as Exhibit 22, and said that I would rule on its admissibility in my final reasons.
The submission for the first defendant was that the plaintiffs had relied upon the Robertson Valuations as accurate documents that properly calculated the value of the hotels, and had used them for a number of purposes, "including to try to satisfy [the first defendant] to provide finance in 2016" (see T 492.22; 634.2). It was said, in closing submissions, that the plaintiffs had placed "heavy reliance" on the Robertson Valuations in seeking to assure the first defendant that he was not at risk by allowing his property to be used as security and it was submitted that this was an admission as to the reliability of the Robertson Valuations. ""In addition, it was noted that the Robertson Valuations had already been admitted in evidence (having been part of a folder of documents put to one or more of the sons in cross-examination at the principal hearing) (see CB Vol 31), without objection by the plaintiffs (and, I might add, without any limitation or qualification by me) and that therefore they were now in evidence for all purposes.
In that regard, as I indicated when this issue was raised in the re-opened hearing, I am not persuaded that any implied admission against interest (as to the proper value of the hotels as at May 2016 or, more relevantly, as to the accuracy of the adjustments made in the Robertson Valuations to which the Lonergan Edwards reports refer) arises out of the provision to the first defendant's solicitors in December 2016 of a copy of the Robertson Valuations. It is clear from the contents of Exhibit 22 that the provision of those documents (together with a raft of other financial information) was for the purpose of providing comfort to the first defendant in the context of the request that he agree to a variation of the Westpac facility (that was secured in part over one or more of his properties). There was no warranty as to the accuracy of any of the financial information there provided (and, given the state of the relationship between the parties by that stage, it could hardly have been assumed that the first defendant would accept at face value, or rely upon the accuracy of, any proposition put to him by or on behalf of the plaintiffs).
Although it was submitted that there had been two occasions (those being, as I understand it, during the principal hearing when the Robertson Valuations formed part of a tender to which there was no objection and at the commencement of the re-opened hearing when no issue was raised as to reliance on those portions of the Lonergan Edwards reports which referred to the said valuations) where the plaintiffs had had an opportunity to say that they have had concerns about the valuations or that they should only be relied upon for a particular purpose, I do not accept that this leads to the conclusion that the plaintiffs' objection to that evidence now being relied upon as expert evidence at this re-opened hearing (or as evidence as to the truth of the opinions contained therein) should be rejected.
That said, the Robertson Valuations were not admitted into evidence as expert reports compliant with the applicable requirements under the rules relating to such evidence (nor was it suggested that this was the case). In circumstances where it is impossible for me on the material before me to test the opinions expressed in the Robertson Valuations, the weight that could be placed on the opinions contained therein is doubtful. (Although it was submitted for the first defendant that, having utilised the valuations for their own purposes, it might be assumed that the plaintiffs would not have sought to cross-examine on this material in any event, I cannot accept that - in circumstances where the valuations are now sought to be deployed in a different context and where there has been a complaint by Senior Counsel for the plaintiffs as to the prejudice that would be sustained by reference to the inability to test that evidence suggesting that evidence might have been sought to be adduced in relation to this issue had it been raised earlier.)
Thus I have concluded that, although the letter dated 5 November 2016 (Exhibit 22) should be taken now to be admitted without the provisional qualification formerly placed on it; being relevant to the basis on which the Robertson Valuations were provided to the first defendant, I do not accept that the plaintiffs have thereby (in any sense that would be relevant to the present question, which ultimately is as to the objection raised to portions of the Lonergan Edwards reports) accepted as accurate the statements contained in the Robertson Valuations. Furthermore, I consider that no weight can be placed on the contents of those valuations insofar as they have not been tested.
Accordingly, insofar as the Lonergan Edwards reports place reliance on the adjustments applied in the Robertson Valuations, I am not persuaded that the factual basis for those adjustments has been established. That has the consequence that those portions of the Lonergan Edwards reports (as identified earlier) should be rejected. (I note that in cross-examination Mr Lonergan indicated that he would, independently of the Robertson Valuations, have been of the view that there should be an adjustment to various items in the hotel trading results; basing this largely on a common sense view of certain expenses - I refer to this further in due course.)
Summary of the Lonergan Edwards reports
I turn now to the Lonergan Edwards reports themselves.
As to the first 12 September 2018 report, what was sought (by a letter of instructions dated 20 July 2018) was an expert opinion as to the ability of E Co, or the sons, or E Co and the sons collectively, to pay to the first defendant, without jeopardising E Co's grazing business: either $2,123,253 (the Loan Amount); or the total market rent payable in respect of the first defendant's life expectancy (the Market Rent Amount); or both the Loan Amount and the Market Rent Amount, having regard to the instructions given by the first defendant's solicitor as to various matters and the documents with which the experts were provided (see 5-(c) of the first report). In each case, if the conclusion was that E Co, or the sons collectively, or E Co and the sums collectively, was or were unable to repay the Loan Amount and/or the Market Rent Amount as a lump sum, opinion was sought as to a reasonable regime for the repayment of the Loan Amount and/or the Market Rent Amount (see [5(d)] of the first report).
Opinion was also sought as to whether the answer to one or more of the said issues would change if E Co's actual annual profit were to be replaced with the reasonable annual profit that could be earned by E Co from grazing operations on the subject properties (referred to as the Achievable Annual Profit) (see [5(e)]). (The response to this last issue (issue 5) (see section IX of the first report) is that portion of the report which, as noted above, was not read by the first defendant in circumstances where Mr Francis, was not by then being called by the first defendant.)
As to the second report dated 19 November 2018, Lonergan Edwards was instructed to adopt the projected annual market rental for the period 1 July 2018 and 1 July 2030 (inclusive) in Mr Donoghue's report; to convert the projected annual market rental stream to be received over the first defendant's life expectancy into a lump sum as at 1 July 2018; and to use the said lump sum as the Market Rent Amount (see [2] of the second report).
By the time of the third report dated 7 December 2018, the plaintiffs had produced an unsigned financial statement of E Co for the financial year ended 30 June 2018 and other financial documents (see [5] of the third report) and it had become known that the C Hotel was on the market for sale (as to this sale, see further below). Lonergan Edwards was instructed to have regard to various 2018 financial statements and other documents of E Co and to make various assumptions in relation to a sale of the C Hotel (see [6] of the third report), including as to: the outstanding balances on the two facilities used to finance the C Hotel (totalling around $11 million) and the outstanding balance on a facility used to finance the P Hotel (around $4.1 million); the agent's commission of 1.75% plus GST payable on sale; the value of the P Hotel; a particular sale price for the C Hotel; and that E Co is not obliged to use any part of the sales proceeds to repay (either in whole or in part) a $2 million loan obtained from Westpac).
Reasoning
The methodology adopted in the Lonergan Edwards reports (see section IV of the first report) in assessing the ability of, first, E Co; second, the sons; and, third, E Co and the sons collectively, to pay the Loan Amount and/or the Market Rent Amount is, broadly: to assess the "surplus assets" of E Co that could in principle be converted into cash and the ability of E Co to raise additional interest bearing debt (in each case without affecting E Co's grazing operations) and then, in the case of the sons, to assess their ability collectively (through their own assets or through their interests in the respective hotels) to raise additional debt "against the uplift (if any) in the market value of their collateral assets" (being their interests in the C and P Hotels and the properties of B and C). Because the proposed sale affects that analysis, where there has been a revision of the calculations it is only necessary to refer to the third Lonergan Edwards report.
As to the assessment of E Co's ability to raise additional debt, the report considered: the interest bearing debt carrying capacity of the company; the extent to which that capacity had been utilised; and the "spare debt carrying capacity" (the difference between the total debt carrying capacity and the currently utilised debt carrying capacity) (see [120] first report).
As to the debt carrying capacity, this was re-calculated in the third report using the FY 18 balance sheet at some $907,000 (see at [35]). Its ability to raise the additional debt of between $2.8 and $4 million necessary to pay the respective amounts was assessed having regard to a re-calculated core asset value base of $22.4 million, comprising the subject properties (at $20 million), the cattle herd (of some $2.5 million), net working capital assets/liabilities (at -$0.2 million) (see [37] of the third report).
Based on that revised core asset base and the assessed target gearing ratio of 25% and 30% (see the first report at [139]-[145], which considered the gearing ratio of two listed companies involved in the farming industry), E Co's implied spare debt carrying capacity was assessed at between $2.5 million and $3.6 million (a mid-point of $3 million) (see third report at [38]). In that calculation, the debt capacity already utilised represented the Westpac loan of $2 million and a $1.1 million loan from Rabobank borrowed against the properties and on-lent to AH Co.
In the first report, the interest cover implied by the utilisation of E Co's spare debt carrying capacity was assessed to ensure the ability sustainably to service the interest payable on the additional debt (see [147]). In calculating that interest cover, EBITDA was used as a measure of profits. In assessing the interest rate payable on the additional debt that it was considered could be raised by E Co, the report adopted a 4.5% interest rate (see [150(d)]).
The third report calculated E Co's adjusted EBITDA for FY18, based on the 2018 profit and loss statement at $365,000. In that calculation, there was added back an amount of $901,500 for "non-recurring legal costs". Then, based on E Co's adjusted EBITDA for FY 18, the report re-calculated its average adjusted EBITDA for the period FY13 to FY18 as $563,000 (see [40]), and, using this an implied interest cover ratio (ICR) of between 3.5 times and 5.0 times was derived (see [41]) (the implied ICRs there calculated being above the observed target/minimum ICR adopted by one of the farming companies to which reference was made in the first report - see [152]).
First defendant's submissions on the Lonergan Edwards reports
It is submitted by the first defendant that the Lonergan Edwards' reports give support for the following findings: first, that the plaintiffs are able to raise as a lump sum the amount of between $4.4 million and $4.9 million, if the sale proceeds from the C Hotel are used to repay the St George debt on the P Hotel; second, that the plaintiffs are able to raise as a lump sum the amount of $5.89 million if the sale proceeds from the C Hotel are not used to repay the St George debt on the P Hotel (see the plaintiffs' evidence on this position -T 93.40-.45; T 97.12; T 93.2ff); and, third, that in either of those two scenarios, the remaining amount due for rent and payment of the Loan Amount can be repaid "over time".
Should no weight be given to the third Lonergan Edwards report on the issue of the further debt raising potential for the plaintiffs upon the sale of the C Hotel, the first defendant says that the position nevertheless remains that the plaintiffs have available to them an increased capacity to make the payments to the first defendant, for the following reasons: first, that the conclusion of the first Lonergan Edwards report remains that there is a capacity to raise a lump sum of up to some $5 million; second, that there is no requirement of St George for the reduction of the debt on the P Hotel upon the sale of the C Hotel; third, that the evidence supports the submission that the net proceeds received from the sale of the C Hotel, after paying out the St George facility on that hotel, will be some $2.4 million; fourth, that the result is the plaintiffs have the capacity to pay as a lump sum the amount of some $7.4 million; and, fifth, that, by realising assets, a significant lump sum amount can be paid (in this regard, reference is made to the evidence (at T 102.12) where B conceded that, by realising the pubs, the plaintiffs (and B's wife) could realise some $9 million (or allowing for the now known sale price of the C Hotel, $6.2 million).
The first defendant notes that the prospect of the need for the plaintiffs to borrow to meet the payments due to the first defendant was something that was raised in the principal judgment. It is submitted that, in order to make the payment of the balance of moneys "due" to the first defendant, orders could be made for a payment schedule over the next 12 to 24 months. Further, insofar as it would be open to the plaintiffs to meet orders for payment to him by selling an asset, the first defendant says that this "would reduce debt-servicing commitments, would still see the plaintiffs with an accelerated asset, would deal with the equity of the first defendant, and allows the plaintiffs to grow their assets".
Cross-examination
Mr Lonergan was cross-examined over parts of three hearing days as to various aspects of the Lonergan Edwards reports.
Strong criticism is made by the plaintiffs of Mr Lonergan's expert evidence, both as to his report and as to his oral evidence. I consider that criticism to be unfounded. I accept that in some particular aspects of the reports the reasoning was not explicitly stated (such as the adoption of a mid point for the EBITDA, which Mr Lonergan explained was "in the maths"); that the comparable organisations used by him were quite different from the business with which comparison is being made (though Mr Lonergan adequately explained the reasons for that in the course of cross-examination); and that his opinion as to the Robertson Valuations adjustment was not supported by any express reasoning in the report. As to his oral evidence, however, I reject the criticisms that have been made of his evidence and, in particular, the suggestion put to him in cross examination that he was acting as an advocate for the first defendant.
In that regard, the following criticisms were made, to which I note my brief response.
First, it is submitted for the plaintiffs that Mr Lonergan "very often answered the question he wished to answer rather than the question that he was asked, and took every opportunity to provide long, discursive answers to questions which were generally non-responsive and included material that was not in any of the reports prepared by him or Dr Chu". One example of a complaint that Mr Lonergan was not being responsive related to the following exchange (from T 603.37):
Q. So if [E Co] borrows $5.2 million, and we assume an interest rate of 4.5%, it's paying $234,000 per annum. Do you agree?
A. It doesn't quite work like that. It's only the additional debt that they have to pay interest on because the existing debt is being paid for by the pubs. So the only debt you worry about is the new debt. It's a slightly peculiar arrangement where‑‑
Q. Mr Lonergan, please, I was asking you about the additional debt.
I did not form the view that Mr Lonergan was being unresponsive in answer to that (or other) question(s). Rather, my observation was that Mr Lonergan (both in the above example and in other instances) was endeavouring to explain the logic of his conclusion. So, in the above instance, I considered that he had been about to explain why it was that the proposition put to him (that E Co on the assumptions given would be paying $234,000 per annum) did not "quite work like that" (T 606.31). I consider that, as an expert witness, Mr Lonergan was there to assist me to understand the financial implications of the matters being put to him; and it does not appear to be disputed that he was well qualified and had considerable experience to be able to do so.
There were certainly occasions on which Mr Lonergan gave relatively lengthy answers. I would describe those as didactic or educative, not discursive, and I regarded them as generally responsive to the questions asked (though perhaps addressing the questions in a more expansive way than the cross-examiner might have wished). True it is that Mr Lonergan on occasion referred to material not in the reports (so, for example, to the cross-referencing work carried out by his staff; or to his knowledge of matters in the hotel industry or of his experience of bankers) (though I note that no particular examples were proffered to support this criticism by the plaintiffs). However, as to the former, it was clear that Mr Lonergan had not been partisan in that respect - he had not provided the cross-referencing material to the first defendant's solicitor nor discussed it with him; and he had no difficulty providing copies to Counsel to review. It was also clear that this material was being referred to and relied upon in effect as an aide memoire not as additional reference material. As to the latter, those arose in the context of the reference in his reports to the adjustments to operating expenses for hotel businesses made in the Robertson Valuations (and seemed to me more to be a statement of what Mr Lonergan considered to be common sense than anything else) and in the context of cross-examination which threw up the question as to how the banks would be likely to treat the overall facility position. Mr Lonergan certainly did not cavil with the proposition I put to him, which was that, if the Robertson Valuations were not able to be relied upon, then there would be nothing in the reports to enable me to test the basis for the adjustments in question (which was hardly the response of someone advocating for a particular outcome); and his view that the banks would be likely to take an "overall" view of things is borne out by the position it appears that Westpac has itself taken (see the Westpac credit memoranda which I refer to in due course and to which the plaintiffs themselves refer in closing submissions).
Conclusion as to the Lonergan Edwards reports
Early in his cross-examination, Mr Lonergan said that he had not spoken with the legal representatives of the first defendant and he had not provided working notes or the cross-referencing notes to the first defendant's legal representatives. Later, (as already extracted) he observed that he was not entirely clear as to the underlying dispute or issues that might have to be determined in this hearing. There was no suggestion that he had any interest in the outcome of the dispute whatsoever. Mr Lonergan certainly expressed his opinion forthrightly in the witness box; he made clear that his reports were based on instructed assumptions and was careful to identify those; and, where he considered that unfair criticism was made of his report, he responded to that and in some instances challenged the cross-examiner on that; but he also was prepared to express opinions based on assumptions he had not earlier been asked to make and he did not advocate any particular outcome at all. True it is, that he was not able to be swayed from the proposition that a bank would consider the overall asset position of the sons and the companies which they control but in my opinion that is a not unreasonable proposition from a common sense point of view and not unresponsive in circumstances where from time to time in the cross-examination he was being asked to express opinions as to matters on which the bank's perspective of the funding position would be relevant. I consider that the criticism of Mr Lonergan in this regard is misplaced and I regarded him as an impressive and helpful expert witness.
[11]
Stamp duty ruling
There was evidence from a solicitor, Mr James Eager, by affidavit affirmed 31 October 2018, that he obtained a private ruling from Revenue NSW on behalf of the plaintiffs on 10 August 2018 to the effect that a transfer of the properties the subject of the present dispute will be eligible for the exemption under s 274 of the Duties Act 1997 (NSW) and as such will not be liable for stamp duty at ad valorem rates (see his affidavit at [3]-[4] Annexure B). The first defendant complained in initial submissions for the re-opened hearing as to the affidavit of Mr Eager evidencing "in a hearsay fashion" a private ruling of Revenue NSW that no stamp duty is payable. Ultimately, however, there was no dispute on this issue. The first defendant notes that ordinarily stamp duty is borne by the transferee and submits that an order should be made in terms that any such liability is borne by the plaintiffs.
[12]
Statistical evidence as to life expectancy
The plaintiffs' solicitor, Mr Fitzgerald, annexed to his affidavit of 31 October 2018: the most recent published life tables, being the Life Tables NSW 2015-2017, which disclose that, as and from the first defendant's 79th birthday this year (2019), he has an average life expectancy of 9.27608 years (see Mr Fitzgerald's affidavit of 31 October 2018 at 2, Annexure A); and the most recent published household expenditure survey, being the Household Expenditure Survey Australia 2015-2016, which discloses that the average weekly total goods and services expenditure of a household consisting of a lone person aged over 65 years is $539.65 per week (Mr Fitzgerald's 31 October 2018 affidavit at 2; Annexure B). There was no dispute as to the life expectancy tables. (There was also no dispute as to the household expenditure survey evidence though the first defendant's submission is that it should not be the basis for calculation of the notional rent payment - as to which I refer in due course.)
[13]
Evidence as to "out of cycle" cattle sales and condition of the property
Each of A, B and the cattle manager employed by E Co at the properties (to whom I will refer eponymously as the Cattle Manager) gave evidence as to the present size of the herd of cattle on the properties and as to sales of cattle said to be "out of cycle" and to have been made in order to fund these legal proceedings. A and the Cattle Manager gave evidence as to the condition of the properties and the need for capital expenditure on the properties. There was an objection by the first defendant that this could not be expert evidence (due to the lack of independence of the defendants) but, as I understand it, this was not sought to be relied upon as expert evidence.
Submissions on the relevance of this evidence
In the plaintiffs' written submissions before the commencement of the re-opened hearing it was said that this evidence was adduced in order to establish that the issue of the termination notice by the first defendant on 27 June 2013 and the subsequent court proceedings had caused "significant damage" to the faming business and the properties for two reasons: first, that the plaintiffs' insecurity of tenure meant that it would be imprudent for them to make any kind of medium to long term investment which might be denied to them if they were not ultimately successful in the proceedings; and, second, that E Co had been forced to make significant out of cycle sales of cattle, first in late 2013 to avoid a "fire sale" in the event that E Co was evicted from the properties, and later to fund the proceedings.
The plaintiffs submitted that A, B and the Cattle Manager had all contributed data and analysis to in the preparation of various tables for the purpose of setting out this "damage". They described those tables as follows: Tables 1 and 2 set out the historical size of the cattle herd and rainfall in the region of the properties; Tables 3, 4, 7 and 8 set out the number of (asserted) "out of cycle" sales of breeding cattle "and the consequent loss of weaners into the future"; Tables 5, 6 and 9 set out the "lost income" flowing therefrom culminating in "lost sales/damages" to the farming business (totalling approximately $9 million); Tables 10 and 13 set out the expenditure on seed and fertilizer on the properties from 2002 to 2014; and, at p 14, the farm income profit and loss from FY 2003 to 2017 and, at p 15, the first defendant's profit and loss from FY 2003 to 2014.
Objection was taken by the first defendant to much of this evidence (and in particular to various tables that had been prepared in relation to this issue) largely on the basis of relevance. (So, for example, there was an objection to [62] and [63] of A's 4 September 2018 affidavit and to a number of the tables contained in what in due course became Exhibit AZ in the proceedings).
There was no objection in this regard to evidence as to the present financial position of the sons (and E Co), nor ultimately as to evidence of past cattle sales (indeed the first defendant accepts that it is probably accurate to say that since 2013 approximately half the stock has been sold off - though noting that this was in a period of drought - see T 25), but it was submitted that the reason that the plaintiffs were in their present position was not relevant on the issues before me in the re-opened hearing. Further, insofar as the plaintiffs had sought to extrapolate into the future the cost to the business of selling (to fund these legal proceedings) what otherwise would have been breeding cows, the first defendant's objection was that this assumed an entitlement to costs on the part of the plaintiffs as against the first defendant, that being an issue not yet determined (or, the first defendant says, able to be determined at this stage of the proceedings) (see T 22.5).
There was a distinction drawn between evidence as to what the plaintiffs referred to as "termination sales" (i.e., sales of cattle following service of the purported notice of termination of E Co's lease on 27 June 2013), to which no objection was taken, and evidence as to what were referred to as "forced sales", to which objection was taken and the extrapolated losses from the reduction of the breeding stock (which are said to be hypothetical). I rejected the description of the sales as "forced" on the plaintiffs by the first defendant, the reference in the heading to Table 9 of Exhibit AZ to "damages" (and I note that the plaintiffs did not place reliance on this heading and expressly disavowed any damages claim in these proceedings), but the objection as to relevance went beyond this.
The relevance of this evidence was put by the plaintiffs as going to the issue that I had raised in the principal judgment, namely that any order be framed so as not to jeopardise E Co's farming business. In essence, the argument for the plaintiff was that one cannot look at the financial position and proceed on the basis that the profitability of the business at present (to which the "out of cycle" sales of the cattle have contributed) is the usual or ordinary profitability of the business and at the same time treat expenses such as the legal expenses (to fund which it is said those sales occurred) as non-recurring expenses, so as to project into the future the profitability of the business at this (what I might call artificial) level. The submission was made that "as matters keep going, they won't have a herd … they'll be farming dirt, that's the reality" (T 24.17).
Relevantly, Table 5 was headed "Loss of income from Termination Notice". There was no objection to the first half of that table, rather the objection was as to the second half of the table ("Loss of income from Forced Sales"). I admitted Table 7 (which dealt with the forced sales over the period) on the basis that it might be relevant to the argument as to any conclusions drawn as to the historic profitability of the business subject to relevance. I rejected Table 8 ("Loss of production and forced sales") and admitted Table 9 (again subject to relevance) (though not the reference to damages in the header).
In submissions, Table 9 was described as "an attempt to put a monetary figure on the losses of E Co flowing from the issue of the Termination Notice and the need to pay legal fees to fund these proceedings". As noted above, the plaintiffs disavow any claim for damages (or equitable compensation) flowing from the conduct of the first defendant but they submit that, to the extent that there is "a balancing of the equities on the question of final relief", the present financial position of the plaintiffs is substantially a consequence of the conduct of the first defendant.
The relevance of Table 9 was put on three bases (as indicated above): first, that business, as presently conducted, is in a position where it has had to sell down about 50% of its stock, so it has a profitability which is inflated by sales which have been out of cycle in order to meet legal costs; second, that the reduced size of the herd impacts on profitability of the business moving forward; and, third, the comparison between that position and the position in which the business might otherwise have been in but for those abnormal expenses. I accepted the potential relevance of that material on the first two points, not the third.
The plaintiffs' submission, based on the evidence of the so-called "out of cycle" cattle sales, is that, whatever methodological doubts may attend the calculations which ultimately appear in the table(s), there is an evidentiary foundation for the claim that the herd has been sold down, and that money has not been expended on pasture improvement, fertilizer and spraying on the properties, by reason of the plaintiffs' insecurity of tenure and the need to pay legal fees.
Substance of the evidence
Turning then to the nub of the evidence as to the castle herd, A's evidence is that the current composition (i.e., as at November last year) of the herd is: 60 bulls; 1306 cows; 259 steers; 147 heifers; and 342 older heifers (next year's maidens) (see A's 15 November 2018 affidavit at [3]); and that 330 nine year old cows and their calves were to be sold in December 2018 and January 2019 to fund these proceedings (A's 15 November 2018 affidavit at [6]). B's evidence is that E Co has been left with no capital reserves to fund improvement of the properties or of the herd (see B's 3 September 2018 affidavit at [47]). B's evidence is further that the plaintiffs are planning to sell further cattle to fund the proceedings, as well as feed for cattle during the drought (see B's 29 October 2018 affidavit at [9]).
The Cattle Manager has deposed in his affidavit sworn 4 September 2018 that he has been employed by E Co since February 2006. His role (explained in more detail at [19] of his affidavit) includes the preparation of monthly reports as to, among other things, sale numbers and which includes a paddock count of stock and monthly handwritten report (see at [6] of his affidavit).
The Cattle Manager deposes (from [20]) to the cattle business cycle of events and (from [23]) to the herd development carried out from 2006. In relation to the state of pasture development, he deposes that 2006 was the last time he recalled that superphosphate was applied to the properties ([31]) and says that the uncertainty of the litigation means that no money has been spent on pasture improvement ([37]).
The Cattle Manager gives evidence as to what he says were out of cycle sales in the financial years 2013 and 2014 (after the termination notice) and then in the period through to August 2018 (and was cross-examined on that evidence), by reference to his monthly reports.
It quickly became apparent in the course of the Cattle Manager's evidence in cross-examination that he had provided the monthly management reports or returns to A (saying that "it goes through the office") and that someone else had prepared the tables to which he refers in his affidavit. Without any criticism of him, it was apparent that he was not readily able to understand the tables. As I understand his evidence, it is simply that in the ordinary course calves or cows would not be sold before the end of their breeding cycle (and hence those sales were labelled "out of cycle" sales). He accepted that there were errors in the tables insofar as sales were included in the tables that did not fall within that category of sale. So, for example, there was the following exchange in relation to Table 3 (from T 221.19):
Q. When you say at paragraph 55, and I'll ask you a question about table 3 then for a moment, sir, when you say at paragraph 55 that, "From looking at the monthly reports to which I've referred to just above, I have formed a view about which sales were out of cycle sales"?
A. Yep.
Q. When you say from looking at the monthly reports you have formed a view, does that mean that what's set out in table 3 is based on those monthly reports that you've prepared?
A. Yeah, I think so, this is all come out of - it's put in a different way that I put it in, but it ‑ come out on the monthly reports.
Q. I'll come back to that in a moment, but if it's come from the monthly report and you've formed a view, does that mean that at the time you formed that view that you've set out as the two ‑ the sales that are out of cycle, you had reference to your monthly reports, you looked at the numbers in there?
A. Yeah ‑ yeah, well I think so. I'm sorry.
…
Q. … I'm just trying to work out that you're getting those numbers that are in table 3 what you referred to to help you get those numbers was you went through your monthly reports to work out which were out of cycle and which weren't?
A. Well, all this, you know, all this stuff that's out of cycle, like cows and calves, we just don't sell cows and calves. It, you know, sort of ‑ we let the cow rear the calf and then we turn the cow off as a fat cow and keep the calf.
First defendant's submissions as to the "out of cycle" cattle sales" evidence
It is convenient at this point to note the submissions made by the first defendant as to the evidence adduced by the plaintiffs in support of their submission as to the impact of the need to pay legal costs on the operation of the business (i.e., that the out of cycle cattle sales has meant that E Co has been left with no capital reserves to fund improvement of the properties or the cattle herd).
The first defendant submits "[t]his part of the case is as damaging to the plaintiffs as their lack of disclosure", and, in particular, makes the following submissions: first, that B has no real idea of what a "DSE" (Dry Sheep Equivalent) is, pointing to the seemingly inconsistent references to it at [11] and [12] of B's 3 September 2018 affidavit and B's refusal to conceded that "progeny" is a reference to both male and female calves (at [11]), whereas "maidens" (at [12]) is not; second, that in significant respects the figures in Table 1 do not match the figures in the Livestock Trading Report which forms part of the financial statements of E Co each year; and, third, that the tables assessing loss of income (already said to be of no use due to the unreliability of Table 1) take no account of the costs savings of having a lesser herd nor of the benefit of the greater income from the sales. The first defendant in general submits that B is an unreliable witness in this regard.
The first defendant submits that the Cattle Manager's evidence showed that Table 3 was unreliable and that there is no reason for sales to be "out of cycle" when reference is made to the Cattle Manager's monthly reports; says that Table 7 was "disowned" by the Cattle Manager; and argues that Table 9 is "meaningless" as the earlier tables are unreliable. While prepared to concede that the Cattle Manager is "doubtless an able stockman and cattle manager", the first defendant argues that the Cattle Manager's affidavit should not have been placed before the Court (having regard to the Cattle Manager's admissions in cross-examination that he did not understand his own affidavit; that he did not prepare his affidavit; that his affidavit was inaccurate; and that Table 7 was unreliable).
The first defendant does not take issue with the proposition (which he submits is hardly surprising or controversial) that the plaintiffs have paid legal fees from the sale of some of their cattle (saying that he too has paid his legal fees from assets under his control), though noting that the vast majority of the plaintiffs' legal fees were paid by E Co (around $3.5 million), a company of which he is a shareholder.
In that regard, the first defendant submits that the fact that the sons have paid this amount of legal fees through the business and yet the business remains solvent tells against the plaintiffs' case in this respect; and it is submitted that the Lonergan Edwards report indicates "just how profitable" the business is. Insofar as the financial records of E Co show that the costs of this litigation have been treated in the books of E Co as a business expense, it is submitted that this will have reduced the amount of tax otherwise payable by the company, so that the impact on the cash reserves of E Co is the amount paid less the tax portion. Further, it is noted that the first defendant is a 25% shareholder of the company and hence has, in effect, funded the litigation against himself to the extent of 25%. (Pausing there, I note that there was no claim made by the first defendant of oppression by the majority by reference to the payment by E Co of that proportion of legal fees referable to the claims made by the sons in these proceedings or their defence of the first defendant's cross-claim though he submitted this meant he had funded 25% of the claim brought against him).
Conclusion as to "out of cycle" cattle sales evidence
What emerged from cross-examination as to the "out of cycle" sales" evidence was that A had provided figures largely sourced from the Cattle Manager's monthly reports (and cross-referenced to the legal bills that the plaintiffs had to pay from time to time in relation to these proceedings) to B and that the Tables were then prepared by B and/or the plaintiffs' solicitor. The basis on which sales were characterised as "out of cycle" was a combination of the timing of those sales (by reference to whether they were in the normal sales period and by reference to what legal bills the plaintiffs then had to pay) and the numbers (and type) of cattle then sold; but the exercise was at least to some extent an impressionistic one.
There were acknowledged inconsistencies in the tables and, ultimately, I treat them only as an indication that the cattle herd has been reduced in size over the period from 2009 (which is not disputed by the first defendant), at least in part due to the need to meet legal expenses (albeit that there would have been other ways open to the plaintiffs to raise funds - such as a sale of one or both of the hotels). None of that seems particularly controversial. Nor is the proposition that, for the cattle herd to be built up again there will need to be one or both of a renewed breeding program and a pasture development program in respect of the properties. ''
[14]
Plaintiffs' evidence as to their financial position/ability to borrow funds
As to the plaintiffs' current financial position and ability to borrow funds, affidavits were sworn by each of A, B and C on 3 and 4 September 2018, respectively (on 3 September in the case of B and C; and on 4 September in the case of A); and then on 24 and 29 October 2018, respectively (on 24 October by A and on 29 October by each of B and C); with a further affidavit of B sworn 16 November 2018 being filed, with leave, at the commencement of the hearing (only served on the first defendant the Friday before the commencement of the hearing); and a further affidavit sworn by B on 9 December 2018.
Objection was taken by the first defendant to the affidavit sworn by B on 16 November 2018, on the basis that it was served late and would impact on the Lonergan Edwards reports (since it provided for the first time copies of the 2018 returns and financial statements of E Co that the first defendant had been seeking for some time).
I gave leave for the filing in court of that affidavit and provisionally read the affidavit subject to that objection, indicating that I would rule on that once the first defendant had had an opportunity to obtain advice from Lonergan Edwards. In due course the third report of Lonergan Edwards was filed, which took into account those 2018 financial statements. In those circumstances, I consider that no prejudice was caused by the late service of the affidavit and it may now be taken to have been admitted without the provisional qualification.
As to the 9 December 2018 affidavit of B, no objection was taken by the first defendant to those paragraphs ([1]-[6]) dealing with the sale of the C Hotel (as to which sale I will say more below) but objection was taken to the balance of the affidavit: in particular, [7] where evidence was given as to the insurance, rates and payments for farm workers paid by E Co (said for the plaintiffs to be updating evidence; see T 459) and [9], in which B deposes to the fact that certain rates and invoices had been forwarded by the second defendant for payment by the plaintiffs.
The objection was put on the basis that it was too late (as at 10 December 2018) for the plaintiffs to lead this evidence (which it was said might properly be characterised as reply evidence to the evidence contained in the first defendant's 3 September 2018 affidavit, in which the first defendant gave evidence that he had been paying the rates on the farms at least since about 2010 and to which were annexed a large number of documents which were invoices for rates said to have been paid in relation to the farms). Complaint was made that by this stage the plaintiffs had already closed their case (which was correct); that it was procedurally unfair for there to be a further opportunity permitted to the plaintiffs to respond to the first defendant's evidence in this regard; and that Counsel for the first defendant had not had the opportunity to determine the implications of this evidence for his client's case. (I note in this regard that the first defendant's evidence (Exhibit 15) did not include receipts identifying who had paid the invoiced amounts.)
My difficulty with the submission as to procedural unfairness derived from the fact that B's evidence was to the effect that the first defendant's solicitor (the second defendant) had forwarded at least some rates invoices to E Co for payment by it. The first defendant's solicitor was in Court throughout the re-opened hearing. It seemed to me that it would be a simple proposition for instructions to be taken from him as to whether he accepted that the invoices in question had indeed been forwarded by him to E Co for payment (particularly when at that stage there remained a further 3 days of the time that had by then been set aside for the extended re-opened hearing, with the prospect of a tenth day, if necessary); and I considered that there was ample time for Counsel to consider the implications of that material for his client's case. Hence, it was not obvious to me that there would be any insuperable prejudice or procedural unfairness by the affidavit being admitted; and I considered that it would be unfair to the plaintiffs, if there was documentary evidence to refute the assertion made by the first defendant that he had paid all the rates and invoices, not to admit that evidence despite the lateness of its appearance. That was particularly so where B had been questioned in cross-examination as to whether the first defendant had paid all the rates in relation to the properties and had expressed doubt as to whether that was "100% correct" (T 77.6).
Accordingly, I provisionally read the affidavit on that basis. Although the objection was not withdrawn, there was no suggestion later in the hearing that the second defendant disputed that the said invoices had been forwarded to E Co for payment. The first defendant had the opportunity, through the second defendant, to contest B's evidence as to the forwarding of those invoices for payment by E Co. He did not do so. In those circumstances, I will now treat the 9 December 208 affidavit as read without the provisional qualification.
Evidence as to the proposed sale of the C Hotel
I have already adverted to the fact that, as at the commencement of the re-opened hearing, the C Hotel was on the market for sale (and, indeed, there was an indicative price for the hotel, there having been an offer made by a purchaser in relation to the hotel). None of the sons, in his September 2018 affidavit, make any reference to a proposed sale of the C Hotel.
As it emerged in the course of cross-examination of the sons, the decision to put the hotel on the market for sale had been made in early August 2018. Steps were taken in this regard around 7 August 2018 (see B's evidence at T 83.24) and an agency agreement in relation to the marketing and sale of the hotel was signed in mid-August 2018 (a copy of which was not provided to the first defendant or his legal representatives until during the course of the re-opened hearing). Both those events occurred prior to the making by the sons of their respective September 2018 affidavits.
The first mention of a proposed sale was in the sons' October affidavits and in the subsequent written submissions (31 October 2018) served by the plaintiffs in advance of the commencement of the re-opened hearing. In those initial written submissions, it was said that the continued need to pay legal fees, and minimal income from other sources, had meant that the plaintiffs were planning to sell further cattle to fund the proceedings, as well as feed for cattle during the drought and that they were "also in the process of selling" the C Hotel. The submissions further stated that it was not clear if there would be any surplus from the sale of the C Hotel.
In their respective 29 October 2018 affidavits, both B and C depose (for the first time) that they are in the process of selling the C Hotel (B at [11]; C at [7]). In particular, in his 29 October 2018 affidavit (at [32]) B deposes that "we appointed a broker" for the sale of the C Hotel and "we have not had a written offer". He also deposes (at [100]) of his affidavit that Westpac may require him to keep a significant equity in his home to support any personal guarantee that they may require as a condition of renewing the Westpac loan facility on the Main Property (T 111).
Neither B nor C in his October 2018 affidavit referred to the fact that an exclusive selling agency agreement had been signed (although that might perhaps be implicit in the evidence that they had "appointed" a broker); nor as to the then asking price (or, in B's words, "aspirational value") for the C Hotel (see B's evidence at T 93.10; T 91).
In cross-examination (following his recall after the production by Westpac of documents on subpoena), B was taken to an email dated 25 October 2018 from a broker in which the "final unconditional position of the purchaser" was conveyed (see Exhibit BG). Although B, having been taken to that email, was prepared in cross-examination to agree that [32] of his affidavit (in which he deposed that "we have not had a written offer") was wrong, I have - and at the hearing expressed - my doubts about that, in that the communication was from the broker and simply conveyed what was said to be a final unconditional position of the purchaser. It was not in terms a written offer from a purchaser. Nevertheless, it seems that, as at 25 October 2018, there was at least an indicative offer in relation to the C Hotel which was not disclosed in B's 29 October 2018 affidavit. In re-examination by Senior Counsel for the plaintiffs, B said that since 25 October 2018 there had been no offers in writing and one orally (T 116.41-117.37).
Ability to borrow funds
Broadly speaking, the sons' affidavit evidence on this issue was to the effect that: EM Co does not have any significant realisable assets (see B's 3 September 2018 affidavit at [49(a)]; B's 29 October 2018 affidavit at [88]; C's 29 October 2018 affidavit at [15]); E Co and A cannot borrow further because they do not own the properties and the first defendant has, since the commencement of proceedings, refused to consent to amending or renewing facilities to permit further borrowing (see B's 3 September 2018 affidavit at [49(b)-(c)]; B's 29 October 2018 affidavit at [89]; C's 29 October 2018 affidavit at [20]); and the plaintiffs are already carrying significant debts (see below), which, apart from C's liability to BankWest, are cross-collateralised.
As to the latest financial position of E Co, as disclosed in the financial statements annexed to B's 16 November 2018 affidavit, the plaintiffs note that E Co's assets are recorded as $4,268,110, and its liabilities as $5,518,002 (i.e., a total negative equity of -$1,249,892); and that its balance sheet records: stock on hand at its book value of $138,561 (the value of the herd is said to be substantially in excess of this); its largest asset is $2,701,312, (the loan to the CI Unit Trust), matched against a liability to Westpac of $2,000,000; its second largest asset is a loan to EM Co of $971,893 (in respect of which the plaintiffs submit that the likelihood of repayment is slim); and total plant and equipment is valued at $22,749 after depreciation (said to demonstrate a significant need for the purchase of new vehicles and agricultural plant and equipment). The plaintiffs note that the balance sheet also records a book debt to the first defendant in the sum of $2,123,523 (pointing out that I held in the principal judgment that this was not payable as a debt, albeit that I considered that it might be required to be paid as a condition of the acceleration of the plaintiffs' expectations in relation to the properties).
In respect of E Co's 2018 profit and loss statement, the plaintiffs note that a total revenue of $1,143,123 is disclosed (of which $1,129,828 was from cattle trading) and total expenses were $1,693,047, resulting in a total loss of $549,924 for the year; that the most significant expense was $901,505 for legal expenses relating to these proceedings, and that the third largest expense, after the second salaries and wages, was $203,311 for fodder, by reason of the drought.
In summary, the debts under the relevant facilities (copies of those facility documents being in evidence) were said to be: $4,282,000 by PI Co under its facility with St George Bank (see B's 29 October 2018 affidavit at [35]); $11,160,000 by AH Co under its variable facility with St George Bank (see B's 29 October 2018 affidavit at [35]); $2,000,000 by E Co under its facility with Westpac (see B's 29 October 2018 affidavit at [29]); $849,485.04 by EM Co under its facility with Rabobank (see C's 29 October 2018 affidavit at [10]); and $923,104.28 by C under his facility with BankWest (see C's 3 September 2018 at 5(ii)-(iii)).
Position regarding discharge of Westpac $2 million facility or Rabobank facility
A contentious issue in the course of cross-examination of the sons was as to whether the $2 million debt owing to Westpac would be (or would be required to be) discharged out of any surplus funds obtained from the sale of the C Hotel.
B had accepted in cross-examination that if there were surplus funds after the C Hotel sale those would be for he and his brothers to do as they pleased (T 93.45). He had had discussions with C from which he knew C was keen to be released from the security over P Hotel (in which C has no interest) (T 97.42) but said that "there is generally time constraints around those things" when asked about any discussions or enquiries with the bank as to a release of that security (T 97.31; 97.41-98.1).
B was cross-examined as to whether certain loans (the EM Co loan for example) would be repaid out of the net proceeds of sale if the C Hotel is sold (see from T 110). He made the point when first cross-examined on this that the Rabobank $862,000 facility had not expired and was not in default.
Recalled on day four of the re-opened hearing (after the production of documents subpoenaed from Westpac had occurred), B was taken to an email sent by him to Westpac on 14 February 2017 in which he had given an estimate of the value of the C Hotel (Exhibit 11) and an email of 1 March 2017 from him to Westpac (Exhibit 7) in which he informed the bank of his expectation of the outcome of the litigation, namely the transfer of the farms "with no disturbance of the mortgage on [the Main Property] to Westpac". B accepted that, by this, he meant that the E Co loan from Westpac of $2 million would remain in place (T 300.18). B agreed (at T 302.47) that it was not being suggested in that email that repayment of the $2 million would come from E Co and he did not suggest that repayment would be coming from AH Co. B said that there was no discussion with the bank officer named in that 1 March 2017 email (Mr Campbell) from March 2017 to the present to the effect that there would be repayment of the $2 million loan by either E Co or AH Co (see T 304.14). The internal credit memorandum of Westpac marked Exhibit 8 appears consistent with the above statements by B.
Taken to an email from a Westpac officer, Mr Viney, B accepted that, as at April 2017, B knew that Westpac would forbear from legal action (in relation to the $2 million loan facility subject to the 3 criteria there stated) and that there would be further review of the facility in October 2017.
There was in evidence an internal credit memorandum of Westpac dated October 2017 (Exhibit 13), which referred to a meeting between B and C with Mr Viney. B said, in response to a number of questions, that he did not recall that meeting (see, for example, at T 305) but he accepted (by reference to the document) that it "clearly occurred" (see T 307/308;308.47). B also accepted (at T 310.32) that in October 2017 there was no proposal for repayment of the $2 million loan by E Co or AH Co.
The position of Westpac in that credit memorandum (that the plaintiffs do not accept was communicated to them at the time but which they are prepared to accept was the bank's position) was that interest payments on the $2 million loan would continue; the bank would monitor the result of the court case; and a full valuation was to be undertaken if the loan was to be extended into a new facility. There is a note to the effect that should the brothers succeed (in these proceedings) a new valuation would be required in connection with the loan application.
[15]
Evidence of the son's' in cross-examination on other issues
Sons' relationship with the first defendant
B agreed in cross-examination that his relationship with father has irrevocably broken down (T 78.23; 78.27) (and see his reason for not disclosing the C Hotel sale). At T 102.27, B referred to the first defendant's history of refusing to sign documents; and how he was fearful that there would be difficulties in dealing with the first defendant (at T 102.36).
A's position, when asked as to the feasibility of the operations continuing with the first defendant remaining as the owner of the land, was that (from T 139.17):
Q. Sir, do you consider it's at all feasible for [E Co] to continue to operate its farming business on the properties with [the first defendant] remaining as the owner?
A. No, I don't.
Q. Why is that?
A. Because I don't believe he has an interest in the farm. [my emphasis]
Q. Has it got to do with your own attitudes towards him as well?
A. Yep.
Q. Is that because the relationship between you and [the first defendant] is just irreparably broken?
A. I think so.
Q. Do you think it would be feasible if say, [the first defendant] was still on title, still the owner on title of the land, and in the day to day workings of the farm there was a need for the owner, for example, to sign certain documents, if you needed to build a shed and get permission or if you needed to have some slight boundary adjustment or anything that might emerge like that, do you think it'd be feasible to then have to go off and say, [the first defendant], we need to get this signed or is that just going to be one big problem?
A. It's been a problem to date.
Q. You don't see it changing?
A. No.
Similarly, C's position was that the concept of a continuing working relationship with his father was that it would not be ideal (from T 166.25):
Q. … say someone suggested there shouldn't be a transfer of the properties to you right now, so the registered proprietor on title of the properties out there at [xxx] would remain [the first defendant] and [E Co] would continue to run its farming business on those properties, on whatever basis might transpire, okay, from what you've just said about [the first defendant], the idea of [E Co], you, [B] and [A] having an ongoing relationship connected to the farms with [the first defendant] would be unthinkable?
A. It's probably less than ideal.
Q. Would you agree with unthinkable?
A. Less than ideal.
Q. Well, when you say, "Less than ideal," I'm just trying to get an understanding of the extent of your view on the matter, sir, it would be something to be avoided at all costs, perhaps?
A. No, it would be less than ideal.
Q. If you think that [the first defendant] might be a person who would disrupt your sale of your hotel do you think you would hold a fear that he would be a person who would disrupt the running of the [E Co] business on the properties if he was still the owner?
A. I would presume there'd be some structure put in place that would allow any destructive efforts to be managed, or put aside.
Q. You consider that subject to some regime the likelihood would be for [the first defendant] to try to be disruptive
A. Well, history says potentially, yeah.
Concerns by sons as to serviceability of any finance
There was a common theme in the oral evidence of B and C as to whether they (and/or E Co) would be in a position to service any borrowings obtained to pay any sum that might be ordered in favour of the first defendant.
So, for example, when taken to the statement in his affidavit as to his inability to borrow because E Co does not own property (see [58]) and it was put to him that that problem would be solved if a transfer of the properties was ordered, B said "subject to serviceability, yes" (T 100.44). As to whether he had access to capital (as deposed to at 58 of his affidavit), B accepted (at T 101.28) that he "may have access to security, yes" but said that he was there talking about being able to obtain funds (T 101.32). B accepted that if the P Hotel was sold he and his wife would "potentially" have funds available (T 101.49).
Similarly, C's evidence at T 167.9ff was that:
Q. So, you have ownership of the land in every sense with you and your two brothers, you would realise that that would give you a greater prospective of raising some finance to finance whatever projects you wanted to finance?
A. The finance would still be contingent on it being able to be serviced.
and when it was put to him that if his home were no longer security for the C Hotel he would have some potential money, C responded immediately "[n]ot without serviceability" ( T 169.6).
Claim by the first defendant in relation to what he says were his cattle
At T 104.50, B's evidence was that he knew nothing of the first defendant's cattle; at T 105, he said that he assumed that when Property No 8 was sold the herd was sold with it but he did not know if that comprised any part of the original herd.
The plaintiffs' priority in relation to the properties
The plaintiffs are seeking a declaration of constructive trust over (and, if their interests be accelerated, a transfer to them of) all the properties that were the subject of their expectations in relation to the farming business. They were cross-examined, however, as to which of the properties they would most wish to retain (or, conversely, might choose to sell) if it were necessary to sell properties either to fund a payment to the first defendant or otherwise as part of the conditions imposed on relief in these proceedings.
At T 107.22, B accepted that he was most concerned to keep Property No 4 (which, it will be remembered, is the property that has been A's home for many years and the subject of A's separate proprietary estoppel claim).
A said he would be speculating as to whether if any properties might be sold if necessary to meet orders (T 145.34) but accepted that the one property he would not like to sell was Property No 4 and that if necessary he would sell Property No 11 (see T 146.5).
C's position was (from T 167.37):
Q. And if we did that, would you agree with the proposition, sir, that if you look at the various aggregations of the properties out there overall it makes sense to so far as possible, keep intact the [3/6 Aggregation] together with [Property No 10] and [Property No 9] and then on the other hand set aside for either meeting with [the first defendant] or selling the [Main/7 Aggretation], [Property No 11] properties?
A. Well [Property No 11] has always been one discussed as being potentially sold, or sold.
Q. I think [Property No 11's] worth approximately $1.6 million, if we assume that that was insufficient to make the payment that was ordered to be paid the next most obvious property to satisfy the payment requirement, or to be left with [the first defendant] would be [Main/7 Aggregation], wouldn't it?
A. Yeah, I guess so.
[16]
Submissions by the plaintiffs' as to their ability to borrow funds
As to the plaintiffs' ability to borrow funds to make payments of the kind envisaged, the plaintiffs submit that neither B (see B's 3 September 2018 affidavit at [50]-[52]; [54]) nor C (see C's 3 September 2018 affidavit at [7]) can himself borrow because of the terms of the security documents over their homes, a restriction which also applies to the hotels (see B's 3 September 2018 affidavit at [53]); C's 3 September 2018 affidavit at [7]-[8], [10]); and that all of the plaintiffs are severely limited in their ability to raise finance because of low income and available capital (see B's 3 September 2018 affidavit at [58]); 'C's 3 September 2018 affidavit at [7]-[8], [10]).
The plaintiffs submit that the likelihood is that Westpac Banking Corporation (which for these purposes is treated as the same corporate entity as "St George Bank") will demand that the full proceeds of sale from the C Hotel (the anticipated amount of which will not here be published) (see B's affidavit of 9 December 2018 at [6]), will be required to pay down debts owed to it (which they say will have the consequence of dramatically affecting the "surplus assets" analysis of Lonergan Edwards as set out in [35] of the third Lonergan Edwards report).
The plaintiffs submit that the great likelihood is that neither the E Co loan to the CI Unit Trust nor the E Co loan to EM Co will ever be repaid, pointing out that: the CI Unit Trust will have no assets after the C hotel is sold and EM Co does not trade (T 547. 37); that EM Co's only income is interest paid by the CI Unit Trust (T 547.43-548.2; first Lonergan Edwards report at [96]); that Em Co itself has a loan from the CI Unit Trust in the amount of $1,080,030 as at 30 June 2017 (T 547.43-548.2, first Lonergan Edwards report at [97]); and that EM Co has a significant excess of liabilities over assets (first Lonergan Edwards report at [97]).
The plaintiffs' position as to their ability to pay the first defendant the sums that I had envisaged might be required as a condition of acceleration of their expectations in relation to the land is thus to the effect that they have very little ability to pay the first defendant before the ultimate conclusion of the proceedings (by which, I interpose to note, they mean "not simply after the making of final orders, but after the determination of the final appeal and the present drought (whichever comes later)"). They say that, after that time, it would depend on the nature of the orders made but that their ability to pay significant sums without selling off some or all of the properties is dependent upon a period of five to seven years to restore the herd and the properties to a position where the farming business could generate sustainable profits (as it is said it would have done but for the issue of the termination notice) (see B's 29 October 2018 affidavit at [59]; A's 4 September 2018 affidavit at [38]-[39]); A's 24 October 2018 affidavit at [25], [39]).
The plaintiffs submit that the evidence of Mr Lonergan and Dr Chu in the Lonergan Edwards reports as to E Co's capacity to service debt ought be disregarded in its entirety, for failing to recognise that, if legal fees are non-recurring items, then adjustments need to be made for the "artificially inflated" revenue, and because a number of the expenses that Mr Francis considered necessary (such as fertilizer and the like) are largely absent from the recent accounts (for reasons that A and B explained in their evidence).
It is submitted that Mr Francis' report provides a safer guide to the earning potential of the farming business and that, in terms of the ability of the farming business to generate revenue to allow for payments to the first defendant, there are three important limitations.
First, that while these proceedings are ongoing (including what seem to be regarded by the plaintiffs as the inevitable appeal(s)) E Co will continue to incur legal fees which will need to be paid by selling down the herd, and the insecurity of tenure will mean that E Co will be very unlikely to make any capital investment to improve the Properties as each of Mr Francis, A, B and the Cattle Manager have set out that they should. (In this regard, in the context of their submission that "acceleration" must be considered not only in the context of what are the rights and obligations of the parties when the expectation is vindicated but also at the time that the final orders giving effect to the expectation become unconditional, i.e., after the final appeal from those orders has been determined, the plaintiffs submitted that the time between the hearing on final relief and that time is likely to be two to three years and that, in the meantime, the farming business will at best be in a kind of "caretaker" mode pending a determination as to their tenure.)
Second, that if orders are made in favour of the plaintiffs vesting in them legal and beneficial title, it is said that it will still require significant time and expense before the properties and the herd are in the condition where they could earn revenue in accordance with Mr Francis' model. The plaintiffs say that this process is likely to take about five to seven years (referring to B's 29 October 2018 affidavit at [59] and A's 4 September 2018 affidavit at [38]-[39]); during which time profits will need to be returned to the business.
Third, it is said that if any of the properties need to be sold to make payments, this will reduce the maximum carrying capacity of the properties and hence the potential revenue from the farming business.
It is further submitted that if (contrary to the plaintiffs' submissions) there is a finding that the first defendant "is entitled to payments in the nature of rent and return of money contributed", then any such payments ought to commence only after the orders in the proceedings are made final "given the likelihood of the grant of a stay on any appeal" and after a further five years' abatement to restore the properties and the herd to the proper operating capacity.
The sons submit that neither their interest in the P Hotel, nor B and C's ownership of their homes, should be subject to sale or charge for the benefit of the first defendant. It is submitted that they have based their lives around their homes, and that the P Hotel was part of the off-farm investments of all parties. The plaintiffs argue that it is difficult to see what principle of equity could demand the sale of the homes or the hotel, or risk as security for the benefit of the first defendant (noting that in the principal judgment I considered that the payments to the first defendant would need to be structured so as not to jeopardise the operation of the farming business).
[17]
Submissions by the first defendant as to the plaintiffs' ability to borrow funds
As to the plaintiffs' suggestion that the consequences of the orders I had proposed would be financially ruinous, the first defendant says (in essence) that it is illogical of the plaintiffs to speak of "financial ruin" when they stand to receive assets worth $20 million and, second, that the plaintiffs have been "less than candid" in putting forward their financial affairs (in particular in: failing to disclose that the C Hotel is for sale; obfuscating the position concerning the E Co loan to AH Co; and failing in a timely fashion to disclose the 2018 financials of E Co).
It is submitted by the first defendant that there are obvious ways in which the plaintiffs can afford to pay whatever amount may be determined as being payable to the first defendant, namely, by selling assets or by restructuring their financial affairs. The first defendant notes that on the orders contemplated in the principal judgment the plaintiffs would receive land worth $20 million, 100% of a business worth some $1.8 million (of which the sons presently own, through E Co, only 75%), a 100% interest in EM Co (rather than their existing 75% interest), and various pieces of farm equipment, all "an estimated 11 years before even they say this was to occur". It is submitted that, depending on the findings as to the amount of the rent and other quantification issues, the "cost" to the plaintiffs of the acceleration of their expectations could be in the vicinity of $10 million. Thus, it is submitted, the plaintiffs will be some $10 million better off.
The first defendant contends that the plaintiffs have not appropriately assisted the Court in this re-opened hearing in respect of their financial circumstances and how any payments ordered to be paid will be made and secured. In particular, it is submitted by the first defendant that the evidence of both C and B as to the position since April 2017 of the E Co loan from Westpac of $2 million, and their meeting with Westpac as recently as 16 October 2018, is "difficult to accept". The first defendant points to the fact that the plaintiffs chose not to tell the Court that their intention (and that of Westpac) was for the facility to be replaced by a new facility once title to the farms is transferred to the sons (there referring to the subpoenaed material from Westpac to which I have referred above); and did not until the October affidavits disclose that the C Hotel was for sale (although the C Hotel has been on the market since early August 2018). Insofar as the plaintiffs' explanation for not disclosing the fact of the sale was a concern that the first defendant would interfere with the attempted sale, the first defendant says that (whether or not that be correct), this does not mean that steps could not have been taken to disclose this information on certain terms and so to allow a full investigation of the proposed sale by legitimate forensic means by the first defendant; and that it was incumbent upon the plaintiffs to do so.
The first defendant also says that, when disclosure was made, it was selective, namely, that that there was no mention in the plaintiffs' affidavits of any offer for sale or any price at which the hotel was being offered and that it was only when the sales agency agreement was produced that this information was made known. Complaint is made that there was no explanation as to why the plaintiffs did not produce the sales agency agreement in the first instance (noting the evidence of B that the document was given to his solicitor and that the document was then produced in Court the following day).
The first defendant's submission in this regard is that the plaintiffs sought to keep relevant evidence from the Court in order to bolster their case and that this raises legitimate concerns as to the extent to which account can be taken of the plaintiffs' evidence in determining the amount and manner of the payment(s) to be made by the plaintiffs to the first defendant.
As to the evidence of the sons' financial circumstances, reference is made to the disparity between their taxable income and expenses incurred or intended to be incurred by them (by way of example referring to the evidence of C's taxable income). Acknowledging that this was not put to C in cross-examination, the first defendant nevertheless argues that this causes speculation as to the contributions by other family members. Reference is also made in this regard to evidence given at the principal hearing to the effect that B's wife receives a reasonable income from a family trust (the only relevance I can see in this fact is to the extent that it might relieve B of the need from any separate income to meet family expenses).
The first defendant submits that the plaintiffs have chosen not to disclose great detail of their immediate financial circumstances; arguing that the plaintiffs' own material "showed their personal asset position to be healthy"; and submits that he, in contrast, "was an open book", pointing to the various notices to produce and subpoenas issued by the plaintiffs seeking documents as to his financial position. (I interpose here to note however, as will be seen below, I am not satisfied that the first defendant has presented a complete position as to his own assets despite submitting that he has been an "open book".)
The first defendant submits that the prospect that the plaintiffs may have to sell their hotel interests, or their homes, or part of the properties themselves, in order to obtain increased wealth in the order of $10-20 million is "entirely logical and appropriate"; and that there is nothing inequitable in the plaintiffs needing to make decisions as to the reorganisation of their financial structure so as to be able to afford this additional asset. It is submitted that the asset(s) then obtained can be utilised for income earning and capital growth over the next 11 years so that by that time the expectation of ownership of the properties is fulfilled. The first defendant submits that the concern (see [1235] of the principal judgment) that the reimbursement to the first defendant of the $2,123,253 not jeopardise the farming business of E Co is respected by the proposal put forward by the first defendant as to the final relief (see below); and that the business will not thereby be jeopardised.
The first defendant says that the plaintiffs' approach to the reopened hearing went, first, to the financial position of both themselves and himself and, second, sought to attribute, for the consideration of equity, difficulties with the farming business due to the litigation. As to the first, it is submitted that the result was to expose non-disclosure by the plaintiffs of their position (and a failure to reveal any similar non-disclosure by the first defendant); as to the second, it is submitted that the case has not been made out. Among other things, the first defendant notes that during the course of the litigation some $1.75 million has been re-paid with interest on the extension of a Rabobank loan indicating that funds were available (though B says that this money could not have been used to meet legal costs as it was a reducing facility - see T 80.32ff).
The first defendant submits that there is a distinction to be drawn between considering the positions of the parties in the overall circumstances of the case, and determining the appropriate compensation for the acceleration of an interest in property and says that the latter is not an amount to be determined by the financial state of the parties.
[18]
Conclusion as to the sons' evidence of financial position
I have referred above to the complaint made by the first defendant as to the non-disclosure by the sons in their September 2018 affidavits of various matters relating to their (and/or E Co's) financial ability to meet payments of the kind I had proposed (relevantly, the proposed sale of the C Hotel and the position of Westpac in relation to any requirement for the repayment of the Westpac $2 million loan). I do not accept that an enquiry could not reasonably have been made to ascertain the bank's position in relation to potential finance if the properties were to be transferred (and/or if the C Hotel were to be sold) but that can be accepted as a forensic decision on the part of the sons not to make, and then put on evidence of, any such enquiry. However, I find most troubling the apparently deliberate non-disclosure (until the October affidavits and October submissions) of information squarely relevant to the proposition that led to the re-opening of the hearing in the first place (namely the financial ruin that it was perceived might be occasioned by the proposed Market Rent and Book Debt conditions). I do not accept that such information could not have been disclosed on a confidential basis in some fashion so as to enable the first defendant properly to test the financial capacity of the plaintiffs, even if he could not personally be privy to the detail of that information. Orders limiting the disclosure of confidential information to the parties' legal representatives are by no means uncommon in this Court. And if there were a perception that the information could not be conveyed to the second defendant lest it be passed on to the first defendant, then that is a matter that should have been raised in a directions hearing.
The position as to the sons' intentions (or the bank's requirements) as to the repayment of the Westpac $2 million facility (relevant to the question of what surplus assets or borrowing capacity E Co will ultimately have) is less clear at least insofar as it depends in essence on how one reads internal bank credit memoranda (or how the sons may have understood what was being conveyed by bank officers from time to time).
I accept that there was some resistance in cross-examination of B and C to the acceptance of propositions that seemed self-evident (such as B's resistance to the proposition that there were other means of funding amounts that might need to be paid, such as the sale of the hotels), though at some points I considered that this may have been explicable by a concern on the part of the witness to be clear as to what he was being asked and/or some confusion as to the questions. The demeanour of B and C suggested to me a wariness on their part to accept at face value any proposition put to them by the first defendant's Counsel.
However, none of that alters the fact that the third Lonergan Edwards report itself makes clear that the plaintiffs cannot individually or collectively afford to pay both the market rent and the loan amount as lump sums. That seems to me to be sufficient for present purposes.
[19]
The first defendant's evidence as to his financial position
The first defendant argues that the consequences of orders for the transfer of the properties to the plaintiffs could be that the first defendant is left with "but a fraction of his asset base" (for example, if the amount ordered as a condition of the acceleration of the plaintiffs' expectations in relation to the properties is modest and there is an almost matching CGT liability). It is submitted that that would plainly be an inequitably harsh result. It is in that context that the first defendant has sought to rely on evidence as to his own financial position (an affidavit sworn by him on 3 September 2018 as to his assets, liabilities, income and expenses).
Objection to receipt of such evidence
Prior to the commencement of the re-opened hearing, an application was made by the plaintiffs for an advance ruling, pursuant to s 192A(a) of the Evidence Act 1995 (NSW), seeking to exclude the first defendant's affidavit of 3 September 2018. I heard that application on 11 October 2018 and declined to make such an order. I did not provide separate reasons for the ruling at that time. For completeness, I do so now.
It was not suggested that the first defendant's financial position would not be a relevant factor to take into account when considering the relief to be granted; nor that the evidence would not have probative value. Rather, the basis for the advance ruling was that the probative value of the first defendant's evidence was substantially outweighed by the danger that the first defendant's evidence might be unfairly prejudicial to the plaintiffs and/or result in an undue waste of time contrary to s 135(a) and (c) of the Evidence Act.
The unfair prejudice identified by the plaintiffs was said to be the result of what the plaintiffs submitted was a deliberate tactical decision by the first defendant not to adduce evidence as to the first defendant's assets and income at the principal hearing of this matter (see T 11/10/18; 3.29). It was submitted that this had the consequence both that the plaintiffs were, in the time available, unable properly to test any such evidence (by way of discovery, subpoenas and cross-examination) and also that the first defendant would be permitted "the unwarranted advantage" of being able in substance to "rerun" part of their defence of the proceedings on a different basis.
The undue waste of time was said to arise because of the range of evidence and issues that it was then contemplated were to be the subject of cross-examination and submissions at the re-opened hearing (then fixed only for three days from 19-21 November 2018). Complaint was made that at no time in the course of the submissions of the parties prior to the making of orders for the re-opening of the hearing had the first defendant indicated that he would seek to adduce evidence of his financial circumstances "having declined to do so prior to 14 August 2017". The plaintiffs argued that providing them a fair opportunity to test this evidence, "even if possible", would have the likely result that there would not be time properly to argue the other matters that fell for decision in the re-opened hearing.
In support of their application, the plaintiffs relied on two affidavits, sworn 17 September 2018 and 3 October 2018 respectively, by their solicitor, Mr Michael Fitzgerald, to the second of which affidavit were exhibited copies of a notice to produce and subpoenas issued to the defendants and the first defendant's accountants and siblings "to safeguard against the prospect that the plaintiffs' application is refused" (as it ultimately was).
It is not necessary here to set out the text of s 192A(a) of the Evidence Act, nor to do more than note the authorities referred to in the submissions then put forward by the plaintiffs as to the making of advance rulings under that provision (namely, NA & J Investments Pty Ltd v Minister Administering the Water Management Act 2000; Arnold v Minister Administering Water Management Act 2000 (No 4) [2012] NSWLEC 120 at [40] per Biscoe J; Lambert Leasing Inc v QBE Insurance Australia Ltd [2012] NSWSC 953 at [11]-[13] per Stevenson J; Beslic v MLC Ltd [2015] NSWSC 908 at [33] per Robb J).
As adverted to above, the plaintiffs accepted that the order made on 14 May 2018 for the re-opening of the hearing to permit evidence (including expert evidence) to be adduced, and further submissions to be made, as to the final orders to be made in these proceedings permitted the first defendant to adduce evidence relevant (within the meaning of s 55 of the Evidence Act) to the making of final orders in these proceedings; and that the first defendant's 3 September 2018 affidavit was potentially evidence of that kind.
The plaintiffs, however, submitted that the application of s 135 to that evidence must take into account the context in which the orders of 14 and 25 May 2018 were made, and the first defendant's decision not to adduce this evidence prior to the hearing of 14 August 2017.
In particular, the plaintiffs submitted that the first defendant's financial circumstances was relevant to the question of proportionality and relief to be determined at the full hearing of the matter; and that the decision not to adduce such evidence by the first defendant was deliberate. In those circumstances they submitted that the first defendant ought not now be permitted to re-exercise this earlier decision, to the prejudice of the plaintiffs.
I took the view, when the application for the advance ruling was made, that the plaintiffs had chosen to open up the question as to the financial consequences of the making of orders of the kind that I had contemplated (in the words I then used, to "open up this can of worms") and that prejudice of the kind that had been adverted to could be met by a timetable that permitted the issue of notices to produce/subpoenas and by allowing further time for such evidence to be tested at the re-opened hearing. It seemed to me that, having themselves chosen not to put forward at the principal hearing evidence of the kind that the plaintiffs were now seeking to adduce at the re-opened hearing (albeit that the plaintiffs say this was because orders of the kind I had contemplated had not been foreseen at the time of the principal hearing and were not raised on the then pleadings), it did not lie in their mouths to seek to deny the first defendant an opportunity to adduce relevant evidence of this kind. I was of the view that the probative value of the evidence was not substantially outweighed by the danger that the first defendant's evidence might be unfairly prejudicial to the plaintiffs and/or result in an undue waste of time contrary to s 135(a) and (c) of the Evidence Act and I declined the relief then sought.
At the re-opened hearing, the plaintiffs again took issue with reliance by the first defendant on this evidence, in essence as a pleading issue. They note that the first defendant did not plead (and has not amended to plead) in his defence the material fact that he would be "left with nothing" if orders were to be made in favour of the plaintiffs.
The plaintiffs point out that, at the time of the principal hearing, they made clear that they did not acquiesce to the first defendant's case being "enlarged" in this fashion, pointing to the following submission made in the plaintiffs' 2 October 2017 reply submissions (at [329]) in response to the submission made for the first time in the first defendant's closing submissions to the effect that he would be left "without any assets at all and no source of income":
[The first defendant] nowhere states in his evidence that without access to the farms he would be left without both assets and income. He has plainly been able to afford substantial legal fees, including the involvement of senior counsel in both his criminal proceedings and these proceedings, from the commencement. If [the first defendant] wished to establish the foundation for this submission, it was incumbent upon him both [to] plead it and support it with evidence, so that it could be subject to forensic testing by the plaintiffs and to the scrutiny of the Court. For this reason alone, the plaintiffs submit that this submission may not be made by the defendants. [my emphasis]
The first defendant's position in this regard is that:
… it was open to infer his financial position was parlous from the evidence of the earlier trial, and his later affidavit could hardly have been too surprising. The first defendant spent money without restraint when the money was available, and the plaintiffs well know this for they were significant beneficiaries of that spending.
Cases are of course to be decided on the issues framed by the pleadings (assuming the case is conducted on pleadings, as was the present) (see Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) 73 NSWLR 653; [2008] NSWCA 206 (Ingot) where Ipp JA noted that the rule that, in general, relief is confined to that available on the pleadings is a rule that secures a party's right to a basic requirement of procedural fairness though there are instances where a party will be permitted to depart from the pleadings during the hearing (see Gould v Mount Oxide Mines Ltd (In Liq) (1916) 22 CLR 490 at 517; [1916] HCA 81 per Isaacs and Rich JJ; Ingot per Ipp JA, citing Banque Commerciale SA (En Liqn) v Akhil Holdings Ltd (1990) 169 CLR 279; [1990] HCA 11 (Banque Commerciale) per Mason CJ and Gaudron J at 286-7).
The general rule is that a defendant must plead in the defence all the material facts on which reliance is placed (see Sir Jack Jacob and Iain Goldrein, Pleadings Principles and Practice (Sweet & Maxwell, 1990) 48). Rule 14.14(2)(a) of the Uniform Civil Procedure Rules 2005 (UCPR) requires a defendant specifically to plead, among other things, any matter that, if not pleaded specifically, may take the opposite party by surprise (see Tyson v Brisbane Market Freight Brokers Pty Ltd (1994) 120 ALR 1; [1994] HCA 67 ; Banque Commerciale). Furthermore, there are instances in which effect may properly be given to defences that have not been pleaded (see Pirie v Richardson [1927] 1 KB 448 at 453
I accept that a failure to plead material facts relating to a particular ground of relief may raise concerns in relation to procedural fairness. So, for example, it has been recognised that raising questions regarding a particular ground of relief not strictly pleaded may mean that the party to which the questions are put has not been given any notice and thus the opportunity to respond accordingly (see Banque Commerciale at 286).
Here, the relevant evidence sought to be relied upon by the first defendant (as to his financial position) goes to the question of final relief; in particular, the financial impact of acceleration of the plaintiffs' expectations in relation to the properties (absent an order for compensation) or, perhaps, an anterior question as to whether a declaration of constructive trust should be made at all (as opposed to the fashioning of equitable relief in some other way). As I see its relevance, such evidence goes to whether final relief of the kind sought by the plaintiffs would be "wholly disproportionate" to the detriment suffered (see Ambridge Investments Pty Ltd (in liq) (rec apptd) v Baker [2010] VSC 59; Commonwealth of Australia v Verwayen (1990) 170 CLR 394 at 413; [1990] HCA 39 (Verwayen)) or "out of all proportion" to the detriment (see Priestley v Priestley [2017] NSWCA 155 at [164] per Emmett AJA (with whom McColl and Macfarlan JJ relevantly agreed) (Priestley)).
In Delaforce v Simpson-Cook (2010) 78 NSWLR 483; [2010] NSWCA 84 (Delaforce) at [4], Allsop P, as his Honour then was, (in a passage I extracted at [1187] in the principal judgment), acknowledged that proportionality of the claimed interest or remedy to the prejudice or detriment was "undeniably a relevant consideration, and sometimes of considerable importance" but his Honour went on to say that it should not be transformed into a "necessary constitutive element of a cause of action to be pleaded or proved by the party seeking relief". His Honour considered that the role of proportionality was better understood as assisting in an assessment whether what is claimed or contemplated to be granted is disproportionate or unjust in all the circumstances. Equally, it might be said that the first defendant was not required in his defence to plead the issue of proportionality as such (i.e., that the grant of the part or all of the relief claimed by the plaintiffs would be wholly disproportionate, or out of all proportion, to the detriment alleged to have been suffered by the plaintiffs).
However, where relying on material facts to support an argument as to the disproportionate nature of the relief sought, those would need to be pleaded. The first defendant's defence to the amended statement of claim (which ultimately stood as his defence to the second further amended statement of claim) did plead (in further answer to the claims of the plaintiffs seeking equitable relief and of A's claim seeking equitable relief in relation to Property No 4) (at [158] and [159], respectively), a denial of entitlement to any such relief and various matters by reason of which the first defendant said that equity would not intervene. Those matters did not include any pleaded fact as to the first defendant's financial position.
In Mercanti v Mercanti [2015] WASC 297 (Mercanti), an application by the defendants to amend their defences was made at the conclusion of the trial (and resisted by the plaintiffs). Le Miere J, having noted the equivalent rules in that jurisdiction as to the pleading containing a statement of material facts on which the party relies in defence and that there be pleaded any matter which if not specifically pleaded might take the opposite party by surprise (see [191]), was of the opinion that the defendants were not required to plead the maxim "he who seeks equity must do equity", nor the way in which the pleaded facts and the maxim would operate, but noted that the defendants were required to plead the facts upon which they intended to rely (see [193]).
His Honour gave leave for the amendment of the defence to plead that if any relief were granted it should be conditional upon matters (namely, the procuring of releases in favour of the defendants from any liability pursuant to security given by one of the defendants to support liabilities for the business, in the case of one of the defendants, and from obligations under a lease executed in connection with the business, in the case of the other defendant), though stating that those were not matters which the defendants were required to plead by the rules (see at [197]). His Honour was of the view that the plaintiffs were not prejudiced by the defendants' delay in pleading the matters then sought to be pleaded (see at [198]).
As the plaintiffs in the present case emphasise, there has been no application by the first defendant to amend his defence to plead any material fact going to the claimed disproportionality of the relief sought by the plaintiffs by reason of his financial position.
It cannot be said, however, that by the re-opened hearing, this was a matter that would have caught the plaintiffs by surprise. It had been raised (and objections had been taken thereto at the tine) in submissions as to relief in the principal hearing. Had the evidence remained closed at that point (and the question of relief only been the subject of further submissions), the complaint here made by the plaintiffs would have had more force. However, with the re-opening of the hearing (on the plaintiffs' application, unsuccessfully resisted by the first defendant) the opportunity for further evidence to be adduced arose. The first defendant's financial position was squarely raised in the first defendant's evidence filed in advance of the re-opened hearing (that being the evidence that the plaintiffs had sought unsuccessfully to have rejected well in advance of the re-opened hearing) and the plaintiffs were clearly able to (and did in cross-examination) test that evidence.
I remain of the view that it was appropriate, in the interests of justice as between all of the parties, for that evidence to have been admitted. What might have taken the plaintiff by surprise at the close of the principal hearing surely cannot have done so by the time of the re-opened hearing; by which time the plaintiffs had been given ample opportunity to test that evidence. Hence, while they certainly did not acquiesce in any enlargement of the pleaded case, they were not in my opinion prejudiced in the relevant sense by the receipt of that evidence. In any event, since at the end of the re-opened hearing I was left with considerable doubt as to whether the first defendant had painted a complete picture of his financial position, that evidence is not determinative of the questions raised as to the relief now to be granted and hence (other than perhaps in relation to costs) nothing turns on its admission.
Substance of the first defendant's evidence as to his financial position
In his 3 September 2018 affidavit, the first defendant deposes that his intention when making the agreement for $100,000 rent with E Co was that he would "at some point in the future raise the rent back to $300,000 or possibly more" (see at [5]). (The plaintiffs say that this was presumably his subjective uncommunicated intention. There is certainly no evidence that this was ever communicated to them.)
As to his assets, the first defendant deposes that he: owns the sole share in the company (to which I will refer as H3 Co, and will add this to the schedule of pseudonyms kept confidentially in relation to this matter; it not having been referred to in the principal judgment) which is the registered proprietor of the property referred to in the principal judgment as House No 3 (which he says is worth between $550,000 and $590,000 and is occupied by a long-standing friend, rent-free - see T 332); owns 2 motor vehicles together said to be worth $61,255; has $534,448.74 in two bank accounts (the quantum of which has since then been reduced according to the first defendant's oral evidence in cross-examination, as to which see below); and owns 200 head of cattle on the properties plus unquantified progeny (a claim denied by B). As t that last aspect of the matter (the 200 head of cattle), the first defendant accepted in cross-examination that he had not included in his cross-claim any claim for the 200 head of cattle that he said had been run as part of the herd run by E Co and said that that was an oversight on his part (T 4.11.27); nor had he ever claimed the progeny of those cattle (T 412). He said that he had just wanted those 200 head of cattle for his primary producer status (T 412).
As to his liabilities, the first defendant deposes that he has the following expenses: $5,214 per month for the apartment in Sydney in which he now resides; Council rates on the properties the subject of these proceedings, the assessment for FY 19 being $17,710.14; Council rates and landlord's insurance for House No 3; motor vehicle insurance; and daily living expenses such as food, clothing and petrol.
Cross-examination of the first defendant
The first defendant was cross-examined as to the evidence he had given in respect of his assets and liabilities; in effect to suggest that he had not painted a complete picture of those assets and liabilities and that, if his position is as he now says it is, then he has expended substantial sums of money in the past few years for which he cannot now account.
It was clear from the cross-examination that some of the information in the first defendant's affidavit was incomplete. For example, there was no reference in his affidavit to F Co despite the fact that the first defendant is the sole shareholder of that company (and the first defendant's solicitor is its sole director). In cross-examination, the first defendant said that: he did not realise he was a shareholder; he does not recall setting it up; and that it has "never been utilised at this point" (T 334-335). Nor was there any reference to the trust of which F Co is trustee, which the first defendant accepted he controls (T 336). I interpose to note that this was a discretionary trust set up by the first defendant by Deed of Settlement 20 August 2013 (Exhibit BL), and referred to by him as the grandchildren's trust; and that under the first defendant's 22 August 2013 will the residue of his estate is to be left for the benefit of that trust; it being suggested for the first defendant at the principal hearing that his sons hade misconceived the effect of the 2013 will because they may potentially receive a distribution out of that discretionary trust. The first defendant's evidence is that at present no amount has yet been settled on that trust (because the present proceedings "disrupted" that - see at T 349.28).
Nevertheless, other than pointing to the incompleteness of the evidence in this regard, nothing turns on the fact that there was no disclosure of the first defendant's shareholding in F Co, since it does not appear to be suggested that it holds any assets. The first defendant was not aware of any shares other than in H3 Co and F Co (T 355.30).
The first defendant (who says he "wouldn't have a clue" how much tax he has had to pay in last four or five years (see T 336.29) was taken through his tax returns produced on subpoena by his accountants (Exhibit AX); from which it can be seen that from the financial year ended 2016 the first defendant was no longer claiming any primary production losses (see T 341ff) (relevant to the question when his status as a primary producer ceased) (see the tax returns Exhibit BM).
As to the first defendant's cash resources, the first defendant was cross-examined as to 3 bank accounts held by him: two with Westpac (ending in "139" and "420") respectively and one with Rabobank (ending in "6-00"). The first defendant referred to the Westpac "420" account as his normal trading account (T 370.12 375.38) ("this is the one I pay my rent and bills out of" - see T 382.50). The Rabobank account seems not to have been a trading account (T 383ff) (and was the account through which the first defendant had a $4 million loan facility used in part to make a $3 million loan to a company associated with his brother - T Co, see below). The first defendant accepted that his 3 September 2018 affidavit should be understood as meaning that he has no available cash sources anywhere else than disclosed in this affidavit (T 346.29).
[20]
Submissions by the plaintiffs as to the first defendant's financial position
In their submissions, the plaintiffs point to the evidence given by the first defendant at the principal hearing, where, in cross-examination he agreed that: (leaving aside the vendor finance for Property No 4) he received moneys from the Sydney Family Trust to purchase each of the farms (28/8/2017; T 718.28); on 30 June 1999, the directors of the company which was the then trustee for the Sydney Family Trust (his two brothers) resolved that he was to receive the benefit of a trust corpus application of $13,438,266 (28/8/2017; T 719.4; Exhibit H); on about 5 April 2002, the directors of the said trustee company (by then his two brothers and his sister), resolved that the first defendant was to receive the benefit of a trust corpus application of $14,401,687 (28/8/2017; T 719.18; Exhibit H); for the financial years ending 30 June 2003 to 30 June 2008 (inclusive), he received capital sums distributed from the Sydney Family Trust in the sum of approximately $13,990,901 (see Exhibit H); and for each financial year between the years ending 30 June 2002 and 30 June 2012 he received, in addition to capital, a distribution of franked income (28/8/2017; T 725.30).
The plaintiffs note that the first defendant did not at the principal hearing dispute that the amounts of income were as shown in documents produced by his Sydney accountant (28/8/2017; T 725.35), which the plaintiffs point out showed franked income that the first defendant received from the Sydney Family Trust in the financial years ending 30 June 2002 to 30 June 2012 (inclusive) in amounts totalling $2,475,606 (see Exhibit H); and that the first defendant agreed at the principal hearing that in mid-2002 he was "cashed up" (28/8/2017; T 728.4).
The plaintiffs calculate that the first defendant received a total of $35,132,725.79 over the relevant period from 1999. They also calculate that the first defendant expended some $11,412,054.80 over that period, which leaves an excess of receipts over payments of $23,720,670.99 (taking into account in this regard, the purchase of various of the properties (Properties No 8-12); the purchase of homes for B and C; the loan (partly repaid) to T Co; the sale of Properties No 8 and 12; the acquisition of House No 3 and an amount of $400,000 paid to the ATO in June 2014). The plaintiffs accept that a portion of the surplus moneys would have been expended on: legal fees; monthly payments to the plaintiffs from 2002 to 2010; and the first defendant's living expenses (though they note that the first defendant was in gaol for four years of this period and say that nothing in his evidence regarding living expenses indicated a lavish lifestyle).
What the plaintiffs draw from this is their suspicion that there remain funds somewhere available to the first defendant (noting that there is no explanation, if it be the case that the first defendant has spent the whole of his substantial inheritance, as to what was done with a large amount of inheritance (and see the cross-examination of the first defendant on this issue, to which I have referred above).
The plaintiffs submit that if (absent a pleading of that material fact) the first defendant is permitted to argue that the making of orders should be influenced by his contention that he would be left without assets or income then the onus of establishing that contention lies on the first defendant, as he is making the assertion and he has the sole means of knowledge (citing Paino (No 2) at [74]); and that he has not discharged that onus.
The plaintiffs submit that the first defendant has not been frank about his assets for the following reasons: first, that he did not raise this an issue in dispute well in advance of the hearing (it being said that had he done so "his financial affairs would have been the subject to the degree of rigorous scrutiny to which the plaintiffs have been exposed"), thus inhibiting the plaintiffs' ability to investigate his affairs in the time available; second, that the first defendant did not, in his evidence, explain the "obvious" question said to arise therefrom (namely as to where, if his assets were as diminished as he claims, he has spent his money) other than in relation to the loan to T Co; third, that the email of 28 November 2018 from the accountant's office to the first defendant's solicitor, which contained the statement "BTW there should be some additional funds coming in soon" (part of Exhibit BS) was suggestive of other funds available to the first defendant not disclosed in the evidence (though this was denied by the first defendant at T 469.18ff); and, fourth, the first defendant's statements in cross-examination and re-examination, on three occasions, in effect that his siblings had bought him an apartment to live in after he was first released from gaol (T 466.50; T 467.17; T 474.2).
As to the last of those matters, it is submitted that the first defendant only recanted his evidence after he realised the consequences for his case of what he was saying. It is noted that on the first of those occasions it was the first defendant who volunteered that it was "financed by my brothers" (see T 466.44). It is submitted that it is especially significant that, in re-examination, the first defendant again stated that they bought the apartment (which the plaintiffs submit was a spontaneous utterance which is likely to be the truth) (T 474.7ff).
The plaintiffs thus submit that, even if an affirmative finding is not made that the first defendant has not been truthful about the true extent of his assets and available financial resources, there is enough suggestive material which has not been explained by him that the Court could not be satisfied that he would indeed be left without assets.
Furthermore, the plaintiffs note that the first defendant, on his own evidence, could choose to reside in House No 3 and he accepted that his own siblings would at least wish to look after him (T 409.20; 420.46).
[21]
The first defendant's submissions as to his financial position
The first defendant maintains that his evidence as to financial circumstances should be taken into consideration and that it establishes that the making of orders for the transfer of the properties without compensation in the order of that which I had contemplated would operate to his significant detriment such that it would be an unjust result in all the circumstances of the case.
As to the matters raised by the plaintiffs in relation to his financial position, the first defendant submits that the evidence shows that, other than his interest in the properties and the farming business (that it was expected he would retain until his death), he has no remaining assets beyond his interest in House No 3. It is submitted that, even were I not to be satisfied that that is the case, there is no less an obligation on the plaintiffs to pay the amounts that the first defendant contends should be paid to him and "no reason in law or logic why the first defendant should be dispossessed of a valuable asset at less than its price simply because he is or is not wealthy".
Pausing here, it should be noted that there is at present no "obligation", as such, for the plaintiffs to pay the amounts in question to the first defendant; rather, that was simply what was contemplated by way of conditions to be imposed on the relief to be granted as at the time of the principal judgment. More relevantly, the basis on which it was contemplated by me that the first defendant be required to transfer the properties had nothing to do with his wealth or otherwise; rather, it was a consequence of my view (shared, it would seem, by all the parties) that the relationship between the family members had irrevocably broken down - namely that the plaintiffs' expectations should be accelerated but with orders to compensate the first defendant for the fact that those expectations were being accelerated.
The only relevance I see of the first defendant's financial position is to the extent that it can properly be taken into account when determining whether any proposed relief to make good the plaintiffs' expectations would be wholly disproportionate, or out of all proportion, to the detriment suffered by the plaintiffs from the resiling by the first defendant from the expectations that had been encouraged and not disabused in his sons as to the holding of the properties and operation of the farming business on those properties during his lifetime and those properties becoming the sons' properties after his death. (The plaintiffs, of course, maintain that it cannot be taken into account even for that purpose because it was not pleaded as a material fact in the defence. I have already considered their submissions on this issue.)
[22]
Conclusion as to first defendant's evidence as to his financial position
As set out earlier, I have admitted the first defendant's evidence as to his current financial position (over the plaintiffs' objections). However, I am not persuaded that I can rely on it as an accurate or complete account of his position. That is because the bank statements themselves show transfers between various accounts the explanation for which is not clear.
On more than one occasion, the first defendant made reference to his forgetfulness or said that his memory was terrible (see, for example at T 359.15; T 363.49; T 364.24; T 381.20), evidence consistent with that he gave at the principal hearing. That may well be so; but, if so, it was incumbent on him (if he wished to rely on his present financial circumstances) to adduce documentary evidence from which his financial position could be clearly discerned. The confusion surrounding the ownership or otherwise of a property (the suggestion being that it was Apartment No 1) financed or purchased for the first defendant by his brothers (and the commotion in the courtroom when that evidence was given), taken with the unexplained note about other funds soon becoming available and the series of transfers between bank accounts for which the first defendant had no real explanation, leaves a number of questions in the air as to the first defendant's financial resources. Whatever the position as to the first defendant's siblings (i.e., whether they are, or would be, in a position to support the first defendant, in circumstances where they too apparently benefited from a substantial family inheritance in an amount corresponding to the first defendant's inheritance) is not to the point (though I do not accept the first defendant's protestations in this regard). What is clear is that the first defendant's siblings have been supportive of him throughout the hearing and that he has been remarkably generous to one or more of them in the past (in particular his now deceased brother, through the T Co Loan). It beggars belief that his siblings would not step in to assist him if they were in a position to do so - and the proposition by the first defendant to the effect that they might throw him a burger when he was in the gutter seemed to me to be pure bravado on his part. That said, there is no basis on which I could make a positive finding on the evidence before me as to the financial ability of the siblings to assist the first defendant and certainly none on which I could make any finding that there are assets held by them or controlled by them on behalf of the first defendant (which seems to be what the plaintiffs surmise is the case).
However, it also seems to me not insignificant that the second defendant, who holds the first defendant's power of attorney and is a signatory over his various cheque accounts, and who was in Court throughout the whole of the re-opened hearing, was not called to give evidence as the first defendant's financial position (nor was there any evidence from his accountants in that regard).
Thus, in the circumstances, I cannot be confident that the whole picture as to the first defendant's assets has been put before the Court.
[23]
The plaintiffs' submissions as to the relief to be granted
Although the plaintiffs do not appear to take issue with my conclusion that relief on the claim based on a joint endeavor constructive trust would effectively be subsumed into the relief I proposed to grant in relation to the sons' jointly made proprietary estoppel claim, and they accept that it is not necessary for present purposes to consider A's claim separate from the sons' jointly made claim and that of E Co, they do cavil with the proposition that E Co's relief is in effect subsumed by the relief to be provided in favour of the individual plaintiffs (see the principal judgment at [62]).
The plaintiffs emphasise that there were three conceptually distinct proprietary estoppel claims made in the proceedings: the sons' jointly made claim; E Co's separate claim; and A's (also separate) claim; each of which succeeded. They argue that each of E Co's claim, on the one hand, and the sons' joint claim, on the other, needs first to be considered in isolation before consideration is given to whether or not the relief granted in respect of the latter subsumes any relief to be granted in respect of the former. They point out that they did nor plead, nor did they make any submission at trial, to the effect that any relief in respect of E Co's proprietary estoppel claim would be subsumed in the relief to be granted to the sons (referring to [467]-[489] of the plaintiffs' closing submissions of 21 September 2017 and [271]-[292] of the plaintiffs' closing submissions in reply).
The practical significance of the plaintiffs' submissions in approaching the question of E Co's relief in isolation first, as I understand it, is that it highlights the limited nature of the rights that (absent acceleration of the sons' expectations) the first defendant, as registered proprietor, would retain in relation to the properties (and, hence, the basis on which the plaintiffs say that any order for payment of a sum notionally representing future rent for the balance of the first defendant's life expectancy should be imposed).
The plaintiffs submit that, having made out the elements of its claim in proprietary estoppel, E Co is entitled to relief against the first defendant and that, prima facie, E Co is entitled to have made good the expectation created and encouraged by the first defendant's conduct. It is submitted that there should be a declaration that E Co's leasehold interest in the farms was held on constructive trust by the first defendant for E Co since the date of the first notice of termination dated 27 June 2013 (see Outline of Closing Submissions dated 12 December 2018 at [23]). Apart from the question of the date from which a constructive trust should be found to have arisen (which I will deal with in due course), one conceptual issue which that submission throws up is the identification of what the first defendant would in those circumstances be found to be holding on trust. The plaintiffs' submissions speak in terms of "E Co's leasehold interest in the farms" being held on constructive trust. As I understand it, what is meant by that is that, during his lifetime, the first defendant would hold his freehold interest in the land subject to E Co's leasehold interest under the agreement for lease that was in place as at 27 June 2013, that lease not being able to be terminated by the first defendant during his lifetime.
Prayer 1 of the relief claimed in the second further amended statement of claim dated 4 September 2017 is not framed in precisely those terms, rather it seeks a declaration that the first defendant holds [relevantly, the farms and the farming equipment and machinery owned by the first defendant] on trust for A, B and C "or alternatively [E Co]". Prayer 4 of the relief there claimed relevantly seeks "[f]urther or alternatively" an order that the first defendant perform the trust the subject of the declaration in prayer 1 "by transferring to the joint ownership of [A, B and C]" [note, not E Co] the farms and the farming business assets (i.e., the farming equipment and machinery). Prayer 6, again prefaced by the words "[f]urther or alternatively" seeks an order that the first defendant transfer to the ownership of E Co the farms and the farming business assets. No such relief is sought in relation to the shares in E Co or EM Co.
Obviously enough, an expectation on the part of E Co as to an entitlement to retain a leasehold interest in the farms (on the terms of the existing agreement for lease unless otherwise varied by agreement - as the plaintiffs submit) during the first defendant's lifetime would not support an order for the transfer of the freehold interest in the land to E Co. Thus prayer 1 must in context be referring to E Co's leasehold interest insofar as it seeks the alternative relief in favour of E Co.
That seems to be made clear by the closing submissions for the plaintiffs in which it is submitted that, to give effect to the expectation created and encouraged by the first defendant in respect of E Co, the first defendant would hold E Co's leasehold interest in the farms on trust for E Co "and would be "estopped from terminating the Agreement for Lease, and evicting E Co from the farms, before the first defendant's death" (see submissions at [29]). The estoppel there referred accords with the relief sought in prayers 15 and 16 of the second further amended statement of claim, namely, for a declaration that the agreement for lease does not confer on the first defendant any rights as lessor to evict E Co from the farms; and, further or in the alternative, an order that the first defendant be restrained from exercising any rights under the agreement for lease to terminate it or to evict E Co from the farms.
As to the separate position of the sons on their jointly made proprietary estoppel claim, the plaintiffs again argue that the prima facie measure of relief is to give effect to the expectation created and encouraged by the first defendant and frame that expectation in similar terms (though here clearly meaning the freehold interest in the farms), namely that the first defendant would "hold" onto the farms for the sons until the first defendant's death, and be estopped from terminating the agreement for lease and evicting E Co from the farms, before the first defendant's death.
The plaintiffs' submission is that the sons should be recognised to have held a proprietary interest in the farms from no later than 27 June 2013 (my emphasis), that being the date the second defendant served the first notice of termination of lease on E Co '(and, it is said, most likely in the period between 21 October 2009 - the date of the initial confrontation as to the first defendant's criminal offending - and November 2011, the date that B and the first defendant agreed to the "second lease agreement" and that the latter would move his own cattle operation to Property No 8 (see the plaintiffs' submissions at [116]). At [116] of their closing submissions, the plaintiffs submit that the date the constructive trust came into existence is the date from which the equitable interest in the land arises. (Elsewhere in the plaintiffs' submissions there seems to be a tension between the submissions that the trust the subject of a declaration nunc pro tunc would be from the time the trust came into existence "being the time it would first have been unreasonable for the first defendant to have resiled from the expectation" (see outline of submissions at 3.)
The plaintiffs submit that the date on which it became unconscionable for the first defendant to depart from the plaintiffs' expectation in relation to the agreement for lease was some time between November 2011 (when the agreement was reached that E Co would in effect resume the payment of rent that had been suspended by agreement in 2008 due to the drought and would pay a lease fee of $100,000 per annum, inclusive of rates and insurance, and that, in addition, E Co would pay electricity, repairs & maintenance; and motor vehicle registrations - see [321] of the principal judgment) and the disappointment of the expectation on 27 June 2013 (the date of service of the notice of termination of the agreement for lease) (see closing submissions at [33]). (However, in their proposed orders, the plaintiffs postulate a third date- namely, the date of the confrontation with their father as to his criminal offending in October 2009.)
The plaintiffs say that, in that period, they remained committed to the joint family business "despite the egregious breach of trust visited on the plaintiffs by the first defendant" albeit on a basis of a separation of personal affairs; and that at each stage following this it was the first defendant (not the plaintiffs), who sought to sever the parties' economic relationship (it being his choice: to separate his personal grazing business in Property No 8 in November 2011; to attempt to evict E Co from the properties by the issue of the termination notice on 27 June 2013; and to seek to disinherit his sons by a revised Will on 22 August 2013 (after establishing his discretionary trust - the F Trust on 20 August 2013).
The plaintiffs submit that a finding that the first defendant holds, and has held, the properties on trust for the plaintiffs (by which I understand them to refer to this being as to the freehold for the sons and as to the leasehold for E Co) has important consequences on the question of final relief (see closing submissions at [122]).
They point to the duty of a fiduciary to act in the exclusive interests of those to whom fiduciary duties are owed (citing Gibson Motorsport Merchandise Pty Ltd v Forbes (2006) 149 FCR 569 at [11]-[12]; [2006] FCAFC 44; and referring also to Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384 at 407-409; [1929] HCA 24; to the recognition that this is a duty of "absolute and disinterested loyalty" (citing Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 104; [1984] HCA 64, quoting Phelan v Middle States Oil Corporation (1955) 220 F 2d 593 at 602-603; Bristol & West Building Society v Mothew [1998] Ch 1 at 18, Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296 at [174]; [2012] FCAFC 6); and noting that the duty of loyalty is enforced in equity by means of two overlapping "proscriptive obligations" (referring to Friend v Brooker (2009) 239 CLR 129 at [84]; [2009] HCA 21, citing Breen v Williams (1996) 186 CLR 71 at 93-94, 113, 135-137; [2009] HCA 57; and Pilmer v Duke Group Ltd (In liq) (2001) 207 CLR 165 at [74]; [2001] HCA 31), namely, the "conflict rule" and the "profit rule".
The plaintiffs further make reference to Westpac Banking Corporation v Ollis [2008] NSWSC 281 where Einstein J at 26, in relation to the duties imposed upon a constructive trustee, referred to the observation by Professor Scott in the Law of Trusts, 3rd ed, Little, Brown & Co, 1967 (at 462) that, in the case of a constructive trust, the duty of the trustee "is merely to surrender property".
The plaintiffs submit that under their Pathway A (i.e., the separate declarations of constructive trust in favour of each of E Co on the one hand and the sons, collectively, on the other), although there would be no immediate transfer of the freehold title in the properties, the nature of the trust obligations imposed upon the first defendant leaves no room for the pursuit of private profits. They argue that, as a consequence, there is no basis for the making of orders for payments from the plaintiffs to the first defendant predicated on the ability of the first defendant to earn such profits arising from the use of trust property.
Emphasis is placed on the fact that the first defendant did not: plead (including any pleading of material facts upon which to found such a case); adduce any evidence to support; or make any submission at the trial to support: either a case or any contention to the effect that there should be a "clean break" with the consequence that the Court ought make an assumption based on a hypothetical that E Co and the first defendant would agree to "market rent" ([145] Outline of Submissions). Nor, it is submitted, did the first defendant plead, or adduce evidence, or make any submission to support a case that if there were to be a "clean break" between the sons and the first defendant in relation to the operation of the family farming business, and the clean break encompasses the buy-out by the sons of the first defendant's shares in the relevant family companies, it would not be unconscionable for the first defendant to require the repayment of those moneys (assuming a reasonable repayment regime to permit this to occur without jeopardising E Co's ongoing business or farming operations) (cf [70] of the principal judgment); or that it would not be unconscionable in all the circumstances for the first defendant to depart from the expectation that E Co (and his sons) were to have the benefit (indefinitely or during his lifetime) of the advance made to E Co or the transfer of the cattle (and hence require the repayment of the sums he has made available to the company over the years and recover the book value of the cattle) (cf [70] of the principal judgment); or that a "clean break" is necessary premised on the hypothetical that "if the assumption is that the family business arrangement is now brought to an end, then there is no reason to assume that the first defendant would not in those circumstances (had he retained ownership of the farms) have sought a market rent for the properties" (cf [75]; [77] - [80] of the principal judgment); or that, as a term of the relief to be granted under which the sons' interest in the farms is to be accelerated, an order should be made that the first defendant's shares in E Co and EM Co be acquired by the sons (at a price to be determined by an independent valuation of the shares) would be appropriate (cf [78] - [79] of the principal judgment); and/or that, as a term of relief, E Co should pay to the first defendant the book value of the cattle transferred to E Co in 2003, and the advances made to E Co over the years (without interest) on a basis that does not interfere with the reasonable operations of E Co's ongoing farming business (cf [79] - [80] of the principal judgment) (there paraphrasing, in effect, the reasons I had given as to why I considered the proposed conditions to be appropriate).
As to the pleading issue, it is relevant to note that the relief claimed in the second further amended statement of claim sought, among a variety of other relief, a declaration that the first defendant holds the properties (and the farming equipment and machinery) on trust for the sons or alternatively E Co. In the defence to the further amended statement of claim, in answer to the claims of the plaintiffs seeking equitable relief the first defendant (at [158]) denies any entitlement of the plaintiffs or each of them to any such relief and further says that equity would not intervene by reason of the matters pleaded. There was, however, no pleading to the effect that relief should be refused on the basis that it would be wholly disproportionate by reference to the first defendant's financial position, nor was that put in issue as a material fact.
The plaintiffs say that they conducted the case on the pleadings and did not acquiesce in any enlargement of the pleaded case (giving in support of this proposition two examples that it is not necessary here to summarise; neither relating to the particular complaints now made).
As to Pathway B (acceleration of the expectation) the plaintiffs submit that an alternative way of making good the relevant expectation (and one which would not have the effect of accelerating the sons' interest in the farms) would be the imposition of a constructive trust over the properties in favour of the sons and the first defendant being restrained from terminating the lease to E CO; and that in that event the only practical benefit of the farms to the first defendant would be the ongoing receipt of rent. In those circumstances they say that acceleration of the sons' interests in the land would not be out of all proportion to the equity established by the sons (referring to [76] of the principal judgment). Their position is that the legal and equitable rights of the first defendant mean that he is entitled, on the declaration of trust, over the properties to no payment from the plaintiffs other than payment pursuant to the agreement for lease as last varied, and that even in that case, he holds (and from the date the trust came into existence, held) the profit from such agreement on trust for the plaintiffs (see [233] Outline of Submissions). In the event that "acceleration" relief is not granted, then the plaintiffs submit that orders ought be made prohibiting the first defendant from encumbering, alienating or otherwise dealing with the properties to preserve the plaintiffs' rights until his death.
If there is to be an acceleration, then the plaintiffs (in their 31 October submissions) submitted that the choice of discount rate, being a rate of compound interest, is not, as submitted by the first defendant, the 3% and 5% rates applied in the calculation of common law damages (which rates, it is said, are to compensate the plaintiff for the time value of money and include little or no risk or inflation component to the discount rate) (see their submissions at [73]). The plaintiffs at that stage submitted that such rates are not appropriate to the net present value of rent on a grazing lease, which is subject to the "well-known risks and variables that apply to the cattle industry" (see 31 October 2018 submissions at [73]) and contemplated that Ms Bateman would opine on this issue as part of her valuation exercise. Ms Bateman did. The discount rate that Ms Bateman used was a 3% discount rate. It is not clear to me whether, in those circumstances, the plaintiffs have revised their position as to the applicable discount rate.
[24]
Submissions as to the proposed conditions referred to in the principal judgment
The plaintiffs object to the imposition of the conditions referred to in the principal judgment at [1222] (the Market Rent Condition), [1225] (acquisition of the first defendant's shares in E Co and EM Co, to which I will refer as the Share Acquisition Condition); and [1235] (the Book Debt Condition, i.e., payment of sums in respect of the book debts recorded in E Co's accounts in respect of the value of cattle transferred to E Co at book value) on a number of bases.
First, that the imposition of such conditions is contrary to legal principle and inconsistent with the maxim "he who seeks equity must do equity". Second, that the recognition in intermediate courts of appeal in Australia that equitable relief may be moulded to recognise practical considerations (such as the need for a "clean break") is "trumped" by, and subject to the application of, the maxim "he who seeks equity must do equity"; and that if regard is had to a practical consideration such as the need for a "clean break" in considering equitable relief, the court cannot arbitrarily impose terms upon a plaintiff, but is restricted to requiring a plaintiff to accept terms which flow from the legal or equitable rights of the defendant to the suit. Third, that the occasion for the clean break arises from the conduct of the first defendant (though the plaintiffs accept that in the typical case it may be that the need for a "clean break" arises "without attributable blame").
As to those conditions, the plaintiffs submit as follows.
Market Rent Condition
The plaintiffs submit that, in the event that a constructive trust in favour of the sons were to be declared in respect of the farms (coupled with an injunction restraining the first defendant from terminating the lease to E Co), i.e., their Pathway A, the only practical benefit to the first defendant of his ownership of the farms (given that he would not on that hypothesis have possession of the farms) would be the ongoing receipt of rent; and hence that the only consideration relevant to the imposition of a conditions necessary "to do equity" to protect the first defendant's legal right as the legal owner of the farms, is compensation for the loss of future rent.
The plaintiffs point out that, if there is a declaration of constructive trust, the first defendant's two legally cognisable rights, as legal owner of the properties, would be a right of residence and a right to rent. They submit further that the first is not a right in respect of which the plaintiffs would be required to "do equity", i.e., by compensating the first defendant in respect of the loss of this right of residence by reason of: the fact that the first defendant voluntarily moved his residence from the region of the properties to Property No 8 in 2011 and has not resided there since; and that the first defendant has a right of residence in a home which is in substance owned him (House No 3), there being no evidence that he could not share that residence with the long-standing friend who occupies it rent-free, and noting that the plaintiffs owe no equity to her.
As to the second, the right to rent, the plaintiffs note that the first defendant sued for past rent on the terms of the agreement for lease as amended, accepting that it had been amended so that he was entitled to sue upon it for past rent. It is submitted that, being bound by a contract, the first defendant could not unilaterally renegotiate the terms of that lease and therefore that the only way that the first defendant could have a legal or equitable right to market rent going forward would be if he were not estopped from exercising his right to terminate the lease. It is submitted that the imposition of the payment of market rent by the plaintiffs to the first defendant is inconsistent with the upholding of E Co's claim for a proprietary estoppel in relation to its tenancy (and subverts the lease agreement).
In their 31 October 2018 submissions, the plaintiffs postulated (as I read them, on the scenario that there would be no acceleration) that the position of the parties in relation to rent after final determination of the proceedings (and any appeals) would be as follows: first, that the proceedings being at an end, the parties would be bound by the expectation (as to the operation of the farming business) and an obligation to do equity in accordance with their legal and equitable rights, second that that expectation includes within its scope that the parties work together for the long term benefit of the business "to be inherited by the sons", but in the meantime recognising the legitimate rights of the first defendant as legal owner of the properties; third that, on this hypothetical, the parties would, at the "appropriate time" renegotiate their arrangement to something that was akin to that which was agreed by them in 2003 a "commercial", but not "market" rent; and, fourth, that this starting position would be adjusted in the following ways.
First, that the first defendant, himself being obliged to do equity, would concede that his conduct has significantly damaged the farming business and has placed it in such a position that it would require approximately five years to recover after final orders are made unconditional and would, consistently with past dealings as to rent, grant a concessionary rent or a rent holiday to permit the business to recover from that damage (and the present drought, if it continues). Second, that after this period of five years of grace, the plaintiffs would recognise that it made little sense to require the first defendant to pour his earnings from rent back into the properties, and would grant him a rent that gave him "real benefits, albeit being calculated by reference to a figure of rent minus outgoings".
Further, it is submitted that, that in making the award for compensation in the nature of rent, it would be inappropriate to require the figure to be calculated by reference to rent less outgoings, as the parties who will in fact be paying the outgoings including those outgoing such as rates and insurance that the plaintiffs submit are typically paid by the land owner.
The plaintiffs thus submitted in their 31 October 2018 submissions that, on this scenario (i.e., as I understand it, no acceleration), it would be appropriate for the present lease arrangement to continue undisturbed until the expiry of the "grace period" (five years after the date final orders are made unconditional) and they pointed to the estimate made by Mr Tremain as to the future rates and insurance cost (that it is said would enable a net present value to be calculated). It was submitted that, after the so-called "grace period", and for the remainder of the first defendant's life, an appropriate figure representing the net benefits that would accrue to the first defendant by reason of his legal ownership is the "indicative net rent" calculated by Mr Tremain (see the Joint Valuation Report at p 4). (In this respect, the plaintiffs note the first defendant's evidence that his subjective intention when renegotiating the lease in 2011 was that it would at the appropriate time return to a more commercial arrangement as it had been before the drought in 2008-2011 but point out that he does not there say that he would have demanded market rent.)
Pausing here, the submissions made in October 2018 as to the rent position both before and after a "grace period" seem to acknowledge that, even as constructive trustee of the properties, it would not be inequitable for the first defendant to obtain "real benefits" from the rent payable for the properties (see 58 of the 31 October 2018 written submissions) (albeit postulating the hypothetical negotiation process by which it is submitted such a rent would be struck).
The proposed orders put forward on 31 October 2018 contemplate payment of an amount representing rent for the period from the making of the orders after the hearing to a date five years after the date of the last appeal being determined of the net present value of a yearly payment of $100,000 "less rent ([sic], presumably "rates") and insurance" set out in Mr Tremain's report p 66 and thereafter the net present value of a yearly payment for net market rent as set out on p 4 of the Joint Valuation Report.
In oral submissions, as adverted to earlier, it was seemingly accepted that a notional rent reflecting the historical basis on which rent had been struck would not be inappropriate were there to be an acceleration of the sons' interest or expectation in relation to the properties (though, as I have said, the plaintiffs quantified this in a nominal amount).
Book Debts Condition
As to the amounts recorded in the books of E Co as loan advances (or book debts) (pleaded at [6] and [7] of the cross-claim; and see [158.4] and [158.5] of the defence to the second further amended statement of claim), in respect of which the first defendant claimed the sum of $2,123,253, and the claim in respect of the transfer to E Co of the cattle at book value (for approximately $758,427, being 2838 head of cattle at $267.24 per head), the plaintiffs note that these were rejected ([1234] of the principal judgment) on the basis that the expectation on the part of the sons, encouraged and understood by the first defendant, was that the sums advanced by E Co by the first defendant for the purpose of the family business farming operations (and the transfer to E Co of the cattle at book value) would not be payable during their father's lifetime ([1235] of the principal judgment). It is submitted that it follows from the finding that the first defendant does not have any legal or equitable claim to the repayment of those moneys recorded as loans in the books of E Co that repayment of those moneys cannot be ordered as a condition of relief.
The plaintiffs say that, insofar as the conditional finding regarding payment of market rent (at [77]) or the repayment of the "book debts" (at [70]) or the transfer of company shares was predicated on the cessation of the joint farming business, this has not come to an end. The plaintiffs argue that this is not a case where they have undermined the substratum of the joint undertaking. Rather, they say, it is the first defendant who is in substance solely responsible for attempting to bring the parties' relationship to an end: first, by his criminal conduct, and then by resiling from the relevant expectation(s). The plaintiffs say that at all times they attempted to preserve at least the economic relationship with their father and that, to permit him to rely upon the necessity for a "clean break" (assuming that that is not a matter that should be left to the election of the plaintiffs), where that necessity arises almost entirely from his own wrongful conduct, would offend the principle ex turpi causa non oritur actio and the equitable maxim that those who come to equity must come with clean hands.
It is noted that the first defendant, not a director and a minority shareholder, never had a right to control the business (and after the confrontation in 2009 did not seek to guide the business, especially after he separated his affairs from those of E Co in late 2011). It is submitted that the first defendant cannot in equity use his own wrong to bring that joint endeavour to an end as the basis for a finding that the plaintiffs are therefore liable to him for an amount in excess of $2 million.
The plaintiffs emphasise that it has been held that the first defendant had no right to receive that money before his death. The plaintiffs accept that if might be otherwise if (as they say underpins the reasoning at [70] of the primary judgment) hypothetically the plaintiffs had undermined the substratum of the joint undertaking, but they say that they have not done so. They argue that the purpose of these proceedings is significantly to preserve the business the plaintiffs have made "life changing decision" to bring into being. It is further submitted that although the first defendant intends that the plaintiffs "receive absolutely nothing from the farms" (something I noted at [689] of my principal reasons), the plaintiffs owe no equity to the first defendant's likely beneficiaries of his current Will (such as his sisters).
The Share Acquisition Condition
As to the first defendant's shares in the respective companies and the right to dividends, the plaintiffs submit that their expectation was such that the plaintiffs would inherit the farming business and the "off-farm" investments business. (This was not pleaded as such, although I considered it implicit in the expectations that the plaintiffs had at the relevant time - see the principal judgment at [78]; [1154]; [1225].) The plaintiffs submit that an order in accordance with prayer 11 in the relief claimed in the second further amended statement of claim (which sought not only an order restraining the first defendant during his lifetime from, in effect, disposing of his legal or beneficial interest in the farms and the farming business assets but also an order restraining him from executing any further Wills during his lifetime - and a declaration that his 22 August 2013 Will is null and void) would be necessary if there is no acceleration as it would clearly be inappropriate for the shares in the corporate plaintiffs to fall into the residue of the estate of the first defendant, and under the control of the second defendant and the first defendant's sister.
The plaintiffs submit that the appropriate order in this regard is that the first defendant's shares in the corporate plaintiffs are held on constructive trust just as the properties are, and on exactly the same basis (namely, that they were to inherit both the land and the business and, in the meantime, both were to be held for the mutual benefit of the parties, but with an aim of the long term enrichment of the plaintiffs rather than the making of short term profits).
As to the first defendant's minority shareholding in both E Co and EM Co, the plaintiffs argue that the fact that the first defendant is a shareholder, and there has been an irretrievable breakdown in the relationship with his sons (of which they reiterate that he was the sole effective cause), does not per se permit the imposition of a condition on the sons that they purchase the first defendant's shares in E Co and EM Co. (In oral submissions an argument was advanced by reference to which such an order might, it was said, be able to be maintained (see T 659.22) as the basis for such an order but the plaintiffs quite rightly note that no such claim was made on the pleaded case nor in the submissions at the principal hearing.)
The plaintiffs accept that, during his lifetime, the first defendant would (by reason of his ownership of the shares) have a legitimate expectation to a quarter share of the profits of the businesses (see 31 October 2018 submissions at [64]) but they note that the evidence is that EM Co is unlikely ever to generate a profit, and hence submit that that expectation in relation to EM Co does not yield compensation in equity and they submit, in respect of E Co, that the first defendant has no legitimate expectation to profits until the expiry of the "grace period" because during that time all profits would be returned to rebuilding the business as set out in the evidence of the plaintiffs. In their 31 October 2018 submissions, the plaintiffs appeared to accept that after the "grace period" the first defendant would thereafter be entitled to one-quarter of the profits of the business "operating at high effectiveness", which value they say can be estimated as one quarter of the EBLIT determined by Mr Tremain in respect of Mr Tremain's "reasonable weaner" model less payment for rent and subject to a reduction for tax; and they proposed an order to that effect in their 31 October 2018 submissions. (In that regard, the plaintiffs submitted that on no reasonable scenario does the business have the time and resources both to achieve the "reasonable weaner" model after the conclusion of the proceedings, and then the further $2.6 million required to achieve the "high profit feeder" model, within the first defendant's expected lifetime (see and fn 69 to the 31 October 2018 submissions). Hence the proposition that there might be a significant benefit payable to the first defendant in this respect does not seem to be accepted by the plaintiffs.)
First Defendant's entitlement to compensation for maintenance
The plaintiffs accept (see their 31 October 2018 submissions) that conditions may be imposed on a plaintiff to take into account conditions subject to which the plaintiff assumed he would acquire ownership of property (referring to Flinn v Flinn [1999] 3 VR 712; [1999] VSCA 109 (Flinn) at [122] per Brooking JA, where his Honour cited Crabb v Arun District Council [1976] Ch 179 at 198-199; S & E Promotions Pty Ltd v Tobin Brothers Pty Ltd (1994) 122 ALR 637 at 653; 656-657; and Giumelli v Giumelli (1999) 196 CLR 101 at 123-124; [1999] HCA 10 (Giumelli)).
It is submitted that (leaving aside the pleading issue) the first defendant is not entitled to compensation for rent for his own accommodation and that the first defendant has not disclosed any significant expenses (apart from rent for his unit, and expenses such as rates and insurance for the properties which will be paid by the plaintiffs). It is noted that the first defendant will be receiving sums in respect of rent and profits of the farming business, and hence, he does not need maintenance. (I note that those submissions were at a time prior to the most recent evidence as to the first defendant's cash reserves, namely when he had some $534,448.74 in available cash. That last proposition is now unlikely to be the case unless the first defendant has undisclosed resources independent of any amounts he may receive from the sons.)
The plaintiffs nevertheless accepted that it is "likely" that they would be required, as occurred in Flinn, to provide an income for the first defendant's living expenses, pointing to the statistical evidence as to the average weekly expenses for a single person over the age of 65 ($539.65 per week), referring to Mr Fitzgerald's 31 October 2018 affidavit, Annexure B); approximately $28,158.17 a year.
However, the plaintiffs say that there is nothing, in the authorities where regard is made to a practical consideration such as the need for a "clean break", that would have the consequence that the defendant be put in a better position than the defendant was before the defendant departed from the expectation created and encouraged by his or her conduct. In the plaintiffs' submission:
… a practical consideration such as the desirability of a "clean break" is not to be elevated into a blade which severs the (economic) relationship between the parties and then uses that severance as the foundation to compensate the defendant for rights that the defendant would not otherwise have, arising from a situation brought ought by reason of the defendant's own wrongful (unconscionable) conduct.
The plaintiffs again emphasise in this context that the imposition of conditions on relief to be granted by the Court must have regard to, and cannot exceed the bounds of, a requirement that the party relying upon the estoppel must "do equity" (referring to Verwayen at 442; and the explanation and application of the maxim that "he who seeks equity must do equity" in Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at [67]; [2009] HCA 44 (Bofinger); Langman v Handover (1929) 43 CLR 334 at 351-352; [1929] HCA 42 per Rich and Dixon JJ; Gibson v Goldsmid (1854) 5 De GM & G 757 at 765; 43 ER 1064 per Turner LJ; and Mercanti at [186] per Le Miere J).
Election
In their submissions before the commencement of the re-opened hearing, the plaintiffs submitted that until they know what sums they are obliged to pay to the first defendant by way of their obligation to do equity, they could not make an election as to whether a full clean break by way of acceleration is appropriate (see 31 October 2018 submissions at [72]).
They maintained the submission that it would be appropriate to permit them to make an election between Pathway A and Pathway B once findings have been made as to the imposition of terms as a condition of relief in respect of each of the two pathways. The plaintiffs argued that as the sole effective cause of the breakdown in the relationship of the parties, and as an unsuccessful defendant, it ought not lie in his mouth to dictate the terms on which the parties' economic relationship is severed, especially if that places him in a position of advantage.
[25]
Balance of orders
As to the balance of the orders to be made (and leaving aside the question of costs at this stage) the plaintiffs' position is as follows.
First, as to the claim for unpaid rent (see [1230] of the principal judgment), apart from their submission that (in the absence of any amendment to the pleadings) the issue of "market rent" remains an issue that is not in dispute between the parties, the plaintiffs submit that the claim for rent on the basis pressed by the first defendant fails for the following reasons: first, that receipt of rent to the first defendant was the subject of a legally binding contract between E Co and the first defendant as varied in 2008 and again in 2011 and that, as at 27 June 2013, the first defendant's entitlement to rent was pursuant to the lease agreement as varied in 2011; second, that the first defendant's cross-claim (at [2]-[5]) against E Co for an annual fee for the years ending 30 June 2008 through to 2011, and then 2015 and 2016 (in the sum of $1.54 million) was rejected; and, third, that the claim to possession of the farms on the basis that any entitlement of E Co to occupy and use the first defendant's properties had been validly terminated (see at [8]-[9] of the cross-claim) was also rejected.
The plaintiffs accept that the first defendant is entitled to rent pursuant to the agreement for lease as amended up until the proceedings are finally determined (including "the likelihood of any appeals given that one party or another is almost certain to seek either a stay of orders and/or a continuation of the present interlocutory regime").
The plaintiffs note that the E Co financial statements for the financial years ending 30 June 2014 to 2018 and onward record payments for insurance and rates and taxes totalling $99,228. The plaintiffs argue that it follows, under the terms of the lease agreement as last varied, that the first defendant is entitled to $100,000, less the payments made by E Co, in each of the relevant financial years, namely: $22,677 (FY 2014;) $6,739 (FY 2015); $83,572 (FY 2016); $39,648 (FY 2017); and $772 (FY 2018).
Second, as to the amount to be accounted for in respect of the proceeds of sale of Property No 12 ([1224] of the principal judgment), the plaintiffs accept that the evidence indicates that the amount of the net proceeds of sale was $769,953.35 and that three-quarters of this amount is $577,465. Thus, they accept that the amount to be accounted for by the first defendant in this regard (which I had considered should be set-off against the sum to be paid to the first defendant by way of compensation for the loss of the future income stream from the lease of the rural properties), is $577,465, (not $600,000, as I had indicated, plus interest from the date of settlement of that sale).
Third, as to the claim for relief in respect of the obligations under the Westpac Deed, the plaintiffs say that once (or, perhaps having regard to their submissions this should be, if) acceleration of their expectation in relation to the farms (i.e., a transfer of the farms) occurs, the only relief necessary relates to the release of the personal guarantee given by the first defendant. The plaintiffs submit that they should, as a condition of the relief to be granted in their favour on the proprietary estoppel claim(s), be required to obtain a release of that guarantee from the bank and, if such a release cannot be procured from the bank for any reason, the plaintiffs should be ordered jointly and severally to indemnify the first defendant from any liability arising under that guarantee (secured by way of charge over farming properties to be transferred to the sons) (see [1237] of my principal judgment).
Fourth, as to the first defendant's suggestion that they should be made responsible for any CGT liability the plaintiffs say that, insofar as the effect of the evidence of both Mr Sneddon and Mr Lam is that there is either a CGT A1 event or CGT E1 event, the plaintiffs say that this is the result of the conduct of the first defendant in disappointing the plaintiffs' expectation, founding the proprietary estoppel. They resist any suggestion that they should bear any such liability.
[26]
Costs set-off
I concluded that it would, in the ordinary course, be appropriate to the plaintiffs to have their costs of the proceedings in light of the outcome (see [1239] of the principal judgment) and that I proposed to order that, to the extent that there is a surplus payable to the first defendant (plus the amount payable to him for compensation in respect of loss of future rent) this should be set-off against any orders made in favour of the plaintiffs (see [1240] of the principal judgment). The plaintiffs say that the necessity for such an order as to set-off is borne out by the first defendant's evidence (here, seemingly assuming it has been accepted) relating to his extant personal assets.
As to the proposed set-off, at [32] of the plaintiffs' closing submissions, the plaintiffs do not cavil with the proposition (see [1238] of the principal judgment) that there should be a set-off, as against the amount payable to the sons in respect of three-quarters of the proceeds of sale of Property No 12 (plus interest from the date of settlement)) of the amounts payable by the sons to the first defendant under the W Deed (together with interest on the W Deed amounts from the date they were due) and the amounts payable by E Co to the first defendant for unpaid rent to 30 June 2017.
[27]
First defendant's submissions as to final relief
The first defendant submits that the case conducted by the plaintiffs following the re-opening of the hearing has not sought to challenge the factual basis on which I considered that there was a need for the acceleration of the expectation (i.e., the irreparable breakdown of the relationship between father and sons) and therefore argues that the focus of the present enquiry is whether, in all the circumstances of the case, the compensation that I had envisaged be payable to the first defendant is appropriate (i.e., not whether there should be the remedy of an acceleration of the expectation but in what manner should the acceleration of the expectation be ordered). (The plaintiffs, as evident from their submissions, do not concede that there is any inevitability as to the acceleration of their expectations in relation to the properties but their evidence certainly reinforces the need for a clean break so far as possible.)
In that regard, the first defendant identifies the issues raised (expressly or by implication) as to the orders I had proposed in the principal judgment as being: the financial capacity of the plaintiffs to pay the present value of the future market rent, calculated for the rest of the first defendant's life expectancy; the amount of that rent; the impact of a presently unknown CGT liability and, in respect of any CGT liability, who should be bear that liability as between the parties; and whether the use by the plaintiffs of income from the farming business to pay legal fees "adds somehow to the inequity of the situation for which they obtain relief".
As to the plaintiffs' proposition that there should be a declaration of a constructive trust (understood by the first defendant as the alternative relief mooted by the plaintiffs but, having regard to the plaintiffs' oral submissions, I understand as being part of the combined Pathways A and B - and the predicate for the imposition of any conditions if Pathway B is adopted), the first defendant says this raises issues as to: the point in time at which that trust come into existence; the CGT consequence of that declaration of a constructive trust; which of the parties should be liable for any CGT liability; how the parties would co-exist (which I understand to be the issue as to the practicability of the parties "remaining entwined with each other's affairs in the constructive trust scenario"); and, as to rent, what amount would be paid, how it should be secured, and how it should be paid. It can thus be seen that there is some overlap between the issues the first defendant sees as being raised in relation to the relief that I had contemplated in the principal judgment and any relief consequent upon the making of one or more declarations as to the existence of a constructive trust in relation to the properties.
In summary, the first defendant's position is that the constructive trust remedy is not practicable and should be put to one side and that the conclusion that there must be a clean break has been "thoroughly endorsed" by the plaintiffs' own evidence; and therefore that the forms of relief that should now be considered are as follows.
First, that there be an acceleration of the plaintiffs' expectation(s), with the plaintiffs required to pay to the first defendant the amounts identified in the first defendant's outline of submissions dated 12 November 2018 (in effect, the relief contemplated in the principal judgment, with the relevant amounts now able to be quantified). This is the relief for which, as I understand it, the first defendant principally presses.
Second, that there be an order for the transfer of some but not all of the properties to the plaintiffs (so as to leave the first defendant as the registered proprietor of the Main/7 Aggregation and Property No 11, without any trust being impressed on the first defendant's holding of those properties) (which is what the first defendant refers to as Pathway C and on which scenario the first defendant says, there would be no payment of money by the plaintiffs to the first defendant, and any CGT liability issue is significantly reduced). This is, in essence, the fallback position put for the first defendant, with emphasis on the flexibility of the remedial discretion following the establishment of the proprietary estoppel claims.
Third, payment by the first defendant to the plaintiffs of an amount by way of equitable compensation (a remedy that had been raised by the first defendant at the principal hearing).
Finally, in effect, a combination of the second and third remedies, namely that there be a transfer of land to A (presumably Property No 4, to which his separate claim related) and the payment by the first defendant of equitable compensation to each of B and C.
In support of the first of those proposed remedies, the first defendant submits that the orders proposed by him in April 2018 (in essence the relief I had envisaged in the principal judgment) gives effect to the findings and conclusions of the principal reasons, in that they: achieve the clean break found to be appropriate; effect the acceleration of the expectation necessary to affect a clean break; are not "financially ruinous" of the plaintiffs; and are in line with the authorities (in particular the principles canvassed in Rodda v Ian Rodda Pty Ltd [2015] SASC 95 (Rodda) per Nicholson J at [90], and in Kevin John Lewis v Peter William Stewart by his tutor Peggy Lillian Mayhew [2018] NSWSC 1186 (Lewis v Stewart) per Robb J at [219]).
The first defendant says that a constructive trust remedy is impracticable, by reference in particular to the fact that the relationship between the plaintiffs and the first defendant has "irreparably broken down". It is not necessary here to set out the evidence of each of A, B and C to which the first defendant points when submitting that a clean break is the appropriate course (and hence a constructive trust remedy is unworkable). That evidence has already been referred to above. I accept that it supports the conclusion that it is not feasible to contemplate a scenario under which the parties can now work co-operatively together in the operation of the farming business on the farms into the future. The likelihood of difficulty in determining in future how rent would be set for the properties is an obvious example of this (as indicated by the gulf in expectations between the parties already as to the payment of rent from 2014 to the present date).
Thus, the first defendant says that the appropriate remedy is acceleration of the sons' interest in the land, subject to certain conditions (including as to the payment of a notional market rent). The first defendant puts forward proposed short minutes which allow for that and the variables that were outlined in the draft short minutes prepared after the principal judgment. (Pausing here, this unworkability submission does not address the proposed combination of a declaration of constructive trust followed by acceleration of the plaintiffs' expectations - which is the remedy urged by the plaintiffs, as I apprehend their oral submissions.)
The first defendant submits that the conclusions as to the issue raised by the plaintiffs (in their submissions) as to when any declared constructive trust may arise (see below) and the related issue of CGT support the view that there is no benefit in the constructive trust remedy that outweighs the imperative of a clean break. It is noted that a lesser form of relief is permitted where relief framed on the basis of the assumed state of affairs would be inequitably harsh. The first defendant refers to Lewis v Stewart at [219], noting there that his Honour referred to Handley AJA in Delaforce for the propositions that relief depends very much on the facts and that the court must look at the circumstances in each case to decide in what way the equity can be satisfied; and to Sledmore v Dalby (1996) 72 P&CR CA 196; [1996] 2 WLUK 129 (Sledmore) for the proposition that relief may be refused or reduced if the plaintiff's equity has been diminished by later events. It is further noted that equity permits the giving of relief on terms (see [1180] of the principal judgment); and the first defendant refers to the authorities that show examples of "(principled) flexibility" (as noted at [1180] of the principal judgment).
The first defendant emphasises that the particular facts of the present case include the fact that the estopped party who encouraged an expectation that included the transfer of title of the properties to his sons upon his death is not dead, and the fact that the relationship of the parties has "irreparably broken down". It is submitted that the further evidence of the first defendant shows that his financial position is now far worse than at the time of creating the expectation.
The first defendant notes that what is in contemplation due to the particular facts of this case is relief accelerating the occurrence of the expectation, namely, beneficial ownership of the properties. It is submitted that, where the relief is to accelerate the expectation, it is necessary to ensure the result is not to place the estopped party in a position of disadvantage compared to the estopped party's position in the assumed state of affairs, and being a position never contemplated by the parties, without fashioning orders that counteract that disadvantage. In this case it is said that the position never contemplated by the parties was one of the plaintiffs being the legal and beneficial owners of the properties in the first defendant's lifetime and with no obligation to perform in accordance with their expectation (namely, to conduct the farming business of E Co), and with the first defendant having no interest in the properties or the worth thereof, and having no income from the properties, and no right of residence on the properties.
It is said that it also needs to be taken into account that, because of the acceleration, the plaintiffs will be relieved from acting in accordance with the assumed state of affairs. The consequence of acceleration, it is said, means that from the date of judgment until the death of the first defendant, the plaintiffs will not need to work the farming business; they will be relieved from performing the very tasks they were required to perform to obtain the properties that they obtain.
It is submitted that, as a matter of logic, to receive the properties now means that the plaintiffs are receiving more than they expected they would. This is so because they are receiving $20 million of property in 2018, not (according to life tables) in 2029. Thus, the plaintiffs enjoy their expectation for that extra period and at the same time are free of any continuing obligation in that same period which otherwise would have, on their case, subsisted. It is submitted that not only do these "variables" seek to "compensate" the first defendant (or to adopt the words of the authorities, to avoid an outcome that is "inequitably harsh") for the loss of property that was on any account the first defendant's property until his death, but they also have the effect of adjusting the benefit to the plaintiffs to accord with their expectation. It is said that, on one view, upon receiving the properties now, the payments required by the orders will have been accounted for by 2029, so that upon that date the plaintiffs duly receive what they expected to receive.
It is submitted by the first defendant that it would not be contrary to the equity of an accelerated result if the plaintiffs were required to sell some part of the properties because the plaintiffs, by receiving the properties now, are receiving more than their expectation and will, by the time they expected to receive the properties, in all likelihood have the equivalent thereof.
Further, it is submitted that there is no difference in terms of the equity held in the properties by the plaintiffs upon acceleration if the payments to the first defendant are financed by way of loaned funds secured by mortgage, or a sale of a one or more of the properties.
As to the time at which any declared constructive trust would be found to have come into existence, the first defendant argues (based on the reasoning applied by the Victorian Court of Appeal in McNab v Graham at [102], [107]-[108]) that this would be at the time of the detrimental reliance on the relevant expectation or assumed state of affairs. The first defendant identifies this as being from 25 September 2002; and argues that the plaintiffs' argument (that the date of the creation of the constructive trust was in 2009, 2011 or 2013) cannot be maintained.
As to the question of CGT liability, the first defendant submits that the declaration (or imposition) of a constructive trust would be prohibitive by reason of the CGT consequences that would flow from such a remedy. The first defendant argues that if there were now to be a declaration of constructive trust, then a CGT event would have occurred in 2002. It is submitted (which must be correct) that there would then be no concession available based on any of the properties having been held for 15 years. The first defendant points out that no calculation has been carried out on this scenario, noting Mr Sneddon's evidence that this would be a CGT A1 event, in respect of which there is no limitation period for amendment of the assessment and for which the general interest charge would apply (and possibly penalties).
The first defendant says that if CGT liability were to be calculated and the properties were to be transferred now (a scenario that, as I understand it, is predicated on there being no declaration as to a constructive trust and hence no earlier CGT event), then the proposed transfer would result in a CGT liability in the hands of the transferor (the first defendant) on his marginal rate of tax at the relevant time (45%) on an amount of capital gain of $6,376,236; hence a liability of some $2.8 million. The first defendant says that insofar as Mr Sneddon suggested that it may be arguable that CGT liability would be assessed on a lower value (if the value of the land took into account interests created by the judgment, i.e., that what was being transferred was the bare legal interest, the beneficial interest already being held by the sons) there is no indication as to what that lesser value would be (nor any evidence of the attitude of the ATO to any asserted lesser value). The first defendant says that arguably that might be a nil value or that perhaps the value would be "whatever amount is finally ordered by way of the market rent assessment".
The first defendant emphasises that the adoption by Mr Sneddon as to a 27 June 2013 CGT event date was an assumption he was instructed to make (and not his opinion as to the relevant CGT event date) but in any event it is said that should the CGT event be at some different date there may be available concessions not otherwise available. Hence, as I understand it, the first defendant's submission is that the amount of CGT liability is presently unknown.
The first defendant accepts that the remedy to which the plaintiffs are prima facie entitled is "the fulfilment of the expectation engendered" and that the requirement that the plaintiffs, in seeking equity, must do equity is not an arbitrary process. As to what conditions should be imposed if there is to be an acceleration of the interest of the sons in the land, the first defendant emphasises that the result must be an equitable one, namely, "one that is proportionate and that is not inequitably harsh".
In that context, the first defendant turns to the proposed condition for payment of a sum to reflect the notion future market rent for the properties and advocates acceptance of Mr Donoghue's view that the lower the percentage rate of the value of land used to determine rent, the lesser the amount of the outgoings that are borne by the landlord. Criticism is made of Mr Tremain's report insofar as he gives no opinion as to what outgoings are borne by the landlord and simply adopts an instructed assumption to deduct from the gross rent the entirety of the tenant's outgoings. It is submitted that a 0.008% return on capital would plainly be an "uneconomic figure unlikely to be accepted by any owner of such a valuable asset" as the farming properties in the present case (and that Mr Tremain's failure to concede this is a matter that discredits him). The first defendant argues that there is no evidentiary support for the proposition contended for by the plaintiffs that all the outgoings of a tenant are to be deducted from some gross rent figure to arrive at the net rent figure.
The first defendant submits that there should be a finding that the gross rent is 3% of the value of the land and that the net rent payable is arrived at by deducting from the gross rent the amount that can be attributed to rates and insurance. It is submitted that the first report of Mr Francis (which it is noted was tendered by the plaintiffs) supports this approach (and supports the proposition that a lower percentage would be adopted to account for outgoings to be borne by the lessee.
As to the discount factor to be adopted when calculating the net present value of the future market rent, it is noted that in the second Lonergan Edwards report discount factors of both 4.5% and 3% were used (see [35]-[42], producing figures of $5,121,076 and $5,534,708, respectively, based on a gross rent of 3% land value less rates and insurance). It is noted that, on Mr Donoghue's figures (a net rent of 2.5% of the land value) and using a 3% discount factor, the present value of future rent would be $5,154,815. The first defendant submits that the results are similar enough to suggest that either approach is reliable (given the margin of difference is less than 10%). The first defendant argues for the approach of Mr Donoghue in this regard, submitting that Mr Tremain's assumption as to outgoings was "just an unevidenced assumption".
The first defendant compares this with the calculations of Ms Bateman as to net present value of the future rent (at [64]-[71] and Schedule 8 of her report; and see T 440) which were based on the respective valuers' conclusions (the Donoghue net rent figure and the Tremain gross rent figure), namely, $5,915,755 and $6,316,726 respectively. It is submitted that if there is a finding that the net rent should be 3% of land value less rates and insurance, then the first year figure arrived at on the agreed figures, and using Mr Tremain's rates and insurance figures, namely, $522,000) is very close to the first year net rent figure of $530,000 used by Ms Bateman by reference to the Donoghue figures.
The first defendant argues that there is no distinction between a market rent and a commercial rent (referring to his submissions of 12 November 2018 at [22]-[25]) and submits that it is of particular relevance that the initial rent agreed was based on 5% of the land value.
The first defendant further argues that it is important to take into account (in the debate concerning gross rent and net rent) that the present case (unlike other landlord and tenant relationships) is one where the tenants "are also the future owners of the land". The first defendant submits that the rationale for a landlord bearing any outgoings is the notion that some benefit accrues to the landlord by reason of the fact that the landlord will later, upon the end of the lease, regain the benefit of the land; whereas, in the present case, it is the lessee that will ultimately reap the benefit of the outgoings. The first defendant submits that this strengthens the position of the first defendant in the rent debate; adds weight to the view of Mr Donoghue that no deductions should be made at all; and adds weight to making deductions of only rates and insurance, as stated by Mr Francis.
Hence it is submitted that there should be a finding that the present value of the future rent is approximately $5.9 million and that this is the amount of compensation required on the acceleration of the sons' interest (or expectation) in the land.
As to the second of the consequential payments that I had concluded (at [79] of the principal judgment) would be appropriate to be paid to the first defendant as a term of the acceleration of the plaintiffs' expectation, namely, the value of the first defendant's shares in E Co and EM Co, the first defendant accepts Ms Bateman's nil valuation for the shares in EM Co but cavils with her conclusion in respect of E Co.
In that regard, the first defendant says: first, that the balance sheet of E Co records stock at book value, not its real value (see T 432); and, second that because the $2,123,253 "loan" account of the first defendant has been found not to be an enforceable debt (see [1234] of the principal judgment), this amount should be added back into the company's balance sheet (see T 438.45-439.19)
The first defendant says that those two matters result in a "positive" adjustment to the net worth of E Co (set out in Ms Bateman's report as being $699,967) in a total amount $4,705,627, comprising the sums of $2,582,374 (for the real value of the stock - see T 438.39) and $2,123,253 (for the unenforceable book debt), thus giving a surplus of assets over liabilities of $4,005,660 (see T 439.11). The first defendant accepts that this figure will differ as stock numbers vary. However, it is submitted that this figure calculated could reliably be utilised given that it is the plaintiffs, to the exclusion of the first defendant, who have had the entire benefit of any realised stock.
It is thus submitted that as the first defendant holds 25% of the shares in E Co, the value of his shareholding in E Co is approximately $1 million but that (given the way that I had concluded that the amount of $2,123,253 is to be treated), the value of the first defendant's shares in E Co should be valued as if there remained a debt of that amount on the books of E Co, which would reduce the net assets of E Co to $1,882,407, and the first defendant's share value to $470,601.
Pausing here, I raised with Ms Bateman during the course of her cross-examination the basis on which the minority shareholding was being valued as simply a quarter of the net assets of the company. As I understand it, this was calculated on a winding up basis. The reason for my concern to clarify this was because I had apprehended that if the minority shareholding were to be valued on a different basis, say for the purpose of the making of a compulsory purchase order (which was akin to what I was envisaging), I would have expected there to be a discount on the value of such a shareholding in a family company to reflect the lack of control of the minority shareholder in the company. Ultimately, however, this point of distinction is not necessary to be explored because (for the reasons I will come to shortly) I accept the plaintiffs' criticism that such an order should not be made (even though, I would add, the first defendant considers that this would be sensible and accepts that there should be a buy-out of his shares). This has consequences for the notion of a clean break - in that it cannot be a completely clean break if the first defendant remains the holder of the minority shares in the respective companies.
As to the sum of $2,123,253 recorded in the books of E Co as a debt owing to the first defendant, the first defendant submits that if there is a buy out of his first defendant's shares in E Co (as envisaged at [1235] of the principal reasons), then on such an outcome the amount of $2,123,253 should be reimbursed to him by the plaintiffs. It is submitted that on this basis, that amount should sensibly be viewed as being in the balance sheet of E Co. It is said that not do so would see the first defendant benefiting twice in respect of that amount.
Insofar as the plaintiffs resist any reimbursement of this amount by relying on the maxim that equity follows the law (as was the tenor of the original submissions by the plaintiffs on this aspect), it is submitted that this involves conceptual confusion, namely: that the "foreshadowed reimbursement of the money is not the equitable enforcement of a debt"; rather, it is an acknowledgement that if there is to be an equitable remedy for the benefit of the plaintiffs that sees a transfer of land and a buy out of shares of a company in a way that was never the intention of the parties (so that without further redress it would mean the plaintiffs would retain the use of the $2,123,253 to the exclusion of the first defendant, when it had always been intended he would benefit from it) then those who seek equity must do equity. It is submitted that to allow the plaintiffs to retain the $2,123,253 would be unconscionable. Thus it is said that the reimbursement of the $2,123,253 is not acceding to a claim of the first defendant, but is part of the remedy being obtained by the plaintiffs.
Insofar as I had indicated that the repayment of this money must occur in a way that does not jeopardise the ongoing business of E Co (see [1235] of the principal judgment), the first defendant submits that the evidence of Mr Lonergan shows that this can be "comfortably" achieved. Moreover, it is submitted that the ability of E Co to pay such sums of money is reflected in the fact of it having paid some $3.5 million in legal fees over recent years, at the same time as repaying some $1.7 million of debt to Rabobank in the same period. (As to this last submission, the payment of legal fees, to the extent achieved by E Co after cattle sales, gives rise to the debate as to the implications for the profitability of the business going forward due to the need to re-stock the properties.)
The first defendant submits that on the plaintiffs' argument a conundrum emerges, namely that, on the one hand, a constructive trust is unworkable, as confirmed by the evidence on reopening; and, on the other hand, it is said that the cost of acceleration is too great.
The first defendant's submission in that regard is to suggest that there be an order (this is Pathway C) for the transfer to the sons of the farms other than Main/7 Aggregation and Property No 11. It is submitted that this has the advantage of not requiring any payment to be made between the parties and lessens the impact of any CGT liability. It is said that on this scenario, the plaintiffs should bear any CGT liability on the land they receive, and the first defendant should bear any CGT liability arising from how he may deal with the land he retains.
It is noted that each of the sons was cross examined in relation to the viability of a separation of part of the properties; and that the evidence shows that their preference is to retain the 3/6 Aggregation, that there is a willingness to dispose of Property No 11 and, it is submitted, an openness to the Main/7 Aggregation remaining with the first defendant, should an in specie resolution become the only viable resolution.
As noted above, another option (put forward by the first defendant at the end of the trial in October 2017 and repeated at the re-opened hearing) is that the first defendant pay an amount (not uniform) of equitable compensation to each of the sons, which payment could be charged upon the properties. (The plaintiff complains that this goes beyond the scope of the re-opened hearing.)
Further, the first defendant submits that this case is like no other. It is said that it does not fit the farming pattern of cases (comparing the position of the plaintiffs in Flinn and in Rodda with that of B and C; and the position of the farm worker plaintiff in Gillett v Holt [2010] Ch 210; [2010] 2 All ER 289 (Gillett v Holt) with that of A).
It is submitted that the distinguishing characteristic of this case is the benefits received by the plaintiffs, in contrast to the cases just mentioned where no such benefits were received. It is noted that the authorities support the view that in fashioning relief all the facts and circumstances of case are to be considered. The first defendant says that the relief necessary to remedy the unconscionable conduct of the first defendant is tempered by these benefits, noting that it is necessary to consider the overall justice of the case.
In the present case the first defendant notes that the detriment is the decision to devote time to the E Co farming business rather than to some other venture. It is accepted that, as Allsop P, as his Honour then was, noted in Delaforce at [5], it is not necessary to evidence the likely prosperity or adversity of that hypothetical other course. Nevertheless the first defendant notes that the course adopted here by the plaintiffs in reliance on the proven expectation was a course with benefits beyond the expectation, namely the largesse of the first defendant, emphasising that the plaintiffs came into the E Co business at no initial cost, something said to be unlikely to be the case on any alternate scenario. It is said that these benefits diminish the unconscionability of the detriment suffered, just as in Sledmore a lengthy rent free period diminished the equity arising from the improvement to the property.
It is submitted that there are two other ways to provide relief by way of a clean break. One is where there is no transfer of land, but simply an assessment of what is the appropriate amount of equitable compensation that should be ordered by the Court for the first defendant to pay now. It is noted that this remedy was canvassed in oral submissions in October 2017, with the figure being calculated as some $3 million to supplant the amounts secured on the properties, with a further $327,000 to be paid to A in respect of the cost of the renovations. It is submitted that this remedy better accommodates the fact of the claims of the sons each being different. It is said that if the Court took the view that some differentiation beyond this was necessary, then possibly an argument exists for some additional payment to B, as he ordered his affairs to be involved with E Co in a more significant way than either A or C. This is because A's evidence was that had he not relied on the expectation he would have done largely what he in fact did. As to C, it is said that equity has no need to interfere since in the overall scheme of the case, C has not only benefited greatly, but performed little by way of working for E Co.
It is submitted that, on this view, a total payment of some $3.5 million may be justified, or such other sum as the Court may assess in light of the earlier money calculations discussed above, and reflected in the proposed short minutes of order.
The remaining method is to divide the properties. This prospect arose in the course of submissions the example given being that orders could be made transferring to the sons the properties save for the Main/7 Aggregation and Property No 11. The first defendant says that this minimises any CGT and stamp duty issues; it allows the sons to continue farming; it allows the first defendant to continue farming; and that, depending on just what properties were divided, it removes the need for orders relating to issues such as the present value of the future rent, and of offsetting other amounts such as the W Deed moneys and may also account for the sum of $2,123,253. By way of example, the first defendant says that the evidence shows Main/7 Aggregation and Property No 11 together to be worth $8.6 million (or $8.855 million), meaning the sons would receive $11.4 million, or some $3.8 million of assets each, and would no longer have the burdens of the W Deed and "loan" account matters, (plus the machinery and stock), in addition to their current asset positions.
As to the submission that such a result is not financially ruinous, in the first set of submissions the first defendant emphasised that the plaintiffs have called no expert forensic accountant to support their claims of unaffordability. The first defendant says that the evidence of the independent expert should be preferred. Should that evidence be rejected, the first defendant says that the simple fact remains that, by realising one or more of the properties, the plaintiffs could make the payments required and could conduct E Co on a debt free basis, freeing E Co up to grow the business and to acquire more land, with the likelihood being that by the expected end of the first defendant's life, the plaintiffs will have the benefit of what was expected to be received at that time.
The first defendant says that the concerns of the plaintiffs that orders reflecting the principal judgment could leave them in financial ruin or with "absolutely nothing" have been shown, even on their own evidence, to be unfounded. The first defendant argues that on the relief envisaged in the principal judgment the plaintiffs will receive $20 million worth of land some 11 years earlier than they otherwise would have, with all the accompanying financial benefits; the net benefit now (depending on the rent figures to be determined) being at least $10 million.
Finally, the first defendant argues that the suggestion of allowing the plaintiffs to choose from alternative remedies should not be permitted; that it is for the Court to determine what is the equitable result, noting that in Rodda, where Nicholson J invited submissions from the parties as to whether Pathway A or Pathway B should be the form of relief, his Honour determined the appropriate remedy noting at [70] that "[u]ltimately the appropriate remedy is one for the Court".
Other relief
Finally, as to the matters not connected with any acceleration of the plaintiffs' expectation(s), the first defendant submits the following.
First, as to the payment of rent or an occupation fee since July 2014, the first defendant argues (as is not disputed) that no rent (or occupation fee) has been paid since then. The first defendant points out that in his cross claim the claim made for a fee for the use of the properties was not limited to a claim for unpaid rent; and says that the period for which the occupation fee was sought was up to the date of filing the cross claim (and, it is said, implicitly up to the date of orders).
The first defendant has submitted that the date approximating the continued occupancy of the properties in the face of a termination notice should be considered to be the time when the familial relationship of the parties had irreparably broken down. It is submitted that from 30 June 2014 (the last date to which rent has been paid) the relationship should revert to one requiring a market rent. It is submitted that it does not follow, from a finding that the first defendant was not entitled to evict E Co, that the amount of rent/fee remains forever more at $100,000. It is submitted that this view is supported by the same reasoning as to why a market rent should be paid from the date of judgment.
The first defendant points to the valuers' reports (those of both Mr Tremain and Mr Donoghue) as demonstrating the value of occupation of the land in the period from 1 July 2014 to date (and refers to the calculations contained in the third Lonergan Edwards report at p 13). Adopting Mr Tremain's figures, the first defendant calculates the total past rent without deductions at $2,201,575. The first defendant says that this does not allow for the deduction of rates and insurance ($77,000 per annum, totalling $308,000), of which the first defendant says he has already paid $110,000. Thus, he says, the net amount owing on these figures is calculated at $2,003,575.
The first defendant says that the plaintiffs' argument (that his claim was a claim under the lease for an amount of $110,000 per annum less the rates and insurance) fails to recognise the legitimate alternative claim for an occupation fee. It is submitted that, as the relationship of the parties had by this time broken down (to the point where there was later to be a finding that a clean break remedy is needed), there is no logical basis to assess the occupation fee on a basis different than the future rent assessment.
In other words, as I understand it, the difference between the parties on the unpaid rent/occupation fee issue is as to whether the period from July 2014 to the date of judgment should be calculated on the basis of the terms applicable under the lease agreement as last varied or, instead, on the basis of a notional occupation or market rent amount for that period. This, of course, has significant differences in terms of quantum.
Second, the first defendant notes that there is no dispute that an amount of $156,250 is owed under the W Deed (and points out that this does not include interest.
[28]
Determination
Before addressing the balance of the issues raised in the respective parties' submissions, I make some introductory observations.
First, as to the complaint made by the plaintiffs as to the statement (at [62] of the principal judgment) to the effect that any relief in relation to E Co's proprietary estoppel claim would be subsumed by the relief to be provided to the individual plaintiffs (i.e., the sons). What I said there, in the course of summarising the conclusions I had reached in the body of the judgment, was:
As to E Co, its proprietary estoppel claim is established by the matters to which I have already referred in the context of the jointly made claims by the sons (see [50]; [52] above) in terms of the capital improvements it made to the first defendant's farms in the expectation that it would be able to continue its farming operations on those properties during the first defendant's lifetime and until his death. However, any relief in that regard is in effect subsumed by the relief to be provided to the individual plaintiffs.
Insofar as it is necessary here to explain that statement, I note that what I there had in mind was that, given the sons effectively control E Co, the transfer of the ownership of the land to the sons would, as a practical matter, lead to the position that E Co's expectation that it would be able to continue its farming operations on the properties during the first defendant's lifetime would be made good.
In part, my conclusion in that regard was informed by the fact that E Co and the sons had joint representation, so I did not appreciate that there would be any conflict in their respective positions in that regard. Insofar as the complaint made in this regard is, at least implicitly, that such a statement involves an impermissible piercing of the corporate veil, I accept that that criticism has force (though it was not put as such). Strictly speaking, if the control of E Co were to pass to third parties (on the first defendant's death) in accordance with where I considered implicit in the expectation held by the sons, then the interests of the sons and the company might nevertheless diverge and the fact that the sons were the registered proprietors of the land might not ensure the ability of E Co to continue to operate its farming operations on that land.
What seems to flow from the position of the plaintiffs in this regard is that, in order to make good the expectation of E Co (and the sons) as to the continued operation of the farming operations by E Co on the properties up until the first defendant's death, any declaration as to the basis on which the first defendant holds (and has held from the relevant time - as to which see below) his interest as registered proprietor of the lands (vis a vis E Co) is that his freehold interest is subject to E Co's leasehold interest in the property for the balance of the first defendant's life (and that the first defendant is estopped from terminating the agreement for lease, in its terms as last varied in November 2011, or evicting E Co from the properties). In other words, the freehold interest held by the first defendant in the properties would be subject to a lease terminable only upon the death of the first defendant. If a declaration to that effect is made, then any trust over the properties in favour of the sons (and any transfer of the properties now to the sons) would necessarily be subject to the interests of E Co under its lease of the properties (absent any priority or other dispute as between E Co and the sons).
Second, I have referred above to the terms of the lease as last varied. There was some debate in the course of the re-opened hearing as to the effect of the two agreements (in 2008 and 2011) to vary the terms of the initial agreement for lease - i.e., as to whether there were three successive agreements for lease or one agreement as varied on two successive occasions. That debate (arid as I consider it to have been) raised for consideration the reasoning of Finn J in GE Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1; [2003] FCA 50 (at [224]ff). For what it is worth, I read his Honour's reasons as standing for the proposition that when one reaches an agreement to vary a lease there are then two agreements: first the lease and, second, the agreement to vary the lease; but not that there are two successive leases as such - rather, the second agreement is a variation agreement that operates to vary the terms of the existing (and subsisting) lease. However, nothing here turns on this.
Third, as to the issue of the time at which any constructive trust should be declared as having arisen, the submissions made for the plaintiffs, as noted above, were to the effect that any constructive trust over the freehold or leasehold interest in the properties had arisen by no later than 27 June 2013 (the date on which the purported notice of termination of lease was issued). In the proposed orders, the plaintiffs in effect hedge their bets on this issue (nominating also dates in 2009 - the initial confrontation as to the first defendant's criminal offending; and November 2011; the date on which the first defendant effectively ceased his participation in the joint farming enterprise (moving to Property No 8). The first defendant, in his submissions puts the date at 25 September 2002, that being the date of the second of the two relevant meetings in September 2002 from which I accepted that the sons held the relevant expectations in relation to the properties.
I concluded that the expectation held by each of the sons (engendered as a result of the discussions held in September 2002 and the conduct of their father in participating in the new business structure following those discussions), on which each relied to his detriment was that the sons would be involved, with their father, in the management and operation of the family farming business on their father's farms; that their father would make his farms available to them during his lifetime for the use of the farming business that was to be transferred to the new business entity (E Co) (and in that sense that the first defendant would "hold" - or retain ownership of - the farms for his sons during his lifetime); and that the farms would be left to them on his death. Further, I found that, as and from the time the meeting of 25 September 2002, the first defendant knew that his sons were making life-changing decisions to join in the new family business in reliance on a belief or understanding or expectation that the purpose of the new family business was to generate wealth for all of them (including the first defendant) and their families and that the first defendant would make his farms available for the purposes of that new family business (and in that sense "hold" - or probably more accurately hold onto or retain ownership of - the farms for his sons during his lifetime to be used for the purposes of that family business) and that the farms would pass to his sons under the first defendant's Will on the first defendant's death.
The issue as to the time from which a constructive trust arises, where a claim in proprietary estoppel has been made out, was considered in McNab v Graham (to which I referred in the principal judgment), the question raised on appeal as relevant to the application of the limitations legislation. In this context, (at [102]) Tate JA said:
There is considerable authority for the proposition that, where detrimental reliance upon a promise gives rise to a constructive trust, in the context of an estoppel, the constructive trust comes into existence before a court makes any order. It comes into existence at the time of the conduct which gives rise to the trust. [my emphasis]
adopting the proposition that, as a matter of general principle, the accepted position under Australian and English law is that a constructive trust will be treated as coming into existence at the time of the conduct which gives rise to the trust. Tate JA went on to say (at [107]):
… equity recognises the constructive trust as having come into existence from the time of the conduct which gives rise to the trust. The relevant time is the time at which there is reliance on a promise giving rise to the estoppel, that is, the time of the reliance which would render departure from the fulfilment of the promise unconscionable. [my emphasis]
Her Honour regarded this as an application of the maxim that equity regards as done that which ought to be done, saying at [109]:
… It is not a matter of a court engaging in 'backdating' the trust arbitrarily, or, as the McNabs would have it, to defeat a limitations period; it is a matter of the court declaring, as with all applications of the maxim nunc pro tunc, the appropriate date on which that which ought to have been done is to be regarded as having been done. Once so declared, the effect of the maxim is that it was done at that time. …
Tate JA also noted that in Department of Social Security v Agnew (2006) 96 FCR 357; [2000] FCA 59 (Agnew), the trust was taken to have come into existence when the conduct which gave rise to it occurred "that is, when the sons acted in reliance on the statement that the land was theirs". Her Honour went on to observe, in the case then before the Victorian Court of Appeal, that, "[t]o deny that Mr Turner was a trustee when he died is to deny the operation of the principles of proprietary estoppel" (at [114]). As to the precise time at which the constructive trust arose, Tate JA said that that it would have arisen "from the time when the detrimental reliance rendered it unconscionable for Mr Turner to depart from the assumption created by the representation". On any account, that was before the commencement of the proceeding, and therefore, it was not necessary to identify with greater precision the time at which the trust arose, because the plaintiffs fell within the exception to the limitation statute.
The decisions in McNab, Agnew and Varma indicate that in a case of estoppel the constructive trust arises from the time when the promisee's detrimental reliance rendered it unconscionable for the promisor to resile from the promise (not from the time at which the promisor unconscientiously, or in more modern parlance, unconscionably resiles from the promise).
In the course of oral argument at the re-opened hearing, having put forward in submissions (and in the proposed final orders) various dates at which it might be said that a constructive trust had arisen, Senior Counsel for the plaintiffs referred to decisions which it was suggested might point to a different conclusion (although he did not contend for such a conclusion), and on the basis of which it was said that the instructions given to Mr Sneddon had been drafted.
See, for example, Evans v Evans [2011] NSWCA 92, where Campbell JA (Giles JA and Sackville AJA agreeing) said (at [107]) that the equity involved in proprietary estoppel operates by considering whether it would be contrary to good conscience (measured according to equity's standards) for a defendant to disappoint the relevant expectation and that the relevant time for consideration is the time at which the defendant seeks to disappoint the expectation. I read that passage as indicating that one considers the time at which the conduct would be contrary to good conscience as (so as to bring into operation the principles of proprietary estoppel) the time at which the defendant seeks to disappoint the expectation or resile from the promise (not necessarily that this is the time from which a constructive trust as a consequence of that conduct is to be taken to have arisen). Similarly, reference was made to the decisions of the Court of Appeal in DHJPM Pty Ltd v Blackthorn Resources Ltd (2011) 83 NSWLR 728 (at [72]-[73] per Meagher JA) and Arfaras v Vosnakis [2016] NSWCA 65 (at [112]). The question of unconscientiousness or unconscionability is thus to be determined at the time of the departure from the promise or expectation ("the time at which there is reliance on a promise giving rise to the estoppel, that is, the time of the reliance which would render departure from the fulfilment of the promise unconscionable").
Ultimately, the plaintiffs submitted that it did not much matter and that the relevant issue was that there was continuing reliance throughout the period and, at the latest, there is a constructive trust impressed upon the land no later than the time of the disappointment of the expectation (though accepting that it might be some time earlier). But for one qualification I would accept that proposition. However, insofar as the CGT consequences of what has occurred might require the date to be identified with more precision than across a spectrum of some ten or eleven years, there may well be a difference depending on whether the constructive trust is taken to have arisen at the time of departure from the expectation in June 2013 or at an earlier date (say, for example, in around 2003).
Having reflected afresh on the various Court of Appeal decisions to which Senior Counsel for the plaintiffs referred, I do not think that they compel a different conclusion from that articulated in McNab v Graham. Rather, the focus in those decisions appears to be on the time at which it can be said that it became unconscientious or unconscionable for the promisor to resile from the promise (by reason of the reliance on that promise, that reliance necessarily occurring, as the plaintiffs accept, at an earlier time, though it may well continue through to the time of disappointment of the promise).
I adhere to the view expressed in Varma, namely, that (absent circumstances, such as the intervention of third party interests, that might lead to a different conclusion - see, for example, Parsons v Bain (2001) 109 FCR 120; (2001) 192 ALR 722; [2001] FCA 376 where the Full Court of the Federal Court (Black CJ, Kiefel J, has her Honour then was, and Finkelstein J) considered (at [15]) that any "discretion" attaching to the determination of this date from when the constructive trust (there considering a common intention construction trust) it is said to have related to whether interests protected by the constructive trust ought yield to other competing interests, such that some "lesser" equity might be required (and see P Young, C Croft and M Smith, On Equity (LawBook Co, 2009) at 6.850) the date upon which a constructive trust is taken to have come into existence in a case such as the present is when the conduct which gave rise to it occurred, that is, when the relevant plaintiffs acted in reliance on the promise or expectation (such that it later became unconscionable or unconscientious for the maker of the promise or the inducer of the expectation to resile therefrom).
In the present case, in the principal judgment, my conclusions as to reliance are set out from [1035].
I found that each of the three sons relied on the expectation engendered in them by their father (which was known to him and of which he did not disabuse any of them): A, in continuing to work on the farms and, importantly, in not looking to purchase a property elsewhere on which he could have built up a farming (or other) business which was not subject to his father's control (in the sense that he would not have had the risk of the farm being sold and making the business effectively inoperable); B by concentrating his endeavours on the family business up until the time of his involvement in the P Hotel and thereafter in working both in the family business and in his own interests; C in making his time available to assist in the family business and to look for investment opportunities to pursue as part of the family business or with his brothers and with the potential involvement of his father. I did not there specify a particular time on which the conduct in question commenced.
The reliance relied upon by A for his separate claim in relation to the homestead on Property No 4 was found to be the payment in 2003, at his father's request for renovations to the property out of the moneys made available to him by his uncle and which he could have invested elsewhere.
I found that the reliance by E Co on the expectation (held by the sons) that it would be in a position to build up a cattle farming business on the first defendant's properties and reap the benefits of that business without the risk of eviction or the like (as set out in the plaintiffs' submissions summarised in the principal judgment) commenced, following October 2002, with development of infrastructure at the properties to cater for increased cattle numbers; the undertaking of significant works on the properties; work performed on the farms from 1 July 2003; the employment from 2004 of a large number of employees to carry out the substantial works to the farms, and significant capital expenditure in the short term.
Although the relevant expectation was held from the meetings in September 2002 (and in particular from the conclusion of the meeting on 25 September 2002), the acts comprising reliance on the expectation in my opinion (and which rendered it unconscientious or unconscionable for the first defendant later to resile therefrom) can in my opinion be most clearly be seen from 1 July 2003, when the agreement for lease was minuted. Accordingly, I consider that the time from which any constructive trust in respect of the properties should be taken (and declared) to have arisen is 1 July 2003 (notwithstanding that the plaintiffs' expectation was held from September 2002 and I accept that some acts in reliance on that expectation will have occurred in the period from then to July 2003).
Fourth, it is important to keep in mind that, as noted in Halsbury's Laws of Australia, volume 430 at [570] (Halsbury) "[t]he constructive trust developed as a remedial relationship superimposed upon common law rights by order of the Chancery Court, and its rationale is still found essentially in its remedial function" (the authors there citing Muschinski v Dodds (1985) 160 CLR 583 at 613); and (at [430-565]) that "the expression 'constructive trust' does not describe a concept of fixed meaning". It is there suggested (by reference to Carl Zeiss Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch 276 at 300; [1969] 2 All ER 367 that the boundaries of the constructive trust "have been left perhaps deliberately vague, so as not to restrict the court by technicalities in deciding what the justice of a particular case may demand". At [430-575] it is said (again citing Muschinski v Dodds at 616-617) that:
In light of the predominantly remedial character of the constructive trust, the circumstances in which it may arise are not closed, but extend to any case where some principle of the law of equity calls for the imposition upon the legal owner of property of the obligation to hold or apply the property for the benefit of another.
In Jacobs' Law of Trusts in Australia (J D Heydon & MJ Leeming, Jacobs' Law of Trusts in Australia (Lexis Nexis, 8th ed, 2016) (Jacobs)), the learned authors state at [13-10] (p 238) that:
the objective of a constructive trust is often remedial in that it seeks to bring to an end a situation where the defendant unconscionably refused to hand over property or effect restitution for some equitable delinquency, rather than institutional by being concerned with the investment and administration of property held, for a time that may be bounded only by the perpetuity period, on behalf of beneficiaries pursuant to an express trust.
The authors in Jacobs at [13-11] (p 240) continue:
In Australia, some constructive trusts have the following features. First, they are only to be applied as the last resort. A plaintiff seeking a remedial constructive trust may have to exclude the possibility that there is some other effective remedy which is non-proprietary - that is, which does not attach to specific assets. Thus in that sense, in Australia constructive trusts are discretionary and exceptional. It does not necessarily follow from the fact that a remedy is used only as an exceptional last resort that it does not or should not exist.
The form of a constructive trust or other equitable remedy ordered can vary (see Jacobs at [13-11] (p 241)). Further, it is noted in Jacobs at [13-11] (p 241) that the cases in Australia "exhibit diversity in the relief granted" in relation to the form of the constructive trust imposed.
In my opinion, a constructive trust declared over the properties in the present case would best be seen as institutional not remedial (see McNab v Graham, approving a statement to that effect in Varma). In that regard, the plaintiffs point to the conclusion (at [75] of the principal judgment) to the effect that the relevant expectation (that the sons would be able to carry on the farming operations on the first defendant's farms, through E Co, during the first defendant's lifetime and would then inherit the farms on the first defendant's death) could be made good by imposing "a remedial constructive trust over the properties in favour of the sons (and requiring the first defendant to account to the sons for three-quarters of the proceeds of sale of Property No 12)" and they correctly surmise that the reference to a "remedial" constructive trust in that paragraph of the judgment was a slip and that what was there intended was a reference to "an institutional" constructive trust. I will amend the principal judgment to correct that unintentional error.
Leaving aside the taxonomical debate as to whether a constructive trust of the kind here being considered be institutional or remedial, the declaration of a constructive trust is still a choice to be made in determining the appropriate remedy to be granted. As stated in Bathurst City Council v PWC Properties Pty Limited (1998) 195 CLR 566; [1998] HCA 59 at [40], a constructive trust "serves as a remedy which equity imposes regardless of actual or presumed intention". It is made clear in the authorities (see Sidhu v Van Dyke (2014) 251 CLR 505; [2014] HCA 9 (Sidhu v Van Dyke) and Giumelli, for example) that the prima facie entitlement (on establishing a claim of proprietary estoppel) is the making good of the relevant expectation. That may well involve the declaration as to the existence of a constructive trust but that is only one of a number of ways in which potentially the expectation might be made good (and it might be coupled with other relief - indeed, as the plaintiffs argue, in the present case one might declare a constructive trust over the freehold but not accelerate the beneficiaries' interests under that trust and simply make orders restraining the first defendant from terminating the E Co lease). It is also clear that such a prima facie entitlement will give way where particular relief would be wholly disproportionate, or out of all proportion, to the detriment; and, in a number of cases there is reference to the flexibility of equity in the crafting of relief in all the circumstances of a particular case.
The plaintiffs have admonished against indulgence in idiosyncratic notions of fairness and justice (there citing Muschinski v Dodds at 614) and pointed to the reminder that decisions of equity are not a "wilderness of single instances determined by idiosyncratic exercises of discretion" (citing Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd ( 2001) 208 CLR 199 at [138]; [2001] HCA 63). For what it is worth, in proposing orders in the principal judgment I had certainly not intended so to act. In essence, the complaint by the plaintiffs as to the conditions I had indicated I considered it would be appropriate to propose is that it is not open for such conditions to be imposed as this would go beyond the proper scope of the maxim "he who seeks equity must do equity"; the plaintiffs citing the reasons of the plurality of the High Court in Bofinger, where the Court held at [67]:
In particular, contrary to the submission by the Solicitors, the appellants were not bound to do equity by offering to perform an obligation to "protect" the second mortgagee as the price of any equitable relief founded on their subrogation rights in respect of the first mortgage. In Langman v Handover Rich and Dixon JJ said that the maxim that he who seeks equity must do equity "does not substitute moral for legal standards in the determination of the conditions of relief". Rather, those who ask for the assistance of a court of equity must be willing to do justice by accepting terms which flow from the legal or equitable rights of the defendant to the suit.
and the admonition implicit in what was said in Mercanti by Le Miere J at [186]:
The maxim "he who seeks equity must do equity" means that equity looks to the conscience of the applicant in determining whether to grant relief. It means that no plaintiff can get an equitable remedy unless that plaintiff fulfils his or her own legal and equitable obligations arising out of the subject matter of the dispute. Meagher, Gummow and Lehane caution that the limits of the maxim must be remembered, the maxim does not empower a court of equity to impose on a plaintiff as a condition of relief any term merely because it considers it reasonable.
Accepting those propositions, it remains the case that whether a constructive trust is the appropriate remedy in all the circumstances of the case must be determined having regard, among other things, to the proportionality of that relief; and, if it were necessary to structure any such trust in order to address proportionality issues, I would not see this as necessarily being in conflict with the above propositions (though the plaintiffs emphasise that this must be done in a principled way).
Finally by way of introduction, it seems to me that there is a risk, when approaching the question of which one or more of the proposed "pathways" for relief should now be followed, of conflating the notion of recognition of the existence from an earlier date of a constructive trust (from which date the first defendant might be said to hold no more than a bare legal interest in the properties subject to that trust) and the concept of acceleration of the interest of the beneficiaries of that constructive trust in the land (as a means of protecting and enforcing the rights of those beneficiaries).
In the present case, making good the expectations of the sons (and I leave aside for the moment the expectations of E Co in relation to the leasehold interest in the farms) does not require a transfer of the properties to them in advance of their father's death (as the plaintiffs own submissions recognise).
Both the recognition of an institutional constructive trust (by way of declaration if that now be granted) and the decision to accelerate the sons' expectations as to their ultimate ownership of the farms involve a decision as to the appropriate way in which to remedy the unconscionable conduct of the first defendant in resiling from the accepted basis on which the sons had made life-changing decisions in the expectation (encouraged, and not disabused, by him) that the farms would be made available to them during the first defendant's lifetime for the use of the farming business that was to be transferred to the new business entity (E Co) and that the farms would be left to them on his death (see [50] of the principal judgment).
If one approaches the matter from the premise that acceleration is simply the collapse of a bare legal trust (the premise from which some of the plaintiffs' submissions seemed to proceed), it might be said that this obscures the remedial choice which is made when and if an order is made for the immediate transfer of the land. Acceleration of the sons' interest or expectations in relation to the farming properties by a transfer of the land is but one way that their rights as beneficiaries of a constructive trust might be protected and enforced; declaration of a constructive trust accompanied by injunctive relief in relation to the properties, as the plaintiffs postulate, is another; yet another, as the first defendant urges as an alternative remedy, would be the payment of equitable compensation.
In that sense, while the proposed pathways for relief may not, as the plaintiffs argue, involve a binary choice, pathway B does involve the making of a decision for acceleration separate from the decision to declare (and thereby recognise the existence as from an earlier time) of a constructive trust.
Turning then to the question of the appropriate final relief, there was no dispute between the parties as to the proposition (to which I referred at [1182] of the principal judgment) that the appropriate starting point is the plaintiffs' "prima facie entitlement" to relief framed on the basis of the assumed (or expected) state of affairs (see Verwayen at 442; Giumelli at [42]; [50]; Donis v Donis (2007) 19 VR 577; [2007] VSCA 89 at [19] (Donis v Donis); Delaforce at [63]-[65]; and Sidhu v Van Dyke at [82]-[86]), which may involve the taking of positive steps by the first defendant.
In the present case, the prima facie entitlement (the making good of the relevant expectation) must be considered by reference to the particular expectations: in the case of the sons, the relevant assumption or expectation was that the family farming business would operate on the first defendant's farms (and in that sense the properties would be "held" for the benefit of the long-term benefit of the sons and/or E Co) and would only later pass to the sons upon the first defendant's death (see [1193]; [50] of the principal judgment); in the case of E Co, the relevant assumption or expectation (informed by the expectation of the sons) was that it would be able to continue farming operations on the properties during the first defendant's lifetime and until his death (see [62]); and that the sums advanced by the first defendant for the purposes of the family business operations (and the transfer to E Co of the cattle at book value) would not be repayable during the first defendant's lifetime (see [67]).
In relation to the first defendant's existing shareholdings in E Co and EM Co, while I was of the view that it was implicit in what was understood by the first defendant to be his sons' expectations in entering into the new family business that they would have the benefit of that family business going forward after his death (see [1225] of the principal judgment), that was not pleaded as such.
The sons' pleaded expectations did not involve them acquiring a freehold interest in the first defendant's properties (or the acquisition of his shares) during the first defendant's lifetime (although, at least in relation to the properties and implicitly in relation to the shares in the companies, there was a testamentary component to their expectation).
The most obvious way to make good the sons' expectation as to the properties (and the shares) is thus the grant of declaratory relief recognising the existence of a constructive trust over the properties (and the shares) during the first defendant's lifetime, such that the sons would only acquire the freehold interest in the properties (and acquire the shares), on his death. An order for equitable compensation, on the other hand, while it would attempt to represent in money's worth the loss of that which the sons had been encouraged to expect in relation to the properties (and the shares) would not conform as closely to the expectation that the sons would have the benefit of use of the properties (and the farming business carried on at the properties) for the balance of the first defendant's lifetime nor their expectation that they would inherit the properties on the first defendant's death.
Similarly, the most obvious way of making good E Co's expectation (as to the use of the properties during the first defendant's lifetime) would be the grant of relief to preclude the first defendant dealing with the properties during his lifetime in a manner which would preclude E Co continuing to carry on its farming operations on the properties. While the plaintiffs have put this as a declaration that the leasehold interest is held on constructive trust for E Co, that seems to me on further reflection to be problematic. The first defendant does not hold a leasehold interest in the land as such, he holds the freehold title, subject to a lease in favour of E Co. Thus, making good E Co's expectation as to the position during E Co's lifetime would more appropriately in my opinion be effected by a declaration that the first defendant holds his interest in the properties on constructive trust for the sons but that this freehold interest is subject to a lease in favour of E Co that the first defendant is precluded from terminating during his lifetime.
That, however, gives rise to the practical difficulty as to what was to be the position if the parties to the agreement for lease were unable in the future to agree as to ongoing terms of the lease, such as the rental; and as to what the first defendant's rights as landlord were to be in the event that there were a breach of the agreement for lease that in other circumstances would have entitled the landlord to terminate for breach - in other words, the terms on and manner in which the leasehold relationship between the parties was to continue during the first defendant's lifetime would potentially give rise to difficulties. Those difficulties would not necessarily be met by a finding (consistent with the plaintiffs' submissions) that the existing lease terms are set in stone, so to speak, in the sense that they could not be varied without E Co's agreement because there would still be the difficulty as to what would occur if, say, there was conduct amounting to a repudiation by E Co of the lease. One answer to that problem might be that the first defendant was limited to a claim in damages or to enforce the terms of the agreement for lease, but that situation is hardly ideal in the present context (of litigation reminiscent of trench warfare). Nor are those difficulties necessarily able to be addressed by assuming an hypothetical exercise of negotiation of lease terms having regard to the obligations deriving from the basis of the expectations held in relation to the ongoing farming business (as was the gist of submissions earlier made by the plaintiffs in relation to the hypothetical situation to which the parties would return at the conclusion of every possible invocation of the appellate process, as referred to above).
Another difficulty is that E Co's expectation cannot be (and was not) said to have a testamentary component. It cannot have been assumed (nor was it pleaded that there was an expectation) that the existing leasehold arrangements between E Co and the first defendant would continue after the latter's death and arguably that would be inconsistent with their expectation as to their inheritance. Logically, if the expectation of the sons was that they would inherit the properties on the death of the first defendant, any expectation by E Co as to its ability to continue farming operations on the properties at that stage must be tied to its expectations as to what the sons would choose to do when they inherited the properties (and cannot relevantly have been induced or encouraged by the first defendant). Thus, from the position of E Co, any relief to be granted against the first defendant to make good its expectation of occupation and use of the farming properties can surely not go beyond the lifetime of the first defendant.
It has been recognised (and does not seem to be disputed by the plaintiffs) that the prima facie position as to the relief being to make good the relevant expectation or assumption will yield to individual circumstances (see Donis v Donis at [20]). In the principal judgment I observed that relevant circumstances may include practical considerations such as the need for a "clean break" (referring there to Pascoe v Turner [1979] 1 WLR 431 at 438 (Pascoe v Turner) and Delaforce at [60]); the impact of the relief upon third parties; concerns of proportionality (see Delaforce at [62]); or the need for the party relying on the estoppel to "do equity" (see Verwayen at 442). (As to the need for a clean break, the plaintiffs point out (correctly) that this term was not used in Pascoe v Turner. It is, however, an apt description for what was there sought to be achieved by the relief granted.)
Further, what is in my opinion made clear by cases such as Giumelli and Sidhu v Van Dyke is not only that any prima facie entitlement is to be framed by reference to the assumed or expected state of affairs but also that, in assessing the relief to be granted, proportionality of the remedy to the prejudice or detriment is a relevant consideration (and, as Allsop P, as his Honour then was, said in Delaforce at [4], this consideration is sometimes of considerable importance). As Nicholson J said in Rodda (at [305]), to which I referred in the principal judgment at [1210]:
Whilst it is not the case that the court should search for the "minimum equity" to do justice in the circumstances and it is not a case of assessing or measuring or weighing the detriment minutely in order to convert it into some equivalent of cash or kind, there must be a sufficient proportionality of any interest or remedy ultimately granted when compared with the prejudice or detriment suffered by the plaintiffs and the overall justice of the case.
As to the need for a clean break, as I have indicated above, and as I said in the principal judgment, I consider that to be an overriding practical consideration in the circumstances of the present case (subject to conditions appropriate to ensure that the outcome is not inequitably harsh to the first defendant or out of all proportion to the detriment in question). The continued holding by the first defendant of legal title to the properties on which the farming operations are to be carried on does seem to me to be unworkable from a practical perspective (and the first defendant does not suggest otherwise). (The question of his continued holding of the shares is a different matter, to which I will return shortly.)
The real question for me following the re-opened hearing is whether an order for the transfer of the properties to the sons at this stage would be disproportionate to the detriment in the sense considered in the authorities to which I have referred above. I considered in the principal judgment that it would not; but that was in the context where I also there considered that it would be appropriate to impose conditions on the acceleration of the sons' interest or expectations in relation to the properties, the effect of which would be to provide a measure of compensation to the first defendant for the loss of his interest in the land.
As noted above, the plaintiffs have challenged the proposed imposition of those conditions on the basis that they are not necessary in order that the plaintiffs to "do equity" and/or conceptually inconsistent with a recognition that a constructive trust came into existence in respect of the properties by no later than 27 June 2013.
I accept that the payment of a sum to reflect the net present value of the estimated market rent for the properties over the balance of the first defendant's life expectancy would not be conceptually consistent with a recognition that the freehold interest in the properties is (and has been since the time of the relevant reliance by the sons) held on constructive trust for the sons, at least unless that constructive trust were to be structured in such a way that the trustee could properly benefit or profit from the rents payable in respect of the properties (noting in this regard that trustees may on occasion be permitted to benefit from their position as trustees). I also accept that the other proposed conditions (i.e., the making of a payment in respect of the amount recorded as a book debt in E Co's accounts or for the transfer of the first defendant's shares in E Co and EM Co) would not readily be characterised as necessary for the plaintiffs "to do equity" in all the circumstances of this case and in that sense would not fall within the scope of the discretion as to the relief to be granted (again, unless perhaps an order of that kind were to be necessary to prevent disproportionality).
The criticism made by the plaintiffs as to the course that I had proposed (insofar as it attempted flexibly to craft relief that would address the respective parties' positions) was that it followed the approach that seems broadly to be adopted in the United Kingdom (and advocated in academic literature such as Professor Macfarlane's text) and suggested a larger discretion than the principled approach to be adopted in this jurisdiction having regard to what was said in Langman v Handover, Bofinger, and Giumelli. I accept that there is some force to that criticism (particularly in relation to the proposed Share Acquisition Condition but also in relation to the Market Rent and Book Debts Conditions, both of which assume that the first defendant would be entitled to profit from the holding of the properties and the shares), though the plaintiffs themselves (in their 31 October 2018 submissions) appeared to consider that the first defendant, albeit as constructive trustee, might have a legitimate expectation to "real benefits" or a share of the profits of the business at least after some kind of "grace period". However, if such conditions are not imposed then in my view the question of proportionality becomes a live issue.
What clearly emerged from the evidence at the re-opened hearing was the significance of the issue as to the potential CGT consequences flowing from the final relief to be granted (an issue about which there was no evidence at the principal hearing). It was not suggested by the plaintiffs that this was an irrelevant consideration to take into account in determining the final relief in this matter. Indeed, the plaintiffs in their submissions relied upon English authority as to the relevance of the likely effect of taxation when assessing the relief to be given on a proprietary estoppel claim (referring to Jennings v Rice [2003] 1 P & CR 100 at [52] per Robert Walker LJ; and academic commentary by Professor B Macfarlane, The Law of Proprietary Estoppel, Oxford University Press, 2014, at [9.62]).
The difficulty which this poses for me in the present case is that there is a real prospect that a declaration recognising the existence of a constructive trust over the properties from a particular date (whether that be 27 June 2013 or, as I consider to be the appropriate date, 1 July 2003) may have significant CGT consequences, irrespective of whether there is also an order providing for the acceleration of the sons' interests or expectations in relation to the farms. The argument by the plaintiffs in this regard seems to be (and I am here only paraphrasing the effect of their submissions) that the first defendant caused the problem and he should therefore live with the consequences (or, to use a colloquial expression, that having made his bed he must lie in it). I am not, however, persuaded that the spectre of CGT consequences can be dismissed so readily. This has been the aspect of the matter that, since the re-opened hearing, has given me the most pause in the determination as to what relief should finally be granted.
Subject to one qualification, I remain of the view expressed in the principal judgment that orders should be made for the acceleration of the sons' interests or expectations in relation to the properties. That qualification is this. While I accept the plaintiffs' submissions that transfer of legal title to the properties should not be subject to a Market Rent Condition in respect of the land, and that this in practical terms would be inconsistent with the basis on which the lease agreement was struck in the context of the joint farming business endeavour in which the first defendant and the plaintiffs were participating, I am troubled by the likelihood that a declaration of a constructive trust over the properties (whether or not coupled with an order for the acceleration of the beneficial interests under that constructive trust) will give rise to a significant CGT liability on the part of the first defendant.
I consider that this makes the relief sought by the plaintiffs (on either Pathway A or Pathway B; or, indeed, a combination of the two) sufficiently disproportionate, or out of all proportion, to the detriment or prejudice the plaintiffs will suffer (from the first defendant's decision to resile from the expectations he encouraged in his sons that he would hold the farms during his lifetime to be used for the purposes of the family business then to be entered into with his sons and that the farms would be left to them on his death), in the sense considered in Delaforce (at [4]) and Priestley (at [164], to which I referred at [1187] and [1189] of the principal judgment), to require a departure from the strict making good of the plaintiffs' expectations on either of those "pathways". That is because, even taking into account the possibility that the first defendant may have access to a source of funds hitherto not disclosed by him, the very making of a declaration of constructive trust over all of the properties (whether the sons' beneficial interest therein might then be accelerated or not) has the potential to give rise to a not insignificant CGT liability (and probably interest, if not also penalties) at the same time as none of the said properties would on that hypothesis be available to the first defendant to offset any part of that liability.
In those circumstances, I have concluded that the appropriate relief as to the farming properties is an amalgamation of each of the so-called pathways put forward by the respective parties: namely, that there be a declaration as to the existence of a constructive trust as from July 2003 over each of the farming properties the subject of the dispute, with the exception of Property No 11 (and, but only as to the date of the constructive trust having arisen, Property No 10); that there be an order for the transfer to the sons of the legal title to the said properties (i.e., with the exception of Property No 11); that there be an order for the payment to the first defendant of an amount representing the net present value of a notional rent for the now remaining nine years of the first defendant's life expectancy; that Property No 11 be sold; and for the payment to the sons, as equitable compensation in respect of their expectations in relation to Property No 11, such amount, if any, as remains out of the net proceeds of sale of that property after any payment by the first defendant out of those proceeds of sale to satisfy any CGT liability that arises from the findings I have made and/or the final orders that are to be made in accordance with these reasons.
I accept that the making of such an order in relation to Property No 11 means that the sons will in effect be contributing to the payment of any CGT liability (or, if that liability be no more than the proceeds of sale of Property No 11, in effect meeting that liability). However, in all the circumstances of the case (and notwithstanding the fact that it was the first defendant's decision to resile from the relevant expectation in relation to the properties that precipitated the findings that are likely to lead to that CGT liability), I consider that this is necessary in order to ensure that the making good of the sons' expectations (their prima facie entitlement to relief) does not operate in a way that is inequitably harsh to the first defendant. It also seems to me not inconsistent with the expectation itself that one of the properties the subject of the proposed joint farming activity should be available to meet a liability incurred in relation to the recognition of the sons' beneficial interest in the remaining properties (noting that the relevant expectation was never in terms of the holding of the specific farms as such - it being contemplated that there might be a sale or acquisition of one or more properties over which the farming business was to be conducted during in the course of the first defendant's lifetime, albeit after consultation with the sons).
Another course to remove the disproportion that I consider would otherwise arise between detriment and relief would have been to adopt the first defendant's alternative suggestion, namely that there be a transfer only of Property No 4 to A (with or without some additional equitable compensation) and the payment of equitable compensation to B and C. However, that form of relief would not in my view adequately make good the expectation of the sons that the properties would be held, and made available for the joint farming business, during the first defendant's lifetime and then would pass to them on their father's death; and would potentially give rise to issues as to how A's expectation in relation to the whole of the properties would be measured against B and C's expectations in relation thereto, for the purposes of assessing the amount of equitable compensation necessary to make good those expectations. Nor was there any principled basis put forward as to the calculation of any such equitable compensation.
So that there is no doubt, I emphasise that I consider that it is necessary to carve Property No 11 out of the declaration and relief to be granted (and for it to be made available for the payment of part or all of any CGT liability) not because of any obligation on the part of the plaintiffs to "do equity" but because I consider that otherwise the relief I propose to grant would be wholly disproportionate, or out of all proportion, to the detriment suffered by the plaintiffs and hence the equity which is to be made good. The likelihood is that there will be a CGT liability arising from the recognition of the existence of a constructive trust over the remaining properties (other than Property No 10) as from July 2003 (whether that be a CGT event E1 or CGT event A1; and whether that event is determined by the ATO to have occurred in July 2003 or, later, say on 27 July 2013).
I consider it appropriate for Property No 11 to be carved out of the relief because Property No 11 has not historically been regarded by the parties as essential for the operation of the farming business (it being a property that the sons conceded it had been contemplated at one stage might be sold). Property No 11 represents roughly 16% in terms of overall acreage of the properties (1,625.37ha out of the aggregate holding 9,893.97ha (adopting Mr Tremain's measurements (cf Mr Donoghue who stated 1,625.35 ha and 9,899.30ha, respectively)) and between 8-11% in terms of value (it being valued at about $1.6 million by Mr Tremain and $2.29 million by Mr Donaghue), i.e., 11% of value ($2.29 million out of $21.08 million as per Mr Donaghue) or 8% ($1.6 million out of $18.95 million as per Mr Tremain). It is the property the sale of which, were it necessary, the sons would least complain about (although I do not by this suggest that they will be at all happy with, or likely to accept, such an outcome).
I also remain of the view (which the plaintiffs do not challenge other than as to its calculation) that there should be compensation for the loss of the future income stream from the properties if the expectation is accelerated. I accept that it should not be calculated on a market rent basis for the reasons put forward by the plaintiffs but I do not consider that it should be limited to the amount the plaintiff suggests. As to the amount of the notional rent, I note that the plaintiffs in oral submissions acknowledged that it would be equitable to permit the first defendant a sum to support him for the balance of his life, and that they have advocated for this amount to be informed by the basis on which, historically, rent for the properties had been set and agreed between the parties (and that, in at least some of their written submissions appeared to consider that the first defendant might obtain "real benefits" to some extent from the business to be operated on the properties).
The rent, as at the time of the purported termination of the lease, was $100,000 per annum, less rates and insurance to be borne by the first defendant. On the transfer of the properties, the plaintiffs will become liable for rates taxes insurance and other outgoings in respect of the properties (other than Property No 11, which I have concluded should be carved out of the relief to be granted to the plaintiffs). They will not have the benefit of the ongoing use of Property No 11 and will not be liable to pay any notional rent for that property.
Historically, the arrangement whereby rent was struck was as a percentage of the value of the leased property; but, more importantly, for present purposes, it was struck so as not to produce a taxable income for the first defendant. I infer that it was anticipated that the rent (and income from the farming operations) was at least intended (with whatever distributions from his family trust that the first defendant would at that stage receive) to maintain him during his lifetime. The first defendant is no longer a primary producer and is approaching the end of his life. The evidence at the principal hearing confirmed at the re-opened hearing was that the family trust distributions have now ceased and the first defendant's evidence in the witness box, largely consistent with his bank statements and income tax returns, is that he does not now receive an income. I accept that there is a suspicion that he receives or is able to call upon income from other sources and that his evidence as to his financial position raises more questions than it answers in this respect. I have therefore not relied on that evidence in reaching the conclusions I have reached as to the question of proportionality of the final relief. Nevertheless, the fact remains that the expectation held by the sons included an expectation that the first defendant would benefit to some extent from the arrangement into which they were entering; and it might well be thought that it would not be inappropriate in that context for a notional rent to encompass some kind of buffer for contingencies that may arise towards the end of the first defendant's life.
Balancing the fact that the lease would not include Property No 11 (and hence the area leased would be reduced by about 10%) and that on this scenario the first defendant would not be paying rates and insurance for the properties to be transferred to the sons, but also that the first defendant's needs towards the end of his life are unknown (and that the plaintiffs at least at one stage contemplated that there might be "real benefits" after the expiry of a "grace period"), and approaching the matter in a broad brush way, I have concluded that the appropriate notional rent for the purposes of calculating the compensation payable for the lost future income stream would be a fixed $80,000 per annum without deduction for rates or insurance. Applying a discount rate of 3% (as Ms Bateman would do), the present value of that income stream over nine years would be in the order of $640,000; applying a discount rate of 4.5% (as Mr Lonergan would do) the figure would be in the order of $600,000 (on my rough calculations, which I do not suggest would meet actuarial standards). On the Lonergan Edwards' calculations, either sum would be able to be met by E Co (or the sons) as a lump sum. That is particularly the case where it has been contemplated that there would be set-offs applicable in any event.
I have noted earlier Ms Bateman's reason for adopting a 3% discount rate (that it reflects the likely risk rate for the return on money in the hands of the recipient). Mr Lonergan adopted 4.5% on the basis that the projected relevant payments would have been akin to E Co's "debt-like fixed obligations" and applied the interest rate payable on long term agri-business loans" (see [157]; 150 of the first Lonergan Edwards report), referring to the fixed interest rates on a five year Agri-business interest only loan applied by NAB (4.45%) and CBA (4.55%).
In that regard, I consider that it is appropriate to adopt the discount rate put forward by Ms Bateman (as the joint expert); though I note there is little difference between the two outcomes. That is because it is not clear to me that the Agri-business interest only rate would be the most relevant to be adopted in circumstances where the first defendant is the recipient of the income stream; and because the approach adopted by Ms Bateman seemed in general to be a conservative one.
As to the position in relation to the first defendant's shares, acceptance of the plaintiffs' arguments on the re-opened hearing (and absent acceleration in relation to the shares) will logically leave the first defendant as a minority shareholder in both E Co and EM Co (giving rise to the possibility of further disputes, a matter seemingly of concern to the plaintiffs having regard to the submissions made on 31 October 2018 as to the shares falling into the hands of the first defendant's solicitor and sister as executors of the first defendant's estate - a problem which I had sought to pre-empt by the compulsory acquisition of the first defendant's shares).
In the principal judgment (at [78]) I raised the question as to whether the expectation as to the benefit of the farming business extended to what was to happen on the death of the first defendant. At [78]-[79], I said:
I have also considered in this context the first defendant's existing shareholdings in E Co and EM Co. The intention of the first defendant was that, subject to the uncommunicated success condition, his sons (and by extension their families) would obtain the benefit of the farming business conducted on the farms during his lifetime (see T 808). It is less clear what expectation there was (or that the first defendant understood his sons to have) as to the ownership of his interest in the companies on his death. I am of the view that it is implicit in what was understood by the first defendant to be his sons' expectations in entering into the new family business that they would have the benefit of that family business going forward after his death. On that basis an order that the first defendant's shares in E Co and EM Co be acquired by the sons (at a price to be determined by an independent valuation of the shares) would similarly be appropriate.
Moreover, to effect a clean break between the parties it seems to me that it would be necessary for the sons to buy out their father's interest in E Co/EM Co. I have thus concluded that it would be appropriate, as a term of the relief to be granted under which the sons' interest in the farms is to be accelerated, for the sons to acquire the first defendant's shares in the companies at a value that represents the present worth of those shares (independently valued) calculated on the assumption that E Co is in a position to continue its farming operations on the properties but having regard to the requirement (to which I turn below) for E Co to pay to the first defendant the book value of the cattle transferred to it in 2003 and the advances made to it over the years (without interest). However, relief in those terms was not canvassed in oral submissions at the close of the hearing. In those circumstances I propose to seek further submissions on this aspect of the relief to be granted.
See also at [1225] of the principal judgment. While there was no pleaded expectation relating to the ownership of the business (through the shareholding of the respective companies), there was no pleading point taken on this issue by the first defendant and the only complaint by the plaintiffs (ironically, perhaps given their stance in relation to adherence by the first defendant to the pleaded case) was as to the proposition that there should be a buy out of the first defendant's interest in the companies.
The plaintiffs have argued that there is no basis for an order for the buy out of the first defendant's shares (though they seek an order for the transfer of those shares). In that regard, the plaintiffs argue that in Gillett v Holt part of the proprietary estoppel was directed not just to the land, but to the relevant companies which farmed the land. It is submitted that it was in that context, where there were company law suits also involved in the litigation, that in Gillett v Holt, the court came to deal with those as part of the orders that were made. It is submitted that, there (unlike the present case), the issue and part of the substratum of the facts in the case was that part of the nature of the disappointment of the expectation related not just to the land and the farming on the land, but the control of the companies and their management; and in effect the shares in the company formed part of the property the subject of the proprietary estoppel.
The plaintiffs submit that it might be a different circumstance if, in the present case, the first defendant had been the director or, effectively, the controller of E Co but the plaintiffs say that is not here the case (and it is submitted that the accounting and taxation advice in the latter part of 2002 made clear that there was a deliberate separation of the father from having a controlling position in the company). The plaintiffs nevertheless accepted in their 31 October 2018 submissions that the first defendant might have a legitimate expectation to a quarter of the profits of the business (after the grace period") - see [66] of the submissions.
In the circumstances, I will make no order for the acceleration of the sons' expectations in relation to the first defendant's minority shareholding in the companies. I appreciate that that means a complete break is not possible but I do not consider it affects the relief to be granted in relation to the properties. (Had a compulsory purchase order been sought, and made, I would have been inclined to accept Ms Bateman's evidence that the shares have a nil value, not least because even if adjustments of the kind that first defendant says should be made to the valuation in respect of E Co, on a compulsory purchase order there would need to be an appropriate discount to reflect the minority nature of the first defendant's shareholding and his lack of control in relation to the company. However, the issue does not here arise given the objection by the plaintiffs to the conceptual basis on which any order for the purchase of the shares might be made.) I will, however, put in place a mechanism for the transfer of the shares on the first defendant's death in an attempt to obviate disputes arising at that stage.
[29]
Conclusion as to the final orders
The above sets out my conclusions as to the principal relief necessary to make good the plaintiffs' expectations: a declaration of constructive trust in favour of the sons - in the case of the properties (other than Property No 11) with effect from 1 July 2003, in the case of all of the properties (other than Property No 11) except Property No 10 and, in respect of Property No 10, with effect from the time of its acquisition, such trust being subject to the agreement for lease between the first defendant and E Co in respect of all the properties (other than Property No 11, which is to be sold in accordance with these orders); the acceleration of the sons' beneficial interest in the said properties with an order for the transfer of the properties the subject of the constructive trust to the sons; an injunction to restrain the first defendant dealing with or entering the properties the subject of the agreement for lease; in the case of Property No 11, an order that it be sold (at public auction or by agreement with the sons) and out of the net proceeds of sale, after payment by the first defendant to satisfy any CGT liability that arises from the findings I have made and/or the final orders that are to be made in accordance with these reasons, payment of the balance by way of equitable compensation to the plaintiffs; and an order that the first defendant hold the shares in E Co and EM Co on constructive trust for the sons but be entitled to profit distributions if any in respect of those shares during his lifetime, the shares to be transferable on his death to the sons.
As to the notional rent amount, I consider it should be calculated on the basis indicated above. I had considered whether there should be a mechanism whereby it be paid in exchange for the provision of signed transfers in respect of the properties (other than Property No 11), rather than set off against other amounts payable or to be payable to the plaintiffs by the first defendant but in the circumstances where the amount to be paid to the first defendant in this regard will largely be balanced by the amount to be repaid by him in relation to the proceeds of sale of Property No 12, that does not seem to me to be necessary to remove any disproportion that would otherwise have arisen had there been a large difference between the two amounts). As to set-offs in respect of other accounts there was no dispute that this should be as I had earlier envisaged.
As to the remaining matters, I can deal with them in relatively brief compass.
I consider that the unpaid rent for the period from July 2014 to the date of judgment (in effect to 30 June 2019 since the rent is payable under the agreement for lease at the end of the financial year) should be calculated as the plaintiffs propose in accordance with the provisions of the agreement for lease as last varied. I see no basis for there to be a calculation of unpaid rent inconsistent with the terms of the agreement for lease that I considered to have been wrongly terminated by the first defendant. As to the evidence of B in relation to invoices forwarded on to E Co for payment (to which objection was made but which the first defendant was in a position, had he wished, to adduce evidence to dispute), I accept that evidence. Accordingly, the unpaid rent amounts will be as the plaintiffs have calculated.
As to the W Deed amount that is due, I accept that interest should be paid both on this and on the plaintiff sons' three-quarter share of the net proceeds of sale of Property No 12 (as from the dates set out in the plaintiffs' proposed orders) on the basis that the treatment of interest should be uniform (but that interest should be payable on both).
As to the release of the guarantee given by the first defendant to Westpac, I accept the first defendant's position that the plaintiffs should be required to procure a release of that (and any other extant guarantees provided to secure borrowings by them or the companies or in relation to their business(es)); and that, if for some reason those releases cannot be procured, there should be an indemnity in the first defendant's favour in relation thereto.
[30]
Costs
As to costs, it was agreed that the question of costs should be reserved pending the final determination as to the appropriate orders. I will make directions to facilitate this when these reasons are published; and will consider at that stage the extent of any set-off in relation thereto.
[31]
Orders
For the reasons above, I propose to make the following orders. In circumstances where the structure of the relief to be granted has been hotly contested (and already the subject of a re-opened hearing following the plaintiffs' complaint as to procedural fairness were that not to occur), I will defer making these orders until the issue of costs has also been resolved. This will give the parties an opportunity to point to any necessary corrections to be made in the arithmetical calculations or any misapprehension by me as to the submissions that were made in the course of the re-opened hearing in relation to the matters considered above (the possibility for which arises not least because of the successive sets of submissions relied upon in that regard). The orders that I propose are as follows.
1. Judgment for the plaintiffs on their second further amended statement of claim.
2. Dismiss the first defendant's cross-claim.
3. Declare nunc pro tunc that the first defendant holds his freehold interest in the properties listed in Confidential Schedule 1 to these reasons (the Properties) (which, for the avoidance of doubt, excludes the property referred to in these reasons as Property No 11), subject to the existing leasehold interest of the first plaintiff in the Properties pursuant to the terms of the agreement for lease entered into between the first plaintiff and the first defendant on or about 1 July 2003 and as varied in November 2011, such trust having arisen:
1. in the case of each of the Properties other than the property referred to in these reasons as Property No 10, on or with effect from 1 July 2003, that being the date on and from which I am satisfied that there was sufficient detrimental reliance by the plaintiffs on the expectation from which the first defendant sought to resile on 27 June 2013 to make the first defendant's conduct unconscientious; and
2. in the case of Property No 10, with effect from the time of its acquisition, by which time there was sufficient detrimental reliance by the plaintiffs on the expectation from which the first defendant sought to resile on 27 June 2013 to make the first defendant's conduct unconscientious.
1. Declare nunc pro tunc that the first defendant holds his shares in the first plaintiff and the second plaintiff, respectively, (the Shares) on constructive trust for the third, fourth and fifth plaintiffs in equal shares, such trust again having arisen on or with effect from 1 July 2003, that being the date on and from which there was detrimental reliance by the plaintiffs on the expectation from which the first defendant sought to resile on 27 June 2013 to make the first defendant's conduct unconscientious.
2. Declare that the legal title to the Shares be transferred to the third, fourth and fifth plaintiffs (absent any agreement between the parties for the shares to be transferred to them at an earlier time) on the first defendant's death but that, during the term of the first defendant's life, the first defendant be entitled to participate in any dividends payable in respect of the Shares as if the Shares were not held by him on constructive trust for the third, fourth and fifth plaintiffs.
3. Order that the first defendant forthwith transfer the Properties to the third, fourth and fifth plaintiffs, and do all things necessary to effect those transfers within 28 days of these orders.
4. Order that the first defendant, by himself, his servants and agents or otherwise, be restrained from selling, disposing, encumbering, or in any way dealing with, any of the Properties or the Shares so long as the first defendant retains legal title to any of the Properties or the Shares.
5. Order that if the first defendant fails to execute a document as required to effect order 6, the Registrar of the Supreme Court of NSW execute such document pursuant to s 94 of the Civil Procedure Act 2005 (NSW) on the plaintiffs presenting to the Registrar an affidavit by their solicitor setting out facts proving the failure of compliance to the satisfaction of the Registrar.
6. Order that the first defendant, by himself, his servants and agents or otherwise, be restrained from entering upon the Properties.
7. Order that the plaintiffs pay to the first defendant, within 28 days, the sum of $640,000, representing the net present value of the sum of $80,000 per annum over the period of the first defendant's present life expectancy (namely, nine years), calculated at a discount rate of 3%.
8. Order that the first defendant provide to the plaintiffs within 28 days of these orders executed transfers for nominal consideration in their favour in equal shares of the Shares, such transfers to be held in escrow by the plaintiffs and not registered until the first defendant's death.
9. Order that the first defendant pay to the third, fourth and fifth plaintiffs the sum of $577,465, in respect of the proceeds of sale of Property No 12, plus interest pursuant to s 100 of the Civil Procedure Act 2005 (NSW) from 11 September 2012.
10. Order that the third, fourth and fifth plaintiffs pay to the first defendant the sum of $156,250, in respect of the Deed referred to in these reasons as the W Deed, plus interest pursuant to s 100 of the Civil Procedure Act 2005 (NSW) from 30 April 2014.
11. Order that the third, fourth and fifth plaintiffs pay to the first defendant the following amounts by way of unpaid rent for the following financial years, plus interest pursuant to s 100 of the Civil Procedure Act 2005 (NSW) from the dates specified:
1. $22,677, for the financial year ending 30 June 2014, plus interest from 30 June 2014;
2. $6,739, in respect of rent for the financial year ending 30 June 2015, plus interest from 30 June 2015;
3. $83,572, in respect of rent for the financial year ending 30 June 2016, plus interest from 30 June 2016;
4. $39,648, in respect of rent for the financial year ending 30 June 2017, plus interest from 30 June 2017;
5. $772, in respect of rent for the financial year ending 30 June 2018, plus interest from 30 June 2018; and
6. such amount, if any as represents unpaid rent of $100,000 less rates and insurance paid by the plaintiffs in relation to the Properties in respect of rent for the financial year ending 30 June 2019.
1. Order that Property No 11 be sold as soon as practicable by the first defendant (at public auction or otherwise by agreement with the third, fourth and fifth plaintiffs) and that, after payment of any amount to the Australian Taxation Office in payment of any capital gains tax liability arising in respect of a capital gains tax event in relation to the Properties, the first defendant pay to the plaintiffs the balance, if any, of the net proceeds of sale by way of equitable compensation for the loss of their expectations in relation to Property No 11.
2. Order that the payments ordered in orders 10 and 12-14 above be stayed until the issue of costs is determined; and then set-off against each other.
3. Order that the third, fourth and fifth plaintiffs do all things necessary to obtain a release of the guarantee provided by the first defendant to the Westpac Banking Corporation, being the subject of the Westpac Deed (the Westpac Guarantee).
4. Order the plaintiffs jointly and severally to indemnify and hold harmless the first defendant from any liability arising under the Westpac Guarantee and any other guarantee provided by the first defendant in connection with any business or other activity of the plaintiffs.
5. Reserve the question of costs of the proceedings.
[32]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 26 April 2019
NSWLR 728
Donis v Donis (2007) 19 VR 577; [2007] VSCA 89
E Co v Q (No 3) [2018] NSWSC 646
E Co v Q [2018] NSWSC 442
Ellison v Sandini Pty Ltd (2018) 125 ACSR 249; [2018] FCAFC 44
Evans v Evans [2011] NSWCA 92
Flinn v Flinn [1999] 3 VR 712; [1999] VSCA 109
Friend v Brooker (2009) 239 CLR 129; [2009] HCA 21
GE Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1; [2003] FCA 50
Gibson Motorsport Merchandise Pty Ltd v Forbes (2006) 149 FCR 569; [2006] FCAFC 44
Gibson v Goldsmid (1854) 5 De GM & G 757; 43 ER 1064
Gillett v Holt [2010] [2010] Ch 210 2; All ER 289
Giumelli v Giumelli (1999) 196 CLR 101 at 123-124; [1999] HCA 10
Gould v Mount Oxide Mines Ltd (In Liq) (1916) 22 CLR 490; [1916] HCA 81
Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6
Honeysett v The Queen (2014) 253 CLR 122; [2014] HCA 29
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; [1984] HCA 64
Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) 73 NSWLR 653; [2008] NSWCA 206
Jennings v Rice [2003] 1 P & CR 100
Kafataris v Deputy Commissioner of Taxation (2015) 243 FCR 291; [2015] FCA 874
Kevin John Lewis v Peter William Stewart by his tutor Peggy Lillian Mayhew [2018] NSWSC 1186
Lambert Leasing Inc v QBE Insurance Australia Ltd [2012] NSWSC 953
Langman v Handover (1929) 43 CLR 334; [1929] HCA 42
Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705; [2001] NSWCA 305
McNab v Graham (2017) 53 VR 311; [2017] VSCA 352
Mercanti v Mercanti [2015] WASC 297
Muschinski v Dodds (1985) 160 CLR 583
NA & J Investments Pty Ltd v Minister Administering the Water Management Act 2000; Arnold v Minister Administering Water Management Act 2000 (No 4) [2012] NSWLEC 120
Paino v Paino [2005] NSWSC 1313
Paino v Paino [2008] NSWCA 276
Parsons v Bain (2001) 109 FCR 120; (2001) 192 ALR 722; [2001] FCA 376
Pascoe v Turner [1979] 1 WLR 431
Phelan v Middle States Oil Corporation (1955) 220 F 2d 593
Pilmer v Duke Group Ltd (In liq) (2001) 207 CLR 165; [2001] HCA 31
Pirie v Richardson [1927] 1 KB 448
Pownall v Conlan Management Pty Ltd (1995) 12 WAR 370
Priestley v Priestley [2017] NSWCA 155
R v Turner [1975] QB 834
Rhoden v Wingate [2002] NSWCA 165
Rodda v Ian Rodda Pty Ltd (No 2) [2015] SASC 128
Rodda v Ian Rodda Pty Ltd [2015] SASC 95
S & E Promotions Pty Ltd v Tobin Brothers Pty Ltd (1994) 122 ALR 637
Sidhu v Van Dyke (2014) 251 CLR 505; [2014] HCA 9
Sledmore v Dalby [1996] 72 P & CR CA 196; [1996] 2 WLUK 129
Spencer v Commonwealth (1907) 5 CLR 418; [1907] HCA 82
Truesdale v Commissioner of Taxation of the Commonwealth of Australia (1970) 120 CLR 353; [1970] HCA 27
Tyson v Brisbane Market Freight Brokers Pty Ltd (1994) 120 ALR 1; [1994] HCA 67
Varma v Varma (2010) 6 ASTLR 152; [2010] NSWSC 786
Westpac Banking Corporation v Ollis [2008] NSWSC 281
Texts Cited: AW Scott, Law of Trusts (Little Brown & Co, 3rd ed, 1967)
B Macfarlane, The Law of Proprietary Estoppel, Oxford University Press, 2014,
G D Pont et al, Halsbury's Laws of Australia (Lexis Nexis, vol 430)
J D Heydon & MJ Leeming, Jacobs' Law of Trusts in Australia (Lexis Nexis, 8th ed, 2016)
J Jacob and I Goldrein, Pleadings Principles and Practice (Sweet & Maxwell, 1990)
JD Heydon and MJ Leeming, Jacobs' Law of Trusts in Australia (7th ed, 2006)
P Young, C Croft and M Smith, On Equity (LawBook Co, 2009)
Category: Principal judgment
Parties: E Co [a pseudonym] (First Plaintiff)
EM Co [a pseudonym] (Second Plaintiff)
A [a pseudonym] (Third Plaintiff)
B [a pseudonym] (Fourth Plaintiff)
C [a pseudonym] (Fifth Plaintiff)
Q [a pseudonym] (First Defendant)
"Second Defendant" (Second Defendant)
Representation: Counsel:
A McInerney SC with N Kabilafkas (Plaintiffs)
J Priestley SC with B Lloyd (19-23 November 2018); B Lloyd (10-13 December 2018) (Defendants)
Judgment
HER HONOUR: The principal hearing in this matter occurred over the period 14 August 2017 to 6 September 2017 and 3, 10 and 11 October 2017. On 13 April 2018 I published my reasons for judgment ([2018] NSWSC 442, to which I will refer as the principal judgment, now renamed as E Co v Q). In summary, I found that the plaintiffs' respective claims in proprietary estoppel had been made good (see the summary at [45]-[81] of the principal judgment) as had a claim based on a joint endeavour constructive trust, though I considered (and this does not appear here to be challenged by the plaintiffs) that the relief on that basis would effectively be subsumed in the relief to be granted on the individual plaintiffs' jointly made proprietary estoppel claim (see [46] of the principal judgment). (I should note that in these reasons I am adopting the anonymised terms used in my earlier judgments, for the reasons stated in the principal judgment.)
When I published the principal judgment on 13 April 2018, I indicated the broad findings I had made and the ambit of the relief that I then had in mind. I made no orders in that regard other than to direct the parties to prepare short minutes of order to reflect my reasons and to forward those, and any brief written submissions in relation to those orders, to my associate by a specified date. The hope that any further submissions in this matter might be brief was misplaced.
What subsequently transpired was, first, a dispute between the parties as to the ambit of submissions that could properly be made in accordance with those directions and then, more relevantly for present purposes, a submission for the plaintiffs in effect that they would be denied procedural fairness were they not to be permitted to adduce evidence and make submissions in relation to the relief that I had envisaged would be appropriate in light of the findings made in the principal judgment.
For the reasons that I published on 14 May 2018 ([2018] NSWSC 646, to which I will refer as the re-opening judgment, now renamed as E Co v Q (No 3)), I concluded that, while leave to re-open would not strictly be necessary in order for the plaintiffs to be permitted to make submissions as to the appropriate form of relief (or conditions to be attached thereto), leave was necessary insofar as the plaintiffs sought to adduce further evidence going to the issue of relief (since, in effect, that would amount to a re-opening of the evidence in the hearing) but that such leave should be granted (see [116] of the re-opening judgment).
That led to further evidence being adduced from both sides as to various issues including as to: the estimated market rent for the farming properties the subject of the proceedings over the balance of the first defendant's life (as estimated according to life expectancy tables) and the net present value thereof; the value to be attributed to the first defendant's shares in E Co and EM Co, respectively; the financial ability of the sons and/or E Co to meet financial conditions of the kind I had anticipated be imposed on the acceleration of the sons' expectations of an interest in the farms; and (over the objection of the plaintiffs) evidence by the first defendant as to his current financial position.
The difference between Mr Tremain's figure for net rent and that of Mr Donoghue, Mr Tremain explained, was that he had adopted a 3% gross rent and effectively worked "backwards", deriving a net rent from the gross rent less outgoings, whereas, he said, "Mr Donoghue has adopted 3% gross. Mr Donoghue has docked 2.5% net" (T 270.4).
Thus, the approach taken by Mr Tremain was: to work backwards from the gross market value of the properties (his opinion as to this value, before the conclave, being around $18,000,950); to adopt a 3% figure from that to arrive at gross market rent (around $570,000); and then to deduct from that all lease outgoings (of $403,000), but not all the costs of operating a farm, based on the financial statements in the 2018 year (see T 270.38ff); and then from the 2018 year to add an amount for a pasture improvement budget. As explained by Mr Tremain, the gross market rent of $570,000, on those numbers, would comprise the amount paid in cash by the tenant ($166,000) with the balance being the contribution to outgoings paid by the tenant (see T 272.15ff).
Mr Tremain accepted that the return on capital for the lessor on this scenario (i.e., of an indicative net rent of $166,000) would be 0.008% (assuming the numbers put to him in cross-examination were correct) (T 271.10) but did not accept that this would "almost certainly" be unacceptable for any landlord or landowner. Mr Tremain said (from T 272.1):
With the agricultural lease, as I touched a moment ago, they're based primarily on a gross rent, which we have agreed, the capital we've agreed, we've agreed on a gross lease of 3%. The biggest variable factor is the contribution of outgoings, which has a direct impact back to our net rental. So we have to look at actuals, and we need to make a judgment on a portion of outgoings. Probably our most important thing is to make sure that we have a lease that is equitable, that tenant can service, and a landlord is also happy with. So we have, it's got to be about sustainability of a rent, a lease. [my emphasis]
Later pressed on that issue, Mr Tremain said that he considered a net return to the landlord of $166,000 for the 2018 year was realistic in circumstances where "we've come through a large property increase, returns haven't been necessarily commensurate to capital gain and this property does require significant inputs" (T 276.35).
Mr Tremain did not accept that if there was a big capital requirement for inputs it would make sense for the burden of costs to fall on the person who was going to benefit therefrom (i.e., it was said, the tenant) (T 272.49-273.27). He accepted the proposition that one of the reasons a landlord would make contributions to the outgoings would be because ultimately the landlord would get some benefit from them in terms of a "well maintained" property (T 285.27; 39). (Pausing here, this immediately illustrates the difficulty of assuming that a landlord would accept the burden of payment of outgoings in a situation where the landlord is holding the property in question as constructive trustee for the tenant (or persons associated with the tenant) and will not himself or herself obtain any benefit from the maintenance of the property; and, conversely, the difficulty of proceeding on the hypothesis that the landlord would be in a position to seek market rent from the property so as to profit from the lease.)
Mr Tremain's evidence was that he was not commonly involved in negotiations for agricultural leases between landlords and tenants (T 274.5), saying that "[w]e see them, and we value properties with leases, we don't sell or negotiate leases" (T 274.12). Mr Tremain also gave evidence that historically one did not see much beyond three to four year leases of grazing properties (see T 283.2).
Mr Tremain accepted that Mr Donoghue had said to him words to the effect that "you wouldn't lease a rural property and get that return" in relation to Mr Tremain's indicative net rental but his account of the conversation was as follows (from T 277.27):
A. The conversation went in regard, in terms of assessing the outgoings and we put less credence on a percentage net return as opposed to a percentage based on a gross less outgoings, and that's primarily how our report was based. As opposed to Mr Donoghue took the view of an estimated net profit which we obviously, after the joint report, was the factor that we didn't agree on because a net component added to the outgoings took the lease round to an unequitable, unsustainable level.
Q. Could you repeat that for me?
A. We couldn't agree on a fixed net return on the property because ‑ and I use the example, if it was 600,000 Mr Donoghue has applied a 500,000 net return and what, in my view ‑ and some of the independent reports we've been provided with is that if you add 500,000 to the outgoings, the total gross rent then becomes inequitable and the tenant cannot service.
…
A. … at the end of the day, a desired net may not be achievable by virtue of the product capability of the property. So we have to make sure that our rent is kept at a sustainable equitable level.
Mr Tremain confirmed that the area of the disagreement with Mr Donoghue was as to the outgoings (from T 280.1):
A. It was very difficult. We agreed, ended up agreeing, on market value and gross lease, as we can see in the independent report. Our biggest stumbling block was that we were provided, and had access to, financial data, plus including the ones we have adopted in the report, where Mr Donoghue didn't have access to those, or provided with them, so we stumbled to discuss them because we looked at a different approach. I had actuals, Mr Donoghue didn't have any.
Q. So you are approaching it on the basis that you had some financial information that showed the level of outgoings historically, and who had paid them?
A. True.
Q. And you applied that going forward?
A. Plus, plus a little bit, plus the pasture and improvement.
Q. Which is where you got to 403,000?
A. Yep, and Mr Donoghue didn't have those, so he took the practice of adopting an estimated 0.5% outgoings, which was $100,000, to derive a net of $500,000.
Q. Starting from the point of a fixed‑‑
A. He started from a gross of 600, which was a 3% gross, and then worked backwards on 0.5% outgoings to derive, well I believe that's how he's done it, or in reverse he's adopted 2.5% net, which obviously means there's 0.5% of market value in outgoings.
For the first defendant, it is emphasised that the approach adopted by Mr Tremain (of deducting all outgoings from the estimated gross market rental) was one that was based on instructions.
Pausing here, the difficulty I have in placing any reliance on Mr Donoghue's opinion as to 2.5% being an "industry standard" is that nowhere in the report does Mr Donoghue explain the basis of his reasoning; i.e., the basis on which he formed the opinion that a 2.5% figure is standard within the industry (which is what I understand him to mean by "industry standard"). It is impossible for me to test Mr Donoghue's assertion that, as a professional, he is aware of the percentage levels (irrespective of how many properties he may himself have leased over the years - as to which there was, in any event, no evidence).
Mr Donoghue's report contained a number of other generalisations said by him to be based on his industry knowledge as a professional in the field (see T 503) without reference to any particular reasoning or to any particular examples.
Mr Donoghue was cross-examined as to his knowledge of the expert witness code of conduct (see T 500) the content of which he could not recall off the top of his head but which he seemed at one stage to conflate with the code of conduct to which he says he always adheres when undertaking valuations (though later accepting that this was a different code of conduct).
Asked by Senior Counsel for the first defendant as to his statement that "[g]enerally long-term rural lease agreements are calculated on the basis that the lessee being responsible for all outgoings", he said (from T 502.28):
A. Can I just speak freely for a minute? Rural leases aren't a standard lease like a commercial or industrial lease. Many times we have outgoings in and out. The lessee paying all or some rates. There is no standard set procedure are rural leases, and the majority of them aren't registered on title, which makes it very difficult to source. It's only through your own experience and negotiation with agents and the people that negotiate these leases that you're able to ascertain this information. Within s 16(b)(iii), it does ask what we consider relevant, and that's what I considered it [sic] relevant at the time. I don't know whether you wanted it spelled out over three pages, but I put in what I thought which ‑ the question was asking.
Q. Well, 16(b)(iii), directing your attention to the expenses associated with land ordinarily borne by, on the one hand, the lesser and, on the other hand, the lessee in leasing arrangements of this type. Now, in the answer you just gave a moment ago, you've given an answer to that. You've said it depends on the circumstances; correct?
A. Correct.
Q. It can change‑‑
A. Yep. Everyone is different.
Q. Everyone is different. And so in effect your answer to that question is there's no standard position as to who bears what expenses; correct?
A. Correct.
Q. But we don't see that anywhere in your report, do we?
A. It was asking for my interpretation of the ‑ of the ‑ the question was asking me to answer the question, and I ‑ I think I spell it out there and say that there aren't any, and I'd have to find the exact paragraph, but there's no standard set leasing clause for rural land.
Mr Donoghue said that, in hindsight, he should have put some evidence in the report but then said that there was not evidence "relevant or comparable" to this property (T 504.31). He disagreed that the Court could not make an assessment of the weight to give to his evidence (from T 504.36):
A. Look, I do disagree because I do have a good handle on the rural market, and I think you'll find that the industry standards are there and in place, and if you're even aligned with what Martin Tremain completed in his report, we aren't too far in gross terms percentage rate ‑ even in his ranges, we are very similar in terms of his overall percentage rates. So I don't think that I'm off the mark. If anything, I probably should have put some evidence in that was not similar country but to provide a level of methodology that you could understand.
As to whether his opinion as to the net rental would differ if the situation were that the land was held on trust by the owner for lessee beneficiaries (and who will be meeting all the expenditure on the properties going forward from the time of inception of the trust) (see T 508.22), and after some confusion as to whether the reference to a "trust" was a reference to a relationship of love and affection between lessor and lessee (see T 508.36ff), Mr Donoghue's position was that "his rates" would be the same or potentially higher (see T 509). Pausing here, the logic whereby a tenant who would eventually obtain the property would pay a higher net rental to a trustee who had no effective legal rights with respect to the property was not explained and was certainly not discernible from Mr Donoghue's answers in cross-examination. It seemed to me that this answer was one that might colloquially be described as "off the top of his head", Mr Donoghue's only explanation being that (from T 510.15):
A. Because that's where the market would fit in my opinion.
Q. When you say, "That's where the market would fit." What do you mean by that?
A. That would be an adopted percentage return that an owner would be wanting to receive - that's not [sic; but my notes of his evidence were that he said that's "my"] professional opinion. I can't explain it any other way.
…
Q. So what's your process of reasoning in that situation?
A. Look, I'd have to look at the situation in isolation.
From my observation, and with no criticism in this respect of Mr Donoghue, who is not a lawyer and for whom this line of questioning may have been unexpected, Mr Donoghue exhibited no real understanding of the concept of a trust or of the difference between a trustee and a beneficiary (or beneficiaries), or as to what is meant by a reversionary interest. That is evident from the following responses to my questions(from T 512.12):
Q. As I understand your position, you have approached consideration of the rental issue by reference to what an owner of the property would want to get back at a rate of return.
A. That's correct.
Q. The assumptions that Mr McInerney has been asking you to make in effect go to the proposition: how would your answer change, if at all, if the owner of the property had no beneficial interest in the property? So that the owner of the property is holding the title to the property for somebody else's benefit entirely?
A. I would need time to think about it, but I do believe the rent would be higher in that regard.
Q. Even in circumstances where the owner will have no benefit from that higher rent if the owner‑‑
A. I would ‑ I would need more time to give you an answer on that. I can't give you a conclusive "Yes" or "No" on that.
As to the difference of opinion in relation to net rental values, Mr Donoghue's position was: that he was not working on the "actuals" (i.e., actual outgoings); that he considered that they were "excessive in terms of costings based on - they just seemed high in my - in my industry experience, being an ex-farmer"; and that his feeling was that they were "high" (see T 516). He could not answer one way or the other how his view would change if he factored in the actual outgoings but he said that he considered that if he were to do so "you would have to adopt a much higher gross rate to account for the discount in the costs associated to the lessee" and that it was uneconomical (T 517.28). He could not see any sense in an asset of that value being leased "at that low amount" and he was of the view that the landlord should derive a return of 2.5% (T 517.31).
As to how the figure of 3% of gross rental had been agreed upon by him, Mr Donoghue's evidence was that net rental should be 2.5% and he had adopted a gross rental percentage of 3% of overall value on the basis that the landlord would be paying $100,000 a year in expenditure (see T 519.27).
The plaintiffs submit (and I agree) that it is readily apparent from the cross-examination of Mr Donoghue that: there is no general principle which applies to agricultural leases (T 502.26- 503.1); he did not have regard to the actual expenses of the E Co farming business in formulating his opinion (T 513.16-31); his choice of 2.5% was ultimately a normative expression of the return that he "felt" (see T 516.46-517.11) a landlord "should" obtain from a lease of the properties (T 503.9-17, 513.33-37); and he was not able to provide a reasoned, logical justification for his conclusion other than that was his opinion (T 496.9-22, 497.48-498.5, 519.34-44). (As I understand it the plaintiffs also point to the evidence given by Mr Donoghue as to his understanding of the expert witness code of conduct, as undermining the reliability of his evidence.) The plaintiffs submit that no reliance can be placed on the opinions of Mr Donoghue insofar as they contradict those of Mr Tremain.
In Makita, Heydon JA referred (at [67]) to the need for an expert fully to expose the reasoning relied upon and went on (at [71]) to say that "examining the substance of an opinion cannot be carried out without knowing the essential integers underlying it" and (at [80]) cited Anderson J in Pownall v Conlan Management Pty Ltd (1995) 12 WAR 370 (at 390):
Expert opinion is to be judged like any other evidence. It must be comprehensible and reach conclusions that are rationally based. The process of inference that leads to the conclusions must be stated or revealed in a way that enables the conclusions to be tested and a judgment made about the reliability of them.
Among other authority, his Honour cited (at [69]) the following remarks of Lawton LJ in R v Turner [1975] QB 834 (at 840):
Before a court can assess the value of an opinion it must know the facts upon which it is based. If the expert has been misinformed about the facts or has taken irrelevant facts into consideration or has omitted to consider relevant ones, the opinion is likely to be valueless. In our judgment, counsel calling an expert should in examination in chief ask his witness to state the facts upon which his opinion is based. It is wrong to leave the other side to elicit the facts by cross-examination.
Applying what was there said to the present case, Mr Donoghue's report, as to his opinion of net market rent, singularly failed to expose his reasoning process and was thus of little assistance to me.
That said, what emerged very clearly from both valuers' evidence was that the process of determining net rent (on a gross rent less outgoings basis) for an agricultural or farming lease would involve a process of negotiation between prospective landlord and prospective tenant; and that the position will vary from case to case. It is no more than common sense to say that it is unlikely that a tenant will agree to pay more than it can afford by way of rent and outgoings combined; or that a landlord will wish to obtain an adequate return on an investment property.
In that regard, I accept the plaintiffs' submission that both valuers' analyses represent an attempt to determine the profit to the landlord if the properties were to be leased on the open market (i.e., a market rental) and did not have regard to the manner in which the properties were in fact historically eased between the parties (on what is said to have been a "commercial" basis, not a "market" basis). To be fair to the witnesses, however, that is what they were asked to determine. In other words, what was required of them was an estimate as to the estimated future market rent in the sense of what a willing but not anxious lessor would accept and a willing but not anxious lessee would pay (to adapt the test in Spencer v Commonwealth (1907) 5 CLR 418; [1907] HCA 82) for a lease of some 11 years from 2018 of the farming properties in question.
The nub of the plaintiffs' argument in this respect is that such a process undermines the intention of the first defendant which he accepted in the primary hearing, namely, that: from 25 September 2002, he had agreed with his sons that the grazing business would be transferred to E Co, that he would make the farms available as security for off-farm investments, and that he would move money out of Sydney into the farms to assist the new business (T 29/8/17; 807.37-47); his intention was that as time went on his sons would have the benefit of the farming business conducted on the farms (T 29/8/17; 808.15-17); his intention was that as time moved forward the sons would obtain the benefit of making off-farm investments in respect of which the farms would be used as security to finance them (T 29/8/17; 808.19-22); in advancing money to E Co he was seeking to assist the new family business and that that was part of what had been agreed back in 2002 (T 31/8/17; 1013.48); he did not expect any benefit from E Co (T 30/8/17; 915.35-39, 997.40; he did not expect any benefit from EM Co (T 30/8/17;916.7); he never expected anything from his sons in return for the gifts that he gave them (T 28/8/17; 768.17); the intention was that the lease fee should not exceed the expenditure incurred on pasture development and capital improvement (T 30/8/17; 866.10); at the time he entered into the lease agreement, it was not intended that he would benefit from the agreement in terms of monetary compensation (T 30/8/17; 867.26); and, when improvements were made to the farms paid for by him, this was part of the plan to move money out of Sydney for the long-term benefit of his sons and their families (T 30/8/17; 874.39).
It is clear from the evidence at the primary hearing that when the rent payable for the properties was first struck, it was not intended to generate a profit for the first defendant; rather the evidence was that it was intended to be a "commercial" rent (in the sense that this would satisfy any later tax office query - see T 29/8/17; 831 from the principal hearing; B's notes of the minutes of a meeting on 2 May 2003 (extracted at [230] in the principal judgment); and Accountant No. 2's letter dated 18 March 2004 items 1 and 2 ([255] of the principal judgment).
As originally struck, the rent was $300,000 ($250,000 for the land and $50,000 for plant and equipment) and the first defendant was to be responsible for pasture development and improvement (including superphosphate) rates and taxes, insurance and capital improvements (see minute extracted at [252] principal judgment). The lease fee was payable at the end of each financial year (see the minute extracted at [252] of the principal judgment). The contemporaneous evidence suggests that the $300,000 figure may have been based on 5% of the value of the leased properties (see B's notes of a 13 August 2003 meeting referred to at [240] of the principal judgment and B's notes in preparation for a 17 March 2004 meeting extracted at [247] of the principal judgment. It also appears that the pasture development contribution by the first defendant was considered to be a potential tax deduction (see the extract at [230] of the principal judgment).
In respect of the period from 1 July 2008, it was agreed that no rent was payable (and no pasture improvement was required) as the area was in drought.
From 1 July 2011, the rent was calculated as $100,000 less rates and insurance which the first defendant was to bear. (The plaintiffs note that, for the period from 2011, those amounts were: rates of $24,190 and insurance of $28,158; from 2013, rates of $23,751 and insurance of $20,190; from 2015 rates of $26,400 and insurance of $72,037; from 2018, rates of $25,725 and insurance of $51,338.)
Relevantly, the evidence at the principal hearing showed that the basis on which the initial rent was struck was such that there would be a "commercial" rent but not one that would produce a taxable profit in the first defendant's hands - and that it was likely struck by reference to a percentage of the land value.
Although, in his 3 September 2018 affidavit filed in the re-opened hearing (at [5]), the first defendant asserts that his intention at the time of the agreement for the $100,000 rent was that at some time in the future he would increase that to $300,000 or possibly more (see below), there is no evidence of any such intention having been communicated to his sons, and I can place no weight on this.
Had it been necessary to make a determination as to the future market rent (which it is not, having regard to my acceptance of the plaintiffs' submissions that this is conceptually inconsistent with a recognition that the freehold interest in the properties was held in trust for the sons that trust arising from at a time earlier than declaration now to be made to that effect - and hence, conceptually inconsistent with the no profit rule traditionally applicable to trustees), I would have preferred Mr Tremain's opinion for the reasons set out above (perhaps with an adjustment to increase the rent once the proposed pasture development program had taken place). The logic underpinning that opinion seems to me to be sound. I can understand that a landlord might well accept a relatively low investment return for a property which requires significant inputs in order to return it to its former condition and in circumstances where the area is still in drought. Further, as noted, I regarded Mr Tremain as providing a more objective and balanced account (and hence to be a more reliable expert witness in that regard).
The question of a notional rent illustrates in my opinion the difficulty of any scenario that does not now contemplate a "clean break" in relation to the farming properties, because, if the leasehold interest in the properties is held on constructive trust for E Co (in the sense that it is not to be open to the first defendant during his lifetime to terminate its lease - and the plaintiffs dispute that the lease has ever been validly terminated, arguing that it still remains on foot), it is not easy to see how that rent would be set (absent agreement between the parties, which is hardly likely to be forthcoming in the future - since it is clearly not forthcoming at the present time), nor as to what rights, if any, the first defendant would have if there were to be a breach of the lease by E Co in the future. Neither of those questions can be, or was, satisfactorily answered in a way consistent with the leasehold interest remaining on foot as between the first defendant and E Co into the future. (The plaintiffs did postulate an hypothetical negotiation process by which "commercial" rent might be set after a "grace period" - see [58]ff of the 31 October 2018 written submissions, but that seems to me to be an exercise fraught with difficulty.)
There is also potential tension between the freehold interest being held on trust for the sons and the leasehold interest being said to be held on trust for E Co - in the sense that it might be in the interest of the sons (holding a beneficial interest in the properties) for a greater rental to be paid by E Co (or more of the outgoings to be borne by E Co) at least if the rental stream were to flow through to the sons. While the plaintiffs emphasised in submissions the different interests the sons have, as compared to the interests of E Co, it was not suggested that the setting of a notional future rent should be done by reference to the distinction between those plaintiffs.
I have concluded (see below at [661]) that the notional future rent should be calculated, for the purposes of determining the amount to be payable as a condition of the acceleration of the sons' beneficial interest in the properties, in an amount consistent with the basis on which, historically, the rent was set as between the relevant parties - in effect, to provide an amount for the first defendant's maintenance in life, not to generate a taxable profit or notional investment return for him. I consider in due course the appropriate amount to set on that basis.
In summary, in the first report the Market Rent Amount was calculated as a lump sum (as at 1 July 2018) at some $5.2 million. It was concluded that:
(a) [E Co] is able to repay to the first defendant the Loan Amount or the Market Rent Amount without jeopardising [E Co]'s grazing operation, but is unable to repay both the Loan Amount and the Market Rent Amount without jeopardising [E Co]'s grazing operations
(b) based on the financial information available to us, A, B and C (as distinct from [E Co]) are unable to repay to the first defendant either the Loan Amount or the Market Rent Amount. The answer is unchanged whether or not the beneficial interest of B's wife in the [P Hotel] is included in the overall beneficial interests of A, B and C
(c) [E Co], A, B and C are able to repay to the first defendant Loan Amount or the Market Rent Amount without jeopardizing [E Co]'s grazing operations, but are unable to repay both the Loan Amount and the Market Rent Amount without jeopardising [E Co]'s grazing operations
(d) because [E Co] or [E Co], A, B and C are unable to repay to the first defendant both the Loan Amount or the Market Rent Amount without jeopardising [E Co]'s grazing operations, but are unable to repay both the Loan Amount and the Market Rent Amount, a reasonable regime for repayment by [E Co] or [E Co], A, B and C should be:
(i) to raise $5.2 million (including $1.5 million from surplus assets and $3.7 million from additional debt) to repay to the first defendant the Market Rent Amount as a lump sum
(ii) to repay the Loan Amount of some $1.2 million over 11.4 years (say, some equal annual amount of $184,000) from [E Co]'s profits after interest on the additional debt of $3.7 million and tax
(e) the answer to (a) and (c) above is unchanged if [E Co]'s actual profit (before legal costs) in FY17 is replaced with the achievable annual profit assessed in the Francis Report.
It is not necessary to dwell on the second report, on which no reliance was ultimately placed by the first defendant. I note, however, that it calculated the revised Market Rent Amount based on Mr Donoghue's revised projected net market rental set out in the Conclave Report at $4,773,075.
In the third report, some discrepancies (some of which were said to be significant) were noted between the E Co unsigned FY 2018 financial statements and E Co's bank statements and related party loan ledger (see the executive summary at [16]) but leaving aside those discrepancies it was concluded that, after allowing for the sale of the C Hotel, A, B and C (collectively) are able to raise (and service) via the P Hotel between half a million and $1 million of additional debt (see [19] of the summary and [76]; [74] of the report); and that the total amount of additional funds that could be raised by E Co, A, B and C was between $4.45 million and $4.9 million (see [20] of the summary).
The report concluded in light of the above that:
(a) E Co is able to repay to [the first defendant] the Loan Amount as a lump sum, but is not able to repay to [the first defendant] the Market Rent Amount as a lump sum;
(b) A, B and C are not able to repay to [the first defendant] either the Loan Amount or the Market Rent Amount as a lump sum; and
(c) if the 50% interest in the [P Hotel] held by B's wife is included in B's interest in the [P Hotel], E Co, A, B and C are able to repay to [the first defendant] either the Market Rent Amount as a lump sum or the Loan Amount as a lump sum, but are not able to repay to [the first defendant] both the Market Rent Amount and the Loan Amount as a lump sum. If the 50% interest in the [P Hotel] held by B's wife is excluded from B's interest in the hotel, E Co, A, B and C are able to repay to [the first defendant] the Loan Amount as a lump sum but are not able to repay to [the first defendant] the Market Rent Amount as a lump sum.
Pausing here, there is no basis on which I could comfortably conclude that B's wife would be likely to assist in the payment of any amount to the first defendant. She might, of course, be prepared to do so in order to assist her husband and his brothers but there is simply no evidence that would enable such a finding to be made (and the evidence of the first defendant himself at the principal hearing would suggest that this would be unlikely - it being abundantly clear at that hearing that the first defendant harbours a degree of resentment towards B's wife and, in light of the accusations he has levelled against her, it seems likely that any ill-feeling on his part would be reciprocated).
As to the alternative (that the net proceeds of sale of the C Hotel would be used to repay in full the St George loans used to finance the purchase of the C Hotel and that no part of the St George loans used to finance the purchase of the P Hotel would be repaid), the report stated that the amount of additional funds available to A, B and C, collectively, to repay to the first defendant the Loan Amount and the Market Rent Amount is "some $1.99 million" (referring to [65]-[66] of the report) and the amount of the additional funds available to E Co, A, B and C is $5.89 million (being $3 million from E Co and $1.99 million from A, B and C collectively) (see [22] of the third report). The report states (at [23]) that in this scenario:
(a) E Co is able to repay to [the first defendant] the Loan Amount as a lump sum, but is not able to repay to [the first defendant] the Market Rent Amount as a lump sum;
(b) A, B and C are still not able to repay to [the first defendant] either the Loan Amount or the Market Rent Amount as a lump sum; and
(c) E Co, A, B and C are able to repay to [the first defendant] either the Market Rent Amount as a lump sum or the Loan Amount as a lump sum, but are still not able to repay to [the first defendant] both the Market Rent Amount and the Loan Amount as a lump sum.
The report also set out a "reasonable regime" for the repayment of the Loan Amount and the Market Rent Amount in each scenario permutation (in sections IV, V and VI of the report).
The report further stated (at [25]) that the assessed ability of E Co to raise additional funds to repay to the first defendant the Loan Amount and/or the Market Rent Amount was not affected by the fact that the Loan Amount was not recorded on E Co's books as a liability nor in any other way "because our assessment is based on the assumption that the Loan Amount is not present on E Co's books and focuses on E Co's ability (given its asset backing and debt servicing capacity) to raise additional (third party) interest bearing debt to repay to [the first defendant] the Loan Amount and the Market Rent Amount".
Thus, assuming the sale of the C Hotel at about the amount that Lonergan Edwards was asked to assume was the sale price, and leaving aside the possibility that B's wife would assist in relation to the making of any payment to the first defendant, the view expressed in the third Lonergan Edwards report is that: the sons would not be able to make payments to the first defendant of either the Loan Amount or the Market Rent amount; E Co would be able to pay to the first defendant the Loan Amount as a lump sum but not the Market Rent Amount as a lump sum; and E Co and the sons collectively are able to pay to the first defendant the Loan Amount as a lump sum (and, if the $2 million Westpac facility is not discharged, would be able to pay - as an alternative to the Loan Amount - the Market Rent Amount as a lump sum) but on no scenario would they be able to pay both as a lump sum.
Relevantly, it is apparent from the third report that, if the Lonergan Edwards reasoning is accepted, there is no basis on which it could be said that it would be financially ruinous for the plaintiffs (collectively) to be required to pay at least the Loan Amount as a lump sum; but nor could it be said that it is feasible on any scenario for the plaintiffs, collectively or individually, to pay both that amount and the Market Rent Amount as a lump sum at this stage.
In light of the revised carrying value of E Co's surplus assets and the revised additional debt that can be raised by E Co, in the third report it was calculated that the amount of additional funds that can be raised by E Co are in the range $3.4 million to $4.5 million with a midpoint of $3.9 million (that last figure being the figure adopted as the amount that in the expert's view could be raised to repay the Loan Amount and the Market Rent amount (see [45]; [70]).
As to the ability of the sons to pay the said amounts, reference was made to their collective assets (see first report from [166]) and the pool of key assets that the sons could use to carry or support interest bearing debt (see [182]). The existing interest bearing debt carried/serviced by the combined hotels as at 30 June 2017 was identified (at [183] of the first report), comprising: two St George Bank loans of $11.3 million and $4.2 million (one in respect of each hotel); a Westpac Loan of $2 million (on-lent by E Co to AH Co); a Rabobank Loan of $1.1 million (on-lent by EM Co); and a BankWest first mortgage on C's property of $0.9 million; which it was said represented an existing overall gearing ratio of between 53.7% and 63.9% (see [184]). A comparison was made as to the gearing ratio of two listed companies involved in the pub industry in Australia (see from [185]).
In the third report, it was concluded that the amount of additional debt that can be raised and serviced via the P Hotel is $1 million (see [56]; [64]; [74]); and that, assuming that B could utilise only 50% of that spare debt servicing capacity, the amount of additional funds that could be raised would be only half a million. On that scenario, it was concluded that the sons are unable to repay either of the amounts. On the assumption that the residual net proceeds of sale of the C Hotel were not required to be used to repay any portion of the P Hotel finance, then the additional funds available to the sons collectively were calculated at some $1.99 million, again insufficient to pay out either of the said amounts as lump sums.
As to the ability of E Co and the sons collectively to repay the amounts, it was said that the amount of additional funds that can be raised by them is $4.9 million ($3.9 million from E Co and $1 million from the sons) (see [81]). Again, assuming that B could utilise only 50% of the spare debt servicing capacity of the P Hotel, the amount of additional funds that could be raised by the sons collectively is again assessed at half a million ([84]). Hence it was said that E Co and the sons could pay the Loan Amount but not the Market Rent Amount as a lump sum ([86]).
Second, the plaintiffs submit, in respect of the Lonergan Edwards reports generally, that there are a number of examples of conclusions made in favour of the first defendant which disclose little in the way of reasoning or factual foundation. I refer to those examples in due course but suffice it to say at the outset that in general I considered that Mr Lonergan's reasoning and methodology were amply outlined in the reports and well able to be tested (as the cross-examination made apparent), though that was not the case in relation to some relatively minor matters.
The plaintiffs say that the cumulative weight of these examples, and the evidence of Mr Lonergan in cross-examination, is sufficient to lead to an inference that Mr Lonergan has (or the Lonergan Edwards reports have) sought "to advocate the maximalist position of the defendants rather than to assist the Court as neutral experts as the Code requires". It is submitted that the reports of Mr Lonergan and Dr Chu should be regarded "with caution at best and generally with outright scepticism]". I do not accept that Mr Lonergan presented, in his answers in cross-examination, as someone seeking to argue the first defendant's case. Indeed at one point he said to me quite candidly that he was not sure what would be in the first defendant's interests and that he did not have a complete understanding of the background to the dispute. In response to a question I put to him as to the proposition that the lowest cost choice is to sell the assets or accept the security, Mr Lonergan explained (from T 604.41):
A. … as I understand this matter, which is at a great distance, there is a difficulty or a debate about the ability to pay the market rent and some loan money. That's my sort of - that's almost the entirety of my understanding of it. In that circumstance, given that pretty much in all of the scenarios it is either difficult or not possible to do both, then one can, for example, sell the assets, the 1.5 million surplus and just get the money, or alternatively they might take the 1.5 million and say, well, I can't ‑ or I don't want to go and borrow against it, but I'll put this up as security to make sure that the market rent or the loan is adequately secured by it. [my emphasis]
There is no reason not to accept that response (which, in any event, assists the plaintiffs' argument as it confirms that in "pretty much" all of the scenarios it is different or not possible for the plaintiffs both to pay the Market Rent Amount and the Loan Amount).
Mr Lonergan was certainly forthright in his evidence and where he did not consider that criticism (implicit or otherwise) was warranted he was not afraid to make that clear. However, he did so courteously and did not appear to me to be overly defensive of his reasoning.
Next, although this is perhaps already encapsulated in the above, the plaintiffs submit that Mr Lonergan "dogmatically refused" to make appropriate concessions and sought to advance the first defendant's case by long, non-responsive answers (referring in this regard to his evidence regarding the surplus assets table at [132] of the first report). It is submitted that Mr Lonergan repeatedly refused to concede "the obvious", namely, that if the proceeds of sale of the C Hotel went to Westpac then, although the loan to Westpac might be removed from E Co's balance sheet, the loans to EM Co and the CI Unit Trust would not be surplus assets because they would not be paid (T 562-571).
The cross-examination on this topic (which commenced at T 562) related to the proposition (put at [131(c)] of the first report) that the difference between the sum of the loans to related parties (i.e., representing E Co's assets) and the sum of the loans from related parties, plus the Westpac Loan (representing E Co's liabilities) could in principle be used to contribute to the payment of the Loan Amount and the Market Rent Amount without jeopardizing E Co's grazing operations; it being said that "[i]n simple terms, these (net) assets are not used in [E Co's] grazing operations".
Mr Lonergan had accepted that the surplus assets approach he adopted was set out effectively at [132] of his first report and agreed (responding "[e]ffectively") with the proposition that (from T 562.25):
Q. And it is not, if I might say so, it is not a complicated exercise. You have set out effectively a balance sheet approach. You have got the two largest assets, a loan to [EM co] and a loan to [CI Unit Trust], respectively of 862.3 thousands and 2 million, sorry, 2,701.3 thousands, which is compared effectively to the Westpac loan?
A. Effectively.
Q. Yeah, and one takes one from the other, and that is how you get to surplus assets of 1.457?
A. Yes.
He was then taken to the statement I have referred to at [131(c)] of the first report and agreed that he had used the words "in principle" deliberately, saying (at T 562.43):
A. Yes sir, it is the pass through issues that we are ‑ that I am alluding to.
There was then the following exchange (from T 563.3):
Q. And what do you mean, that is what you were alluding to?
A. Well the ‑ the rural business at the moment is not paying interest on its debt. Therefore, although it has debt as a balance sheet obligation, its trading results are not being adversely affected by the interest charge that would normally be reflected thereon.
Q. So which debt are you referring to there, the Westpac one?
A. Yes.
Q. When you say it is not paying interest on the debt?
A. The [E Co] is not paying interest on it.
Q. Because the [C Hotel] is paying it?
A. Yes.
Pausing there, that is what I understand Mr Lonergan to be referring to as a pass-through - namely, that E Co had taken a loan from Westpac but had on-lent the money to AH Co (for the benefit of the C Hotel) and that the interest on the loan was being paid by the hotel entity not E Co. The cross-examination continued (from T 563.18):
Q. But if the [C Hotel] ceases to be making that payment, the obligation falls to [E Co], correct?
A. Well, if nothing else is done about security and so on, yes, that is what would happen.
Again, pausing here, there is nothing objectionable or non-responsive about this answer, in my opinion. The cross-examination continued (from T 563.23):
Q. So, if you assume that the [C] Hotel is sold, and it is sold and the facility is a total of the 15 million and 56 odd thousand, and their proceeds is this figure of [xxx], and the St George bank wants its money, then the assets of the loan to [EM Co] and the loan to [CI] Unit Trust, they are not surplus assets at all, are they?
A. I think we are circling around and around the same issue, Mr McInerney. [my emphasis]
Q. Well, I know, but‑‑
A. Because the essence of it is, at the end of the day, the [P] Hotel is still there and it can still sustain 4 million of debt. Therefore, the proposition that you are putting to me comes to this. If you give back all the money to the bank, and you ignore the residual hotel asset, then there is a problem. Well of course, that is so. But the [P] Hotel is still there and it is still mortgageable and, you know, an attractive lending proposition, so.
Q. But as I understand your reports, including your third report, you don't factor in that once the sale occurs, that it is then left to some new financing arrangement which will have to be directed to the [P] Hotel for these assets of, for [E Co] of the loan to [EM Co], and the loan to [CI] Unit Trust, to enable a situation where there is a surplus asset position?
A. Well, firstly in the second scenario, the asset position is changed and it goes down to about 900,000 rather than 1 and a half and the constituent elements of it change. But secondly, at the end of the day, it is the same issue again and again. That is, there is a mortgageable asset left, exactly how the funds are steered through the various entities is a question of negotiation with the bank, but there is still $4 million mortgageable asset in the form of the [P] Hotel, plus the farm.
Q. I understand that, but what follows from the proposition that there is an asset, there is 50% LVR, against the [P] Hotel, with respect to [E Co] being able to recover these loans?
A. Well, because at the end of the day there is $[xxx] million worth of pub security, the short answer is, everybody will get their money back. Exactly what the mechanics are is a question of negotiation with the bank.
Q. And is that based on the assumption that the sons own the properties, the farms?
A. No, I was just thinking in fact about the pubs.
…
WITNESS: It was [xxx] million, there is [xxx] million for the one that we have sold and there is [xx] million left on [P], so there is $[xxx] million worth of pub assets. In fact at the earlier time, I think the understanding that pub assets were a bit more valuable than that. There was more than enough security to cover the debts.
…
A. I am not ‑ not sure how many times I can keep coming back to the overview of it, Mr McInerney. At the end ‑ at the end of the day, there is 4 million available debt capacity in respect of the [P Hotel] alone. And therefore, that has to go somewhere and that can be ‑ that can be deducted from the total borrowings due to SGB and Westpac. [my emphasis]
The references by Mr Lonergan to "circling around" the same issue and to "how many times" he could "keep coming back" to the same issue were references harking back to earlier cross-examination that day (commencing around T 557.15) in which there was the following:
Q. Then once the [C] Hotel has been sold and the bank wants the amount outstanding to the bank of this $2,110,000 odd figure, one also has the circumstance where the [C] Hotel can't repay the moneys the [C] Hotel borrowed from [E Co]; correct?
A. I would have to sit down with a piece of paper and trace that through, but, I mean, the short explanation, in overview is that at the end of the day, the [P] Hotel is still there, it's a valuable security and would sustain a quite reasonable level of debt. Exactly, through which entity is one level of detail. You would expect it to sustain a debt level of at least half its asset back in, which I think is 8 million odd.
Q. But we're talking about ‑ the [E Co] has got a loan. It lent money to the [CI] Unit Trust, some $2.7 million?
A. Yeah.
Q. It's back at paragraph 92. So, if the [C] Hotel is sold, the person from whom it borrowed money in circumstances where the sale of the asset doesn't cover the facility obligations to St George, there's no asset left, meaning the [C] Hotel to repay the $2.7 million; correct?
A. I think the answer is not quite. There is both the practical issue and a collateralised issue. As we discussed before, the debts, as I understand it, are cross‑collateralised, therefore, the way the bank would look at it in overview is in total. Exactly which entity did what, perhaps, wouldn't worry it too much. The bank's view will be on a go‑forward basis, as I would see it simply this, what is the available security? Basically an 8 million hotel [P] in respect of the pub business. How much would you expect them to lend? $4 million, being roughly 50% thereof. Exactly which entities that's through, you'd sit down and talk to the bank about. [my emphasis]
…
Q. My question wasn't directed to the position of the bank. My question was directed to between [E Co] who lent the money to the [CI] Unit Trust. Once the pub has gone, it's been sold and the bank has taken the money it's owed under the facilities, the [C1] Unit Trust isn't in a position to repay [E Co], is it?
A. Well, other than that through some other rearrangement internally, given the remaining residual asset which has got a 4 million mortgage ability value.
Q. The same applies, doesn't it to [EM Co]? To the extent that [EM Co] has an asset which is moneys it lent to the [CI] Unit Trust and there's a loan, an obligation of $1.1 million, let's call it, for present purposes, the same follows, doesn't it? Once the [C] Hotel is sold, [EM Co] is not able to recover the $1.1 million?
A. I can only give you the same answer. There is ‑ the bank's position is there was a residual asset worth 8 million. You can borrow four. Exactly what the internal arrangements are probably don't matter too much to the bank, because their underlying security is the 8 million. The probability is high that they would prefer it to be, there's the hotel, there's the owner, there's a mortgage, no interposed pass through entities. That would be their preference, but, at the end of the day, they should be prepared to lend 4 million against an 8 million asset, exactly how they did it, with their negotiation with the bank.
Q. You've said that a few times now and I understand it's a question of LVR against the asset value and you're assuming approximately 50% LVR against an $8.2 million asset?
A. Yes.
Q. But the proposition is, once the [C] Hotel is sold, the bank [is] still owe[d] about $2.1 million; correct?
A. From memory, yes.
Q. And then [E Co] is owed by the [C] Hotel, $2.7 million; correct?
A. I'd have to sit down and trace the entries through, I'm sorry.
Q. It's in the balance sheet?
A. Well, it might be in the balance sheet, but the difficulty is, Mr McInerney, if one looks at this thing in overview, it's clear what happens. If one traces entity to entity, it's a much more complicated way of doing [it] and I just have to sit down with pieces of paper and do it, I'm sorry.
Q. I'm just asking you ‑ I mean, you've done an analysis of surplus assets, based on a balance sheet analysis?
A. Yes, I have, but it's done--
Q. That's what I'm directing your attention to. I'm just working through that at the moment?
A. But I keep saying to you that's only an overview and that's the answer I keep giving you. In overview, there will still be $4 million of bank loans available. [my emphasis]
Q. I understand that, but what I'm putting to you is the bank is owed $2.1 million, the [C Hotel] owes 2.7 to [E Co] and owes about $1.1 million to [EM Co], the total which exceed $4 million?
A. Yes, it does, before you allow for exactly what flows where.
Having regard to the earlier cross-examination, Mr Lonergan's position is not in my opinion fairly characterised as a refusal to concede the obvious. He made it very clear, I thought, that he was approaching the position by way of overview (as he thought the bank would do - and which, as the bank's own credit memoranda suggest, is precisely what the bank did do) and to assess the debt position having regard to the overall amount owed irrespective of the particular entity. That, I think, is made clear by the response Mr Lonergan gave to a question I asked in clarification in the following exchange, commencing at T 564.50:
Q. So am I right in understanding then that you say ‑ if you look at overall
what the position is, assume the hotel is sold, assume that all the debts are able to be paid out through the refinancing of the [P] Hotel or paid out otherwise?
A. Well, either ‑ you know, the residual is left in place, your Honour, or they clean sweep it and sort of start again, but either way, there should still be a 4 million debt owing on the [P] Hotel at the end of the day in the third report scenario.
…
Q. … if we're just looking at it in an overall sense, if we say there's - you've got a borrowing capacity ‑ the residual security - you've got a borrowing capacity of $4 million. So you say one way or another everything can be paid out?
A. Yes.
Q. But what does that then leave in terms of availability to meet additional debt for the purposes of paying an amount that might be ordered to be paid by way of ongoing ‑ a net present value of future rental, or in relation to the book loan? Does that mean that you would be left with - you've used your residual security to pay out the other debts so that you're left only with the security of the farms to have any further borrowings, or am I misunderstanding where we're ending up here?
A. I may be suffering from a misconception, your Honour, because I'm not particularly familiar with all of the background of this matter, but as I understand the essence of it, the requirement is - that's in dispute ‑ is the ability or otherwise of A, B and C to pay market rent on the farm and to repay a debt, and, therefore, whether that money comes from the [P] Hotel borrowing, and whatever the surplus is after paying interest thereon, all comes from the farming business that would be operated in a go‑forward situation, as I understand it, it is a complication as to who gets ordered to do what, which I haven't sort of thought about at all, and a probably very complex one for your Honour.
But at the end of the day, I understood that the basic issue was A, B and C, through whoever entities, are being asked to pay two fundamental amounts of money, and if that's so, what's the ability for that to happen. It depends on a whole lot of assumptions and facts, but as I understand it, because the [P] Hotel is left, and the farms are left at the end of the day, the ability to pay is on that two‑page document that was handed up yesterday
…
Q. I guess I'm just trying to work through ‑ when you say the basic issue is the [P] Hotel will be left and the farms, is [sic] are you assuming that there's any residual borrowing capacity by reference to the [P] Hotel after the other debts ‑ if the other debts are refinanced? If the shortfall on the sale of the hotel and the other two debts are refinanced through the [P] Hotel security, then would I not assume that it would not be available to secure any other borrowings?
A. Well, your Honour, I think ‑ as I say, I haven't done the calculation. I'm a bit hesitant to be unequivocal about it, but it seems to me reasonably clear that because there is a surplus of asset value over borrowings in respect of the hotels, then the money can go back to [E Co], if that's necessary, but then, having gone back there, it sort of goes back around the circle and reduces the indebtedness, which can then be kick‑started again to go back to 4 point ‑ just over 4 million in respect of the pubs. So I think it goes in a big circle. [my emphasis]
Mr Lonergan's position was, I thought, not unreasonable. Approaching it not on an entity by entity basis but, rather, on an overall group basis, his position was that there was an amount of "surplus" assets that could be utilised. As I understand his evidence, Mr Lonergan accepted the proposition that on an entity by entity basis if one entity had repaid a loan then it would not have to make repayments in respect of that loan but said (at T 570.44):
A. But you keep taking me to a scenario that says Westpac wants its 2 million back. Well, if Westpac wants its 2 million back, then the surplus assets of [E Co] must go up by 2 million because the Westpac loan obligation of 2 million has reduced the surplus assets down to what they are.
The culmination of this line of cross-examination was at T 571.27:
Q. What I have trouble understanding, Mr Lonergan, at this point is this: 132 is a very simple balance sheet analysis. You talk about overview and you've got to look through the passes of all the other entities and understand how it all fits together. Your surplus asset analysis is set out in 132. It's a balance sheet. That's all it is. That's the extent of it?
A. At that entity level, yes, that's correct.
Q. But when I ask you about it and ask you to accept some propositions about it, you want to start telling me how you've got to look at all the other entities and how they interact rather than adopting the same methodology you adopted in your report; isn't that right?
A. No, no, it's not right, because what we discussed just a couple of minutes ago is that if the scenario you're pointing for me, the Westpac loan or Westpac wants to take away 2 million and discharge its loan to [E Co], you were portraying a position where that's a net loss of $2 million to the borrowing group, but that is not is so, because if it's repaid, the asset base goes up.
Q. You've told me that and we go to 132, all you do is put a line through the Westpac loan?
A. Yes, but that alters the total, Mr McInerney.
Q. It does alter the hotel and the total is largely comprised of two assets, you describe, a loan to [EM Co] and a loan to the [CI] Unit Trust?
A. Yes
Q. Yes?
A. Well, then -
Q. And the [CI] Unit Trust doesn't exist anymore because it's one [been] sold?
A. Well, I would have to look at the accounts of the [CI] Unit Trust and [EM Co] to see what happens to them in the scenario that you're describing. I haven't done that.
Q. Right. Why haven't you done that?
A. Because it wasn't necessary in the assumptions that I was given.
Q. As we've‑‑
A. Can I just please answer your question? The assumptions I were given including inter alia that the Westpac Bank loan was to stay in place and also that the totality of the borrowings with SGB were not going to be discharged, but only that proportion that was basically the cash proceeds of 12.9 million. That is a totally different scenario to the one you're putting to me now and with great respect, I think it's a little unfair of you to say I should have made that calculation when what I did was completely in accordance with my instructions which are quite different from the scenario you're trying to make me to [sic] on the run. [my emphasis]
Q. Mr Lonergan, that's a fair point. I didn't mean in any way to be disrespectful, but the point is you acted on the instructions you were given and you weren't asked to consider the effect of some of the assumptions I put to you during the course of this cross‑examination since 12 o'clock?
A. That's correct.
Q. So, you haven't undertaken the analysis, as to, if I might put it this way, the likely position, having regard to the evidence you've given about what the bank is likely to do?
A. Sorry, Mr McInerney, I'm probably becoming overly sensitive, but I think if you look at the conclusions in the third report and, in particular, the summary thereof, what it does do is enables one to look at the various possible outcomes and adjust that to the sort of scenarios that you're talking about and what the final report says, in essence, is, yes, there are some surplus assets, yes, there's some borrowing ability in [E Co] and then depending upon what happens with the banks, there's anything up to 1.99 million additional left over. I think what you're saying to me is, there won't be 1.99 left over in the scenario you're painting and there may be some difficulty getting any further borrowing in respect of the pub which I put at something between half a million or a million dollars. Other than that, I think that you can take the scenario you have and simply adjust my report 3 for whatever different matters you think are appropriate. [my emphasis]
The short point that emerges from the (lengthy) extracts above is that I do not regard the above as supporting the criticism made of Mr Lonergan's evidence; and I reject that criticism. Mr Lonergan made clear in the last passage italicised in the above extract that he did not suggest that there was a significant additional borrowing capacity in respect of the P Hotel. (I also note that the first of the passages italicised in the above extract is an instance where Mr Lonergan in effect challenged the implicit criticism made of his report, when noting that he was in the witness box being asked to address assumptions quite different from those he was asked to make in preparation of his report; and that this was quite appropriately conceded by Senior Counsel for the plaintiffs.)
The next criticism the plaintiffs make is that there are a number of other parts of the Lonergan Edwards reports which, they say, on their face raise a sufficient fair inference of advocacy on behalf of the first defendant, such that this evidence cannot safely be accepted. In that regard, the plaintiffs refer to the following matters.
First, it is submitted that there was no examination in the Lonergan Edwards reports as to whether the comparators used (namely, Rural Funds Group (RFF) and Australian Agricultural Company (AAC), two listed companies involved in the farming industry in Australia, as comparators to the farming business of E Co - see [139]ff of the first report; and Hotel Property Investments (HPI) and ALE Property Group (ALE), two listed companies involved in the pub industry in Australia, as comparators of the C Hotel and P Hotel businesses - see [185]ff of the first report) were appropriate comparable businesses. In that regard, the plaintiffs point to the size and scale of the companies used as comparators and argue that these organisations are in no way comparable for the purposes of assessing the borrowing capacity of E Co, submitting that this is an "unreal, at best a theoretical exercise unmoored from reality (especially in the context of the tightening of lending guidelines following the Banking Royal Commission)". It is noted that both of the hotel organisations used as comparators are landlords (not owner operators) and that, of the agricultural entities, AACo is the biggest beef enterprise in the world, while RFF has heavily diversified activities. It is submitted that all of the comparators present a lower risk profile than the plaintiffs' businesses. Thus I was, in effect, invited to disregard any of these comparators as appropriate.
Mr Lonergan was cross-examined as to the comparators that had been used in the report. At T 560.14, he explained that the criteria to assess comparability of the farming businesses was basically that they were in the same industry (or "comparable industry in the broad"), noting that there are very few agricultural companies that are anything like E Co's cattle business, but also explaining that (from T 560.17):
Q. Any other criteria?
A. Well there is something, I have been doing blending [sic; lending] work for 40 years, you know, pretty much ‑ pretty much most of the lenders I have dealt with have portfolios of loans that, you know, cross industry sector, so that is just the nature of lending. All of them have views about the rural sector. Some banks won't ‑ not some banks, some financial institutions won't go there at all. Some bank ‑ some financial institutions go exclusively to the sector. But all of them take a conservative view of the ability of a farming business as to sustain debt through the inevitable rural downturns that are, you know, climatically effects, et cetera, induced. There could be ‑ they are cautious about it.
…
Q. And it is not based on the number of head of cattle run on the particular number of hectares?
A. Well the ‑ it ‑ it ‑ as a lender it is in two respects. Firstly, the cattle are valuable, and there is 2.1 million or something of cattle there at the end of 2017, at market selling prices. The second is, although the banks generally won't second guess carrying capacity in any detail, they are aware, because they lend in the area, when I say the area, they lend in the sector, they would have a view about what carrying capacity was. Or if they had any doubts, they would ask for a report on it.
As to the comparables for the pub businesses, Mr Lonergan said that he put them in the report because he thought it would look strange if he picked them up for the rural industry and not for the pub industry; and that it was "always useful" to have confirmation as to the acceptable leverage ratio if that were available (T 599.8).
This is one of the instances where I accept that matters to which Mr Lonergan referred in cross-examination were not set out in the reports; and general evidence of that kind would not satisfy the requirements outlined in Makita for the reasoning process and sources on which an expert opinion is to be based to be set out in the report. See, for example, the following (from T 561.16):
Q. You haven't adopted that type of analysis in anywhere in your report where you say, "I am asked to look at the gearing ratio for this company, [E Co], and this is the criteria I am looking at to assess whether these other entities are comparable?
A. I think perhaps if we just substitute the word comparable, borrowing for comparable sale, it will clarify exactly how I thought about it.
Q. All right, but do that, do you agree you haven't set that out in your report?
A. Well, it is set out in the report in the sense that the most easily identified lenders or borrowers with the public companies, where you can get data, all of them have very low leverage ratios and that confirms 40 years odd experience of looking at loan portfolios.
Q. So is the sort of the step in the process of reasoning, there is limited data available for a company which would be comparable to [E Co], therefore I have to use data for publicly listed enterprises and therefore I have selected two publicly listed enterprises?
A. No, no, no. The - the fundamental analysis depends on the nature of the industry which is what 121, 122 are talking about. The conceptual framework of the lenders, if I can use that term, is that they think about all these things and they have learnt from bitter experience that lending a lot of money to the farming sector is not a good idea as a percentage of asset value, because things go wrong for climatic effects or whatever reasons, therefore they are very cautions [sic]. Public examples of individual debts just don't exist and people don't trade debts in the same way that they trade box of land or shares or houses or home units, it just doesn't have the same comparable sales data. What you have to do in looking at any industry is look at what the fundamentals of the industry are and what is a realistic balance for a lender between lending money to make a profit, which is their fundamental aim, and not lending too much money and incurring losses that are outside the acceptable loss ratio. That is how they think about it
Q. But if you are, from your experience which you have told us about, providing services to lenders for many years, some 40 years, a lender is going to assess a private company which is farming 10,000 hectares very differently from the approach it will take to a publicly listed enterprise?
A. Yes, they will lend less.
Q. They will lend less and they will lend at a lower ratio, won't they?
A. Well, I am sorry, the two are implicitly linked. Yes, they will lend less as a percentage of the asset backing. I agree with that.
Q. You don't say that anywhere in your report?
A. I do, because the -
Q. Well, just tell me where you say it in your report?
A. It is the conclusion I reach about the sustainable borrowing level of 25 to 30% of the underlying asset backing, compared for example to the publicly listed companies who have ratios up to 30, 35, target ratios up to that high, et cetera. It is just reflected in the mathematics.
I consider the criticism made of the report in this respect to be justified, though I do not accept, as I have already stated, that it indicates the adoption by Mr Lonergan of the role of advocate for the first defendant; and I do not accept that it should lead to the rejection of his expert opinion as to the borrowing capacity of the respective plaintiffs.
Second, the plaintiffs refer to the reliance placed in the third Lonergan Edwards report on the 24 May 2016 valuation (one of the two Robertson Valuations) of the P Hotel (see for example at [57] of the report in the context of calculating the ICR implied by the interest bearing debt serviced by the P Hotel to cross-check the ability of the P Hotel to service an additional debt of $1 million; and the application of the adjustments used in the 2016 Robertson Valuations at [60]). The plaintiffs submit that if the paragraphs of this report to which they took objection are admitted into evidence then the matters they raise go to the weight of the evidence but that in any event the reasoning of the third report "displays advocacy rather than analysis". I have already indicated the reasons for my rejection of [60]-[61] of the third Lonergan Edwards report. I do not, however, accept that the reference in the third report to the adjustments made in those valuations (or the evidence given by Mr Lonergan in cross-examination on the topic of adjustments) displays partiality or advocacy rather than analysis and I reject that criticism.
Third, complaint is made as to the following additional matters in the third Lonergan Edwards report: first, as to the determination (at [59] of the third report) of the EBITDA for FY17 (adjusted for non-recurring items) of the P Hotel (at some $265,700), that nowhere is it stated that this is not an "actual EBITDA" (referring to the cross-examination of Mr Lonergan at T 578.12-16), Mr Lonergan saying that what he calculated is the "reported EBITDA" for each financial year; second, as to the application of the adjustments used in the Robertson Valuations (at [60] of the third report) resulting in a "maintainable" EBITDA of $646,200, that nowhere is there an explanation as to why it is appropriate to make these adjustments or on what basis the adjustments were made (and that the explanation given by Mr Lonergan in cross-examination at T 578.18-26 on this issue does not appear in the Lonergan Edwards reports (as Mr Lonergan accepted at T 578.32-35) nor is there any reference to benchmarks in the reports (see T 579.20); third, as to the adoption of a midpoint (at [61]), that this is chosen without explanation or analysis (in this regard, the plaintiffs appear to find suspicious the fact that the EBITDA for FY17 determined at [59] of the third report of $265,700 yields an ICR of approximately 0.936, while the midpoint chosen at [61] of $646,200 "is just sufficient to meet the necessary ICR of 1.5"); and fourth, as to the adjustments themselves, that Lonergan Edwards "does not even say that it is correct valuation practice to make the adjustments made by Robertson and Robertson, let alone provide any insight into the methodology applied by the latter".
The plaintiffs (somewhat emotively it must be said) submit that the process of "reasoning" undertaken (at [59]-[63]) of the third report "is exactly what it looks like: an artless massaging of data with the barest veneer of methodology over a manipulation of numbers to achieve a desired result" and argue that it ought to be rejected outright. I do not agree.
Cross-examined on the issue as to the "actual' EBITDA as opposed to "reported" or "maintainable" EBITDA, there was the following exchange (from T 578,8):
Q. Based on the financial statements?
A. Correct. But I emphasise, reported. And you use the word "actual"" the actual results are better.
Q. Which you don't refer to anywhere in this report, you don't draw any distinction between actual and the reported results, do you?
A. No, I draw the distinction between reported results of 265,000, and at the bottom of paragraph 60, a maintainable EBITDA that adds back what I will loosely call excessive costs?
Q. Right, well that is based on the Robertson valuation?
A. Well, in part it is based on the Robertson valuation, because he picks up the costs a couple of years earlier. I have then looked at them item by item to see whether they should be adjusted. In simple terms, I have adjusted them for inflation, so the costs should be a bit higher in 2017 than they were a couple of years earlier. Sometimes the costs went down but I have reduced them in those circumstances. But there are some big elements of expenditure which are excessive. And if you add back those things that are excessive, you get a much higher EBITDA. Now, I -
Q. All right, well, Mr Lonergan‑‑
A. Just if I can just finish. I haven't taken the whole of those adjustments. I have taken half of them.
Q. It is not set out in the report at all?
A. With great respect, it is the difference between the 265,000 reported EBITDA towards the top of page, my page 18, paragraph 58, and the 646,000 at the bottom of the same page, which I think is maintainable, but as described more fully in paragraph 61, I have midpointed that range.
I clarified with Mr Lonergan the net adjustments of about $380,000 (see at [60] of his report - which I note has now been rejected) and he informed me that they were basically numbers that came off the profit and loss account and were (from T 579.11):
A. Well, I think it is a ‑ it is a combination of excessive and what I will loosely call irrelevant to the business. So at the simple level, you don't need to spend $16,000 on a motor car or to travel, to run ‑ to run a pub, they are just sort of a couple of the very simple examples. If you are running a pub, you would expect some repairs and maintenance, but not at the level that it is being charged to this business, relatively consistently. In respect of salaries and wages, there are two issues. One is that the wage bill looks high, and this is a managed hotel that is proprietor owned. So your expense control is not quite the same under a manager as under a fulltime proprietor. But there are benchmarks for wages in the pub industry, depending in simple terms on how big the pub is and how complicated it is, you know to balance between restaurant and bars and so on. And the numbers that are being charged to the [P] Hotel are, to put it simply, significantly above benchmark.
Mr Lonergan informed me that the figures followed the same conceptual approach as Mr Robertson's valuation but were updated in quantum for the FY17 and that the reasoning as to why they might be thought to be excessive for this particular business was in the Robertson valuation, albeit in respect of 2016. Thus, if the Robertson valuation, for any reason, were not in evidence, Mr Lonergan accepted he would not be able to use it but he said that that would not mean he could not carry out the exercise he had carried out in relation to the excessive cost adjustments. He said (from T 580.1):
A. … The one that I would be happy with everything up ‑ let me try that again. I would have come to exactly the same view about the add backs, motor vehicles, travel and so on, as he had, whether he had done it or not. I would say, no, no, they shouldn't be there. I would have formed a view that the repairs and maintenance number is too high for a couple of reasons. One is, it is just too high. And the second is, it is inconsistent with the hotel that is being sold. So it is clearly excessive.
The one that is a little more difficult to do, absent anything from Mr Robertson, is ‑ is the benchmark, because he keeps benchmark data. But, I mean, we do hotels from time to time and the salaries and wages are clearly higher than you would expect. And there are examples, by nature, that Mr Robertson picks up. For example, he says the managers are eating, whatever it is, $16,000 worth a year, of pub food which, he says, is excessive. Well, clearly it is because, you know, in retail terms, that is probably about 55 or 60,000 or $1,000 a week. I mean it is a lot of money that you shouldn't be losing that way. And there are various other things that he touches on. So I couldn't have got the salaries and wages ones as precise as Mr Robertson without Mr Robertson, but I would have come to some number that was broadly about at least half that.
While there was nothing in the Lonergan Edwards report to explain the reasoning in relation to particular items as adjustments, Mr Lonergan said that (from T 580.32):
A. I think, your Honour, to assist on the basis that Mr Robertson's report isn't there, I would have come to the same view about everything other than salaries and wages. I would have added back pretty much the same number, and in respect of salaries and wages, I probably would have added back some number like half of Mr Robertson's number, not having Mr Robertson's report.
…
A. … you know, clearly some of those things just shouldn't be there as a matter of logic.
As to the plaintiffs' complaints on these issues (and bearing in mind that I have rejected the portions that rely upon the Robertson Valuations in any event), I do not accept that the matters here criticised by the plaintiffs (as to inadequacy of reasoning or explanation for the adoption of the midpoint or the like; and the absence of an explanation in relation to the adoption of the adjustments contained in the Robertson Valuations), even accepting that there is some force to the complaint that some of those matters were not made explicit in the third report, warrants the accusation that this is a manipulation of numbers to achieve a desired result.
The criticism made by the plaintiffs to reliance on the adjustments in the Robertson Valuations on the basis that the Robertson Valuations were obtained by B "for the purpose of assisting him to obtain finance, and not in the context the Code requires of impartiality and explication" is not criticism that in my view can properly be levelled at Mr Lonergan. He simply took into account documents with which he was provided for the purpose of preparing his reports. Nor does the fact that the "chosen" EBITDA yields an implied ICR of 1.5 (whereas the FY17 EBITA yields an ICR of less than 1) lead me to ascribe sinister motives to Mr Lonergan or Dr Chu in adopting the former figure. Similarly, the fact that the report does not disclose that the St George facilities had a required ICR of 1.7 in their second year, a matter that Mr Lonergan readily accepted when his attention was drawn to it, lead me to conclude that there has been some attempt arithmetically to manipulate the numbers when assessing the borrowing capacity of the P Hotel in the third report. Mr Lonergan accepted that, on the assumption of an ICR of 2, that the St George ICR would not be met and said that the conclusion would be, not necessarily that the bank would not lend any money, but that the bank would not lend as much money.
The fact is that the third Lonergan Edwards report is supportive of the proposition that there is limited borrowing capacity on the part of E Co and the sons, even taking them collectively. That is surely not consistent with an attempt to manipulate data in the first defendant's interest (and, as already adverted to, Mr Lonergan seemed genuinely bemused at the proposition that he even knew what the first defendant's interests in this matter might be).
It is not necessary to say much more on this issue. I accept that Mr Lonergan has the relevant expertise to opine on the ability of E Co and the sons to pay as lump sums the amounts I had considered should be ordered as conditions on the acceleration of their expectations in relation to the properties; and I accept his conclusions in that regard. That is the case whether or not the correct EBITDA was determined for the E Co business and whether or not other aspects of the calculation of additional borrowing capacity were correctly assessed.
I should add that, when I later sought clarification as to the position if it might be anticipated that there would be continuing legal costs (say, in the process of the seemingly inevitable appeal(s) to come) (in the context of cross-examination of Mr Lonergan as to his treatment of these as abnormal expenses), Mr Lonergan explained that (from T 555.9):
… I'll try and explain it as simply as I can without sort of going too far into valuation principles and accounting. When one assesses value, one looks at the core asset value and the core ability to generate trading profits. If, for example, you have $1 million in the bank in addition to what you need to run the business, that's the surplus asset. Conversely, if you have an obligation to pay let's say $1 million to take a large number for an appeal process, and that it is virtually inevitable that that will have to be paid, that is the mirror image of a surplus asset. It's a surplus liability, or put more simply, you deduct that from the value you're dealing with.
Senior Counsel for the plaintiffs then asked (T 555.25):
Q. Mr Lonergan, adopting the same assumption which her Honour put to you, so the prospect that there will be appeals and those appeals will be costly, as I understand your answer, one would treat that as a surplus negative asset?
A. Yes, in simple terms, that's what it is.
Q. Yes, and that would affect, would it not, the ability of a company to obtain finance?
A. If the company was the litigant, yes, that would be so.
Again, that is hardly the response of someone seeking to manipulate data in order to act as advocate for a party in the proceedings.
I have now dealt at some (and perhaps too great) length with the Lonergan Edwards reports. I should, however, add that, questioned as to the methodology employed in relation to the aspect of the reports that dealt with a reasonable regime for payment of the amounts (of some $5.2 million), namely the identification of "surplus assets" (see 119) that Mr Lonergan said could in principle be converted into cash or used as security; taking into account the additional debt (see 119), Mr Lonergan confirmed that what he was saying in his report was that $1.5 million represented the surplus assets could be converted into cash or used as security (namely, that there was $1.5 million of value).
Mr Lonergan was cross-examined as to whether the largest components of the surplus assets he had identified (the debt represented by E Co's $862,300 loan to EM Co (see [132] and the debt represented by the loan to the CI Unit Trust of $2,701,300), were likely to be able to be converted to cash in those amounts. Mr Lonergan accepted that the assumption implicit in his analysis was that those debts could be sold for the amount of the debts (perhaps with some netting off of the loans) or that the indebted party would be able to pay, or borrow against, those sums of money. Mr Lonergan was taken through a series of assumptions, beginning with the sale of the C Hotel such that there would be no trading entity through the CI Unit Trust, and that having regard to loan to value ratios the P Hotel would be an available security in the amount of about $4.1 million for any borrowing (assumptions that Mr Lonergan made clear he had not been asked to make when he prepared his first report and that the scenario where the hotel was sold had not been apparent). He was then asked (from T 589.24):
Q. Having made those assumptions, if you are asked to advise the bank to value the choses of action available to [E Co], to put a value on the loan to the [CI] Unit Trust, you as an experienced valuer would valuer that chose in action as close to nil, wouldn't you?
A. Only if you ignored everything else. These are all related parties. The arrangements with the bank are a little unusual because assets from the farm back in the early report situation are used as security, whereas the pubs pay the interest. It's a bit unusual.
Q. Mr Lonergan, my question was directed on specific assumptions, and‑‑
A. It was directed on specific assumptions, and it's to do with the ability of the [CI] Unit Trust to repay in a different scenario, and in that different scenario, if I was advising the bank, I would not say, "Ignore everything else, and ignore all this other security. Strictly speaking, you can't get back whatever is left of the 2.7 million at the later date in the later assumed circumstance." I would not do that. That specific asset may not be worth 2.7, but there is between the available security in the go forward pub business and the go forward assets, being the pub and the properties, still a surplus of about $5 million to cover what I'll loosely call "pub debts."
Q. I think your answer, respectfully, was entirely unresponsive after the first part of it. Do you agree with that or not?
A. No, I don't agree with that.
Q. What I'm going to suggest to you is that you're here simply as an advocate in the interests of your client, aren't you?
A. To be honest, I'm not actually entirely sure what the interest to my client are, but I'm certainly not here as an advocate for anyone, Mr McInerney. That's not correct. [my emphasis]
Q. The question was directed to the loan ‑ valuing the loan to the [CI] Unit Trust.
A. Yes.
Q. In circumstances where the [C] Hotel, the asset has been sold.
A. Yes.
Q. You agree, don't you, on that assumption you would value that chose of action at nil or close to nil?
A. If there was nothing else there, if there was no cross‑collateralisation and none of those other circumstances existed, on a pure standalone, ignoring everything else, prima facie that debt isn't worth anything.
Q. And the same‑‑
A. I acknowledge that, but it cannot be looked at fairly in isolation for borrowing purposes, or for available security purposes.
Q. And the same applies to the loan to [E Co]; correct?
A. Indeed.
Q. It would be valued at close, or close to, nil?
A. I will give you exactly the same answer as I just gave. It has to be looked at in its entirety.
As I have already made clear, I do not accept the proposition that Mr Lonergan was acting as an advocate in his client's interests ("simply" or otherwise). He addressed in his reports the questions on which he was asked to express his expert opinion. He did not, in the first report, address the scenario where the C Hotel might be sold - unsurprisingly, since he had no instructions as to any such sale (and, I might add, since the plaintiffs had chosen not to disclose the potential for such a sale to the first defendant or his solicitor at any time prior to their October 2018 affidavits - nor did they until in the course of the re-opened hearing disclose the by then real prospect of such a sale).
In essence, as I understand Mr Lonergan's evidence, it was that if one looked at the position overall and assuming that the C Hotel was sold, there would be two options, either "the residual is left in place" or "they clean sweep it and sort of start again" but that either way there should still be a $4 million debt owing on the P Hotel at the end of the day in the scenario contemplated in the third report. In re-examination the first defendant explained the reference to "the residual is left in place" as being (from T 624.14):
A. Well, there are two aspects. Firstly, the 4.1 you just referred to was only in respect of the mortgage over the remaining hotel being 50% odd of that number, or 45% to be technical. There was in addition to that another almost 8 million of other security, which means that the total borrowing able to be made at a prudent loan‑to‑value ratio was a total of 7.1 million.
So what I was trying to convey, as I said yesterday on the run, is if you look at what the position is afterwards, it is apparent that there's sufficient security to still be carrying 7.1 million of debt, and, therefore, exactly how you get there entity by entity, which I haven't worked out, probably doesn't matter much because if you look at the total debt that was put to me yesterday of 19.5 million, [xxx] million of that is discharged by the net proceeds of the [C] Hotel. That leaves a residual debt position of [xxx].
Mr Lonergan then went on to comment on the make-up of that residual debt in an answer criticised as "totally non-responsive" to the question but which I understood to be responding to what was meant by "the residual" in the expression "if the residual is left in place". In essence, I understood Mr Lonergan to be treating the sons and E Co's position in an overall sense as far as the assets and liabilities were concerned.
The Cattle Manager accepted that, when he came to making his affidavit, all he had to aid his memory (as to whether sales, for example, that happened in 2014 were out of cycle or not) were the actual monthly reports (from T 222.14).
Q. Sir, you said a little moment ago that you had provided the numbers from the monthly report to somebody and it wasn't like table 3 and it came back in the table 3 form, do you remember saying that?
A. Yeah, yep.
Q. Do you have a copy of the version that you had?
A. No, I haven't them since they went to [A].
Q. And how was it different?
A. I just put them roughly, like, you know, sort of like that, just in the sales for each month, who they're sold to and what they were, whether they were culled cows or whether they ‑ a lot of these cows here were young cows which we wouldn't normally sell and ‑ well, we just don't sell cows and calves, that's not a normal practice.
Q. So, did you, in the information that you prepared ‑ well, first of all, let's make it clear, table 3 isn't something prepared by you?
A. No.
Q. And the second point, sir, is table 3 is different to what you initially provided to show out of cycle sales?
A. Yeah, all this has been taken out of my report and put in a different graph.
Q. And when you say, in paragraph 55 ‑ sorry, page 1721, when that was presented to you for your consideration, did you apply your mind independently of whoever made up table 3 to confirm that they were, indeed, out of cycle sales?
A. Yeah, I knew they were out of cycle because they ‑ you know, sort of because of what cattle they were.
It was evident that there was a similar position in relation to other Tables.
The Cattle Manager was in my opinion a co-operative witness, genuinely attempting to answer questions put to him in the witness box. It was obvious, however, that his experience lies in the practical aspects of farming and that his role in preparing the statistical information on which the plaintiffs rely in relation to out of cycle claims was limited (and to be fair to him he did not suggest otherwise in his affidavit). What I take from his evidence is the general proposition that, ordinarily, cows (and female calves) would not be sold until the end of the breeding cycle but that he was not responsible for the decisions as to sales occurring within that period and to that extent it is little more than speculation on his part as to whether, and if so which, sales occurred out of the ordinary cycle in order to fund these legal proceedings (as opposed to sales occurring outside the ordinary course of events for whatever other reason). I accept the Cattle Manager's evidence as to the condition of the properties in general and as to the steps that would need to be taken in order to improve the condition of the properties and to rebuild the cattle herd.
Turning then to the evidence of A and B about the "out of cycle" sales, about which both were cross-examined, it seems to me to be clear that, as between A and B, it was A who was in the best position to determine if sales of cattle were usual (see T 66) but that the decision as to the need to raise funds (say, to pay legal bills) from the sale of cattle is more likely to have been within B's domain.
B accepted in cross-examination that there are occasions when heifers are sold in the ordinary course of business (T 67). Tested as to various entries in Table 3 ("Termination Sales") (sales in the termination period from 27 June 2013 up to March 2014), he accepted that some sales in that period were included as termination sales and some were not (T 68); he said that the information in the table came from source documents (sales tickets and paddock documents) (T 69.48), which, as I understand it, would confirm the numbers and type of cattle but not the purpose for which they were sold (other than insofar as an inference could be drawn from, say, a sale that was not in the course of the usual breeding cycle and which coincided with a need for funds - though that exercise was not clearly articulated in the affidavit evidence). B said in cross-examination that he went through the tables and "would have" confirmed them with A; his evidence being that he spoke to A about the table(s), not the Cattle Manager (T 70).
As to the basis on which there had been a calculation as to the financial impact of the so-called termination or forced sales, B was cross-examined as to the estimates of fertility rates (B saying that the Cattle Manager's estimates differ from his; namely the Cattle Manager's estimate being more specific and applied to different age groups, whereas B says he adopts a flat 87% across herd when doing his forecasts, which he says was more conservative - see T 70.45-71.36); and B agreed that: he had made no attempt to estimate the cost of production or cost of sales (i.e., the figures are estimated gross revenue figures not loss of profit figures )(T 72.38); there had been a benefit of income from sales (of around $6.95 million) (T 72.44) (and hence, after legal fees - approximately $3.5 million of which were paid by E Co (T 65.41), there had been a benefit of around $4 million for E Co from the sale of cattle); as a result of sales there would be a decrease in expenses of the business (T 73.3); and that nowhere does he calculate the benefits of those two factors (i.e., decrease in expenses and increase of cash) (T 73.19).
Pausing here, I note that B was also cross-examined as to perceived inconsistency in his September 2018 affidavit as to the use of the term "DSE" (Dry Sheep Equivalent) (see T 48ff; T 57) - something to which the first defendant points in criticising the reliability of B's evidence as to the position of the farming business (the first defendant noting that both B and A explained this in their affidavits in almost identical words); and as to inconsistencies between the livestock trading statements and some of the entries in Table 1 (see T 53.16) (B accepting that there were some variances, up to 20%, but not accepting that he was understating the variances in that table (see T 53)). I consider in due course the first defendant's submissions on the reliability of B's evidence in this and other respects.
A's evidence in cross-examination was that the numbers of cattle had decreased "to pay our bills" (by which I understood him to be referring to legal bills, since he said that the drought would not have been a problem if they had not had to pay bills - see T 126.23ff). He agreed that, at the end of the day, it was probable that this drought would be worse than 2009 (something to which the first defendant points when comparing the breeding stock back in 2009 with current levels).
A said that the plaintiffs' solicitor and he had put together the tables; that he had all the Cattle Manager's' reports; and that the solicitor added the numbers up and put them in the table (see T 128). He agreed that the table was not produced by B (T 130.19).
As to Table 7, A said that he suppled all the information (T 147.40); it is based on the monthly reports and when accounts were due (T 148.3); and that these were cattle sold for a particular reason outside of a normal sale (T 148.9), ordinarily, sales occurring in either March/April or November of each year. Asked how he differentiated (between normal sales and out of cycle sales) he said "the numbers, for a start" and "simply the numbers" (see T 151.39/156.44) and he accepted that there were some sales of heifers that did not fit breeding program at the time (T 157.40). There was some confusion by A over questions as to whether he took into account overall stock levels, but as I understand in his evidence he was referencing the out of cycle sales to the legal bills that had come in (see T 159).
The significance of out of cycle sales, on the plaintiffs' case, is that they say that, as a consequence of the out of cycle sales, E Co has been left with no capital reserves to fund improvement of the properties or the cattle herd. The first defendant, on the other hand, argues that sale of cattle was not the only way open to the plaintiffs to raise funds (a proposition put to B in cross-examination, to which he displayed some resistance - perhaps due to confusion as to the question, although the proposition put to him was not a complicated one - see T 75). In that regard, B ultimately agreed that he could have chosen to sell the pubs and could have done so before now (T 76.14) but denied that, instead, he chose to run down the farm(s) (T 76.23). (Pausing here, I note that the first defendant points to the obligation of a tenant to maintain the premises and says that the suggestion that the plaintiffs have not fully invested themselves in the farming business due to the uncertainty as to whether the properties would ultimately become theirs ignores that obligation. It is submitted that a tenant with a duty to maintain premises who receives an eviction notice is not thereby relieved from his obligations to make good the premises; and that the consequences of non-adherence by the plaintiffs to their obligation from 1 January 2012 for the costs of maintenance of the properties are to be borne by the plaintiffs, not the first defendant.)
As to the manner in which the cattle stock could be re-established, B accepted that this could be by either a breeding program (which obviously would take more time) or by buying cattle, or, he said, a bit of both (see T 74.27ff). B accepted that if he and his brothers were to become the legal and beneficial owners of the properties they would have $20 million capital as security (to use to finance matters such as restocking and improvement of pasture) (T 78.40) but added that "[s]ecurity but serviceability will be the determining factor" (T 79.1).
As to the current condition of the properties, there is no dispute that since around 2008 there has been no superphosphate applied to the properties (see B's evidence at T 76.34; A's evidence at T 136.15). B accepted that the pasture was in "good shape" in 2012 as a result of the previous program of pasture improvement (see T 77.29) and readily agreed that in the time that E Co had had an obligation (under the agreement for lease) for pasture maintenance the quality of pasture had decreased (T 77.37).
As to the estimated work required to be performed on the properties to restore them to a condition where the farming business could operate optimally A's evidence is that this would be: weed spraying for three years at a total cost of $270,000 (A's 4 September 2018 affidavit at [43]-[44]); implementation of a pasture improvement program at a total cost of $63,000 (A's 4 September 2018 affidavit at [45]-[46]); 100% fertilizer spread (A's 4 September 2018 affidavit at [48]-[50]), at a cost of $204,908 for the first year (50%) and 50% the second year for a total of $409,815); capital works (A's 4 September 2018 affidavit at [51]): comprising 17 dams, costing about $2,200-$4,400 per dam; cattle yards, estimated at $15,000-$20,000; a hay shed, estimated at $20,000; roads, tracks, grids, gates and crossing, estimated at $3,000; and weeds, estimated by the Cattle Manager at about $100,000 (Cattle Manager's 4 September 2018 affidavit at [38]); and extensive equipment replacement (A's 4 September 2018 affidavit at [52]). Thus, A estimates that approximately $2 million would be required over a 5 year period for restocking and pasture improvement to "get back on track" (T 134). A disagrees with Mr Tremain's opinion that no immediate capital expenditure is required in respect of the properties other than aquaculture development.
As to the benefit of pasture maintenance and improvement, B agreed that there is a benefit to the occupier (of such property) of application of fertilizer and to keep up quality of feed and produce (T 77.15).
The first defendant submits that the plaintiffs do not take any account in their approach to the fact that they have paid no rent (or fee) since 2014 and that not since 2012 have the plaintiffs incurred the cost of pasture improvement notwithstanding the arrangements made in late 2011; nor have they made allowance for the fact that the end of the litigation will see an end to the need to fund the litigation.
The first defendant argues that it is significant that, as at March 2019, A expects the number of female breeding cattle to be 1648, which is the amount of breeding cows he would expect to have in a drought (see T 142.40-49). The first defendant submits that this means that, although E Co has been selling down its "produced" stock, E Co retains its breeding stock at usual drought levels.
As to the evidence of A, in his October affidavit, as to the cost of building up the farming business, it is submitted by the first defendant that "[w]ith the extra capital of $20M (less the cost of obtaining the acceleration)", this will be able to be funded and that the business would be able to recover from the drought no more or less ably than it did after the 2009 drought.
Both B and C were aware of the proposal to sell the C Hotel and made a deliberate decision not to disclose that fact in their respective September 2018 affidavits. A's position (see T 138.30) was that he did not handle the finances and he did not know when he was told that the C Hotel was on the market for sale (although he accepts that it was probably before his September 2018 affidavit, he did not recall this - see T 138.35-42); and he said he was not familiar with the numbers in that regard (T 138.46).
Each of the sons was cross-examined as to whether he accepted that it was a relevant matter to disclose to the Court in the context of the present application.
B agreed that he knew one of issues was whether it would be financially ruinous for the plaintiffs if they were required to make payments (T 84.15); and that a potential sale of the C Hotel would be a relevant consideration for the Court in the process of making that assessment and that he chose not to disclose it (T 84.3ff):
Q. You knew that one of the issues in this case was, firstly, if her Honour was to accelerate the expectation ‑ are you familiar with that expression by now?
A. Yes.
Q. Meaning that her Honour was to make an order that the properties be transferred to you and your two brothers ‑ she considered that it would be necessary for some kind of rent to be paid by the plaintiffs, if I can use an elective word, to [the first defendant]?
A. Yes.
Q. The other issue was whether that would be financially ruinous of the plaintiffs if they were required to pay some kind of rent? Do you follow all that?
A. Yes.
Q. It therefore would be a fairly relevant consideration for the Court to have some knowledge as to whether or not the plaintiffs were in the process of realising an asset worth, on one valuation, 14.325 million. Do you think?
A. Yes.
Q. And yet knowing that it was relevant to know that fact, you chose not to disclose it in your affidavit.
A. That's correct.
Q. That is because you wanted to understate the amount of ready money you might have to enable to satisfy some kind of order the Court might make in relation to what payments should be made to [the first defendant]?
A. Not at all.
Q. You knew it was a relevant consideration about what was happening with the hotel?
A. Yes.
Q. And despite knowing it was relevant chose not to say anything?
A. There's a trust issue with providing this information at a very early stage.
Q. Did you seek to raise it in a confidential way with anybody on behalf of ‑ you didn't think you could raise it via solicitors?
A. I didn't trust [the first defendant] with this information at this early stage, no.
Q. What would [the first defendant] do with the information ‑ what was your concern that he would do with that information about the hotel?
A. I don't trust [the first defendant] and I don't trust that there wouldn't be some kind of phone call or meddling made to an agent or a broker or someone that could impact people's interest in this business. We're looking to sell a business and, as you rightly say - I'm not sure what that number is but there is a lot of commercial trust there and there is also just basic trust about what's happening and I have absolutely not [sic] trust at all in [the first defendant] not having ‑ I don't know, making a phone call or doing something that might jeopardise that process.
Q. In terms of trust, is your belief in terms of [the first defendant] that he doesn't trust you?
A. I don't know what [the first defendant] believes but I don't trust [the first defendant].
Q. Putting that lack of trust on a scale of 1 to 10, I'm getting the feeling you'd probably put it at about a 12?
A. Yes.
…
Q. You want no ongoing relationship with Frank whatsoever. Is that correct?
A. Correct.
…
Q. The other thing you haven't disclosed even now in your affidavit material when I think it was the later October affidavit where you disclosed the prospect of selling the pub ‑ when I say, "pub" I mean the [C Hotel].
A. Yes.
Q. I don't think you've disclosed a sales agency agreement?
A. I don't know what ‑ I can't recall.
Q. Are you aware of such a beast as a sales agency agreement?
A. There would be, yes.
Q. And a sales agency agreement is an agreement between the vendor and an agent who is trying to sell the property?
A. Correct.
Q. And often it comes with a period of exclusive agency for the agent?
A. Correct.
Q. Have you signed such a document?
A. Yes.
Q. And you've not disclosed that document?
A. To the best of my knowledge we have, have we not? [my emphasis)
However, B rejected emphatically the suggestion that he did not disclose the asking price for a reason (T 96.17); and rejected (at T 98.26; 30), that he did not make enquiry of the bank or disclose the asking price for a reason.
As to the decision to sell the C Hotel, there was in evidence an email dated 15 June 2018 from St George Bank to B and C, to the effect that the bank would not be extending facilities for AH Co and PI Co at current levels. The evidence of C was that the decision to sell the C Hotel was made in circumstances where (see T 203.27), having gone through a refinance and also looking for some extended finance to place into hotels for some capital improvements, the concern was that St George wanted them to reduce debt substantially in order to continue as their bank.
C, asked as to the sale of the C Hotel, said he was hoping to achieve something to clear the debt (including the $2 million on-lent to AH Co). Asked why the sale process was not disclosed in his September affidavit (see from T 165.20), there was the following evidence:
Q. And you don't mention in your affidavit of 3 September 2018 the fact that the pub was actually on the market, do you?
A. No.
Q. It was a relevant thing to disclose to the Court, don't you think, to know that you were in the process of selling a major asset?
A. To the Court, yes.
Q. But, knowing it was relevant for the Court to know that, you chose not to disclose it?
A. Correct.
Q. And, as I understand it, the reason for that is because you didn't want your father to know?
A. Well, my father and [the second defendant] have been nothing but disruptive and destructive so why would I give them the opportunity to do so again?
Q. So, was your main reason your fear of [the second defendant] or your fear of your father doing something disruptive?
A. Either/or.
Q. Well, the only ‑ I mean, let's focus on [the first defendant] for a moment, what was it that you thought [the first defendant] might do?
A. He may try and make contact with brokers, potential buyers, no idea.
Q. Do I take it from that that you don't trust your father?
A. He didn't need to know because it's not for him to know. As far as it was concerned, this was those who needed to know knew.
Q. You just described your father as disruptive?
A. Mm
Q. And I think you gave an indication that ‑ I can't remember your exact words but it seemed to be suggesting that it would be a continuation of him having been disruptive before?
A. Correct.
Q. My question to you is do I take it from that that you do not trust your father?
A. He doesn't give us much reason to trust him. [my emphasis]
As to the fact that C's affidavit said nothing about contacting Westpac to see what it would expect on sale of C Hotel, C said "no that point wasn't raised" (T 169.24). C (at T 188.46) agreed that at the time he swore his first affidavit (September 2018) they were looking at potential sale for C Hotel but said (at T 189.15) that if the hotel did not sell it still had the potential to trade. He denied that it was misleading, at [8] of his September 2018 affidavit, to say that he was hopeful that the pub would provide source of income into the future without saying that the pub is for sale.
A said he did not know if it would be relevant to tell the Court (about the hotel being up for sale) but "supposed" it was (T 138/139). He disagreed with the propositions that he did not talk about the sale because he did not want the Court to know about it or because he did not want the first defendant to know about it because he was worried about what the first defendant might do.
The non-disclosure of the then proposed C Hotel sale is one of the matters relied upon by the first defendant as going to the overall reliance to be placed on the sons' evidence. A similar complaint is made as to the fact that the sons (or more particularly B and C) did not disclose what they understood to be the position of Westpac in relation to the Westpac $2 million loan in respect of which the moneys had been on-lent to AH Co (as to which see below).
There was some debate in the course of cross-examination as to the status of the St George facilities in respect of the two hotels. It appears that these facilities expired on 15 October 2018 but had since then been rolled over on a month to month basis (and hence it was disputed that those facilities were in default). As to the separate Westpac facility for the $2 million loan, it expired in August 2016. The plaintiffs say that it has not been the subject of a rollover because the first defendant refused to amend his guarantee. As I understand it Westpac has agreed to forbear from enforcement in relation to that amount at present.
The plaintiffs accept (although they say it has not been directly communicated to them by Westpac) that documents subpoenaed from Westpac demonstrate that a decision has been taken within Westpac to aggregate the facilities after the making of final orders in this matter, noting the consistency with Mr Lonergan's evidence (about which I interpose to note he was cross-examined at some length) that the bank was likely to take an "overview" and view the facilities together.
The plaintiffs thus say that, after the sale of C Hotel, the total Westpac/St George debt will likely be reduced but with an amount still owing under both the Westpac Facility and the P Facility (the latter being cross-collateralised with the C Facility). It is submitted that the combined debt will be approximately half the value of the P Hotel (and at that value serviceable at an ICR of that debt of 1.82) (that ICR derived by performing the same calculation as that contained in the Lonergan Edwards the third report at [63] but dividing the interest by an EBITDA of $265,700). The plaintiffs submit that 'the sons' interest in the P Hotel will not be able to contribute anything to further debt, whether via security as LVR or through revenue for serviceability (and that there can be no reason in equity why the half-interest owned by B's wife in the P Hotel should be seen as a source of funds for the first defendant).
Significantly, in my opinion, as adverted to earlier, there was no evidence by any of the sons of any approach made to a financier or bank as to the prospect of funds being advanced to the sons and/or E Co in order to enable payments of the kind I had envisaged; and, in cross-examination, it became clear that there had indeed been no such approach. Nor was there any evidence from a financial analyst challenging, or in response to, the opinions contained in the Lonergan Edwards reports.
B's response in cross-examination to the suggestion that he might have approached a bank to ascertain the availability of finance on the basis that he and his brothers might have some $20 million worth of land (T 79.21), was dismissive, saying that it "would be a very interesting conversation to try and have with a bank" (T 79.27). And at T 100.46ff:
Q. And again, I think I won't repeat myself but just to make sure I asked this yesterday, you again have made no inquiries of a bank on taking a proposal and saying "in the event that I was to be the owner of [3/6 Aggregation] and the other properties the subject of this case what would be my lending or borrowing options," you haven't had that conversation, have you?
A. Banks aren't generally favourable with properties subject to litigation, no. So what conversation we're going to have with the bank, I'm sorry?
Q. Pardon?
A. What conversation do I have with the bank about a fictitious place in the future?
Q. The first question I asked was did you have one and the answer seems to be no, you've not approached any bank to ask "what are my options if I end up with $20 million of real estate"?
A. No.
Q. I suggest to you sir that there's an inquiry you could have made if you wanted to?
A. I disagree.
Q. And again, I suggest to you it's an inquiry you've chosen not to make, it's been a tactical decision on your part so as to what you consider to be best advance your interests in this case?
A. Really?
Q. You don't agree with that?
A. I don't agree with you at all.
Pausing here, I see no logical impossibility in approaching a financier or bank with an enquiry as to the prospect of obtaining finance on a hypothetical scenario, particularly in the present case where there were ongoing discussions with officers from St George and from Westpac. Moreover, as is apparent from the fact that Mr Lonergan was in a position to opine on the financial capacity of the sons and/or E Co to service a level of borrowings, it was surely equally possible for the plaintiffs to seek advice of that kind. They chose not to do so. Nevertheless I do not conclude that this was because they considered that any such enquiry would be adverse to their interests in the present case. I rather gained the impression from B's evidence, in particular, that the sons' discussions with the banks in relation to the overall financial position and the proposed sale were strictly compartmentalised (according to what B thought others needed to know in relation to those matters).
A agreed that he had made no enquiries to the bank as to any arrangement for working capital if the properties were to be his (T 137.45) (though as noted his position was that he did not handle the finances). A was prepared to accept that his ability to repay interest and principal would improve as revenue increases (saying at T 138.24 "well I expect so").
There is also an internal Westpac credit memorandum of April 2018 (Exhibit 14) to similar effect, which referred to there being the next full review on 15 October 2018. B does not recall a meeting at that time but accepts that the position as to any repayment of the $2 million Westpac loan was the same.
Finally, there is in evidence an email of 10 October 2018 arranging a meeting with Westpac on 16 October 2018 and a Westpac diary note (Exhibit 9) referring to a meeting on 16 October 2018 attended by Mr Viney, another bank officer and each of B and C. B did not recall the conversation (T 312) and said that it was an informal meeting, simply an update and not a full meeting (T 313).. C accepts (T 212.25) that the note refers to once matters settle they will lodge an application to extend facility. He accepted (at T 212.41) that this would reflect the change in ownership necessary where the $2 million is not being repaid.
B accepted (at T 314.50-315.1) that it would be consistent with his current intention that at the conclusion of the proceedings application would be made to extend the expired facility (and see T 316.8); (at T 316.40ff) that at no time between March 2017 and December 2018 had E Co proposed to Westpac that AH Co would repay the expired $2 million facility or that it would be repaid by E Co; and confirmed that he did not believe that Westpac (I note here that there is a distinction in this regard as to the position with St George, which B said in re-examination had been informed of the proposed sale) had been told that the C Hotel was for sale.
The first reference to dealings with Mr Viney in 2018 was in B's October 2018 affidavit (at [26]), as B accepted (at T 321.50). At [28] of that affidavit B deposes that Mr Viney did not say what Westpac had decided or was considering acting in any particular way and, at [35], that he did not know whether Westpac would demand the surplus of the hotel sale in payment of the facility.
B agreed (at T 317) that in his 3 September affidavit he was putting (at [49]-[54]) the position as to his ability to obtain finance. It was put to him that a number of matters had not been disclosed in that affidavit (and he broadly accepted that was the case) (see from T 318.21):
Q. Neither, in this affidavit, sir, do you discuss any of the reviews of the [E Co] facility with Westpac for two million as to your dealings with the bank in October beyond saying there was a meeting ‑ actually, I withdraw that ‑ you do mention it in your second affidavit. You don't mention the reviews that you had in April of 2018?
A. I can't recall. If it's not there, I don't know.
Q. What you also don't disclose in your first affidavit is that if the hotel was sold at any amount in excess of [$xxx], whether or not there would be any surplus funds available to [AH Co]?
A. Sorry, what are you actually asking?
Q. You don't give any evidence, because you don't disclose the fact of the pub being for sale, you also do not disclose the asking price?
A. Correct.
Q. And you don't canvass the situation of if there was to be a surplus of sale proceeds beyond the [$xxx million] to be repaid to St George Bank what you would need to be made of those surplus funds?
A. No.
Q. In an affidavit where you're seeking to set out what the financial capacity of the plaintiffs and [E Co] ‑ sorry ‑ the plaintiffs to make a payment to after any Court order, it's very relevant, I suggest to you, the fact that there is a major asset for sale; would you agree?
A. Yes.
Q. And it's also very relevant to point out that if that major asset is sold, the finance facilities that need to be repaid are an amount less than the expected sale price?
A. Yes.
Q. It is also very relevant to point out that the surplus of the sale price over the loan facility is in excess of $2 million?
A. There's a difference between selling something and something being sold. You're guessing at a number
…
Q. In trying to work out how much money may be available to [AH Co] for the plaintiffs to satisfy any order of the Court to make a payment, it would be relevant to know that that is a possibility of the conduct that you're presently engaging in?
A. Yes.
Q. And yet you chose not to say that in your first affidavit?
A. Yes
…
Q. You do not say in your affidavit that you intend to make an application on behalf of [E Co] to extend the expired facility should the properties be transferred to you -
A. No.
Q. or to [E Co]?
A. That's right, no.
Q. Yet you also don't say that you know from what you have been told by Mr Viney, that Westpac will consider such an application?
A. Sorry, I don't know, just I don't know whether they will consider an application, is that what you said?
Q. That you 'don't - I'll start again, sir. What you know about what Westpac will do is it will consider an application if you make one for the extension of the expired facility if the properties are transferred to you?
A. Yes.
Q. You don't say in your affidavit that you know that, do you?
A. No.
Q. You don't say in your affidavit that the position has been for the last 18 months that your intention with respect to this facility in the event that the land is transferred to you is to make that application for an extension of the facility, the expired facility?
A. I don't say that, that's right.
In summary, it was put to B (at T 325.12ff) that:
Q. So it's a long‑winded question, sir, so bear with us. The question is, that at the time of swearing your affidavit in October 2018 your understanding was a relevant matter for the Court to know about for these proceedings was the amount of cash that you and the other plaintiffs may have available in order to satisfy any order of the Court for the plaintiffs to make a payment of money to [the first defendant]?
A. Yes.
Q. You also knew at the time of swearing your affidavit that it was your intention should the properties be transferred to you or the other plaintiffs to make an application to Westpac to extend the expired facility?
A. Yes.
Q. You did not include in your affidavit that relevant information?
A. No.
Q. Nor did you include in your affidavit the fact that you knew at the time that you swore it that if you made an application to extend the expired facility the bank would consider it?
A. Sorry, are you asking me if the bank would consider that application?
Q. That's right?
A. And, sorry, did I know that they would?
Q. Yes?
A. Yes.
Q. You didn't include that information in your affidavit either?
A. No.
Q. That was a deliberate decision on your part I suggest to you to not include in your affidavit the information of your intention should the properties be transferred to the plaintiffs to make that application for an extension of the expired facility?
A. I'm sorry, I don't understand that question at all.
Q. Knowing that the information as you understood it about applying for an extension of the expired facility was relevant‑‑
A. Yes.
Q. ‑‑and agreeing with me that you've made no mention of it in the affidavit‑‑
A. Yes.
Q. ‑‑I'm suggesting to you that it was a deliberate choice on your part?
A. No.
Q. It was something that you deliberately did not include because you are trying to present to the Court that [E Co] and the plaintiffs would encounter greater financial difficulty in making any Court ordered payment than is in fact the case?
A. No.
In re-examination, B made clear that the case manager at St George was well aware of the sale process for the C Hotel and an email dated 3 October 2018 from Sidney Lin at St George to B was tendered, with an attachment, to support that proposition (Exhibit BI).
As for C, asked to make assumptions as to there being net proceeds of the sale of C Hotel that might be available to be used to repay the E Co $2 million loan to AH Co and that there was no legal obligation on AH Co to make any repayment (T 176), as to whether there would be a sum of money available, he said "we don't know what Westpac will do, so we can't speculate" (see T 176.46).
C was aware (T 177) that as at 28 April 2017 the bank's position would that it agreed to forbear in relation to enforcement of the Westpac loan and to review the position on 10 October 2017. At T 177.33 C said that the facility was not in default but that it had expired. At T 178.45 C said he was aware at the time the facility expired in 2016 that the bank had given approval to forbear from any legal action on certain terms. At T 181.15, he said "we don't know what they will do, I can't speculate as to what Westpac may or may not do when the pub's sold, if it's sold". He did not recall a conversation in which the prospect of a sale was mentioned to Westpac (T 181.26).
C agreed that he was aware since April 2017 that the position as between Westpac and E Co in relation to the $2 million facility was that the bank was going to review the position (T 190). At T 190.18 his understanding was that if the properties were transferred there would have to be a completely new facility involving all new facility checks and measures.
At T 195.16, C said that his intention in the period from April to October 2017, if the bank had enforced any guarantee in respect of the facilities is that he would have endeavoured "to cover any liabilities that fell to us". He agreed that he had met with Mr Viney (and B) twice; and was aware that in October 2018 it was expected that there would be a new application made to extend facility once judgment was finalised (he was not sure if he was aware of this in April) (T 195; T 196). He knew as at April 2018 that there was no need for the $2 million lump sum to be repaid at that time (T 197). He accepted that (at T 199.25) as at 16 October 2018 either there would be facility its current form or, should there been a change, the facility would continue after that as a new facility requiring a new application.
C said that he did not believe that as at October 2018 B had told Mr Viney that the C Hotel was for sale (T 201.6); that they were dealing with Mr Viney as Westpac not St George (T 201.46); that he did not broach the subject of sale of C Hotel (T 202.7); and that he had not given notice of any offer to Westpac regarding C Hotel being on the market for sale (T 205.8).
At T 204.7, as to the balance of the sale proceeds after the sale of the C Hotel, he said that this was "subject to Westpac and their position". At T 208.18, C said that he does not know if they will call on that $2 million. At T 208.49, questioned as to whether any surplus on sale says would be paid to E Co to pay off Westpac's $2 million, C first appeared to say that it would and then said that at this stage he did not know (T 209.5). He denied that his affidavit was misleading in this respect (T 209.16); agreed that he had not told the Court that if the properties are transferred Westpac will be expecting application for renewal (either an extension of facility or application for new facility) (T 209.23). He said at T 210.12 that AH Co will pay any liabilities due (one of those being to E Co). At T 210.30, C denied minimising the amount of available funds.
C agreed that nowhere in the affidavit did he tell the Court that to his knowledge the situation in relation to the E Co loan from Westpac is that the bank is awaiting an application to extend the expired facility (T 206.13). He denied that his second affidavit was misleading (at [9]) in this respect (T 206.35).
The first defendant's usual practice seemed to be to top up the Westpac trading account ("420") from time to time from the Westpac non-trading account ("139"); and that the Rabobank account was the one used by the second defendant "for any moneys that he spends" (see T 386.14). The second defendant also was paid a monthly amount for his work as the first defendant's attorney under the power of attorney granted to him at the time of the first defendant's incarceration and for legal fees and disbursements in these proceedings (see T 390).
The first defendant's solicitor (the second defendant), who has held a general power of attorney executed by the first defendant since around 2012, is authorised to write cheques on all three bank accounts and there is no limit on his authority (T 352). The first defendant says that his accountant is a signatory on the Westpac "420" account, with a limit of $50,000; and that the accountant "pay[s] all the bills" (although it would seem likely that by this the first defendant was referring to bills in relation to the properties and the like not the legal expenses, for example) (T 353.48).
It would appear from the first defendant's evidence in cross-examination that there was a practice whereby funds would be transferred from the Westpac "139" account to the Westpac "420" account from time to time in order to permit the payment of bills - he referred to this at times as topping up the "420" account. The two Westpac accounts seem to have been opened at a branch in the area where the properties are located but since the first defendant is now in Sydney when he effects transfers between accounts they are done in Sydney. The first defendant's evidence seemed to be that sometimes he would transfer the funds; sometimes it would be the second defendant (see for example at T 375.25). He said at T 374.48 that when he transferred money "I usually do it in $10,000 hits if I'm doing it depending on what the balance is, to try and keep it at around $10,000 or a bit more".
The first defendant was taken in cross-examination through various items in a schedule of deposits to the various accounts from July 2011 (see Exhibit BO). It is fair to say (and perhaps not surprising given his age and the limited information appearing on the bank statements) that he seemed to have little recollection of particular transactions recorded in those bank statements. Moreover, some of his speculation as to the entries cannot have been correct (as he himself accepted) - so, for example, (at T 374ff) taken to a transfer deposit of $10,000 on 18 May 2016, he suggested that this was a transfer by him from Sydney but then agreed that he was still in gaol at that time, so said that he had no idea. Another example of apparent speculation as to the nature of the entries was the first defendant's evidence in relation to one of the transfers (of $70,000 on 10 August 2016) which he thought would be his solicitor transferring money again from the Westpac "139" account to the Westpac "420" account (see T 370.23ff).
Although as at the date of his September 2018 affidavit, the first defendant said his cash in the bank totalled $534,448.74, he says that this has now diminished. In particular, he says that he has had "zilch" (T356.11) income from 1 July 2017 to 30 June 2018and no income this financial year (see T 357/358); he says that although there were some repayments of a loan made to his brother (see below) from 1 July 2016 to the present, there have been no significant amounts received in the present year (T 358); and that the dividends he had received from the family trust set up by his father have ceased.
The first defendant was cross-examined as to a loan of $3 million he made in 2012 (see the Loan Agreement dated 11 May 2012, Exhibit BK). That loan was made to T Co, although the first defendant treated it as a loan to his brother - the first defendant says he lent it to his brother and was not aware that his brother was "going to put it through" T Co (T 346.45) (although I interpose to note that the first defendant seems to have signed the loan agreement, so was presumably aware at the time that the agreement was with the company and not his brother). The loan was subsequently the subject of a Deed of Release dated 5 February 2018, in which it was recited that the debtor indebted for $3 million plus interest less the sum of $1,463,046 paid in reduction of debt. The deed was signed by the first defendant, one of his sisters and another person whose signature he could not identify. The first defendant said that his solicitor had drawn it up (T 3780.7) but he seemed to accept that someone would have compiled the information for that amount (T 381.2).
There was much confusion in the first defendant's evidence as to that loan; in particular, as to the source of the moneys that he lent to T Co; whether they were secured over one or more of the properties; and what was done with the repayments that were made. Some of that confusion was in due course clarified when documents were produced by the first defendant in that regard. Relevantly, however, the confusion on the first defendant's part before the production of those documents highlights the difficulty in relying on his recollection of events without reference to contemporaneous documents.
The timeline of relevant events to note here is that: the loan to T Co was on 11 May 2012; Property No 12 was sold on 11 September 2012 for $769,000; House No 3 was purchased on 25 March 2013 for $358,000; and Property No 8 was sold in November 2013 for around $5 million (there being two deposits recorded on 20 November 2013 to the first defendant's Rabobank account - one for $499,224 and one for $3.9 million - see Exhibit BO).
The first defendant said at first that the source of the moneys lent to T Co was the sale of Property No 8 (T 398.25). However, as he conceded when this was pointed out to him by Senior Counsel for the plaintiffs, that could not be correct since Property No 8 had not been sold at the time the loan to T Co was made (and as the first defendant later pointed out, he was in gaol when the sale of Property No 8 occurred).
The first defendant then said that he obtained a loan from Rabobank against a mortgage over Property No 8 for $3 million (see T 398.31) and he drew down that loan. Asked whether it was the same (Rabobank) facility that he had had for many years (the ("6-00") account), or some other loan with Rabobank, his answer at first was "[t]hat would be the facility I would think" and then that "I'm not sure" (see T 399.10ff). The first defendant accepted that if it was the same facility he would think there would be a drawdown of some $3 million against a mortgage over Property No 8 which was then advanced to T Co.
There was also the following evidence on this issue (from T 400.14):
Q. As I understood your evidence yesterday afternoon, you thought the moneys for the deposits the two deposits shown, $499,224.68 and $3,999,000, came from the proceeds of the sale of [Property No 8]? I thought that's what you told me yesterday?
A. Yeah, well that's what I thought too.
Q. As you sit there now you're not sure, is that the position?
A. No, I'm not sure.
Q. Are you sure or not as to whether or not [Property No 8] was mortgaged to raise the money to lend to [T Co]?
A. I'm pretty sure it was, I know I had to repay Rabo.
The first defendant seemed to accept that if the Rabobank statement for the period ending 31 May 2012 recorded an opening balance of $475,676.26 (an assumption he was asked to make), then that would indicate that this was not the Rabobank facility against which Property No 8 was mortgaged to enable him to draw down moneys to pay to T Co (T 400). Questioned on this, the first defendant then seemed to suggest that there could have been a different Rabobank loan facility (from T 400.35):
Q. If you assume that that Rabobank statement shows, for the period ending 31 May 2012, a figure of $475,676.26, there must be some other explanation for where you sourced the monies to lend to [T Co] in the sum of $3 million, do you agree?
A. Yes. It had come from Rabo, it could have been a different facility.
Q. Could have been but, as you sit here now, you're not sure?
A. I'm not sure.
Q. If it could have been another Rabobank facility, what facility would it have been?
A. Well, would it have been set up for a mortgage on a property for a loan.
What became abundantly clear was that, apart from being definite that the moneys lent to his brother (via T Co) were sourced from Rabobank, the first defendant's recollection as to what had occurred was not clear (from T 400.48):
Q. Well, if we come back to the two deposits into the Rabobank facility on 20 November 2013 of $499,000 odd and $3,999,000 odd, if you had, in truth, mortgaged [Property No 8] to draw down $3 million to pay to [T Co], then you wouldn't have received, from the sale of [Property No 8], the two amounts of $499,000 odd and $3,999,000 odd which were deposited into Rabobank on 20 November 2013, would you, do you agree?
A. I wouldn't have thought so. I really don't know how that came about. All I know is I got $3 million from Rabo and I just assumed it was through a mortgage on [Property No 8], maybe there was no mortgage, may it was just a straight loan, I don't know.
…
Q. All right, but on one view, as at 11 May 2012, you had access to $3 million which you could lend to [T Co] without taking a mortgage on [Property No 8], that's one possibility, do you agree?
A. Yes.
Q. A second possibility is that you raised $3 million, via a security over [Property No 8], which you then on‑lent to [T Co], that's a second possibility, do you agree?
A. Yes.
As to the repayments of that loan, the first defendant said that he did receive money from T Co by bank transfer (roughly $1 million in one hit and then "maybe" a second payment of about $400,000), that he said was probably close enough to $1.5, $2 million (T 347.15).
The re-opened hearing did not complete on 23 November 2018 and the issue of the Rabobank facility was further explored when the matter resumed on 10 December 2018. By that time, documents had been obtained that disclosed the existence of a Rabobank loan facility of 24 May 2012 with a loan limit of $4 million (not $3 million), to be secured by "new" registered first mortgages over Property No 8 and Property No 11 and the existing registered first mortgage over Property No 4. The loan facility document referred to the first defendant as borrower and described the loan purpose as $3 million on- lending, to on‑lend to T Co. There was also then put into evidence the cover page of a mortgage dated 7 June 2012, which had been stamped for duty on 13 June 2012, referring to a sum of $4 million.
Taken to those documents (Exhibit BS), the first defendant accepted that he had raised some $4 million via a loan from Rabobank, secured by mortgages against Properties No 8, 11 and 4, of which $3 million was on‑lent to T Co in around May 2012; and he accepted that there was a mortgage taken over Property No 8 to support the loan from Rabobank for $4 million of which $3 million was on‑lent to T Co.
Also shown to the first defendant was a statement from Rabobank (also within Exhibit BS) that recorded as at 30 June 2012 a debit entry of $3 million, with details referring to T Co. The first defendant accepted that on 7 June 2012 moneys were drawn from the Rabobank account in the sum of $3 million which were transferred to T Co.
The significance of the moneys obtained in relation to the Rabobank $4 million facility, and how they were secured, went to the question as to what had happened to those loan funds. It was put to the first defendant (before the evidence that emerged on 10 December 2018), and he accepted, that: there was no doubt that he had received the proceeds of sale of Property No 12 on 11 September 2012 ("[w]hatever the figure was, yes") (that amount being agreed in the first defendant's written submissions to be $769,9653); and the deed of release with T Co recorded that he had received some $1,463,046 in reduction of the debt from T Co. It was put to him that there were two possibilities in relation to the proceeds of sale of Property No 8 (from T 401.28):
Q. And then when we come to the [Property No 8] sale which resulted in sale proceeds of $5 million, we then come to two possibilities and I'll take you to them one at a time; one is you received all of the $5 million from the sale of [Property No 8], or thereabouts, less your expenses of selling, do you agree?
A. Yes.
Q. And the second is that from the sale of [Property No 8], there were sale proceeds of $5 million, less the selling expenses, less any mortgage over [Property No 8] at that time which needed to be discharged, do you agree?
A. Yes.
The proposition was then put to the first defendant was that if, as he has deposed, as at September 2018 he had only around $534,000 in cash, then over the period from 11 September 2012 to September 2018 he had spent more than $6 million (from T 402.21):
Q. So, if we proceed on the basis that, from [Property No 12], you had $769,000 and then $5 million from [Property No 8] and then $1.463 million from [T Co], from the period from about 2012 ‑ say, from about September 2012 through to September 2018, you've spent, what, more than $6 million?
A. How much?
Q. $6 million?
A. The proceeds from the [Property No 12] sale paid for [House No 3].
Q. Yes?
A. For starters, that's what some of it went on, $3 million would have paid back to [his brother's] ‑ paid back to Rabo.
Q. That's assuming you'd raised the money against [Property No 8] by way of security?
A. Yeah, however it was done but that had to be repaid to Rabo. I'm not sure what all the others were without seeing accounts and things.
Q. But if we take out ‑ so, if the evidence ultimately demonstrates that you didn't raise money against [Property No 8] by way of a borrowing to on‑lend to [T Co], then you'd agree, wouldn't you, that you've received in excess of ‑ $769,000 plus $500,000 plus $1.463 million, so over $7 million, and as you sit here as of 3 September 2018, on your evidence, you're down to your last $546,000?
…
WITNESS: It's not that now.
Q. Well, that's what I'm going to come to but can you answer my question first?
A. Well if the question was I've got about $500,000 odd at that time, yes.
Q. But, during the period from 11 September 2012‑‑
A. Well, that's the figures you're giving me but I can't tell you where they come from or whether they were even there without seeing invoices and statements and things, but I have no idea where it went, as such.
Q. But you'd agree that if you're down to your last $546,000 as at September 2018, you've spent millions of dollars in the previous, sort of, six years?
A. Yeah.
Q. Yes, correct?
A. Well, that's the arithmetic, yes.
Pausing here, although the first defendant in the course of the above exchanges made reference to needing to see invoices and the like, he seemed to me not to cavil at all with the proposition that, if his cash reserves at the time of his September 2018 affidavit were as he deposed then he had spent millions of dollars over the six years in question. (The plaintiffs, as I understand it, are suspicious that the first defendant still has assets somewhere - see the cross-examination in which this was put directly to the first defendant to which I refer below. Whether or not those suspicions are justified, the reality is that the first defendant's financial position was not clearly exposed in the material before me to which I have referred above and it was clearly within the first defendant's power to put the complete picture before me - not least because his solicitor, who has held his power of attorney for some time, was in court during the duration of both the principal hearing and the re-opened hearing and clearly has access to the first defendant's financial records.)
Going back to the first defendant's evidence in this regard, it was that, on settlement of the sale of Property No 8, the mortgage in favour of Rabobank over that property was discharged. What was then put to the first defendant was that Rabobank did not take any money from the sale of Property No 8 in order to discharge the mortgage over that property, rather the proceeds of sale were received into his Rabobank account and were available to be used by the first defendant (from T 465.29):
Q. What I'm suggesting to you that Rabobank didn't take any money from the settlement of the sale of [Property No 8] to discharge the mortgage. You received the entirety of the money into your Rabobank account; do you agree or not?
A. Well, I don't fully understand what you're trying to tell me there. The money coming from the sale and offset the loan, so how come it's still there?
Q. My point to you is that it didn't offset the loan; it was money free to be used by you which you received into your Rabobank account.
A. No. It would have offset the loan.
The basis of that submission, as I understand it, was the fact that the Rabobank ("6-00") statement as at 20 November 2013 showed the receipt of the proceeds of sale of Property No 8 as an amount sitting to the credit of the first defendant's Rabobank facility (rather than as discharging a debit amount so as to bring the balance to zero). The first defendant did not accept this (see T 465).
As to the first defendant's evidence as to his current accommodation (i.e., that he is living in rented accommodation, and owns no real estate other than the properties and House No 3), in cross-examination on 23 November 2018, and his current financial position, it was put to the first defendant in effect that it had been his choice not to rent out House No 3 (the first defendant accepting that "I could have done lots of things" and that "I chose not to") and to release the balance of the T Co debt (which he said he did on his brother's deathbed). He accepted that T Co had since been deregistered, though he was not sure exactly when.
He was also questioned as to a $400,000 payment to the ATO. The first defendant denied that he had paid this on behalf of his siblings (from T 404.22):
A. I don't know that that's correct, didn't pay it on their behalf. They were also up to a tax thing - that's the $400,000 was my share of that total, it's I think came to around $16 million or something.
Q. So your share you say was $400,000?
A. Yeah.
The first defendant was cross-examined as to his financial future after deduction of the legal expenses from the case (the unpaid amount of which, as emerged in cross-examination will take up most if not all of the cash reserves to which the first defendant had deposed). There was the following evidence, given somewhat petulantly by the first defendant (from T 408.47):
Q. And have you given any thought to your financial future moving forward after you deduct these legal expenses from this case?
A. I'll cross that bridge when I come to it.
Q. You'll cross that bridge when you come to it?
A. If the worst comes to the worst, I'll end up in a home somewhere, destitute, whatever, or I'll be camping down in Martin Place.
Q. Well, isn't the position that through members of your family, you're always going to be taken care of, aren't you, by your sisters and your brothers?
A. I wouldn't ask them.
Q. You wouldn't ask them?
A. No.
Q. They've always had the financial capacity to assist you in the past?
A. They have and you couldn't wish to have better siblings but I wouldn't ask them to -
Q. But they're going to look after you into the future, aren't they?
A. Not necessarily.
Q. You know full well they're going to look after you into the future, don't you?
A. They won't see me starve if that's what you mean, they can bring me a hamburger while I'm sitting in the gutter.
The first defendant disavowed any arrangements with his siblings for his future. He was then asked (from T 409.48):
Q. Mr [xxx], on one view, I want to put this to you, in the past six years, you've had access to millions of dollars, do you agree with that?
A. Yes.
Q. And in the past six years, you've spent millions of dollars, do you agree with that?
A. If that's what the records show.
Q. Well, I'm asking you?
A. Just on what I couldn't tell you as such, apart from [his brother's] loan, that's the biggest thing I can think of.
Q. But you seem to, objectively looking at your financial position, have received millions of dollars and then spent it to a position where, on your evidence to the Court, you're down to your last half a million dollars and, as you sit there in the witness box at the moment, that amount of money might have been halved again, so that by the end of December, you may have no money in the accounts at all after you attend to your legal expenses, is that correct?
A. I'll survive one way or another. With the guts kicked out of me, I don't really care too much anymore.
Q. The true position is, isn't it, that you've got access to money through family members which you haven't disclosed to the Court, that's the truth isn't it?
A. No, it is not. They might buy me a meal occasionally and that's it.
Q. Well, I'm suggesting to you that your evidence about that is not true?
A. Well, I'm telling you it is and if you'd like to call me a liar again, go for your life.
Q. All right, so long as we're on the same page, I'm duty bound to do that, Mr [xxx], I'm putting to you that your evidence as to your financial position in your evidence of 3 September 2018 is a pack of lies, do you agree or not?
A. No, I do not agree and you have poor judge of character since your case has been built up mainly on lies and deception all the way through and if you want to worry about who is financing who, you can ask the boys where they got some of their money from.
At T 420, again rather petulantly, the first defendant said he was not particularly concerned about his financial future and that he would not let the family members look after him.
On 10 December 2018, the first defendant was taken to email correspondence between the second defendant (his solicitor) and one of the first defendant's siblings relating to the apartment in which the first defendant lived when he was first released from gaol. In particular, the second defendant enquired as to whether the siblings "need any funds for the unit you chose for [the first defendant]"; and the first defendant's sibling informed the second defendant that the first defendant was happy with "the apartment we've chosen for him".
The first defendant's evidence was that he had lived in one apartment in the building for a short period (Apartment No 1) and had since moved to another (Apartment No 2) (see T 466) (after about 12 months), where he now lives.
There was conflicting evidence given by the first defendant as to whether Apartment 1 had been purchased for (or perhaps by) the first defendant (or was only rented by him). Evidence on this issue commenced at T 466.43:
Q. Did [two of the first defendant's siblings] choose the apartment for you upon your release from prison?
A. Before I was released.
Q. Was that apartment purchased for you?
A. Not from my funds. I believe it was financed by my brothers. [my emphasis]
Pausing here, my understanding of this evidence, as it was given, was that the first defendant was not denying that the apartment had been purchased but was making the point that it was not from his own funds. The exchange continued:
Q. Which brothers are you referring to?
A. My brothers [xxx] and [xxx].
Q. [xxx] and [xxx] arranged and they financed the purchase of apartment‑‑
A. I believe so.
At that point there was audible commotion at the rear of the Court amongst the first defendant's family members and it appeared that the first defendant's sister moved forward to give instructions to the first defendant's legal representatives. The commotion was visible to me but, obviously, not to Counsel as the family members were at the back of the Court. Nevertheless, it was clearly audible, as Senior Counsel for the plaintiffs immediately turned towards them and made clear that he regarded the family members as trying to prompt the witness. The cross-examination then resumed (from T 467.15):
Q. The question was that your two brothers financed the purchase of [Apartment No 1].
A. That was my understanding, yes.
Q. [Apartment No 1] still remains available for you; is that correct?
A. [Apartment No 2].
Q. Let's just take it a step at a time. I'm talking about [Apartment No 1] at the moment.
A. I haven't been in there for over 12 months.
Q. But they purchased it for you to live in, your two brothers, [Apartment No 1].
A. No, hang on. They didn't purchase it at all, no, sorry. They're renting. They were paying the rent.
[Pausing here, this was the first reference by the first defendant to the payment of rent for Apartment No 1; and it followed the obvious commotion at the back of the Court when the first defendant said it had been financed by his brothers]
Q. You just told me, didn't you, that they arranged finance to purchase the apartment, didn't they?
A. I didn't say they arranged finance; you've said that. No, they didn't. They rented. They were paying the rent for me. I've never owned it and I don't own the one I'm currently in. I'm paying rent.
[Again pausing, the distinction between "arranged finance" and "financed" seems to me to be a relatively fine distinction. I accept that arranging finance would encompass procuring funds from, say, third parties as opposed to financing by the provision of one's own funds; but in any case, it seems odd to speak of the payment of rent for an apartment as financing the apartment - and the word "financed" was the first defendant's own term.]
The first defendant was then asked about the second apartment into which he had moved (Apartment No 2) after about 12 months. He said that he was paying rent for it; he denied that his brothers arranged finance for the purchase of that apartment and denied that either of the two apartments was held on trust or that either of his brothers had an interest in either of the two apartments ("[o]nly for the rent they paid for me while I was ‑ when I started paying it once I got out, but they were paying it, holding it for me before I was released").
The first defendant was taken to the email from the second defendant to his sibling in which the question was put: "[d]o you and [xxx] need any funds for the unit you chose for [the first defendant]" and denied that this was a reference to the purchase of the unit, albeit in somewhat qualified terms (though I accept that the first defendant was essentially being asked to speculate on what someone else meant in a document he had not written himself) (from T 468.8):
Q. He's there referring to the purchase of the unit, isn't he?
A. No, he's not, not necessarily. It could be to cover rent.
Q. It could be, but it could also be to purchase it, couldn't it?
A. It could be, but we never purchased it.
Because I considered this evidence to be inconsistent with the first defendant's earlier evidence I then sought to clarify the position (from T 468.16):
Q. I just take you back. My note of your answer to a question about five or six questions ago, it was put to you and [his two siblings] arranged for the purchase of [Apartment No 1] and you said, "I believe so"?
A. Yeah, I was wrong, I'm sorry. They didn't. They were paying the rent on it.
Q. Then you were asked a question when Mr McInerney restated his question as being that his question was that the brothers had purchased [Apartment No 1] and you said, "That was my understanding, yes."
A. No. Well, I was wrong. They've never owned either of those apartments.
Challenged on this by Senior Counsel for the plaintiffs, there was the following (T 468.28):
Q. Your evidence isn't truth, is it?
A. Its spot on. I was a little confused to start with, but it's not unusual for me.
If the first defendant had been confused earlier, that confusion persisted when he was re-examined by his own Counsel, when asked how long his brothers had paid rent for Apartment No 1 (from T 475.3):
Q. How long did they do that for?
A. For about three months, I think.
Q. Three months?
A. Something like that, I think, because my ‑ my appeal was denied and they bought the unit thinking I was going to come out, so they hung onto it and were paying the rent in the meantime. [my emphasis]
Q. You just said that you bought ‑ they bought the unit?
A. No. That's wrong. They didn't buy it.
Q. Well, what do you mean?
A. They rented the unit.
Q. How long did you live in [Apartment No 1]?
A. About 12 months.
Q. So your evidence is that of that 12 months your siblings paid the rent for about three months?
A. Yeah.
In re-examination, the first defendant was shown copies of the front pages of the rental agreements for Apartment No 2 and the car-park lease, which are consistent with him renting that apartment from a third party (but says nothing about Apartment No 1).
The first defendant was also taken in cross-examination to an email from the second defendant to the accountants who act for the first defendant, in which the second defendant requested that the accountant "get the paperwork organised ASAP for $100,000 from the Cash Reserve Westpac account" and went on to state "BTW there should be some additional funds coming in soon". The first defendant was distracted by asking himself why there would have been a need to organise a $100,000 withdrawal, by the identity of the person in the accountant's office to whom the query was addressed, and by the acronym "BTW", but (when asked to assume it meant "by the way") did not know to what the statement as to "some additional funds coming in soon" was referring or from whence those funds were to be coming in. He denied that he had access to additional funds that he had not disclosed to the Court and said (from T 470.48):
A. The only funds I've got are in the bank, and one of those three ‑ two Westpac accounts or Rabobank account. I've got none of the moneys anywhere.
Third, on the question of interest, the first defendant notes that in the principal judgment I had foreshadowed ordering interest to be paid on the proceeds of sale of Property No 12 but not on the amount payable to the first defendant of $2,123,253. The first defendant argues that are other moneys payable by the plaintiffs that ordinarily would attract interest (namely, the W Deed amount - see above; and the amount for the so-called occupation fee).
The first defendant submits that the treatment of interest should be uniform, and that interest should not accrue on any of the moneys, on two bases. First, that the character of the "loan account" moneys and the proceeds of sale are the same (insofar as, on the findings I have made, the sale proceeds were for the use of the plaintiffs and the "loan account" moneys were for the benefit of the first defendant, at least in part). It is submitted that there is no basis for a distinction between these amounts as to whether interest should or should not apply; and that in terms of the W Deed moneys, favourable to the first defendant, there is no reason that interest should not apply, subject to set-off considerations. Second, by reference to the "let bygones be bygones" approach proffered by Brooking JA (at [126] of Flinn albeit on a different issue), that interest should be treated on a uniform basis "without searching for distinctions". The first defendant submits that the distinctions between these amounts are not sufficient to justify anything but the uniform approach. The first defendant submits that the appropriate order is that no interest accrue on either amount.
The next issue raised is as to the CGT liability. The first defendant submits that an order for the transfer of the properties as foreshadowed would most likely create a debt in the hands of the transferor taxpayer, the first defendant, of $2.8 million (that, I interpose to note, seems to assume that there has not been an earlier CGT event arising from any declaration of constructive trust or otherwise as a result of the findings in the principal judgment).
It is submitted that this is not something that was ever envisaged (the first defendant noting that CGT on a transfer of the lands prior to the father's death was not contemplated as part of the expectation on which the plaintiffs claimed to have relied).
As to CGT, in the initial submissions for the first defendant this was calculated as a capital gain of some $6,282,736 will be made, which after allowing for the 50% discount, would give a taxable capital gain of $3,191,868, in the hands of the first defendant, upon realisation of the properties or their transfer. It was submitted that this amount would be taxable at the first defendant's personal income tax rate, which given the amounts involved would be approximately 47.5%, or $1,516,137. It was noted that this liability was subject to any concessions that may be available. The first defendant submits that any CGT liability should be borne by the plaintiffs, for the reason that if it arises it is due to the acceleration of the expectation, which it is said plainly benefits the plaintiffs and not the first defendant. On that basis the first defendant seeks an order that the plaintiffs pay to the first defendant the amount of CGT assessed, if any; and for such a payment to be secured.
The first defendant argues that there is a clear benefit to the plaintiffs of the transfer. The first defendant accepts that it can be said on behalf of the plaintiffs that the need for acceleration arises "due in part" to the first defendant's resiling conduct (the plaintiffs, I interpose to note, say that it is wholly due to the first defendant's conduct and include in that conduct his criminal offending). However, the first defendant argues that it is inequitably harsh that he should lose $2.8 million "of his compensation for losing the title to his land". It is submitted that, on that scenario, the plaintiffs retain the whole of the compensation of their remedy, but the first defendant does not. The first defendant thus submits that it may be appropriate to consider an order that the parties bear equally any CGT liability.
The upshot of the first defendant's submissions is that the result for which he presses (based on what I had envisaged in the principal judgment (i.e., that there be an acceleration of the sons' interest in the properties) is that he receive a total sum of $10,076,214, excluding CGT ($12,876,214, including CGT) comprised of the following amounts: the present value of the market value of the properties for the life expectancy of the first defendant ($5,900,000); the value of the shares in E Co and EM Co ($470,601); the "loan account" reimbursement ($2,123,253); an occupation fee payable by E Co for the period 1 July 2014 to date ($2,003,575); the W Deed debt ($156,250); estimated CGT liability ($2,800,000); less three-quarters of the proceeds of sale of Property No 12 ($577,465).
After a number of interlocutory stoushes, the re-opened hearing commenced on 19 November 2018 and was heard over a period of some nine days (a significantly extended time frame from that which had been contemplated on 14 May 2018 when I fixed the re-opened hearing for three days); the re-opened hearing only finally concluding on 13 December 2018.
I will summarise in due course the evidence adduced on the re-opened hearing. At this stage, I simply note (not least because it may well be relevant to the ultimate issue as to costs and it is as well to advert to this upfront so that it can be addressed in due course in submissions on costs) that, although the plaintiffs' submissions that had led to the grant of leave to re-open had focussed on the prospect that financial conditions of the kind I had proposed to impose would be financially ruinous to them, the evidence adduced by the plaintiffs did not in my opinion establish that proposition; nor, in respect of the plaintiffs' borrowing capacity as at late 2018, did it go much beyond assertions by the sons as to their (and E Co's) financial position.
Relevantly, there was no evidence that any approach had been made by the sons to any financier or bank as to their individual or collective borrowing capacity (including that of E Co) in the event that the properties (or one or more of them) were to be transferred to the sons in equal shares following the determination of these proceedings (although there were communications by one or more of the sons with representatives of both Westpac and St George banks over the relevant period relating to the borrowings secured over various assets in which there would seemingly have been the opportunity to do so); and the evidence of B and C at the hearing confirmed that no such discussion had been held.
Nor was the affidavit evidence initially filed on the re-opened hearing by one or more of the sons completely candid (a matter to which I will return in due course), insofar as there was no reference in the sons' September 2018 affidavits to what was by then at least B and C's intention to place the C Hotel on the market for sale (information that both B and C accepted was relevant to the relief to be determined in this re-opened hearing but the deliberate omission of which they denied was misleading). By the time of the re-opened hearing, the evidence was that not only was the C Hotel on the market for sale - a decision said to have been made in August 2018; but also that a prospective purchaser had made one or more offers for the hotel such that an indicative price for that asset was known. (I interpose to note that there was a concern by the plaintiffs to keep confidential the information in relation to the C Hotel sale, lest it prejudice their commercial negotiations; and, since I have no information as to whether that sale has eventuated, I will not include in these reasons details as to the financial aspects of the proposed sale.)
In contrast to the lack of any independent evidence for the plaintiffs as to their capacity to borrow any funds that might be needed to satisfy orders of the kind I had envisaged imposing on the acceleration of their expectations in relation to the properties, there was evidence from a financial expert called by the first defendant (Mr Wayne Lonergan of Lonergan Edwards) and expert reports (jointly prepared by Mr Lonergan and Dr Hung Chu, also of that firm), which in my opinion did establish that (although not necessarily financially ruinous to the sons) conditions of the kind that I had proposed to impose on the acceleration of the sons' expectations in relation to the properties (namely, the payment of both a sum to reflect the net present value of market rent for the first defendant's life expectancy and the payment of sums recorded in the books of E Co as debts owing to the first defendant) would not likely be able to be met at this stage (at least as lump sums) whether by E Co, the sons individually, or E Co and the sons collectively; though it might be possible for a regime to be put in place whereby that could be effected over time.
That said, as it emerged from their written submissions and oral argument at the re-opened hearing, the real focus of the plaintiffs' complaint as to the relief that I had envisaged was that it proceeded on a misapprehension of principle as to the ambit or proper exercise of the discretion to grant relief (insofar as that relief were to involve the acceleration of the expectations of the plaintiffs) and, at least in relation to the proposed "market rent" condition, was inconsistent conceptually with a constructive trust having already arisen (by, the plaintiffs say, no later than 27 June 2013). With some qualifications, I accept the force of that criticism. I observe, however, that this does not turn on the financially ruinous (or otherwise) impact of what I had proposed by way of imposition of conditions on the plaintiffs; and that, but for the plaintiffs' desire to adduce further evidence, this could surely have been dealt with by way of submissions at a much earlier stage (and with no doubt considerably less expense than has presumably been incurred by all parties in preparation for the re-opened hearing). That, too, may be relevant in due course to take into account on the question of costs.
In summary, for the reasons that follow, I am persuaded that the conditions that I had considered it appropriate to impose on the acceleration of the sons' expectations in relation to the properties should not be imposed; but that, without taking into account the potential capital gains tax (CGT) ramifications of relief making good the plaintiffs' expectations (whether or not there be an acceleration of the sons' expectations), the relief proposed to be granted would be inequitably harsh in all the circumstances of this case. In particular, the spectre of a significant CGT liability on the part of the first defendant (the final quantum cannot here be determined), which could have arisen on the happening of a CGT event as early as July 2003, in my opinion makes it wholly disproportionate, or out of all proportion, to the detriment suffered by the plaintiffs (from the first defendant resiling from the relevant expectation) for relief now to be granted by way of a declaration of constructive trust (and/or an order for the transfer of the properties) that encompasses all of the properties the subject of these proceedings.
I remain firmly of the view (which has only been reinforced by the evidence given by each of the sons in the re-opened hearing) that the relationship between the members has irreparably broken down and that this breakdown will affect their ability co-operatively to work together in what was always expected to be a joint farming business. This confirms my view that what is needed, so far as is possible, is for there to be a clean break between the family members. (I interpose here to note that I consider that in relation to the E Co and EM Co shares that will not now be possible in light of the stance adopted by the plaintiffs on this issue).
I do not suggest, as the plaintiffs seem to have perceived, that this is or should be elevated to a free-standing rule of law of some kind. However, when determining how the plaintiffs' expectations should in equity be made good, it is impossible not to take into account the circumstances that call for a clean break in this case, namely the complete lack of trust now reposed by the sons in their father (extending seemingly, to his solicitor, the second defendant, who holds a power of attorney for the first defendant and is named as one of the executors in the first defendant's last Will). Indeed the lack of trust in their father (and his solicitor) was put forward as the reason for the filing of less than candid affidavits by the sons in September 2018 in advance of this re-opened hearing. Those circumstances, in my opinion call for an acceleration of the sons' expectations in relation to the farms. The prospect of the family relationship being repaired sufficiently so as to enable the first defendant and his sons henceforth to work together in a joint farming enterprise or otherwise seems fanciful in the extreme; and neither side suggested to the contrary.
In those circumstances, I have concluded that the relief to be granted should be an amalgamation of the so-called "pathways" for relief (using the terminology adopted by Nicholson J in Rodda v Ian Rodda Pty Ltd (No 2) [2015] SASC 128 (Rodda (No 2))), put forward by the respective parties in this case. I do not consider that permitting some form of election on the part of the plaintiffs as to the structure of the final relief is appropriate, particularly if that might lead to the present situation in relation to the ownership of the farms continuing. In that regard, I accept the first defendant's submission that it is ultimately for the Court to determine the relief to be granted.
What I have concluded is appropriate by way of the final relief to be granted is to the following effect: declarations as to the holding by the first defendant of his freehold interest in the properties (subject to E Co's existing lease of the properties) and his shares in E Co and EM Co on constructive trust for the sons but to carve Property No 11 out of that declaratory relief; orders for the sale of Property No 11 and for the payment to the sons as equitable compensation in respect of their expectations in relation to that property in such amount, if any, as remains out of the proceeds of sale of that property after the first defendant has satisfied (whether wholly or in part) any CGT liability that arises from the findings I have made and/or the final orders that are to be made in accordance with these reasons; an order for the acceleration of the sons' interest in the properties the subject of the declaratory relief (i.e., the properties other than Property No 11) (but not their beneficial interest in the first defendant's shares in E Co and EM Co) by the making of an order for the transfer of those properties; and that there be an order for the payment to the first defendant of an amount representing the net present value of a notional rent for the now remaining nine years of the first defendant's life expectancy.
I propose, when publishing these reasons, to list the matter for directions to deal with three matters: any submissions as to the final form of the orders I am now proposing to make - see [677] below) ; any concerns as to further anonymisation of these reasons; and the issue of costs. Lest there be any doubt, this is not an invitation for a further re-opening of the hearing or the matters determined in these reasons.