Emanuel Management Pty Ltd & Ors v Foster's Brewing Group Ltd & Ors

For the reasons I have given I do not believe that to have been the case.

[404] I conclude that the plaintiffs have not made out their case on de facto directorship and that the evidence establishes that none of the first, second, third, fourth, ninth or tenth defendants were at any time a director of any of the companies in the Emanuel group.

[405] These transactions fall naturally into two categories because of the statutory provisions which are relied upon to attack them. In the first category are those entered into before 23 June 1993 for which recourse is had to s 120 and s 121 of the Bankruptcy Act 1966 (Cth). The second category is of those which occurred after that date where reliance is placed upon various provisions of part 5.7B of the Corporations Law.

[406] Section 120 as it was at times relevant to the action provided:

`1. A settlement of property, whether made before or after the commencement of this Act, not being -

(a) a settlement made before and in consideration of marriage, or made in favour of a purchaser or encumbrancer in good faith and for valuable consideration; or

(b) a settlement made on or for the spouse or children of the settlor ...

is, if the settlor becomes a bankrupt and the settlement came into operation after, or within two years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy.

2. A settlement of property, whether made before or after the commencement of this Act, not being a settlement referred to in paragraph 1(a) or (b) or a settlement that is void as against a trustee by reason of the operation of that subsection, is, if the settlor becomes a bankrupt and the settlement came into operation after, or within five years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy, unless the parties claiming under the settlement prove -

(a) that the settlor was, at the time of making the settlement, able to pay all his debts without the aid of the property comprised in the settlement; and

(b) that the settlor's interest in the property passed to the trustee of the settlement or to the donee under the settlement on its execution.

8. In this section, "settlement of property" includes any disposition of property.'

[407] By its terms the section made void as against a trustee in bankruptcy, voluntary settlements, other than of the types described in subsection 1(a) and (b), made within two years of the bankruptcy, and voluntary settlement made within five years of bankruptcy unless the settlor was at the time of the settlement able to pay his debts without the aid of the settled property. A `settlement' in this context means the divesting of beneficial ownership in property. See Williams v Lloyd

[1934] HCA 1; (1933-1944) 50 CLR 341 at 373. In addition a settlement of property for the purposes of section 120 is a disposition of property which contemplates its retention in some form by the donee rather than immediate consumption or dissipation by the donee. See re La Rosa and Ors; Ex parte Norgard v Rocom Pty Ltd (1990)

21 FCR 270; re Kastropil; Ex parte Official Trustee in Bankruptcy v Kastropil [1989] FCA 255; (1991-1992) 33 FCR 135. No doubt the term is wide enough to accommodate many ways of dealing with property, and a variety of kinds of transactions.

[408] Section 121 provides:

`(1) Subject to this section, a disposition of property, whether made before or after the commencement of this Act, with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith, is, if the person making the disposition subsequently becomes a bankrupt, void as against the trustee in the bankruptcy.

(2) Nothing in this section shall be taken to affect or prejudice the title or interest of a person who has, in good faith and for valuable consideration, purchased or acquired the property the subject of the disposition or any interest in that property.

(3) In this section "disposition of property" includes a mortgage of property or a charge on or in respect of property.'

In Cannane v. J Cannane Pty Ltd (1998) 192 CLR 557 Brennan CJ and

`If property be disposed of by sale and the sale price received by the disponor is equal to the true value of the property at the time of the disposition, the creditors have an undepleted fund against which to prove their debts. But if property is sold for an undervalue or is given away, that fact is relevant to the intent to be attributed to the disponor in disposing of the property ... Section 121 is not enlivened merely by showing that the disposition has reduced the assets available to the creditors when the disponor is adjudicated bankrupt. It is the disponor's intent to deprive creditors of assets against which (or against the proceeds of which) they would otherwise be entitled to prove their debts that enlivens the operation of section 121. As Dixon CJ said in Hardie v. Hansen [1960] HCA 8; (105 CLR 451 at 456)

"The phrase "intent to defraud creditors of a company" suggests that present or future creditors of the company will, if the intent is effectuated, be cheated of their rights."'

[409] Gummow J also referred approvingly to Hardie. At 578 his Honour set out the passage from the judgment of Dixon CJ which was referred to in the joint judgment of Brennan CJ and McHugh J but included the following passage:

`An intent to defraud creditors has been described, for the purposes of bankruptcy legislation, as an intent by deceit to deprive creditors of something to which they are entitled.'

Gummow J also quoted a passage from the judgment of Kitto J in the same case, saying that the onus lay on a liquidator

`to prove affirmatively that the carrying on of the company's business during the relevant 15 months was characterised by an intent - which in the circumstances means an intent on the part of [the director] - to defraud creditors of the company. An actual purpose, consciously pursued, of swindling creditors out of their money had to be established against [the director] before a declaration under the section could be made.' (105 CLR at 463; 192 CLR at 578)

[410] Section 451 of the Companies Code provided

`A settlement, a conveyance or transfer of property, a charge on property, a payment made, or an obligation incurred, by a company that, if it had been made or incurred by a natural person, would, in the event of his becoming a bankrupt, be void as against the trustee in the bankruptcy, is, in the event of the company being wound up, void as against the liquidator.'

[411] Between 1 January 1991 and 23 June 1993 the relevant statutory provision was

s 565 of the Corporations Law which was in identical terms to s 451 of the Code.

[412] Another matter should be mentioned. These proceedings were commenced when the Corporations Law was the applicable legislation but, by virtue of s 1383 of the Corporations Act 2001 the proceedings are taken to be new and to have been brought into the court exercising federal jurisdiction under the provisions of the new legislation that corresponds to the relevant provisions of the Corporations Law.

[413] The primary loan agreement governing the advance for the acquisition of the APM lands is a Deed of Master Agreement of 12 June 1987 (Exhibit 106, Volume 14/1351). It is not one of the transactions which the plaintiffs attack but it is relevant to set out its salient terms because they are relevant to other transactions which are attacked.

[414] The deed was made between the fourth defendant (then known as Arrow Properties Pty Ltd) which was described as mortgagee, Management which was described as mortgagor, and Mr & Mrs Emanuele, Emanuel 14, PBRS, Paterson,

Giuseppe Nominees, Lonsdale Stage 2, Emanuel Properties, Emanuel 4,

Meka Securities, Rundle Mall, Grangeville, Villa-Cairns and Cofordo 251, all of which were described as guarantors. It will be remembered that the APM lands were purchased by Emanuel 14 pursuant to a contract with APM Forests Pty Ltd dated 9 May 1986. Settlement occurred on 12 June 1987. The deed recited that Management had requested the fourth defendant to agree to make advances from time to time, which it had agreed to do as long as the amount outstanding at any one time did not exceed the agreed limit of $43,000,000. There was a further recital that Management might in the future request further advances in excess of that limit.

[415] By Clause 2, Management acknowledged receipt of the initial advance of $43,000,000 which it undertook to repay in accordance with the terms of the deed. By Clause 3 the fourth defendant agreed, upon application by Management and subject to Clause 3(b), to make an additional advance if the amount of moneys secured by the deed would not exceed the agreed limit of $43,000,000 and on the condition that Management had at all times complied with and observed the terms and conditions of the deed.

[416] By Clause 4 Management was allowed to apply for, and the fourth defendant agreed `in its discretion' to make further advances which it was not obliged to make pursuant to Clause 3. By Clause 5 Management covenanted to repay the whole of the moneys secured by the deed at the expiration of the fixed period (which was four months) and to pay any further advance in accordance with any written agreement `in respect of the same or in the absence of any such agreement ... on demand ...'.

[417] There was a definition of what moneys were secured by the deed. It included an `all moneys' clause:

`All moneys now or hereafter owing or payable to the mortgagee by the mortgagor or any related corporation of the mortgagor within the meaning of the Companies ... Code either alone or in conjunction with any other person whether directly or indirectly or contingently under this agreement or on any other account whatsoever including (without limitation) all costs, charges and expenses the mortgagee may incur or become liable for in connection with this agreement or any security.'

[418] By a combination of Clauses 5(d) and 12 Management promised to pay interest on the advance at 18.25 per cent per annum if payments were made punctually but 20.25 per cent otherwise. The interest was to be `capitalised and compounded on monthly rests and (to) form part of the principal sum and shall be paid on the date for payment of the principal sum.'

[419] By Clause 14 Management agreed to pay, in addition to all other moneys payable pursuant to the deed, a further sum of $2,000,000 provided that if the principal sum were repaid within four months that figure should be reduced to $1,000,000.

[420] By Clause 11 the guarantors `in consideration of the mortgagee at the request of the guarantors agreeing to enter into this agreement ... jointly and each of them severally ... unconditionally and irrevocably guaranteed to the mortgagee the due and punctual payment by the mortgagor ... of the moneys ... secured ...'

[421] To secure the advance Emanuel 14 gave a first registered mortgage over the individual parcels of land which collectively have been called the APM lands. A description of them can be found in Exhibit 106, Volume 14/1356. In addition Emanuel 14 executed a mortgage debenture (Exhibit 106, Volume 14/1357) in favour of the fourth defendant which charged with the payment of all money secured by the mortgage debenture:

`All and singular its undertaking and all its property and assets real and personal whatsoever and wheresoever both present and future ... or any business carried on now or hereinafter ... its goodwill, its business name, its leases and tenancies and unsold shares and uncalled capital ... and all present and future cash in hand, credit balances, book debts and other debts (both present and future) and, choses in action ... all ... motor ... vehicles, stock-in-trade, building, erections, plant, machinery, equipment, installations ... and all other contracts, mortgages, deeds, certificates of title ... and all the rights and benefits of the mortgagor ... into and under all contracts whatsoever now or at any time hereafter entered into by the mortgagor ... including the interest ... of the mortgagor in all moneys from time to time now or hereafter payable thereunder ...'

[422] By Clause 8 the charge thereby created was to be a first charge on the mortgaged premises and was to operate as a fixed and specific charge as regards all stands of timber and trees including felled trees and logs, (Schedule 7), but a floating charge as regards all other property and assets. By Clause 9 the fourth defendant could at any time by written notice convert the floating charge into a fixed one with respect to all or any part of the charged property.

[423] It was pursuant to this mortgage debenture that the fourth defendant had a charge over the timber growing on the APM lands once it had been felled and so severed from the realty, as well as a charge over the payments made by Softwoods pursuant to its harvest and royalty agreement with Emanuel 14.

[424] The real mortgage property is found in Exhibit 106, Volume 15/1359.

[425] The first transaction which is the subject of attack is a Deed of Variation dated

2 September 1988 (Exhibit 106, Volume 15/1362) made between the same parties as the Deed of Master Agreement. The operative part of the Deed of Variation is to delete Clause 4 of the earlier deed and replace it `by the following':

`4(a) The Mortgagor may apply for and the Mortgagee may at its sole and absolute discretion make further advances and/or readvances ... which it is not obliged to make pursuant to Clause 3. Each further advance and/or readvance (if any) shall be secured by each security and any security collateral hereto and shall be subject to the terms and conditions of this Agreement ... Any performance bond or guarantee given by the Mortgagee to any local authority ... on behalf of the Mortgagor shall be deemed to be a further advance hereunder.

(b) Notwithstanding the provisions of Clause 4(a) ... the aggregate of the moneys advanced ... shall not exceed the amount of the Agreed Limit ...'

[426] The plaintiffs say of this transaction in their submission:

`(iv) It provided for a profit fee of $2,000,000 ...

(v) It was a disposition of property (which includes a mortgage or charge ...)

(vi) It was made with intent to defraud creditors ... because it involved a "subtraction of assets which, but for the impugned disposition, would be available to meet the claims of present and future creditors", the Emanuel group knowing that Lensworth was being preferred

(vii) It was made in favour of Lensworth, who was not acting in good faith ...

(ix) It is a particular of duress and unconscionability and/or undue influence because ... these securities were merely required by Fosters ... from an insolvent Emanuel group ... led by directors who thought themselves to be in no position to refuse Fosters' requests ...'

[427] The authority for proposition (iv) is Exhibit 1, Mr Macks' statement, annexure 21.16 and the plaintiffs' own opening. The proposition is wrong insofar as it relates to the deed which does not provide for a profit fee or indeed any payment by the Emanuel group.

The authority for proposition (v) is said to be the plaintiffs' own opening and some paragraphs in the statement of claim. This proposition, too, is wrong. The deed does not, as I read it, dispose of any property. It only varies in a minor particular the objects on which the advance provided for by the deed of master agreement may be used.

The authority for proposition (vi), the serious submission that the transaction was made with intent to defraud creditors has as its authority no reference to evidence but only to the judgment of the High Court in Cannane.

The authority for proposition (vii) is not any part of the evidence but the dissenting judgment of Kirby J in Cannane.

The authority for proposition (ix) are paragraphs in the statement of claim and in the plaintiffs' own opening.

[428] It is unsatisfactory that the court should be asked to deal with claims of the utmost seriousness having enormous financial consequences for the parties on the basis of submissions made in reliance only on the plaintiffs own assertions and not by reference to evidence. I fear that the plaintiffs' conviction in the justice of their cause has lead them to assume what they had the burden of proving. One hesitates to rely upon submissions, whether of fact or of law, made by the plaintiffs.

[429] The terms of the Deed of Variation other than Clause (4) do not appear to be of any moment. This transaction was not, as far as I can recall, referred to at all in the oral testimony. This is, perhaps, surprising given that the transaction is attacked in the statement of claim on the grounds of duress, unconscionability, undue influence, breaches of fiduciary and statutory duty by EFG as de facto director of the Emanuel group and knowing participating by EFG in a breach of fiduciary duty by the Emanuele family directors. Being unsupported by evidence these grounds for challenge may be disregarded. Some of them are met by my findings that EFG did not become a de facto director of the Emanuel group.

[430] The plaintiffs' real point seems to be that the transaction was a fraudulent disposition of property which is voidable against the liquidator pursuant to s 121 of the Bankruptcy Act.

[431] For the section to be applicable there must be evidence of an intent, on the part of the person disposing of property, to defraud that person's creditors. Apart from the complete lack of evidence of any such fraudulent intention the deed did not itself dispose of any property or evidence the disposal of any property. The complaint seems to be that the deed contemplated that the fourth defendant might make payments to local authorities or other government bodies of performance bonds or the like at a time when Management was insolvent. But no money changed hands pursuant to the deed. Whether further advances or readvances or the payment of performance bonds were made was a matter of discretion for the fourth defendant. It was not obliged by the Deed of Variation to make any such payment. Moreover the deed did not increase the limit of the advance which might be made pursuant to the earlier deed. That deed, in any event, provided that further advances might be made even in excess of the agreed limit.

[432] The plaintiffs rely upon World Expo Park Pty Ltd v. EFG Australia Ltd (1995)

129 ALR 685 for the proposition that a transaction will be treated as fraudulent irrespective of the presence or absence of an actual fraudulent intention if the result of the dealing is to put property beyond the reach of creditors. This reliance appears misplaced. It was that view which was adopted by the full Federal Court in Cannane, (1996) 65 FCR 453. It was on that point that the High Court reversed the Federal Court and, as shown by the passages I have quoted, insisted upon the existence of an actual dishonest intention before the section can operate. Although the decision of World Expo Park does not appear to have been adversely commented upon by the High Court, its approach is inconsistent with the majority reasoning of the High Court in Cannane and must be taken to have been rejected.

[433] The attack on this deed is without substance.

[434] The plaintiffs include in their attack on the deed of 2 September 1988 an assault upon a transaction evidenced by a letter of 26 September 1988 (Exhibit 106 15/1363) from EFG to Management which was signed by those two parties as well as all the guarantors to the Deed of Master Agreement. The plaintiffs' submissions in relation to the deed of 2 September 1988 proceed as though it incorporated the terms of the letter of 26 September 1988. There appears to be no justification for this treatment of the deed and the letter. There is a reference to the deed in the letter the terms of which indicate that the transactions in each transaction are separate and distinct. There is, obviously, no reference to the letter in the (earlier) deed. As far as I can recall there was no evidence at all from any witness which might link the two transactions so as to make them one. The deed was not, as far as I can see, referred to at all. The letter was referred to in very brief terms and in passing by

[435] The letter extended the terms of the loan made in June 1987. That, it will be recalled, was for four months only and was not repaid at the expiration of that term. The letter of 26 September 1988 was the first formal extension of the loan. The letter read, in part,

`... the (fourth defendant) is pleased to extend and vary your loan in accordance with your joint and several requests ... on the following terms and in consideration of the following special conditions:-

Amount of Rearrangement/Loan: $43,000,000 being the amount secured or to be secured by the securities referred to hereunder.

Interest rate: 18.25% per annum simple on monthly balance outstanding reducible to 16.25% per annum in accordance with the terms of the security (variable by notice).

Term of Loan Extension: 12 months ... to 12 June 1989

Instalments: Monthly instalments of interest only will be calculated on the invoice sent to you each month.

(a) Existing Master Mortgage Agreement dated the 12th day of June 1987 and Deed of Variation dated the 2nd day of September 1988.

(b) All bills of mortgage given by the mortgagee and guarantors ...

(e) Additional: written acceptance of the amended terms of the loan ...

In consideration of (the fourth defendant) agreeing to this extension the borrower agrees to pay ... a profit share fee of an additional $2,000,000 making a total fee of $4,000,000 no later than the expiry of the extended term provided that the fee shall be reduced by $166,666.66 ... for each full month of payment in full before 12 June 1989 ...'

[436] The real basis for the plaintiffs' complaint about the letter is the `imposition' of the further profit fee of $2,000,000. I deal with this complaint later in the section of the reasons when considering the topic of profit fees. For the reasons given there I consider there is no substance in the complaint about the fee charged by the fourth defendant for extending the loan in September 1988. For a start it cannot be an unfair loan because it pre-dates the enactment of Part 5.7B of the

Corporations Law. Equally importantly one can see, even in the absence of any evidence adduced by the parties in respect of the transaction, reasons why the profit should not be regarded as extortionate. It was the price Management and Emanuel 14 had to pay to avoid the loan becoming overdue and immediately repayable. The initial term was short indicating Mr Emanuele's confidence that his Chinese

co-venturer would provide sufficient capital as notional loan funds to repay EFG. The fee, though substantial, reflected the risk to the lender that the borrower might not be able to repay on time or in full. The risk had taken on a new dimension with the failure of the joint venture. The fee would be reduced substantially should

Mr Emanuele find a replacement for the co-venturer, or effect a sale of the land or find another financier on better terms.

[437] As I say, I discuss these points in more detail when dealing later with the question of profit fees and interest. The only statutory bases for attacking the transaction is found in the Bankruptcy Act which do not assist the plaintiffs. The payment of the fee was not a settlement and there is no evidence of an intent to cheat or defraud creditors.

[438] The next transaction attacked is an Indenture and Guarantee dated 16 January 1990 (Exhibit 106, Volume 15/1364) which is attacked on the same bases as the first transaction. The plaintiffs' submissions are substantially the same. The indenture was made between Addstone, Antlia, Centaurus, Cloudland Investments, Cofordo 260, Derwentwater, Emanuel 7, Lascivious, Leominor, Livilla, Saroon, Segacious, and Woodville Industrial Park. The purpose of the indenture appears to have been to add those companies to the number of guarantors to the initial Deed of Master Agreement. It recites that those additional guarantors had requested the fourth defendant to lend to Management the sum of $43,000,000 on the terms set out in the Deed of Master Agreement. The additional guarantors guaranteed `the payment by (Management) to (the fourth defendant) of any or all money payable by Management' under the agreement.

[439] The plaintiffs submit that the indenture does not purport to make any new advance and that it wrongly provided that the guarantors had requested the fourth defendant to lend $43,000,000, because that advance had been made two years earlier. The complaint is that additional companies became liable as guarantors for an existing debt. However the evidence does establish that the guarantee was given at a time when the Emanuel group sought and was granted an additional advance of $2,500,000. This is conceded by the plaintiffs at T.1944.20-.30. Exhibit 137 is a memorandum from Mr MacDonald to Mr Crosby of 16 October 1989 summarising the Emanuel group's financial position and noting that it had applied for $2,500,000 of working capital which Mr MacDonald recommended.

[440] Earlier in the year EFG had sought advice from Mylonas & Associates about the state of their security documentation. By letter of 22 May 1989 Mylonas & Associates advised:

`... It is apparent that all securities held can no longer be relied on to secure all loans.

The result of the use of the "all accounts" clause in each bill of mortgage is that any bill of mortgage given by a registered proprietor will secure any loan to which that registered proprietor is a party either as borrower or guarantor. Thus in a group that is expanding by the use of new companies as owners of land there is a real danger that loans in existence before the use of these new companies would not have been guaranteed by them ... To overcome this problem ... we recommend that all loans to the (Emanuel) group:-

(b) That each company in the group be made a party to each consolidation either as borrower or guarantor. ...'

Mr Jaenke replied to Mylonas in a letter of 22 December 1989 saying that:

`In order to ensure our loans are fully cross-secured and due to the changing structure of Emanuel companies since our first loan documentation, we require all accounts to be guaranteed by all the other companies in the group ... To achieve this we list below the principle documentation for each loan along with the principal amount ...'

[441] The inclusion of the additional guarantors by the indenture of 16 January 1990 would seem to reflect the advice from Mylonas. There was evidence from

Mr Morphett that it was common for financiers to improve their security position by cross-collateralisation by guarantors and other obligors when extending loans or making fresh advances. Speaking of an occasion when Esanda extended a loan on

4 October 1991 Mr Morphett was referred to a term of the approval (T.5204.5-.35):

`This is a letter of 4 October 1991 extending the Giuseppe Nominees facility ... to 30 April 1992 ... Additional security including guarantees by companies which were not already tied to this advance. Is that right? - That's correct.

... An acknowledgment that all securities would be interlocking and so on? - Correct.

... You indicated that "the abovementioned securities will be in a form that is cross-collateralised both as regards to the borrowers and as regards all the companies that are within the ANZ, Esanda ... group"? - Correct.

So you were taking the opportunity while you were extending the loan to improve so far as you could your security position for the loan? - Correct.

And as far as the cross-collateralisation goes that was something you tried to do in the ordinary course of your business wherever you could? - Correct.'

[442] The only oral testimony touching the transaction came from Mr Crosby who could not recall anything about it.

[443] The essence of the plaintiffs' complaint seems to be the addition of the further guarantors for no reciprocal benefit to the Emanuel group. The consideration was probably the further advance of $2,500,000 but whether that be correct or not the guarantors added to this indenture were already bound by existing deeds in respect of the liability they undertook by the new indenture.

By a `Primary Loan Deed' dated 7 April 1989 (part of Exhibit 476) Management agreed to borrow $2,000,000 from Elders Finance Ltd, the second defendant, on terms set out in the deed. Management's obligations were guaranteed by all of the Emanuel group of companies save for Lascivious. By Clause 5(a) Management covenanted with the second defendant to repay the whole of `the moneys hereby secured ...'. By Clause 5(c) Management covenanted to pay `any other moneys forming part of the moneys hereby secured ... in accordance with any written agreement between the borrower and the lender ...' By Clause 11 each of the guarantors jointly, severally, unconditionally and irrevocably guaranteed the due and punctual payment of `the moneys hereby secured.' That term was defined to include:

`All moneys now or hereafter owing or payable to the lender by the borrower (or any related corporation of the borrower within the meaning of the Companies ... Code) ... under this agreement or on any other account whatsoever ...'

The guarantors were therefore liable for the debts of Management to the second defendant whether payable pursuant to that agreement or any other.

[444] By another Primary Loan Deed made on 2 June 1989 between Management as borrower, Lascivious as mortgagor and all the other companies in the Emanuel group as guarantors, Management borrowed $630,000 from the second defendant on terms and conditions set out in the deed. It is in similar terms to the deed of

7 April 1989 with the exception that by clause 6 Lascivious covenanted to give a first registered bill of mortgage over specified real estate to secure payment by Management of all moneys which were `from time to time owing by the borrower ...'

[445] A further Primary Loan Deed on 20 August 1990 is in relatively identical terms to the deed of 2 June 1989 save that Lascivious appears as guarantor rather than mortgagor. Two other guarantors, Airlie Bay Developments and Antlia provided security by way of real property mortgage to secure their guarantees.

[446] By Deed of Master Loan Agreement made 9 June 1988 Management borrowed $5,500,000 from the fourth defendant in terms identical to those appearing in the other primary loan deed, that of 7 April 1989. In this deed, too, all members of the Emanuel group apart from Lascivious (and Management which was the borrower) guaranteed Management's promises to repay the sums as defined in the deed.

[447] The result is that by the two Deeds of Master Loan Agreement all of the Emanuel group save for Lascivious were liable to pay all debts of Management on any account and pursuant to any agreement to the fourth defendant. By the Primary Loan Deeds of 2 June 1989 and 20 August 1990 all of the Emanuel group of companies were liable to pay all debts of Management on any account and pursuant to any agreement to the second defendant. None of the Primary Loan Deeds or Deeds of Master Loan Agreement are impugned in any way in these proceedings. The only additional obligation obtained by the 16 January 1990 guarantee is that of Lascivious which became liable for the debts of Management to the fourth defendant as well as to Elders Finance Ltd. With that exception the obligations on the Emanuel group as guarantors provided in the indenture and guarantee of

16 January 1990 were already in existence and those guarantors would have been liable for the debts of Management whether or not they became parties to the indenture and guarantee.

[448] The indenture did not effect a settlement of property. The challenge based upon s 121 also fails. There is no basis for inferring an intent to defraud creditors. Rather the explanation for the deed appears the ordinary practice of bankers when making fresh advances. There is no need to search for a sinister motive. Moreover the indenture does not dispose of any property. The parties to the indenture assume a personal contingent liability but that is not a disposition of property.

[449] The attack on this document too, is fanciful.

[450] The next transaction is dated 4 May 1990 and is another Deed of Variation between the fourth defendant, Management and the guarantors, including those who had been added on 16 January 1990 (Exhibit 106, Volume 15/1365). This deed varied the Deed of Master Agreement by adding to Clause 4(b) a proviso

`... that the Mortgagee may at its discretion and as from 11 March 1990 make advances for the purpose of meeting working capital requirements of the Mortgagor or paying interest on moneys due by the Mortgagor which advances together with any interest which the mortgagee may permit the Mortgagor to capitalise hereunder shall not exceed in the aggregate the sum of $10,000,000.00'

[451] By Clause 12 the mortgagee might, at its absolute discretion, permit the mortgagor to capitalise interest payable under the Deed of Master Agreement `for such a period and at such times as the mortgagee may at its discretion agree ...'. By Clause 2 of the Deed Management agreed to pay to the fourth defendant a fee of $6,000,000 `at such a time or times as the mortgagee may demand but ... no later than

31 March 1991 provided that if the mortgagor pays the mortgagee the whole of the moneys hereby secured ... prior to 1 March 1991 the amount of such fee shall be reduced by ... $500,000 for each whole month following such payment commencing on the first ... of the month following such payment and expiring on 31 March 1991 provided further that the amount of such reduction shall not exceed ... $2,000,000.'

[452] The plaintiffs' attack on this transaction again relies principally upon s 120 and

s 121 of the Bankruptcy Act `insofar as it imposed the $6,000,000 fee, it being a fee imposed on an advance which was inadequate to render solvent the insolvent (plaintiffs), the full payment of which was inevitable in that there was no realistic prospect of its diminution by reason of earlier repayment of the loan ...'

[453] To incur an obligation to pay a fee as the price of obtaining further advances of working capital which the plaintiffs desperately needed if they were to remain in business and effect sales of their assets does not appear to be a settlement of property for the purposes of s 120. There is no reason to think that EFG was to retain the fee, if it were paid. It would have been dissipated as part of ordinary revenue. The agreement to pay the fee (it was never paid) is probably not a disposition of property for the purposes of s 121. There is nothing in the evidence to support an inference that it was intended to defraud Management's creditors. There is no evidence from anyone as to the state of mind of those directing Management with respect to the agreement, but it seems a safe inference that Management needed money and the best terms on which it could be obtained were those offered by EFG, which, it is true, drove a hard bargain. The acceptance of the offer was the price Management had to pay to borrow the further, desperately needed, working capital. I would have thought it likely that Mr Emanuele intended by the transaction to obtain money which would enable his companies to survive and prosper and thereby to eventually pay their creditors rather than to defraud them. Whether there is sufficient evidence to draw the inference or not it is the fact that there is no evidence that he agreed to pay the fee so as to defraud creditors. Moreover this transaction occurred at about the time the Molinara sale was being negotiated. It was hoped that this sale would overcome the plaintiffs' financial difficulties. Mr Emanuele was keen for his companies to survive long enough for that happy outcome to be realised.

[454] The first defendants advance several reasons in their submissions why the fee should not be regarded as excessive.

The fee was not referrable only to the further advance of $10,000,000. It was, according to Mr MacDonald, imposed in part because of EFG's past financial support for the Emanuel group and its intended future support. EFG had lent altogether in excess of $100,000,000. Mr MacDonald explained that the advance, and the proposed fee, had been discussed between him, Mr Crosby and

`... It was understood that the only way this facility was ever going to have a chance was if it was priced in a way that gave the Elders credit committee an incentive to make another advance of this nature ... We deemed it attributable in exchange for the group advancing $10,000,000 on what was already advanced of some hundred ... plus million dollars so ... in the context of that exposure and ongoing support we were all relatively relaxed ... about the future prospects ... of sales being able to cover the debt ...' (T.7012.40-7013.4)

Mr MacDonald is a witness whose evidence I accepted. He does not appear to have been cross-examined on this part of his evidence in chief.

[455] The extent of anticipated future support was not limited to the advance of $10,000,000. In addition EFG proposed to have allowed payment to the Emanuel group of another $18,000,000 by way of release of the proceeds of sale of properties which were mortgaged to EFG. See Exhibit 421, Volume 13 - the cash flow statement for 5 April 1990 enclosed with Mr Grier's memorandum of 9 April 1990 and the evidence of Mr MacDonald at T.7016.5-.20.

[456] The size of the fee reflected, in addition, the amount of profit it was anticipated Emanuel 14 would make from sales of the APM land. The reasoning appears in a memorandum to the Board of Credit Committee of EFG dated 7 March 1990 from Mr Crosby and Mr MacDonald which recommended the loan, and the fee. They wrote (Exhibit 421, Volume 12):

`With respect to the future strategy of the portfolio, Emanuel [sic] intends to continue his gradual development and sales program of certain parcels. So far land of a total value of $43.8m (or 13.6% of the original land area) has been sold. $23m sales proceeds have already been received. The future program is for sales of another $29.5m (approximately 9% of the land area) in 1990, $3m (or 10% of the land area) in 1991, $31m (approximately 10% of the land area) in 1992 and $18.5m (or 6% of the land area) in 1993. The total value of sales budgeted is therefore $155.8m and Emanuel estimates the valuation of the balance area unsold to be $166m (51% of the original land area).

The sales to date indicate that Emnauel has bought very well. Our current valuation of $104m is conservative ... compared to the sales achieved for individual parcels to date. The sales targets indicated are subject to the confirmation of an orderly marketing program over at least four years. The track record of sales over the last three years would suggest that Emanuele is capable of achieving his target.

This application proposes to advance ... an additional $10m on a progressive basis to a maximum of $77m. The funds would be used to meet the operating expenses of the group over the next six-twelve months until cash is generated from the sales receipts ...'

[457] The next consideration advanced by the first defendants is that the fee reflected the fact that EFG was in the process of winding up its business and liquidating its assets. It was no longer in the business of money lending. The fee was the price charged by EFG for this disruption to its own realisation program.

[458] There was, from EFG's point of view, a good case to be made out for the profit share, or fee, of $6,000,000. The APM lands had cost $48,000,000 which had been entirely funded by EFG. There was a recognised element of risk in the loan (see

Mr Crosby's memorandum of 15 May 1987, Exhibit 421, Volume 6) but

Mr Emanuele had been able to sell 13 per cent of the land for about half the total price, $23,000,000. Anticipated sales of the next 38 per cent were expected to realise another $112,000,000. EFG saw the fee as `an excellent opportunity to gain additional value from (its) exposure ... not by simply lending more money at a narrow margin but ... engaging in ... profit sharing arrangements ...'

According to Mr MacDonald Mr Emanuele was prepared to pay the fee in return for an advance of a sufficient sum to enable him to conduct the operations of his company for about a year without having to make frequent requests to EFG to cover particular items of expenditure. See T.7012.10-.30 (MacDonald).

[459] The plaintiffs contend that to agree to the fee was a breach by the Emanuele family directors of their fiduciary and statutory duties to their companies and that EFG, by its officers, was aware of and participated in the breaches. Although they asked for findings along these lines the plaintiffs led no evidence in support of them and it is not sensible to entertain the argument. I deal in the next section of the judgment with the principles relevant to the statutory duties of honesty and diligence and the fiduciary duty of acting honestly in the best interests of the company. The courts, as I point out, are reluctant to substitute their own views about matters calling for business judgment for that of directors of the companies transacting of business. I can see, as I have explained, why the directors of the Emanuel group would agree to pay the fee, in accordance with sound business judgment.

[460] There is no evidence that the agreement of the Emanuel group to pay the fee in return for the further advance was a result of duress, unconscionability or undue influence.

[461] I do not understand the express basis for the attack on this transaction, namely that the fee was imposed on an advance which was inadequate to render solvent the insolvent plaintiffs. The further advance was agreed to on the basis that it would provide sufficient funds to enable the Emanuel group to continue in business, i.e. paying debts as they fell due for a period of between six and twelve months by which time it was hoped that further sales would have alleviated their liquidity problem. The advance was intended to provide solvency to the group.

[462] But if the matter were otherwise and the plaintiffs assertion were factually correct I cannot see how it would make s 120 or s 121 applicable. If the plaintiffs intend to make a case that EFG was a party to a fraud by the Emanuel group on its creditors the case would fail because no such fraud had been shown. Indeed it would be impossible to show that by borrowing money for the purpose of paying creditors and in continuing in business the Emanuel group was intending to defraud its creditors.

[463] I have found that the Emanuel group was insolvent from July 1988 onwards but it does not follow that their continued business operations were intended to defraud creditors. On the contrary I would think it most likely that Mr Emanuele believed that, given time, he would effect sales and restore his companies to both solvency and profitability. Moreover there is no convincing evidence that EFG, by its officers, knew that the Emanuel group was insolvent. I do not intend to review the evidence with any particularity but I would find, if it were necessary, that EFG believed that it was making sufficient funds available to the Emanuel group to allow it to continue in business which would include paying their creditors.

Mr MacDonald gave express evidence to that effect (T.7231.50-.60). The whole rationale for the frequent further advances made by EFG to the Emanuel group was to allow it to continue in business so as to effect sales and reduce its debt to EFG. I suspect EFG's officers did not turn their minds to the particular requirement that debts be paid on time but they were aware that companies like the Emanuel group had a `lumpy cash flow' because income depended upon sales, and they expected that those who dealt with the Emanuel group would also appreciate that fact and be prepared to wait until proceeds of sales became available. There is not on the evidence any basis for concluding that EFG knew of, or took part in, a fraud by the Emanuel group on its creditors by remaining in business.

[464] The next transaction attacked is an Indenture of 4 September 1990

(Exhibit 106, Volume 15/1366) which, by Clause 15, was made `collateral to and ... (was) intended to secure all moneys now or hereafter secured by the documents' identified in the fifth appendix to the Indenture. They included the Deed of Master Agreement and its variation of 2 September 1988, the extension agreement of

26 September 1988 and the variation of 4 May 1990. The operative clause appears to be 1, which provided:

`The Mortgagee may at its absolute discretion lend advance and provide to the Mortgagor the principal sum in such amount or amounts and at such time or times as the Mortgagor shall from time to time request provided always that the Mortgagee may at any time or times and without assigning any reason ... decline to lend and advance any amount ... so requested ... unless otherwise agreed ... and subject to ... Clause 5, the Mortgagor shall repay the whole of the principal sum on or before (31 March 1991)'.

[465] Interest was fixed at 22.5 per cent per annum reducible to 20.5 per cent per annum if payment were made promptly.

[466] The effect of the agreement appears to have been twofold. The first effect was to remove the limit on the amount which might be advanced to Management, $43,000,000, without committing the fourth defendant to lend any amount. Whether further advances were made were left entirely to the discretion of the fourth defendant. The second effect was to cross-collateralise the obligations of all the Emanuel group companies to Lensworth (the fourth defendant) and any related corporation of the fourth defendant's. This result was brought about by the definition in clause 27(b) of `mortgagee' to `mean and include any corporation which is a related corporation of the mortgagee within the meaning of ... the Companies ... Code.' And by clause 27(h)(xii) which defined `principal sum' to include:

`All moneys now or hereafter to become owing or payable to the mortgagee on any account whatsoever by any corporation which is a related corporation to the mortgagor within the meaning of the term as defined in the Companies ... Code.'

[467] To the extent that the complaint is that the deed had the effect of making each of the Emanuel group of companies liable for debts of any of them to any EFG company it is met by the point that collateralisation of obligations had already been achieved by the primary loan deeds and Deed of Master Loan Agreement of 7 April 1989,

2 June 1989, 20 August 1990 and 9 June 1988, considered when discussing the attack on the guarantee of 16 January 1990. Those four deeds are not challenged in these proceedings.

A perusal of the loan documentation will show that for the relevant period the EFG lenders to the Emanuel group had been the second and fourth defendants. Later the third defendant became a creditor of the Emanuel group by assignment from the fourth defendant of the loans and security instruments pursuant to which the fourth defendant had made advances to Management. The assignment was by deed of

11 April 1991 (Exhibit 106 16/1354). The explanation for the assignment was given by Mr O'Grady (T.8170.30-.40). It followed the suspension of interest on the Emanuel group account. Because of prudential requirements the loans could not appear in the balance sheet of the fourth defendant. The assignment did not result in any increase in the debt of any of the Emanuel group of companies. Nor did the debt of any such company increase by virtue of the 4 September 1990 deed.

Further advances made to the Emanuel group pursuant to this further deed were not settlements of property by the Emanuel group or dispositions of property by the group. No doubt upon receipt of the advance the companies owed a further debt but that liability was offset by the amount of the advance.

[468] This deed is attacked pursuant to s. 120 and s. 121 of the Bankruptcy Act `on the ground that it charged the assets of Emanuel companies for improper purposes, namely the continuation of insolvent trading.' A more relevant analysis might have considered whether the indenture was a settlement for the purposes of s 120 or a fraudulent disposition of property by Management for the purpose of s 121. It does not appear to have been either. It disposed of no property and it did not charge any assets that were not already the subject of mortgages or mortgage debentures effected by earlier securities.

[469] The deed was apparently executed in contemplation of a further advance of $3,100,000 to enable the Emanuel group to pay out some mortgages and to complete the purchase of a property. Mr Grier's memorandum of 20 August 1990 (Exhibit 421, Volume 14) contains the reference. See also Mr MacDonald's statement, Exhibit 434 para 499. At the time the sale of Parcel 53 to Molinara was on foot and the proceeds were anticipated to restore the Emanuel group's fortunes.

Messrs Crosby and MacDonald reported to Mr Biggins, chairman of Ramco, in a memorandum of 29 August 1990: (Exhibit 421, Volume 14)

`The Emanuel group's borrowings are currently ... $117.724m which ... represents a 78.7% advance.

Of these balances $79.100m relates to the APM securities ... Virtually all loans are cross-secured.

We have undertaken a review of the Emanuel group's ... current financial position and in particular its cash flow requirements to November 30th.

Cash from known sales for the period will yield $12.05m and outgoings are $10.6m... Other sales not due for settlement until after November are considerable.

Apart from the sales referred to above we are encouraged that Emanuele is continuing to receive excellent inquiries on major parcels ... Negotiations are currently underway on parcel 64 and 8 totalling approximately $30m. Our debt on these parcels is $16m.

CSR has now successfully obtained an export licence for wood chipping and harvesting of the trees ... is now to commence in earnest. Emanuele's cash flow from royalties will be at least $3m per annum.

However the most important sale currently being brought to ... contract stage ... is the sale of land on Bribie Island to a Japanese purchaser for $105m. ... Consultants acting for both Emanuele and the purchaser are confident that FIRB approval can be obtained. Our mortgage is $20m.

The combination of this sale together with other ... sales ... should ensure the group's financial position. However we must acknowledge that conditions have to be met for settlements to proceed.

In the meantime ... we estimate that although total sales revenue should exceed total outgoings in the next few months we have nevertheless identified periods when settlements will not match cash flow requirements.

We believe that it is unwise to risk precipitous action from other creditors in the short term and see a distinct advantage in Emanuele being able to continue trading from an apparent position of strength.

It is therefore recommended that Management be given discretion to make temporary advances ... up to $4m to meet commitments ...'

[470] Mr MacDonald's evidence was that he anticipated that the further advances would be repaid (T.7022.55). He was not cross-examined about his assessment. That apart the document clearly explains EFG's reason for making the further advance. It was to enable the Emanuel group to carry on business in the expectation that very substantial sales would be made in the near future. It is a complete answer to any assertion that the advance was intended to defraud creditors even if the terms of the deed in question gave scope for the operation of s 120 and s 121. They do not.

[471] The plaintiffs next focus upon the imposition, on four separate occasions, of profit fees, the liability to pay which was incurred when loans were made. $2,000,000 became payable on 21 December 1988; a further $2,000,000 on 30 June 1989; $1,000,000 on 31 December 1989 and the $6,000,000 already mentioned on

[472] The plaintiffs seek an order `avoiding these "profit fees" on two bases: one as unfair loans pursuant to s 588FD and s 588FE(6) of the Corporations Law, and two as voidable transactions pursuant to s 120 and s 121 of the Bankruptcy Act.'

[473] Exhibit 140, Mr Mack's supplementary statement, paragraph 33, shows that if the profit fees were excluded from the debt owed by the plaintiffs to the first defendants as at 23 March 1995 the total would be reduced by $31,442,402. The reduction, of course, takes into account interest at the rates charged by EFG from the date of the imposition of the fees to 23 March 1995, compounded monthly.

(a) The interest on the loan was extortionate when the loan was made, or has since become extortionate because of a variation; or

(b) The charges in relation to the loan were extortionate when the loan was made, or have since become extortionate because of a variation;

even if the interest is, or the charges are, no longer extortionate.

(a) Whether interest ... was or became extortionate ...

(b) Where the charges ... were or became extortionate ...

regard is to be had to the following matters as at that time:

(d) The value of any security in respect of the loan; and

(f) The schedule for payments of interest and charges and for repayments of principal; and

`(1) Where a company is being wound up, a transaction of the company that was entered into at or after the commencement of this Part may be voidable because of any one or more of the following subsections.

(6) The transaction is voidable if it is an unfair loan to the company made at any time on or before the day when the winding up began.'

Section 588FF provides that where, on the application of a liquidator, the court is satisfied that a transaction of the company is voidable because of s 588FE the court may make orders providing appropriate redress. These include orders setting aside the transaction or, in the case of unfair loans, directing an indemnity to the company for its loss.

[476] The plaintiffs' argument is that when s 588FE(6) applies to an unfair loan `made at any time' so as to make it voidable, the subsection overrides the temporal limitation appearing in s 588FE(1) which appears to limit the section to transactions made on or after 23 June 1993.

[477] Sections 558FD, 558FE and 558FF are all found in part 5.7B of the

Corporations Law which came into effect on 23 June 1993, after the transactions which are presently the subject of attack were made, and after Management became liable for the fees. I accept as accurate the first defendants' submission, relying upon Rodway v R [1990] HCA 19; (1990) 169 CLR 515 at 518:

`A statute ought not to be given a retrospective operation where to do so would affect an existing right or obligation unless the language of the statute expressly or by necessary implication requires such a construction.'

[478] I can see no such expression or necessary implication in the sections in question. On the contrary they seem to me to operate to affect only transactions of the requisite kind `entered into at or after 23 June 1993, the commencement of part 5.7B.' I would read "at or after" as identical with "on or after".

[479] I do not accept that there is any inconsistency between the two subsections. If there were, one would have expected the draftsman to provide in subsection 6 words to the effect that it operated notwithstanding the requirement in subsection 1 that the transaction be made at or after 23 June 1993, or by providing in subsection 1 that it was subject to subsection 6.

[480] The two subsections can be read harmoniously. An unfair loan made at any time on or after 23 June 1993 may be set aside. There is no time limit other than that the loan must have been made at or after 23 June 1993.

[481] It may be noted that in each of subsections 2, 3, 4 and 5 of s 588FE the transactions referred to may be set aside subject to a particular time limit, but it is clear that the transactions described in each of those subsections must have been entered into at or after 23 June 1993. By contrast subsection 6 does not itself contain any particular temporal limit. The general limit found in subsection 1 still applies.

[482] The attack on the imposition of fees as unfair loans must therefore fail.

[483] The claim that the profit fees may be avoided pursuant to the Bankruptcy Act is also untenable. It is predicated upon the fees being settlements and/or dispositions of property made with the intention of defrauding creditors. There is an immediate problem. The fees do not appear ever to have been paid. Amounts equal to the fees were debited to the account of the borrower and interest was charged on that debit as part of the principal sum but the fees themselves were not paid. There was no transfer of funds from Management or Emanuel 14 to EFG which can be identified as the payment of the profit fees. They cannot therefore be a settlement. In any event payment of interest or fees would have been ordinary revenue for EFG and would have been applied by it in the ordinary course of its business. They were not a fund to be retained by EFG.

I do not see how incurring a liability can be a disposition of property. Giving a mortgage or charge to support a liability may be a disposition of property for the purposes of the section but that did not happen here. The liability was already secured by existing mortgages and charges. Another difficulty is that the plaintiffs rely upon the view as to what constitutes a fraudulent intention which was discarded by the High Court in Cannane. The plaintiffs argue they have to show no more than the company parted with assets which thereby diminished its ability to pay creditors, but it is clear that to set aside a transaction pursuant to s 121 an act or intention to cheat or defraud must be established. The plaintiffs did not essay that task.

[484] The plaintiffs also rely for their attack upon the profit fees on the same combination of complaints advanced for the other transactions: duress etc., breach of statutory and fiduciary duty and knowing involvement therein by EFG. The only support advanced by the plaintiffs for these complaints is their own allegation of them in the statement of claim.

These are serious charges and if they are to be persisted in should have been the subject of particular evidence.

It is no doubt true that the profit fees charged by EFG were substantial and were greater than the margins charged by other financiers. This evidence is of little relevance because those financiers did not operate in the particular market in which the Emanuel group was borrowing and EFG was lending. The loans were to a company with little or no net worth, an income insufficient to meet interest commitments and large parcels of en globo land as security. On the evidence very few, if any, financiers would engage in lending to such a customer on such security and those that did were the `entrepreneurial' lender who would require a commensurate return for risk. Neither Westpac (or its merchant banking subsidiaries) nor Esanda made such loans. Mr McCabe's evidence, (at

T.3100-3101) is to the effect that Westpac would not have lent to the Emanuel group as EFG did. Nor would Esanda, according to Mr Morphett, (T.5213-5217) Esanda would not have made further advances to provide working capital for the borrower. (T.5222.4-.35) According to Mr Morphett a lender interested in a transaction such as the APM loan `could charge what he wanted to' (T.5217.50). This should not be taken as a justification for charging extortionate rates of interest or fees but rather as an indication that there were no market `norms' against which to assess the reasonableness of the charge. The evidence did not suggest that any financier other than EFG would have made the loan. There is evidence that

Mr Emanuele made repeated efforts to refinance the loan from EFG at better rates of interest. He was unsuccessful. No doubt such considerations played a part in his decision to agree to the profit fees put forward by EFG as a condition of further advances.

[485] The plaintiffs' next complaint is about interest rates charged on their loans. With four late exceptions the complaint is not that the rates were excessive when the loans were made, but that EFG did not adjust the rate of interest payable on the loans when, because of the recession, interest rates generally fell. The result was that the plaintiffs continued to pay, or be liable to pay, interest rates fixed at an earlier time when prevailing rates were higher. From the time of the

Deed of Master Agreement of June 1987 the interest rates charged by EFG were 18.25 per cent if paid promptly otherwise 20.25 per cent. The letter of

26 September 1988 which extended the loan on the APM lands reduced rates by two per cent. The rate thereafter varied between 19.5 per cent and 21.5 per cent but for most of the period, 1 April 1990 to 27 February 1995, it was 20.5 per cent.

[486] From about 1990 interest rates generally fell significantly though, of course, rates charged by particular lenders to particular borrowers for particular purposes would have varied considerably. Taking the 180 day bank bill rates as a guide and speaking generally, interest rates fell to about 16 per cent in 1990, about 12 per cent in 1991, about eight per cent in 1992, about seven per cent in 1993, about nine per cent in 1994 and about 10 per cent in 1995. Throughout this time EFG was charging the Emanuel group 20.5 per cent. Annexure 31.4 to Mr Mack's second statement, Exhibit 140, is a graphical representation of the movement of interest rates charged by EFG; interest rates charged by financiers other than EFG; and the 180 day bank bill rate. The movement in rates is charted from 1 July 1987 to

1 January 1995. The graph shows that the decline in rates charged by other financiers began in about September 1989. At its greatest the difference between rates was about nine per cent at the end of 1993. Between September 1989 and September 1991 the difference ranged between half a per cent and about five per cent. Mr Grier gave evidence that the `market rate' for interest in October 1991 was about 16 per cent (T.7531.12). Mr Debelak gave evidence that between

September 1988 and October 1991 interest rates declined from about 22.75 per cent to 18.5 per cent and had fallen to about 14 per cent in 1992. (T.2925.8; 2926.10)

Mr Morphett's evidence (T.5169-5170) was that interest rates fell from about

18.5 per cent in April 1990 to 16.5 per cent in October 1991 and fell further to about

[487] Judgment against the Emanuel group and Mr Emanuele was entered on

27 February 1995 for $186,880,302.71. Mr Macks has calculated that an average interest rate reduction of two per cent from September 1989 would have reduced the debt to $156,876,510. If the interest rate reduction had been on average five per cent from September 1989 the debt would have been reduced to $121,285,024. Had interest rates been decreased to the average rate charged by financiers other than EFG the debt would have reduced to $104,222,188.

[488] The amounts at issue are therefore very substantial, in the last instance being of the order of $82,000,000.

[489] Mr Macks seeks `an order avoiding these interest rates as unfair loans pursuant to

s 588FD and s 588FE(6) of the Corporations Law and seeks orders pursuant to

s 588FF effecting their reduction to market rates.'

[490] Section 588FD speaks of loans which are unfair by reason of interest being extortionate or becoming extortionate by reason of a variation to the loan. It is therefore necessary to identify the loans which are said to be unfair. It is the loans which are voidable pursuant to s 588FE(6). Therein lies a problem for the plaintiffs because as noticed with respect to the fees charged by EFG these sections of the Corporations Law apply only to transactions entered into at or before 23 June 1993.

[491] Section 588FD looks to the time at which the loan was made or a variation to the loan was made. If the interest at either of those times was extortionate, and those times post date 23 June 1993 then the sections are applicable. The only loans in this category appear to be:

[492] The rates of interest on each of the four loans just identified was that applicable generally to the APM advance, 20.5 per cent. By this time the average interest rate charged by non-EFG financiers was about 12 per cent.

[493] The plaintiffs face another problem with respect to the earlier loans. Their complaint is not that the interest rates charged by EFG were excessive, or extortionate, when the loans were made. Their complaint is that during the currency of the loans interest rates generally declined but EFG did not adjust their rates. This does not seem to be a circumstance within the purview of s.588FD. It speaks of interest being extortionate when the loan was made or when a variation to the loan agreement was made. That is not the situation about which the plaintiffs complain. They are upset because there was no variation to effect a reduction in interest rates to reflect the market trend. This section does not apply to such a circumstance.

[494] The plaintiffs point to some evidence given by Mr Grier in cross-examination as indicating that EFG's motivation to keep rates high was the desire to minimise what was available to other creditors. The evidence is at T.7608.12-.30:

`Over 8 percentage points higher than the market rate doesn't indicate greed to you, Mr Grier? - No, it doesn't. Interest was being suspended over the account and it mattered not. ... It did as far as the second mortgagees and the priorities.

The higher the rate the less they got? - That's true.

And that was the motivation to keep the rate high, wasn't it? - It may have been, yes.'

The point was not taken up with any EFG officer more senior than Mr Grier. He was the Queensland manager but the real decisions concerning the Emanuel group account were made in Melbourne by Mr O'Grady or Mr Crosby or Mr MacDonald. Mr Grier may have known about the reason for a decision to keep interest rates at the rate initially agreed but it is unlikely he would have been consulted about it. His admission is equivocal and probably does not justify a finding that EFG made a deliberate decision not to reduce interest rates because of the advantage that it would give to subsequent mortgagees.

[495] Even if such a finding were made it would have no significance. EFG was entitled to have regard to its own interests. It cannot legitimately be criticised for not reducing interest rates when the only recipient of such a move might be a subsequent mortgagee. There was no prospect that a reduction in rate would benefit the borrowers in the Emanuel group. By the time interest rates had begun to fall the Emanuel group had lost its equity in the mortgaged lands. Their value was less than the debt to the first mortgagee, EFG, let alone the subsequent ones. There were in some instances, notably with respect to Parcel 64, a priority agreement between EFG and KBA, the second mortgagee, restricting EFG's priority to $19,000,000. Reducing interest rates charged to Emanuel 14 might have a consequence that the second mortgagee could recover something on a sale of the property but would not benefit Emanuel 14.

[496] The plaintiffs include in their complaints about interest rates the usual claims under the Bankruptcy Act. These can be ignored. The submissions are predicated upon there having been variations to the agreement which constituted dispositions of property made with the intent to defraud creditors. There were no relevant variations. The whole point of this part of the plaintiffs' case is that EFG refused to vary the agreement by reducing interest rates. I cannot conceive that interest payable (though not paid) at a certain rate amounts to a disposition of property because the lender might have, but did not, agree to accept interest at a lower rate.

[497] The next transaction under attack is a Deed of Collateralisation dated 5 March 1992 (Exhibit 106, Volume 16/1372). It was made between the first 27 plaintiffs and

Mr Emanuele and the second, third and fourth defendants. By it:

`2.1 Each of the Collateral Agreements is declared to be collateral to each other of the Collateral Agreements and in any case in which a Customer by a Collateral Agreement has created or creates a security in favour of any Elders Company each such security is declared to be a security to each other Elders Company all of the obligations of that Customer and of each other Customer.

3.3 Each Customer irrevocably agrees in respect of any Security provided by that Customer to any Elders Company which is a Collateral Agreement that:

(a) The covenants given in any Collateral Agreement may be enforced by any Elders Company (even though that Elders company is not party to that Collateral Agreement) in that Elders company's own and sole name without that Elders Company being obliged to take an assignment from or otherwise join the Elders Company named therein; and

(b) The Collateral Liability shall, as from time to time they become owing and regardless of when they may be due for ascertainment and/or payment, be secured by each security held by Elders Company (regardless of its terms).'

[498] The deed defined Elders Company to mean any of the second, third and fourth defendants. "Collateral Agreement" was defined to mean any agreement or security relating to or creating or securing any collateral liability existing at any time between any of the Elders Companies and any of the first 27 plaintiffs and

Mr Emanuele. "Collateral Agreements" were more specifically defined to include the agreements listed in item 3 of the schedule to the Deed of Collateralisation in which are set out the Deeds of Master Agreement, the variations thereto and the specific mortgages, charges and debentures given by various of the first 27 plaintiffs to secure loans made by EFG.

"Customer" was defined to mean the first 27 plaintiffs and Mr Emanuele. "Collateral Liabilities" were defined to be all liabilities and obligations of any of the customers to any one or more of the Elders Companies.

[499] The result of this deed was that each of the Emanuel group who had borrowed money from the second and/or third and/or fourth defendants, or who had guaranteed the repayment of loans to other of those plaintiff companies became liable to each of the second, third and fourth defendants for all the debts and obligations of all those 27 plaintiff companies. The securities given by any of those plaintiff companies to any of the second, third or fourth defendants became available to secure the repayment of the debts of all and any of those plaintiffs.

[500] The plaintiffs' complaint about this deed is that, by it, `Management and the guarantors became liable (to the second, third and fourth defendants). That was later to prove most useful as it led to judgment in favour of the three companies, proofs of debt lodged by the three, and an increased weight of vote at meetings of creditors. Presumably that was its purpose, for it is difficult to see any other.'

The circumstances in which each of the second, third and fourth defendants voted the full amount of the judgment debt at creditors meetings are set out in Section IV of the reasons.

[501] Mr Macks seeks to have the deed set aside pursuant to s 120 and s 121 of the Bankruptcy Act because `there was no benefit to the Emanuel companies in increasing their indebtedness by imposing liability to three rather than one creditor, it has served no purpose other than to give the Fosters' creditors greater opportunity to enforce their wishes on other creditors should there be meetings of creditors.'

[502] The first defendants point out that the deed of 5 March 1992 was not innovative in that previous instruments made between various of the second, third and fourth defendants and the plaintiffs had already effected in large part the cross collaterialisation of securities which was the subject of the later deed. Clause 27(b) of the 4 September 1990 Deed defined "Mortgagee" to include:

`... Any corporation which is a related corporation to the Mortgagee (fourth defendant) within the meaning of s.7(5) of the Companies ... Code.'

The first four defendants are, and always have been, related companies. Clause 27(h) defined `Principal Sum' in a most compendious manner. Subclause (xii) included in the definition:

`All moneys now or hereinafter to become owing or payable to the Mortgagee on any account whatsoever by any corporation which is a related corporation to the Mortgagor within the meaning of the term as defined in the Companies ... Code.'

This deed, therefore, went some way towards making debts payable to the fourth defendant by Management and all its related companies named in that deed payable to the second and third defendants as well as the fourth.

The deed of 4 September 1990 effected substantially the same collateralisation of liabilities as the deed of 5 March 1992.

[503] The first defendants also contest the imputed motive for the deed. They point to

Mr Elliott's evidence (Exhibit 463 paras 20-31) that he advised the execution of such a deed so that there could be no doubt about the efficacy of any of the securities granted by any of the Emanuel group to secure the debts of any of them. This had largely, if not entirely, been achieved by the existing interlocking mortgages, charges and debentures but he thought it preferable to have a single document which would collect all the obligations into one document and supplement them if there were gaps between existing documents which meant that not all securities were available for all debts. The motive was to improve EFG's security position at a time when it was still lending to the plaintiffs whose position was doubtful.

[504] Mr Elliott explained orally why the deed defined the three EFG companies as lenders. He said (T.8666.44-8667.45):

`There had been some restructuring with the EFG group ... There had also been an assignment of securities as part of the restructuring and also ... the winding down of the Elders Finance Group and ... ELFIC became the recipient of all the securities but there had been loans previously made through other lending companies within the group. So I felt it was appropriate to bring all of those parties into the document because it was my understanding that in some instances there were arguments that mortgages contained personal covenants that may not be assigned ... and I wanted to preserve any of those personal covenants that may not have been effectively taken over by Elfic in the course of the transfer of securities ... The types of covenants I was thinking of were those such as powers of attorney ... It was a fairly academic argument but it was one that I was aware of and I was concerned to ... make sure that we had all of the parties all locked up. The borrower was Emanuel Management ... under a master deed and all of the other companies were members of the group. This was a method whereby you would have a master deed for stamp duty purposes and then borrowings by particular purchasers. So you might have properties owned by a number of companies ... and it seemed prudent and it wasn't unusual for me to recommend this type of practice to lenders.'

[505] I accept Mr Elliott's evidence. There was a sensible and immediate motive for the execution of the deed. There is no need to impute a motive that depends upon foresight in 1992 of events that did not occur until 1995 and do not appear to have been in contemplation before they occurred. That is to say there is no evidence that in March 1992 anyone thought that there might be meetings of the plaintiffs' creditors at which EFG would wish to cast three votes in respect of the debt.

Mr Winter's use of EFG's proxy to achieve that end was not something authorised, or even contemplated by EFG. See also Mr O'Grady's evidence at

Mr Elliott gave evidence (T.8667.25-.35) that he never intended the Deed of Collateralisation to permit EFG to vote its debt three times rather than once at meetings of creditors. He thought the proposition `a novel concept ... there was a debt and it was owed by the borrower to the lender.' He did not advise EFG that the deed permitted the debt to be voted three times.

[506] Sections 120 and 121 can have no application. There was no fraudulent disposition of property. Indeed there was no disposition of property because the Deed of Collateralisation dealt only with existing securities already given to secure existing debts. There was no settlement of property. The earlier transactions which have been noted and which culminated in the 4 September 1990 deed had the effect that each of the 27 companies in the Emanuel group was indebted to the second and fourth defendants in respect of the debts of each of the companies. The

5 March 1992 Deed of Collateralisation did not increase this burden by adding a third EFG company as the lender. The debt was not increased. No new securities were taken or fresh charges imposed.

[507] For this deed, too, the plaintiffs call in aid duress, unconscionability, undue influence, breach of statutory and fiduciary duties and the knowing involvement therein of EFG. It is pointed out by the first defendants in their submissions that none of Messrs Crosby, Elliott, Grier or Jaenke were cross-examined about the deed or EFG's motive for proffering it to the Emanuel group for execution. Mr O'Grady was asked about it but had no recollection of it. He believed it to have been a matter handled within the Brisbane office. He denied in the passage I recently referred to that the deed was intended to allow EFG to vote three times in respect of its debt. I accept his denial. It is, in my view, fanciful to think that the events of March 1995 were in contemplation three years earlier. A much more likely explanation for the deed is Mr Elliott's cautious approach to his client's affairs and the advice he gave, almost a year before he was instructed to prepare the deed. As well, the circumstances in which Mr Winter came to be appointed proxy for EFG at the creditors' meetings documented in correspondence between Mr Perrett and

There is no evidence of any impropriety connected with the execution of the March deed. The only evidence as to an approach to the Emanuel group and Mr Emanuele concerning it is in Exhibit 16 (12/491) which is the minutes of one of the regular meetings between EFG and the Emanuel group on 1 June 1992. According to the note the deed was handed to Mr Emanuele with a request from Mr Jaenke that `it be considered ...' and Mr Emanuele `undertook to have same signed and returned.'

Mr Grier could not recall the occasion and Mr Jaenke was not asked about it.

[508] This agreement is alleged by the plaintiffs to have been made in October 1991 and that its terms effected an immediate reduction of about $10,000,000 of the debt owed by the Emanuel group as well as a reduction in interest rate from 20.5 per cent to 16 per cent. EFG contends that the debt incentive agreement never became binding upon the parties. The computation of the debt which appears as a recital in DOOR and the subsequent calculation of the debt which was claimed in proceedings in this court which resulted in judgment being entered on

27 February 1995 proceeded without reference to the terms of the debt incentive agreement. That is to say the reduction in principal and interest rate which was the subject of the debt incentive agreement were ignored by EFG when it demanded payment of its debt and sued to recover it. The plaintiffs place much emphasis on the agreement. They argue:

`Disregard of the incentive scheme ... the introduction of DOOR (and particularly the acknowledgment of debt), the deposit agreement, and finally the Queensland judgment, were each part of a scheme to defraud creditors, especially the secured creditors.

Whilst each may be considered individually they must also be viewed collectively as steps towards the culmination of an insolvent transaction, liable to be set aside under s 588 of the Corporations Law.

The scheme was to remove any equity that the Emanuel group held in the secured properties from the reach of the creditors, with Kleinwort Benson being a prime example ...'

[509] The terms of DOOR and the deposit agreement are discussed next in this section of the judgment.

[510] Although the plaintiffs include the debt incentive agreement among the `1988-1994 transactions', it is in a different category to the others. It is not a transaction which the plaintiffs seek to set aside. Their complaint is that EFG disregarded its terms. However, no claim is apparently made in the statement of claim for relief pursuant to the debt incentive agreement. The plaintiffs real point seems to be two-fold: firstly that the computation of the debt in DOOR and for the purposes of the Supreme Court litigation was inflated as I have indicated. This is seen as something as more sinister than a mere breach of contract. As the plaintiffs' submissions make plain they regard it as an integral part of a broader scheme to defraud creditors. A proposition put to Mr Grier in cross-examination (T.7562-64) was that the debt incentive agreement was not given effect to in order to discourage other secured lenders from taking action against the Emanuel group by winding up or litigation. The notion was that if those other lenders saw a very substantial debt, one exceeding the value of the lands, there would be no point in their moving because there would be no equity to apply in reduction of their mortgages. If, however, EFG's debt were reduced the equation might change.

[511] The second basis for asserting that the debt incentive agreement is relevant to the action is that by disregarding its term the amount of the debt stated to be due in DOOR, and for which judgment was obtained, was inflated and the exaggeration of the amount was deliberate by EFG.

This deception, of obvious seriousness, was not put to any of EFG's witnesses save Mr Grier. He denied it. Nor was it put to Mr O'Grady that the acknowledgment of debt in DOOR was false and was known to be so.

[512] There are two difficulties. The first is that this case has not been pleaded. The second is that it relies upon acts done in furtherance of an intention to defraud, not the Emanuel group, but its secured creditors. The plaintiffs do not complain that they have suffered loss by reason of EFG's mendacity towards other secured lenders.

[513] The suggested basis for the deception of other financiers founders on the evidence. Mr McCabe, when speaking of the position of BAC, said that its assessment of its position would not have changed had the level of debt been reduced, in accordance with the debt incentive agreement, by an amount of as much as $27,000,000. See T.3050.8-.40. It is, perhaps, significant that the cross-examiner was reluctant to put the question directly to Mr McCabe. When he did the answer was destructive of his proposition.

I cannot recall any other financier being asked about the point.

[514] The idea to include an acknowledgment of debt in DOOR originated with

Mr Elliott, not with EFG. Mr Elliott explained (T.8685.35-8686.15) that it was his idea to include the recital of debt `but it would be considered as being a boiler plate type approach to drafting of securities at Clayton Utz security group. An acknowledgment of debt whenever one can get one was always considered as prudent in trying to establish an estoppel from deed ...'. Moreover the calculation of the debt was undertaken by a solicitor employed by Clayton Utz `who had done a lot of work on the rebating of lease agreements with finance companies and he was a very very clever bloke with figures and was very studious and ... diligent ... The solicitor worked with Mr Jaenke ... going through ledgers and all those types of things that are necessary to establish an amount.'

This evidence, which I accept, disproves the notion that EFG arbitrarily fixed upon an amount for inclusion in the DOOR so large that it would dissuade other financiers from seeking to enforce their securities.

[515] As with so much of the plaintiffs' case, this aspect of it is built upon documents (most of which are included in Exhibit 139) which are at best ambiguous and which lack the strength necessary to support the elaborate edifice the plaintiffs attempt to construct. The foundation collapsed under the weight of the testimony of witnesses called by the first defendants who gave first-hand accounts of the negotiations and their termination which the plaintiffs simply did not answer. No witness was called in the plaintiffs' case to testify that the debt incentive agreement was actually made.

[516] The agreement had its origin in a letter from Mr Emanuele to Mr Crosby of

14 October 1991. In it Mr Emanuele proposed `restructuring ... the Elders facility' by reducing the debt to $120,000,000 and reducing interest to 15 per cent `to be capitalised and repaid from proceeds of sale.' In addition, interest was to be reduced by a further one per cent for every $10,000,000 paid to Elders in reduction of the principal sum. There were other conditions which are not presently relevant.

Mr Crosby sought from Mr Grier information as to the then amount of the debt.

Mr Grier advised by a memorandum of 15 October 1991 that the debt as at the end of that month would be $140,500,000 and that, on the basis that the debt remained constant, interest payable for 12 months would be $27,500,000. He also advised that interest on that debt for 12 months at 16 per cent would be of the order of $20,000,000.

[517] A key document for the plaintiffs is Mr Crosby's memorandum of 18 October 1991 to Mr Gardiner, Mr O'Grady and Mr Biggins (who chaired Ramco). The memorandum reads:

`The following points were agreed in discussions between (Messrs O'Grady, Biggins, Gardner & Crosby)

2. In the event that $30,000,000 is paid off the debt within six months a $5,000,000 rebate will apply, i.e. the starting point will be $125,000,000 and not $130,000,000.

3. Interest from now on to be charged at 16 per cent.

4. For every $10,000,000 paid off the debt during the next 12 months, a 1 per cent rebate shall apply on the basis that the rate will not drop below 10 per cent.

As far as the Emanuel group is concerned, it is important that we make sure that all of the legalities are properly covered before entering into this new arrangement and in doing this, Brisbane branch should point out to our solicitors that we should not ignore the possibility that this Group could still `tip over'. With this in mind any concessions would cease if this eventuality occurred. It is also important to stress that these new arrangements must not in any way jeopardise our existing security position.'

[518] On 21 October 1991 Mr Gardiner, the account manager, wrote to Mr Grier to direct him to `implement changes to the accounts' of the plaintiffs consequent upon the agreement recorded by Mr Crosby. Mr Jaenke noted in hand on the letter: `whatever is debt in six months is less $10 million'. (Exhibit 139 Tab 6) Mr Grier wrote on another copy of the memo (Tab 4): `effective from 1/11/91' and, opposite the statement that the debt was agreed at $130 million, `was $140 million - treat as a $10,000,000 rebate'.

[519] The strongest point for the plaintiffs is that EFG admitted, in a number of documented instances, that the incentive agreement had been made. For example the board papers for the meeting of directors of Fosters' Brewing Group on

30 November 1991 contained in appendix B6 the advice that:

`We have just entered into an incentive agreement with Emanuel under which the debt is discounted by an attractive sum if it is reduced within set parameters.'

[520] Similarly the minutes of Ramco on 30 October 1991 include this:

`... in respect to the Emanuel group it has been agreed:

The total debt is agreed at $130,000,000. In the event that $30,000,000 is paid off within six months, a $5,000,000 rebate will apply i.e. the starting point will be $125,000,000 and not $130,000,000. From today interest will be charged at 16 per cent.

For every $10,000,000 paid off the debt during the next 12 months, a one per cent interest rebate shall apply except that the rate will not drop below 10 per cent.'

[521] Early in 1992 EFG sought the advice of Macquarie Bank Ltd about its program for winding down its business and recovering its assets. Employees of Macquarie Bank Ltd spoke to EFG officers and inspected EFG files. A draft report was prepared which was submitted to Mr O'Grady for comment. Section 3 of the report dealt with the Emanuel group. Paragraph 3.4.2 contains a reference to the incentive agreement. It was said:

`Elders has advised that an incentive agreement exists between Emanuel and Elders to encourage the sales but, given the likely current position regarding debt versus value, it is understood that this incentive agreement will not provide sufficient encouragement to Emanuele.'

[522] In a letter of 7 February 1992 to the executive director of Macquarie Bank Ltd,

Mr O'Grady took issue with the second part of that statement. Having referred to it he went on:

`We are not aware that Emanuele believes this, and we would be very reluctant to make the incentive plan any more attractive to him.'

[523] These admissions apart, the plaintiffs' documentary case is far from clear.

Clayton Utz were retained to prepare a document giving effect to the incentive agreement. Mr Jaenke was sent a draft under cover of a letter of 15 November 1991 which drew attention to some difficulties to which the agreement might give rise. A further draft was prepared and sent by letter of 28 November 1991 which reiterated the earlier concerns. It noted that the proposed deed had been drafted in an attempt to overcome the problems.

[524] On 10 December 1991 Mr Gardiner directed Mr Jaenke that the second draft `accurately reflects the arrangement with Emanuel group and may be executed.' On that day, however, Mr Elliott met Messrs Gardner, Grier, Jaenke & Crosby to advise them on a number of topics. One of them was the form of the deed which was to constitute the debt incentive agreement. According to Mr Jaenke's note of the meeting dated 13 December 1991 (Exhibit 139, Tab 16):

`It was agreed the incentive deed document would not be signed at this time but held by ourselves as a reference document.'

[525] There is another note of the meeting, also dated 13 December 1991, which has a fuller account of this topic (Exhibit 139, Tab 17; also Exhibit 58). It, too, is signed by Mr Jaenke but is probably partly Mr Grier's work. It is likely that he expanded Mr Jaenke's first note to make a fuller record. The longer version is:

`Discussion took place on the incentive deed as while I.R. Gardner agreed it reflected the agreement reached, J.D. Elliott felt that all contingencies could not be covered as future developments could not all be contemplated. J.D. Elliott felt it could be used against us if litigation took place in the future - section 52A Trade Practices Act regarding misrepresentation.

It was agreed, the document would not be signed at this time but held by ourselves as a reference document.'

[526] There is also a handwritten note of the 10 December meeting made by Mr Jaenke dated 12 December 1991 written on the letter of 28 November 1991 from Henderson Trout which enclosed the second draft. It recorded cryptically that

Mr Elliott had met Messrs Crosby, Gardner & Grier and that the draft deed was:

`To be used for internal references only and will not be signed by either parties. It is a clear understanding of agreement reached but the full provisions cannot be described to cover all future events.'

[527] The plaintiffs see something deeply suspicious in the existence of the two typed memoranda, only the shorter of which was held in EFG's files. The longer document which contains the reference to the TPA was discovered by the plaintiffs in the files of Macquarie Bank Ltd. By the plaintiffs' reckoning Messrs Grier and/or Jaenke were involved in concealing relevant evidence by attempting to suppress one of the memoranda and by retaining the one which gave a false account of this part of the meeting.

[528] The plaintiffs also rely upon a memorandum to Mr O'Grady from Mr Grier dated 20 July 1992. Relevantly it reads:

`Joe Emanuele has requested Elders consider the following:-

1. Reduce present liability of about $150,000,000 to $120,000,000 and cap until 1/7/93.

... Emanuel is desperate for us to enter into his simple arrangement; it may be an incentive for him but I believe it will be a disincentive for us.

In October 1991 the following incentive was agreed to:-

2. Should $30,000,000 be repaid within six months a further $5,000,000 was to be rebated.

4. For every $10,000,000 during the following 12 months a further one per cent reduction would apply - interest rate not to go below 10 per cent.

A suggested incentive which is simple as of below ...

2. Interest rate currently applied at 15 per cent to be reduced by one per cent for every $10,000,000 reduction in debt - minimum interest rate of 10 per cent to apply ...'

[529] The plaintiffs seize upon Mr Grier's note that `interest rate currently applied at

15 per cent' as an admission that the incentive agreement had been implemented by EFG and was then (i.e. July 1992) in force. It is impossible to put this construction on the document. For a start the interest rate, had the incentive agreement been implemented, would have been 16 per cent, not 15 per cent. As a matter of fact the interest rate being applied by EFG was not 15 per cent but in excess of 20 per cent. It is evident that Mr Grier's note reflected an hypothesis: if the `suggested incentive' had been adopted interest would have been 15 per cent. He was not asserting as a fact that it was 15 per cent. Moreover the plaintiffs overlook the commencement of the memorandum. Mr Emanuele had approached Mr Grier, in July 1992, to consider an incentive arrangement broadly similar to that discussed months earlier. It is inconceivable that Mr Emanuele would have proposed such an incentive if he believed the earlier agreement had been finalised and was in force between the plaintiffs and EFG.

[530] Lastly, the plaintiffs rely upon a memorandum of 4 August 1992 from Mr Burns to Mr Grier in which he instructed the latter

(a) To write-off $10,000,000 from the balance of accrued interest.

(b) To adjust interest being charged to 16 per cent on and from 1 November 1991 which would give rise to a reduction of the interest bill to 30 June 1992 of $3,950,000.

(c) To make a further reduction in the interest rate to 15 per cent on and from 1 July 1992 if the plaintiffs had paid at least $10,000,000 off their debt since 1 November 1991.

[531] Mr Burns was a senior accounting officer employed by EFG in Melbourne. His instruction appears to have been obeyed. Exhibit 431 is part of the plaintiffs' statement of account which shows that debt and interest reductions were made but almost immediately reversed with effect from 1 August 1991. It is not possible to date precisely when the reversal occurred but it must have been no later than the end of that month.

[532] The argument that Mr Grier or Mr Jaenke concealed the longer 13 December note is entirely fanciful. Both Mr Grier and Mr Jaenke had a completely plausible explanation for the differing versions. Moreover, and far more importantly, there is no material difference in the three written reports of the discussion which led to the decision not to proceed with the deed. They vary in detail but there is no inconsistency between them and there is nothing in any of them that could possibly embarrass EFG or give rise to a desire to suppress it.

[533] None of the witnesses present at the meeting of 10 December 1991 had any real recollection of what was said at it. This is scarcely surprising given the lapse of time. Mr Grier was firm in his evidence that the incentive agreement was not entered into because of legal advice (T. 7542.10-28; 7544.40-50; 7544.1; 7564.35). Mr Jaenke thought that the conditions precedent had not been satisfied (T. 8075.25-35; 8078.45). He is partly wrong about this in the sense that, as proposed, the agreement would have resulted in an immediate reduction in principal and interest and further reductions depending upon the success of the plaintiffs' realisation program. Nevertheless, he too, was adamant that the incentive agreement did not become operative. Mr Crosby, likewise, believed the agreement had not been finally entered into (T. 6906.15).

[534] Mr Elliott had no recollection of the meeting of 10 December 1991. It is clear from his evidence that he disliked the idea of secured lenders entering into incentive agreements with their borrowers because of the potential such agreements had to compromise lenders' rights, or at least to give rise to arguments that rights had been surrendered. For this reason he took no part in the drafting of the incentive agreement deeds but passed the task onto an employed solicitor. Mr Elliott was a very experienced solicitor with particular knowledge and expertise in the law and practice of securities. He was clearly a cautious practitioner who advised his clients, including EFG, to avoid any conduct that might give rise to difficulties in the enforcement of their rights. He was generally averse to incentive schemes given by lenders to defaulting borrowers. Generally his concerns were that they might be construed as a waiver of past defaults or as having the potential to give rise to arguments between lender and borrower about the amount of the debt.

[535] Although Mr Elliott cannot recall the meeting, an indication of his opinion about incentive arrangements may be seen in his letter of advice of 23 July 1992 to EFG. He expressed:

`A further concern ... that any agreement reached with the Emanuel group may be utilised ... by the directors ... to make representations to their other financiers ... if any prospective equity return is pledged to the other financiers but is not available in the event the incentive is not forthcoming. There is always the possibility ... of the other financiers encouraging or even financing the Emanuel group in mounting an action against Elders.'

Mr Elliott explained his thinking to be that the borrower might, on the strength of the incentive arrangement, represent to its other financiers that the prior debt was at a certain level but in the event that conditions precedent to the debt reduction were not satisfied, the debt would not be reduced. In that circumstance the borrowers' dissatisfaction could give rise to allegations of misrepresentation amounting to contraventions of s 52 and/or s 52A of the Trade Practices Act which may lead to litigation funded by the subsequent mortgagees.

[536] Such an eventuality might be thought remote but I accept that Mr Elliott saw it as a possibility which should be avoided, and he so advised his clients.

[537] Another concern which Mr Elliott entertained was that the incentive agreement proposed for the plaintiffs was to come to an end in the event that the plaintiffs went into receivership or liquidation. Mr Elliott saw obvious difficulties in drafting terms which would enable a debt which had been reduced to increase retrospectively in circumstances which had to be foreseen and provided for.

[538] It is, I think, inconceivable that Mr Elliott would not have raised his concerns about these matters at the meeting of 10 December 1991, and would not have advised the EFG managers present about the difficulties. The notes made by Mr Grier and

[539] The plaintiffs insinuate from the terms of Mr Jaenke's correspondence that an agreement was made between EFG and the plaintiffs to the effect that the incentive agreement would be binding between them but that its existence would be concealed from other financiers who would be told that the amount of the debt and rate of interest was as specified in the loan documents. The purpose of this was that which I have mentioned: to persuade them that their securities were worthless in order to enable EFG to take an assignment of them for a minimal consideration.

[540] These are serious allegations. The support for them is said to lie in Mr Jaenke's notation of 12 December 1991 that the incentive agreement was `a clear understanding of agreement reached' which was `to be used for internal references only', as well as his letter to Messrs Clayton Utz of 18 March 1992 in which he said:

`It was mutually agreed the document would not be executed ... but record an accurate understanding of the agreement.'

[541] Allegations as serious as these require cogent evidence. I cannot see it in

Mr Jaenke's communications. It is clear from his testimony that he is not a man to whom clarity of expression comes easily. He was not an articulate witness and found it hard to say clearly what he meant. I did not think him dishonest or evasive. I thought only that his evidence suffered the drawback I have described. I would not ascribe to his words the mendacity which the plaintiffs do.

[542] Another difficulty for the plaintiffs is that Mr Elliott was present at the meeting during which, according to the plaintiffs' understanding of Mr Jaenke's note, EFG decided to embark upon this course of duplicity. Mr Elliott has no recollection of it. I cannot believe he would have forgotten it or condoned it to any extent. I would have expected that he would immediately have written a stern letter of advice and disapproval of such a course.

[543] What happened instead is that both the plaintiffs and EFG acted as though the incentive agreement were not in place. This conforms to what one would expect to happen if Mr Elliott advised the incentive agreement should not be made because of legal difficulties and EFG accepted his advice, as Mr O'Grady said it did.

[544] The plaintiffs seemed to argue that the reference to s 52A of the Trade Practices Act in the longer memorandum of 13 December 1991 (which was not held on the EFG files) signified that Mr Elliott advised that if the incentive agreement were made but subsequent financiers were told that the debt was at its original levels, EFG could incur liability for a contravention of the Act. It was for this reason, so the argument runs, the incentive agreement was concealed.

[545] I cannot accept the argument. It would involve disbelieving Mr Elliott's explanation of why he was concerned about s 52. I accept his explanation. Moreover it overlooks the point that Mr Elliott advanced the possibility of liability under s 52 as providing a reason for not making the incentive agreement. If the incentive agreement were not made there could never be a misrepresentation about the level of debt.

[546] It is noteworthy that no executed copy of the deed has been produced. Mr O'Grady said he would have signed the deed on behalf of EFG, and he did not. It is evident that for whatever reason the parties did not proceed to sign the agreement which both clearly intended to be reduced to writing. Moreover, Mr Emanuele was not called as a witness. He did not testify that he had come to a concluded agreement with EFG for the reduction of principal and interest.

[547] Equally significant is that no contemporary correspondence was produced in which Mr Emanuele asserted that he had made such an agreement. Indeed, letters were produced in which Mr Emanuele asserted a position inconsistent with existence of such an agreement. Exhibit 154 is a letter of 5 December 1994 from Mr Emanuele in which he complains about what he regarded as the excessive amount of the debt set out in the DOOR. The letter was written at a time when the Emanuel group had lost its action in the Federal Court and when the parties were negotiating for a resolution of their differences. In the course of making many points Mr Emanuele wrote:

`As you know when the deed was entered into both Bruce Wales and I expressed a great deal of concern about the level of the debt which then existed and which has continued to "balloon" at high interest rates (20% plus for most of the period) capitalised throughout the period. You will recall the view which was expressed at the time by EFG namely that an adjustment of the debt would take place at an appropriate time once the position with the other creditors had been resolved.'

It is significant that Mr Emanuele did not assert the existence of the antecedent incentive agreement but relied upon an unparticularised representation that an `adjustment' of some sort would take place at some time.

[548] Indeed, this apparent attitude on Mr Emanuele's part conforms to his companies' pleading in the Federal Court proceedings. Paragraph 34 of the statement of claim filed 15 July 1994 pleads that by reason of their becoming parties to the DOOR they suffered detriment. This was relevant to the case of misrepresentation. One particular of detriment was that:

`The Emanuel group has incurred liability to the EFG group for interest on the debt at the EFG interest rates during the deed moratorium period which interest rate has for all of that time substantially exceeded the prevailing commercial market interest rates for finance facilities equivalent or similar to the Finance Facilities.'

It is evident that Mr Emanuele did not think to tell his lawyers when litigating against EFG that, on behalf of his companies, he had made an agreement to reduce the rate of interest they had to pay.

[549] Likewise, Exhibit 453 is a letter from Mr Emanuele to Coopers & Lybrand in which he provided information for the 1992 audit. A schedule enclosed with the letter shows the rate of interest being paid on the loans from EFG to vary between

20 per cent and 21.5 per cent, well above the rate which the plaintiffs contend they had agreed to in 1991.

[550] To the same effect is a letter dated 18 March 1994 which Mr Emanuele wrote to

Mr O'Grady to complain about Mr Booker's handling of the Emanuel group account. As a justification for his companies' inability to develop the APM lands, Mr Emanuele complained that:

`... (the) Group cannot be expected to rezone these parcels without significant funds in place to do so. Further, my Group is kept on interest rates of 22% and compounded monthly ...'

Although unhappy with the rate there is no hint of dissatisfaction by Mr Emanuele that the debt incentive agreement had been made but not honoured. (This letter is to be found in Volume 33 of Exhibit 421)

[551] On 8 April 1994 Mr Emanuele and his son Rocco met with Mr O'Grady and

Mr Benskin in Melbourne as part of the negotiations to settle their dispute.

Mr Benskin made a note of the meeting which records Mr Rocco Emanuele as having said:

`We talked 18-24 months ago about an interest rate reduction. A large part of (the) $150,000,000 debt is interest accruing at 22 per cent ...'

Neither he nor his father, who was present, asserted that an incentive agreement had been made and that the debt and rate of interest were both less than EFG claimed.

[552] Moreover, in the directors' report accompanying the financial statements for Management in the year ended June 1991, the directors stated that, after years end, Management had:

`Entered into an agreement with (EFG) whereby their debt was reduced by approximately $19,000,000 to $138,000,000 and the interest rate on that debt was reduced from rates varying between 18 per cent and 22 per cent to a rate of 15 per cent with an incentive agreement whereby that rate would be reduced further as the company reduces its debt.'

It will be noted that the terms of this incentive agreement differs materially from that advanced by the plaintiffs. Be that as it may, this report was read by

Mr McCabe of Westpac who brought it to Mr Grier's attention. Mr McCabe's interest was, of course, that a reduction in Emanuele's debt to EFG might provide hope for a recovery of sorts by other lenders such as Westpac. According to

Mr McCabe's note of his conversation with Mr Grier, the latter denied the existence of a binding incentive agreement.

[553] Having had their attention drawn to what it regarded as a misstatement in the directors' report, EFG, by Mr Jaenke, wrote to Clayton Utz on 18 March 1992 requesting Mr Elliott to draft a letter to go from EFG to Emanuel demanding it retract the statement. In his letter to Mr Elliott, Mr Jaenke wrote:

`The agreement was prepared by yourselves but it was mutually agreed the document would not be executed by either party but record an accurate understanding of the agreement. ... The statement is in contrast to Elders' verbal agreement with Emanuel group and materially affects the amount of interest recoverable by ourselves on the properties over which we have consented to a second mortgage. ...'

The letter drafted by Mr Elliott and signed by Mr Grier was addressed to the directors of Emanuel Holdings. Dated 1 April 1992, it referred to the directors' report of Management and went on:

`It is acknowledged that there have been discussions in relation to some form of incentive to encourage the early retirement of debt which has taken place between representatives of our respective companies, however such incentive ... is clearly dependant upon documentation and performance criteria. The performance criteria have not been met and there has been no documentation entered into between Emanuel Management ... and (EFG).'

[554] The response was the preparation of a further directors' report which omitted all reference to the incentive agreement. There is no record of any protest from the Emanuel group. The only possible conclusion is that Mr Emanuele, on behalf of his companies, accepted that there was no such agreement.

[555] Whatever mystery the documents might have given rise to was dissipated by

Mr O'Grady's evidence. He explained (T. 8178) that the incentive agreement had to be satisfactorily documented by EFG's solicitors (as the memorandum of

18 October 1991 itself makes explicit). Mr O'Grady was advised `at a point in time' that the agreement `could not be documented legally without jeopardising or position vis-a-vis other lenders ... as a consequence this ... was just killed off.'

A copy of Mr Burns' memorandum was sent to Mr O'Grady. Having read it he spoke to Mr Burns `and told him that the interest rate arrangement with Emanuels had not been implemented because of legal reasons and that it was a dead issue ...' (T. 8202.55). This no doubt explains the initial reduction implemented in response to Mr Burns' instruction which was then countermanded after Mr O'Grady had spoken to him.

[556] The riddle of the admissions was also solved by Mr O'Grady. He kept the minutes for the Ramco meetings and he, of course, wrote to Macquarie Bank Ltd. The minutes were written before Mr Elliott gave his advice on 10 December 1991. The likelihood is that Mr O'Grady wrote to Macquarie Bank before he had been informed of the outcome of the meeting of 10 December 1991. The minutes and the letter were written in the belief, subsequently shown to be wrong, that the agreement had been made.

[557] Apart from Mr Burns' memorandum of 4 August 1992, the documents on which the plaintiffs rely as providing evidence of EFG's officers acting to implement the `agreement' all pre-date the meeting on 10 December 1991 with Mr Elliott. Up until then EFG had proceeded on the basis that there would be an agreement, though it had to be fully documented and signed before it would come into effect. Nevertheless steps were taken in anticipation of agreement. Following the meeting of 10 December and Mr Elliott's advice EFG no longer proceeded on that basis. No further attempts were made to draft the document giving effect to the agreement which was effectively at an end. When Mr Elliott's advice went to Mr O'Grady he `killed off' the prospect of the agreement. Mr Burns apparently was not informed of the decision but Mr O'Grady acted when he received notice of Mr Burns' actions.

[558] I am satisfied the debt incentive agreement never became a binding contract between the plaintiffs and EFG.

[559] The Deed of Orderly Realisation was executed by the Emanuel group, Mr Emanuele and the second, third and fourth defendants on 11 March 1993.

[560] The plaintiffs submit that the deed contained three critical elements:

(b) It provided for a period of time in which the Emanuel group was to market and value-add, under the strict supervision ... of EFG.

(c) It gave no assurance that funds would be made available, and in this respect maintained the pattern of inadequate assistance.

The acknowledgment of debt was the platform for the Queensland judgment of February 1995. It was calculated on the basis of rates which exceeded those agreed under the (debt incentive agreement) and which were extortionate. The rates were levied upon an insolvent group of companies unable to source funding elsewhere ...

The acknowledgment of debt was ... a settlement of property (and ... a disposition of property ...)'

[561] By the recitals to DOOR the Emanuel group admitted that the loans from EFG were due and payable and that EFG was entitled to exercise its powers of sale as mortgagee. As well, they acknowledged that instruments of security for the loans consisted substantially of vacant land in varying stages of development and/or rezoning and had not been listed for sale for some time. All parties acknowledged that EFG `considered that the management, marketing and sale of the land is more effective and commercially viable if continued by the Emanuel group subject ... to the terms and conditions' of DOOR. The final recital was that those plaintiffs had requested EFG to grant a period of grace during which the plaintiffs would proceed with the marketing and realisation of the property subject to the securities, and that EFG had agreed to the request for the moratorium `subject to the execution of this deed and upon the terms and conditions hereinafter appearing ...' By Clause 2.1 the Emanuel group acknowledged that an amount of $155,144,910.58 was due and owing to EFG and that they were in default under their securities.

[562] By Clause 3.1 the Emanuel group agreed to enter into a marketing and sales program for the secured property with a marketing group approved by EFG. It further agreed it would pay the full net proceeds of sales to EFG and would make specified minimum repayments as well as providing accurate monthly marketing reports.

[563] By Clause 4.1 the Emanuel group acknowledged that in the course of realising the secured properties it would be necessary to make applications for rezoning or other forms of approval from local governments in order to enhance the value of the land and/or to make it saleable. It promised to provide EFG with all information relating to applications of that kind.

[564] By Clause 4.2 the Emanuel group authorised EFG to negotiate with local authorities, consultants and real estate agents in connection with the marketing, sale and development of the properties and to negotiate with prospective purchasers of the properties.

[565] By Clause 4.3 it was to be a breach of the terms of DOOR should EFG `in its absolute discretion form the view that the Emanuel group's negotiation and decision making in relation to such matters (dealings with local authorities and purchasers) is not bona fide in the interests of orderly realisation ... and is considered ... to be unreasonable.'

[566] By Clause 5.1 the Emanuel group agreed to comply with all the covenants contained in the instruments of security identified in item 3 of the schedule; to diligently realise the secured property; and to pay net proceeds to EFG and to supply EFG with detailed financial report relevant to their efforts.

[567] By Clause 6 the cost of implementing and operating the Emanuel group was to be its responsibility but `the EFG group shall permit at its absolute discretion the flow of funds from the Softwoods agreement to the Emanuel group to assist in the funding of the orderly marketing of the land ... subject always to the Emanuel group providing satisfactory financial information ... EFG ... reserves its right to fix the mortgage debenture charge over Emanuel 14 ... so far as the Softwoods agreement is concerned at any time.'

[568] By Clause 7 EFG agreed not to enforce the securities against the Emanuel group during the moratorium period, which was defined to be 40 months from

1 March 1993 ending 30 June 1996, on the condition that the Emanuel group complied strictly with the terms of the DOOR and all terms, covenants and conditions of the securities other than the obligation to pay principal and interest.

[569] By Clause 7.2 in the event that the Emanuel group defaulted in the performance of any term under any of the securities save for the payment of principal and interest, and in the event that the Emanuel group did not strictly comply with the terms of the DOOR `then the balance of the principal sum and interest shall become forthwith due and payable ... upon demand ... and ... EFG ... shall be entitled to enforce all its rights pursuant to the ... securities and restrictions of this deed as to enforcement ... shall be at an end.'

[570] By Clause 12.1 the Emanuel group agreed not to disclose any of the terms of the DOOR to any person without the prior consent of EFG, except for the purposes of enforcing the deed.

[571] The plaintiffs' submission is misconceived. It is made without any regard to the terms of the legislation. For a transaction to be vulnerable pursuant to s 120 it must be a settlement of property. The whole purpose of DOOR was to allow the Emanuel group time to recover from their financial misfortunes. The obligation to pay interest and to repay principal on their loans was suspended for 40 months while it attended to the sale of properties. No property was disposed of by DOOR: it effected no settlement. I do not understand how an acknowledgement of debt could be said to be a settlement or disposition of property. It is no more than an admission of fact.

[572] The first defendants' submission, which I accept, bears setting out:

`This transaction did no harm to Emanuel at all. On the contrary it gave it the benefit of the moratorium it had been seeking. Interest rates were not increased. No burdens were imposed. No guarantors were added. No extra security was taken.'

[573] It is impossible to understand how it might be thought to be a device to defraud the creditors of the Emanuel group. The properties which were to be sold by way of orderly realisation, which was the objective of DOOR, were all mortgaged to EFG. It had a right to the proceeds of sale of those properties. The payment of the proceeds to EFG would not have defrauded creditors. It would have, pro tanto, paid the secured creditor what it had a right to receive.

It might be different if DOOR sought to apply to EFG proceeds of sale in excess of the amount of its debt, but it did no such thing.

[574] The plaintiffs seek to link DOOR with the debt incentive agreement, the deposit agreement and the judgment of February 1995 to form a scheme `to defraud creditors' of the Emanuel group not, it will be noted, the Emanuel group itself.

If one were to rely upon the plaintiffs' submission one would understand that they rely upon the usual litany of coercive conduct and breach of directors' duties to attack DOOR, as well as the Bankruptcy Act, but they do not rely upon its inclusion in a fraudulent scheme as a basis for seeking relief in respect of it. This may be because the scheme conferred benefits without corresponding detriments on the Emanuel group. It may also be because events have bypassed the provisions of the deed. It is, I think, necessary to address the submission, not developed, that DOOR was part of an elaborate fraudulent devise.

[575] The evidence is overwhelming that the initiative for a moratorium came from

Mr Emanuele and not from EFG. Mr Crosby gave evidence (T.6870.40-6871.5):

`Well, to the best of my knowledge the deed was something that the Emanuel group wanted ... Elders were prepared to consider that approach so ... a certain amount of work would have to be done by Mr Elliott and then this preliminary ... meeting took place ... My best recollection of it was that Mr Emanuele wanted to have some sort of the issues spelt out with EFG and was going to attempt to deal in a similar fashion with other financiers ...'

Mr Crosby was cross-examined at T.6873.20-.30 in which it was apparent that his recollection of the meetings in January was far from clear.

Although I do not have quite the same confidence in Mr Crosby's evidence as I do in that of the other EFG witnesses, his statement appears right. It is corroborated by Mr Crosby's own note of a meeting with Mr Emanuele on 4 January 1993 and the minute of a more formal meeting on 22 January. The first note (Exhibit 421, Volume 26) is in handwriting. It reads:

`Joe queries value of PRD - discuss with (Grier) and (O'Grady) - wants to work on sales himself with advertising budget work with agents.

The minutes of the meeting of 22 January 1993 (also Exhibit 421, Volume 26) show that Messrs O'Grady, Crosby and Grier met with Mr Elliott in the absence of any representatives of the Emanuel group. Mr Elliott gave some preliminary advice on a deed of orderly realisation and was instructed to prepare a draft. Mr Emanuele and his sons Rocco and Linton then joined the meeting. Mr Emanuele reported that he had raised the question of an orderly disposal of assets with his other financiers, BAC, Mercantile Credits and Kleinwort Benson, with mixed reactions. The minutes record:

`Joe believes he should arrange an orderly realisation with his other financiers and come to an understanding with his creditors before executing the proposed EFG deed.'

[576] Mr O'Grady confirmed the provenance of the moratorium:

`Now, let me ask you about DOOR. Whose idea was that? - Well, it came from the Emanuel side, effectively in response to Mr Wales' business plan where he was requesting a moratorium to enable the group to realise the major land parcels and to have something that could be shown to the other lenders of the Emanuel group.

Is that an honest answer, Mr O'Grady, that it came from the Emanuel side? - It is, Mr Meagher. ...

See I suggest it ... came from Mr Elliott? - The legal documentation came from Mr Elliott but the thrust of the documentation, the commercial thrust of the documentation came from the Emanueles, from Bruce Wales, principally ... I was surprised at the document itself and I haven't heard of a document like a deed of orderly realisation so I was surprised to that extent, but the principle of it, a moratorium with creditors and giving them deadlines ... that was something that I wasn't unsurprised with ...' (T.8591.25-.50)

[577] Mr O'Grady was pressed in cross-examination with the point that the DOOR had originated from Mr Elliott and not Mr Emanuele. Mr O'Grady rejected the suggestion:

`The framework that the Emanueles and Bruce Wales put the DOOR to us was that they needed a moratorium and they needed it documented in some form ... that they could show to their other lenders ...

Can I suggest to you that the deed of orderly realisation was first mentioned to you on 22 January 1993 by Mr Elliott? - As a document, yes.' (T.8593.30-.40)

[578] Mr O'Grady was taxed with an answer he had given in evidence in the

Federal Court proceedings. He had said that Mr Elliott `went through the concept' of the DOOR and that that was the first time that Mr O'Grady knew `such a thing could be done'. When it was put to him that his answer indicated that Mr Elliott had proposed the DOOR he said:

`... I meant in terms of an overall deed of orderly realisation. ... I had had some other thoughts in my mind in terms of a moratorium and targets. Mr Elliott managed to pull all of this together in one major document which ... was the first time I had seen it done ... That's what I'm referring to.'

A little earlier he had said that `the concept of a moratorium I certainly understood and the concept of giving them targets which they could achieve I certainly understood but the concept of how all that could be then bound together in a legal document ... was ... news to me when Mr Elliott produced it. ...' (T.8593.39-.45; 8595.12-.18)

[579] There is some further documentary support for a finding that

Mr Emanuele initiated the basic propositions later found in DOOR. In his memorandum of December 1992 which followed delivery of the Wales report

Mr Emanuele outlined a program by which the Emanuel group might continue to operate despite being unable to pay its way. The document commenced:

Identify the amounts payable for 92/93 by property by financier.

Meet with each financier in January 93 to advise them of the extra costs which they will incur in servicing their securities.

At meeting with each financier, also present to them a selling program for their properties and inform them that Elders have agreed in principle to fund the Emanuel group's administrative overhead and certain costs for the purpose of "adding value" to the group's properties in the Brisbane northern corridor ...'

[580] The plaintiffs appeared ultimately to accept the point that the concept underlying DOOR was Mr Emanuele's idea:

`Mr Meagher: You have set out - if you want to see it I'll have it shown to you. You say, "Mr Emanuele stated if he could reach some arrangement with the EFG group who was by far his major secured creditor he believed that he would increase his prospects of coming to arrangements with his other creditors," do you recall saying that? - Yes.

And that was the situation wasn't it? - Yes.' (T.8597.4-.10)

[581] Mr Elliott freely admitted that by early 1993 he had been concerned for some time that EFG's `workout' relationship with the Emanuel group had not been adequately structured or documented. His letters of advice which were mentioned in Section II of these reasons show that concern. Mr Elliott said:

`What was concerning me is that the Emanuel group ... were in a position of technical insolvency and ... the debt was continuing to increase by capitalisation of interest. The secured creditor was discussing matters with the Emanuel group or its directors ... from time to time and it seemed to me that their conduct in this regard ... to lack the type of discipline that, as a legal advisor, I would have preferred ... I was alluding to the fact that if there was an ongoing unofficial undisciplined type of arrangement without having a definitive workout terms and conditions ... the blurring between being a secured creditor and entering into proper negotiations with your borrower to try and realise securities ... as opposed to being an intermeddler ... and giving some direction to members of the Emanuel group ... it would be harder to ward off an allegation. I wasn't particularly concerned of any particular action but it was just a general concept ... that I should be drawing this to the attention of the client. My objective was to try and encourage them to formalise their relationship and work towards a documented workout rather than a loose situation ...' (T.8674.55-8675.20)

`My view (was) that ... a formal workout arrangement with the consensus of the borrower and the lender setting out terms and conditions of timeframes of objectives and methods of realisation of property ... should take place ... In due course there was a document ... called the DOOR ... and with the DOOR was another mechanism which was a reserved deposit account. And the two of those, at a later stage did start to meet my ideas of a regulated and proper workout.' (T.8676.5-.20)

[582] Both Mr Grier and Mr Jaenke testified that it was Mr Emanuele who wanted and who asked for a moratorium on his debt which forms the principal part of DOOR. They confirmed that Mr Emanuele's purpose was two-fold: to obtain time to sell his properties at an improved price to reduce the EFG debt and to show to his other financiers to persuade them to come to a similar arrangement. Mr Grier's evidence is at T.7540.35-.45; at 7571.33; at 7573.25-.30. Mr Jaenke's evidence is at T.8110.40-.45.

[583] EFG's motive for agreeing to the DOOR appears in the minutes of the meeting of Ramco of 23 February 1993 at which Messrs O'Grady and Crosby:

`Reported that the purpose of the deed or orderly realisation was to:

* Formalise the existing strategy ... in respect of the orderly realisation of assets in the Emanuel group.

* Of all the debts owing by the various companies in the Emanuel group to EFG

* That EFG has the authority to deal and negotiate with parties in respect of the ... sale of the properties.

* That EFG has the authority to set and establish a pricing program.

* Under the deed EFG has protected its existing rights ... In addition should any other lender take action against the Emanuel group ... EFG's security position is crystallised.

* A favourable by-product of the ... deed ... is expected to be that other lenders will fall into line with similar arrangements, and that the Emanuel group will be able to concentrate on orderly realisation in a controlled environment ...'

[584] The document effectively disproves the plaintiffs' theory that DOOR was intended to form part of a complicated scheme to defraud the Emanuel group and its other secured creditors. The minute shows a legitimate commercial reason for the moratorium. It gave the mortgagor a chance to increase the proceeds of realisation of the secured properties while protecting the mortgagee's position should events not transpire as hoped. Neither Mr Crosby nor Mr O'Grady were cross-examined in an endeavour to show that their report to Ramco was false and that they intended quite different consequences from DOOR.

[585] EFG's approach to the Emanuel group was identical to that of its other secured creditors, BAC and Esanda. Both of those lenders took the view that their interests were best served by leaving the Emanuel group in charge of the realisation of assets secured to those lenders (T.2955; 2963). Both lenders gave the Emanuel group time to realise assets and did not insist on immediate repayment. Nor did they exercise their powers of mortgagee. Indeed ANZ formally extended all of the Emanuel loans from time to time to avoid formal default. As well both lenders made further advances for the purpose of increasing the value of their secured property or more effectively realising them. (T.3091; 3092; 3094;

Exhibit 249, Tab 47; T.2962; T. 3086-7; Exhibit 247, Tab 71, 78)

[586] There is no reason to doubt the accuracy of the amount of the debt acknowledged by the Emanuel group and Mr Emanuele to be due and owing as at 11 March 1993. Save for the effect of the debt incentive agreement, which I have concluded never reached the stage of being a concluded contract, there is no complaint about the calculation of the debt. The plaintiffs seek a recalculation of the debt should their claims in this action proceed, but that is a different point. The complaint that DOOR contained an acknowledgment of debt therefore has no significance. It may be true that the acknowledgment of debt `was the platform for the Queensland judgment of February 1995' but that is to say no more than that judgment was entered on a debt which actually existed in an amount which was honestly believed by all parties to be correct. The suspicion that DOOR was intended as an instrument of fraud has been disproved by the evidence.

[587] An agreement made ancillary to DOOR, the Deposit Account Agreement (Exhibit 83, also found in Exhibit 421) of 20 May 1993, is also impugned. It was this agreement by which the proceeds of the sale of timber to Softwoods were to be paid into an account controlled by EFG from which money was released to the Emanuel group to allow it to perform its part of DOOR.

[588] The Deposit Account Agreement was made between Elfic Ltd and Emanuel 14. By clause 1 Elfic was obliged to open a deposit account in the name of Emanuel 14 styled `Emanuel group deposit account' into which moneys were to be deposited by Emanuel 14. By Clause 2 the deposit account was to be under the control of Elfic and was to be maintained until there had been `due performance and observance of all liabilities and obligations of Emanuel 14, Management, Navicio, Segacious, Meka Securities, Grangeville and Cofordo 251 pursuant to the terms of agreements made between them and all securities collateral thereto'. Further `until the time of due performance ... of all ... liabilities and obligations ... (Emanuel 14) shall have no right to call for the payment of any amount outstanding to the credit of the deposit account ...'

Credit balances in the deposit account were to attract interest. By Clause 5 Elfic was to make funds available to Emanuel 14 `upon request in accordance with the terms of paragraph 6 of DOOR'.

Emanuel 14 authorised Elfic to make payments from the account to it or to Management at Elfic's `absolute discretion'.

[589] By Clause 7 so long as any moneys were payable by Emanuel 14 or the other companies named in Clause 2 Elfic was entitled to pay itself from the deposit account any amount that it `in its absolute discretion may think fit and to apply or set off that amount in or towards satisfaction of all or any of the liabilities' of those Emanuel companies.

[590] By an irrevocable authority in writing dated 26 May 1993 Emanuel 14 authorised and directed Softwoods to pay all moneys that were to become due and payable to it pursuant to the terms of their agreement into the deposit account created pursuant to the Deposit Account Agreement.

[591] This transaction is impugned upon the same grounds, mechanically reproduced, as the other transactions. The principal source of complaint is that it offends s 120 or

s 121 of the Bankruptcy Act.

[592] The basis for the plaintiffs' complaint is not apparent. EFG had a mortgage debenture over Emanuel 14's property, and the charge created by it was fixed over the standing timber. (See Exhibit 106, C14/1357 Clause 8 and Schedule 7. This has been referred to earlier) EFG had allowed Emanuel 14 to fell the timber and sell it but the unfelled standing timber remained subject to the fixed charge. The charge over the contract and moneys paid pursuant to it from Softwoods had not been fixed and the money was allowed to flow to Emanuel 14. However, EFG could have fixed the charge over the sale proceeds at any time (Clause 9 of the debenture). The right to fix that charge was specifically preserved to EFG in DOOR, by Clause 6 which I have set out.

[593] The result is that the Deposit Account Agreement and the irrevocable authority together brought about a situation which, from the point of view of the Emanuel group, was no different from that which would exist had EFG exercised its right to fix the charge over the Softwoods agreement about which the Emanuel group could not have complained.

[594] There was a benefit to EFG in the arrangement. Mr Elliott explained it. In his advice of 10 September 1992 he had pointed out that receipt of the timber royalties by the Emanuel group posed a dilemma for EFG. Had it fixed its charge EFG would have received the proceeds in reduction of its debt but if it returned the money to the Emanuel group it would thereby make further advances. In the event that the companies in the Emanuel group were wound up EFG would be unable to recover interest. As well there might be, in some circumstances a loss of priority to subsequent mortgagees. (T.8682.1-8683.35) By contrast allowing the moneys to be paid to the Emanuel group directly removed those problems but increased the risk of a finding that EFG had become de facto director of the Emanuel group if it controlled the manner in which the money was spent. (T.8683.40-8684.20)

`... The (dilemma) was resolved in that when (DOOR) was put in place with the deposit ... account the effect ... was to make the funds available for utilisation in accordance with the contractual arrangements that the Emanuel group had agreed to in terms of ... DOOR ... The moneys that were released ... were in accordance with the terms of that agreement and therefore ... were not decisions ... made by EFG in the sense of controlling the funds but purely using a discretion they had to release the funds for specific purposes which the Emanuel group had contracted to undertake and EFG in terms of ... DOOR had agreed to allow funds to flow through to meet those contractual obligations, for example ... marketing agents, advertising costs ... They weren't advances because the moneys arose from the sale of assets ...'

[595] The first defendants' analysis of the transaction, which I accept, is that the deposits into the account from the proceeds of the sale of timber were loans by Emanuel 14 to EFG. Interest was payable by EFG, as I have pointed out. The term of the loan could not have exceeded the life of DOOR, 40 months. The transaction contemplated that moneys would be paid from the account to Emanuel 14 to allow it to perform its obligations under DOOR. Any credit balance in the account at the termination of DOOR would have been paid to Emanuel 14 or appropriated by EFG by way of set off in reduction of the debt owed by Emanuel 14. The loans (deposits) made by Emanuel 14 cannot, therefore, be regarded as a settlement. It is true that a loan for a very long term during which no repayments of principal are required may constitute a settlement (Barton v. Official Receiver [1984] FCA 337; (1984) 4 FCR 380 affirmed 161 CLR 75) but this is not such a case.

[596] It is impossible to see in the agreement an intention to defraud creditors. The deposit of the timber proceeds did not alter the assets of the Emanuel group or, more particularly, Emanuel 14. Instead of receiving cash in hand it had a chose in action of identical value being the loan to EFG which attracted interest. While EFG refrained from exercising its rights to fix its charge over the money it had no proprietary right in it and could not prevent Emanuel 14 from calling for repayment. EFG had a right of set off with respect to the deposits but had that been exercised it would have benefited Emanuel 14 by the reduction, pro tanto, of the debt.

[597] There was a rational commercial basis for the transaction of which both DOOR and the deposit account agreement formed part. It was intended to benefit both the Emanuel group and EFG. It was not intended to defraud creditors.

[598] The plaintiffs next complain about a deed of 16 August 1993 which provided for a further advance of $350,000 to form part of the moneys lent pursuant to the

Deed of Master Agreement. The deed is found in Exhibit 106, Volume 15/1637. It was made between Elfic (the third defendant) as mortgagee, Management as mortgagor and the Emanuel group (excluding Management) as guarantors. It recited that the mortgagor and guarantors had requested the mortgagee to lend a further sum of $350,000 which the mortgagee had agreed to do, upon conditions.

[599] Clause 1 provided that the mortgagee may `in its absolute discretion lend ... the mortgagor the further sum of $350,000 ... in such amount ... and at such time ... as the mortgagee (sic mortgagor) shall ... request provided always that the mortgagee may ... decline to lend ...'.

[600] Clause 2 provided that any amounts advanced pursuant to clause 1 should form part of the money owing to the mortgagee under the Deed of Master Agreement as varied, and should be repaid on the same terms and conditions. By Clause 4 the mortgagor agreed to pay interest on the further advances at the rate applicable to moneys owing under the Deed of Master Agreement as varied from time to time.

[601] The further advances were made to allow Emanuel 14 to discharge mortgages over three parcels of land which adjoined, and indeed were surrounded by, parcels of the APM lands which were mortgaged to EFG. Clause 5 of the deed provided that those three parcels would then become subject to a registered bill of mortgage in favour of the second defendant as additional security for the further advance.

[602] The three parcels had been mortgaged to BAC and to ANZ. What happened was that Emanuel 14 borrowed $350,000 from EFG to discharge the secured loans from those other financiers. EFG then took a mortgage over the three parcels to secure its further advance.

[603] It seems that on 20 August 1993 the sum of $250,000 was advanced to discharge the mortgage to BAC and on 25 August the sum of $100,000 was advanced to discharge the mortgage in favour of ANZ.

[604] Mr Macks attacks the agreement because its purpose `was to benefit (EFG). Its effect was to exchange existing mortgage facilities for new facilities ... at high rates of interest and to charge more of the Emanuel companies with liability for the facility than was previously the case ...'.

[605] The basis of the attack is said to be s 558FB, s 558FC and s 558FE(4) of the Corporations Law. It will be recalled that this is one of the transactions that

post- date 23 June 1993 and in respect to which it is said that the loan was unfair because of an extortionate rate of interest.

`1. A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:

(a) The benefits (if any) to the company of entering into the transaction; and

(b) The detriment to the company of entering into the transaction; and

(c) The respective benefits to other parties to the transaction of entering into it; and

`A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:

(a) Any of the following happens at a time when the company is solvent:

(ii) An act is done, or an omission is made, for the purpose of giving effect to the transaction; or

(b) The company becomes insolvent because of, or because of matters including:

(ii) A person doing an act, or making an omission, for the purpose of giving effect to the transaction.'

[608] The liquidator claims that the transaction is voidable by reason of s 588FE(4) which provides:

(a) It is an insolvent transaction of the company; and

(b) A related entity of the company is a party to it; and

(c) It was entered into, or an act was done for the purpose of giving effect to it, during the four years ending on the relation-back day.'

[609] Reliance is placed on subsection (4) because EFG had been a shareholder in Management by reason of the issue of preference shares to it in 1983. Most of the shares had been redeemed in December 1990 but a small parcel of the shares remained with EFG so that Management could truly say it had remained continuously under the same ownership and was therefore eligible for income tax concessions. The detail does not matter for the moment. The point is that by reason of the small shareholding EFG was a related corporation to Management and its subsidiaries. On its face subsection (4) would appear to be aimed at transactions by which an insolvent company transacted business with a related entity for the benefit of that entity. This is said to be its function in the Explanatory Memorandum to the Corporate Law Reform Bill 1992 which introduced the section. Paragraph 358 of the memorandum said:

`The extensive definition of `related entity' ... is for the purpose of widening the application of provisions allowing a liquidator greater capacity to recover assets which have been disposed of to persons who are related entities, such as where an action is brought to recover the benefit of reviewable transactions under proposed s.588FE ...'

`The consequence of being a related entity in connection with a reviewable transaction is that instead of a 6 month time zone prior to the relation-back day in which transactions may be reviewed, transactions in which one of the parties is a related entity attract a time zone of four years ...'

[610] Professor Keay thought the meaning of subsection (4) clear enough. In an article `Relation-backed Day and Related Entity: New Key Terms in Liquidation Law' 1994 vol. 2 Insolvency Law Journal p.126, he wrote (129):

`... One of the two major aims of Part 5.7B was to strengthen the antecedent transaction provisions concerning related persons with the goal of ensuring that property disposed of to favoured creditors shortly before the commencement of winding up will be more readily available for distribution among the general body of unsecured creditors ... For instance, an unfair preference can only be set aside, normally, if it occurred within the six months immediately preceding the relation-back day. However, if one of the parties to a transaction ... is a related entity of the company in liquidation, the unfair preference could be set aside ... within four years ...'

[611] This is not a transaction by which a benefit passed from an insolvent Management to related companies. This is what appears to be the subject of the subsection's operation. This conclusion is suggested by the terms of s 588FF which is predicated upon the recovery of benefits or property that passed from an insolvent company. For example the first two types of order that may be made are those directing a person to pay to the company an amount equal to the money that the company paid under the transaction, or the re-transfer of property that the company transferred under the transaction.

Under the transaction in question Management did not pay money or transfer property. It received money, by way of loan. It assigned mortgages over the lands in question from one financier to another. Its asset position did not change.

Even if s 588FE(4) is literally applicable to this transaction there would not seem to be any scope for relief under s 588FF.

[612] In any event subsection (4) only applies to an insolvent transaction, which means in this context an uncommercial transaction which Management entered into when it was insolvent. Management and the other companies in the Emanuel group were insolvent in August 1993. Was the transaction an uncommercial one?

[613] The only evidence concerning what lay behind the transaction - the further advance - is documentary and rather sketchy. The plaintiffs did not call any witness who could speak about it. Only Mr Grier of the first defendants' witnesses was questioned about it. There are some documents which throw some light on it. It will be recalled that this transaction occurred some months after DOOR had been executed and the Emanuel group were attempting the orderly realisation of the secured properties. Part of that process was to improve the value and/or saleability of properties. That, in turn, necessitated the occasional expenditure of money. It will also be remembered that the plaintiffs had borrowed from BAC and were in default under those loans. That bank, too, was looking anxiously at its position and had arranged with Mr Emanuele for an orderly strategy of selling properties over which it held security. According to a diary note (Exhibit 5, Volume 7/328)

Mr Emanuele and his son called upon the account manager at BAC, Mr Durack on 15 July 1993 to discuss `a system of reporting in respect of the group's property activity ...'. At the meeting Mr Emanuele raised the prospect of BAC releasing its mortgage over two parcels of land at Beachmere in return for payment, to be borrowed from EFG, of $250,000. According to Mr Durack's assistant's diary note:

`This land ... represents a small but strategic pocket in what is almost the centre of approximately 2314 hectares mortgaged to ... Elders ... Mr Emanuele has persuaded Elders that the land will be of strategic importance to any future developer. As a consequence of Mr Emanuele's discussions on the matter, Elders have agreed to fund the property at a negotiated level, enabling the total land package to be offered to the market at the appropriate time. ... Mr Emanuele has negotiated with Elders for a payment to us of $250,000 in release of our mortgages over lots 16 and 380 ... The properties will then go to Elders as security. ... Mr Emanuele is convinced that Elders would not provide further funding and ... representations for a higher amount would very likely result in Elders deciding not to do the deal at all.'

[614] The two parcels mentioned are two of the three which were mortgaged to EFG in accordance with the deed of 16 August. The third parcel was presumably mortgaged to ANZ with whom a similar arrangement was made.

[615] EFG's view of the matter may be seen from the report to Ramco on

`A further advance of $350,000 has been made to pay out ANZ and Westpac in relation to land adjacent to parcel 10 in Caboolture. Purchase of these small areas of land is considered necessary to maintain good main road frontage. On a stand alone basis, the valuations of the properties exceeded the amount advanced.'

[616] It is difficult to accept the submission that the transaction was of no benefit to the plaintiffs. The evidence, unsatisfactory as it is, suggests that it was Mr Emanuele who proposed the substitution of mortgagee. The parcels were said to be of strategic importance by improving the road frontage of the adjacent APM land. By effecting the substitution of mortgagee the Emanuel group obtained the benefit of the moratorium provided for by the DOOR. The risk that BAC and/or ANZ might exercise their powers of mortgagee to sell the land was removed. Had that happened the enhancement of value to the adjacent APM land by having the better road frontage would have been lost.

[617] There was one disadvantage to the Emanuel group following the assignment of mortgages. EFG charged a higher rate of interest than had been due to ANZ and BAC. This is not enough, in my view, to make the transaction an uncommercial one. The transaction was clearly regarded by Mr Emanuele as being in the best interests of the companies. The land had significance from the point of view of a strategic landholding and the increased interest obligation appeared to be a worthwhile price to pay for the benefits obtained from the transaction. In any event the obligation was more academic than actual. The Emanuel group were not paying interest and had the benefit of the moratorium.

[618] The evidence is scant but such as it is it does not support a finding that the transaction was such that a reasonable person would not have entered into it.

[619] Although the interest rate was higher than that charged by other lenders I am not prepared to find that the rate was extortionate and that the loan was consequently unfair, because of the peculiar circumstances of the parties. The transaction added value to the adjoining APM land owned by Emanuel 14. Had EFG not made the advance there was a real risk that the existing mortgagees would have forced a sale of the properties. The Emanuel group had no other source of funds available. No other financier would lend them money. Moreover interest was not being paid but capitalised and there was a real prospect that it would never be paid.

[620] The considerations discussed earlier when considering the complaint about profit fees is relevant to the complaint about extortionate rates of interest. The rate charged in any given set of circumstances will reflect the risk to the lender, the ability of the borrower to repay the principal and to service the loan in the interim, the value of the property taken to secure the loan and the cost and difficulty involved in selling the property if the lender is obliged to act in that regard. The rate will also reflect competition between lenders for business and the attractiveness of a borrower to lenders. Mr MacDonald explained that EFG was a `lender of last resort' (T.7087.20). It is to be expected that borrowers who have recourse to such lenders will pay a higher rate of interest than if they were wealthy customers of first class institutions. Other factors of relevance have been mentioned. Emanuel was insolvent. Its only prospect of paying interest was from the sale of land which by reason of its size and zoning would be attractive only to a small class of discerning buyer and much effort and time would be required to make the land saleable at all.

EFG at the time was not in the business of money lending.

All in all the situation was one in which the rational objective observer would expect a lender to impose a rate of interest higher than the prevailing market rate charged to borrowers in ordinary circumstances.

[621] Section 588FD uses strong words when describing when a loan will be unfair. The interest rate must be `extortionate'. This means it must be exorbitant, or grossly excessive, or characterised by extortion. This latter term is the act of extorting, i.e. wresting or wringing something from a person by violence, intimidation or abuse of authority, or obtaining money etc. by force, torture, threats or the like. See the Macquarie Dictionary. It is not enough to make a loan unfair for the purposes of

s 588FD that the interest rate charged is higher, even substantially higher, than the market rate for similar transactions. There must be something in the fixing of the rate which brings to mind the concepts implicit in the word I have just identified. There is a particular difficulty when there are no similar transactions and one is forced to compare interest rates charged on `ordinary' transactions with those which are unusual and which by their nature would attract a higher rate of interest.

[622] Given the circumstances of the Emanuel group and the nature of the transaction I do not believe the rate can be regarded as `extortionate'.

[623] The next transaction attacked is a Deed of Variation of 9 September 1993 (Exhibit 106, Volume 15/1368). This was the deed by which mortgages granted by

Giuseppe Nominees over a number of residences to a number of private individuals were assigned by the original mortgagees to EFG which advanced moneys to those mortgagees to effect the assignment. A further sum of $80,000 was advanced to allow building work on one of the houses to be completed. They were a house property in suburban Brisbane; a beach home at Cape Jervis south of Adelaide which was the home under construction; two homes in suburban Adelaide and a fifth home in the Adelaide hills. The interest rate charged on the assigned mortgages and the additional advance was that applicable under the Deed of Master Agreement. It will be recalled that this further advance is one of the loans which is attacked as being unfair by reason of the extortionate interest rate.

[624] The transfer of the homes figures in the plaintiffs' case about the 1995 Scheme and I deal with the evidence relating to it later in these reasons. The transfer of the mortgages is separately attacked pursuant to s 588FB, s 588FC and s 588FE(4) on the grounds that the transaction was uncommercial, insolvent and was between related parties.

[625] The deed was made between Elfic Ltd as mortgagee, Management as mortgagor and the other companies in the Emanuel group as guarantors. By Recital B it was acknowledged that the mortgagee would take an assignment of the mortgages listed in the third schedule to the deed under which various of the companies in the Emanuel group had incurred liability to repay loans. By recital C Management and the other companies in the Emanuel group acknowledged their request to Elfic to vary the existing securities between them, and the further mortgages to be assigned, and to lend a further sum of $80,000 to both Management and the Emanuel group.

[626] By Clause 1 the parties agreed that all money owing under the assigned mortgages would form part of the money owing to Elfic under the Deed of Master Agreement as varied. By Clause 2 the Emanuel group agreed that the interest rate applicable to the moneys owing under the assigned mortgages were to be varied to the rates of interest applicable to the sum owing under the Deed of Master Agreement. By Clause 4 Elfic was given an absolute discretion whether or not to advance the requested sum of $80,000. If the advance were made the money was to be paid to building contractors when they completed the work. The money advanced was to form part of the principal advanced under the Deed of Master Agreement. By Clause 5 Giuseppe Nominees was not to execute further mortgages over the properties the subject of the assigned mortgages.

[627] Mr Emanuele was one of the guarantors. He was also the mortgagor of the home in Brisbane. Giuseppe Nominees was the mortgagor of the four South Australian properties. Management, Holdings, Giuseppe Nominees and Paterson were guarantors of various of the assigned securities.

[628] Giuseppe Nominees and Cofordo 251, both of whom were guarantors to the deed of 9 September, were parties to it in their own right and as trustee of the

Emanuel Family Trust and the Earl Hill Unit Trust respectively. It was in that same capacity that Giuseppe Nominees had been mortgagor and guarantor of the assigned mortgages.

[629] The plaintiffs' complaints about this transaction are that it was the `first step in implementation of a scheme proposed by Mr O'Grady on 7 September 1993' by which I take it the plaintiffs mean the 1995 Scheme; and it had the effect of making all of the companies in the Emanuel group liable as guarantors for the obligations of the mortgagor under the assigned mortgages whereas formerly only a few of those companies were so liable.

[630] The second point can be disposed of shortly. The fact that additional companies in the Emanuel group became guarantors for the mortgage debts is not a relevant disadvantage to those companies in circumstances where the security for the debt was adequate to discharge it. Valuations of the property (Exhibit 421, Volume 26 and minutes of 3 February 1993) show that the properties had a combined value of $1,580,000 whereas the debt owed against the properties was $1,205,000

(Exhibit 421, Volume 28, Memo Mr Grier to Mr O'Grady 29 April 1993). Had the guarantors been called upon to pay the debt they had a right of indemnity from the principal debtor, including a right to have the principal debtor pay the debt before the guarantor. See Abigroup Ltd v. Abignano [1992] FCA 567; (1992) 112 ALR 497. As well the guarantors had a right to be subrogated to the security if they paid the debt. Scholefield Goodman & Sons Ltd v. Zyngier [1986] AC 562. On the evidence the additional guarantors suffered no diminution in their asset position by reason of their becoming guarantors.

[631] The other ground of objection disappears with the finding, which I make in the next section, that there was no 1995 Scheme and no conspiracy or plan involving EFG to defraud the Emanuel group or anyone else. The plaintiffs do, however, rely upon their repeated grounds for impugning this transaction. I suppose I must deal with the evidence.

[632] The proposal that EFG take an assignment of the mortgages over the residential properties was an initiative of Mr Emanuele. Mr Crosby had a recollection to that effect (T.6376.20) as did Mr O'Grady (T.8224.30-.40.) This evidence appears to be corroborated by a document dated September 1993 prepared by the Emanuel group and headed `Summary of Liabilities Owing to Non-Institutional Lenders'. Under the heading `Private Mortgages' there is an entry:

`Elders requested to pay out third party mortgages securing the four personal use properties.'

Mr Crosby also had a recollection that EFG was lending money to the Emanuel group to enable it to pay interest on the private mortgages but was reluctant to continue that arrangement without additional security. Mr O'Grady explained that he saw a benefit to EFG in taking an assignment of the mortgages as their value was believed to exceed the amount of the mortgage debts. This was borne out by the valuation as I have mentioned. Mr Grier explained in his memorandum of

`At the present time Emanuele has encumbrances on his family residential properties and each month interest is paid to the mortgagees with funds made available by EFG through the cash flow budget approved half yearly. It was recently agreed that if there is an equity in these properties it would be in EFG's interest to clear liability and be in a position to enjoy a capital appreciation in the future.'

[633] A substantial delay occurred between approval in principle for the assignment of the mortgages and the completion of that agreement. A memorandum of 15 June 1993 to Mr Crosby refers to approval for the assignment and also to delays `as existing mortgagees have not provided copies of their documents to our solicitors.' By

24 August 1993 the assignments had still not been effected. It is, therefore, apparent that the assignment was unrelated to Mr O'Grady's initiative in

September 1993 to bring about a `clean break' with the Emanuel group, which is the subject of discussion in the next section of the judgment.

[634] By the time the assignment did take place Mr O'Grady had added reason for proceeding with it. He had experienced Mr Emanuele's resistance to his proposals and thought that if EFG were mortgagee of those residential properties, its bargaining position in the negotiations might be improved. See T.8273.50-8274.10.

[635] It is difficult to understand quite what is the basis for attacking this transaction. The circumstances giving rise to it have already been discussed. Given that the request for the assignment came from Mr Emanuele who could not pay interest without EFG's support and that by the assignment interest was capitalised and could not be demanded until the expiration of the moratorium period, it does not seem possible to regard it as an uncommercial transaction. Unless it is it is not amenable to attack pursuant to s 588FE(4).

[636] The Emanuel group does not appear to have suffered any detriment by reason of the transaction. To the extent that the assignment made additional equity available to secure their debts they were better off.

[637] Although this transaction involved the Emanuel group becoming liable to pay interest at the higher rate fixed by the deed of master agreement, the plaintiffs' submissions do not refer to s 588FD as a basis for attacking it. In any event for the reasons advanced with respect to the last transaction I would not find that the loan was unfair for the purposes of the section.

[638] The penultimate transaction which the plaintiffs seek to have set aside is a Deed of 23 September 1993 (Exhibit 106, Volume 15/1369). It was pursuant to this deed that Management was advanced the sum of $237,000 which was paid to Kartha pursuant to the agreement between those two companies for the recission of the contract for the sale and purchase of Parcel 64. The parties to the deed are the same as for the previous Deed of Variation and the terms are essentially the same. Elfic was given the discretion whether or not to advance the moneys but, if advanced, they were to form part of the principal due under the Deed of Master Agreement and were to bear interest at the rate set under that agreement.

[639] The statutory basis for the attack is the same as for the previous deeds of

16 August and 9 September. The factual basis of the attack is said to be that the deed `served no useful purpose for the Emanuel companies. It was done solely for the benefit of (EFG) and ... resulted in the loss of the Kartha contract and the prospects of a valuable development ...'.

[640] There is brief reference in the Introduction to these reasons to the contract by which Kartha agreed to purchase Parcel 64. It is mentioned at more length in that part of Section IV of the judgment which deals with the valuation of the APM land. For present purposes it is enough to say that Kartha did not complete the contract of purchase despite a number of extensions of time to do so, and the contract was eventually rescinded by Emanuel 14. The plaintiffs appear to contend that the decision to bring the contract to an end was EFG's and was made for an ulterior purpose. That purpose is identified as EFG's desire to obtain title to Parcel 64 itself. It could not hope to do so while the contract with Kartha persisted. The payment of $237,000 to Kartha is said to be the price EFG was prepared to pay, at the expense of Emanuel 14, to persuade Kartha not to contest the recission.

[641] The evidence is overwhelmingly against this theory. Everyone concerned shared the view that Kartha could not complete the contract because it did not have the financial resources. Mr Wadley, Kartha's principal, was said to be a speculator without financial substance who needed the involvement of a wealthy joint venturer to be able to proceed with the purchase of Parcel 64 (T.4268.50). The evidence of his solicitor, Mr Purvis, demonstrated convincingly that Kartha was unable to attract a suitable partner. (T.3634.10-.60) This was evidence adduced in chief by the plaintiffs who called Mr Purvis. At T.3643.30 Mr Purvis confirmed that

Mr Emanuele expressed doubt about Kartha's ability to complete the contract.

Mr Crosby (T.6207.20-.23) and Mr Grier (T.7402.10-.20) both testified that they had doubts about Kartha's ability to complete the contract. Mr Booker

(T.7637.35-.40; 7643.30; 7646.35-.45; 7739.24) gave evidence that Mr Emanuele wanted the Kartha contract to be rescinded because while it subsisted he could not proceed to have Parcel 64 rezoned and Kartha had demonstrated an inability to proceed with the contract.

[642] The payment made to Kartha was the product of a `reluctant decision' made by EFG when the contract was entered into (T.6211.10) to pay Kartha the expense incurred in attempting to have Parcel 64 rezoned. It had made endeavours in that regard and $237,000 was the negotiated amount to reimburse Kartha. In return for the payment Emanuel 14 received the results of the work done by consultants in preparation for the rezoning application. There was no evidence that the amount paid was not fair consideration.

[643] In follows, and I find, that Emanuel 14 wished to terminate Kartha's contract for sound commercial reasons and, with EFG's assistance, negotiated a fair price for the recission. It was reasonable for Emanuel 14 to borrow the money necessary to pay out Kartha as it enabled Emanuel 14 to proceed with applications to rezone the land utilising the benefits of work done by Kartha's consultants. The terms on which the money was borrowed was not extortionate in the circumstances in which

Emanuel 14 found itself and which have been discussed earlier.

[644] The plaintiffs' contention that the contract was brought to an end as part of `the O'Grady scheme' is untenable. There is no doubt that Kartha could not perform its contract which, while it remained on foot, prevented the sale of Mango Hill to any other party and precluded both the Emanuel group and EFG from proceeding to have the land rezoned or obtaining development approvals. In return for the payment of the $237,000 the Emanuel group, and EFG, obtained the benefit of the work done by Kartha's consultants with respect to obtaining development approval. The negotiations for the recission occurred between parties at arms length and there is no evidence that the amount paid was not an appropriate price. It cannot be said that the transaction was uncommercial so that the attack based upon s 588FE(4) fails.

[645] The last transaction in this category is the sixth Deed of Variation of

16 November 1993 (Exhibit 106, Volume 15/1370). The parties are the same as for the previous Deeds of Variation and the terms are substantially the same.

[646] By Clause 2 Elfic agreed to vary the existing loan agreements by advancing two further sums of money (together totalling $1,857,500) to enable work to be carried ot on two of the APM parcels. $540,000 was to assist with works on Parcel 52 and $1,317,500 was to permit work to occur on Parcel 53.

[647] Parcel 52 comprised Caloundra Downs. The Deed of Variation set out a brief description of the items of work to be done and the price for each which totalled the amount of the advance of $540,000. The work was the construction of an access road. The advance was described as a progress payment to subcontractors which was to be paid upon the receipt of a certificate from the consulting engineers that work to the requisite value had been performed. It is evident that the work was meant to enhance the value of Caloundra Downs to the benefit of both the Emanuel group and EFG.

[648] Similarly the advance for Parcel 53, Bribie Island, was to pay for the construction of the haul road to allow stands of timber to be felled and removed. This is discussed in the next section of the judgment. Without that expenditure the haul road would not have been built and without the road the timber could not have been harvested and sold. The proceeds of sale went in reduction of the Emanuel group's debt.

[649] This is one of the transactions which is said to be an unfair loan by reason of the imposition of the interest rate applicable to the Deed of Master Agreement. As well, it is attacked on the usual bases relying upon s 588FB, s 588FC and

[650] The basis for the complaint is that `there was no benefit to (the Emanuel group) in ... provision of these funds. To the contrary, the deed had encouraged trading whilst insolvent, incurring expenses in a considerable amount. ... This imposition provided no commercial benefit to (the Emanuel group) for by this time Fosters had determined to take the APM lands for itself.' These contentions are wrong as a matter of fact. The facts relevant to it are set out in the next section of the judgment. It is true that by this time Mr O'Grady had proposed to Mr Emanuele that the APM lands be transferred to EFG as a means of allowing EFG to recover its loss and on terms that provided some succour to the plaintiffs, but it is not right that Mr O'Grady had `determined to take the APM lands'. Mr Emanuele had not accepted his proposal and in November 1993 the matter was still under negotiation.

[651] Nor is it right that the advance conferred no benefit on the Emanuel group. It allowed it to recover about $10,000,000 worth of timber sales which were credited to its account. The money spent on Parcel 52 might reasonably be thought to have improved its value which was of benefit to both mortgagor and mortgagee. Apart from the bare, erroneous, assertion that the transaction conferred no benefit on the Emanuel group, the plaintiffs supply no basis for a finding that the transaction was uncommercial. The other bases are likewise without substance for the reasons given with respect to the previous transactions. The attack on it therefore fails.

[652] The deeds of 16 August 1993, 9 September 1993, 23 September 1993 and

16 November 1993 are all those in respect of which it is said the advances made pursuant to them were unfair loans. I have dealt with the argument when considering the first of those loans but not the other three. With respect to them I consider that the loans were not unfair for the reasons I expressed when considering the 16 August 1993 transaction. They were not relevantly different.

[653] The plaintiffs' habit of advancing precisely the same grounds for attacking the transactions repeated in the same terms without endeavouring to apply the legal bases of complaint to the facts of the particular transactions makes it difficult to understand what, in reality, the plaintiffs contended were the grounds for impugning the transactions. I have therefore had recourse to what was said about the transactions in the opening in an endeavour to understand and to deal with the points of substance in contention.

[654] One of the grounds repeated throughout the submissions as a basis for seeking to have transactions set aside is that they constituted unfair preferences pursuant to

s 451 of the Companies Code or s 588FA of the Corporations Law. No detailed submissions are advanced in respect of this contention which cannot have been intended. S 451 speaks of payments made by a company which is later wound up, and s 588FA refers to a creditor receiving payment from the company which is wound up. The transactions here called in question are those in which payments were made to Management by EFG by way of loans. It is not my understanding that a payment made to an insolvent company can be a preference.

[655] These are all of the transactions which figure in the plaintiffs' submissions as those which are sought to be set aside or in respect to which some relief is asked for. There were one or two other transactions referred to in the statement of claim but as they had not been the subject of submission I take them to have been abandoned.

[656] Reduced to its simplest the 1995 Scheme had three components:

(a) Obtaining a judgment in the Supreme Court of Queensland by collusion for a debt in an amount much in excess of what was `truly' owed by the Emanuel group to EFG.

(b) The execution of the DOFR, the Simionato deed and the Giuseppe Emanuele deed which diverted $4,600,000 from the Emanuel group to a trust and thence to Mr Emanuele personally and which released EFG from claims arising out of its relationship as mortgagee with the Emanuel group as mortgagor.

(c) A transfer of the APM lands for an arbitrarily fixed amount which was less than the true value of those properties.

The scheme is said to have involved a conspiracy between: Giuseppe and

Rocco Emanuele, Mr Ferrugia and Mr Purcell, their solicitors, Mr Winter (who became the solicitor for the Emanuel group in February 1995), Mr Elliott (a partner in EFG's solicitors, Messrs Clayton Utz) and Mr O'Grady and Mr Crosby. It was alleged to have begun in July 1993 and ended in March 1995 with the execution of the three deeds.

[657] Paragraph 214 of the statement of claim sets out the full detail of what was said to constitute the scheme, the three essential components of which I have summarised. Paragraph 215 pleads the scheme was implemented by:

(ii) A letter of 16 March 1995 written by Mr Winter to Clayton Utz

(iv) Payment of $400,000 to Thomsons (of which Messrs Ferrugia and Purcell were partners)

By paragraph 263 it is pleaded that the 1995 Scheme:

`Was conceived ... and implemented for the purpose of dividing the assets of the Emanuel group between the (first defendants) and the Emanuel Family Directors and their legal advisors, leaving $650,000 to be divided between the remaining creditors whose debts exceeded $120,000,000 which purposes were ... unlawful and dishonest ...'

[658] By paragraph 264 it is said that the 1995 Scheme was unlawfully and dishonestly executed:

(a) By the corruption and subornation of the Emanuel Family Directors and their legal advisors.

(b) By the first defendants exercising its dominance at meetings of creditors of the Emanuel group to compel the acceptance of deeds of company arrangement in order to suppress investigation by external controllers of the Emanuel group.

(c) By the first defendants concealing the fact and terms of the 1995 Scheme from the Emanuel group's external controllers.

(d) By depriving the Emanuel group of assets, thereby removing its capacity to fund an investigation by the external controllers of the Emanuel group into the affairs of the group and funding litigation `to bring to account those responsible for the execution and implementation of the 1995 Scheme and the recovery of any and all losses thereby suffered.'

[659] A recurring theme in the plaintiffs' submissions, indeed a note sounded constantly, is that throughout the negotiations and discussions which led to the 1995 Scheme the Emanuel group was insolvent. Often it is said that those companies were `utterly' insolvent. I have no doubt this was so. I have found that the Emanuel group was insolvent from 1 July 1988 and its position deteriorated year by year.

Against this recurring theme the plaintiffs describe the transfer of properties from Emanuel 14 to the first defendants as being, for various reasons, a wrongful act of great seriousness. The submissions must be dealt with in detail but it is as well to remember that the properties which were transferred were all secured by real property mortgage and company charge to EFG and that the amount of the debt owed by the mortgagor, Emanuel 14, was far greater than the value of the lands transferred. The debt was even greater than the value which the plaintiffs ascribe to the land.

[660] This had been the case since at least August 1993. The debt was, of course, increasing while interest was capitalised and added to the principal sum. There was no commensurate, or any, increase in the value of the secured properties.

The August 1993 Security Executive Summary, which, as its name suggests, was a condensed report of EFG's security position in relation to the Emanuel group prepared monthly by the account manager and his staff for submission to his superiors, shows that the estimated realisable value of properties securing EFG's loans totalled $99,915,000 as against a debt of $144,780,000. In

January 1995 the Security Executive Summary for the previous month showed that the estimated realisable value of EFG's securities was $99,281,000. The debt was then $132,365,000.

It is apparent that Mr Emanuele and his co-directors had come to accept this reality by April 1994. A meeting was held that day between Mr Emanuele, his son Rocco, Mr O'Grady and Mr Benskin who attended only as a witness. According to the transcript of the meeting Mr Rocco Emanuele acknowledged that `they' were `under water'. This was said in the context of statements by Mr O'Grady that EFG would be unable to recover the whole of its debts from the Emanuel group because of the deficiency in value of the secured assets compared to the loan.

[661] The point which is obvious, but which should nevertheless be stated because it is so frequently ignored by the plaintiffs, is that neither the companies in the Emanuel group nor their unsecured creditors could ever have expected to receive any benefit from the sale of those properties or their continued ownership by the Emanuel group.

[662] One of the more curious aspects about the way in which the plaintiffs presented their case is their ambivalence towards the allegations made in the statement of claim, and repeated in the written submissions, about the dishonesty of EFG's officers, its solicitors, Messrs G & R Emanuele, and their solicitors. Having read the pleadings one expects to encounter a case in which proof of

wide-ranging, serious fraud and dishonesty is to be offered against those who are said to have conspired to defraud the Emanuel group and its creditors, and to have bribed directors of the Emanuel group companies to achieve their ends. The pleading seems to raise a case of deliberate, personal mendacity on the part of those who are said to have come together to deprive a company of its property for the benefit of their employer and client respectively, and to have deliberately corrupted by bribery those whose co-operation they needed to achieve their purpose.

[663] The plaintiffs' written submissions (Part 6.1 page 28) state in categorical terms that `THE SCHEME WAS FRAUDULENT.' In subsequent paragraphs it is, however, submitted that it is not necessary for the plaintiffs to prove dishonesty on the part of Messrs Emanuele or the EFG officers, and that the fraud alleged was `of the same variety as that required under the Bankruptcy Act when provisions are attack [sic] as offending s.121 (dispositions with intent to defraud creditors). Fraud for that purpose involves the notion of detrimentally affecting or risking the property of others ... The situation is akin to equitable fraud, where the fraud consists in the abuse of the fiduciary duties ... in the sense of abusing the position occupied by the fiduciary ...' (para. 89, 91 of the submissions)

[664] Leading counsel for the plaintiffs made the same point in oral submissions. He said theirs was not a case of deliberate, subjective dishonesty against EFG (and

Mr Elliott) but rather it was a case where those gentlemen had blundered into transactions without, regrettably, understanding that the law did not permit them. (T.9904-6) If the plaintiffs' case truly were of that character so that the impugned transactions may be set aside because the law forbids them, one wonders why it was thought necessary to publicly accuse senior officers of a public company, and a solicitor of impeccable reputation, of such iniquities as conspiracy, dishonesty and corruption when the case against them does not involve assertions of moral turpitude and the plaintiffs are entitled to relief regardless of the intentions or state of mind of the officers of EFG and the Emanuel group. One wonders, as well, why the word `dishonestly' should appear so frequently in the statement of claim.

[665] I listened attentively to the cross-examination of Messrs O'Grady, Crosby, Elliott, Perrett and Byrne for indications in their answers that there may have been a conspiracy to defraud along the lines pleaded, or that the judgment was obtained by collusion, or that there was dishonesty involved in the agreement reached between EFG and the Emanuel group. I did not detect any suggestion of any of these things. I did not detect any attempt to elicit any of them. So remarkable was its absence that at the conclusion of the cross-examination of Mr Perrett I asked Mr Morrison QC:

`... Should I conclude from a remark you made a moment ago that in due course you will ask me to conclude that Mr Perrett engaged in some conscious wrongdoing on behalf of EFG or himself?

Mr Morrison: That question's too wide. No, your Honour, no need to conclude that.

His Honour: Well, I tell you now distinctly, that I have attended to your cross-examination quite carefully. I have not in it detected a suggestion he acted dishonestly. ... If you want to contend that he has in some way I think you should put it to him directly.

Mr Morrison: No, no. Your Honour's apprehended it correctly.' (T.9288.1-.20)

[666] Mr Perrett was not alleged to have been a conspirator but his partner, Mr Elliott was. Mr Perrett conducted the litigation for EFG in the Federal Court and in this court in 1995. He, as well as Mr Elliott, advised Mr O'Grady during the negotiations which led to the execution of DOFR and the other deeds and he negotiated on EFG's behalf to bring about that agreement. I do not really understand how EFG can be accused of dishonesty if its officers acted in accordance with legal advice and it is not said the solicitor acted dishonestly in any way.

[667] Something similar happened in the cross-examination of Mr Byrne. As will emerge Mr Byrne gave advice to Mr Perrett that to pay money to Simionato Holdings rather than the Emanuel group was not unlawful. This payment is the foundation stone of the plaintiffs' case. It is said to constitute the bribe which corrupted the directors of the Emanuel group and induced them to defraud their companies. Mr Byrne saw it very differently and so advised Mr Perrett. Whether his advice was right or wrong if it was his honestly held opinion that, as a matter of law, the payment was lawful it seems hard to castigate EFG for engaging in conspiracy to defraud if it acted in accordance with that advice. I asked Mr Meagher QC whether he was `going to submit that I should find Mr Byrne did not believe in the accuracy of the advice he gave' to which Mr Meagher replied `I don't think I have to go that far.' (T.8994.50)

[668] I formed the distinct impression during the cross-examination of Mr Elliott that all allegations of impropriety against him had been abandoned: that it was not to be argued that he conspired with others to defraud the Emanuel group or that he personally had behaved in any way dishonestly or knew of any dishonesty in the conduct of those with whom he was negotiating on behalf of EFG. Any attempt now to submit that Mr Elliott acted dishonestly would involve the grossest dereliction of the cross-examiner's duty in not fairly allowing the witness an opportunity to answer the charge against him. I put it more strongly. Any submission now of dishonesty by Mr Elliott would give rise to a distinct suspicion that there was hypocrisy in the cross-examination.

[669] Contrary to the plaintiffs' submissions, it is, of course, the case that fraud of the kind referred to in s 121 of the Bankruptcy Act does involve an actual intention to deprive a creditor of the benefit of an asset to which it would have been entitled but for the challenged disposition. Re Barnes, ex parte Stapleton [1962] Qd R 231 to which the plaintiffs refer does not assist them. In that case Gibbs J (237-8) insisted upon actual fraud, `an actual intention to defeat or defraud creditors', being established before statutory provisions to a like effect of s 121 could operate. It is to miss the point to say that the courts determine the existence of the intention as a matter of inference from facts objectively proved. What has to be proved, by whatever means, is the actual, subjective, intention to cheat. The plaintiffs' submission is defeated by Cannane to which reference was made in the previous section of the judgment.

[670] The conspiracy had as its object the transfer of the APM land to EFG's subsidiaries at an undervalue to allow EFG to develop the land, or part of it, for its own benefit. A convenient place to begin an examination into the 1995 Scheme is that third component: the undervalue of the consideration for which the land was transferred.

[671] An integral part of the 1995 Scheme, as defined, was that the APM lands should be transferred from Emanuel 14 to nominees of the first named defendant by contract of sale and that:

`An arbitrary and improper value of less than market value would be fixed as the consideration for the transfer of the lands and applied in reduction of the debt, leaving a significant debt outstanding.' (para 214.7.5 of the statement of claim)

[672] There are, therefore, two issues to be addressed with respect to the amount of the consideration for which the APM land was transferred. One is whether the stated amount was in fact less than the true value of the land at the time. The second is whether the amount was fixed arbitrarily at an undervalue so as to benefit EFG at the expense of Emanuel 14.

[673] It is convenient to deal with the second point first, because it is shorter.

[674] After the Emanuel group's failure in the Federal Court EFG considered how best to achieve the highest return possible from its secured properties. It anticipated exercising some or all of its rights as mortgagee and chargee. Part of Mr Jaenke's role in this assessment was to obtain valuations of the real properties secured by mortgage. He did this because he:

`Fully expected that Joe Emanuele would take any point he could in relation to EFG's enforcement action and ... wanted to make sure EFG's interests were protected ... by getting valuations in advance of any sale.' (Exhibit 457 para 406(e))

[675] Accordingly, and probably because he was told to instruct valuers by Mr Booker, (T.7694.40) by letter of 19 December 1994 Mr Jaenke instructed Jones Lang Wooten (JLW) to value a number of properties. Mr Jaenke wrote:

`Under its securities ... EFG is mortgagee in possession of the majority of the properties listed in the letter dated 5 December 1994 from the writer to ... Clayton Utz - copy attached ...

Current valuations on a "forced sale" basis are required on the individual properties.

While we are in possession of current market valuations on all the properties, we require reports from a third party valuer.

"Forced sale" valuations are defined as what a prudent purchaser would pay for a property in the existing current market conditions, given a professional marketing promotion in a 3-6 month period by a reputable sales organisation.

Please do not hesitate to contact this office should you have any queries.

[676] By letter dated 31 January 1995 Mr Gregory of JLW replied:

`We refer to your letter dated 19 December 1994 ... We advise that we have inspected the properties, undertaken local research, prepared our calculations and now provide this brief letter, pending finalisation and issue of our full and formal report documents.

Subject to the issue of our formal valuation reports we are of the opinion that the "forced sale" values of the properties forming part of the Emanuel group are as follows:

Our formal valuation reports are being prepared and we undertake to forward three unbound copies ... by the end of this week. ... Should you require any further information in respect of the valuations ... please do not hesitate to contact the undersigned.'

[677] A valuation in respect to Parcel 64 was delivered a little later. It valued the land at $26,000,000.

[678] Mr Elliott said that when he met Mr Ferrugia on 10 February 1995 the latter asked for a copy of the valuations of the APM land which it was proposed would be transferred pursuant to the DOFR which was then being negotiated. Mr Elliott said he would seek instructions from EFG about releasing the valuations (Exhibit 463, para 527). The evidence does not appear to show whether the valuations were ever supplied.

[679] Mr Jaenke's description of how the valuations were obtained and the instructions which were given to the valuers in respect of them was not the subject of any question from the plaintiffs. Mr Gregory himself valued Parcel 64, the most significant. It was not suggested to him that the opinion he gave as to the value of that parcel was not his honestly held opinion. It was not suggested that he did not value the properties in accordance with the instructions given on

19 December 1994. These, it would be understood, asked for no more than the value of a large number of parcels of land, only some of which became the subject of the transfers pursuant to DOFR, on the basis set out in the letter. There was no hint in the cross-examination that Mr Gregory had been asked to, or had, valued those four parcels arbitrarily or so as to produce a figure less than his opinion as to their true value.

[680] The only possible conclusion is that the ascertainment of the consideration for the transfer of the APM land was not arbitrary or designed to secure their transfer at an undervalue, where the only evidence relevant to the topic shows that a valuer of accepted skill and reputation was asked to value the lands on a basis made manifest in correspondence, when he purported to do so, and there was no challenge to any aspect of the instructions issued or manner in which the valuation was performed. The plaintiffs dispute the correctness of the valuation opinion, but that is a different question.

[681] Moreover there was no evidence that any officer of EFG believed the APM land to be worth more than the JLW valuation. None of them was asked about his belief in that regard.

[682] This part of the plaintiffs' case therefore fails. The APM lands were transferred by Emanuel 14 to the fifth, sixth, seventh and eighth defendants for a consideration equal to their valuation determined by a reputable and competent valuer in the conscientious exercise of his profession.

[683] I turn then to consider the evidence as to the worth of the APM land in March 1995.

[684] There were four parcels of land which have been the subject of valuations. It is convenient to refer to them by the designations used by the parties. These were:

[685] I take the following descriptions of each parcel essentially from Mr Slater's valuations. There is no controversy about the physical characteristics or zoning of the lands. Debate centred on the development potential of each parcel.

[686] Parcel 64 had an area of 1,071 hectares comprising 109 separate lots. All but

54.75 hectares were in the local authority area of the Pine Rivers Shire Council ("PRSC"). The balance was within the Caboolture Shire Council area. The southern boundary of the property is 26 kilometres north of Brisbane. Its western boundary is the Bruce Highway. The south and east are bounded by Anzac Avenue which connects the Bruce Highway to Redcliffe. The northern boundary is formed by Boundary Road, adjacent to which is the part of the land in Caboolture Shire. Boundary Road connects the Bruce Highway to Deception Bay which lies to the north of Mango Hill. There were no water supply or sewerage connections in the locality, though electricity and telephone services were available. The country was undulating coastal forest and generally of good elevation. Its topography made it well suited for urban development. The land had been used as a pine plantation but the trees had been cleared by the end of 1994. The land was in the `Rural' zone, which forbade any form of residential development or subdivision into lots smaller than 16 hectares.

[687] Parcel 52 consists of five separate lots with a total area of 4,023 hectares. It is about 10 kilometres long, north to south, and between four and six kilometres wide, from east to west. The land is low-lying, generally level but some is gently undulating. Much of it is swampy and prone to flooding. The parcel lies to the south-west of Caloundra, its nearest point being about four kilometres from the central business district. Surrounding localities to the north include some residential and rural residential developments. The Caloundra aerodrome lies to the east of the parcel towards its northern end.

[688] The greatest part of the land is zoned rural. At the northernmost end 100 hectares were sold off to a developer, Mr Harrison, for $2,500,000 subject to conditions as to rezoning to allow residential development. The conditions were not satisfied within the times allowed by the contract. The Elders defendants, having decided to exercise their powers as mortgagee, were not bound by the contract and refused to honour it. Instead, they paid the purchaser an agreed sum, the reasonableness of which was not in doubt, for his considerable efforts in attempting to obtain rezoning. In fact he had been very substantially successful despite the opposition of the Caloundra City Council so that the Elders defendants obtained the benefits of the rezoning which occurred shortly after the termination of the contract. The result is that the valuers were prepared to accept the contract price of $2,500,000 as indicative of the value of that area of land despite the contract being conditional and not proceeding to settlement. The area which had been the subject of Mr Harrison's endeavours, was known as Caloundra Downs 1. The balance of Parcel 52 was known as Caloundra Downs 2. It was vastly bigger in area, was more remote from

Caloundra City and contained large areas of flood-prone, environmentally sensitive, land.

[689] The next parcel to describe is 53, the land at Bribie Island. It too, is vast in extent, comprising 1,826 hectares which had been utilised as a pine plantation. The parcel lies centrally on Bribie Island being an elongated area parallel to but separated from both the ocean and Pumicestone Passage by national parks and natural vegetation. The southern boundary adjoins a residential canal development known as

Pacific Harbour. It is planned to include a golf course which is to be located on land formerly comprising part of Parcel 53. Some was acquired prior to and some subsequent to the events in question in this litigation. The land is completely unserviced and has no conventional means of access apart from a road which terminates at the southern boundary.

[690] The fourth Parcel, 62, consists of seven lots aggregating 1,226 hectares. It is situated about 38 kilometres north of Brisbane and six kilometres south-east of the township of Caboolture. Its northern boundary is the Caboolture River and it is north of Mango Hill. It is irregular in shape and is generally low-lying, falling away from higher ground in the south and west to lower undulations of the

Caboolture River basin. Less than a third of it, about 363 hectares, is above the Q100 flood-line. Apart from the higher land near the southern and western boundaries, there are only isolated portions of flood-free land. It was initially used as a pine plantation. There are a number of swamps and creeks within the parcel. Most of the land is in the rural zone while the strategic land use plan map shows that its preferred uses are open space, sewerage disposal, rural and rural residential. This last designation relates to a small part only. On 18 September 1992 the

Caboolture Shire Council issued a notice of intention to resume the land to put it to use as a sewerage treatment and disposal facility. The notice expired but in 1995 it was still a distinct possibility that the land would be acquired for that purpose. It would appear to be eminently suitable for it.

[691] When expressing their opinions about the value the valuers were obliged to make assumptions about the use to which the land might be put. More accurately, because the valuations were retrospective and looked to the value as at March 1995, the valuers were obliged to make assumptions as to what would then have been the likely use to which the land could be put. The assumptions made by the valuers differed. The difference is explained partly by the instructions given to them by the parties who retained them. In coming to a judgment about value I have had the advantage of hearing evidence from a number of witnesses involved in attempts to develop Parcel 64, the most valuable of the four parcels. This evidence is of considerable importance in assessing which of the opinions as to valuation should be accepted. It imposes a degree of reality into the valuations to replace the assumptions.

[692] It is convenient to deal with this evidence which was adduced in the plaintiffs' case from witnesses called by them before discussing the valuation opinions.

[693] In order to improve the prospects of obtaining some form of development approval for Parcel 64, EFG entered into a joint venture agreement with

Lendlease Developments Pty Ltd ("Lendlease") a large, experienced and reputable commercial developer. It was thought that PRSC would treat a development application more seriously if it were made by such a company rather than by a mortgagee in possession whose evident interest would be to effect a quick sale with approvals rather than to develop the land.

[694] Past events had shown that it would not be easy to obtain development approval. Some work had been done by PRSC and its officers in 1991 and 1993 to prepare a plan for the orderly development of the shire in the vicinity of Mango Hill but it had not progressed very far despite some prompting from the Emanuel group. However, on 11 March 1994 the director of the Department of Development and Environment of PRSC recommended to its Planning and Development Committee that he be authorised to advertise for a senior planning officer to work on a

`Mango Hill DCP' and that the PRSC accept Elders' offer to pay for consultants involved in developing the DCP and that Mr Brannock be appointed the town planner responsible to PRSC for the preparation of the DCP. The director also recommended Elders, Emanuel and Mr Brannock be included in the consultation steering group involved in the preparation of the DCP and further recommended if the DCP preparation included an environmental impact assessment that further such assessments would not be required for subsequent rezonings or development applications on Mango Hill.

[695] A "DCP" is, of course, a development control plan.

[696] These recommendations marked a substantial victory for Emanuel 14 and Elders. The recommendations were for the preparation of a DCP for Mango Hill in which the owners and mortgagees of the land would be involved and their preferred town planner would be largely responsible for its terms.

[697] The local authority elections held in March 1994 saw a change to the composition of PRSC. A number of councillors were elected who were opposed to any, or any substantial, development in the area of Mango Hill. Their declared desire was to retain as much of the natural environment in the shire as possible. At a meeting of the Council on 18 April 1994 the recommendations of the director were rescinded and the question of the DCP was referred back to the Planning and Environment Committee `for further consideration.' That committee met on 22 April 1994 and recommended that PRSC:

* `Conduct an environmental impact study ("EIS") on the Mango Hill ... area before any further action be taken regarding the preparation of a DCP

* Council write to the adjoining authorities, Redcliffe City Council and Caboolture Shire Council inviting expressions of interest on the preparation of an environmental impact study for the Mango Hill region

* That an environmental impact study for the region be prepared `based on the principle of low density urban development linked to and by open space links which would provide the protection of watercourses and vegetation and natural farmland.'

Such a proposal would have severely curtailed development in Parcel 64.

[698] On 16 May 1994 PRSC resolved to establish a special committee, the aim of which was to implement a DCP for a large part of the shire including Mango Hill, to implement an EIS of the Mango Hill, to review a DCP for Kallangur and to prepare a commercial area DCP for Petrie.

[699] The result of this was that a DCP for Mango Hill was to form part of a much wider planning study to consider commercial and urban development for the whole of the shire. It was likely to delay the preparation of the DCP considerably.

[700] The Planning and Environment Committee met on 19 May 1994. It concluded that `existing and approved floor space levels represent a serious over-supply of retail floor space, even with anticipated growth,' in the shire. The committee recommended that PRSC consider including as an aim of the proposed DCP for Mango Hill the following:

`In respect to the localities of Mango Hill and Griffin it is not Council's intention to permit central shopping facilities, commercial facilities, local shopping facilities and neighbouring facilities to be established east of the Bruce Highway other than precincts 8 and 11 ... until it has completed an environmental impact study and development control plan for these localities.'

The relevant parts of Parcel 64 lay outside precincts 8 and 11. On 9 June 1994 a special committee endorsed the recommendation that no development be allowed `east of the Bruce Highway' until a DCP was prepared. PRSC duly resolved to accept the recommendation at its meeting on 18 July 1994, thus effectively delaying any new development approval on Parcel 64 until the entire planning study was complete.

[701] The State Government Department of Housing and Local Government was also taking some interest in Parcel 64. Because of its size, single ownership, topography and locality, it was seen to be suitable for housing development. RPAG recommended that a major centre be established at Strathpine or Caboolture or a new site, one possibility for which was Mango Hill. PRSC rejected the planning group's premise that closer development should occur in its area. The special committee recommended on 17 August 1994 that Council should, in the preparation of its new planning documents, `severely limit the intrusion of urban development into environmentally sensitive areas ... and to encourage new and innovative land development techniques which will protect the natural landscape. These broad principles would achieve much lower population projections than those forecast in the (planning group) report.'

[702] On 26 August 1994 the special committee recommended that any contact

Mr Brannock might have with the Council concerning the content of the DCP should be restricted to its manager of strategic planning and economic development. The recommendation appears to have been designed to reduce Mr Brannock's influence. On 13 September 1994 the special committee noted that a brief for the planning study had been adopted by PRSC on 5 September but that no timetable for the study had been prepared. At its meeting of 23 February 1995 PRSC approved the Planning and Environment Committee's recommendation that `no application for rezoning, subdivision or town planning consent in respect to any land located within the localities of Mango Hill and Griffin shall be approved ...'.

[703] Mr Guy Gibson is a town planner, holding a degree in that discipline from the University of Queensland. He was enticed to leave his employment with the Brisbane City Council in May 1996 by Lendlease for the express purpose of obtaining planning approvals for the joint venture development of Mango Hill .

[704] In order to maximise return from the development of the land, Elders and Lendlease proposed what has been called a master planned community development, which is to say that from its inception the development was to be subject to an overall plan to produce a socially and geographically coherent neighbourhood which would include residential housing of various densities; parks and other open spaces; schools; local shopping centres; commercial buildings and a sub-regional shopping centre. The last of these had proved the most troublesome. A number of sites within the PRSC boundaries were competing for that centre. Only one was to be allowed. The construction of such a centre would attract people and money, thereby adding considerably to the value of the successful site and its surroundings. As noted the Council was opposed to large scale development on Parcel 64.

[705] Merely rezoning the land would have been insufficient because of the mix of uses which were proposed for the master planned community and the difficulty inherent in identifying the precise location on a large broad acre site of the particular position of the various facilities, each of which would require a particular zone. The only realistic procedure was a DCP unique to the site.

[706] In the end, three years were required to obtain the DCP. The original rezoning application was lodged in December 1995 and the plan was gazetted in

November 1998. It cost the joint venture parties $18,000,000. A large part of the time was taken in negotiations with Westfield and PRSC to have the

sub-regional shopping centre located in Parcel 64. It was Mr Gibson's opinion that the expenditure of that entire sum was necessary to achieve the development approvals needed for the development. It was by no means certain that the

sub-regional shopping centre would be located in Parcel 64. There was a rival site, Tulip Town only a few kilometres to the west which had the advantage of appropriate zoning and of already having on it a large neighbourhood-sized shopping centre. It could have conveniently been extended to become the

sub-regional centre. It was, obviously, in an area already serviced by water, power and sewerage. Parcel 64 was unserviced. The value of the development without the sub-regional centre would have been considerably less. Without it, according to Mr Gibson:

`... it would have effectively reverted to a being a large residential subdivision ... without all of the ... non-residential component and indeed without probably a large proportion of the medium density housing ...' (T. 3343.10)

[707] It was Mr Gibson's opinion, based upon his experience of dealing with PRSC, that in March 1995 a town planner could not have been confident that a development of the type now approved, would ever have been allowed. He said:

`It was identified as a future urban area on the strategic plan but it was outside the headworks areas. Council had effectively expressed a view that density ought to be ... restricted so as to give greater weight to environmental and open space aspects so one ... might have been very confident that some form of development would ultimately be approved, one couldn't be confident that it would be for a master planned community. It could well have been for a much lower density of development.' (T.3378.40-50)

By this he meant an ordinary suburban development supported by local convenience shopping centres and an overall population of between twelve and fifteen thousand people rather than the proposed population of about 25,000.

[708] Mr John Brannock is a town planner of considerable experience. He was engaged by Emanuel 14, with Elders' approval, to assist in obtaining rezoning approvals for the promulgation of a DCP for Mango Hill. His services were terminated in

December 1995 when his application was lodged with PRSC. Mr Brannock was retained by the plaintiffs to provide four reports - one with respect to each of the four parcels of land setting out his opinion as to their highest and best use from a town planning perspective as at March 1995. His reports were provided to

Mr Slater, the valuer engaged by the plaintiffs and formed an important basis for the valuation.

[709] In each case Mr Brannock's opinions were optimistic and portray an expectation that the lands could have been developed substantially from their raw state.

[710] Mr Brannock expressed these conclusions for Parcel 64:

`... a rezoning proposal for a master planned community which included a sub-regional centre would have been approved on the subject site in February 1995. A DCP including such development would also have been successful. It was only a matter of time before either or both of these mechanisms would come to fruition.

There was extensive market interest (at the relevant date) in the development of a large scale residential estate anchored by a sub-regional centre. ... the market place was anticipating this kind of development.

It was widely recognised that the 1988 PRSC strategic plan was outdated, having been based on much earlier planning studies which had not anticipated the higher population growth in Brisbane's northern corridor. Consequently, there was support from both Government officials and the private sector for a well planned major residential and sub-regional centre development.

In February 1995 the vast majority of the subject site was designated urban areas on the PRSC's strategic plan and would have had the following development potential:

(1) Urban development would have been approved as a master planned or integrated mixed use development proposal providing all the necessary community, open space and commercial needs to support the proposed resident population.

(2) The developable area of the ... site was approximately 900 hectares and would have been able to accommodate an urban residential population in the order 25,330 to 33,000. A diversity of accommodation types would have been likely with the predominant form being conventional detached dwellings ...

(3) There were good prospects for the approval of a sub-regional centre ...

In conclusion given the State Government's recognition of the site as lying along the Bruce Highway in the midst of a growth corridor and the market place's acceptance of a large scale development the logical development outcome for the subject site was for a master planned community anchored by a sub-regional centre.'

This opinion encouraged Mr Slater to value the land as though it were `as good as rezoned' in March 1995.

[711] I cannot accept Mr Brannock's opinion. It does not take account of the expressed views of PRSC which I have set out. It is also contrary to the opinions he himself expressed when given the task of endeavouring to obtain planning approval. On

26 May 1994 Mr Brannock's firm wrote to EFG. The letter noted that EFG had requested further advice regarding the procedure to secure rezoning of Parcel 64 `having regard to ... the apparent reluctance of Council to enter into an agreement with Emanuel/EFG ...'. The writer noted that the DCP `could reasonably be expected to be gazetted up to thirty-one months hence ...'. On 15 July 1995

Mr Brannock himself wrote to EFG on the same topic. He wrote:

`... there are only three options which are able to be considered to facilitate development of the land:

This letter sets out the time and cost implications for each process ...

The former Council had resolved to prepare a DCP for the Mango Hill area ... Furthermore numerous meetings with the former Council initiated a process which was intended to result in a DCP being by Brannock Humphrey and gazetted by the Government by July 1995 ... On 26 March 1994 a substantially new Council was elected and since this time the above process initiated with the former Council has been effectively discarded ... We ... do not consider that the DCP route is a viable option to pursue with the current Council. They have shown no commitment to proceed toward the preparation of the previously agreed DCP ... They have failed to liaise with their own staff and State Government. They have cancelled an important meeting scheduled with EFG. ... We now believe there to be no acceptable degree of certainty that Council has the commitment or resources to pursue a Mango Hill DCP in a timely fashion, if at all.

The main uncertainties common to each process are whether Emanuel/EFG will succeed in securing the best future development potential of the land and how long this will take.'

[712] In a further letter to EFG dated 20 July 1994 Mr Brannock identified a risk to the development posed by the fact that the sub-regional centre proposed for the PRSC area may be situated at Strathpine or Caboolture rather than in the vicinity of

Mango Hill. Even if it were in the last of those three places it may have been sited at the rival Tulip Town. This doubt continued. In a letter dated 3 August 1994 to

`The most recent event concerning Mango Hill occurred on 18 July 1994 when ... Council adopted a notice of motion ... to the effect that Mango Hill should not be considered as a possible site for a future sub-regional retail centre, but rather that the area west of the Bruce Highway is now Council's preferred location for core retail services at the sub-regional centre in this vicinity ... We are also aware that Tulip Town Shopping Centre may soon be the subject of a major expansion ...'

[713] On 27 September 1994 Mr Brannock reported to both the Emanuel group and EFG that:

`... Some councillors ... are being deliberately obstructive. I recommend we seek a meeting with the Redcliffe City Council mayor to suggest that Mango Hill be considered as part of a boundary realignment by the local Government Commissioner in a boundary review.'

[714] Although in cross-examination Mr Brannock sought to downplay the significance of this recommendation, it seems a clear indication that he thought at the time that the prospects of obtaining worthwhile development approvals from PRSC were slight indeed. He agreed that it is difficult to obtain boundary realignments between local authorities. The fact that he suggested such a course indicates, in my view, a degree of desperation.

[715] Finally, on 2 February 1995, Mr Brannock wrote to EFG to provide advice `as to a recommended course of action ... to take with respect to various strategic issues relating to the Mango Hill land.'

[716] There followed a detailed list of recommendations included in which was pursuing all legal avenues available to `keep Council honest - particularly the political arm.' As well, Mr Brannock recommended appointing a public relations consultant with the aim of demonstrating to PRSC and its ratepayers that the development was in the best interests of their community. He repeated the advice to pursue a transfer of the land to the Redcliffe City Council area and to undertake political meetings with senior Government planning officials to secure their support for the development. The letter identified that PRSC might seek to withhold services from the land even in the event that rezoning was obtained from State Government or the Planning and Environment Court.

[717] I cannot reconcile Mr Brannock's sanguine but retrospective assessment which appears in his report with the very real difficulties he encountered with PRSC in 1994. His report is unduly favourable to the plaintiffs and supports a degree of confidence in the development potential of the land which one does not find in a perusal of his contemporaneous correspondence. He has, in my opinion, overstated the position. I prefer Mr Gibson's assessment that in March 1995 one could feel confident that some development would ultimately be approved but that one could not have confidence that it would include approval for a sub-regional retail centre and the higher density development that it would support.

[718] Mr Brannock's opinion about Parcel 52 was, in summary:

`At February 1995 the majority of the land was identified as rural on Council's zoning and strategic plan maps. The pine plantation and cultivation of same on the site has altered the natural characteristics of the land.

The residential development of Caloundra Downs 1 is located in the northern part of the subject land, and comprises 147 hectares. Special residential rezoning has been approved for the majority of that land (100 hectares) in December 1994 and the remainder was approved in March 1995.

Caloundra Downs 1 represented a logical extension of existing urban residential development.

The balance of the 4,023 hectares of the land is known as Caloundra Downs 2.

In February 1995 the land was under single ownership, and being a large strategically located parcel, Caloundra Downs 2 would have been suitable for development as a master planned community. The master planned community would have predominantly included urban residential development, as well as commensurately scaled open space, retail and community facilities. The master plan would have included a buffer to Pumicestone Passage.

The land would have been substantially improved by a future connection between Caloundra and the Bruce Highway ...

There were environmental considerations which affected sections of the site ... it is understood that some of the land may have been subject to flooding, however detailed investigations would have been required on this issue, and the other environmental matters prior to a detailed determination of the ultimate use of all portions of the land. These considerations could have been accommodated through master planning for the site.'

This opinion formed part of Mr Slater's instructions for his evaluation of Parcel 52. As with Parcel 64 I am satisfied that Mr Brannock's opinion was far too optimistic in terms of the development potential of the land. The result is of little significance because for reasons which will appear later, I am prepared to accept much of

Mr Slater's valuation of this parcel. I will, however, indicate briefly why I reject

[719] Had the whole of the land been rezoned to allow an integrated residential community to be developed, it would have housed a population of between 70,000 and 80,000 people. The entire population of Caloundra in 1995 was only about 50,000. Rezoning to allow such development was contrary to the strategic plan developed by the Caloundra City Council. That plan was current. The land had been designated by the Council for open space and as a `green belt' buffer to the south. Parts of the land were environmentally sensitive. Development was contrary to the objective of State Government planning studies.

It is, I think, fanciful to believe that any more than a small part at the northern end of the parcel was suitable for rezoning in the first half of 1995.

`The site immediately adjoined urban residential development to its south, and open space joined its other boundaries. Bribie Island was highly accessible and was an attractive location for permanent residents and holiday makers alike.

From a town planning viewpoint, the subject site offered the potential for urban residential development as a logical extension of the urban development which adjoined to the south.

I am of the opinion that there were good prospects for approval of tourist accommodation and related facilities on the land. Access to the island and the presence of existing services and social infrastructure, made the land highly suitable for large scale tourist development.

The land could have been developed for urban residential purposes alone, or a combination of urban residential and tourist accommodation facilities.'

His opinion could justifiably be held only with respect to a small part of the land adjacent to its southern boundary. The proposed use was contrary to its zoning and no support for a rezoning could be found in the State Government plans for the region. Any such development would have been opposed by the active and vociferous environmental protection group on Bribie Island.

[721] In relation to the fourth parcel, Parcel 62, Mr Brannock noted that seventy-five

per cent of it had been designated as a possible sewerage effluent disposal area but that a 1992 notice of intention to resume had expired and no fresh notices had been issued. Mr Brannock concluded:

`It is reasonable from a town planning viewpoint to consider in February 1995 that the sewage disposal area was no longer required.

... Whilst regard must be had to the strategic plan designation of the land, in my opinion an application to rezone all of the land from rural to rural residential to permit rural residential land use ... would have gained approval. This would have been subject to consideration of any environmentally sensitive parts of the site and any buffering requirements to the Caboolture River.

My conclusion is that the site would have been developed for rural residential land use purposes on allotments ranging in size from 3,000 square metres to 2 hectares as permitted in accordance with the rural residential allotment size provisions that applied at the relevant date.'

The difficulty with this opinion is that most of the land lies below the Q100 flood line in which building is prohibited. In fact most of the land forms a flood plain to the south of the Caboolture River. The small portions of the land above the flood line on which a home might be constructed if the land were rezoned to rural residential are separated by flood-prone land and cannot be cheaply or conveniently joined or given access to a road system. Moreover there was no identified market interest in such a rezoning. Such a change would have been contrary to the strategic plan and the local authority's designation of the land as rural.

[722] I am satisfied that Mr Brannock's opinions which were supplied to Mr Slater were unduly optimistic for Parcel 53 and well as for Parcel 62. In my judgment they do not form a sound basis for approaching the valuation of the land.

[723] Mr Rowan Slect was the general manager of Delfin Property Group Ltd ("Delfin") which was, at relevant times, a large and successful property development company. It had planned and developed the suburb known as Forest Lakes on Brisbane's southern outskirts. Delfin was strongly interested in developing a similar project on the city's north. It looked at Parcel 64 but things were complicated because

Emanuel 14 had made a contract with Kartha Pty Ltd ("Kartha") for the conditional sale of the land. That company was an insubstantial speculator which could not fulfil the terms of its contract. To avoid defaulting it sought a joint venture partner and Delfin became a candidate.

[724] The contract was made on 25 March 1991 and was varied on 2 June 1992. The purchase price was $30,000,000 if settlement were effected on or before

31 July 1993. If the purchaser extended settlement (which it could until

29 December 1995) the price increased each month by which settlement was deferred. The increase was $600,000 per calendar month until 31 December 1993, $700,000 per month until 30 June 1994, $800,000 per month to December 1994 and by $900,000 per month if settlement occurred between 1 January and

31 June 1995. The price increase escalated to $1,000,000 per month for the second half of 1995.

[725] The contract was subject to the land being rezoned appropriately to allow development by end December 1995. The result was that Kartha was obliged to obtain rezonings of the land by 31 July 1993 if it was to avoid severe increases in price. It was to pay dearly for any delay in obtaining rezoning. At best the contract obliged it to pay $30,000,000 if the land were rezoned at the earliest possible date.

[726] Mr Slect's terse comment upon reading the contract was that Mr Wadley, Kartha's principal, was `crazy'.

[727] Delfin's interest in Parcel 64 remained unsatisfied. Mr Slect's assessment was that Kartha had promised to pay too much for the land and that the timeframe for obtaining rezoning approval was unachievable. It was unwilling to participate in a joint venture based upon those terms. He approached Elders directly to express Delfin's interest in the land but there was an obvious difficulty in that Emanuel 14 was the registered proprietor and it had a contract with Kartha. Mr Emanuele was reluctant to accept that Kartha would not pay the full contract price. Mr Wadley too, protested that his company would perform. In those circumstances it was impossible for Delfin to buy the land.

[728] Nevertheless Mr Slect and his officers did a considerable amount of work to assess what price they could offer for Parcel 64. He explained that companies like Delfin do not buy land for its inherent value but for the profit they can generate from its improvement and development. Their assessment of land value is therefore predicated upon the projected cash flows, income and expenditure, which will be involved in the development. The anticipated surplus generated over the life of the project, discounted to present value, after allowing for an adequate profit, yields an amount which the developer is prepared to pay for the land.

[729] One such analysis undertaken by Delfin in February 1993 showed that the value of the land, that is the amount Delfin was prepared to pay to buy the anticipated future positive cash flow, was $9,750,000. A value so arrived at is dependant upon the assumptions made as to level of risk, likely returns and likely costs of development. An adjustment to any of the components in the cash flow analysis will produce a different result. Such a thing happened the following month when some adjustments were made to anticipated costs and return. The analysis then showed that Delfin could make an acceptable profit from the project if it paid $14,600,000 for the land.

[730] In fact it appears to have been prepared to offer more. At a meeting held on

27 May 1993 attended by Mr Emanuele and his sons Rocco and Linton,

Messrs Grier and Jaenke from Elders, Mr Wadley, Mr Slect and his superior,

Mr Bird, Delfin indicated that it would not pay $30,000,000 for the land but would pay $15,000,000 on gazettal of rezoning approvals and three equal annual payments of $5,000,000 free of interest. This may not have been a firm offer because the minutes of the meeting record that Mr Bird also said that

`... $26,000,000 is the price today ... schools, parks etc. could reduce this figure further.'

`he could settle for $15,000,000 on DCP gazettal in 6-9 months ...'

[731] In any event the greatest figure mentioned by Delfin as a price it would or might pay was $30,000,000, half of which was to be paid over three years by instalments interest free and then only after appropriate rezonings had been obtained.

[732] Mr Purvis was the solicitor for Mr Wadley and his company Kartha. He was actively involved in advising Mr Wadley with respect to Kartha's performance of its contract with Emanuel 14. He put together a group of consultants whose task was to obtain the planning approvals on which the contract was conditional. The process was expensive and Mr Wadley became increasingly concerned about his level of expenditure which might produce no return, in the sense that he would not obtain approvals or not obtain them in time to save his contract. Mr Purvis, a very experienced solicitor, expressed his candid opinion that the time allowed by the contract to obtain rezoning was `almost impossible'. He confirmed Mr Gibson's evidence that PRSC was dubious about the development, deeming it to be premature because the land was too far removed from existing Council infrastructure and services. Mr Purvis testified that by November or December of 1991 Mr Wadley had realised that he had run out of money and time. According to Mr Purvis:

`We realised ... that we needed more time to achieve the planning objectives and we would need a financial partner to assist in financing the planning and the ultimate development.' (T.3623.10)

To that end he contacted a number of reputable and substantial developers, amongst whom were Delfin and Mirvac. The problem was, as Mr Purvis frankly said, that representatives of those developers all thought that the price of $30,000,000 which Kartha had promised to pay for the land was too high. According to Mr Purvis

`Once they learnt it was $30,000,000 virtually up front or in very short term instalment plan, they were very quickly disinterested.' (T.3634.25)

[733] One of the potential joint venturers, a company described as Amex from

Western Australia were `very interested but when they saw the $30,000,000 they decided that they would ... go back west.'

[734] Mr Purvis also confirmed that Delfin would not proceed in a joint venture with Kartha unless the price were less than $30,000,000 because `... their own cash flows or feasibilities couldn't justify that sort of exposure.' (T.3642.10)

[735] To much the same effect is the evidence of Mr Booker, which I accept. He was not a valuer, but he was an experienced and obviously intelligent bank manager whose particular expertise was in realising mortgaged realty on behalf of lenders when borrowers got into difficulty. He became responsible for the Emanuel companies' account in June 1993 and oversaw attempts to prepare their properties for sale. He was particularly involved with Mango Hill which occupied much of his time and effort. I formed a most favourable impression of Mr Booker's testimony. He seemed to be honest, direct and dependable and I would assess him to be extremely competent in his work. His opinion, borne of experience with the property and the economic circumstances of the early 1990s, was that Parcel 64 was virtually "unsaleable" without re-zoning or the approval of a DCP. He thought there was no market for it in its then state and that developers would only agree to buy conditional upon re-zoning or development approvals being obtained.

[736] The difficulty of the task in arriving at a value of Parcel 64 was recognised by

Mr Slater, the plaintiffs' valuer. He reported that because of the size of the parcel and the uncertainty as to its potential for development, it was `unrealistic to attempt to arrive at a definitive value of the land' as at March 1995. He pointed out that had the property been put on the market prospective purchasers would have had different views about the most appropriate form of development and the amount they would have been prepared to pay would vary with the estimated profitability of the particular development they favoured. Because of this uncertainty Mr Slater valued the parcel by the method of direct comparison, though conceding that there was no directly comparable sales evidence because `the property could be fairly described as unique.'

[737] Having reviewed the most comparable sales evidence he could find, Mr Slater valued Parcel 64 in three portions: a sub-regional centre; residential land including commercial development other than at the sub-regional centre, and the smaller part within the Caboolture Shire Council area.

[738] Acting upon Mr Brannock's opinion, Mr Slater thought that a purchaser of the land in 1995 would anticipate the inclusion within it of a sub-regional centre. He thought the value of that part of the land was $3,100,000. The second part he thought should be valued at between $40,000 and $50,000 per hectare yielding a range of values between $35,400,000 and $44,250,000. The balance of the land he thought was less valuable. He ascribed to it a value of $1,368,000. In total his valuation ranged between $40,000,000 and $48,000,000.

[739] A number of criticisms were made of Mr Slater's approach, all of which have some validity. The first has already been mentioned. There was no probability in 1995 that any development at Mango Hill would include a sub-regional shopping centre. Although the amount allowed by Mr Slater for the centre itself is relatively modest, its presumed inclusion has affected the value he ascribes to the balance of the developable area. Mr Slater proceeded on the basis that the parcel had immediate potential for development as a master planned community offering a high level of amenity and the increases in value that such amenities command, as well as a population-based need for retail and other commercial services which in turn would enhance the value of the development. The result has been that Mr Slater has ascribed a very high value, on a per hectare basis, notwithstanding the very large size of the parcel. That rate of between $40,000 and $50,000 per hectare may be justified by reference to Mr Slater's comparable sales, though the rate appears a little high. However none of his comparable sales was of an area anything like 900 hectares in extent. It is notorious that the larger the parcel the lower the per area rate of value. Mr Slater could not point to any sale of land of anything like a comparable size where such a rate had been paid. A number of the comparable sales relied on by Mr Slater were transactions which were completed pursuant to contracts, the terms of which made them conditional upon achieving rezoning from rural to another zone which would allow development. The nature of these contracts was such that the prices reflected the removal of risk that the land could not be developed. The values derived from these sales must be adjusted if they are to be used to derive a value for Parcel 64 which was, on the hypothesis under consideration, to be sold with its original zoning.

[740] Mr Slater was critical of the hypothetical development method of valuation utilising a cash flow model because it requires a reasonably high level of prior planning for a proposed development so that the likely costs over time, the timeframe in which those costs would be incurred and the likely returns over time can be ascertained. The outcome can vary significantly with minor variations to the estimated cost components, or prices or times when money will be spent or received so he believed the method to be too uncertain to be worthwhile.

[741] This criticism relates only to Mr Kendall's valuation of Parcel 64. He was retained by EFG and valued the parcel by means of a discounted cash flow analysis.

Mr Slater asserts that this is not a recognized method of valuation endorsed by any recognised textbook and, to his knowledge, has not been accepted by the

Land Court. That may be so but as the method was explained it differs only in its degree of sophistication from the hypothetical development method of valuation which has been in use for decades. Moreover I was impressed by the evidence of

Mr Southwell who, as a valuer, specialises in advising the larger development companies on the value of parcels of land seen to be likely development sites. His evidence is that such companies, experienced in this market insist upon a discounted cash flow analysis on which to base their decisions on whether to purchase and at what price. This, I am satisfied, is the reality and it would be foolish for the court to ignore it. It must be admitted that the method is susceptible to error and requires constant updating and revision as more information about the likely scale of costs and prices becomes available or needs amendment. Nevertheless as a method it is what is used in the market place for prospective purchasers on sites such as Parcel 64. Mr Kendall cannot be criticised for using it though the precise exercise he performed can be amended, as happened in

cross-examination. The evidence of Mr Slect and Mr Purvis corroborate what

[742] Mr Southwell's evidence in chief is found in Exhibit 162. As I say, I accept what he had to say. In particular I accept his evidence that the experienced commercial developers who form the only likely class of purchaser for Parcel 64 would only value the land by means of a discounted cash flow. As he explained, they are in the business of making profits from development and any acquisition of land is based upon an investigation and analysis of what profit they can make from it. This entails assessing the projected costs of development, the times at which the expenditure would occur as well as assessments of revenue from the sales including the time at which it will be earned. He explained that the direct comparison method `only yields a wide range of possible values for a site. To obtain a more detailed and reliable understanding of the value of a particular parcel of land, it is necessary to use the discounted cash flow method to analyse the features of the ... land.'

`Although the discounted cash flow method does have difficulties of its own (because of the need to make the numerous judgments (as to costs, revenue etc) ) it is ultimately more reliable than the direct comparison method because it focuses upon the characteristics and potential of the particular land in question.'

He explained that in his experience the discounted cash flow method is the primary method actually used by developers and that:

`The advantage of the method is that it actually requires a valuer ... to give consideration to any issues which affect how to make best use of the land and requires judgment to be made about these matters.'

[743] Mr Southwell's practice is to advise the large developers and their financiers, the major banks. He has provided valuations for developers for such projects as

Pelican Waters, Pacific Harbour, Kawana Estates, Noosa Waters, Noosa Springs, Chancellor Park and Twin Waters. Most of these are well known. He performs his valuations by the discounted cash flow method because his clients demand it.

[744] Mr Slater points out that using a method for valuing land which will be developed over decades produces a totally inadequate value for the land which will be last developed. For example, the analysis used by Mr Kendall would produce a value for the commercial segment of the development actually being undertaken of some tens of thousands of dollars only whereas in reality it will change hands for millions of dollars. This may be so, but as Mr Southwell explained, what the method does is to value cash flow, not land as such.

[745] Mr Slater's criticism is really of theoretical interest only, and does not affect the outcome of this aspect of the litigation for reasons which will emerge. The criticism does have some force. Because the cash flow analysis is sensitive to variations in estimates of cost and revenue, a valuer using it would not perform one analysis only. As information becomes available, either from fresh estimates of costs from engineers or contractors or new information on sales of comparable developments, or when development commences and actual costs or revenues are known, the analysis would be repeated using the updated information. As I understood

Mr Southwell's evidence the cash flow analysis is performed repeatedly with updated information. Mr Kendall essentially performed it once, with variations to the IRR component, taking as his other inputs the figures used by Delfin for their assessment. It is not surprising that he derived much the same value as Mr Slect and his valuation cannot be seen to be a truly independent exercise.

[746] The real point is that Mr Slater's opinion is shown to be wrong by what actually happened in the market place for Parcel 64. I have already set out the details. No experienced developer was prepared to pay $30,000,000 for the land in

March 1995. The best that might have been obtained was something less, probably very substantially less, than $30,000,000 when the land was zoned to allow development satisfactory to Delfin. A valuation of $40,000,000 is unacceptable when the land was still zoned `Rural' with all the attendant uncertainty about what development might be permitted or achievable.

[747] Mr Kendall thought that `the highest and best use for the land was that of a development site for a master planned community, although (he) took into account the fact that it did not have approvals for such a use and that there were risks associated with obtaining ... approvals.' Mr Kendall thought, unlike Mr Slater, that the direct comparison method was inappropriate because `with large development parcels, there are so many variables involved which led to a decision to pay a particular amount for the property that a reliable clarification of the sale is not possible.' As well he noted the difficulty of finding suitable comparisons. Because of the size of Parcel 64 and the very long period which could be expected for it to become fully developed it was inappropriate to adopt `a simplified approach which merely applies a dollar rate per hectare to the entire holding based on rates paid per hectare for properties which are substantially smaller in size.' Where there are sales of large parcels they were sufficiently different from each other and Parcel 64 `for comparisons to be perplexing.'

[748] Mr Kendall therefore thought it appropriate to value the land by means of a discounted cash flow residual land analysis. He said:

`The types of buyers for the subject land ... capable of taking it to my considered highest and best use as a master planned community are not to be found from within the public at large. They include major sophisticated developers ... these ... players typically embark upon a series of feasibility analyses prior to making their acquisition.'

Mr Kendall thought from his instructions that there was a sufficient factual basis to justify the preparation of a feasibility analysis of Parcel 64 as at 1995. He thought it was appropriate to undertake the analysis `given the fact that this is typically the approach embarked upon by purchasers in the market place for such a property.'

[749] Mr Kendall based his discounted cash flow analysis upon the Delfin feasibility study which Mr Slect had had prepared for his negotiations with Emanuel 14 and Elders. An integral factor in the analysis is the choice of an internal rate of return ("IRR") which the measure of the level of profit a developer expects from the project. The required IRR reflects the risks inherent in achieving a profitable result. The greater the uncertainties associated with the project (i.e. the higher the risk) the higher will be the required IRR. The point of the discounted cash flow analysis is, for present purposes, to arrive at a residual land value analysis which comes when estimated amounts for income, expenses and risk (IRR) are analysed in accordance with the model to determine the amount a developer is prepared to pay for land.

[750] The results of Mr Kendall's analysis shows a variability of result which supports

Mr Slater's criticism of the method and shows the uncertainty to which it is prone. What Mr Kendall did was to `try' different land component prices for the project up to a figure of $25,000,000 to see what IRR was reflected in the project with those land values. They showed that above $15,000,000 the IRR was too low to justify the development. Having got so far Mr Kendall was then supplied with further information about the likely price of individual developed lots and the rate at which they might be sold over time. Making adjustments to his analysis it `was then able to support a land value more towards the upper end of the initial range of $10,000,000 to $15,000,000.' Mr Kendall adopted a value of $15,000,000. In evidence he conceded it should be increased to $16,000,000 because he had overstated the cost of unit sites in the development.

[751] As a check to his valuation he undertook a comparison of comparable sales which he thought showed that $15,000,000 was too high. Nevertheless he maintained his opinion that Parcel 64 should be valued on the basis that cash flow analysis was the most appropriate method of valuation.

[752] I would find it difficult to determine the value of the parcel if the only materials which I could have regard were the forensic reports of these two valuers. I would be satisfied that Mr Slater's figure was too high but would not be confident what the real figure should be. Although in my judgment Mr Kendall's method is the more appropriate the uncertainty of the exercise he undertook shows the unreliability of the outcome. It is dependant upon the particular type and cost of the project the purchaser has in mind.

[753] Happily the court does not have to choose between these two competing valuations. Three other valuations of Parcel 64 were undertaken close to the time in issue but before litigation was in prospect. One of the valuations was to become the basis for a commercial transaction and the valuer knew that to be its purpose. The valuation was not a hypothetical forensic exercise but was performed in a commercial context to form the basis of an exchange between parties at arm's length. For that reason the valuation calls for particular mention.

[754] The valuer was Mr Christopher Shaw whose career specialised in the valuation of land for residential subdivision. He advised major land developers and major lenders to such developers. His experience of such valuations extended across all the eastern states of Australia.

[755] By letter dated 24 January 1996 Lendlease and EFG retained Mr Shaw to value Parcel 64 for the purposes of those companies entering into a joint venture.

Mr Shaw understood that his valuation would determine the price which Lendlease would pay to acquire its interest in the joint venture. His two clients therefore had conflicting interests: Lendlease would benefit from a low valuation while EFG would benefit from a high one. Mr Shaw rightly interpreted his role to be akin to that of an arbiter. His opinion would become the price to be paid for a half interest in the land.

[756] Mr Shaw valued the land as at 27 February 1995. He explained that of the two generally accepted methods of valuing for subdivision, discounted cash flow and comparable sales, the former was inapplicable because of the absence of any detailed feasibility study as to the particular development that might be undertaken. He was to value the land by reference to its highest and best use, which he believed to be subdivision and residential development but without any particular knowledge as to the type or content of the development. He determined to value the land by reference to comparable sales despite the significant difficulties in such an approach. They were that there were no directly comparable sales, primarily because of the very large size of Parcel 64. All comparable sales were of much smaller area. A larger area takes longer to develop and return a profit so that the developer is exposed to a considerable risk of holding the land for many years without a return. The third difficulty was that the land was not zoned for development and Mr Shaw believed there was a substantial expense and risk involved in obtaining approval. The particular difficulty for a valuer is that land is `almost never' purchased on an unconditional basis. Rather, developers secure options over the land or contract to purchase conditional upon rezoning being achieved. There were no comparable unconditional sales of large parcels of subdivisional land.

`The en globo land market ... has been quiet for some time ... despite the somewhat subdued nature of the ... market at the present time (which has become more noticeable in the past 12 months) demand for key landholdings still exists. Mango Hill represents one of the better opportunities and if offered on the open market, we expect it would generate considerable interest. However, because of the price category, the market would be tight with purchasers keen to structure delayed settlement terms and/or joint ventures to minimise the burden of holding long-term development debt. Given a fairly pessimistic short-term outlook (one to two years) for the residential land market, we would expect that a cash buyer would want a discount substantially to compensate for a lengthy approval process and what is expected to be a drawn out recovery in the property market. We also believe that there is a price threshold at which the market thins out dramatically with sales above $10,000,000 being fairly uncommon; and more importantly at the present time, where genuine inquiry is patchy.'

[758] Mr Shaw then analysed the sales he believed to be comparable and thought that the land in its then state with a rural zoning was worth $11,000,000 but that taking into account its potential for rezoning and development it was worth $14,000,000. He adopted the average of those two figures, $12,500,000 which the joint venture partners accepted.

[759] In 1995 Mr Ian Gregory was a valuer employed by JLW Advisory in Brisbane. He was widely experienced in valuing commercial, industrial and residential properties. In December 1994 his employer was retained to value a number of properties owned by the Emanuel group. The task of valuing them fell to a number of JLW Advisory employees. Mr Gregory completed the valuations of Parcels 64 and 53.

[760] EFG's letter of retainer required valuations to be prepared on a `forced sale' basis which was defined to be `what a prudent purchaser would pay for a property in the existing current market conditions, given a professional marketing promotion in a

3-6 month period by a reputable sales organisation.'

[761] The only information which EFG provided to Mr Gregory was the address and real property description of the land, the identity of the relevant local authorities and details of its securities. He was not given information relevant to any history of attempts to sell the parcels nor copies of any consultants' reports or feasibility studies relevant to the development of the lands and no narrative of dealings with the local authorities' attempts to obtain development approvals. For this reason

Mr Gregory thought it was not possible to undertake the valuation on a hypothetical development basis. He therefore adopted the method of direct comparison. However, Mr Gregory noted:

`Given the property's large size, `Greenfield' site status, its inherent unique features and location, we have been unable to identify a directly comparable sale from which to deduce an appropriate rate to adopt for valuation purposes. Accordingly, we have adopted a degree of professional judgment in arriving at our determination.'

[762] Mr Gregory then referred to a number of sales of en globo parcels of land, none exceeding 100 hectares in extent, at prices which ranged between $68,000 and $100,000 per hectare. Mr Gregory also referred to sales of parts of Parcel 64 which had been effected by Emanuel 14 in the years 1989 - 1992. These showed a rate per hectare of between $30,000 and $60,000. Assessing things as best he could,

Mr Gregory applied a rate of $45,000 per hectare to the southern portion of Parcel 64 which had access to the Bruce Highway and Anzac Avenue. This part had more immediate development potential. For the balance of the property he applied a rate of $28,250 per hectare to arrive at an overall rate which gave `an open market value' of $37,000,000.

`We have been required to provide an assessment of the property on a "forced sale" basis. In normal circumstances and particularly so in the current market, we believe a selling period of up to 12-18 months may be required to achieve our open market value and therefore, to achieve a sale within a limited time period, a vendor may well have to accept a discounted value ...'

[764] Adopting a degree of `professional judgment' he discounted the value to $26,000,000.

[765] Mr Gregory's opinion was that the highest and best use of Parcel 64 was as an integrated dormitory development comprising separate suburbs together with schools, shopping centres, community facilities and recreational spaces. He thought that a development of that type would occupy about 30 years and involve large initial capital outlays for the development. The overall magnitude of the development severely restricted the number of potential purchasers so that the parcel had limited market appeal. Those who might be interested would all be experienced and sophisticated developers with extensive expertise or retained consultants to assist in the planning, costing and marketing of any development undertaken.

Mr Gregory would not expect any such purchaser to consider buying Parcel 64 without undertaking feasibility studies and at least preliminary hypothetical development analyses.

[766] According to Mr Gregory such purchasers will not themselves assume the risks associated with obtaining development approvals. They will not buy land outright before those approvals are obtained. Rather, they will purchase on contracts conditional upon obtaining rezoning or other development approval. The contract price will reflect the avoidance of risk.

[767] The last valuer whose evidence needs to be rehearsed is Mr Gardiner who, during the years in question, was a senior partner of Herron Todd White. Since 1987 a significant part of his practice has involved the valuation of development land. According to Mr Gardiner the valuation of such land gives rise to particular difficulties, especially for large parcels, the market for which is confined to experienced developers because of the extensive resources required to develop the land and the high level of skill and experience necessary to do it profitably. Their interest in the land lies only in its capacity to produce a profit. When deciding whether to buy and how much to pay developers form an opinion about profitability by conducting a hypothetical development analysis with regard to the particular risks involved and whether the projected profit is sufficient to justify undertaking the risk. Often the exercise is undertaken elaborately through the use of a discounted cash flow model.

[768] Mr Gardiner and his firm developed a program utilising information obtained from developments undertaken by clients of his firm to allow them to approach the valuation of broad acre land in the same way the developers did. Because reliable data for a discounted cash flow analysis such as the plans for the developments, its costs and likely returns may not be readily available to a valuer, a number of judgments or assumptions must be made which may cast doubt upon the accuracy of the analysis. A large element of judgment comes into play.

[769] In November 1992 Mr Gardiner was instructed by EFG to provide a valuation for Parcel 64 as part of a review of its securities. He valued the parcel at $20,000,000. He did so on the basis that the land provided a major development opportunity, though to a limited number of purchasers because of its size and the costs involved with development. Mr Gardiner's opinion was influenced by the PRSC's then support for the development of the site pursuant to a DCP and his belief that market conditions were likely to improve over the ensuing few years. His method was that of direct comparison though, he too, noted the difficulty of finding any truly comparable sales.

[770] The plaintiffs seek to make much of the fact that in his valuation Mr Gardiner recorded that he had been ask to comment on the possible escalation in the value of Parcel 64 by the year 1995. He said:

`It is almost impossible to provide such an estimate, however, based upon the assumption that future real estate cycles will follow past cycles, it is fair to assume that 1995 should experience very buoyant real estate market conditions and the peak of a boom period should be imminent. Given the circumstances and assuming that the DCP and rezoning are in place, a value of between $40,000,000 to $50,000,000 could be possible.'

[771] In June 1994 Mr Gardiner was again instructed by EFG to value Parcel 64. His opinion was that its value had not changed from the $20,000,000 he had advised at the end of 1992.

[772] There is another aspect of Mr Gardiner's evidence. In November 1993 EFG wrote to Mr Gardiner enclosing a draft concept master plan for Parcel 64 prepared by

`This plan has not standing in current planning ordinances and has been prepared solely as a working report for our purposes.

From the limited information shown on the plan, we require an estimate of value of the site, not for mortgage purposes but as an "owner/developer" of the property.

The model set up can be used for future purposes as it is anticipated the project will be ongoing.'

[773] As requested Mr Gardiner prepared a `Feasibility Analysis and Indicative Value Assessment' based upon Mr Brannock's concept master plan. Mr Gardiner's report noted that:

`Planning is at a very early stage and therefore any feasibility analysis completed at this stage can only be of an indicative nature, however such feasibility is of considerable use as a guide to value and in identifying the key components within the proposed project and quantifying the effect of any change in those key components on value.'

[774] Mr Brannock's plan showed different components of development. It contained an estimate of the number of residential property sites which could be developed and sold. Mr Gardiner prepared a cash flow analysis model basing his costings on the amounts and timing on the analysis which had been prepared by Delfin and given to EFG. The analysis was difficult because the proposed development was very large and was proposed to occur over 20 years. No planning approvals had been obtained so the cost of meeting conditions of rezoning were unknown. The information as to costings was imprecise. Despite these difficulties Mr Gardiner was asked to prepare the analysis, making such judgments and assumptions as he thought reasonable.

`The ... parcel is a large strategically located piece of land which is ripe for development.

It is unfortunate that the rezoning ... process is not further progressed ... as the time ... in obtaining ... approvals ... is considerable.

If rezonings and development approvals are not in place before the next peak market period (anticipated to be around 1995) the value and viability of the project will be considerably reduced.

Analysis of the cash flows prepared for this project revealed that is has the potential given good project management to be an extremely viable venture. The key component is the regional ... retail site ... which generates a considerable inflow of capital with which to reduce exposure at a fairly early stage of the development.

This feasibility is based upon a concept master plan with little available information on development requirements and accurate costings and should be treated as a guide to value and viability at this early stage. The model attached to this report does however indicate that the project is viable at a current land component of $35,000,000.'

[776] In this confusing welter of opinions and arguments, two factors stand out which, in my judgment, indicate what was the value of Parcel 64 in March 1995 in its then state. The first is the evidence of Mr Purvis and Mr Slect. I accept their testimony that no developer of the kind who formed the only likely class of purchaser for the land would pay $30,000,000 to acquire it. Their evidence, which I accept, is that such a developer would not pay $30,000,000 even if the land had been given zonings or approvals which would allow residential development.

[777] The second factor is that a half interest in the land was transferred from EFG to Lendlease on the basis that the whole was worth $12,500,000. The price was arrived at by accepting Mr Shaw's valuation but he had the task of deriving the immediate value of the land, as it was, to allow the sale of the half interest in it. He advised both vendor and purchaser and he was forced to confront the reality of market value more than any other valuer who had expressed an opinion free of the immediate threat of being proved wrong by the conduct of those in the market place.

[778] Mr Shaw's valuation, taking into consideration the potential of Parcel 64 for development, was $14,000,000. I am satisfied for the reasons I have given that Parcel 64 was worth less than $30,000,000 rezoned and much less while still included in the "Rural" zone.

[779] I think the best that one can do is to say that the land at the time was worth about $14,000,000.

[780] It may be objected that this finding unreasonably departs from the figure which Emanuel 14 and EFG agreed should be the consideration, $26,000,000, at which the land was transferred. That figure came from Mr Gregory's valuation which was commissioned for the purpose of determining the value of the land for the purposes of transfer.

[781] I have no doubt that the evidence of Mr Purvis and Mr Slect, as well as Mr Shaw's valuation, acted on as it was by Lendlease and EFG, show Mr Gregory's valuation to be wrong. Had he known when he prepared his valuation what the court was subsequently told he could not reasonably have thought the land was worth $26,000,000.

[782] Another factor which should not be overlooked is that the value of the land has to be determined by reference to what a willing but not anxious purchaser would have paid for it as it was in March 1995, before it had been rezoned or made the subject of a DCP. On the evidence the only prospective buyers were large, shrewd, developers who did not buy land in that state. If it was to be sold unconditionally on the basis that the purchaser took on the risk of obtaining development approval of some sort, the price would be very modest compared to what would be paid for it on the basis that there was a right to develop it with a view to profit. The risk was substantial and the prospect of any return, even with approvals, was to be deferred for a decade or more.

[783] The plaintiffs rely upon several points but none of them, individually or collectively, makes me doubt the conclusion to which I have come on the question of value.

[784] Firstly it is pointed out that Mr Gregory's valuation was predicated upon there being a forced sale rather than by adopting the traditional test set out in

Spencer v. The Commonwealth of Australia (1907) 5 CLR 418, by reference to the willing but not anxious buyer and seller `cognisant of all circumstances which might affect ... value.' There are two answers. The first is that, on whatever basis

Mr Gregory valued the land, his figure was too high. He arrived at that figure by discounting his valuation of $37,000,000, which he would have obtained by the application of the Spencer test, by 30 per cent. The plaintiffs argue that this is

Mr Gregory's `real' valuation and that his discount should be ignored. It is impossible to accept that the land was worth $37,000,000 when on the clear evidence in the case no developer would pay as much as $30,000,000 for the land, even with development approval.

[785] The second answer is that the term `forced sale' does not have the connotations the plaintiffs believe it has. All that was meant by it was the value of the land was to be assessed in its then state after a marketing program of between three and six months. The term was coined to make it clear that the valuer was not to approach his task on the basis that, with the effluxion of time and expenditure of money, the land may be rezoned and so become more valuable. No doubt a vendor would, if at all possible, seek to enhance the value of the land before putting it on the market, but the question in this part of the case is what the land was worth as it was, not as it might have become.

[786] Next the plaintiffs point to Mr Gardiner's opinion expressed in November 1992 that within about three years the land might be worth between $40,000,000 and $50,000,000. This is relied upon as showing both that the value of the land in 1995 was of that order and that the Elders defendants knew it to be so when they accepted a transfer for $26,000,000.

[787] The refutation need not be long. For the reasons I have mentioned too often already, the land was not worth as much as $30,000,000. Mr Gardiner never said it did have a value of between $40,000,000 and $50,000,000.

[788] The third point is similar to the last. It is that Mr Gardiner's feasibility analysis showed the land to be worth $35,000,000 late in 1993 and that the Elders defendants, knowing of that value, took unconscionable advantage of Emanuel 14 to acquire the land at a known under-value.

[789] Again, the refutation can be short. The feasibility analysis was not a valuation of the land. At most it indicated what value the land might have upon a given set of assumptions as to type of development, cost of development and rate of return. Even if it were an expression of opinion the evidence shows it to have been wrong.

[790] All valuers found the task difficult. With the exception of Parcel 64 none of the parcels had a clearly discernible end use. Their value, such as it was, lay in some potential for future development which was in the nature of things, conjectural and almost impossible to quantify. All parcels are huge with restrictive zonings and were environmentally important because of their proximity to

Moreton Bay or the waterways that lead into it. All of them were too big to develop in the foreseeable future. A large variation in opinions as to value was to be expected. That being the case it is even more difficult to make out a case of dishonesty.

[791] The finding I have made with respect to the value of Parcel 64 has the consequence that the plaintiffs have not made out their premise that the APM lands were transferred to Elders at an under-value. Even if the three other parcels were worth the amounts ascribed to them by Mr Slater, their aggregate value, combined with what I find to have been the value of Parcel 64 would not exceed the value given to Emanuel 14 by Elders for their transfer.

[792] It is therefore possible and, in the interests of brevity, desirable that the competing opinions and arguments as to the value of those other parcels be dealt with shortly.

[793] I am prepared to accept much of Mr Slater's opinion about the value of

Caloundra Downs, Parcel 52. For this parcel there are transactions which would seems to fix its value with something approaching precision. Not all the transactions are of the type on which valuers prefer to rely, but given the paucity of such evidence, the transactions in question are the best available evidence.

[794] For ease of analysis and discussion, Parcel 52 has been divided into two: Caloundra Downs 1 and Caloundra Downs 2. The former comprises an area of 147 hectares carved out of a larger portion, lot 648 on RP 838059 which formed part of the aggregation. 100 hectares of the sub-division was contracted to be sold on conditions to Harrison. I have set out a brief history of this transaction. The approvals which were obtained by Harrison did not apply to the whole of

Caloundra Downs 1, but their gazettal for part of the land enhanced the balance which could be seen as a natural extension of the development which was approved.

[795] What happened in fact was that the fourth defendant, Lensworth, entered into a joint venture arrangement with Prudential Finance Holdings Ltd ("Prudential") to undertake the residential development of the whole of Caloundra Downs 1. According to Mr Slater's synopsis of the contract, which he did not have in its entirety, Lensworth was to provide the land and Prudential was to develop it.

15 per cent of the gross sales of the developed land was to be paid to Lensworth as the cost of the land. The division of the other returns from the project was complicated and depended upon the actual performance of the project. According to Mr Slater's report:

`... a summary of a commercial assessment ... shows a total projected land payment to Lensworth of $13,492,000 over ... nine years ... this is 15 per cent of the assessment's anticipated gross sales of $90,632,600.'

[796] Mr Slater attempted to value the land from the joint venture agreement but he noted that the documents were incomplete and gave no indication as to the timing of the payments so it was impossible to arrive at a discounted residual land value. He noted that `it appears that Lensworth's assessment of the value of this land was approximately $4,000,000 ...' which he "adopted", though in part of his report he seems to adopt a value of $4,500,000.

[797] Mr Kendall's approach was simpler and, I think, more persuasive. He accepted the contract between EFG and Harrison as providing cogent evidence of the value of the 100 hectares of Caloundra Downs 1 which obtained development approval. Rounding off, this gave a value per hectare of $25,000,000. Mr Kendall noted that there was `no guarantee' of obtaining rezoning for the balance 47 hectares of Caloundra Downs 1, but he thought it likely to occur and that the land should be zoned on the basis that its highest and best use was for residential development. To allow for the risk that rezoning might not occur, or might be delayed, and the costs of obtaining it, he applied a rate of $20,000 per hectare to the balance area of

47 hectares, giving a value of $940,000. Thus he would value the total of

[798] This approach appeared to be sensible. Mr Slater's approach is a little contrived and requires some guesswork.

[799] Mr Slater valued Caloundra Downs 2 by reference to an agreement between Lensworth and Prudential for the purchase of a half interest in it for $3,500,000 in December 1997. The consideration was paid by Prudential though it appears that no transfer of a half interest in the land was ever registered. Both valuers treated the transaction as genuine. Though subsequent to the date of valuation it was common ground that the market had remained flat between March 1995 and December 1997 so that the transaction was indicative of value at the earlier time.

[800] Mr Kendall was reluctant to accept the transaction as showing that the value of the land was $7,000,000. He claimed that Prudential was not only a willing purchaser but an anxious one who paid more than market value. His reason was that Prudential is the developer of a large residential estate located at Kawana, between the northern end of Caloundra and Mooloolaba. This development commenced some years ago and is still proceeding. Mr Kendall's thesis was that to protect its investment Prudential was prepared to pay a premium for Caloundra Downs 2 so as in some way to be able to control its development or otherwise reduce the competitive effect any development of Caloundra Downs 2 might have.

[801] Mr Slater would not accept that there was evidence of Prudential's anxiety to purchase the half interest. His opinion was that it was simply another investment opportunity taken by Prudential.

[802] I am sceptical of Mr Kendall's claim. Reliance is placed on some documents obtained from Prudential which to my mind do not indicate anxiety on its part to protect its development at Kawana. Exhibit 376 is a Prudential memorandum in which one of its executives set out his `analysis and thoughts' for the comments of his superior with respect to the proposed joint venture. The relevant part reads:

`The approach suggested by Lensworth is that they should be entitled to put the parcel to (Prudential) as current rural value (suggested at around $7,000,000 to $8,000,000) plus the opportunity cost of those funds to Lensworth at their internal investment handle rate ...

* Offer an alternate approach with reflects the risk each party is taking ...

* Pay half the rural value now to reduce the future cost.

* Accept the risk of paying more for the land than it is worth as the premium required to secure this opportunity to keep out a potential major competitor to Kawana.

Using the previous based case analysis ... the put option cost and premium payable would be as follows

Premium (after 30% required rate of return) $2,500,000

[803] I cannot get from this that the $3,500,000 paid by Prudential included a premium. The memorandum suggests the contrary: that the land had an agreed value of $7,000,000 (or as much as $8,000,000). The option of paying more for the land, which in any event was thought to be a risk rather than a certainty, appears to have been a suggestion alternative to making an immediate payment of half the value of the land.

[804] These are matters of conjecture. If it were important to Elders to cast doubt upon the transaction as an indication of value they should have done more than tender an ambiguous memorandum. Its author could have been called to explain the ambiguity and reveal whether Prudential was an anxious rather than a willing purchaser.

[805] There was evidence from Mr Booker, whose testimony I regarded as honest and reliable, that Prudential was `a very willing buyer' of whom he `was able to take full advantage ...'. When asked to explain the basis for his opinion he explained

(T.7702.5.20) that its development at Kawana Waters had about seven years to run and that it had developed good relationships with the local authority and State Government. He went on to say:

`We believed that the best result we could get was to have a joint venture ... because of those relationships which may bring development potential ... sooner rather than later.'

The evidence was objectionable, consisting as it did of opinion from a witness other than an expert. No basis for the opinion was provided: the avowed justification is insufficient to support a finding that Prudential was prepared to pay a premium on the market value of the land. The evidence shows no more than it had a reason to acquire the land, and a basis for believing that it might eventually obtain approvals for development. The evidence should have been objected to but was not, presumably because of the segmented way in which the plaintiffs conducted their case. Counsel who conducted the `valuation' case for the plaintiffs was absent for Mr Booker's evidence. Counsel who was present appeared not to understand the relevance of this aspect. Nevertheless despite its receipt without objection I am not persuaded by it to find that Prudential was an anxious purchaser.

[806] I think it appropriate to act upon Mr Slater's assessment. There are two other components to Parcel 52 but there is agreement as to their value. Part of the parcel was resumed for rubbish disposal. Compensation was agreed in the sum of $600,000. A further parcel was the subject of an option to purchase which, though not exercised, was regarded by both valuers as providing satisfactory evidence of value. The amount for the exercise of the option was $1,250,000.

[807] I find therefore that the value of Parcel 52 was:

which could be conveniently rounded down to $12,000,000.

[808] Both Mr Slater and Mr Kendall found it difficult to arrive at a valuation of Parcel 53, the land at Bribie Island. Mr Slater said:

`A valuation of this land is particularly uncertain. There is no use, apart from as a pine plantation, which could be considered as being achievable with some level of confidence. Additionally there is no sales evidence whatsoever that could be considered comparable.'

`... an overriding confusion exists as to the appropriate highest and best use for the land, and I therefore find that my approach to a valuation of the site is met with great difficulty and intangibility ...'

[809] Mr Slater thought that a valuation at $6,850,000 was "not unreasonable". He pointed out that the parcel is unique in many respects, being a large private holding on an island accessible by car and in close proximity to a capital city. Because of these attributes he thought the land could be considered highly desirable for a number of forms of development including an integrated tourist resort, a golf course based residential community or simply traditional residential subdivision. He immediately recognised that development would face `significant obstacles' and that the approval process would be `somewhat challenging' with `infrastructure problems to be overcome.'

[810] Mr Slater thought that the parcel might attract interest from the adjacent developer of Pacific Harbour. He pointed out that only a small part of the parcel need be sold for an extension to the proposed golf course and/or further residential development at the rates historically achieved to yield an amount in excess of $5,000,000.

[811] It should be pointed out that in 1989 the developer had bought 121 hectares of the parcel at the southern end adjoining the development for use as a golf course. The amount paid was $2,250,000. Subsequent to the sale of Parcel 53 by

Kinglingston Pty Ltd to the State Government in June 1995 the government sold a further 20 hectares to the developer for an extension of the golf course for a price of $3,950,000.

`... the best prospects for a development ... would have been a tourism or golf course/residential development on a comparatively low scale with a preparedness to sacrifice a large part of the land for public ownership. The difficulty with a low scale development is the ability to bear large infrastructure costs. ... the appropriate approach is to apply a long term holding value ...'

[813] Mr Kendall was much more pessimistic. He noted that according to local government policies the parcel's dominant land use was open space and there was no long term potential for use other than within the `Rural' zone. The property was vast in size and had a total street frontage of only about thirty metres. He observed that:

`Whilst an island location sounds attractive for tourism purposes ... once one is physically on the site ... it is found to be generally level and low lying with no instantly recognisable appeal. ... Bribie Island is well known for being a limited budget retirement precinct, as well as a convenient day-tripper destination for nearby downscale socio-economic areas such as Caboolture. The ... middle class of Brisbane tends to bypass Bribie Island ...'

[814] Mr Kendall valued the land by reference to the contract for its sale by Elders to the State Government dated 9 June 1995. He adjusted the contract price to arrive at a value of $3,000,000. There is no doubt the price does need adjustment but

[815] The contract price was $5,860,000 but the property sold included four separate parcels of land in addition to Parcel 53. The contract does not apportion individual consideration to the various parcels but a memorandum from Mr O'Grady to EFG of 13 June 1995 (Exhibit 16, 15/736) apparently records the agreement of the parties that the price for parcel 53 was $4,565,000. Payment was to be made by instalments; one payment on settlement and four payments on 1 January in each of the years 1996, 1997, 1998 and 1999.

[816] In addition to selling the land the contract settled a controversy begun by

Mr Emanuele which passed to EFG when it acquired possession and subsequently ownership of the parcel. What had happened was that the standing pine trees on the parcel had been the subject of a contract made by Emanuel 14, by the terms of which the vendor was to provide access for the removal of the felled timber. In his haste to obtain the royalty revenue, Mr Emanuele had caused a haul road to be built over the parcel without obtaining the necessary permits and in a way which was insensitive to the local vegetation. His action outraged members of the environment protection groups on Bribie Island. The consequence was that trucks were forbidden the use of the haul road built by Mr Emanuele and there was a real danger that the valuable timber resources on Parcel 53 could not be harvested.

[817] The contract overcame the difficulties. The contract acknowledged EFG's right to sell the timber to Softwoods (for a price of $10,500,000) and allowed it to build a road for the purpose of removing the trees. As well, the Government agreed to compensate EFG should harvesting be prevented by Government policy or legislation. The cost of building the road remained with EFG which also remained liable to reinstate the land occupied by the road at the conclusion of harvesting. However, the contract transferred to the State the rehabilitation at a cost not to exceed $1,000,000 which was to be subtracted from the final instalment of the purchase price. In addition the State Government undertook the obligation, at its cost, to rehabilitate the landscape once the trees had been removed.

`EFG has achieved a major objective of passing all the plantation risk associated with the harvesting of Bribie Island ... to either the Queensland Government or Softwoods ... the agreement does not relieve EFG of the cost of building the haul road ... however the Government compensation quarantined the risks associated with obtaining the haul road approvals ... the Government will assume the responsibility for removing and restoring the haul road ... for a capped cost to EFG of $1,000,000. EFG believes that this is a significant benefit as it passes the responsibility for the road to the Government and caps EFG's costs at $1,000,000 for an event seven to nine years in the future.'

[819] Mr Kendall's approach was to discount the contract price because of the delayed receipt of part of it and to deduct the sum of $1,000,000 to be paid for the restoration of the road. Thus he arrived at his valuation of $3,000,000.

[820] It may be right to discount the price for delayed receipt but I cannot see the justification for further reducing the value by $1,000,000. That was, in a sense, the price paid for the right to remove $10,000,000 worth of timber. There is no doubt the contract did more than merely sell land. There is an obvious difficulty in equating the unadjusted price to the value of the land but it seems unjustifiable to reduce the value by the $1,000,000 without allowing anything for the economic benefit to the vendor of securing the right to harvest the timber.

[821] There is simply no evidence of the value of that right so one cannot notionally adjust the contract price upwards. The safest approach is to ignore the deduction on the basis that it is referable to a transaction separate from the sale of the land. It was a matter of convenience only that the parties agreed that payment for the restoration of the road should be made by deduction from a debt otherwise due as a separate reciprocal obligation.

[822] Accordingly, in my opinion, Mr Kendall's valuation is too low. However, I think Mr Slater's valuation is too high. I think Mr Kendall's telling criticisms of

Parcel 53's tourist potential are well founded. Mr Slater ascribes too much development potential to the land and pays insufficient attention to the contract of sale for the very parcel three months after the relevant date. Such development potential as the land had would have been reflected in the contract price.

[823] Accordingly in my judgment Parcel 53 was worth somewhere between $3,000,000 and $6,850,000 as at March 1995. The contract price of $4,565,000 is the best evidence of value. Discounting a little for the delayed receipt of the price I would assess value at $4,000,000.

[824] Mr Gardiner's valuation of $6,400,000 was given before the making of the contract on 9 June 1995 and is shown to be wrong by that transaction.

[825] The last parcel to discuss is 62 at Caboolture. Mr Slater noted Mr Brannock's conclusion that an appropriate use for all of the land was rural residential purposes. Mr Slater reported:

`This form of development is consistent with development of adjoining lands where subdivision to rural residential estates has produced lots ranging from about 3,000 square metres to about 8,000 square metres.

Subdivision to lots of this size however would be limited to that land above the Q100. The land below the Q100 would ... be best developed as adjunct areas to adjoining rural residential areas as this would maximize the return on this land.'

[826] Mr Slater then referred to a number of sales of land `in close proximity' which have been developed for rural residential subdivisions. Emanuel 14 was the vendor in both transactions in 1989 and 1992 respectively. The land sold had formed part of the original Parcel 62 acquired by Emanuel 14. One sale was of 101 hectares for $750,000 giving a value per hectare of $7,420. The second was a sale of

105 hectares for $700,000 giving a per hectare value of $6,666.

[827] Mr Slater thought that due to the `relatively early timing of these transactions and the general movement in the market through 1993/1994' a reasonable rate to apply to the flood-free land was $7,500 per hectare, giving a value of $2,722,500 for the 363 hectares. He thought that the flood-prone land was worth $3,000 per hectare because of its potential `to form acreage additions to rural residential lots.' His aggregate value for Parcel 62 was therefore $5,300,000.

[828] His valuation is trenchantly criticised by Mr Kendall who points out that the two sales were of far better quality land which were the `prime sections' of the original parcel acquired by Emanuel 14. There were subdivided off and sold because of their obvious value. They were the higher parts of the land and were close to established development. They were easily accessible by existing roads. The value ascribed by Mr Slater is higher than that achieved actually in the comparable sales which were of much better land. No evidence was offered to support a valuation of $3,000 per hectare for the submergible land; much of which is swampy, some of which is covered in mangroves or in salt water inundation.

[829] The parcel has, as Mr Kendall points out, a `backwater location enclosed by physical barriers such as the Caboolture River, Burpengary Creek, Deception Bay and the Bruce Highway. ... it appears to form an isolated market away from the rest of the mainstream metropolitan area.' Moreover:

`... most of the overall property ... had been fairly well picked over for the more desirable components by various developers prior to the relevant date ... any remaining segments still worth pursuing are generally scattered as pockets or strips across the overall land mass ... given the overall hotch potch nature of the subject holding and the lack of good quality development land linked together to create flood-free land of any substantial ... mass ... it is highly unlikely that a sophisticated developer would be interested in the property as a large overall holding.'

[830] Mr Kendall attempted to find comparable sales to arrive at a value. He listed the positive attributes of the land as being:

* Location within a fringe section of the Brisbane metropolitan area

[831] Its negative attributes were identified as:

* Most of the site is subject to flooding and cannot be occupied for habitation

* Even for rural use much of the land is unsuitable because of the effect of salt water or waterlogging

* Most of the land which is suitable for potential high uses is restricted to strips or pockets which cannot be developed in an orderly fashion

* Access to a significant portion of the higher land is difficult or must traverse flood-prone land

* The site is between Caboolture and Deception Bay which are relatively poor areas

* Generally poor location and difficulty of access

[832] Mr Kendall considered eight sales which he thought might afford some basis of comparison. Two of these were the sales discussed by Mr Slater. The land sold varied in quality and location. The three sales of land physically closest to Parcel 62, other than the two superior properties relied on by Mr Slater, yielded per hectare rates of value of between $1,900 and $2,900. Mr Kendall thought that a rate of about $2,000 per hectare would `broadly align with an appropriate magnitude of value.' and give an overall value of $2,452,000 which he rounded out to $2,500,000.

[833] I accept Mr Kendall's opinions on Parcel 62. Mr Slater has been far too selective in his use of comparable sales. Large tracts of Parcel 62 are virtually useless and much of it would appear to be literally worthless. To ascribe a value of $3,000 per hectare to such land is not sensible. It is not realistic to regard the parcel as suitable for development as rural residential land.

[834] The land was also valued by Mr Gardiner but his valuations may be ignored. They appear to have been composed when the Caboolture Shire Council had given notice of its intention to resume the land and were designed to support a claim for compensation. They clearly overstated the value of the land. The valuation as at

30 June 1994 claimed the land to be worth $8,500,000. This was the result of a sparse hypothetical development method ignoring sales of comparable nature and assuming that the highest and best use for the land had been established by

Mr Brannock as 970 rural residential and 20 waterfront rural allotments. A year earlier, in May 1993, Mr Gardiner had produced a valuation for the same purpose. He obviously regretted his expressed opinion, which was that the land had a value of $14,300,000, because he stamped his report `draft' after he had signed it. It too was based upon a hypothetical subdivision development which included a marina and golf course adjacent to the Caboolture River near Beachmere.

[835] Mr Gardiner was embarrassed by the valuation, for obvious reasons.

[836] I therefore find that Parcel 62 had a value of $2,500,000 in March 1995.

[837] The total value of these four parcels of land transferred to Elders was:

[838] The stated consideration for these parcels of land in DOFR was $41,679,500 which went in reduction of the debt owed by the Emanuel group to EFG.

[839] Not only was the land not transferred at an undervalue but the plaintiffs did not make out the case that the value was fixed arbitrarily. Indeed they did not attempt such a case.

[840] Attention must now turn to the first component of the scheme which is that judgment was obtained by collusion for an amount agreed to be in excess of the `true debt'. In order to appreciate the arguments it is necessary to rehearse in some detail the negotiations which culminated in the execution of the three deeds on

15 and 17 March 1995. The facts relevant to those negotiations are not seriously in doubt. They were conducted initially by EFG's own officers and then subsequently by solicitors. There is a comprehensive documentary record of communications concerning the negotiations. Where the parties differ is in the assertions they are prepared to make about their character.

[841] The parties agree that the relevant commencement for a consideration of the events leading up to and constituting the 1995 Scheme can be dated in about August 1993. As a consequence one may ignore a very large part of the evidence adduced in the trial. Many documents running to thousands of pages concerning events prior to August 1993 were tendered. Some of those events were the subject of oral testimony. By limiting the evidence relevant to the 1995 Scheme to the period August 1993 to March 1995 the parties accept that earlier events can safely be ignored except, of course, where they relate to particular claims made by the plaintiffs or are relevant to an understanding of those claims. Happily it will not be necessary for these reasons to deal with many episodes of fact which it was thought necessary to explore at the trial.

[842] There is nothing in the evidence to suggest any dissatisfaction with the Emanuel group's performance under the DOOR or with the terms of that deed prior to

August 1993. In that month, however, each of Messrs O'Grady, Crosby and Booker came to a belief, on differing grounds, that the objectives meant to be achieved by DOOR were not likely to be fulfilled. As I mentioned in the introduction

Mr O'Grady was concerned by the implication which RPAG had on the value of the APM land which comprised the most significant part of the security for EFG's loan. Of the four major parcels only one, Parcel 64, was identified by the state planning authorities as having any potential for development. The other three were designated as open space. Previously Parcel 53, Bribie Island, had been thought to be of particular value. It had been the subject of the failed sale to Molinara for about $100,000,000. It was valued in the Wales report at $34,000,000. The RPAG report constituted an immediate threat to EFG's chances of recovering its debt. It will be recalled that by this point that debt exceeded the value of the properties so that the Emanuel group had no equity in the lands.

[843] If the strategic course for land use set out in the RPAG report was to be altered to allow development of some kind to occur on Parcels 52, 53 and 62 government would have to be negotiated with at a high level. Mr O'Grady thought that

Mr Emanuele was unsuited for that task, particularly because of the pressing demands on the Emanuel group by a number of creditors, including other secured creditors, which meant continuous distraction from the task of devising and pursuing a plan which would see the APM land rezoned and sold. The financial difficulties of the Emanuel group, its lack of coherent management practice and structure and the distractions of pressing creditors meant that, in Mr O'Grady's opinion, Mr Emanuele would not successfully negotiate with the government.

[844] A further consequence of DOOR was that the timeframe for development of the APM land was greatly extended from the two to three years envisaged by DOOR for the development and sale of the land. There was a distinct possibility that the land would be required as open space for a decade or more, and that even if negotiations were successful they would take years to bear a result. A basic premise underpinning DOOR had been falsified (T.8245.20-.35).

[845] A second concern was that there had been no success in achieving sales of large parcels of land which were necessary if a substantial reduction in the debt was to occur. The Kartha contract was terminated in about August 1993. Two previous sales in 1988 and 1991 had also failed to eventuate. This, as I mentioned earlier, was Mr Crosby's major concern. (T.6212.50-.60) Mr O'Grady shared this concern (T.8237.50-.30)

[846] Another point of concern for Mr O'Grady was that the moratorium might not be effective because similar indulgences had not been granted by other creditors of the Emanuel group so that its management did not have the ability to concentrate on selling the portfolio free from the worry that the group companies might be wound up or be subject to recovery action of some kind. According to Mr O'Grady:

`... Whereas the moratorium ... had been accepted by the other major lenders it had not been accepted by some of the smaller ... creditors ... and they were continuing to put pressure on the Emanuel group and as a consequence the Emanuel group were starting to not focus on the things that we wanted to focus on so the object of actually taking the pressure off the Emanuel group had not worked ...' (T.8233.42-.55)

[847] Mr Booker had another concern. When he replaced Mr Grier as EFG's Queensland manager in July 1993 and took responsibility for the Emanuel group account he was critical of the Emanuel group's capacity to effect major sales. Mr Booker had not known Mr Emanuele in the better times when he was a successful property dealer and a valued customer of EFG. An experience of those times appears to have coloured Mr Grier's, Mr MacDonald's and Mr Crosby's judgment of Mr Emanuele and his conduct. Mr Crosby had been a friend of Mr Emanuele's for many years. Mr Booker came fresh to the task of managing EFG's Queensland property portfolio which required him to realise those properties in the shortest time for the best return for EFG. I have mentioned before my favourable impression of

Mr Booker. He would have been an efficient, intelligent and direct manager. He did not let sentiment cloud his judgment. He thought that Mr Emanuele and his managers were incapable of dealing successfully with PRSC, and its consultants, to obtain the DCP for Mango Hill and likewise incapable of selling the other parcels for a substantial price. He recommended that EFG take possession of the properties as mortgagee and deal with them itself. Mr O'Grady was concerned that the workload involved in taking possession of, maintaining and marketing all of the Emanuel group properties `which were spread from ... Brisbane all the way up to Cairns' would exceed EFG's capacity. `The Emanueles knew about those properties. We didn't know about them. We didn't have anybody ... in those regional centres to manage them ...' (T.8233.25-.30) Mr O'Grady did, however, share Mr Booker's concern that marketing the APM land was too large a challenge for Mr Emanuele.

[848] I do not understand the evidence I have just summarised to have been contested. In any event I accept the evidence and make those findings.

[849] Mr O'Grady formed the opinion that there should be an overall resolution of the difficulty which the Emanuel group account presented EFG. Having given the matter some thought he devised a proposal to split the portfolio:

`broadly into APM and non-APM land. The APM land would be dealt with entirely by EFG with assistance from Joe Emanuele ... if EFG should request that assistance. EFG would become responsible for all the expenses and liabilities associated with the APM land and the Emanuel group ... would have no residual interest in them. Joe Emanuele would drive the sale program of the non-APM lands subject to EFG's overview. In return EFG would provide the $500,000-$700,000 ... which Emanuele believed would solve his immediate problem ... EFG would also ... give Emanuel group 20 per cent of the proceeds of the sale of non-APM lands if these were sold at above the price EFG agreed ... After three years this arrangement would cease. To facilitate the sale program and to assist with the APM lands as requested by EFG, EFG would continue to pay the family remuneration for which the budget provided fixed at $500,000 per year.' (O'Grady's statement in Exhibit 454 para 190)

[850] Mr O'Grady thought that Mr Crosby, who was then a consultant to EFG, but known to and respected by Mr Emanuele, should undertake the task of putting the proposal to Mr Emanuele.

Mr O'Grady recognised that EFG and the Emanuele group had different `agendas' with respect to the APM land. EFG wishes it to be sold for the highest return in the shortest time. Mr Emanuele wanted to hold the land, if necessary for many years, until its development potential could be fully realised. Mr O'Grady explained (T.8239.1-.40):

`We were interested in realising assets ... as reasonably quickly for as much value as we could in the medium term. For the Emanuele's to actually have value return to those properties ... the properties had to be held for extremely long ... periods ... on the basis that ... the market would catch up with them at a point of time ... and as a consequence would have ... significant values returned to them and we were working on a short to medium term timeframe so ... they'd need to hold them for 15 years and we were looking at three to five years as a maximum ...'

[851] On 1 September 1993 Mr O'Grady sent to Mr Crosby a revised version of a proposal which Mr Crosby was to discuss with Mr Emanuele. It read (Exhibit 421, Volume 30):

A. EFG has entered a deed of orderly realisation with the Emanuel group and is prepared to continue to work with Emanuele under the DOOR if Emanuele wishes.

B. If Joe Emanuele decides it is in his best interests to enter a Part X arrangement with his creditors EFG is prepared to support him ...

D. ... EFG is prepared to work with Emanuele under the following revised arrangements.

The Emanuel portfolio is to be split into two components ...

(a) EFG will take title to the APM portfolio and related income streams immediately

(b) The Emanuel group shall have no further interest in or obligation in regard to the APM portfolio ... or the realisation of those assets

(c) EFG shall take onto EFG's payroll those Emanuel staff who are working directly on the APM portfolio assets

(d) EFG shall bear all costs associated with the APM portfolio.

EFG and the Emanuel group will work on the realisation of the $19,800,000 peripheral portfolio on the following basis:

(b) EFG will continue to pay the `family salaries' for three years capped as follows ...

(c) EFG will continue to pay on the non-APM portfolio overheads ... for one year ... to enable an orderly wind down ...

(d) Minimum realisation targets for the peripheral assets will be ... along the following lines

(e) EFG will agree with the Emanuel group minimum sale figures below which the assets cannot be sold.

The Emanuel group will be able to earn a fee based on realisation of the peripheral assets as follows:

* If assets sold at valuation figures ... 10 per cent of sale price

* If sold above Appendix A values 50 per cent of the profit above Appendix A value

* At the end of three years the arrangement will lapse ... the Emanuel group will have no further interest in the disposal of the peripheral properties.

(v) EFG will make a once off advance payment on the fee in paragraph (iv) of $500,000 which will be deemed to be an advanced payment of the above fee income

At the time of settlement the Emanuel group may elect to take the final payment in the form of cash or any unsold private assets listed in Appendix A.'

Item 2 in Appendix A under the heading `Peripheral Assets' are four houses; three in South Australia and one in Queensland with a total value of $1,580,000.

[852] Mr O'Grady was prepared to show generosity towards Mr Emanuele. He explained why in his report to Ramco of 7 September 1993. Mr Emanuele (and his companies) had been an important customer of EFG's for 25 years during which his business had been profitable for EFG. In the previous two and a half years

Mr Emanuele's efforts had raised $40,000,000 in sales which had gone in payment of interest and reduction of debt to EFG, and he had dealt with secured lands so as to improve their value.

[853] Mr O'Grady submitted his proposal to Ramco for its approval on 7 September 1993. He explained that the proposed arrangement:

1. The proposal acknowledges that the objectives and time horizons of EFG and the Emanuel group are not the same and may be in conflict particularly on the major APM parcels ... as

(a) EFG wishes to generate cash and reasonable values as quickly as possible

(b) ... Emanuele needs a very extended timeframe to realise any equity interests which may emerge in the properties.

2. EFG has concerns about Emanuele's ability to handle extended negotiations to the State Government and local authorities which will be required to obtain appropriate zonings and concessions to enable development of the major parcels ...

3. EFG believes that as a result of Emanuele's demonstrated `deal doing' ability EFG will probably achieve better sales results on the peripheral assets, if Emanuele sells them ...

(a) Free EFG to deal with the major land parcels in accordance with Foster's time horizons

(b) Establish a fee formula whereby Emanuele can realistically be assured that he will be able to walk away at the end of three years with at least the `private assets' valued at $1,580,000 ...

(c) Give Emanuele some `blue sky' upside if he is able to sell peripheral assets above ... current estimated ... value

The proposal put to Ramco for approval differed from that put to Mr Crosby for his comments. The second draft contained a proposal to release Mr Emanuele from his personal guarantees and his companies from their obligations after three years if the minimum cash realisation targets set out in the proposal had been met. In that case as well as the releases just mentioned EFG would release title to the private assets to Emanuele or his nominees.

[854] Mr O'Grady gave evidence, which I accept, that at this time he did not intend or expect that EFG would be involved in long term development of any of the APM land. The rationale for taking a transfer of the APM land was to add value to them by rezoning or obtaining development approvals for sale in the short to medium term. See T.8241.35-8242.20.

[855] On 9 September 1993 Ramco approved the proposal and authorised it to be put to Mr Emanuele.

[856] Thereafter Mr Crosby together with Mr O'Grady met with Mr Emanuele on a number of occasions over the next four months in an attempt to reach agreement along the lines of the EFG proposal. They were unsuccessful.

[857] A preliminary meeting had been held on 6 September 1993 prior to the proposal obtaining Ramco's approval. The purpose of the meeting seems to have been to give Mr Emanuele and his solicitors prior notice of the approach to be made after Ramco met. The first formal meeting was on 20 September 1993 between

Messrs O'Grady and Crosby for EFG and Messrs G & R Emanuele and Mr Wales. Mr Emanuele refused to accept that his companies had no equity in the APM portfolio and insisted upon being involved in its retention and sale. Mr O'Grady's recollection is that Messrs Emanuele:

`Didn't accept the fact that they lost their equity. They didn't accept the fact that they weren't adding to the realisation process ...' (T.8252.15)

Mr Crosby's brief note of the meeting (Exhibit 421, Volume 30) Item 3 & 6 tend to support Mr O'Grady's recollection. Mr Crosby again met Mr Emanuele on

23 September 1993. Mr Emanuele continued his refusal to countenance the EFG proposal.

[858] On 1 November 1993 Mr Crosby and Mr Emanuele met again. Mr Emanuele put a counter-offer to Mr Crosby which the latter summarised in a fax to Mr O'Grady of the same date. Mr Crosby wrote:

`Set out below is what he would agree to accept, bearing in mind that he realises EFG may simply refuse to assist. It is perhaps best to pick up the points of EFG's original proposal in Emanuele's suggested approach.

1. Non core - must achieve $12,000,000 in sales by June 1995 - no fee payable to Emanuele.

2. Core - Emanuele doesn't accept that all is lost and that he shouldn't continue to play a role.

(a) He accepts the deed of orderly realisation needs to change ... to reflect a greater EFG influence/control

(b) Parcel 64 ... is to be an important benchmark i.e. unless ... sold ... by June 1995 for $45,000,000 then EFG to proceed without Emanuele involvement. If however price is achieved deed (as reconstructed) to continue for a further two years.

3. Creditors may need up to $1,000,000 over two years ... however ... no fees to be earned therefore this amount to be added to the debt.

[859] Mr O'Grady did not accept the counter-offer, principally because he did not believe that Mr Emanuele could make any worthwhile contribution to the sale of the APM portfolio and because he thought the proposed benchmark sale of Parcel 64 unattainable. Delfin had refused to pay a substantially lesser sum for the land only a few months earlier, saying that a price of $30,000,000 could not be justified for the parcel as an unzoned development site. See T.8259.55-8260.15. On

8 November 1993 Mr Crosby spoke to Mr Emanuele and told him that he wanted to avoid having to make an arrangement with his creditors under the Bankruptcy Act; that he wanted a continuing involvement in the whole portfolio and would not agree to a division of responsibility for sales; and that he `wanted to stay with the DOOR for the present.'

[860] Mr Crosby and Mr Emanuele met on a few occasions in Adelaide over the Christmas holiday period. According to a letter of 12 January 1994 which

Mr Crosby wrote to Mr O'Grady to report upon the outcome of their discussions:

`... I took him through the submission to ... Ramco of the 7th September ... and the notes that I sent you on 1st November 1993 ... As you are aware those notes were more a case of Emanuele's wish list, but as I explained at the time, it was as close as I was able to get him to the submission agreed to by Ramco.

Basically, he is firmly of the opinion that his group has a role and value as far as the ongoing dismantling of the projects are concerned. I stressed the fact that the two agendas will never meet. Whilst he acknowledges that this may be the case, he has made a strong request for an ongoing role, subject to the normal review process.

He also requires assistance to cover certain creditors over the next two or three years ...

Whilst all of the creditor issues may not necessarily be attended to, Emanuele is simply trying to get EFG to agree to a proposition that keeps him afloat during the period that the DOOR ... remains in force.'

[861] Mr Crosby thought that there was no prospect that Mr Emanuele would agree to the EFG proposal and that further negotiations would be futile. He therefore asked to be relieved from the obligation. T.6232.50-6233.10.

[862] On receipt of the letter Mr O'Grady thought that there was no point in continuing negotiations with Mr Emanuele. He withdrew Mr Crosby's authority to continue the negotiations. Exhibit 454 para 258 T.8264.15-.30. It will be noted that the cessation of negotiations was unilateral. Mr Emanuele was not told of EFG's decision. Henceforth there were to be no further approaches from EFG.

[863] The stalemate ended on 31 March 1994 when Mr Emanuele was informed of EFG's decision to terminate the payment of timber royalties from the deposit account. Prior to the decision being communicated there were a number of events which led to it.

[864] In a report of 10 February 1994 Mr Booker drew Mr O'Grady's attention to the insolvency of the Emanuel group, and pointed out that a statement appearing in the June 1993 accounts for Emanuel Management, i.e. that the directors believed that the group could trade out of its current financial problems with the support of its major financiers, did not address the problem that it did not have that support and was `continually at risk' of being wound up. Mr Booker expressed the view that the moratorium allowed for by DOOR would not succeed in having all debts paid and that liquidation was inevitable. The next day, 11 February, Mr Booker reported again and questioned the worth to EFG of releasing further funds to the Emanuel group. Mr Booker asserted that the cost to EFG of realising the properties itself would be lower than the sums being paid to the Emanuel group.

[865] Mr O'Grady did not act immediately upon the reports because he was preoccupied with obtaining approval from Ramco to pay for the costs of having Parcel 64 rezoned. He foresaw the amount involved to be substantial and sought the support of Mr Kunkel, the first defendants' chief executive officer for a request to Ramco to approve the expenditure. Mr O'Grady's agenda for the meeting read:

* Additional peak investment $16,000,000 over inputted land value of $35,000,000

* If we decide 2(b) or 2(c) we must resolve relationship with Emanuele, as we are purely mortgagees

[866] The figures in paragraph 2 of the agenda were taken from Mr Gardiner's 1993 feasibility report.

Mr O'Grady regarded any decision about developing Mango Hill subsequent to its being rezoned as being `for another day' depending upon `what the circumstances were after the property had been rezoned' and whether EFG was selling it or developing it with a joint venturer. (T.8266.25)

[867] Mr O'Grady explained that Parcel 64 was in its then zone `virtually unsaleable at anything other than giveaway prices.' The recommendation to have it rezoned was essential `to realise anything like the values that we had in mind around the $35,000,000 mark' but that it would be an expensive undertaking and take a considerable time. He thought it would be difficult for a mortgagee to justify spending such sums which `the Emanuel group didn't have'. This was the reason for `wanting to go our separate ways.' Mr Crosby, too, thought that any decision to develop the land after rezoning could only be considered `if in fact a separation occurred or some agreement was reached to take control of the property.' (T.6236.40-6237.10)

[868] Mr O'Grady gave evidence that he recalled an advice from Clayton Utz the effect of which was:

`That there was dangers associated from our point of view in spending significant amounts of money against properties while we were the mortgagee in possession in that it could be potentially ... challenged by the mortgagor in terms of the amount of money we had spent ... so ... the consequence ... was that we either had to come to an arrangement with the Emanueles whereby we took the properties into our name or if we couldn't come to an arrangement ... we had to foreclose ... Our experience had been that foreclosure was a very long and complicated process. We'd done it on a couple of properties - not Emanuel properties ... and I ... understood that there was ... advice from John Elliott that ... when one foreclosed ... the stamp duty was paid on the total value of the debt as opposed to the actual value of the property ... so there was a couple of reasons why it was better to actually come to an arrangement ...' (T.8266.50-8267.25)

[869] I should, perhaps, say that I accept this evidence. The only point of it which may be controversial is the assertion by Mr O'Grady and Mr Crosby that EFG did not intend, at this time, to develop Mango Hill itself as a long term project with a view to making considerable profits. The plaintiffs are disposed to argue that that decision had been made at about this time and that EFG moved inexorably forward to obtain possession of Parcel 64 to enable that development to occur. The documents, which I hope can be referred to briefly, show conclusively, to my mind, that this was not so. It is clear that EFG did desire to obtain possession of the APM portfolio and to rezone at least Parcel 64 in an endeavour to recover something of its debt. I accept the evidence I have summarised, and the testimony of Mr O'Grady and Mr Crosby, that EFG's wish to take possession of the APM portfolio, manifested late in 1993, was not for the purpose of developing it over the long term. I am also satisfied that EFG wished to obtain the APM land by agreement in transfer for the reasons Mr O'Grady articulated, i.e. a saving of time and money and the removal of uncertainty, but that it would seek to foreclose if it could not reach agreement.

[870] On 14 February 1994 Ramco authorised Mr O'Grady to proceed with the rezoning of Parcel 64 on the basis that it would significantly improve the value of the land as security. It also authorised him to continue negotiations with the Emanuel group.

[871] On 15 February 1994 Mr O'Grady and Mr Crosby spoke by telephone to Mr Elliott who cannot find a file note of the conversation but recalls having been told of the failed negotiations with Mr Emanuele and being asked to advise generally `as to the legal ramifications of the various course of action available to EFG.' Mr Elliott remembers that Mr Crosby told him that his experience of Mr Emanuele was that he would `fight to the death' and that the manifestation of this determination could result in protracted litigation and delays in realising EFG's securities.

[872] On 23 February 1994 Mr Crosby spoke to Mr Emanuele by telephone. Mr Crosby's note shows that Mr Emanuele wished to `stay with DOOR with alterations to be agreed; for Emanuel group to live within the Softwoods royalties including all third party obligations; and that there should be no fee income on expiration of the deed.' (Exhibit 420, paragraph 543) Mr Crosby does not say he passed on the contents of the conversation to Mr O'Grady, but no doubt he did.

[873] On 9 March 1994 Mr Booker telephoned Mr Elliott to instruct him to give a written advice on whether the Emanuel group was in breach of the provisions of DOOR. This followed Mr Booker's concerns that Mr Emanuele had sought to defeat EFG's right as second mortgagee over land at Brendale by a contrived sale to Mr Schutz's company at an undervalue. By a letter of 14 March 1994 Mr Elliott advised that there had been a breach by the Emanuel group of DOOR but that:

`The difficulty which arises is that the Emanuel group will no doubt protest that it has acted bona fide in its dealings and if the matter does become litigious, the issues will turn on the credibility of the various witnesses involved and whether or not the actions by the Emanuel group have been reasonable.'

The letter went on to advise that EFG had `an absolute discretion as to the release of funds from the Softwoods agreement' which it could exercise `at any time' without having to justify its decision.

[874] A second letter of advice also dated 14 March 1994 identified and explained five courses of action available, the last of which was:

`Institute proceedings seeking a foreclosure order with respect to the secured properties or negotiate an agreement with the Emanuel group to transfer all or some of the properties to the EFG group or a subsidiary ...'

The fourth course of action discussed was legal action. The advice given was:

`If ... EFG ... wishes to exert pressure upon Giuseppe Emanuele with a view to forcing him to negotiate an arrangement ... consistent with ... EFG ... realisation strategy, legal proceedings for the outstanding debt could be instituted ...'

* `Serve a demand ... requesting payment of the outstanding debt

* Serve notices of exercise of power of sale and then, after expiry of the 30 day period, sell the properties which ... EFG ... does not wish to retain for longer term development strategy

* As regards to the properties which ... EFG wish to develop prior to sale in the longer term, either remain in possession as mortgagee or via a receiver and manager, and sell the same after appropriate development, or consider foreclosing on these properties, or entering into an agreement with the Emanuel group to acquire the properties in question ...'

`On balance, the history of the account and the many and varied issues that arise would seem to lead to the conclusion that a negotiated settlement with mutual releases may lead to the best result for the EFG group.'

[875] Mr Booker passed on the letters of advice to Messrs O'Grady and Crosby. The former noted the recommendation `that it would be better in the circumstances if we attempt to negotiate the peaceful parting of the ways rather than resort to ... litigation.' (T.8271.5)

[876] Mr Emanuele found Mr Booker's more forceful style of management unsettling after Mr Grier's easy-going ways. It was Mr Booker who uncovered the

Livilla-Schutz transaction and the sale of gravel from Parcel 52. Mr Emanuele complained to Mr O'Grady several times about Mr Booker's severity. For his part Mr Booker had little time and no respect for Mr Emanuele. He thought him little better than a thief.

[877] Mr O'Grady reported to the 22 March 1994 meeting of Ramco that:

`(a) ... the Emanuel group effectively lost its capital base at the time the Molinara sale did not proceed.

(b) EFG does not ... believe (it) will recover all its principal and interest on the Emanuel loans and, hence the Emanuel group has lost its equity in EFG's securities.

(c) In March 1993 EFG agreed to enter into the DOOR as

* EFG believed Joe Emanuele to be a person of high repute with a history of successful property dealings

* EFG hoped the Emanuel group might pull off a major transaction to enable the group to refinance itself. This has not occurred. In fact the reverse has occurred ...

* Emanuele's performance on the smaller asset sales has been in excess of the minimum targets in the deed but is not having a material impact on overall debt level.

(d) EFG believes the agenda of EFG and the agenda of the Emanuel group are not the same now and never will be the same.

(e) EFG, through JDC, has been trying for nine months to negotiate an exit scenario whereby:

* EFG went its way and realised the security in accordance with EFG's agenda, and

* The Emanuele family went its way and started a new life with dignity.

`(i) The value of EFG's securities is not to be eroded by the release of further funds to the Emanuel group; and

(ii) All cash realised on EFG's securities is to be used to repay EFG debt. As a consequence pursuant to DOOR no further funds shall be advanced from the ... deposit account ...

(iii) JOG is to advise the Emanuel group that no further funds shall be released from the Softwoods agreement ...'

[878] Mr Crosby believed that Mr Emanuele's reaction would be to fight `tooth and nail to try and survive ...' (T.6242.1) Mr O'Grady sought further advice from Mr Elliott to be forearmed against any pre-emptive strike from Mr Emanuele. Mr Elliott gave his advice by letter of 24 March 1994. (Exhibit 462, Volume 2) Mr Elliott concluded his advice in a section headed `Strategy'. He wrote:

`In our telephone discussion today it was ... agreed that the strategy to be undertaken in the forthcoming meeting with the Emanuel group and its legal and accountancy advisors will be a communication of the decision ... that no further funds ... be forthcoming from the Softwoods agreement.

We take the view that this meeting should be a communication of that decision and an opportunity for Mr Emanuele to take legal and accountancy advices on the basis that further negotiations are open if the Emanuel group is prepared to submit a reasonable program for exit from the EFG securities.

It would seem to us that after 18 months of negotiation that if Emanuele is not prepared to enter into meaningful negotiations EFG will have no alternative but to consider its legal position and to pursue the recovery of the debt in the best possible manner. In the writer's experience at times litigation run in parallel with negotiation brings the best results.

We would also suggest that it is an appropriate time for a clear message to be indicated to Mr Emanuele that he should take proper legal and accountancy advice ...'

Mr Elliott's reference to '18 months of negotiation' is an error on his part. The negotiations had commenced in August the previous year.

[879] Mr O'Grady concurred with the thrust of the advice. He believed:

`... that one of the issues associated with the Emanuel group ... in particular Mr Emanuele, was that he was ... in complete denial as to the true state of the financial position of the Emanuel group and that what he needed to do was to get some high level advice from Bruce Wales and ... Danny Ferrugia ... as to what his position was ...'

Mr O'Grady also explained that his reasoning for denying the timber royalties to the Emanuel group was that:

`By ... ceasing the flow of money under the Softwoods contract ... this whole issue would be brought to a head and that, as a consequence of that, there would be some sensible discussions between Emanuele, through this advisors, and EFG, through our advisors. And that basically something would be sorted out at a lawyer to lawyer level rather than attempting to have commercial negotiations where it was obvious that both EFG and Emanuele had completely different views as to the reality of the situation.' (T.8277.10-.35)

[880] On 31 March 1994 Messrs O'Grady and Crosby met with Mr G Emanuele,

Mr Rocco Emanuele, Mr Ferrugia and Mr Wales. The best record of what was said would appear to be Mr O'Grady's notes, prepared in advance, to which he spoke. Mr O'Grady's notes read:

`1. EFG continues to have a high regard for the Emanuel group and the principals of the Emanuel group.

2. However EFG believes that Emanuel group lost its equity at the time the Molinara sale did not proceed.

(a) EFG believed Joe Emanuele to be a person of high repute and a very skilled operator

(b) EFG hoped that Emanuel group might pull of a major transaction to enable Emanuel group to refinance itself ... (the miracle)

(c) No (miracle) has occurred. In fact the reverse, as Kartha could not perform ...

(d) Emanuels performance on the smaller asset sales has been satisfactory

4. EFG believes the agenda of EFG and the agenda of Emanuel group are not the same now and never will be the same.

5. EFG (John Crosby) has been trying for nine months to negotiate an exit scenario whereby

* Was left with the family's personal assets (houses/motor vehicles

6. Emanuel group's counter-proposal had been rejected ...

(a) EFG will not get all its interest back on the Emanuel account

(c) EFG board wants all cash realised on EFG's securities to repay debt

(d) EFG board is not prepared to erode its securities by the release of any funds to the Emanuel group pursuant to the terms of the DOOR and hence no further funds will be forthcoming from the Softwoods agreement.

8. The purpose of this meeting is to communicate the decision of the EFG board to the Emanuel group and its legal and accounting advisors.

9. EFG believes Joe Emanuele and the Emanuel group:

(a) Should take proper legal and accounting advice, and

(b) Any further discussions/negotiations must involve the lawyers and accountants to ensure all parties are protected.

10. EFG believes the next step should be for Emanuele's solicitor ... and EFG's solicitor ... to get together ...

11. The Emanuel group shall revert to EFG with the practicalities of the exit of the Emanuel group from EFG's securities.'

[881] The first point in Mr O'Grady's notes may have some significance. As will be seen the Simionato deed recited that the consideration for the gratuitous payment of $4,600,000 was the high regard EFG maintained from Mr Emanuele personally. The plaintiffs regard this as the purest cant. They point to Mr Booker's trenchant criticism of Mr Emanuele's character and the evidence of his attempts (one of which appeared to have succeeded) to defraud EFG for his own benefit. The plaintiffs submit that EFG had, in truth, no regard at all for Mr Emanuele's character and the recital was intended to deceive the casual reader. Mr Crosby said about that comment:

`... There was a divergent view ... certainly the people that had had an association over a longer period of time ... Mr O'Grady, those people that knew of Mr Emanuele on the Ramco committee still had high regard for the group and I think on what they mean by that is people of integrity and people who had been trying their heart out to ... achieve a result. ... That's what is meant by that comment.' (T.6245.50)

[882] My impression, formed from observing the examination and cross-examination of the EFG officers, tends to accord with Mr Crosby's statement. There was a difference between those officers who had dealt with Mr Emanuele when his group was successful and those who had not. The first group included Mr Crosby,

Mr MacDonald and, at a lower level, Mr Grier. I thought they did retain a degree of respect for Mr Emanuele's abilities as a property dealer and had had regard for him personally. They were sympathetic for his fall into penury. Those who did not know him in the good times but dealt with him as he struggled with adversity, such as Mr Booker, had a very different view, as I have explained. Mr Crosby was, I suspect, the most sympathetic and the gentleman on closest terms with

Mr Emanuele. Although he put Mr O'Grady in the same category I do not think he belongs there. Mr O'Grady did not have much personal contact with Mr Emanuele and did not, I thought, have a personal opinion about him. He was influenced by his senior managers, such as Mr Crosby and Mr MacDonald who did have empathy for Mr Emanuele.

[883] Mr Emanuele wrote to Mr O'Grady on 7 April 1994. Having referred to the meeting on 31 March his letter went on:

`... EFG is threatening to withdraw financial support to my group by denying access to the timber royalty under the DOOR.

* The 40 months moratorium was agreed little more than a year ago; and

* Our performance has been consistent with our obligations and better

Clearly EFG's position has changed since the deed was signed. I understand that the rationale for the approach now taken is that in EFG's view my group's financial position is beyond redemption ...

I believe I have a deal with EFG for a 40 month moratorium the terms of which ... allow my group access to the timber royalty. It is in that context that I put forward the following proposal.

I have obtained agreement in principle to arrangements whereby a syndicate will acquire all of EFG's rights, interests and securities for $60,000,000 before 30 June 1994. If the transaction is not completed by that date, I will comply with EFG's instructions regarding the management and disposition of the portfolio subject only to:

* Payment by EFG of $2,000,000 to my group to discharge its creditors

* Continued funding by EFG of my operation for 12 months from 1 July 1994

* EFG immediately releasing by Brisbane office, Beaumont SA House, Mt Barker, SA property, Cape Jervis SA house, Gap Queensland house for transfer;

* All family and business car leases to be paid out

* EFG paying a commission fee of 10 per cent on sales of non-core assets

* EFG paying a fee of $1,000,000 on obtaining DCP approval on lot 64

* If EFG sell the portfolio for more than $60,000,000 EFG paying a fee equal to 10 per cent of the excess proceeds

* Absolute releases of all guarantees and other liabilities to EFG and the group of me, my family and my family trust

* Legal documentation of these arrangements on satisfactory terms.'

[884] Both Mr O'Grady and Mr Crosby thought the offer unrealistic. For a start the book value of EFG's securities was much more than $60,000,000. The payments which Mr Emanuele requested as the price for his agreement came to about $10,500,000 which Mr O'Grady regarded as exorbitant and bringing an end to further negotiations. As he said (Exhibit 454, para 304):

`I calculated the cost of the proposal to EFG was about $10,500,000 quite apart from the loss it would realise on its securities, which I viewed as ridiculous. ... I had not turned my mind to a figure for the purposes of negotiation ... but Joe Emanuele's proposal was not even a basis for further negotiation.

[885] On the same day Mr O'Grady replied to Mr Emanuele by letter. He wrote:

(a) I was very disappointed to receive your letter ... Your proposal is rejected.

(b) In the circumstances I believe there is no point is us meeting ... tomorrow.

2. I advise that under the terms of clause 6.2 of the DOOR ... EFG group has exercised its absolute discretion in respect to the release of funds from the Softwoods agreement and I confirm the advice ... in my letter ... 5 April 1994 that from 8 April 1994 EFG group shall cease to permit the flow of funds ... to the Emanuel group.'

[886] As the letter indicated Mr O'Grady had spoken to Mr Emanuele on the telephone that same day, 7 April. His contemporaneous note of the conversation shows that he told Mr Emanuele:

* The Emanuele proposal of 7 April was completely unacceptable and is rejected.

* There was no point in going to Adelaide to meet, as had been planned, on 8 April.

* He would write to Mr Emanuele giving formal notice of the decision to withhold payment of the timber royalties.

* He was very disappointed and surprised that the offer was rejected.

* He believed EFG wanted to get out of the Emanuel exposure and that $60,000,000 was, he had been told, a fair value for the portfolio.

* EFG's position was, and always had been, that it wanted to get all its money back. If anything was left over it would go to the Emanuel group.

* EFG did not believe that EFG would recover all its money and the Emanuel group had no equity in the securities.

* That any further discussions should involve the lawyers for EFG and the Emanuel group.

[887] It is of significance that Mr Emanuele's counter-proposals to bring about a termination of the relationship between his group and EFG, and the transfer of the APM land, involved the payment of a sum of money by EFG to allow

Mr Emanuele, and his companies, to pay, or at least to compromise with their creditors. Mr O'Grady understood generally the need for Mr Emanuele to effect a compromise with his creditors if he was to continue in business but had no detailed knowledge of the claims on the Emanuel group, and Mr Emanuele, or how he intended to deal with them. He said:

`I had no clear understanding of any distinction (between company and personal creditors) between them ... Mr Emanuele had followed the practice of giving personal guarantees to all ... his lenders and to my mind the vast majority of ... the Emanuel group's creditors had been personally guaranteed by Mr Emanuele and that they were virtually one and the same ... I thought the group would have to call in its creditors and put a proposal to them in some form or other that ... there would be some formal legal arrangement ... in respect to both Mr Emanuele and the companies. ... What form that took I don't think I really spent a great deal of time thinking about ... There had to be a negotiation ... where he put a proposal ... and they either accepted it or they didn't accept it ... If it wasn't accepted ... he would have been presumably made bankrupt and ... the companies went into liquidation.' (T.8279.40-8280.15)

[888] Also on 8 April 1994 Mr O'Grady sent a memorandum to Messrs Booker and Crosby (inter alia) advising them of the contents of the conversations he had had with Mr Emanuele on 7 April and setting out the stance they should take with respect to dealings with the Emanuel group. His instructions included:

* EFG expects the Emanuel group to continue to manage and market the properties in accordance with DOOR.

* EFG expects to continue to be involved in all those discussions and negotiations under clause 4.

* EFG should initiate no discussions with the Emanuel group in respect of the overall solution of the position.

* EFG should be extraordinarily circumspect in any discussions we have with the Emanuel staff and should not be drawn on EFG's position. The same applies with any discussions with other creditors ...

* At a later date it may be appropriate to initiate a discussion between John Elliott and Danny Ferrugia, but we should play this by ear.

* In the immediate period going forward we should maintain the position that

John Crosby's role has ceased in respect of attempting to organise an orderly exit of the Emanuel group.

The matter has now gone to a different level, namely board/JOG/lawyers.

[889] Mr O'Grady had spoken to Mr Elliott following his receipt of Mr Emanuele's letter of 7 April. By letter of 8 April 1994 he set out some general advice for

Mr O'Grady's consideration `in preparation of any offensive action taken by the Emanuel group, as a response to the exercise by ... EFG ... of its absolute discretion in withholding further funds.'

[890] Also on 8 April Mr O'Grady and Mr Benskin met with Messrs G & R Emanuele. Mr Benskin had no involvement in the Emanuel group account but was asked by

Mr O'Grady to attend as a witness and to take minutes. Mr Benskin's notes (Exhibit 421) record that Mr Emanuele explained that he had not meant the `$60,000,000 offer' to be insulting but he was `looking for a point at which Emanuel and EFG (were) happy.' Mr O'Grady said:

`EFG has spent over nine months trying to get a solution. Based on the debt of $150,000,000 Emanuel's offer shows a $90,000,000 gap. Emanuel therefore has no equity in the properties. At the time the Molinara deal fell over Emanuel (was) stuffed ... we were looking for the possibility of a miracle ... these did not happen. We then asked how can we ... make this as painless as possible. John Crosby tried to get a solution, failed, his mandate has been cancelled. EFG is not getting all its money back ... there is nothing for Emanuel ... there is no incentive for us to pay outstanding creditors. FBG (Fosters) is a public company and cannot take a bath and see Emanuel walking away with a large payoff ...

The proposal put to you to take houses/cars was to provide a settlement that we could live with and which preserved your self respect. We are now so far apart on your offer that it is useless talking.'

Mr O'Grady went on in response to a question from Mr Emanuele:

`The point is that EFG has got more lent against the portfolio than we will get back. We therefore want to dispose of the properties in our time horizons.'

In response to a plea from Mr Emanuele that he had performed in terms of the DOOR Mr O'Grady said:

`... You have realised $90,000,000 versus $50,000,000 budget but the debt is $150,000,000, therefore little impression is being made ... Our mandate is to get back as much as possible. Because of the massive gap Emanuel will never catch up. ... Fosters Brewing Group board (is) happy for Emanuel to get personal assets such as houses and cars and keep their reputation.'

Mr O'Grady repeated that EFG wished to recover its debt to which Mr Emanuele responded that he could not accept `being pushed out with no money.' He pleaded for more time, two years, in which he might perform `a miracle'. Mr O'Grady expressed his scepticism and explained that EFG had tried `to come up with a solution through John Crosby' but had failed. He went on:

`The fundamental problem is the huge gap between debt and asset value which means no equity will ever be there for Emanuel. Foster's view is that any money released to Emanuel re Softwood is wasted and we would not get back ... The board believed that if John Crosby couldn't get a solution no-one could.'

Mr Rocco Emanuele agreed with the assertion that Emanuel had no equity in the securities and would never recover any.

`JE I will not deal with Brisbane (Mr Booker) any more. I will not give up deed and I expect money.

JOG EFG believed the deed is on foot and you will not be getting any money. The board have high regard for JE and that's why we have been nine months looking for solution (which) didn't materialise.

JE We will put a further proposal and will not give up easily.

JOG Suggest again that you discuss your position with your advisors and put any proposal in writing.'

[891] It was Mr O'Grady's wish that negotiations would pass from Mr Emanuele personally:

`Into the hands of his advisors, particularly Bruce Wales and Danny Ferrugia, on the basis that ... they were likely to have a more balanced view of what Mr Emanuele's and the Emanuel group's real position was ... so ... the real strategy (was) that we were then trying to move it to a more professional and legalistic position rather than having myself and John Crosby ... dealing with Mr Emanuele which ... achieved nothing ...' (T.8284.5-.20)

[892] On 13 April 1994 Mr Linton Emanuele sent Mr Crosby a copy of a document headed `Deal Summary' which `Dad and Rocco have been discussing with Elders in Melbourne ...' The summary proposed:

* That Emanuel would pay EFG $100,000,000 before 30 June 1996. Of this $60,000,000 was to be paid within six months, $18,000,000 by 12 months and the balance within the two years. This was to be achieved by the sale of property, calling in vendor mortgages or refinancing. The timber royalties were to continue to be paid to the Emanuel group who would also receive the proceeds of sale of specified properties in excess of the projected sale price. As well a number of properties, including lots 52, 53 and 62 were to be transferred to the Emanuel group.

[893] Mr O'Grady rejected this proposal. He said:

`... It was completely unrealistic for the Emanueles to think that they would be able to (make the sales suggested in the proposal). They had demonstrated no ability to do it in the past and I had no confidence ... that they'd ... be able to come up with that sort of a number ... We were being asked to take a significantly less amount of money and effectively leave our fate in the hands of the Emanueles for another six or 24 months which we were not prepared to do. (T.8285.20-.35)

[894] On 13 April there was another meeting between Messrs O'Grady and Benskin and G & R Emanuele. It was held to discuss the proposal set out in the

`Deal Summary'. I have mentioned this meeting already. It is the one at which

Mr Rocco Emanuele accepted that the Emanuel group had lost all equity in the mortgaged properties, the debt far exceeding their value.

The discussion served to reinforce the point that Messrs Emanuele were looking at a timeframe for the realisation of the APM portfolio much longer than EFG required. Mr Rocco Emanuele said:

`We are looking for a solution that gives us a future over the long term 5-10 years possibly 20 years.'

Mr Rocco Emanuele also mentioned that he and his father were endeavouring to put together a consortium of financiers presumably to refinance EFG's loans or to buy the mortgages from EFG. The meeting ended with a plea from Mr Emanuele to allow DOOR to run its course to enable him in the meantime to effect a major sale or refinance the EFG loans. Mr Emanuele said:

Mr O'Grady replied that the Emanuel group had no equity in them and whether the land was sold in the short or long term was a decision for EFG. He pointed out that the proposal was that EFG should accept $100,000,000 in two years when the debt was presently $150,000,000. The meeting concluded with Mr O'Grady promising to `meet the consortium' if there was a sensible offer.

[895] On 19 April 1994 Mr O'Grady reported to Ramco and recommended that the most recent proposal by the Emanuel group should be rejected. It agreed and on 20 April Mr O'Grady telephoned Mr Emanuele to advise him of the decision. Mr Emanuele became upset and threatened some unspecified action which Mr O'Grady understood to be litigation.

[896] On 18 April 1994 Mr Emanuele wrote to Mr O'Grady. Given some evidence that Mr Emanuele did not always express himself clearly in English the letter would appear to have been written by solicitors. It identified QIDC as the consortium referred to in the meeting of 13 April and went on to advance reasons justifying the proposals set out in the `Deal Summary'. The explained rationale for the transfer of some assets to the Emanuel group were that those assets were `generally private properties or non-core assets which are long term holdings with likely development realisation over 5-10 years or more.'

[897] On 20 April 1994 Mr O'Grady wrote to Mr Emanuele to confirm his telephonic advice that Ramco had rejected his proposal of 13 April. He explained the grounds for the decision:

`(a) The proposal does not address the major issues which EFG required ... namely:

* EFG believes the Emanuel group has lost its equity in the securities.

* As a result ... the agendas of Emanuel group and EFG are not the same and ... never will be ...

(b) The proposal would result in a major loss of interest to ... EFG and this is not acceptable ...

(c) The proposal would involve EFG losing for all time any upside on the (properties to be transferred to the Emanuel group) and tree income from those securities.'

Having referred to Mr Emanuele's letter of 18 April Mr O'Grady said that EFG was `prepared to mutually investigate ways of finding a solution ... to the Emanuel group's problems which is acceptable to EFG.'

[898] The next day, 21 April 1994, Mr Ferrugia rang Mr O'Grady. He said he wanted to arrange a `without prejudice' discussion because he wished to try to help

Mr Emanuele out of his present difficulties. He remarked that Mr Emanuele was `pretty distressed' and could `easily flip over in a fashion that was not constructive.' Mr Ferrugia suggested to Mr O'Grady that they should meet `unofficially' in an attempt to `find a middle ground.' He asked to be informed of `EFG's position.'

[899] There was another meeting between Messrs O'Grady, Benskin and

G & R Emanuele on 26 April 1994. It was concerned with the acrimonious relationship that had developed between the Emanueles and Mr Booker in Brisbane. There was no discussion of a compromise of the conflict of interests of EFG and the Emanuel group.

[900] On 29 April Mr O'Grady telephoned Mr Emanuele to warn him that he was sending a letter and to discuss its contents with him in advance. Mr O'Grady's desire was to explain the letter `in the hope that we might be able to get somewhere on a commercial settlement. Our position was that the DOOR was still in place, albeit that we were no longer releasing funds ... and the Emanuel group had obligations ...' Mr Emanuele had asked Mr Crosby, who relayed the query to Mr O'Grady, whether DOOR would be extended after its expiration in June 1996. Mr O'Grady told Mr Emanuele that that was most unlikely. He told him the purpose of his call was to encourage Mr Emanuele to `keep communication going'.

[901] On 3 May 1994 Mr O'Grady wrote his foreshadowed letter to Mr Emanuele. It reiterated past statements about EFG's position but went on to explain the reasons for its taking that position. Mr O'Grady wrote:

`In view of the long standing relationship between Emanuel group and EFG ... I believe I should explain ... why EFG ... has made the decisions it has ... which have not been taken lightly. In summary:

EFG group maintains a high personal regard for you and your family and the past achievements of the Emanuel group.

However EFG believes that the Emanuel group may have solvency problems and that there does not appear to be a realistic prospect of the Emanuel group being able to recover its equity base ...

(c) EFG believes it will not recover its loans in full

EFG group believes it will not recover the full amount of its loans ... of approximately $153,000,000 from either the disposal of the security properties mortgaged to EFG ... or from other sources.

(d) The Emanuel group has lost its equity in security properties

As EFG group believes it will not recover its loans in full EFG group believes that the Emanuel group has lost its equity in the EFG security properties.

The letter went on to summarise the respective obligations of the parties under DOOR, the action taken by EFG to appropriate the timber royalties and to express EFG's expectation that the Emanuel group would continue to comply with the terms of DOOR.

[902] On 11 May Mr Emanuele telephoned Mr Crosby to repeat his last proposal to effect a compromise. Mr Crosby told him to ring Mr O'Grady.

[903] On 20 May 1994 Mr O'Grady met with Mr Ferrugia who had requested the meeting. According to Mr O'Grady's note of the conversation Mr Ferrugia said:

`(a) The Emanuel group was looking to a commercial solution with ... EFG

(b) From his perception he thought EFG was looking for an Emanuel exit from the portfolio. An impasse had arisen because the Emanuel group was wanting EFG to exit and take a hit.

(c) He believed there had been a breakthrough in that possibly Joe might exit and walk.

(d) However Joe Emanuele was wavering during where his position is and where he wants to be.

* Joe is in a situation where he has to `bite the dust' or take affirmative action now.

* The cash flows are important to the Emanuel group.

(e) A liquidator getting into the Emanuel group would be a problem for Joe Emanuele and in his opinion a problem for EFG.'

Mr Ferrugia made it clear he was not putting a proposal from the Emanuel group but was putting forward `ideas that EFG might like to think about' so that a proposal `could be put to Joe Emanuele.'

[904] Mr Ferrugia then outlined the proposal which was:

(a) The Emanuel group would retain its existing corporate structure.

(b) There would be a restructure of the debt so that assets would be valued and transferred to EFG for fair value except for Parcel 52, Parcel 63 and the private houses which would be retained by Emanuele.

(c) The balance of the debt to EFG after the transfer of the assets would be assigned by EFG to a company nominated by Emanuele.

(d) The Softwoods contract would be valued and transferred to EFG at that value.

(e) The timber royalties from Parcel 52 would belong to the Emanuel group.

(f) EFG would pay the Emanuel group's `pressing' creditors up to $3,000,000.

(g) EFG would contribute to the cost of keeping the Emanuel group office open for 12 months.

(h) Emanuel group would keep the companies and their tax losses.

(i) EFG would release its mortgage over the Emanuel group office.

(j) EFG would pay the Emanuel group a fee of $1,000,000 upon the gazettal of a DCP on Mango Hill.

(k) EFG would pay the Emanuel group 10 per cent of the sale price of non-core assets estimated at $1,000,000.

(l) The private houses would be transferred to the Emanuel group at an estimated cost of $1,300,000.

(m) Car leases would be paid out at an estimated cost of $200,000.

(n) Parcels 52 and 63 would be transferred to the Emanuel group.

(o) EFG would pay all costs involved in the restructuring of the debt and transfer of properties.

(p) The Emanuel group was to have an option to make an offer for the core properties when EFG came to sell them.

`... EFG's starting point was that it would have to pay stamp duty of the order of $6,000,000 in order to transfer the assets to EFG via foreclosure ... Any proposal which involved transferring them at fair value, say $75,000,000 resulted in a stamp duty saving of $3,000,000 to EFG.

As a consequence it was easy for EFG management to justify a figure to the board of the $3,000,000, but beyond $3,000,000 any increase had to be justified on other commercial grounds. ... The cost of the proposal to EFG would be the deciding factor. I believed the 10,000 acres at Caloundra was a very valuable security but ... did not have its value to hand.'

[906] Mr O'Grady calculated that Mr Ferrugia's proposal would cost EFG $15,900,000. This was greater than the cost involved in the earlier proposal which EFG had rejected. On 23 May 1994 Messrs Crosby and O'Grady attended a meeting of Ramco to which Mr O'Grady explained the progress of the negotiations and outlined Mr Ferrugia's proposal. He recommended rejecting it but responding with a final offer in terms which he outlined. Ramco accepted his recommendation and on 24 May 1994 Mr O'Grady rang Mr Ferrugia to pass on the offer. Its terms were:

`1. The Emanuel group shall transfer all the security properties except the private houses to EFG at fair market value which consideration would go in reduction of the EFG debt.

(a) EFG would pay up to $3,000,000 to Emanuel's pressing creditors.

(b) EFG would pay the costs incurred in running the Emanuel group office for 12 months.

(c) The Emanuel group could retain its companies and tax losses.

(d) EFG would release its mortgage over the Emanuel group office in Brisbane.

(e) EFG would discharge the mortgages over the three houses in South Australia and the one in Queensland for no consideration.

(f) EFG would pay out the leases on the cars used privately by Mr Emanuele's family.

(g) EFG would make a payment in cash or property to the Emanuel group up to a total of $2,000,000.

(h) EFG would transfer the residual balance of the EFG debt to a company to be nominated.

3. The offer was conditional on obtaining releases from the Emanuel group.

4. The offer was subject to legal documentation to EFG's satisfaction.

[907] If accepted the offer would have benefited the Emanuel group in the amount of $7,200,000. Mr O'Grady's justification for this payment from EFG's point of view was:

`... getting a clean break from the Emanuel group in terms of enabling us to ... realise assets ... under our own time ... and there was ... a commercial benefit to us in terms of being able to realise the assets in a speedier and unfettered manner ... The normal difficulties that you have ... where you are realising assets in a mortgagee type situation ... is that the interests of the mortgagor and, in this case the interests of Mr Emanuele's guarantor would have to always be taken into account and that potentially would put us in an ongoing conflict or tension situation with Mr Emanuele because his ... objectives were one thing and our ... objectives were another ... He wanted to try and maintain value in the assets in the long term and we would be making decisions in the shorter term ... and ... as a consequence I ... thought we would have a long and difficult realisation process unless we could actually come into a clean break with the Emanuele's.' (T.8291.1-.30)

[908] The idea of a transfer of residential properties had originated from Mr Emanuele in an earlier offer. Mr O'Grady was content to accept the proposal because:

`... They were the equivalent of cash for the Emanuel group ... there would be ... a negotiating point ... The Emanuel group would value retaining the residences on the basis that they were long-standing residences of the Emanuele family.' (T.8290.42-.50)

The houses were the equivalent of cash to the Emanuel group because:

`Mr Emanuele was the sort of guy that would mortgage his family home for his business ... I, or EFG, did not want to be throwing the Emanuel group out of their houses. I was quite happy for those houses to be made available to the ... other creditors of the Emanuel group. If Mr Emanuele was able to do a deal with those creditors, fine. If he could not ... he would lose the houses. But as far as I was concerned the houses were the equivalent of cash and he was able to deal with those houses as he wished ...'

`Mr Emanuele had been a long-standing 25 year client of EFG ... and over the years had been a very good client of EFG - I did not want EFG to necessarily be putting Mr Emanuele and his family out on the street. But, in terms of a settlement, we were prepared to treat the houses and the cash as one, make them available to the Emanuel group and if he could then do a deal with his creditors and continue to reside in the houses that was all well and good for him. If he could not, it was up to the other creditors as to what they did (with) those houses.' (T.8446.1-.35)

[909] This proposal contained for the first time a release from the Emanuel group in favour of EFG. Mr O'Grady explained:

`... I didn't put any value on the releases ... but I wanted this to be a clean commercial and legal break. ... I just wanted to be in a position where the Emanuele's could not come back to us at some stage in the future ... I didn't think there was anything ... that they could challenge us on but that was the thinking behind it.' (T.8291.35)

[910] Mr O'Grady was asked what he expected would happen to the Emanuel group should EFG's proposal be accepted. He answered:

`... They would take the pool of cash and assets and have a negotiation with their creditors in terms of attempting to ... compromise in some manner ... and Mr Emanuele would presumably do the same in respect to his own personal situation.' (T.8293.30-.35)

[911] There does not appear to have been a response to EFG's `final offer'. By letter dated 2 June 1994 Thomsons wrote to Mr O'Grady on behalf of the Emanuel group:

`Our client considers the actions of ... EFG ... to be in breach of DOOR ... On our instructions it was clear from the discussions in meetings leading up to the signing of the deed that our client would have access to the timber royalties for the 40 month term of the moratorium ...

... EFG ... is well aware that ... withholding ... the timber royalty proceeds severely compromises our client's ability to perform its obligations under the deed ... by its conduct ... EFG ... has breached the deed ... Our client requires that the payment direction to Softwoods ... be withdrawn immediately ... and that the flow of funds to it under the Softwoods agreement be restored forthwith.'

The letter finished with a threat to commence legal action `unless this matter is resolved immediately.'

[912] On 7 June Mr O'Grady spoke by telephone to Mr Ferrugia and told him he would put the EFG `final offer' in writing and post it. He did so on 8 June but, in the meantime, received a call from Mr Ferrugia advising him that Mr Emanuele `had withdrawn any mandate (Mr Ferrugia) had to deal with (Mr O'Grady) and that

[913] On 14 June 1994 EFG commenced proceedings in the Supreme Court of Queensland seeking declarations that it was entitled, pursuant to the terms of DOOR, to appropriate the timber royalties. The plaintiffs were the second, third and fourth defendants in these proceedings. The defendants were the Emanuel group and Mr Emanuele personally.

[914] On 14 June 1994 Mr Elliott wrote to Mr Ferrugia indicating that EFG would like to resolve their differences by agreement rather than resort to litigation. Mr Elliott reminded Mr Ferrugia that he had an offer which was open for acceptance until close of business until 15 June. The next day Mr Ferrugia replied in a letter to

`It is the earnest desire of the Emanuel group to achieve a commercial resolution ... The offer contained in your letter of 8 June ... goes a long way towards achieving that objective however the matter requires further discussion ...'

but he was unable to respond by the required deadline. Mr Ferrugia and Mr Elliott spoke by telephone on 16 June 1994. Mr Elliott told Mr Ferrugia that Ramco would not improve its last offer. Mr Ferrugia said that he wanted `to keep the door open for a commercial settlement'.

[915] Mr Elliott wrote to Mr O'Grady on 16 June to report his conversation with

Mr Ferrugia. Having received instructions from Mr O'Grady, Mr Elliott rang

Mr Ferrugia. He told him that he had instructions from Mr O'Grady to respond to his letter of 15 June to the following effect:

* The previous offer which had lapsed had an upper limit of $7,200,000 which could not be exceeded.

* If Mr Ferrugia or Mr Emanuele could submit a proposal for a compromise within that limit of $7,200,000 it would be considered provided that EFG was satisfied its true value was within the limit.

* EFG had valued the Caloundra land at $10,000,000.

* Any further discussions towards a commercial settlement must be put to EFG in writing. If EFG considered the offer worthwhile a meeting would be convened to discuss it.