Executors of the Estate of Bruce James McAdam v Chylos Pty Limited

5 The liabilities disclosed in the balance sheet were: '1999 2000 $ $ CURRENT LIABILITIES … 219319 LOAN ACCOUNT - JAX TYRES P/L 269 322.71 (42596) LOAN - D & D SMEDLEY - 106666 LOAN - I F HURRELL 87 499.43 (20000) LOAN - B J MCADAM - (20000) LOAN - S MCADAM - …'

6 It is not altogether easy to make sense of this. The current liabilities record a negative liability to Mr and Mrs McAdam of $40,000 in 1999. This would appear to be the same as a loan to them of $40,000. Ordinarily one would expect such a loan to be recorded as an asset rather than as a debit entry in the liabilities. 7 In any event, the asset consisting of the negative liability of $40,000 in 1999 appears to have been replaced by a receivable of $48,333.43 (being the sum of the two loans of $24,166.71 and $24,166.72). It is tempting to think that the person who drew the accounts had decided to straighten the books out by moving the loan from the liabilities disclosed on the balance sheet to the assets, but this explanation fails to explain the difference of $8,333.43. One interpretation might be that the accounts had recorded a loan to Mr and Mrs McAdam of $40,000 in the form of a negative liability in 1999, that the loan account was increased during the following financial year, that this was recorded in the accounts as at 30 June 2000 and that the books had been regularised by moving the loans from the liabilities side of the balance sheet to the assets side. Other interpretations may, however, also be available. For instance, they may be entirely different transactions. Scrutiny of the balance sheet does not, therefore, advance one's understanding of the transactional history. 8 The evidence of the transactions themselves is scant: Mr Bruce McAdam is deceased and there is no direct evidence available from him; Mr Hurrell is available but he has no recollection of what the entries refer to; the director who was active in the affairs of Chylos at the time, Mr Smedley, has given no relevant evidence on the topic; and there is no extant primary documentation to explain what the transactions were to which the accounts advert. 9 Evidence was called from Mr Denton, the accountant who prepared the accounts for the year ending 30 June 2001. He used the 2000 accounts as a starting point for his work but he was not responsible for the drawing of those accounts. Further, Mr Denton was himself not a witness to any of the events which might have explained what the loans were. His knowledge was, in effect, derivative and no greater in content than the accounts upon which he relied. Mr Denton recorded the loans in the later accounts because he believed the loans existed but he held this belief only because they appeared in the earlier accounts. Whilst I do not doubt that Mr Denton's reasons for this were sincere, I do not think his evidence provides any assistance in understanding what the loans were or where they came from. 10 The loans continued to appear in the financial statements prepared by Mr Denton for the years which followed. Again, I do not think this tells one any more than what the 2000 accounts themselves establish. 11 The other positive evidence bearing on this issue came from Mr Hurrell, Mr Smedley and Mr Marcus McAdam. Mr Hurrell could not recall giving instructions to Mr Denton for the 1999-2000 year or, indeed, for any year. Whilst he did recall that a property owned by Chylos at Orange had been sold on or about 20 April 2000, he could not explain the change in the loan balances and he gave no evidence as to their origin. Mr Hurrell's evidence, therefore, does not assist. 12 As I have said above, Mr Smedley was the director who in fact operated the business conducted by Chylos. He gave no evidence about the loans which assisted in the resolution of the present question; indeed, he gave no evidence at all. 13 The late Mr Bruce McAdam produced a file note on 15 March 2009 about Chylos' accounts. In part it reads: 'Chylos balance sheet 30/6/2008 shows debit balances BJM/MM each $24,167. Composition of the debt need to be established from Paul Denton.' 14 From this I would infer that Mr McAdam was also ignorant of the origins of the loans. Mr Marcus McAdam gave evidence of his late father having told him that neither he nor Mrs McAdam had received a loan from Chylos. This evidence comes secondhand through Mr Marcus McAdam. Although I consider that this is Mr Marcus McAdam's genuine recollection of what his father said to him, I prefer the file note as an independent record showing that Mr Bruce McAdam's position was that he did not know about the loan, not that he knew there was no loan. The tension in the evidence may be explicable by reference to the word 'received': loans in books can often be generated without any receipt of money. 15 I do not think, therefore, that there is any evidence upon which I would be willing to act in order to understand the nature of the loans in question. Nor do I accept that any party is to be criticised for failing to recollect details of such a small transaction (in the scheme of the affairs of the Jax businesses) some fifteen years after the event. 16 Section 1305 of the Corporations Act 2001 (Cth) provides: '1305 Admissibility of books in evidence (1) A book kept by a body corporate under a requirement of this Act is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book. (2) A document purporting to be a book kept by a body corporate is, unless the contrary is proved, taken to be a book kept as mentioned in subsection (1).' 17 This provision does not elevate a book entry to the status of prima facie evidence of the transaction which it records: Whitton as Trustee of the Estate of Rose v Regis Towers Real Estate Pty Ltd (in administration) (2007) 161 FCR 20 at 36 [59] (FC); Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377 at 386 [37]. 18 I incline therefore to the view that the accounts for the year ending 30 June 2000 provide prima facie evidence that a director, probably Mr Smedley, believed that Mr and Mrs McAdam owed money to Chylos. 19 If matters rested there, the issue might be somewhat equivocal. However, two events which then occurred are inconsistent with the non-existence of the loans. Before explaining what this negative evidence was, it is first necessary to note that the evidence satisfied me that Mr Hurrell did provide the late Mr Bruce McAdam with the accounts of Chylos as they became available and that by 2003 the 2000 accounts themselves had become available. Mr Bruce McAdam must have had them by then. 20 It is true, no doubt, that the evidence suggests that by 2009 (when he wrote the file note referred to above) he could not recall the loans. In 2003, however, the parties entered in a deed to resolve the many differences which, even then, existed between them. This was entitled the Shareholders and Associated Parties Deed and was dated 24 September 2003. The deed envisaged the sale of Chylos to a third party with the McAdams to receive 16.67% of the eventual sale price. Mr Hurrell was to provide the 2003 accounts to the McAdams within four weeks. As I have said, I accept that the earlier accounts had already been provided to the late Mr Bruce McAdam. Those accounts mentioned the now disputed loans. It would be natural to expect that if the loans had then been in dispute that this would appear in the deed as a matter requiring resolution in some way. That absence is negative material from which an inference may be drawn that there was no such dispute. 21 I accept also that the in-principle agreement recorded in Mr Skyring's email of 25 July 2005 has a similar effect. Although it recorded that the parties proposed to sell Chylos it made no mention of any mechanism to resolve any dispute between them about these loans. It is material which suggests that there was no such dispute. 22 I infer then, from these two matters, that there was no dispute about the loans in 2005. Whilst I accept that the late Mr Bruce McAdam had forgotten about the loans by 2009 when he made his note, this is not inconsistent with that conclusion. A minor point of detail like this in the Icelandic saga which was the dispute between the Hurrells and the McAdams together with the passage of time makes this readily explicable. 23 Because of the paucity of the evidence it is not possible to know what generated the loans but it is clear that they were not in dispute up to and including 2005. I infer from that fact that the loan entries reflect an underlying reality which was accepted, even if that reality's nature cannot now be known. 24 It was the plaintiffs who bore the onus of proving that the loans did not exist. Regardless, I am affirmatively satisfied that the loans did exist. The plaintiffs fail not because they have failed to prove the loans did not exist but because Chylos has shown that they did. 25 The ninth defendant argued that the case advanced by the plaintiffs had been abandoned on the first day of the trial at T50-51. Like the obscure pleading which gave birth to the point in the first place, this is not entirely clear. However, I do not think, on balance, that the point was abandoned. 26 The second and fourth plaintiffs' proceedings against the ninth defendant will be dismissed with costs. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.