Icognition Pty Ltd v Callaughan [2012] ACTSC 19

3. Ultimately, on 20 October 2008 a shareholders' agreement was executed in which it was agreed that three companies would be the shareholders of the plaintiff. These companies were Kygera Pty Ltd for The Mammoliti Investment Trust, Meralda Pty Ltd as trustee for the Callaughan Family Trust, and Gingarna Pty Ltd as trustee for the Carruthers-Taylor Trust. Each company held an equal number of shares in the plaintiff.

4. It was common ground between Mammoliti, Curruthers-Taylor and the defendant that in the years leading up to the defendant leaving Alphawest in 2003 they discussed the possibility of setting up an information management company through which they would operate on their own account. There is disagreement between those parties as to how serious those discussions were prior to the defendant's redundancy, and also as to what representations may have been made to the defendant by Mammoliti and Curruthers-Taylor about his remuneration if he set up the plaintiff and went into business with them.

5. From time to time after Mammoliti became a director, the directors of the plaintiff set their remuneration, with each director entitled to the same remuneration according to the terms of the various resolutions. However, over the period from 2003 until the defendant left the plaintiff in or around May 2007 he drew sums from the plaintiff in excess of those to which he was entitled in accordance with the various resolutions setting the directors remuneration. In these proceedings the plaintiff seeks to recover those sums plus interest. The defendant does not deny that he received the sums (although he does claim that $17,803.03 was a business expense), but says he is not liable to repay them, or alternatively not at this time. The defendant's principal contention is that he was entitled to the amounts he drew as agreed remuneration consistent with representations made to him by Mammoliti and Curruthers-Taylor prior to him setting up the plaintiff. His alternative contention is that if the sums were not received by him as agreed remuneration, but were effectively loans from the plaintiff, the terms of the loans do not presently require payment.

6. In large measure, the outcome of this case turns upon the credibility of the three main witnesses: Mammoliti, Curruthers-Taylor and the defendant. Before proceeding further I will consider the issue of the witnesses' credibility. I note that the defendant was legally represented up until the commencement of the hearing before me. He was self represented during the hearing itself, a matter I take into account when assessing his credibility.

7. I formed the view that both Mammoliti and Curruthers-Taylor were truthful witnesses who did their best to recall the relevant events and who were responsive to questioning in both examination-in-chief and cross-examination.

8. In his written submissions the defendant suggests that the evidence of Mammoliti is unreliable insofar as it relates to the formation of the plaintiff and the circumstances surrounding the defendant's redundancy:

"His first attempt was to say the formation of iCognition was due to my redundancy from Alphawest which he knew nothing about until the day, but then advised he knew all about the formation of iCognition at least a month before and he knew of the plans to set up a new company. His evidence said the reason I set up was because I had been given the redundancy of which I was not aware. Of course this is not feasible as iCognition was set up in March and I was walked in April".

(defendant's submission, paragraph 12)

9. It is fair to say that Mammoliti's evidence as to when he became aware of the registration of the plaintiff changed during the course of cross-examination:

Question: Yes okay. Were you aware that Icognition was formed - and this is where I get to the discussions - were you aware that Icognition was formed about a month prior to you handing me a redundancy?

Question: I was employed until 16 April 2003, so a month later after the vehicle had been set up I got my redundancy?

Question: But you had already known that Icognition had been formally constituted and that the vehicle was on its way? Is that true?

Answer: I'm trying to recall, so just give me time. The - as far as I'm concerned you started the company (sic) in 19 March, it's in the records, right?

Answer: I was not aware that you were still employed when you started it.

Answer: I understand that, look I take you at your word.

Question: A month later, we had discussions around the formation of Icognition, the naming of Icognition. I'm pretty sure I came back and said "Right, guys the company's now set up, we're ready to go"?

Question: You don't recall those discussions at all?

Question: Okay. So having come back, and you knew that Icognition had been formed in March, and you knew pretty much straight away in March that Icognition had been constituted, yes, is that correct?

Answer: I'm trying to recall. Right. I'd have to just think about that Peter. As far as I'm concerned you started the company.

Question: Yes. When did you become aware that Icognition had been formally constituted?

His Honour: Again please don't ask, answer a question.

The witness: I'm trying to recall. I suppose at the time.

Question: Right, okay. So you were aware that the vehicle that we had been discussing as a concept had been formally constituted by myself?

10. In my view the circumstances of this change do not adversely affect his credibility. Initially Mammoliti said he was not aware that the defendant had set up the plaintiff until after the defendant had been made redundant from Alphawest, but shortly after he gave further thought to the issue and agreed that he was aware of the defendant setting up the plaintiff "at the time". Mammoliti was, of course, trying to recollect events that occurred eight years prior to him giving evidence. The change in his evidence on this issue was not forced upon him by the revelation of some fact or document making his original evidence untenable, nor was it a change calculated to meet or challenge some aspect of the defendant's case. In fact the change in Mammoliti's evidence was to the obvious advantage of the defendant. I am satisfied that the process of cross-examination caused Mammoliti to reflect on the events and to realise that his initial evidence was incorrect.

11. I accept that the date on which the plaintiff was registered, and Mammoliti's knowledge of that fact, are matters of potential significance to the defendant's case. It is the defendant's assertion that he and Mammoliti were complicit in Mammoliti arranging a redundancy for the defendant from Alphawest to allow the defendant to commence operating the plaintiff and so as to avoid the application of a restraint of trade clause in the defendant's contract of employment with Alphawest. It was the intention of the defendant to operate the plaintiff in competition with Alphawest, which may have been hampered by the restraint of trade clause. The defendant points to the timing of the formation of the plaintiff vis a vis his redundancy as supporting his contention that the redundancy was arranged by Mammoliti.

12. A superficial consideration of the timing of these events does support the defendant's position, but a closer analysis does not. First, there is no evidence that Mammoliti was in a position at Alphawest to determine who was to be made redundant, or to influence that decision. Mammoliti gave evidence that he was directed to make the defendant redundant, arising out of a review of the operations of Alphawest conducted by one of its owners. There was no evidence to contradict that evidence. The defendant accepted that the "official reason" given to him for his redundancy was that his "billables were low" and that he was "often absent from work". The defendant did not allege that, in fact, his billables were not low or that he was not often absent from work, nor was there any suggestion by the defendant that he engineered those circumstances in order to justify a redundancy.

13. Secondly, if the defendant had been concerned about the possible application of a restraint of trade clause in his contract with Alphawest, it is odd that he chose to set up the plaintiff whilst still employed by Alphawest. It is the gist of the defendant's evidence that he wanted to make it appear that he was setting himself up in competition with Alphawest, using the plaintiff as a vehicle, because he had been made redundant. He certainly did not want Alphawest to think that he was planning, or had planned while employed at Alphawest, to operate his own company in competition with Alphawest. There is no evidence that there was any urgency in early 2003 which required the defendant to set up the plaintiff when he did. If there was some complicity between the defendant and Mammoliti in early 2003 to arrange a redundancy for the defendant for the purposes of allowing the defendant to compete with Alphawest unhindered by any restraint of trade clause, it would have made much more sense for the defendant to have delayed the setting up of the plaintiff until after he received his redundancy. On his version of the events, the defendant had a strong reason not to set up the plaintiff when he did, as it may have alerted the owner of Alphawest to his intentions, and put in jeopardy his conspiracy with Mammoliti to have the defendant made redundant. On the other hand, if Mammoliti is accepted when he says there was no such arrangement the timing of the formation of the plaintiff presented no such danger.

14. Thirdly, assuming that Mammoliti had and utilised the power to influence Alphawest in making the defendant redundant, there could be no guarantee that he could do the same for himself or for Curruthers-Taylor. The defendant's case is that he was blazing the trail for Mammoliti and Curruthers-Taylor, but he could not know if or when they would be free of the operation of restraint of trade restrictions imposed by their contracts with Alphawest. Certainly, the defendant gave no evidence of any conversations with either Mammoliti or Curruthers-Taylor about how they proposed to avoid these restrictions or the timing of any proposed exit from Alphawest.

15. Mammoliti was made redundant by Alphawest in June 2003, but did not join the plaintiff until November 2003. If the defendant's contention that the timing of his and Mammoliti's redundancies was arranged to allow them to commence operating the plaintiff is correct, there is no reason why Mammoliti could not have joined him at the plaintiff in July 2003 or shortly thereafter, rather than waiting until November 2003. The only rational explanation for this delay is that given by Mammoliti: that his redundancy was unforeseen, he had made no commitment to joining the defendant at the plaintiff and he wanted to consider his future.

16. I do not accept the defendant's evidence that he and Mammoliti were complicit in Mammoliti arranging a redundancy for the defendant, or himself, from Alphawest.

17. I was not impressed by the defendant as a witness. It is clear that the defendant is an intelligent man with tertiary qualifications in accounting. He is able to understand profit and loss statements and balance sheets, and revealed an ability to answer questions directly, and to ask direct, comprehensible questions when he chose to. However, I was left with the strong impression that the defendant deliberately pursued a policy of obfuscation and delay throughout the hearing.

18. Additionally, there are areas of the defendant's evidence that reveal a tendency to dishonesty. First, the defendant's evidence about the circumstances in which he left Alphawest involve him, on his version, conspiring with Mammoliti to avoid restraint of trade restrictions in the defendant's employment agreement with Alphawest. Whilst I am satisfied that Mammoliti was not, in fact, party to such an arrangement, the defendant's evidence reveals a willingness on his part to be involved in such a dishonest arrangement. Secondly, the defendant's defence to the plaintiff's claim is that the amounts in question were received by way of remuneration, not loans. In none of the tax years that he received the sums the subject of the present claim did the defendant declare them as income in his personal tax returns. It is fundamental to the defendant's defence that he behaved dishonestly with respect to his taxation obligations. Thirdly, the defendant gave evidence of participating in an arrangement with Tower Software in the United States whereby the defendant provided a false invoice to Tower Software with a view to allowing Tower Software to claim a tax deduction to which it was not entitled, and consequently reducing his own liability for his family's airfares to the United States. This was an arrangement calculated to defraud the United States revenue by allowing Tower Software to claim a tax deduction to which it was not entitled. The defendant in his written submissions says that Mammoliti was "involved" in this conduct by performing the invoicing, but even if that be the case there is no evidence that Mammoliti or Curruthers-Taylor were aware of the fraudulent nature of this transaction.

19. I formed the view that the defendant has little regard for honesty and is prepared to engage in dishonesty where he sees advantage to himself in so doing.

20. As already noted, the defendant registered the plaintiff company on 19 March 2003. I have already outlined, and rejected, the defendant's evidence as to the circumstances leading up to him being made redundant by Alphawest in April 2003. The additional matters that need to be addressed are the representations on the part of Mammoliti and Curruthers-Taylor alleged by the defendant prior to him setting up the plaintiff, and the reason for the defendant being made redundant.

21. The defendant's case is that there was an agreement between himself, Mammoliti and Curruthers-Taylor that he would leave Alphawest first and commence operating the plaintiff as a start up company as he was in the best position to do so. In his written submissions the defendant sums up his position:

"The defendant was seen as the most capable of setting up the business as he was able to perform Sales, management and consulting roles, while the others were not capable of performing all roles to the same extent...As suggested it did not make sense for the defendant to start the business without commitments as to his financial standing and that he would be no worse off than the other two in giving up his salary at Alphawest to set up the company on their behalf".

22. It is the defendant's contention that in conversations with Mammoliti and Curruthers-Taylor prior to him leaving Alphawest they represented to him that if he set up and operated the plaintiff during the "commencement phase" he would be no worse off financially than if he had stayed at Alphawest. At Alphawest the defendant had been earning $120,000.00 per year.

23. Both Mammoliti and Curruthers-Taylor denied making a representation to the defendant along the lines he suggests. I accept their evidence.

24. I am satisfied that neither Mammoliti nor Curruthers-Taylor made any representations to the defendant to the effect that he would be no worse off financially if he left Alphawest, or that he would be paid $120,000.00 per year. There is not a single document which supports this contention. When, from time to time, the directors set their salary level (inevitably at a level below $120,000.00 per year), there is no record of the defendant having asserted any entitlement to a different level of income pursuant to the alleged representations. Additionally, it is inherently implausible that any representations of this nature would have been made by Mammoliti or Curruthers-Taylor at the times alleged. At the time the representations were allegedly made the plaintiff either did not exist or was not trading. As such it had no clients, no business and no income. It is not credible that Mammoliti or Curruthers-Taylor would have made representations to the defendant about the level of his remuneration with the plaintiff in these circumstances.

25. I am satisfied that the defendant had planned, at some time, to leave Alphawest to commence his own business. To that end he set up the plaintiff. He was made redundant from Alphawest, because his billables were low and he was often absent from work. He then commenced his own business using the plaintiff. Whilst he may have hoped that Mammoliti and/or Curruthers-Taylor would ultimately join him in that business (consistent with their earlier discussions about their hopes for the future) I am satisfied that they made no commitment to do so prior to the defendant's redundancy. I am further satisfied that they made no representations to the defendant as to the remuneration he would receive as a director of the plaintiff.

26. When Mammoliti and Curruthers-Taylor joined the plaintiff there was an initial decision that the directors would each be paid a salary of $100,000.00. However, it soon became evident that the plaintiff was not sufficiently profitable to sustain that level of remuneration, and by 20 October 2004 it was officially decreased to $45,000.00 per year. I use the word "officially" because the evidence suggests that the directors were not paid remuneration to the level of $100,000.00 per year at any time leading up to 20 October 2004. In fact, for the year ending 30 June 2004 the defendant received gross remuneration of $36,608.00, Mammoliti received $18,304.00 and Curruthers-Taylor (who only started with the plaintiff on 1 May 2004) received $6,102.00. These figures equate to an annual remuneration for each director of $36,608.00. It was apparently agreed by the directors that lesser remuneration should be paid to them bearing in mind the plaintiff's financial position. Of course, if it had been intended by the directors to maintain their remuneration at the level of $100,000.00, but only pay themselves what the company could then afford, the net balance could have been recorded in the plaintiff's accounts as director's loans to the plaintiff. In that way, should the plaintiff have then generated greater profits in later years it could have paid out the net balance of the director's remuneration. This simply did not occur.

27. It is fundamental to the defendant's defence that he was to be treated differently to the other directors in terms of remuneration. I have already rejected his assertion that representations were made to him by Mammoliti and Curruthers-Taylor prior to the defendant leaving Alphawest that he would receive a particular level of remuneration ($120,000.00 per year). The records of the plaintiff reveal that after Mammoliti and Curruthers-Taylor became directors, all directors received, or were entitled to receive, the same remuneration. I accept the evidence of Mammoliti and Curruthers-Taylor that the directors agreed that they would all receive equal remuneration. All contemporary records support their evidence.

28. Accordingly, despite the lack of evidence of formal resolutions up until 20 October 2004, I accept that the remuneration which each of the directors received from time to time was in accordance with decisions made by the directors, including the defendant.

29. It is quite clear that in the period leading up to 27 April 2006 the defendant drew more than the amounts payable to him as director's remuneration, and more than the amounts paid as such to the other directors. The defendant used his corporate credit card provided by the plaintiff and the plaintiff's internet banking account for personal purposes throughout that period to the extent that he received for his own use the following amounts in excess of his directors remuneration:

• in the period 1 July 2003 to 30 June 2004 $90,512.28

• in the period 1 July 2004 to 30 June 2005 $98,136.02

• in the period 1 July 2005 to 26 April 2006 $101,340.69

30. The only amount disputed by the defendant with respect to these periods is a sum of $17,830.03 for travel by his family to the United States. The defendant asserts that this was a business expense. There can be no doubt that the defendant travelled to the United States for business purposes, and that this travel was with the knowledge and approval of his fellow directors. I do not, however, accept the suggestion that the defendant's fellow directors agreed to pay for the defendant's family to accompany him. The defendant's position with respect to this sum is unclear. His primary position appears to be that Tower agreed to pay these fares, but they would then be invoiced to the plaintiff. The defendant would then send an inflated account for his work to Tower, disguising the amount claimed for travel by his family as an amount claimed for work performed by him. In this way, the defendant says, the travel costs for his family would in reality be paid by Tower who would then receive a tax deduction for that amount. However, the defendant also seems to suggest in his evidence (transcript p 216, lines 36-38) that his fellow directors agreed that the plaintiff should pay his family's travel expenses.

31. I do not accept that Tower agreed to pay for the defendant's family travel expenses, except to the extent that they agreed to pay for those expenses up front and to then invoice the plaintiff for them. There is no independent evidence to support the defendant's contention and for the reasons I have already given I do not accept that the defendant is a reliable witness, particularly in matters affecting his own interests. There is no documentary or other evidence supporting the defendant's position that this cost has effectively been paid by Tower. I also do not accept that the other directors agreed that the plaintiff would pay for his family's travel. There is no documentary or other evidence supporting this proposition, and in fact the evidence of Curruthers-Taylor that he told the defendant that he would have to reimburse the plaintiff for his family's travel expenses is inconsistent with the proposition.

32. I am satisfied that the defendant received all of the amounts claimed by the plaintiff, and that those amounts were received for his personal use and not for business purposes. Those amounts were in excess of the sum the defendant was entitled to receive from time to time for remuneration as a director of the plaintiff. The evidence establishes that the other directors were made aware from time to time of the amounts being drawn from the plaintiff's accounts in excess of this salary by the defendant. In my opinion these sums were loans to the defendant by the plaintiff and, indeed, to the defendant's knowledge were treated as such in the plaintiff's accounts. These loans were governed by Schedule 8 of the Constitution of the plaintiff.

33. In late 2004 and throughout 2005 the Chartered Accountant who provided consulting services to the plaintiff, Ms Gail Kinsella, became increasingly concerned about the solvency of the plaintiff and the level of the directors' loan accounts, particularly the defendant's loan account. By letter dated 2 December 2005 to the plaintiff's directors Ms Kinsella noted that as at 30 June 2005 the defendant owed the plaintiff $194,648.30, Carruthers-Taylor owed $29,772.82 and Mammoliti owed $21,229.71. She went on to note:

Without a prescribed loan agreement drafted in accordance with Div 7A of the Income Tax Assessment Act 1997 and executed prior to the lodgement of the tax return for iCognition Pty Ltd, the loan draw downs for the 04/05 year would be deemed to be an unfranked dividend to each of the shareholders and subject to tax.

For this reason, loan agreements have been prepared and should be executed and returned to our office prior to lodging the company's tax return.

The consequences of the loan agreement are that each director will have to make minimum loan repayments on their loan, to the company each year, until the loan is repaid. Most importantly interest will be charged. The interest will be assessable to the company and non-deductible to the directors.

34. On 27 April 2006 the defendant executed a written loan agreement with the plaintiff covering all loans from the date of execution (the April 2006 loan agreement). That agreement provided for interest to be payable on any loans, and for a minimum repayment regime. Subsequent to 27 April 2006 the defendant received the following sums from the plaintiff for his own use above his remuneration as a director:

35. I am satisfied that each of these amounts were loans for the purposes of the April 2006 loan agreement.

36. Under Schedule 8 of the Constitution of the plaintiff, loans made by the plaintiff to directors who may be associates of shareholders within the terms of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) are subject to repayment in accordance with the provisions of the Schedule. The defendant, as well as being a director of the plaintiff, was for the purposes of the ITAA 1936, an "associate" of the trustee of his family trust, Meralda Pty Ltd (Meralda). Meralda was at all material times a shareholder of the plaintiff. Accordingly, subject to paragraph (b) (which does not apply to loans taken prior to the April 2006 loan agreement), Schedule 8 of the Constitution of the plaintiff applies to loans to the defendant.

37. Schedule 8 of the Constitution of the plaintiff provides:

Loans to shareholders and directors, who may be associates of shareholders within the meaning of the ITAA, shall be subject to repayment on the following terms:

(a) The following words shall have the following meanings for the purpose of this Schedule:

"ITAA" means the Income Tax Assessment Act 1936.

"Borrower" means an individual or a company accepting a Loan from the Company.

"Loan" means any advance made by the Company to a Borrower within the meaning of section 109D (3) of the ITAA and also includes any existing loan which is amended within the meaning of section 109D (5) of the ITAA but does not include any advance repaid before the end of the year in which it is made, or any other advance which would not be treated as a dividend for the purposes of Division 7A of the ITAA.

"Year" means a period of 12 months comprising an income tax year of the Company for the purposes of the ITAA.

(b) These terms apply to all Loans, whether made before or after adoption of this Constitution, except such loans as may be governed by a separate written agreement.

(c) Each Borrower acknowledges that the terms of this Schedule to the Constitution constitute a binding written Agreement between that Borrower and the Company.

(d) Each unsecured Loan shall be repaid in full by the Borrower within seven years by instalments the amount of which shall be calculated in accordance with rule (i).

(e) Each secured Loan shall be repaid in full by the Borrower within twenty five years by instalments calculated in accordance with rule (i).

(f) Notwithstanding the above, all Loans to a Borrower, together with interest, shall be repaid in full forthwith upon the earlier happening of one or more of the following events:

(i) If the Borrower becomes insolvent or commits an act of bankruptcy, or, if a natural person, dies or becomes liable to be dealt with under the laws relating to mental health.

(ii) If the Borrower fails to make any payment according to this agreement, or otherwise commits a substantial breach thereof.

(g) Each Borrower agrees to pay interest on each Loan calculated from the date on which it is made and computed on a daily basis.

(h) Interest shall be paid annually in arrears or more frequently as agreed, on each Loan outstanding, on the anniversary date of making of the Loan at the benchmark interest rate prescribed pursuant to Division 7A of the ITAA or any other amended or substituting legislation which from time to time prescribes a minimum interest rate to be paid by recipients of loans from private companies.

(i) The annual amount repaid on each Loan shall be the amount prescribed by Division 7A of the ITAA or any other amended or substituting legislation which from time to time prescribes a rate of repayment to be paid by recipients of loans from private companies.

(j) Notwithstanding anything in this Agreement, a Borrower may repay any Loan in full before its due date, or may make payments greater than the minimum specified in rule (i), at times agreed between the parties.

(k) All monies paid by a Borrower to the Lender under this agreement will be applied firstly in payment of outstanding interest, secondly in payment of other moneys owing under this Agreement and lastly in reduction of the Borrower's longest outstanding Loan.

(l) A Borrower shall from time to time sign all such documents as the Lender may reasonably require to confirm the total amount of the Loans outstanding from that Borrower.

38. The April 2006 loan agreement applies to all unsecured loans made to the defendant by the plaintiff on or after 27 April 2006. Recital B to the April 2006 loan agreement expresses the intention that the terms of each loan the subject of the agreement will be such that the loan will not be treated as a dividend under the ITAA 1936. Any loan governed by either Schedule 8 of the Constitution of the plaintiff or the April 2006 loan agreement met the criteria in the ITAA 1936 for minimum interest rate and minimum term: see ITAA 1936, s 109N.

39. Under both Schedule 8 of the Constitution of the plaintiff and the April 2006 loan agreement the defendant had an obligation to pay interest on the loans, and to repay a minimum amount each year. Both the interest payable and the amount of annual repayment were calculated in accordance with the provisions of Division 7A of the ITAA 1936.

40. Phillip Van Zomeran, the plaintiff's financial manager, prepared a statement setting out calculations of the amounts taken by the defendant as loans, the interest that accrued on those loans in accordance with the terms of the Constitution of the plaintiff and the April 2006 loan agreement, the amounts paid by the defendant in reduction of the loans and the amounts outstanding. Van Zomeran was not challenged on those calculations, nor did the defendant give evidence challenging their accuracy. I have no hesitation in accepting the contents of Van Zomeran's statement and his oral evidence as true and accurate.

41. The amounts loaned to the defendant by the plaintiff are:

42. Under both the provisions of the Constitution of the plaintiff and the April 2006 loan agreement interest is payable on the loan amounts. By virtue of paragraphs (g) and (f) of Schedule 8 of the Constitution of the plaintiff, loans taken before the commencement of the April 2006 loan agreement attract interest calculated on a daily basis and from the date the loan is made. Interest is payable annually in arrears. The April 2006 loan agreement provides for interest only to be payable on that portion of the loan which is not repaid in the financial year that it is made.

43. Attachment "ASOC-G" to the Second Further Amended Statement of Claim conveniently sets out the interest calculation payable to the various loans by virtue of the Constitution of the plaintiff and the April 2006 loan agreement. The defendant made no submission that these calculations are inaccurate. Accordingly, I propose to rely upon them. The calculation of outstanding loans plus interest is set out below:

44. The plaintiff submits that with the exception of one payment of $33,000.00 in the income year ending 30 June 2005 the defendant has made no repayments with respect to the loans or interest accumulated on the loans. During the course of the hearing evidence was given that each of the directors of the plaintiff, at the times relevant to the present claim, were paid by the plaintiff once a month by crediting their remuneration to the individual directors' loan accounts within the accounting software used by the plaintiff. The defendant submits that these sums should be viewed as repayment of his loan account, presumably meaning that when he withdrew a sum equal to his monthly remuneration from the account he was taking a new loan from the plaintiff.

45. I do not accept this submission. For convenience the plaintiff only created one account for each director. Payment of monthly remuneration into that account was never intended by either party to be repayments of loans. The defendant's intention in that regard is amply demonstrated by the fact that he invariably drew at least the amount of his remuneration from that account each month. In the plaintiff's accounts, the defendant's salary was credited to "Drawings and Advances" in the year in which the credit was made. The defendant made no objection to this and as a director he signed the Director's Declaration in the relevant Financial Reports.

46. The way in which the plaintiff treated payments of monthly remuneration into the defendant's account was explained by Van Zomeren:

17. I point out that Peter Callaughan's salary was credited to his loan account and for the purpose of what was loan by iCognition to him I have treated the debits and credits for the year as net loan. At no stage did Peter Callaughan request of me that any salary or other credits be allocated to the previous years. My analysis of the drawings by Peter Callaughan (sic) leave me to the conclusion that he treated iCognition's credit card and bank account as his personal accounts to draw upon for personal items and funding.

47. I accept the plaintiff's submission that where a debtor makes no appropriation when making a payment, the creditor may appropriate the payment to any debt owed by the debtor by communicating that appropriation to the debtor. This election must be communicated to the debtor. In the present case the defendant, as a director of the plaintiff, must have been aware of the way in which the payments of remuneration were being treated in the plaintiff's accounts. At the very least, he was made aware of this when he received the statement of Van Zomeren.

48. With exception of the year ending 30 June 2005 I am satisfied that the defendant made no payments towards the loans received from the plaintiff.

49. With respect to the loans taken prior to the April 2006 loan agreement, Schedule 8 (d) of the Constitution of the plaintiff provides that each unsecured loan is to be repaid in full within seven years of the borrowing by instalments as calculated in accordance with the provisions of the Schedule. No payments by instalment were made by the defendant, other than the one payment of $33,000.00 in the year ending 30 June 2005. Schedule 8 (f) (i) of the Constitution of the plaintiff provides that if the borrower fails to make any payment as required all loans to the borrower plus interest are immediately repayable in full. I am therefore satisfied that each of the loans taken prior to the April 2006 loan agreement is repayable with interest.

50. Turning to the April 2006 loan agreement, clause 4.1 provides for loans to be repaid within seven years, and for repayment of an "Amalgamated Loan" by way of instalments calculated in accordance with the clause. No payments of instalments were made by the defendant. The April 2006 loan agreement contains no provision equivalent to Schedule 8 (f) (i) of the Constitution of the plaintiff, but the plaintiff submits that the defendant has repudiated the April 2006 loan agreement because his conduct evinced an unwillingness or inability to render substantial performance of the agreement.

51. In Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited [2007] HCA 61; (2007) 233 CLR 115, the plurality judgment (Gleeson CJ, Gummow, Heydon and Crennan JJ) had this to say about legal principles concerning termination of contract for breach:

The term repudiation is used in different senses (32). First, it may refer to conduct which evinces an unwillingness or an inability to render substantial performance of the contract. This is sometimes described as conduct of a party which evinces an intention no longer to be bound by the contract or to fulfil it only in a manner substantially inconsistent with the party's obligations (33). It may be termed renunciation (34). The test is whether the conduct of one party is such as to convey to a reasonable person, in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under in (35). (In this case, we are not concerned with the issues that arise where the alleged repudiation takes the form of asserting an erroneous interpretation of the contract. Nor are we concerned with questions of inability as distinct from unwillingness.) Secondly, it may refer to any breach of contract which justifies termination by the other party (36). It will be necessary to return to the matter of classifying such breaches. Campbell J said this was the sense in which he would use the word "repudiation" in his reasons. There may be cases where a failure to perform, even if not a breach of an essential term (as to which more will be said), manifests unwillingness or inability to perform in such circumstances that the other party is entitled to conclude that the contract will not be performed substantially according to its requirements (37). This overlapping between renunciation and failure of performance may appear conceptually untidy, but unwillingness or inability to perform a contract often is manifested most clearly by the conduct of a party when the time for performance arrives. In contractual renunciation, actions may speak louder than words.

In the past, some judges have used the word "repudiation" to mean termination, applying it, not to the conduct of the party in default, but to the conduct of the party relying upon such default (38). It would be better if this were avoided.

(at pp 135-136, footnotes omitted)

52. In the instant case the plaintiff says that the defendant's unwillingness or inability to render substantial performance is to be inferred from:

a) The breaches of the defendant's obligations pursuant to Schedule 8 of the Constitution of the plaintiff and the April 2006 loan agreement to pay the loans by instalments;

b) The defendant's continuing refusal to remedy any of the breaches, despite written demands by the plaintiff;

c) The defendant's financial position as demonstrated by:

(i) the manner, extent and duration of his drawings in the loan account;

(ii) the defendant's admission in letters dated 13 May 2007 that he was unable to pay the loans outstanding or any part thereof;

(iii) the Default Notice from the NAB dated 12 January 2008 requiring payment of in excess of $1 million by reason of the defendant and his wife defaulting on mortgages;

(iv) with the exception of the round-robin dividend payment of $33,000.00, all credits to the loan account of the defendant came from payments of salary made by the plaintiff;

(v) by the time of trial, the NAB having sold all secured property owned by the defendant and his wife;

(vi) the defendant's evidence that he had to draw heavily on the loan account because his salary was not sufficient.

53. In my opinion these facts establish not only breaches of the terms of the April 2006 loan, they also manifest unwillingness or inability (probably the latter) to perform the agreement such that the plaintiff is entitled to conclude that the agreement will not be performed substantially according to its requirements.

54. The terms of the April 2006 loan agreements breached by the defendant were, in my opinion, essential terms, or at the least the defendant's breaches are sufficiently serious to give the plaintiff a right to terminate the agreement. The purpose of both Schedule 8 of the Constitution of the plaintiff and the April 2006 Loan Agreement was to structure the companies affairs in such a way as to comply with the ITAA 1936 requirement for amounts received by the directors as loans not to be taken to be dividends. Failure to comply with the requirement for regular repayment endangered the very purpose of the agreement, and goes to its root.

55. I am satisfied that the defendant has breached essential terms of the agreement, and has manifested unwillingness or inability to comply with the terms of the agreements. The plaintiff is entitled to terminate the agreement and recover the outstanding loans and interest in accordance with the agreement.

56. Before concluding there are two matters referred to in the defendant's Second Further Amended Defence that must be addressed. The first is a claim that the plaintiff is incapable of maintaining its claim against the defendant by virtue of clause 16 of the Shareholders Agreement of 20 October 2005 in that the plaintiff has not complied with a condition precedent to the commencement of litigation. Clause 16 provides that where "a dispute arises out of or relates to the provisions of this Agreement", the shareholders agree to attempt to resolve the dispute by mediation before having recourse to litigation.

57. This clause has no application to the current proceedings. The term "shareholder" in the Shareholders Agreement is defined as meaning Kygera Pty Ltd, Meralda Pty Ltd and Gingarna Pty Ltd, none of which are parties to these proceedings. In any event, the present dispute is not one arising out of or relating to the provisions of the Shareholders Agreement.

58. The final matter to be addressed is the allegation of oppression of a minority stakeholder raised by the defendant in the Second Further Amended Defence. This was expressly abandoned by the defendant in the course of the proceedings.

59. The defendant, as I have already noted, did not dispute the plaintiff's calculation of the amounts the subject of the claim and the interest payable on them. These amounts are set out in Schedule ASOC-G to the Second Further Amended Statement of Claim, a copy of which is reproduced in par 42 of this judgment. The total amount is $559,990.20.

60. There will be judgment for the plaintiff in the sum of $557,990.20. I will hear the parties on the question of costs.

I certify that the preceding sixty (60) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Burns.

Counsel for the defendant: The defendant appeared in person