Illawong Village Pty Limited v State Bank of New South Wales

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST

3426/00 ILLAWONG VILLAGE PTY LIMITED v STATE BANK OF NEW SOUTH WALES LIMITED JUDGMENT HIS HONOUR: Nature of the Case 1 Illawong Village Pty Ltd ("Illawong") borrowed money from State Bank of NSW Limited ("State Bank") over a period from 8 April 1988 to August 1998. Illawong contends that during two periods of time, namely from 8 April 1991 to 26 July 1993, and from January 1997 until August 1998, State Bank charged Illawong more interest than it was entitled to charge. Illawong seeks to recover the excess interest it claims to have paid, together with interest. 2 As well, Illawong had, and continues to have, borrowings from financiers other than State Bank. Illawong contends that, because State Bank was charging it too much interest, it was less able to reduce its borrowings from those other financiers. Illawong claims damages for the losses it has suffered by reason of this lessened ability to pay the other financiers. Uncontroversial Facts 3 Illawong's operations have at all times involved the construction, and then operation, of a neighbourhood shopping centre in the Sydney suburb of Illawong, which lies on the south side of the George's River and to the west of Como. The shopping centre is constructed on land which was, in 1987 and 1988, in four separate titles. Two of those titles were at all relevant times ones of which Illawong was the registered proprietor. The third was the site of a closed road, which Illawong had contracted on 23 December 1986, to purchase from the Council of the Shire of Sutherland for an amount of $133,175, plus an additional purchase price equal to interest computed from 1 January 1985 to the date of completion on that sum of $133,175, compounded annually on 1 January each year. The fourth parcel of land was another closed road, which was vested in the State of New South Wales at the beginning of 1988. Arrangements were on foot for Illawong to acquire that fourth parcel of land. The details of those arrangements were not gone into fully in evidence, but they fell short of Illawong having a contractual right to acquire the fourth parcel of land. Clause 27 of Illawong's contract with Sutherland Council obliged the Council to use its best endeavours to arrange for the Department of Lands to transfer that fourth parcel. 4 Illawong had constructed the shopping centre with the assistance of money borrowed from Elders Lensworth Finance Limited ("Elders"). In August 1987, at a time when construction was nearing completion, Illawong approached State Bank for a term loan of $7.75m, said to be for the purpose of refinancing the existing construction finance of $6.5m, and an additional amount of $1.25m for working capital. In August 1987 State Bank indicated it was interested in making such a loan. 5 At that time the directors of Illawong were Mr Barry Alcock, who was a chartered accountant with experience in land development, Mr Ross Davis, also a chartered accountant, and partner in the accountancy practice of which Mr Alcock was a member, and Mr Gregory White, a real estate agent who lived in the suburb of Illawong and had experience in land development. The shares in Illawong were held in 1988 by the directors, members of the families of the directors, and a company in which certain of the directors were interested. By 1992 some other minority shareholders existed. 6 In October 1987 Illawong told State Bank that there had been some variations to the building contract, and in consequence some additional building costs were incurred. However according to Illawong those additional building costs could be accommodated within the $7.75m loan which had been requested. 7 On 17 November 1987 State Bank sent to Illawong a formal letter of approval for financial facilities of $7.75m. It included the following provisions. "We wish to advise that the Bank has approved the following facilities: Commercial Bill/Fixed Interest Term Loan Switch Option Facility $7,750,000 The terms and conditions applying to the facilities are as follows:- Term Loan Option · The loan is to be conducted on a separate account styled "Illawong Village Pty Limited Term Loan Account". No operations will be permitted on this account by the company other than the drawing of the amount of the loan and payment in reduction of the debt on the account. The Bank will, of course, be entitled to debit interest and other charges to the account. The interest shall be payable on the full amount from time to time owing on the loan account, calculated on daily balances and shall be debited by the Bank to the loan account quarterly. The rate of interest payable on the loan account shall be the cost of funds to the Bank at the date of settlement, plus a margin of 0.75% pa fixed for 3 year term. · In the event that Bank interest is not paid on the day it falls due a penalty rate will apply, consisting of a margin of 2% over Bank's cost of funds for the whole of the period during which interest remains unpaid and will not affect the Bank's usual rights under default in the mortgage. … · Payment of the Bank's Debt Administration Fee. This fee is charged at a rate of 0.2% pa and will be debited to the company's account quarterly. … · The security required by the Bank is to be to the Bank Solicitor's satisfaction and will comprise:- i) Registered first mortgage over commercial property known as Illawong Village Estate, Fowler Road, Menai. ii) Registered first mortgage over 14 residential vacant blocks at Menai (adjacent to Illawong Shopping Village). iii) Registered first equitable mortgage and floating charge over assets and undertakings of Illawong Village Pty Limited. iv) Unlimited joint and several guarantees from three directors. NOTE: No part of the facilities will be made available until all security and other documents have been executed and the Bank's requirements in respects of the security and the facilities satisfied. The above security will extend to cover not only the principal and interest in respect of these facilities but also any other liabilities the company may have to the Bank, either past, present or future, actual or contingent … . · Term of the facility is 3 years, with a Review to be carried out one month prior to expiration to determine repayment or refinance conditions. · Notwithstanding any other conditions attaching to the facilities, the whole of the amount owing, together with interest thereon shall at the option of the Bank, without any notice to the company, become payable and the obligations of the Bank hereunder shall cease in any of the following events:- · if at any time the company fails to pay to the Bank any moneys from time to time owing by the company to the Bank as they fall due, or if there is default under the terms of any other arrangement between the company and the Bank; · if at any time there is a breach of or default under any other covenant, term or provision of any security held by the Bank from the company or in respect of the company's indebtedness to it." 8 On 4 December 1987 the credit committee of State Bank, having been informed that the 14 blocks of vacant land were not available as security, decided to require a margin of 1% over cost of funds. 9 On 11 December 1987 State Bank issued a new facility letter to Illawong, which contained the terms I have quoted from the letter of 17 November 1987, save only that the reference to a margin of 0.75% pa was replaced by a reference to a margin of 1% pa, and the reference to the security including "registered first mortgage over 14 residential vacant blocks at Menai (adjacent to Illawong Shopping Village)" was deleted. 10 After some delay, while State Bank decided whether it was happy with the limited security it could obtain in relation to the third and fourth titles of land, and Illawong declined to accept the finance which had been offered until the State Bank security requirements were known, Illawong executed an equitable mortgage and partly fixed and partly floating charge over all its assets ("the Charge"), in favour of State Bank, on 25 February 1988. The Charge was an "all moneys" mortgage. Part of the definition of "the moneys hereby secured" contained in it was: "… AND ALSO interest upon all such moneys as aforesaid at the rate or rates agreed upon from time to time and in default of such agreement as decided by the Bank from time to time such interest to be computed from the time or respective times of such moneys being paid or becoming due and to be deemed to accrue from day to day week to week month to month or quarter to quarter as the Bank in its discretion shall from time to time determine …" 11 The Charge contained covenants in the following terms: "1. THAT the Mortgagor will pay to the Bank interest on the moneys hereby secured at the rate or rates agreed upon from time to time and in default of such agreements as decided by the Bank from time to time." 2. THAT the Mortgagor will upon demand or until such demand at such time or times and in such manner as may have been agreed upon between the Mortgagor and the Bank pay to the Bank the monies hereby secured … 22. THAT the Mortgagor will … execute … and give to the Bank … all such mortgages … over the Mortgagor's property both real and personal … as the Bank may require from time to time such mortgages … to be prepared … and registered by the Bank's Solicitor … and to contain such terms … as the Bank's Solicitor may consider necessary, including notifying the Bank of the consolidation and subdivision of the land contained in Certificate of Title Volume 8021 Folio 115 and the road exchange referred to in the Contract between the Mortgagor and the Council of the Shire of Sutherland dated 23 December 1986 ("the Contract") as set out in Clauses 26, 27, 28, 29 and 30 of the Contract. Once the Mortgagor becomes registered proprietor of the land referred to in the Contract, it will give a first registered Real Property Act mortgage over that land to the Bank. AND IT IS HEREBY AGREED AND DECLARED as follows:- 23. THAT the charge hereby created shall operate in manner following:- a) as a FIXED CHARGE over - · All real and leasehold property … of the Mortgagor … 39. … nor shall any other security now held or hereafter taken by the Bank abate or prejudice the powers and provisions herein contained. 45. THAT this mortgage shall not affect or be affected by any other security now or hereafter held or taken by the Bank from or on behalf of the Mortgagor …" 12 At a meeting between Mr Alcock and a bank officer on 9 March 1988, Mr Alcock requested an increase in the loan facility, so that it was for an amount of $8.287m. This led to the State Bank writing to Mr Alcock on 11 March 1988, rescinding its approval for facilities totalling $7.75m, and asking for additional information in support of the application for $8.287m. Negotiations over the next few days led to the State Bank writing to Mr Alcock on 15 March 1988, reinstating its offer of a facility for $7.75m, and consenting to there being a second mortgage in favour of Elders. The conditions included "All other terms and conditions of approvals 16 November 1987 and 4 December 1987 to remain." Those dates were dates upon which State Bank's internal processes had approved lending on terms set out in the facility letters dated 17 November 1987 and 22 December 1987. 13 State Bank advanced the term loan of $7.75m on 8 April 1988. On that day Illawong gave to State Bank mortgages ("the 8 April 1988 Mortgages") over the two land titles it then held. Those mortgages had identical conditions. Each contained a definition of "the moneys hereby secured" which included in substance the same wording as I have quoted at paragraph [10] above from the definition of "moneys hereby secured" in the Charge. 14 Each of the 8 April 1988 Mortgages also contained the following clauses: "THIRDLY - The Mortgagor will pay to the Bank interest on the moneys hereby secured at the rate or rates agreed upon from time to time and in default of such agreement as decided by the Bank from time to time. FOURTHLY - The Mortgagor will upon demand or until such demand at such time or times and in such manner as may have been agreed upon between the Mortgagor … and the Bank pay to the Bank the monies hereby secured … 8. Upon the occurrence of any of the following events: (a) the Mortgagor shall fail to pay any sum which is due and payable under this Mortgage on the due date … then in any of the such events (in this Mortgage referred to as an "Event of Default") the monies hereby secured shall unless otherwise agreed upon between the parties without notice be immediately due and payable …"

Those mortgages have been registered under the Real Property Act . 15 Also on 8 April 1988 a Deed of Priority was entered between State Bank, Elders and Illawong, whereby Elders agreed that the State Bank's mortgage would have priority for $7.75m plus all interest payable and all costs and expenses which State Bank was entitled to charge. The mortgage which Elders already had over the two land titles which Illawong then had remained on foot, subject to that Deed of Priority. The ongoing Elders finance was granted under a facility letter dated 21 March 1988 which approved an advance of $850,000, for a term of 12 months, at an interest rate of 17.25% if there was no default, and 20.25% if there was default. 16 The costs of the funds which State Bank advanced on 8 April 1988 was 12.97%. Hence the interest rate it charged during the three years of the term loan facility was 13.97% during times when the loan was not in default. 17 On 19 April 1988 State Bank wrote to Illawong, reporting on how the $7.75m had been disbursed on 8 April 1988. The letter stated, "Interest and debt administration fee only, are payable quarterly, the first such payment being due on 2 July 1988. 18 One of the conditions of the approval of State Bank dated 15 March 1988 was that $270,000 from the settlement proceeds would be retained in a term deposit, for "Water Board, Council and interest". In fact at settlement $270,600 was placed on a term deposit. That term deposit came to be used for payment of interest to State Bank. 19 In early August 1988 Illawong requested State Bank to advance it an additional $1.8m. One of the purposes of the borrowing was to pay out the second mortgage to Elders. That application was not granted. 20 In October 1989 Illawong made another application to State Bank for an additional $1.6m. That application also was not granted. 21 In December 1989 Illawong made a further application to State Bank for additional finance totalling $1.99m. That application was rejected in mid-January 1990. 22 State Bank also came to provide other financial facilities in connection with Illawong. By mid-December 1989 there was a company called Village Properties Pty Limited, which was owned by Mr Alcock and Mr Davis and operated a real estate agency in the Centre. It had an overdraft from State Bank. As well, State Bank financed some leases for Illawong, and provided a current account for Illawong. 23 On 12 March 1990 Elders served Illawong with a notice under section 57(2)(b) Real Property Act 1900 relating to Illawong's failure to pay an instalment of interest due in March 1990. 24 On 22 March 1990 St George Commercial Credit Corporation Limited ("St George") approved a loan of $1.5m to Illawong, for one year, for purposes including the payout of Elders. The interest rate was 20.25% per annum if there was no default, and 22.25% if there was default. On 6 June 1990 State Bank consented to a second mortgage in favour of St George. 25 On 29 June 1990 Illawong, having obtained title to the outstanding two land titles, mortgaged them to State Bank ("the 29 June 1990 Mortgages"). Each of those mortgages was registered under the Real Property Act. Each contained provisions as follows: "3. The Mortgagor will pay to the Mortgagee interest on the moneys hereby secured as that term is defined in the Memorandum referred to in clause 5 herein. 4. The Mortgagor will pay to the Mortgagee the moneys hereby secured as that term is defined in the Memorandum referred to in clause 5 herein. 5. The Mortgagor will observe the provisions which are deemed to be incorporated herein and which are set forth in the Memorandum filed in the Land Titles Office as number X208233." 26 Memorandum X208233 ("the Memorandum") contained the following provisions: "1.1 When used herein or in any mortgage deemed to incorporate this memorandum, the following terms shall, unless excluded by or be repugnant to the context, have the following meanings:- … "Agreement" means and includes each and every agreement … made or existing from time to time whether in the past, present or the future, between, inter alia, the Mortgagor … and the Mortgagee under which the Mortgagee has provided or agreed to provide to or for the benefit of, inter alia, the Mortgagor … facilities whether financial or otherwise which the Mortgagee may lawfully provide … "Interest" means where the context so requires that amount calculable and payable in the manner set out in Part 2. "Interest Rate" means the rate or rates from time to time agreed upon between the Mortgagor and/or Customer and the Mortgagee and failing such agreement, the rate determined from time to time by the Mortgagee as being applicable to like accounts … 1.8 In the event of and only to the extent of any inconsistency between the provisions of the Mortgage and the provisions of any Agreement, the provisions of the said Agreement shall prevail … 1.11 The provisions of this memorandum shall apply to the Mortgagor … to the full extent possible at law and equity. Any provisions that are not applicable or relevant to the Mortgagor … shall to the extent of such inapplicability or irrelevance be excluded. 2. Interest 2.1 Except as otherwise provided in any Agreement:- 2.1.1 (Payment) interest as herein provided shall be payable by the Mortgagor … on the last day of each and every period as determined by the Mortgagee and advised to the Mortgagor … from time to time and failing such advice on the last day of each and every calendar month: 2.1.3 (Calculation) interest shall be calculated by applying the interest rate upon the maximum debit balance of any account of and/or advance to the Mortgagor … for that period for calculation of the interest immediately preceding the due date for payment of interest: 2.1.4 (Capitalisation) interest unpaid on the due date shall, on that date and without notice to the Mortgagor … be added to the moneys hereby secured and bear interest at the rate or rates as hereinafter provided for moneys not paid on the due date and shall, at the option of the Mortgagee, be capitalised. 3. Payments and Repayments 3.1 Except as otherwise provided in any Agreement:- 3.1.1 (Payment) the Mortgagor … shall repay the moneys hereby secured upon demand. 3.3 (Overdue Payments) in respect of moneys not paid on their due date … interest by way of liquidated damages shall be paid upon demand on such moneys unpaid … same to be an amount determined by applying the highest of the prevailing interest rates payable on the moneys hereby secured from time to time plus two percent (2%) per annum or such lesser amount or rate as the Mortgagee may in its sole discretion determine to the moneys not paid on their due date … calculated from the date for payment of such moneys … until payment thereof and until payment such interest shall form part of the moneys hereby secured." 27 Also on 29 June 1990 two Deeds of Priority were entered between State Bank, St George and Illawong. One of them agreed that the real property mortgages of State Bank and St George would have priority so that State Bank had priority for $8m plus interest plus costs of enforcement, St George would have security for $1.5m plus interest plus costs of enforcement, and State Bank would have priority thereafter. The other agreed that charges which State Bank and St George had over the assets and undertaking of Illawong would rank pari passu. 28 On 26 September 1991 a deed was entered into between Mr Alcock, Mr Davis, Mr White, and a company which Mr White was interested in, which provided for the shares in Illawong in which Mr White or his company was interested to be sold to Mr Alcock and Mr Davis for a total of $700,000, payable by instalments over four years. Mr White remained a director of Illawong until 26 September 1991. 29 On 23 July 1993 Illawong and State Bank entered a Facility Agreement relating to, amongst other things, a loan of $8.5m, for a term of three years, at a fixed rate of 2.25% above Cost of Funds. 30 On 23 July 1993 the advance provided for by that Facility Agreement was made. It was only at that time that the term loan which had originally been made by State Bank in April 1988 was repaid. That loan had, from 8 April 1988 until 26 July 1993, been maintained in an account numbered 491315-16 ("the "16" account"). At the time of repayment of that loan, State Bank allowed to Illawong what it described as an "interest concession of $90,192 for a period 7 April 1991 to 25 August 1992". State Bank's intent in allowing that credit was to bring the interest which was charged during the period from 8 April 1991 to 26 July 1993 down to 13.97%. 31 On 17 September 1993 State Bank allowed Illawong a further credit of $144,318.26. This arose from State Bank re-calculating interest on the expired term loan so that, from 1 December 1992 to the date of repayment, interest was charged at the State Bank's Reference Rate plus 2%, rather than at 13.97%. At that time it also allowed Illawong a further credit of $3,156.18.26. This arose from State Bank having previously debited interest to Illawong's account on the amount of interest which, by making the credit of $144,318.26, it was refunding. 32 The first claim which Illawong makes in these proceedings relates to the interest which State Bank charged on the expired term loan, during the period from 8 April 1991 to 26 July 1993. I will refer to this period, when Illawong did not have any fixed rate term loan on foot, by a convenient terminology which Mr Whitehead used, namely "the Limbo Period". 33 When the three-year term loan which had been made on 23 July 1993 matured, it was not repaid, and no consensual arrangement for its extension was arrived at. State Bank commenced charging interest, from the date of expiry on 26 July 1996, at its Reference Rate plus a margin of 2%, plus a debt administration fee. State Bank continued to charge interest at Reference Rate plus 2% until the loan was repaid in August 1998. It was repaid largely by being re-financed by Howard Funds Management Limited. 34 Illawong's second claim in these proceedings relates to the interest charged in the period January 1997 to August 1998. Illawong contends that an agreement was entered into in January 1997 to fix the interest payable at $70,000 per month. The Plaintiff's Pleaded Case 35 When Illawong's Statement of Claim was filed on 2 August 2000 it included a claim for money had and received, arising from the payment of what Illawong said were excessive amounts of interest. It also included a claim for breach of a contract, arising from the facility letters and said to be incorporated by reference in the mortgages, in that State Bank had not carried out a review for the purpose of determining repayment or refinance conditions. Each of those causes of action was struck out by Master Macready on 30 March 2001, as being statute barred. 36 Illawong's case is now articulated in a Further Amended Statement of Claim filed on 1 October 2003. Implicitly it draws upon section 36(11) Real Property Act 1900, which provides, "Upon registration, a dealing shall have the effect of a deed duly executed by the parties who signed it" to avoid limitation problems by availing itself of the 12 year limitation period arising under section 16 Limitation Act 1969 for causes of action founded on a deed. The steps in the plaintiff's pleaded case are, in essence:

The rate of interest payable was governed by the clause incorporated into the 1990 mortgages requiring interest to be paid at "the rate or rates from time to time agreed upon between the Mortgagor … and the Mortgagee and failing such agreement the rate determined from time to time by the Mortgagee as being applicable to like accounts" .

In the Limbo Period there was no agreement as to the rate or rates of interest to be applied.

The rate of interest which the bank determined as being applicable to like accounts in the Limbo Period was the cost of funds to the bank from time to time during the period, yet the bank charged more than its cost of funds.

Alternatively, there was an implied obligation on the bank to determine a rate of interest applicable to like accounts, yet it failed to make that determination.

When it failed to make that determination, and there having been no agreement as to rates, the only rate the bank was entitled to apply was its cost of funds from time to time. During the Limbo Period the defendant charged interest at much more than its cost of funds.

In January 1997 there was an agreement whereby interest would be paid at the rate of $70,000 per month until the repayment or finance.

Notwithstanding that agreement, the bank charged more than $70,000 per month in the period between January 1997 and August 1998.

The claim to recover is pleaded also on the basis of a failure to render accurate accounts, and a claim for money had and received which arose in August 1998 when State Bank allegedly insisted on being paid more money than it was entitled to receive before it would grant a discharge of mortgage. The claim for an account is one which Illawong accepts would have separate work to do only if Illawong established, by reason of its other pleaded causes of action, State Bank had received too much money, but the quantum of the excess which the Bank had received could not be ascertained on the evidence available at the hearing. No separate argument was put based on the claim for money had and received which arose in August 1998. 37 The parties have conducted the litigation as though two additional claims were made by the plaintiff. The first of those additional claims is an alternative claim, that the rate which State Bank was entitled to charge during the Limbo Period was its cost of funds plus a margin of 1% per annum. The second is a claim for damages for breach of the alleged obligation of State Bank to determine a rate of interest applicable to like accounts, where the rate of interest State Bank would have applied if it had performed its alleged obligation is not confined to cost of funds, or cost of funds plus 1%. Some Pleaded Issues in Defence and Reply 38 One of the issues which State Bank raises in its defence is that it is not the 29 June 1990 Mortgages which contain the relevant agreement which governs the charging of interest in the Limbo Period, but rather that it is the Charge and/or the 8 April 1988 Mortgages. The Bank puts in issue that there was no agreement concerning interest rate, and says that, if there was no agreement concerning interest rate, then it has decided what interest to charge, and actually charged it. 39 In reply to those allegations Illawong has pleaded that if the 8 April 1988 Mortgages governed the obligation to pay interest, then there was no agreement between the parties about the interest rate payable, nor was there any decision by the Bank as to the interest payable. Alternatively, Illawong says that any decision of the Bank as to the interest payable was invalid because the decision was not communicated to Illawong, and "The interest rate alleged determined by the defendant was arbitrary, unreasonable, and not made in good faith in the light of the defendant's then prevailing interest rates equivalent to cost of funds to it." 40 Even if Illawong succeeded in proving that any determination by the Bank of interest rates was invalid, that would not of itself entitle Illawong to any relief. This is because Illawong's claim concerning the Limbo Period is not one for money had and received, but is one for damages for breach of a covenant in a deemed deed. This was pointed out by Mr Marshall SC, counsel for State Bank, in the course of address. It did not elicit any application on Illawong's part to amend the Statement of Claim, to sue for breach of covenants express or implied in the Charge and/or the 8 April 1988 Mortgages. There was some discussion of whether, if such application were to be made, the Bank would have wanted to make enquiries of additional witnesses, or of existing witnesses concerning additional topics, to meet an allegation that it had acted arbitrarily, unreasonably, or not in good faith, but that topic was not explored fully. I propose to decide the case on the basis of the pleadings as they presently stand, together with the two consensual extensions of them which I have earlier identified. 41 I will deal separately with some other issues which arise under the defence and reply. I should here record, however, that in paragraphs 57 to 61 of its defence State Bank alleged that there had been an accord and satisfaction in 1998 concerning any claims of Illawong of overpaid interest. In paragraphs 62 to 66 it had relied on certain clauses in its security documentation giving a contractual effect to certain certificates of bank officers. At the trial the defences in paragraphs 57 to 66 inclusive were abandoned. The Construction Question - Which Interest Rate Provision Prevails 42 The covenants upon which Illawong sues are ones in the registered 29 June 1990 Mortgages. It is those mortgages which incorporated by reference the Memorandum, which in turn contains and applies the definition of "interest rate" which Illawong pleads is the relevant one. In Tallerman & Company Pty Limited v Nathan's Merchandise (Victoria) Pty Limited (1957) 98 CLR 93, at 144 Taylor J said: "… the parties to an agreement may vary some of its terms by a subsequent agreement. They may, of course, rescind the earlier agreement altogether, and this may be done either expressly or by implication, but the determining factor must always be the intention of the parties as disclosed by the later agreement."

The provision concerning rate of interest contained in the 29 June 1990 Mortgages will, thus, be operative if an intention to vary the provisions as to interest contained in the Charge, and the 8 April 1988 Mortgages, can be seen. 43 I do not see any intention of the parties, as disclosed by the 29 June 1990 Mortgages, to vary the provisions as to interest which are contained in the Charge and the 8 April 1988 Mortgages. At the time State Bank advanced the term loan in 1988, the only contractual provision there was about the rate of interest payable after the expiry of the three-year term was the covenant in Clause 1 of the Charge dated 25 February 1988 (para [11] above), and the covenant in substantially identical terms in the Clause numbered "THIRDLY" in the 8 April 1988 Mortgages (para [14] above). When Illawong granted the June 1990 mortgages, it did so in performance of the obligation contained in Clause 22 of the Charge. It would be odd if mortgages over the two land titles which Illawong did not have in April 1988 effected a change in the provisions which governed interest of a loan which had already been on foot for more than two years. 44 Further, Clauses 39 and 45 of the Charge were contractual agreements that the provisions of the Charge would prevail over the terms of later documents. While it would have been open to Illawong and State Bank to agree that Clause 39 and Clause 45 of the Charge would not apply in relation to some later security, the mere granting of the 29 June 1990 Mortgages does not amount to such an agreement. 45 The same conclusion is arrived at from a consideration of the Memorandum which was incorporated in the 29 June 1990 Mortgages. When the Charge was in existence at the time State Bank advanced the $7.75m, and it was expressly stated in the Facility Agreement that the Charge was required as security, and no part of the facilities would be made available until the security documentation had been executed, the Charge is an "… agreement … under which the Mortgagee has provided … facilities …", and thus is an "Agreement" within the meaning of the Memorandum. Thus Clause 1.8 of that Memorandum makes provision for the Charge to prevail over that Memorandum, if there is any inconsistency between them. 46 Further, the obligation contained in Clause 2.1.3 of that Memorandum, to use the "interest rate" as defined in calculating interest, is one which is stated, by Clause 2.1 of the Memorandum, to apply "except as otherwise provided in any Agreement". This reinforces the predominance of the clause concerning interest contained in the Charge. Further, Clause 1.11 of the Memorandum enables the provision about calculation of interest contained in that Memorandum to be excluded. 47 Illawong submits that the provisions concerning charging of the interest rate contained in the Memorandum amount to an agreement within the meaning of Clause 1 of the Charge, and hence, Illawong submits, there is no inconsistency between the provisions concerning interest rate in Clause 1 of the Charge, and the provisions concerning interest rate set out in the Memorandum. I do not accept that submission. 48 Part of the basis upon which Illawong contends there is no inconsistency between the Charge, and the June 1990 Mortgages incorporating the Memorandum, is that the expression "in default of such agreements" in Clause 1.1 of the Charge does not mean "in circumstances where there is no such agreement", but rather requires there to be a default, in the sense of a breach, of an agreement concerning the rate of interest which is to be paid. Illawong says there has been no breach of any agreement concerning the rate of interest which is to be paid, and so the occasion for Clause 1.1 of the Charge to allow the Bank to charge a rate "as decided by the Bank from time to time" has not arisen. I do not accept that construction of Clause 1.1 of the Charge. What the second part of Clause 1 of the Charge means is that in circumstances where there is no agreement as to the rate or rates of interest to be charged, then the rate which is to be paid is as decided by the Bank from time to time. 49 In Doe d. Dacre v Dacre (1798) 1 Bos&P 250; 126 ER 887 at 258 of Bos&P, 891-892 of ER Eyre CJ said, "I do not know a larger or looser word than "default". Abstracted from other words, what does it mean? In the expressions "judgment by default" and "a juror making default" we understand it differently. In its largest and most general sense it seems to mean, failing."

The substance of this passage was quoted with approval by Rich J in Woolworths Ltd v Crotty (1942) 66 CLR 603 at 620. 50 This view of the meaning of "in default of such agreements" is supported by internal matters in the Charge, and the 8 April 1988 Mortgages. Both the Charge, and the 8 April 1988 Mortgages have a provision which includes in the definition of "the moneys hereby secured" "interest upon all such moneys as aforesaid at the rate or rates agreed upon from time to time and in default of such agreement as decided by the Bank from time to time …" A more natural reading of the expression in the context of that definition is that "in default of such agreement" means "when there is no such agreement". Further, Clause "SEVENTHLY" of the 8 April 1988 Mortgages contains a covenant enabling the Bank to carry out any of the activities which the Mortgagor is required by the Mortgagor's covenants to carry out, but which the Mortgagor fails to carry out, and providing that: "… all moneys expended for all or any such purposes shall carry interest at the rate agreed upon from time to time and in default of such agreement as decided by the Bank from the time or respective times of the same having been so expended until repayment" . (emphasis added)

Clause "SEVENTHLY" is concerned with a situation where it is only by virtue of the Mortgagor having not performed its covenant to carry out certain activities that the Bank comes to spend money in making good that failure. The expression "in default of such agreement" in the portion I have quoted from "SEVENTHLY" cannot in that context mean "when there is a breach of the agreement concerning payment of interest" . Rather, in Clause "SEVENTHLY" it means "when there is no such agreement" . The principle that a document should be construed on the basis that it uses language in an internally consistent way means that "in default of such agreement" has the same meaning in Clause "THIRDLY" . As Clause "THIRDLY" of the 1988 mortgage concerns payment of interest on the same principal sum as does Clause 1 of the Charge, Clause 1 of the Charge should also be interpreted in that way. 51 Further, Clause 1 of the Charge, and the definition of "Interest Rate" in the Memorandum, each have a common structure - that interest will be paid at the rates agreed from time to time, and if there is no agreement, at a rate determined in some other fashion. There is no reason why the "if there is no agreement" provisions ought bear different meanings in the two clauses. If that is so, there is a conflict between them, which is resolved in favour of the provision concerning interest contained in the Charge. 52 The consequence of this construction is that a fundamental premise of Illawong's case for recovery in relation to the Limbo period, namely that it is the definition of "Interest Rate" in the 29 June 1990 Mortgages which governs the contractual relations between the parties, is not made out. However, in case the Court of Appeal disagrees with the construction I have arrived at, I shall go on to consider factual matters relevant to the plaintiff's case concerning the Limbo Period. Organisational Changes Concerning State Bank 53 Over the period relevant to this case, some organisational changes occurred in the State Bank which bear on the case. When the term loan was first taken out in 1988, Illawong's ordinary point of contact with State Bank was through the branch of State Bank at Riverwood, a Sydney suburb which is near the suburb of Illawong. In early 1991 State Bank decided to separate the administration of commercial banking from other banking transactions, to take commercial banking away from the branches, and centralise control of commercial accounts in regional Business Banking Centres, called BBCs. Part of this process involved transferring managers and other staff who had dealt with commercial lending in branches to regional BBCs. In April 1991 the State Bank established a BBC at Hurstville, to cover the southern metropolitan area. A BBC was also established at Whitlam Square, to cover a different area. Responsibility for particular files was transferred from branches to BBCs progressively over the next few months. In August or September 1991 control of the Illawong file was transferred from the Riverwood Branch to the BBC at Hurstville. 54 The second organisational change arose from the privatisation of the State Bank. State Bank, formerly owned by the New South Wales Government, was sold in June 1994 to Colonial. In connection with that privatisation the State Government gave an indemnity concerning loans owing to State Bank. To administer that indemnity, an Indemnified Loans Committee ("ILC") was established. In 1996 and 1997 that Committee usually met weekly. Immediately after the privatisation, all of the bank's loans were indemnified by the government, but as time went on, and Colonial examined the loans, Colonial agreed to various of the loans being withdrawn from the indemnity. The loan which State Bank had made to Illawong was one which remained subject to the indemnity, and on which periodical reports were made from the manager administering Illawong's account to the ILC in 1996 and 1997. Staff Involved in Administration of Illawong's Account 55 Ms Donna Churchland was Manager of the Riverwood Branch in 1990, up to about September. 56 Mr Errol Rowland was the Manager of the Riverwood Branch for approximately September 1990 to September 1991. The Illawong file was at the Riverwood Branch when Mr Rowland arrived there, and he became acquainted with it soon after his arrival. After the BBC Hurstville was established, bank officers at that BBC had some role in supervising the conduct of the account. In about August/September 1991 the making of management decisions concerning the account was transferred to the BBC Hurstville. For all except the last month or so of the time that managerial responsibility for the file was with Mr Rowland at Riverwood, Mr Rowland was assisted by Jon Gillingham. 57 For a few months before managerial control of the file came to BBC Hurstville, Brent Scotten was the Relationship Manager for the Illawong account who was located at BBC Hurstville. Mr Scotten was replaced in that role in about September 1991 by Stuart Fitzpatrick. Mr Fitzpatrick was in turn replaced in that role about June 1992 by Darren Nagel. 58 Owen Eaton was appointed as Manager of the BBC Hurstville in April 1991. He was the most senior person at BBC Hurstville with responsibility for Illawong's account over the period from April 1991 until around November 1992. 59 Jon Gillingham was moved from the Riverwood Branch to the BBC Hurstville, probably around July or August 1991. There, he continued to assist those senior to him concerning the Illawong account. 60 In August 1992 Brian Salter was the Regional Business Banking Manager for an area known as BB1, which included BBC Hurstville. Owen Eaton reported to him. Kevin O'Neill had a position in Credit Administration at State Bank's Head Office. Both those men attended a meeting on 25 August 1992. 61 Alan Whitehead was the Head of Business Banking of the State Bank in 1992. In the period from October to December 1992 he had some involvement with the Illawong Account. He ceased being employed by State Bank in the course of 1996. Towards the end of 1996 he was engaged by Mr Alcock as a consultant concerning Illawong's dealings with State Bank. Around January or February 1997 his role with Illawong changed, so that he came to act as a mortgage broker seeking to obtain a refinance of Illawong's mortgages. 62 State Bank had a section known as "Special Loans Unit" or "Special Loans Administration", which was located at Ashfield. This was the debt recovery area of the Bank, which handled problem or defaulting loans. In the first half of December 1992 administration of Illawong's relationship with State Bank was transferred from BBC Hurstville to the Special Loans Administration at Ashfield. There, Wayne Lyell was the account manager handling the file. 63 In December 1992 Ross Peden was Manager of the Asset Management Group of the defendant. Mr Whitehead described this as an organisation "which identified problem loans for the bank so they could be managed without interfering with the bank's 'good book'". Its relationship to the Special Loans Unit was not made clear in the evidence. Mr Peden had some dealings with the Illawong account in December 1992. 64 The administration of the Illawong account was transferred back from Special Loans Unit to BBC Hurstville in late January or early February 1993. Mr Nagel resumed being the responsible account manager. 65 By 22 March 1993 Steve Footit was undertaking responsibility for the Illawong account at the BBC Hurstville. He continued to be involved with the account until at least March 1995. 66 From 20 November 1995 the administration of the account was transferred to the Asset Management Group at Parramatta, where Ross Williams was the manager in charge of it. By September 1996 Mr Garry Glover, who was then the head of the Asset Management Group, came to have some involvement with the account. 67 After the account was transferred to the Asset Management Group, Patrick Ward also came to have some responsibility for the account, until he left the Asset Management Group around June 1997. Mr Ward had a place in the organisational structure above Mr Williams, but below Mr Glover. State Bank's Cost of Funds 68 One of Illawong's contentions in this case is that during the period from 8 April 1991 to 26 July 1993 State Bank should have charged it an interest rate equal to State Bank's cost of funds, or State Bank's cost of funds plus a margin of 1%. For the purpose of these proceedings only, the parties have reached an agreement: "That for any calculation of damages which requires the Court to determine the "cost of funds" as alleged by the plaintiff, the cost of funds generally, on any given day, shall be deemed to be the Reserve Bank of Australia Cash Rate Target (as attached), on that day plus 0.35%."

That agreement results in the cost of funds being deemed to be as follows:

Date of Change in Reserve Bank Cash Rate Target New Cash Rate Target (%) New Deemed State Bank Cost of Funds (%)

4 April 1991 11.50 11.85 16 May 1991 10.50 10.85 3 Sep 1991 9.50 9.85 6 Nov 1991 8.50 8.85 8 Jan 1992 7.50 7.85 6 May 1992 6.50 6.85 8 July 1992 5.75 6.1 23 Mar 1993 5.25 5.6 30 Jul 1993 4.75 5.1

State Bank's Reference Rate 69 State Bank had at all relevant times a published rate of interest which it called the Reference Rate. This Reference Rate was the starting point for fixing the rate of interest payable on variable rate loans. During the period relevant to this case, there were very significant movements in the Reference Rate. At the time Illawong drew down its fixed rate facility, the Reference Rate was 13.25% per annum. Thereafter, changes occurred as follows: Date of Change in Reference Rate New Reference Rate % p.a. Date of Change in Reference Rate New Reference Rate % p.a.

18.4.88 13.50 18.4.90 18.75 9.5.88 13.75 27.7.90 18.25 1.6.88 14.50 13.8.90 17.75 17.6.88 14.75 7.9.90 17.50 21.6.88 15.00 12.9.90 16.75 7.9.88 15.50 22.10.90 16.00 18.10.88 15.75 7.1.91 15.50 3.11.88 16.00 29.4.91 15.00 8.11.88 16.25 3.6.91 14.25 22.11.88 16.50 16.9.91 13.25 9.1.89 16.75 11.11.91 12.25 20.1.89 17.00 14.2.92 11.75 3.2.89 17.50 15.6.92 10.75 17.2.89 17.75 17.8.92 9.90 21.2.89 18.00 31.5.93 9.70 14.3.89 18.50 24.8.93 9.20 23.3.89 18.75 22.9.94 9.70 12.4.89 19.00 14.11.94 10.50 23.5.89 19.25 19.12.94 11.25 30.5.89 19.75 2.9.96 10.75 29.6.89 20.25 30.12.96 10.25 27.9.89 20.50 28.1.97 9.75 29.1.90 20.00 30.6.97 9.25 28.2.90 19.50 28.8.97 8.75

A page of State Bank's Procedures Manual as at 9 December 1993 shows that the guideline for making a commercial loan on first class security was to charge a minimum of 1.75% above Reference Rate, for a commercial loan on not all first class security a minimum of 2% above Reference Rate, and a formally approved unsecured commercial loan a minimum of 3% above Reference Rate. It was, of course, always possible for the Bank to decide that it would not adhere to these guidelines in the charges it made on some particular loan. Illawong's Application to Whitlam Square 70 In the latter part of 1990 Mr Alcock telephoned Ms Churchland, at the Riverwood Branch of the State Bank, and enquired whether the Bank would be interested in refinancing Illawong's loan when it matured the following April. Ms Churchland said that the Bank would be happy to look at it. However Mr Alcock made no appointment to see anyone at the Branch concerning obtaining refinancing, nor did he submit any documentation to the Riverwood Branch seeking refinancing. 71 In March 1991 Mr Alcock called at the Bligh Street Sydney Branch of the State Bank. He explained to a bank officer there that Illawong had a loan with the bank at its Riverwood Branch, and he would like to move the account closer to his office in the city, and that Illawong was looking to re-finance the existing loan which was due to mature in April. The bank officer told him that all business loans had been taken away from the branches and were now being dealt with at Oxford Street Darlinghurst. The bank officer gave him the name of Paul Morrison as the person to see there. 72 Mr Alcock then prepared a collection of documents for the purpose of making application for an extension of the term, and increase in the amount of the loan. The documents included balance sheets, asset and liability statements of directors, a valuation, tenancy schedules, and demographic data for the area around the shopping centre. 73 On 7 May 1991 Mr Alcock met with Mr Morrison, at the BBC Whitlam Square. Mr Alcock handed him a letter of application for a $10m loan. This letter was in the same form as an application letter which Mr Alcock sent on 7 May 1991 to other financial institutions, namely Advance Bank, National Australia Bank, and Wespac. These letters explained that the $10m was required to repay the borrowings from State Bank and St George, and provide Illawong with a reserve of funds. 74 Mr Morrison was assisted, at BBC Whitlam Square, by Michael Stephens. Mr Stephens telephoned Brent Scotten, at BBC Hurstville, on 9 May 1991. Mr Scotten's file note reads: "Mike Stevens, Manager BBC City & Eastern Suburbs rang to advise that Barry Alcock of Illawong Village had approached him for a loan of $10.0m to repay existing $7.75m with SBN, repay $1.5m to St George and provide $750 000 to renovate the "Village". Mike said Barry had originally approached CAFID who had referred him to the BBC. Mike stated that Barry indicated he had talked to John O'Neill & that Barry had a client who banked SBN (CAFID) & had a net worth of $0.5bn. Barry stated he would use this as leverage. Mike went on to say that Barry "slagged" Riverwood branch manager, Metro South Regional Manager & the BBC. I advised Mike of the problems encountered some 12 months ago with this relationship & have sent him copies of our submissions held on file. Given the leverage that Barry Alcock is endeavouring to use combined with the fact that he talks disparagingly about all the SBN staff he has met & dealt with to date it would appear that the proposal is unlikely to stand on its merits & that client may be a little "desperate". Mike intends to ring Riverwood Branch & talk to Errol Rowland and Jon Gillingham regarding present position of existing facilities."

John O'Neill, referred to in this file note, was at the time the Managing Director of State Bank. State Bank staff regularly referred to the Bank in their internal communications as "SBN" . Part of the "problems encountered some 12 months ago with this relationship" would include the circumstances in which Illawong's various requests for funds had been refused by State Bank. The assessment of a bank officer, expressed in a memorandum of 27 February 1990 concerning one of Illawong's applications for increased finance, included: "… administration of this relationship is exceedingly difficult. They are overly demanding and antagonistic in the approach towards SBN. They expressed a desire to bank elsewhere come maturity of facilities in April 1991. It is apparent that this relationship is over and we merely transact." State Bank's Initial Reaction to Expiry of Loan Term 75 By May 1991 Mr White had moved from his home in the suburb of Illawong to Brisbane, where he operated a newsagency. On 2 May 1991 Mr Rowland had written to the Secretary of Illawong, at the address of Mr White's former residence, saying: "Kindly note that your Fixed Rate Term Loan for $7.750 million expired 8/4/91. We should be pleased to learn of your intentions/ requirements in this matter."

That letter was forwarded to Mr White in Brisbane. On 13 May 1991 he faxed a copy of it to Mr Alcock. He also telephoned Mr Alcock and told him emphatically to deal with it. Mr Alcock's evidence was: "He sent me this and he is a pretty bombastic sort of guy and he probably would have shouted over the phone to me 'You better attend to this. I've enough problems down here.'" 76 On 3 June 1991 Mr Stephens prepared an office minute, which recorded the various accounts which Illawong and associated people and companies had with State Bank, asset values of Illawong, and a précis of the actual profit and loss account for the year ended 30 June 1990 (which showed a loss of a little short of $215,000) and estimated profit and loss accounts for years ended 30 June 1991 and 1992 (which showed profits of the order of $135,000 and $291,000 respectively). In commenting on Illawong's application to borrow $10m, the minute said: "The problems we face are two fold:- 1. SBN Valuer has confirmed that value of centre has not increased since the last valuation in December 1989. Refer valuers comments. The shortfall in loanable sum is $1.6M if additional funds are advanced. Director (Alcock) was advised that SBN requires additional first class security if increased funding is to be considered. Statement of assets and liabilities for directors is attached. 2. Repayment capacity is only marginal at increased borrowing level. Mr Alcock was advised that SBN was comfortable with the present exposure and that we did not want to increase our exposure unless additional security was given. Also a close look would have to be taken at the income from the centre to confirm same."

The evidence does not establish precisely when it was that "Mr Alcock was advised that SBN was comfortable with the present exposure and that we did not want to increase our exposure unless additional security was given" , but I would infer that it was on 3 June 1991 or shortly prior to that date. 77 That office minute was submitted to the Senior Manager of the BBC for the Central Sydney Region on 3 June 1991, who noted on it "should we wish to proceed further, it would be on the basis of supported guarantees of directors (real estate) and critical look at cash flow bearing in mind projecting increase in rents in a negative growth period." On 4 June 1991 the Credit Administrator, Central Sydney Region noted the document with the words "Why are we looking at Riverwood customer". 78 On 25 June 1991 Mr Eaton prepared a file note of his telephone conversation with Mr Rowland. His note included: "I advised Errol Rowland regarding the current status on Illawong Village. I advised Errol that City/Eastern Suburbs BBC had been talking to Alcock and reviewing a proposal to refinance the existing Bank loan, the St George Building Society second mortgage and provide some working capital. A position paper had been done by one of the BBC staff that had been put to the Credit Administrator who had asked why they had been dealing with this account as it was domiciled in this region. I advised Errol that they had indicated to Alcock that the Bank couldn't provide this facility without additional security and more information regarding serviceability, particularly with regards to the large projected increase in rental income. Alcock had also been advised that he had to deal from here on in with this region." Threat of Penalty Interest Made, Then Retracted 79 Meanwhile, on 20 June 1991 Mr Rowland had sent another letter to the Secretary of Illawong, also addressed to the address of Mr White's former residence. It said: "As previously advised in our letter 2 May 1991, your Fixed Rate Term Loan for $7.750 million expired 8 April 1991. This facility will now need to either be repaid in full or re-negotiated within the next 14 days, otherwise the bank will have no alternative other than to proceed with "call up" of the advance. In the interim a penalty interest rate of 20-25% will apply."

It had been Mr Rowland's intention to say that a penalty interest rate of 20.25% would apply. This was the Bank's Reference Rate at the time, plus a margin of 6%. However a typographical error in the letter led to Mr White, and later Mr Alcock, forming the view that State Bank was saying that a penalty interest rate in the range of 20 to 25% would apply. 80 That letter likewise was forwarded to Mr White in Brisbane. On 8 July 1991 he faxed a copy of it to Mr Alcock. He also telephoned Mr Alcock about it - a telephone call concerning which Mr Alcock said, "discussion would not be an appropriate word", and "I would have received a tirade". 81 Mr Alcock immediately on receipt of that fax, wrote a letter to Mr Stephens, of the State Bank at Whitlam Square, referring to his application for funds of 7 May 1991 and subsequent telephone conversations. He continued: "You indicated that the bank was comfortable with its present loan position and would prefer not to lend any more. I advised that I was seeking funds from other sources so that I could merge the first mortgage and the second mortgage and would advise on the progress. I am currently awaiting decisions from those sources which I expect this week. Meanwhile, I enclose a copy of a letter dated the 20th June, 1991 from the Manager of the State Bank Branch at Riverwood. That letter was received TODAY . The main reason for this delay is that the bank sent the letter to the wrong address. The address for all correspondence to the company is at its registered office in our premises here. Would you please advise Mr Rowland that we are in the process of re-negotiating and that there is no need for the type of letter written by him."

Mr Alcock faxed a copy of that letter to Mr Rowland on 8 July 1991. 82 Mr Stephens replied to Mr Alcock on 10 July 1991 saying: "I refer to your letter of 7 July 1991. This matter is now being handled by the Manager, Riverwood Branch in conjunction with Business Banking Centre, Hurstville. Please note that the facility expired on 8 April 1991 and the consequences of not remedying the problem as outlined in the Manager's letter of 20 June 1991."

Mr Alcock's office had a system whereby a unique identifying reference was placed on each letter. That reference included the initials of the author, the initials of the typist, and a series of numbers which identified where that letter lay in the total number of pieces of correspondence produced by that typist in that month. Mr Alcock's letter of 8 July 1991 had on it a reference number which included "7.7.91" , meaning the seventh letter produced by that typist in July of 1991, and Mr Stephens had mistaken that reference for a date. The final paragraph of Mr Stephens' letter of 10 July 1991, by referring to Mr Rowland's letter of 20 June 1991, amounted to a reiteration of the threat of speedy enforcement action if the loan was not repaid or renegotiated, and that penalty interest would be charged in the meantime. 83 Mr Rowland recalls receiving a telephone call from Mr White, in which Mr White told him that Illawong was dealing with Paul Morrison of the bank in relation to re-negotiation, and that Mr Rowland should confirm this with Paul Morrison. Mr White gave Mr Rowland the telephone number of Paul Morrison. Mr White also asked State Bank to waive the penalty interest. Mr White was abusive about State Bank's imposition of penalty interest. Mr Rowland's evidence that this telephone call took place on either 8 July or 9 July 1991 fits in with the objective evidence. · It was on 8 July 1991 that Mr White faxed to Mr Alcock the State Bank's letter of 20 June 1991. · On the facsimile copy, which Mr Alcock sent to Mr Rowland on 8 July 1991 of the letter which Mr Rowland wrote to Mr Stephens on 8 July 1991, Mr Rowland made a note saying "Paul Morrison - renegotiation - ring Greg White" followed by Mr White's Brisbane telephone number, and another note of the telephone number of Mr Morrison. · A file note dated 9 July 1991 of Mr Scotten records "Errol advised he had been abused by Greg White (called from QLD) for the letter he had sent". · As well, the topic of the loan having expired, and penalty interest being charged is one likely to cause Mr White to react promptly. 84 On 12 July 1991 Mr Rowland wrote to Illawong saying: "We firstly apologise in forwarding our letters 2 May 1991, and 20 June 1991, to an incorrect address. Furthermore, we acknowledge that this action has led to a communication break-down. As a result, additional time will be allowed to enable this matter to be satisfactorily resolved. As advised by Michael Stephens, in his letter 10 July 1991, from The Business Banking Centre, Whitlam Square, this matter is now to be handled by this Branch in conjunction with our local Business Centre Hurstville. … Please note we do not have any formal proposal for consideration currently before us. Your letter 8 July 1991, to Michael Stephens, stated that you were awaiting decisions from other sources, and we should now be pleased to learn of the results as soon as possible."

A copy of that letter was sent to Mr White. 85 At some stage in the period 8 to 12 July 1991 Mr White caused his solicitors, the Brisbane office of Freehill Hollingdale & Page, to make a complaint to the Managing Director of State Bank, concerning the intention Mr White believed State Bank had to charge a penalty interest rate of 25%. 86 A memorandum of Mr Rowland to Mr Eaton dated 16 July 1991 records, "Up until now, customers were/are of the opinion that a proposal was being processed/considered by BBC Whitlam Square. They also want penalty interest to be waived". 87 A note which Mr Rowland made on 6 August 1991 records: "Owen Eaton - BBC has appointment with Barry Alcock, Monday 12/8. NB penalty interest to be waived - previous rate to apply."

Mr Rowland gives evidence, which I accept, that that note is one which he made on 6 August 1991, of a discussion which he had with Mr Eaton, in which he was informed that Mr Eaton would be meeting with Mr Alcock on Monday, 12 August 1991, that penalty interest on the expired loan was to be waived, and that the previous interest rate was to apply to the loan. Mr Eaton was, at the time, the most senior officer at BBC Hurstville, and the State Bank's practice was that because Illawong's loan had expired and had not been repaid, all decisions in relation to setting of interest rates on it required Mr Eaton's approval. 88 By 8 August 1991 Michael Stephens had advised Brent Scotten that he could not find all the information which Mr Alcock had given to BBC Whitlam Square enclosed in his application letter of 7 May 1991. Only some of the information referred to in that letter had been sent from BBC Whitlam Square to BBC Hurstville. 89 On 16 September 1991 Mr White sent a facsimile to Mr Rowland, saying: "I refer to your letters dated the 20th June and the 12th July 1991 and our subsequent telephone conversation and confirm that the bank has agreed not to apply penalty interest on the loan to Illawong Village Pty Ltd which it is currently re-negotiating with the company." 90 The version of that facsimile which is in evidence bears a facsimile imprint showing that it was sent on October 3 1991 from Mr White's Queensland newsagency. The facsimile bears the original of a bank "received", showing that the facsimile was received at the BBC Hurstville on 4 October 1991. The facsimile bears writing on it "Attention Mr Gillingham MGR BBC Hurstville", and also has Mr Gillingham's name in large block capital letters in handwriting. I would infer that by the time Mr White wrote the original of that letter, responsibility for the file had been transferred from the Riverwood branch to the BBC in Hurstville, and that the content of the facsimile (whether the original or a further facsimile copy of it does not matter) only came to Mr Gillingham's attention at the BBC Hurstville in early October. This fits in with the note dated 10 October 1991, recording the amendment of the rate of the facility to 13.97% (para [92] below). 91 On 8 October 1991 Mr Fitzpatrick (who by this time had become the manager responsible for Illawong's account at BBC Hurstville) wrote to Illawong advising it that administration of its accounts was being transferred to BBC at Hurstville. 92 A note of a bank officer, probably Mr Gillingham, appears on the same page as the note of Mr Rowland referred to in para [87] above. It is dated (using some Roman numerals) 10 October 1991. It records "Rate ammended [sic] to 13.97%". November 1991 to March 1992 93 On 6 November 1991 Mr Eaton, the Manager of the BBC at Hurstville, wrote to Mr Alcock saying: "Further to our meeting on 23 October 1991 and our telephone conversation today I confirm that we will require the following in order … to complete a review of the matured loan facility for Illawong Village Pty Limited …"

As well as listing the information required, Mr Eaton requested that interest which had been charged to the account on 1 October 1991, and which was still unpaid, should be paid in the next few days. 94 On 10 December 1991 State Bank wrote to Illawong saying: "We refer to our letter of 6 November 1991 and subsequent discussions, and note with concern that the information requested has not been received nor has the interest payment due as at 30 September 1991 been satisfied. Unless these matters are rectified to the satisfaction of the Bank prior to 31 December 1991 we may have to consider taking legal action for recovery of the debt." 95 That letter enclosed a letter dated 9 December 1991 from State Bank to Freehill Hollingdale and Page Queensland, solicitors for Mr White, who had requested in early October 1991 that Mr White's guarantee of the debts of Illawong be released. That letter said: "We advise that ILLAWONG… is in default of its arrangements with the Bank and as such the request to release Mr White's guarantee from the Bank's securities has been refused." 96 Illawong provided some further information to Mr Fitzpatrick of State Bank by letter dated 18 December 1991. Mr Fitzpatrick received that letter on the same day as he received another letter from Mr Alcock dated 20 December 1991, which Mr Alcock opened by saying: "Further to our discussions about the calculation of our interest charges and the frustrations I have expressed to you about the past performance of the bank, I have gone right back through all my files and bank statements." 97 The letter set out three pages of complaints against the bank before turning to the question of interest. There then followed one page and a half of complaints about the way in which the bank had dealt with interest. These complaints related to the date when debits were made, and alleged inconsistencies or lack of explanation concerning particular debits. Particular complaints were made about debits of interest in October and November 1990, and January, April and July 1991. A theme of the complaints concerning January, April and July 1991 was that the Bank had, without explanation, departed from the practice it had followed since inception of the loan concerning charging of interest. Relevantly for present purposes, no complaint was made at that time that the bank was not entitled to charge at the same rate of interest it had been charging since inception of the loan. A complaint was made about a particular charge of interest which had been made on 1 October 1991, of over $328,000, which was considerably higher than interest charges which had previously been made. The letter concluded with complaining about certain debt administration fees alleged to have been improperly charged, totalling a little over $8,200. It concluded: "All in all, it seems we have been overcharged well in excess of $100,000 and so I will hand you the can of worms to see what you can come up with." 98 The question of the rate of interest which the bank had been charging was mentioned in the letter dated 18 December 1991, but not in a context of saying that State Bank was not entitled to charge 13.97%. One place where the rate of interest charged was mentioned was in explaining the 1991 accounts - Mr Alcock said that in that year "we paid interest of $1,456,000 which is $335,000 more than we would need to pay if we are granted a first mortgage for $9,750,000 (an increase of $500,000) at today's rates." Later in the letter, Mr Alcock pointed out that the amount of interest which would be paid on a loan of $9.75m, at current market rates, was less than the amount of interest which Illawong was paying to State Bank and St George combined, for loans totalling $9.25m. This was pointed to as a reason why Illawong was having a cash flow problem, and a reason why it would be appropriate for State Bank to lend Illawong $9.75m. 99 A memorandum of Mr Fitzpatrick's of 13 January 1992 records the then attitude of State Bank to the Illawong facility: "We are currently reviewing the account to determine if we will assist in full or part with the above request or if we will call-up our securities in relation to the existing expired advance." 100 On 26 February 1992 Mr Fitzpatrick requested an assistant to manually recast the account for the term loan, on the basis of interest being charged at 13.97% per annum charged quarterly on the last day of each financial quarter whilst the account is in order, interest being charged at 14.97% per annum charged quarterly on the last day of each quarter whilst the account was out of order, and a debt administration fee being charged quarterly at 0.2% per annum to the greater of the principal amount ($7.75 million) or principal plus arrears if that amount exceeded $7.75 million. 101 On 26 February 1992 Mr Fitzpatrick wrote to Illawong, stating that the Bank was not prepared to advance the amount required to discharge the second mortgage debt on the property, and that the Bank was not prepared to consider lending an additional $300,000 for capital works until the position regarding the existing advance was resolved. The letter noted that the current position of the fixed rate term loan was "balance $8,114,022.55 debit; expired 8/4/1991." The letter said: "It is noted with concern that the only attempt made to adjust the interest arrears during this calendar year is the $50,000 received 11 February, despite your statements that the debt can be serviced. Your request to refinance the existing expired loan of $7,750,000 plus partial capitalisation of arrears is currently being considered, however cannot receive favourable consideration while only nominal attempts are being made to service the debt. Immediate adjustments of the interest arrears is now required."

Various additional information was asked for, and the letter continued: "The contents of this letter should not be construed as an indication that your request for extension of the current facilities in default will be approved, merely that the request is being considered. The contents of your letter dated 20 December 1991 are currently being investigated and we will advise you of the results as soon as we can." 102 On 4 March 1992 Mr Alcock and Mr Davis met Mr Fitzpatrick and another bank officer. Mr Fitzpatrick recorded their request for finance made that day as follows: (1) Extend existing finance facility (expired) $7,750,000 (2) Capitalise arrears & costs $350,000 (3) Fitout of change over shop uses $150,000 (4) Refinance St George second Mtge $1,500,000 $9,750,000

His note continued: "Alcock & Davis were advised that it was extremely doubtful that SBN would be prepared to take out St George in the current climate, & if extension & capitalisation of arrears & fit out costs were approved would be on the basis of bank bills at a margin of 2.25% to 2.5% on 12 month basis only. Then requested 3 yrs [fixed rate term loan] - no - interest rate protection may be made available if they purchase a cap. If we approve the $8.25m (excluding St George) our priority will only cover us for $8.0m - customers to be advised that:- (a) St George priority will need to be raised or (b) St George may have to increase their debt to $1.75m (doubtful) or (c) Additional security will be required." 103 On 13 March 1992 Mr Fitzpatrick and Mr Alcock met. I will discuss that meeting in more detail in para [227] below. 104 Within one or two business days after that meeting Mr Fitzpatrick wrote a note to his assistant, Mrs Jan Fahy saying: "Jan, just spot check - customer will drop claim & accept what's been charged - but please check for me how October '91 int was assessed by computer - appears way too high." 105 On 31 March 1992 Mr Alcock sent Mr Fitzpatrick the information he had requested. Mr Fitzpatrick's Proposal of 7 April 1992 106 On 7 April 1992 Mr Fitzpatrick submitted, to those above him in State Bank, a proposal for financial facilities for the Illawong group. He recommended that approval be given to restructure and increase facilities, so that there was a fixed rate term loan of $8.25 m for 12 months at a margin of 2.25% per annum above the Bank's base lending rate, a bank bill facility of $100,000 for 12 months, and an overdraft of $50,000. One of the recommended conditions precedent was a new formal Deed of Priority between State Bank and St George fixing State Bank's priority at $8.5 m plus interest costs and charges. Another condition precedent was the registration of leases over two identified shops. A negative pledge was also to be required from Illawong. Mr Fitzpatrick recommended that overcharged interest of $32,117 be refunded to the customer's account upon acceptance of offer. This amount of $32,117 was an amount which had emerged from the manual recasting of the account which Mr Fitzpatrick had asked to be carried out. 107 In his commentary on the proposal, Mr Fitzpatrick wrote: "The company's facilities expired 4/91 … and since that time they have been seeking to have [State Bank] not only extend the expired facility but also to take out the expired second mortgage of $1.5m to St George … Delays have occurred in processing this request due to file papers being lost at BBC Whitlam Square, substantial volume of outstanding reviews acquired by BBC following restructure, staff absences due to the Bank's leave policy and delays in obtaining further information from customer to complete the review. Delays were also incurred in having to totally reconstruct the loan and trading account facilities following claim against the Bank (since dropped) in December 1991 for overcharged interest - discussed at annexure C." 108 In annexure C to the proposal Mr Fitzpatrick set out the history of the matter, including that "Branch Manager agreed to cease charging penalty interest." He continued: "In December 1991 customer lodged a claim against the Bank for overcharged interest of approx. $100,000 and accounts were totally reconstructed by BBC for the period 4/88 to 12/91 to check the validity of the claim. The reconciliation has revealed that, depending upon which interpretation the Courts give to the documents, we have either overcharged customers by $79,000 or undercharged them by $269,000. Having examined all Bank statements and correspondence for the period it is the writer's opinion that this matter should not be allowed to proceed to court as the Bank has failed to honour the loan contract on several occasions. It is considered that an acceptable return has been achieved on the facility given the "penalty rates" applied for the past 10 months whilst various proposals have been considered by not restructuring facilities at current interest rates, and attempting to collect the possible undercharged interest will only further impact upon customer's ability to service proposed commitments. In an attempt to diffuse the situation we have advised customers of our findings, and it was mutually agreed that the matter should not proceed. Customers did request, however, that the penalty interest rate of 20.25% pa imposed during the period 6/91 to 8/91 be reversed, which would necessitate a refund of $51,617. Given the fact that customers had lodged a proposal through BBC Whitlam Square and were awaiting decision this request is strongly supported, however perusal of the statements during the term of the loan reveal that Debt Administration Fees totalling $19,500 have not been collected and should be withheld from the refund. Accordingly a net interest refund of $32,117 is supported." State Bank's Letter of Offer 25 May 1992 109 On 25 May 1992 State Bank wrote to Mr Alcock and Mr Davis offering Illawong various banking facilities, including a 12-month fixed interest rate term loan for $8.25m. The purpose of the facility was stated to be "to repay Borrowers existing expired Fixed Interest Rate Term Loan of $7,750,000 and assist adjust arrears on that facility." The various conditions recommended by Mr Fitzpatrick were part of the facility letter. 110 The offer made by that facility letter was one which remained open for acceptance for 14 days. It was not accepted during that period. Rather, in June 1992 Illawong set about trying to raise $10m from other financiers, ABN Amro and Rural & Industries Bank. 111 On 4 August 1992 Mr Eaton wrote to Mr Alcock and Mr Davis, referring to "our (expired) Letter of Offer dated 15 May 1992", and saying: "The rate of interest payable on the expired term loan from maturity until settlement of any new facility will be calculated at 13.97%. As some interest charges have been made at a rate in excess of this an interest adjustment of $90,192.25 would be made to the account once the new facility was settled. Please note however that this offer of an interest adjustment does not waive the Bank's rights to charge a penalty rate of interest from maturity should a satisfactory resolution not be made on the matured term loan within the timeframe specified below." 112 Mr Eaton refused to agree to a complete waiver of the negative pledge, but agreed to modify it in certain limited respects. He stated that, with those amendments, the offer was re-open for acceptance for 15 business days from 4 August 1992. 113 Mr Alcock replied on 10 August 1992, saying: "As you know, we are greatly concerned about the overcharging of interest since the term loan expired and although we thank you for your comments and the proposed credit, we feel this does not adequately adjust the position. In the notes I gave you at our last meeting, I pointed out that the overcharge was in the vicinity of $500,000."

He also expressed concern about the loan being for only 12 months rather than 3 years, and about the negative pledge. 114 A meeting occurred on Tuesday, 25 August 1992 at State Bank's office at Whitlam Square, Sydney. Mr Alcock and Mr Davis attended for Illawong; Mr Eaton, Mr Salter and Mr Kevin O'Neill (not the Mr O'Neill who was the Managing Director) attended for the Bank. The Bank's files once contained a record of that meeting, but it was not tendered in evidence. None of Mr Salter, Mr O'Neill, and Mr Davis were called as witnesses. A credit proposal prepared by Mr Footit on 24 March 1993 includes the words "I understand the ongoing claim for interest concessions was settled and agreed between borrowers and Kevin O'Neill/Brian Salter in a meeting held 25 August 1992." 115 On 28 August 1992 Mr Alcock wrote to Mr Eaton, referring to the meeting the previous Tuesday, and making comments on the letter of 25 May 1992. Those comments included: "My notes show that some months ago at your office I raised the question that, although there may be some difference of opinion on the interest rate that had been charged up to that point, the interest rate from that point onwards should be at short term lending rates eg bill rate plus satisfactory margin. You commented "with a nod" that that would be given consideration. Could I please ask that you accept that position because obviously we are getting further behind at the rate being charged, and the capitalised interest will cause a problem with the priority required from St George by the time settlement is effected. I will provide you later with an opinion from our lawyer on the interest question." 116 Mr Eaton replied to that letter on 3 September 1992, saying: "The matter of the interest rate has been discussed at length a number of times and as stated clearly at our meeting on 25 August 1992 the rate being applied from maturity is 13.97%. As explained to you at the meeting the Bank offered to restructure and refinance the facilities by way of our Letter of Offer dated 25 May 1992 which to date you have chosen not to accept and accordingly through your inaction the interest has continued to compound. … This matter has now been dragging on far too long. We will extend the date for acceptance of our Letter of Offer dated 25 May 1992 until 11 September 1992 and request your acceptance or decline of the offer by that date. Should we not have resolution by this date then you will leave us with no option but to proceed with the issuance of default notices and commencement of action to protect the Bank's position." 117 That letter was faxed on 3 September 1992 to Mr Alcock. He replied to Mr Eaton by facsimile the same day, saying: "Thank you for your explanations in today's fax … There seems to be no choice other than to accept your offer … Accordingly we will send our acceptance. I note that there was to be a slight change to the negative pledge in accord with your letter 4 Aug '92. Does the letter 25 May 92 need changing. Please advise." 118 State Bank sent Illawong a fresh facility letter on 4 September 1992, which was open for acceptance until 11 September 1992. On the last day, Illawong communicated its acceptance. 119 The facility letter of 4 September 1992 had a provision in it concerning interest as follows: "FEES AND CHARGES: … The interest rate which shall apply to the facility limit will be set at 2.25% per annum above the Bank's Base Lending Rate for the facility term, which shall be determined upon the date of settlement. As an indicative quote only the interest rate which would apply if the facility was settled on the date of this letter is 8.85% per annum, however this may vary with market fluctuations prior to settlement. OVERDUE RATE: The interest rate which will apply to any late or unpaid interest or fee charges is the Bank's rate for accounts overdrawn without arrangements. The rate is determined by the Bank from time to time and is currently 6.0% per annum above the Bank's reference rate (at present 9.90% per annum). Reference rate is published in the major national financial newspapers on a weekly basis, and is subject to change with market fluctuations." 120 The 12-month term offered by the facility letter of 4 September 1992 was one which ran from the date of settlement of the facility. Notwithstanding that the offer made by that letter had been accepted, the financial accommodation it offered was never provided - rather, the money which had been advanced on 8 April 1988 continued to be owing by Illawong to the State Bank. 121 On 19 October 1992 the then solicitor for Illawong, Mr Robin Speed of Speed & Stracey, wrote a letter of advice which said: "You have sought our advice as to the interest rate payable after April 1991 under the loan facility from the State Bank of New South Wales to Illawong Village Pty Ltd. The relevant terms of the facility are set out in letters from the State Bank to the Company dated 17 November 1987, 11 December 1987 and 15 March 1988 and in Memorandum Number X208233. It is clear that the Bank and the Company negotiated an interest rate for the facility of the cost of funds to the Bank plus a margin. For the first three years of the facility it was agreed that the cost of funds to the Bank were fixed at the cost at the date of settlement. At the expiration of the three year period the cost of funds ceased to be fixed. … There is no reference in the letters or in the security documents to the money owing under the facility becoming due and payable at the expiration of the three year period. Rather, if the Review was carried out and if agreement was not reached between the Company and the Bank, the Bank was in a position to demand repayment of the money outstanding. See clause 3.1.1 of Memorandum Number X208233. What has happened is that the Bank has been reviewing the position since April 1991 and has made no demand for repayment. In the circumstances, it is my opinion that the facility has continued after the expiration of the three year period at an interest rate of the prevailing cost of funds to the Bank plus the agreed margin."

That letter gives no indication that Mr Speed was aware of the terms of the Charge or the 8 April 1988 Mortgages. Mr Whitehead's 1992 Involvement 122 In October 1992 Mr Alcock contacted Mr Whitehead, and arranged a meeting which took place on 29 October 1992. Mr Alcock gave Mr Whitehead a letter dated 28 October 1992 which said, amongst other things: "What concerns us is that over all that time from April, 1991 until now we have been charged the interest rate applicable to the fixed rate term loan which expired in April, 1991. We enclose a copy of an opinion from Speed & Stracey, Solicitors which confirms our view that we have been overcharged by a very large amount. We believe that the bank has adopted an incorrect approach not only in a legal sense but in a commercial sense and in a moral sense. Had the interest rates over that period been substantially higher than the old loan rate it is easy to recognise that the bank would have charged us the new rates and not merely the lower old rate. In summary the bank has charged us 13.97% for 18 months when they should have been charging rates ranging from say 6% to 10%. This represents several hundred thousand dollars. The company has experienced difficult times since July, 1991 and has spent a considerable amount of money on alterations and capital works. Also it was involved in a legal dispute with a tenant which cost us over $150,000. The result is that it has not been able to pay its interest as charged and this has naturally affected the banks approach. The bank is now proposing a $50,000 acceptance fee, only a one year loan and a 2½% margin. Could we please discuss a more reasonable facility which adjusts the overcharge." 123 Mr Whitehead was called as a witness in the case by Mr Alcock. Mr Whitehead gave evidence in an affidavit that, at that meeting on 29 October 1992, after Mr Alcock had put to him the assertion that Illawong should be paying interest at a much lower rate, he had said: "I will look into it for you as I don't know the answer or why your company is continued to be charged 13.97% when you should be charged at the current variable rate."

In cross-examination he accepted that he had not said the words "when you should be charged at the current variable rate." There is a high degree of improbability about a senior banker, at a first meeting with a client, and at a time when he was not in possession of the facts relating to the matter, making a statement potentially detrimental to the Bank's interests, like the one which Mr Whitehead agreed in cross-examination had not been made. Mr Alcock's affidavit gave an account of this meeting on 29 October 1992, which had Mr Whitehead saying, "when it seems to me you should be getting the current variable rate" . Words to that effect were not said. It is a matter of concern if two witnesses each give evidence which is in substance identical, and which is wrong. 124 On 30 October 1992 Mr Eaton sent a memorandum to Mr Whitehead, enclosing various documents relevant to the interest charged to Illawong, and saying: "The main point the client continues to focus on is the rate of interest accruing on the loan since maturity. The Bank has had no formal policy in place on how to deal with expired Fixed Rate Term Loans and these have generally continued at the previous interest rate until repaid. Lately however the practice has been to adjust the interest rate to the Bank's reference rate plus an appropriate margin. Depending upon the circumstances margins of 2.0% - 6.0% are applied (the Bank's standard default margin is 6.0%). Had the rate on this loan been adjusted on this basis at maturity then even at a margin of 2.0% the rate charged would have been in excess of 13.97% up until 14 February 1992 when reference rate was reduced to 11.75%. Reference rate has subsequently been reduced to 10.75% on 15 June 1992 and 9.90% on 17 August 1992. If any adjustment below 13.97% is to be made then we believe it may be justifiable to reduce the rate to reference rate plus 2.0% from their acceptance of the letter of offer (16 September 1992). We would however need to obtain legal opinion on this to ensure that we did not prejudice our prior position by making this arrangement. You will also note from the correspondence that they have repeatedly referred to a legal opinion regarding what rate their Solicitors believed the Bank should charge. This opinion has still not been provided to the Bank for our consideration. …" 125 On 29 November 1992 Mr Whitehead wrote to Mr Alcock, assuring him he had not forgotten the matter, that he was still looking into it, and would get back to him soon. Also on 20 November 1992, Mr Whitehead made a file note. "… discussed this matter with Messrs Eaton and Nagel at Hurstville on 17 November 1992 … Asked Darren Nagel to recalculate the position had the Bank been charging RR plus 2% pa since the FRL matured in April 1991. I stated that I felt that such a rate was perhaps more arguable than an arbitrary 13.97% pa. Darren agreed to do the calculation and come back to me as soon as possible." 126 On 29 November 1992 Mr Whitehead sent a memorandum to Mr Eaton saying: "I thank you for your memorandum dated 27 November 1992 and the attachments. It would seem that, at this stage, the fate of the client [is] in the hands of St George Bank. We should not yield to pressure to take it out of the deal … Addendum to the report on the meeting held on 7 April 1992 (prepared on 10 July 1992!!) states that the client was seeking pricing of Reference Rate plus 2% pa, from January 1992, at least. If the Bank were to have applied that rate since April 1991, the client would, indeed, have been worse off than the 13.97% pa rate which was charged. In the circumstances, if St George Bank does consent to the increased priority, the client would be well advised to sign the Bank's documentation as soon as possible." Illawong Loan Transferred to Special Loans Administration 127 On 9 December 1992 representatives of State Bank met with St George. By that time St George had appointed an investigating accountant to Illawong. St George was proposing to appoint a receiver and manager to Illawong, and to sell the shopping centre within eight to ten weeks. In fact no receiver was appointed. 128 On 15 December 1992 State Bank wrote to Illawong advising that administration of its account had been transferred to the Special Loans Administration at Ashfield, and that Mr Lyell was the man in charge of the account. The letter asked: "Would you please advise whether you are now in a position to comply with all terms and conditions of the letter of offer dated 4 September, 1992. As previously advised, due to the delay in settlement, we have had to seek an increase in the priority from St George to cover interest which has continued to accrue. At this time the Bank is seeking an all monies priority to cover the debt which will result from settlement of this matter." 129 On 16 December 1992 Mr Alcock sent a facsimile to Mr Lyell, referring to his letter to Alan Whitehead and the solicitor's opinion that accompanied it. He continued: "Irrespective of the legal position - surely the bank should take a compassionate approach given the delays in dealing with our loan between April 1991 & now. To charge us 14% throughout that period is a tremendous imposition on a matter that was not our fault." 130 On 16 December 1992 Mr Alcock telephoned Mr Lyell. Mr Lyell's note records: "He stated he was ready to settle the restructure to which I responded certain conditions had not been met. In particular the St George priority … Barry raised the matter regarding interest adjustments to which I responded I believe it had been previously resolved. He would send further info on situation. I advised that the St George priority at this time was holding settlement up. It was suggested he contact them to determine their stance on the priority." 131 On 18 December 1992 Mr Lyell met with Mr Alcock and Mr Davis. Mr Lyell's file note records: "The Bank pointed out to them, and eventually they agreed that it was up to them to ensure all conditions precedent including the St George priority were in place to allow the restructure to proceed. They would call a meeting with St George to determine its position and start addressing the conditions precedent. The matter of interest charged on the account was raised to which we remarked it was a side issue with the main focus to be on the proposed restructure … As far as we were concerned the interest matter had been resolved however would look at the file and revert back by phone" 132 On 21 December 1992 Mr Alcock faxed Mr Whitehead, saying that the Special Loans Unit "They were unaware of our query on the interest until I gave them copies of Robin's letter and my letter to you but they are still adopting a hard line that the bank is right. Are you still involved or are we totally in their hands?"

Mr Whitehead replied on 24 December 1992, saying that the Special Loans Administration would deal with the matter. 133 In the course of January 1993 St George agreed with Illawong to State Bank having priority for all its liabilities, to St George extending its $1.5m loan for 12 months from 1 December 1992, and that the St George interest rate would be reduced to 12% from 1 December 1992. However St George required that the State Bank debt be reduced below $8.5m and not exceed that amount, and that the St George Bank debt be maintained at $1.5m and not exceed that amount. The statements of the "16" account show that during January 1993 the debt to State Bank exceeded $8.777m. Hence the requirement of St George that the State Bank debt be reduced below $8.5m posed a potential difficulty to the refinance proceeding. 134 Once State Bank knew that St George had agreed in principle to extend its loan, administration of the Illawong account was transferred from the Special Loans Unit back to the BBC Hurstville. 135 On 4 February 1993 Mr Alcock wrote to Mr Lyell, enclosing St George's list of concessions and requirements. He continued: "You will see that they are prepared to give you the priority you sought so I presume we can now move towards finalising the arrangements. I know you were not previously involved with our many discussions with State Bank regarding interest charged to us on the loan since April 1991 and consequently the balance of the term loan account, but believe me, we feel that we have been unfairly charged at a high rate over the two years of continuously falling interest rates. We have been charged $2,000,000 in interest in that time when a reduction from 14% to an average of even 11% would have saved us $450,000. Were you to read the file fully you would see that the delays were certainly not all our fault and yet we are bearing the full responsibility because the bank continued throughout all the delays since April, 1991 to charge 14%. In order to put the matter to bed we need to have the debt to you at settlement maximised at $8.5m. This would require a greater credit for interest than the $90,000 offered by the bank in respect of the period to April, 1992. Could you please exercise, on behalf of the bank, some compassion for our problems and agree to a further credit, so that the terms of St George offer can be met. If you simply reduced the interest rate from the date we accepted your offer there would be a credit for $160,000. St George were kind enough to reduce their interest rate when asked and you said you would reduce your rate if they did." February 1993 to April 1993 136 On 4 February 1993 Mr Lyell wrote to Mr Alcock, saying that the administration of Illawong's relationship with State Bank had been transferred back to Mr Nagel at BBC Hurstville. 137 On 11 February 1993 Mr Alcock wrote to Mr Nagel enquiring whether he had seen Mr Alcock's letter to Mr Lyell of 4 February 1993, and asking what the procedure was from that time. Mr Nagel replied on 15 February 1993, saying: "At this stage, we are still considering how to proceed in relation to this matter and if we determine that it is possible to proceed on the basis of a new refinancing package, a proposal will be contained in a new Letter of Offer. If that is the case, we may be in a position to issue the new Letter of Offer during the course of next week." 138 By 22 March 1993 Mr Footit had the Illawong file at BBC Hurstville. In a discussion with Mr Alcock he confirmed his preference for a three year loan if St George would agree. Mr Footit was, by that time, working on a submission to his superiors in the Bank to his superiors in the Bank which recommended a fixed loan of $8.5m, and a bill line of $400,000. St George indicated that it would agree to a three year loan by State Bank, and to State Bank having priority for a total of $8.9m. Mr Footit proposed to Mr Alcock that there should be $200,000 per annum principal reductions off the bill line, at $50,000 per quarter in arrears. 139 On 23 March 1993 Mr Alcock wrote to Mr Footit, enclosing a copy of the legal opinion from Speed & Stracey. He continued: "Although you have said you will not be swayed by the letter I would appreciate some indication as to why the opinion is incorrect. It seems to cover points discussed by us and I don't think it is right to simply dismiss what he says is the correct interpretation of our position. As I mentioned I believe the bank at least should honour the undertaking to reduce the rate from December as done by St George. The bank has earned $6m from the Company in interest with $2m relating to the period since April 1991. Surely under the circumstances a more equitable resolution would be to reduce the debt to $8.5m." 140 Mr Footit submitted a recommendation for loan approval on 24 March 1993. It referred to the May 1992 lending approval, and stated: "The main hold up to settlement of the above approval was as follows: - Failure by the second mortgage St George Bank Ltd to acknowledge the Bank's increased priority in a re-structured facility. - Failure by borrowers to comply with the registration of tenancy leases. - and to a lesser extent, ongoing discussions over interest rate concessions. St George Bank Ltd advised SBN in a letter dated 22 February 1993 that it was willing to agree to all the debts outstanding to SBN under priority … I understand the ongoing claim for interest concessions was settled and agreed between borrowers and Kevin O'Neill/Brian Salter in a meeting held 25 August 1992."

That report also stated: "The claimed interest rate has been parried around by the borrower quite extensively however, whilst the borrower may have been disadvantaged by a delayed settlement, the delay in that settlement (up to 22/2/93) was not the fault of SBN. There may be some claim for the delays since that date and this should be conceded." 141 On 19 April 1993 the Credit Committee of the State Bank resolved to approve that application. 142 On 27 April 1993 State Bank issued a new facility letter, which made provision for (amongst other financial accommodation) a fixed term rate loan of $8.5m for a term of three years, with the interest being a margin of 2.25% above State Bank's base lending rate, and a commercial bill facility of $400,000 for which an acceptance fee of 2.25% would be charged on bills discounted. Minimum half yearly principal reductions of $25,000 were required from the bill line. The New Facility Agreement 143 State Bank issued a Facility Agreement on 26 May 1993. On 9 June 1993 the then solicitors for Illawong wrote to the solicitor for State Bank proposing certain changes to the documentation. State Bank's solicitor replied on 15 June 1993, saying which changes were agreed and which were not. 144 In the State Bank solicitor's letter of 15 June 1993 he said, in response to a statement from Illawong's solicitors that they assumed that the proceeds of the bill line would be available to meet legal costs at settlement, "… we are instructed that the Bill Facility to be provided is not intended to finance the legal expenses incurred by the customers in the refinance of the facilities. The approval of a commercial bill facility of $0.400m is merely intended to assist in providing for flexibility in debt reduction, ie Illawong Village Pty Limited can repay more than the required amount without incurring a penalty. An example of how the facility amount is derived was advised as follows:- Current balance of Fixed Rate Term Loan (expired) and expired leases $9,010,611.00

Less: Interest Concession $ 90,192.00 $8,920,419.00

Add: Application fees/legals & other $ Nil

Approved Facilities $8,900,000.00

We are advised that the debt has escalated since the date of the application and the Customers will therefore need to ensure that there is cash available to them to meet all costs and fees on settlement." 145 On 12 July 1993 Mr Footit sent a memorandum to Mr Quilty, the then Regional Business Banking Manager, which said: "We are now approaching settlement of the restructure of this facility, however, because of delays encountered between the initial date of application (24/3/93) and now, and the reduced monthly payment being made by the borrowers on the expired FRTL, the overall debt has escalated. On discussion with the borrower, and review of the file, it is apparent the interest rates charged require adjustment and that the excess of facilities required stem from that overcharging. The current FRTL expired in April 1991 and has been charged an interest rate of 13.77% since that time. Since May 1992 customer has been paying only $65,000 per month (in lieu of the required $105,000) to meet accruing interest. This reduced payment was on the advice of the borrower's solicitor and based on the solicitor's assessment of prevailing rates at the time. There has since been a "concession" by the Bank of some $90,192 which will be taken into consideration in the coming settlement. However, because of the continued monthly shortfall between interest charged and interest paid, the amount required to fully restructure the facilities is assessed as follows: Current FRTL Balance as at 9/7/92 $9,026,394 Add: accrued interest 1/7/93 to 31/7/93 $ 105,000 $9,131,394 Less: payment to be received 7/93 $ 65,000 $9,066,394 Add: expired leases $ 22,921 Add: application fee $ 50,000 $9,139,315 Less: interest concession $ 90,192 Total Facilities required $9,049,123 Total Facilities approved $ 8,900,000 Shortfall in approved facility $ 149,123

NB: Should settlement be effected by say 20 July 1993, then accrued interest will reduce by around $30,000. The escalation of the expired FRTL facility is reconciled as follows: Balance as at 24/3/93 $8,841,497 Add: interest debited May/June/July $ 314,777 LSD $ 78 $9,156,352 Less: payments May/June $ 130,000 $ 9,026,352

As can be seen, the escalation in the debt is due to excess interest costs which have arisen because of continued delays in settling the restructured facilities. The borrowers have continued to claim that the Bank is penalising them in continuing to charge a rate of 13.77% on the expired facilities when indications had earlier been given that a lower rate would be applied. Certainly internal correspondence (attached) points to discussions/considerations of a rate of R + 2%, which were never acted upon. This would result in an interest adjustment of approximately $120,000 if adjusted from 1/12/92. The borrowers further state that the Bank (via GAM officers) undertook to reduce the SBN rate to the 1 year fixed rate plus margin if St George reduced their rate. The relevant GAM officers dispute this and the associated office minutes do not support the borrower's claim. Already the Bank (via Kevin O'Neill and Brian Salter) have agreed to a concession of $90,192 for the period 7/4/91 (loan expiry) to 25/8/92. A start date of 1/12/92 has been adopted because this is when St George Bank reduced their rate from 17% to 12%. Clearly the bank needs to consider a further interest rate concession or agree to further loan facilities. The latter, however, will not be agreed to by St George Bank under the terms of their priority to SBN. It is submitted the Bank consider agreeing to the charging of interest at the Bank's reference rate plus a margin of 2% from 1/12/92 to the date of restructure. This would result in a further concession of interest of approximately $120,000. Whilst it is difficult to refund such income, I do believe in all fairness, a rate of R + 2% is a fair return to the Bank whilst restructure issues were satisfied. Recommendation It is recommended that the interest rate on the expired FRTL in the name of Illawong Village Pty Ltd be assessed to R + 2% on and from 1 December 1992 with the appropriate adjustments to be effected." 146 On 21 July 1993 Mr Footit wrote to a Manager, Credit Administration, in the State Bank saying that settlement was imminent, and continuing: "The attached papers, however, indicate that continued delays in settlement, together with the charging of penalty rates of interest, have resulted in approved facilities being exceeded when settlement of the restructure is completed. Whilst I am seeking an interest rate adjustment, based on past file indications, this paper has gone astray and again needs to be re-submitted. I am seeking your approval to settle the restructured facilities recognising the shortfall of $150,000 in the approved facility. This shortfall is to be carried on overdraft (unauthorised) until the interest adjustment is addressed." 147 Also on 21 July 1993, Illawong's solicitors returned an executed copy of the Facility Agreement to State Bank's solicitors. 148 As mentioned earlier, the new Facility Agreement which Illawong and State Bank entered on 23 July 1993 related to a fixed rate loan of $8.5m, for a term of three years, at a margin of 2.25% above Cost of Funds. As well, a bill facility of $400,000 was provided for 12 months from the first drawdown of the bill facility. The purpose of the fixed rate loan facility was stated, in the Facility Agreement, as being "to repay all existing facilities the Lender has extended to the Borrower upon Drawdown." Settlement of the New Facility, and its Aftermath 149 Settlement occurred on 26 July 1993. The Statement of Account for the "16" account shows that at the start of 26 July 1993 the account was in debit in the sum of $9,026,394.14. On 26 July 1993 there was credited to the account a refund of interest of $90,192, an amount of $59,211.92 which was transferred from Illawong's cheque account, $400,000 being proceeds of a commercial bill, and $8.5m being the new advance. An interest payment of $65,000 was also credited to the account. Amounts for administration fee, interest and financial duty were debited to the account that day. The whole of the administration fee, and part of the financial duty, was credited to the account on 28 July. Those credits on 28 July brought the account to a zero balance, whereupon it was closed. 150 On 26 July 1993 a new account, 491315-17 ("the "17" account"), was opened in the name of Illawong. The advance of $8.5m made under the new facility was debited to the "17" account that day. The new facility was thereafter maintained in that account. 151 Once the facility was drawn down, State Bank required that there be monthly management meetings attended by a representative of the Bank, a representative of Illawong, and the managing agent. The first such meeting was held on 27 July 1993. Mr Footit's note of that meeting includes that he, "… confirmed with Davis and Alcock the settlement of the restructure and pointed out the account excesses and adjustments by providing copies of statements of all accounts. Decision on further interest adjustment is awaited."

Mr Footit's note recorded as one of the "outstanding administration items" "decision of interest rate adjustment". While Mr Alcock disputes that at that meeting he was provided with copies of statements of all accounts, I prefer the contemporaneous record. 152 On 4 August 1993 a bank officer wrote to Illawong saying: "We wish to advise that settlement of your approved Fixed Rate Term Loan facility of $8,500,000 and Commercial Bill facility of $400,000 was effected on 26 July 1993. Proceeds have been applied as follows:- * REPAY EXISTING TERM LOAN A/C 491315-16 $9,049,413-92 * REPAY LEASE A/C NO.491315-33 $ 4,365-32 * REPAY LEASE A/C NO.491315-34 $ 18,748-30

$9,072,527-54 The shortfall of $172,527-54 was made up by interest concession of $90,192 for period 7 April 1991 to 25 August 1992 and debit to your No.1 account $82,335-54. … Term Loan Details of this facility are as follows:- * Interest Rate fixed at 8.68% p.a. for 3 years. * First reduced instalment of $12,136-10 will be debited to your No.1 account on 31 July 1993. This represents interest from date of settlement to 1 August 1993. * Monthly instalment $65,418-40 effective 26 August 1993. Please note your first quarterly principal reduction of $50,000 will be due 26 October 1993." 153 On 17 August 1993 a new Priority Deed was entered between State Bank, St George and Illawong. It agreed to the Charge having priority to the extent of $8.9m plus all interest, costs and charges, and to a company charge taken by St George ranking after that. There does not seem to have been any new deed of priority so far as Real Property Act mortgages were concerned. 154 On 14 September 1993 Mr Alcock sent a facsimile to Mr Gillingham, at BBC Hurstville saying: "Could you please help us to understand some of the entries on our statements & get the general account adjusted in accordance with Steve's advice in July. Steve said the general account overdraft would be credited with $120,000?? Which represented a reduction in interest from January 1993 to settlement. This is not to be confused with the credit for $90,192 which came about because of an overcharge in 1991 & 1992. … We continue to be charged interest on the overdraft. Will part of it be rebated when the credit in is passed?" 155 On 17 September 1993 State Bank passed a credit for $144,318.26, to Illawong's account numbered 491315-00. The voucher which raised the credit states it is being for "refund of interest accrued". On 22 September 1993 State Bank raised a further credit to account number 491315-00, in the amount of $3,156.18. The document raising that credit stated it as being for "refund of interest". 156 On 21 September 1993 Mr Gillingham gave Mr Alcock a letter which replied to his facsimile dated 14 September 1993. The response adopted the same paragraph numbers as the facsimile. It said: " Preliminary calculations indicated an interest refund of approximately $120,000 in excess of the $90,192 previously refunded. On recasting the facility an amount of $144,318.26 was recredited to account 491315-00 on 17 September 1993. … An interest adjustment of $3,156.18 has been made on 21 September 1993." 157 That letter was handed over at a meeting attended by Mr Gillingham, Mr Davis, Mr Alcock and Mrs Davis. The file note of that meeting includes the following: "Following approval and reimbursement of Bank Interest to account No. 491315-00 $144,318.26 and $3,156.18 account is still in excess approximately $12,000. Discussions held with Lorraine Davis [Advise] they are looking at ways to adjust, this will probably take the form of monthly reductions, amount to be specified. Discussions were also centred around the proposed principal reductions as specified in the approval. Proposed reductions C/Bill $25,000 Dec/June FRTL $25,000 Dec 93 $50,000 Jan 94

Reductions Approved include: C/Bill $25,000 ½ yearly FRTL $50,000 ¼ yearly C/AC $10,000 Annually (village properties)

The first of the proposed principal reductions falls in line with proposed cash flow surpluses." While the New Term Loan was in Place 158 On 6 December 1994 agreement was reached between State Bank and Illawong for a bill acceptance and discount facility for $300,000, for a 12-month period. Replacement of the $400,000 bill facility by this $300,000 facility meant in effect that a principal reduction of $100,000 was made. 159 The various capital reductions which were a term of the new facility settled in July 1993 were not all made in the period up to March 1995. On 7 March 1995 Mr Footit, having received draft 1994 accounts from Illawong, and a cash flow forecast, proposed that capital reductions be made in April and August 1995, and February 1996. On 8 March 1995 Mr Alcock responded to that proposal saying: "I thought I should make some observations so that you could appreciate the position we are in and how we have done all that we could under difficult circumstances. I think it is worthwhile to cover a little history to realise the effect it has had on us. Way back in March 1991, I anticipated a need for reserve funding and I applied for additional funds to take our existing loan to $8.25m. Had we received the loan at that time things would have been different. The bank offered in May, 1992 and again in September, 1993 a loan which we accepted. It did not involve any capital reductions. It took 12 months to put the loan into place and at the last minute capital reductions were called for. By that time we had no choice." 160 He went on to explain how the recession and unfavourable trading conditions, and the need to make some capital works, had impacted badly on Illawong, and continued: "Because of the horrible mix ups we have incurred over $1m in unnecessary interest - we have not received the $500,000 we wanted for our cash flow - we have paid off $100,000 and we still owe the bank $8.8m. Not really a good picture compared to what I wanted originally."

He went on to request "… the breathing space we require to conduct our business and negotiate better leases to achieve a better income." 161 On 5 June 1995 State Bank agreed to defer principal reductions until 30 September 1995. 162 On 19 October 1995 State Bank wrote to Illawong, referring to the forthcoming expiry of the commercial bill facility, noting that Illawong sought to renew the bill facility, and setting out information the Bank would need before it could consider any such request. The letter stated that: "… at this time approval is not held to extend the facility and in the absence of such approval the Bank will retire the Commercial Bill Line to the company cheque account." 163 On 20 November 1995 administration of Illawong's account was passed to the Asset Management Group at Parramatta. 164 Mr Alcock recorded State Bank's attitude to the Illawong loan in a letter he wrote to Mr Williams on 19 December 1995. "Firstly I acknowledge that you have made us fully aware of the bank's position. That is, it wants to exit the loan, does not want to be involved in any way in any redevelopment for the centre and seeks capital reductions in the interim. The bank also wants assurances that we are addressing the problems and are moving towards those ends. Our options are: 1. sell now and exit the bank 2. sell later and exit the bank 3. refinance and exit the bank 4. increase equity by way of a partner and then refinance and exit the bank Our preferred option is number 4 and we have told you of our moves in that direction."

He went on to request a reinstatement of the bill facility. 165 On 2 February 1996 Mr Williams wrote to Illawong saying that the request to re-establish the commercial bill line was declined, and saying: "The account is to remain in default in a Current Account (at an interest rate of Reference Rate plus a margin of 2%) pending refinance."

While State Bank temporarily deferred any requirement that there be principal reductions, Mr Williams stated "It is expected however, that accruing interest on all accounts is to be met on a monthly basis." 166 On 7 June 1996 Mr Williams wrote again to Illawong, saying: "The Bank is extremely concerned as to your lack of results in repaying the Banks debts and the fact that it now appears unlikely that same will be achieved prior to the expiry of the Fixed Rate Term Loan. The Bank does not intend to extend this facility and in the absence of repayment or other arrangements, the loan will be converted to a variable rate facility at a rate of Reference Rate plus a margin of 2% (currently 13.25% in all)."

He reiterated that the Bank expected that accruing interest on all accounts continue to be met on a monthly basis. After Expiry of the Second Term Loan 167 The three year fixed rate term loan was not repaid on 26 July 1996. On 7 August 1996 Mr Williams gave an instruction to treat the expired fixed rate term loan as a variable rate loan, at an interest rate of Reference Rate plus 2%, with the interest adjustment dated to 26 July 1996. Mr Williams wrote to Illawong on 7 August 1996 to inform the company of that step, that the loan was deemed to be in default, and that State Bank expected that Illawong would continue to meet all accruing interest on a monthly basis. 168 Mr Williams was aware that Mr Alcock asserted that he had a claim against the bank for overcharging of interest. On 23 August 1996 Mr Williams sent a facsimile to a mortgage broker who Illawong had engaged to obtain refinancing, holding out the prospect that the bank might agree to certain concessions, subject to conditions, one of which was "an undertaking by the borrower/guarantor not to sue in respect to any other alleged claims in respect of these facilities." A report from Mr Williams to the Indemnified Loans Committee on 9 September 1996 concerning the Illawong loan recorded: "The borrowers also advise that they intend making a claim on the bank for alleged interest overcharging in early 1990. Full details of such claim are not yet to hand."

The 1990 date is wrong, but the note confirms that Mr Alcock was at this stage threatening a claim. 169 On 12 September 1996 Mr Whitehead, who by then was acting for Illawong, wrote to Mr Glover enclosing a document which Mr Alcock had prepared which set out his case, and saying: "The main issue is the basis on which the Bank continued to charge interest after the first fixed rate loan matured in April 1991. I questioned Mr Alcock on whether Illawong was in technical default and, therefore, subject to penalty interest rates. He said that Illawong had not been able to pay full interest rates at 13.97% pa during the "limbo" period, and that the Bank had agreed to capitalize the shortfall. It still begs the question though as to, even with a penalty interest rate, why the overall rate structure did not reduce as the underlying interest environment improved. Whichever way you might look at the proposal, there are a number of matters that need attention. Mr Alcock has expressed concern that, over a period of about five years, he has not had a satisfactory response. I realize that, if Illawong is in AMG, the Bank would have some problems with the account. I also know that he is close to consummating a refinancing deal that would be acceptable to the Bank. While he proceeds with the refinance, however, I would appreciate your looking in to the history of the account during the period from April 1991 to July 1993 in particular, and arranging a meeting for us to discuss the outcome in some detail." 170 Mr Alcock, Mr Whitehead, Mr Ward and Mr Williams met at Parramatta on 10 October 1996. Mr Alcock repeated his claim that Illawong had been overcharged interest. One of State Bank's representatives said they would look into it. 171 When no answer was received, Mr Alcock wrote to Mr Stuart James, the then Managing Director of State Bank, a letter dated 4 November 1996 which set out his then complaints. "1. The matter relates to my company Illawong Village Pty Ltd. 2. The company borrowed $7.75m in April 1988 on a loan for 3 years with a fixed interest rate of 13.97%. 3. The company met all interest payments. 4. In accordance with the loan agreement the company had discussions in November 1990 and in March 1991 that led to a full application for refinance being lodged on 7th May, 1991. 5. A series of happenings involving the loss of the file, long periods of inaction by the bank and continual changes of staff meant that the refinance was not completed until 26th July, 1993. 6. Throughout that period I had contact with as many people in the bank as I could to request a reduction in the interest rate being charged. It was still 13.97%. 7. Our initial loan carried a margin of 1% above the banks cost of funds and throughout the two and a half years it took to refinance interest rates were falling. Between April 1991 and November 1991 the 90 day bill rates fell by 3%. By June 1992 they had fallen a further 2%, by February 1993 they were down to 5.86%. 8. With an appropriate margin our interest rate should have been between 6.86% and 9.61%. 9. We were unable to pay the 13.97% being charged but actually paid an average of 9% per annum. 10. As a result the debt rose from $7.75m to $8.9m before it was refinanced. 11. In 3 years we have paid interest on this higher debt at an additional cost of $300,000. 12. I have received several legal opinions that confirm the opinion given by my Solicitor in October, 1992 which was provided to the bank at that time (copy enclosed). 13. I have had no explanation provided by the bank offering an alternative interpretation of our contractual position between April 1991 and July 1993. 14. The financial impact on me and my company has been disastrous and I now find myself in a position where the loan is in the hands of the Asset Management Group and the indemnified loans committee and still no thought is being given to explaining to me why my legal advisers are wrong. 15. If we did not have the increased burden of $1.5m caused by the excessive interest and the interest on that sum over the past 3 years we would be able to refinance the loan. Now the bank may force a sale and cause me considerable damage as I have plans to expand the centre and make several million dollars profit. 16. I am quite prepared to recognise that the bank may take a strong view contrary to my legal advice but it would help if I knew what that view was. 17. I have no desire to enter into a protracted legal battle with the bank but I do feel that I have been improperly treated both legally and morally." 172 This letter appears to have been received by State Bank on 11 November 1996. The Customer Relations Centre of State Bank replied on 13 November 1996 saying that the concerns were being investigated. Mr Alcock wrote again to Mr James on 22 November 1996 enquiring whether he had seen the complaint before it was handed on to Customer Relations. The reply which State Bank sent to Illawong was a letter dated 20 December 1996 which was polite and uninformative: "Thank you for your letters dated 4 November 1996 and 22 November 1996 regarding the difficulties you have experienced in relation to your various loans. The Managing Director has asked that I, as Head of Financial Services, respond on his behalf. I can assure you that Stuart James is aware of this matter. I understand that Pat Ward, Area Manager Asset Management Group, is having ongoing discussions with your representatives in an endeavour to resolve the matter. I apologise for any inconvenience and again thank you for taking the time to write to express your concerns." 173 The views of Mr Williams and Mr Ward concerning Mr Alcock's claim are, it seems to me, more likely to be captured by the memorandum which Mr Williams wrote on 14 November 1996 to the then Head of Risk Management in response to Mr Alcock's complaint. "Illawong Village Pty Ltd is an account being administered by Asset Management Group. The loans are currently in default by virtue of expiry of all facilities and defaults on debt reduction conditions. The borrower's complaint relates to a claim on the Bank for $1.45m for alleged interest overcharging in early 1990. This matter has been addressed by various Bank management on a number of occasions and refund of $90k was approved in 1993 by Salter/O'Neill. We had legal opinion at that time which suggest the Bank could defend any such claim, however a refund was made on a concessional basis. The exact amount of the refund is not clear as our records are incomplete, but it appears an even greater refund (up to $210k may have been granted due to further delays in settling the loans after the Salter/O'Neill approval). It appears a release from further claims was not obtained upon settlement of the refund. The following addresses Mr Alcock's issues in the order in which they are raised: 1. Agree 2. Agree. Rate was 13.98%, being cost of fund plus a margin of 1% 3. Agree, up until expiry of the loan. After that time they, on occasion, met interest at a rate they felt appropriate. On other occasions payments were not received and funds diverted elsewhere. 4. An application may have been lodged (I am unable to confirm) however the file indicates the application when received was inadequate and required further information. 5. The borrower appears to be trying to make the point that the delays in settlement were due to Bank delays. My understanding is that the major reasons for the delay in settlement was that they could not comply to reasonable 'Conditions Precedent', being the registration of all leases, and their second mortgagee, St George Bank, would not consent to the proposed increased priority. In fact St George were at the point of appointing a receiver and only backed down after AMG convinced them otherwise. 6. Unable to confirm or deny. 7. I agree with the premise that rates were generally in declining [sic] during the limbo period. 8. What we have here is a defaulting customer telling the Bank what interest rate he should have been charged. He refers to the prevailing Bill rates when he had never had a Bill facility. He does not make mention of the prevailing Reference Rate which would be a more appropriate benchmark for a defaulting FRTL. 9. The borrower would have us believe his lack of serviceability stemmed from the interest rates being charged. In fact the problem stemmed from poor management (Alcock was managing the Centre at the time in lieu of a professional Centre Manager and the centre had chronic arrears and vacancies) and the performance of the business. 10. As mentioned in 3) above, the reason the debt increased was because on occasion they met interest at a rate they felt appropriate. On other occasions payments were not received and funds diverted elsewhere. 11. I am unable to comment on this issue. 12. We are aware of one legal opinion held by the borrower. We have our own contrary legal opinion. 13. As noted above, this matter has been addressed (one on one) on numerous occasions by various levels of management ranging from various Account Managers, senior, experienced BBC Managers, BBC Area Managers and the Head of Business Banking. I simply cannot accept that no one in the past has provided the borrower with an alternative interpretation of the legal position. From an AMG perspective, I have attended at least two meetings where the Banks position has been put. 14. AMG has not mentioned the existence of an ILC to the borrower. 15. It is our understanding the borrower has in fact arranged refinance. A copy of the letter of offer is held which is now expired. It is understood the borrowers are currently attempting to have the offer reinstated the outcome of which should be known by the end of the week. 16. I do not feel the Bank should make the borrower privy to our legal advice. 17. Legally and morally the borrower has been treated fairly. In summarising the Bank's position, it acknowledges the initial FRTL expired and it took some two years to effect a renegotiation of the facilities. The Bank asserts the delays were caused in the main by the borrower. On the issue of the equity of the rate being charged following expiry and renegotiation, the Bank has looked at the issue and completely recast the loan following expiry on the basis of a floating rate at R+2% and made interest adjustment as a concession. Accordingly, as far as the Bank is concerned, the issue has been addressed. In the writers opinion the borrower is aware that the Bank is getting close to the stage where it is about to act in respect to the defaulting facilities. This 'old chestnut' has again been raised as a smoke screen to divert attention away from the real issues. The real issues are the borrowers expired, defaulting loans. Just as in the past, the borrowers are again refusing (or are unable) to meet the current market interest rates on their expired facilities (R+2%). Accordingly debt is increasing. Borrowers have been promising a sale or refinance for over 12 months without result. Pat Ward has been negotiating directly with the borrower and their representative in an attempt to have the debt repaid. He has indicated that if refinance could be effected, the Bank may consider further interest concession to finalise matters." 174 Mr Ward wrote on that memorandum on 14 November 1996. "Noted, we have been having ongoing discussions with Alcock and his advisor (Whitehead) and hope to settle the interest claim on repayment of Bank debt. We are also having difficulty locating old files to confirm the exact amount already refunded." 175 On 13 January 1997 Mr Williams wrote to Illawong saying: "It is understood that your attempts to refinance your loans with, initially Norwich Union and later Bank West, has been unsuccessful. In this regard you are requested to advise your current intentions and time frames to repay your indebtedness to the Bank. As you continue to pay an amount insufficient to meet accruing interest, your debt continues to rise. Clearly, given your inability to contain the debt or refinance, the situation cannot continue. You are requested to give this matter your urgent attention." 176 Mr Williams made a file note on a copy of that letter: "Alcock's secretary phoned 15/1 & advised he is on leave till 27/1 & requested we wait until then for our reply. I requested Ross Davis to reply in Alcock's absence but he does not wish to do so. More of the same. Delays!" 177 During the last several months in 1996 the principal tenant in the shopping centre had a lease which was due to expire. Negotiations were underway for Coles to lease that space, but were proceeding slowly. Both Illawong and State Bank recognised the undesirability of selling the shopping centre without an anchor tenant. 178 On 17 January 1997 Mr Williams prepared a report for the Indemnified Loans Committee. That report summarised each account of Illawong and of Village Properties Pty Limited, including stating the amount owing, and the interest rate. The interest rate was reference plus 2%. The report included statements that: "Borrowers continue to pay interest on a monthly basis at the rate of the expired Fixed Rate Term Loan. Accordingly the debt is escalating at a rate of approximately $27,000 per month. … The bank's strategy to date has been to exit this relationship by sale, refinance and/or call up. The method and timing of such strategy was to be further determined following receipt of reports from Retail Management Consultants. Approval was given 13 September 1996 to defer the above report pending refinance or determination same will not occur. It has become apparent that a commitment by an anchor tenant (Coles) is required in order to secure a refinance. The borrowers are currently on leave returning 27 January. Following their return we intend to meet with them and attempt to ascertain the timing of Coles commitment. Should same not be forthcoming in the near future it is proposed to instruct the previously appointed Retail Management Consultants to prepare a report for the Bank. In the meantime the position is to be updated on a monthly basis to ILC." The January 1997 Agreement Re $70,000 Payments 179 It is common ground between the parties that on or about 31 January 1997 a meeting took place at the offices of State Bank at 150 George Street, Parramatta between Mr Alcock, Mr Whitehead, Mr Ward and Mr Williams. It is common ground that at that meeting a consensus was arrived at that Illawong would thenceforth make monthly payments of $70,000. The dispute concerns whether that payment of $70,000 per month was to be a total discharge of Illawong's ongoing obligation to pay interest, or whether it was merely to be a payment on account of interest. 180 While the term loan which was drawn down on 26 July 1993 remained on foot, Illawong made regular monthly payments of $65,418.40. The monthly interest which State Bank charged on the loan depended upon the number of days in any month. For a 30-day month it was $60,255.83. As well, quarterly payments of debt administration fee was debited to the account, and there were regular small debits for financial institutions duty. The regular payments which Illawong made were able to keep the debt, apart from occasional lapses for a few days, below $8.5m. 181 When that loan was, on expiry, treated by State Bank as a variable rate loan with an interest rate of Reference Rate plus 2% (see para [167] above) the amount of interest charged each month became greater than it had formerly been. A statement issued by State Bank on 29 July 1996, and which bears a "received" stamp, of the type which Mr Alcock's office used, dated 30 January 1997, shows that in the period 29 July 1996 to 24 January 1997 the debt had increased to $8,579,450.80. Illawong had, during this time, continued to make monthly payments of $65,418.40. 182 Mr Alcock's account of the conversation at the meeting on 31 January 1997 is as follows: WILLIAMS: "The debt is increasing every month". ALCOCK: "The company's debt is increasing because the bank is charging a rate of interest which is unreasonable having regard to current market rates and the cost of funds to the bank". WARD: "Ross, please calculate what the monthly interest is at the reference rate". WILLIAMS: "It comes out at a bit over $69,000 a month". WARD: "Well say $70,000 a month. Can Illawong pay that amount each month"? ALCOCK: "The company would be able to manage that amount". "I then heard Mr Williams say to Mr Ward "Is this something the bank could be comfortable with"? Immediately after this comment, I observed both Mr Ward and Mr Williams looking at a file which appeared to be a bank file with a large number of documents and they appeared to be reading those documents. Both Mr Ward and Mr Williams continued speaking to one another however I cannot recall what they said to each other. After a few minutes Mr Ward said to the meeting "Yes $70,000 is an amount which the bank would be comfortable with each month. That should stop the debt increasing OK"? ALCOCK: "OK"." 183 Mr Whitehead gave an account of a conversation in his affidavit as follows: WILLIAMS: "The debt is increasing all the time." ALCOCK: "The interest rate the bank is charging is unreasonably high having regard to current market rates and the company is having difficulty meeting these rates." WARD: "What do you say Illawong can pay each month?" ALCOCK: "About $70,000. The company would be able to manage that amount." WILLIAMS: "Is that an amount the bank would be comfortable with? $70,000 a month equates to a rate of (he stated a percentage rate which I cannot now recall)". "Either Mr Ward or Mr Williams then said "$70,000 a month is an amount the bank would be comfortable with. The bank will accept $70,000 a month from the company. Is that alright?" ALCOCK: "Yes". 184 I take the following matters into account in deciding whether there was any agreement that the $70,000 per month payment would be a payment which was a total discharge of Illawong's ongoing obligation to pay interest. 185 Mr Whitehead's affidavit evidence did not include the element which Mr Alcock included in his affidavit, whereby Mr Ward said "That should stop the debt increasing" - the clearest indication in Mr Alcock's account that the payment of $70,000 per month was intended to be a total discharge of obligation. 186 Mr Ward gave evidence. He denies that at the meeting on 31 January 1997 he said the words "That should stop the debt increasing OK". 187 The conversation in January 1997 took place in an environment where Mr Alcock and Mr Whitehead were of the view that State Bank was thinking about enforcement action. Mr Whitehead said that the Bank was threatening to put in a receiver, "… from when shortly after we first were speaking with them when I was involved, which would have been probably December 1996, up to and including probably a week or 10 days before settlement took place in 1998. We were walking on a knife's edge for nearly two years." 188 It is difficult to see a reason why the Bank was likely to be willing to agree to an interest concession, at least outside the context of the debt being refinanced. Both Mr Ward and Mr Williams had given detailed consideration to the matter in November 1996 (para [173] above), and at that time were unsympathetic to any reduction in interest, outside the context of a refinance. There is no evidence of anything having happened between November 1996 and January 1997 which might cause Mr Ward and Mr Williams to change their mind. Under the Deed of Priority, State Bank had priority over St George for $8.9m plus interest and costs - thus, even though the total indebtedness of Illawong to State Bank at the end of January 1997 was around $8.9m, part of that sum was unpaid interest, and allowing further interest to accrue would not relegate State Bank in priority. As well, State Bank had personal guarantees from directors for the whole debt (though it should be said that State Bank valued these at zero in its assessment of the value of the security, and there is no indication in the documentation of the Bank giving consideration as to whether it would actually seek to enforce the guarantees.) 189 Neither Mr Alcock nor Mr Whitehead made any note of an agreement of the type which Illawong alleges, and no mention of it was made in any contemporaneous documentation. It is an agreement of some importance, of a type which it would be imprudent not to record in writing, or confirm with the Bank in writing. Illawong needs to overcome the difficulties inherent in the Court being persuaded that memory alone has accurately captured nuances of a conversation years after that conversation occurred: Watson v Foxman (1995) 49 NSWLR 315. 190 The contemporaneous records are all inconsistent with the existence of an agreement like that sued on. 191 On 4 February 1997 Mr Williams made another report to the ILC. It continued to show the account of the expired term loan as attracting an interest rate of reference plus 2%. The report included: "To date the borrowers have continued to pay interest on a monthly basis at the rate of the expired Fixed Rate Term Loan ie $65,000 - whereas the actual interest that was being charged amounts to $91,000 - (@ R+2%). Accordingly the debt was escalating at a rate of approximately $26,000- per month. Following recent reductions in Reference Rate the average monthly interest on the former FRTL equates to approximately $86,000-. The borrowers maintain the business still cannot afford to meet the full interest accrual however arrangements have now been made for the monthly interest payment to be increased to $70,000- which represents a return of close to that of Reference Rate. The borrowers have undertaken to provide management accounts to support their servicing argument." 192 Mr Williams prepared a report for the ILC on 3 March 1997. Again it recorded the expired term loan as attracting an interest rate of reference plus 2%. The body of the report stated: "As indicated in the last update the borrowers have agreed to increase their interest payments to the Bank to $70,000-per month. The first payment was received 10 February 1997. Whilst this is still insufficient to meet accruing interest which averages at $85,000-per month, it still represents a return equating to approximately Reference Rate."

A notation on that report by Mr Cole, one of the government representatives on the ILC, dated 7 March 1997, states "Noted. Increased monthly payment of $85,000 to be sought on a best endeavours basis." 193 Mr Williams' report to the ILC dated 8 April 1997 continues to record the expired term loan as attracting an interest rate of reference plus 2%. It includes the statement: "Borrowers continue to meet interest payments to the Bank of $70,000-per month. Whilst this is still insufficient to meet accruing interest which averages at $85,000-per month, it still represents a return equating to approximately Reference Rate. As requested by ILC in their notation of 7 March 1997, we have requested the borrowers to increase their payment to meet the full interest accrual, however they again maintained that the current payment of $70,000- is the maximum payment they can meet." 194 Mr Williams' report to the ILC dated 28 May 1997 shows the expired term loan facility attracting interest at Reference Rate plus 2%. It includes the statement: "Borrowers continue to make interest payments to the Bank of $70,000-per month. Whilst this is still insufficient to meet accruing interest which averages at $85,000-per month, it still represents a return equating to approximately Reference Rate." 195 Mr Williams' reports to the ILC dated 10 July 1997 and 19 August 1997 contain the same features as I have quoted from the 28 May 1997 report. 196 State Bank had procedures which were followed when the interest rate on a customer's loan was changed. Statements and other accounting documents were ordinarily generated by computer, and a particular type of document was used to instruct those maintaining the computer system to alter the rate in the computer. No such document exists concerning any change in the interest rate to be charged to Illawong from 31 January 1997. 197 In fact statements continued to be produced relating to the loan account, which showed interest being debited at a rate which exceeded $70,000 per month, and which also showed actual payments of $70,000 per month. Such statements were sent to Illawong covering the period 25 January 1997 to 25 July 1997, the period 26 July 1997 to 23 January 1998, and the period 24 January 1998 to 24 July 1998. Those statements show signs, in the forms of ticks against various entries, of having been examined. No complaint was made that State Bank was charging interest on a basis different to what had been agreed on 31 January 1997. Indeed, no complaint was made about excessive charging of interest rates in the period following 31 January 1997 until the Statement of Claim was filed in this matter on 2 August 2000. 198 On 7 November 1997 Coles signed a lease of the main tenancy of the centre. Various attempts by Illawong to find refinance were unsuccessful, until a loan approval from the Howard Group on 15 May 1998 approved a loan of $9,100,000 subject to certain conditions. State Bank stated, on 27 May 1998, that that finance approval was insufficient to fully discharge the bank debt, and the bank was not prepared to accept that amount. On 30 July 1998 State Bank made demand on Illawong to repay the amount owing on account number 491315-03 (namely $320,202.93), and the amount owing on account number 491315-17 (namely $9,199,170.40). 199 On 11 August 1998 Mr Alcock sent a facsimile to Mr Williams saying: "I know you've been worried about our capacity to pay the bank out. To address the issue and demonstrate our credibility I have banked $350,000 to reduce the loan account. At settlement - you can rest assured you will be paid out in full." 200 The amount which State Bank claimed was due to it was paid on the settlement. Because the amount being obtained from the Howard Group was not enough to pay out the loan, it was necessary for the shareholders to find extra money to pay out State Bank. All this happened without any claim being made that State Bank had charged more interest in the period since 31 January 1997 than it was entitled to charge. 201 On 6 February 1997 Mr Alcock wrote to Mr Williams a letter saying, "Enclosed is a cheque for $70,000 being January interest payment on the above loan." Letters in similar form, with only a change in the month mentioned, were sent on 5 March 1997, 2 April 1997, 2 May 1997, 2 June 1997, 1 July 1997, 4 August 1997, 2 September 1997, 2 October 1997, 6 November 1997, and 2 December 1997. However, in each September, October, November and December 1996 Mr Alcock had written to State Bank a letter saying "Enclosed is a cheque for $[amount] being [month] interest payment on the above loan." In those circumstances I do not regard the form of the letters sent after 31 January 1997 enclosing the monthly interest cheque as confirmation that an agreement was reached fixing the interest at $70,000 per month. 202 When discovery was given by Illawong in this matter, it was given by making available to the solicitors for State Bank, photocopies of the relevant documents. Shortly before the trial, solicitors for the Bank asked to see the originals of various of the discovered documents. Some pencil markings on five or six pages, out of 300 or 400 pages produced, had been rubbed out, when the originals were produced to the solicitors for State Bank. One of the documents on which pencil markings had been rubbed out was a statement for the "17" account, for the period 26 July 1997 to 23 January 1998. Mr Alcock was the person who did the rubbing out on that bank statement. He did the rubbing out on that bank statement in the two or three weeks before the trial started. The original of that statement, when produced, had a note on it, in pen in the handwriting of Lorraine Davis "$9,253,900 payout as at 26/5/98 advised by Alan Whitehead by Ross Williams". The printed part of that statement showed that the closing balance in the account was a little over $8,757m. Comparison with the version which had been produced on discovery showed that the pencil markings which had been rubbed out, which were in Mr Alcock's hand, showed him calculating that $320,000 would be charged for the months of February, March, April and May, and that a total of $140,000 was available and had been paid for the months of February and March, leaving an amount of $180,000 to be paid. Another calculation in Mr Alcock's hand included an addition of that $180,000 to the $8.757m shown on the statement, and the entry "+ $300,000". The total of those amounts ($9,237,000) is approximately the amount which Mrs Davis had been advised as the payout figure. At that time, Illawong's former bill facility of $300,000 had been referred to an overdraft account which in the first few months of 1997 stood at around $303,000. As well, Village Properties had an overdraft of the order of $13,000, which was not reflected anywhere in Mr Alcock's handwritten calculations. However, it is likely that the process which Mr Alcock was here carrying out was checking the accuracy of the payout figure which Mrs Davis had been given. For the purpose of so doing, he treated the interest payments which would fall due in February, March, April and May 1997 as being $80,000 per month, making a total of $320,000 for the four months. From that he subtracted the payments of $70,000 per month which had actually been made for the months of February and March. That he did a calculation in this way is inconsistent with there having been an agreement entered into on 31 January 1997 which capped the interest payment at $70,000 per month. That he rubbed out such a calculation, in the weeks before the trial, and when he knew that the original document was to be inspected for the first time by the solicitors for State Bank, does not assist his credibility. 203 Mr Whitehead gave evidence in cross-examination, concerning the 31 January 1997 meeting, that: "There was discussion among Williams and Ward and they were working out among themselves what that represented as a percentage interest rate on the loan outstanding. And Mr Ward said the bank will accept that."

In re-examination he said that: "… when Mr Ward and Mr Ross Williams agreed to the $70,000 in lieu of what I think previously was $84,000 that I questioned again whether this was something that they had the commitment to make and I recall them saying Yes, that was within their level of authority and that is so clear to me because I had been so wrapped up in what the indemnified loan deed allowed you to do and what it didn't, that I did not want to leave that meeting without getting some understanding as to whether those officers, one or both, had the authority to make that decision binding and I left the meeting with Mr Alcock and a clear understanding that he had the authority to make that decision …" 204 When Mr Ward had the substance of this evidence put to him he did not recall it, and said: "I can't categorically deny it, but knowing what happened subsequently and knowing what I know about other things, about delegation etc, I would certainly deny it on that basis."

I prefer the evidence of Mr Ward on that topic. 205 In all these circumstances, I am not persuaded that an agreement of the type on which the plaintiff sues concerning $70,000 per month was made in January 1997. No Agreement on Interest Rate - Onus of Proof 206 On the construction of the documentation which I have found to be correct, and given the questions which arise on Illawong's Statement of Claim, Illawong's claim for interest in the Limbo Period would fail, regardless of what was decided concerning whether Illawong has established that there was no agreement concerning interest rate during the Limbo Period. However, lest the Court of Appeal disagree with my construction of the documentation, I will give consideration to that question. 207 An essential precondition of the plaintiff succeeding in its pleaded case concerning the interest charged in the Limbo Period is that it establish that there was no agreement between itself and State Bank concerning the interest to be charged during that period. It is common ground that the expression "failing such agreement" in the definition of "interest rate" in clause 1.1 of the Memorandum means "if there is no agreement between the Bank and Illawong from time to time". 208 If a negative proposition is part of what a plaintiff must establish before its cause of action is complete, then the onus of proving that negative proposition lies on the plaintiff: Abrath v The North Eastern Railway Company (1883) 11 QBD 440 at 449 per Brett MR, 463 per Fry LJ. In Abrath at 457 Bowen LJ said: "Wherever a person asserts affirmatively as part of his case that a certain state of facts is present or is absent … that is an averment which he is bound to prove positively." (emphases added)

That decision was affirmed on appeal in the House of Lord: Abrath v The North Eastern Railway Company (1886) 11 App Cas 247, at 249 per Earl of Selborne. See also Crowley v Glissan (No.2) (1905) 2 CLR 744 at 754 per Griffith CJ, 762 per Barton J, 762 per O'Connor J; Currie v Dempsey (1967) 69 SR (NSW) 116 at 125 per Walsh JA; Cross on Evidence (Australian edition) [7060] - [7070]. 209 In the period 1988 to September 1991 Illawong had three directors, namely Mr Alcock, Mr Davis and Mr White. While Mr Alcock was the director who had by far the largest amount of contact with the Bank concerning the Illawong loan, all three directors had a financial interest in Illawong's success arising from their shareholding, and from the fact that each had given the Bank a guarantee of its debts. After September 1991 Mr Alcock and Mr Davis remained directors. 210 Mr Davis attended various meetings with State Bank - the meeting on 4 March 1992 (para [102] above), the meeting on 25 August 1992 (para [114] above), the meeting on 29 October 1992 with Mr Whitehead (para [122] above), a meeting in December 1992 with Mr Lyell (para [131] above), a meeting with St George on 12 January 1993 at which agreement was reached on the matters set out in para [133] above, and at the meeting with State Bank on 27 July 1993 (para [151] above), at which the interest rate adjustments made on settlement, and proposed to be made in the future, were discussed. He was also present at the meeting with the Bank on 21 September 1993 when the final interest adjustments were discussed (para [157] above). The personal and professional relationship between Mr Alcock and Mr Davis was such that they discussed matters regularly. Even though Mr Davis was not the leader in Illawong's relationship with State Bank (and indeed in January 1997 declined to meet with the Bank during a period when Mr Alcock could not be present), he was still a person who was likely to have knowledge of what had, or had not, been agreed between Illawong and State Bank. 211 Mrs Lorraine Davis was the company secretary. She worked in the office of the accountancy practice of Mr Alcock and Mr Davis, where she carried out bookkeeping tasks for Illawong. She had dealings with State Bank from time to time when she sought explanations of particular amounts which had been debited to Illawong's bank accounts, or requested credits for items appearing on Illawong's bank accounts which she thought were wrongly calculated. She attended the meeting on 21 September 1993. 212 While Mr and Mrs Davis are now divorced, both continue to live in Sydney. Mr Davis remains a close friend of Mr Alcock. 213 State Bank submits that Illawong's failure to call Mr and Mrs Davis and Mr White means that it cannot prove that there was no agreement as to interest during the Limbo Period. It submits that where an individual has the onus of establishing a negative fact, the individual must swear to the absence of the relevant matters and be available to be cross-examined, and that where a company asserts a negative the relevant officers of that company must give like evidence. It relies on cases where local councils have needed to prove that a particular decision was not actuated by a proscribed consideration: IW v The City of Perth (1997) 191 CLR 1 at 31-33, 51, 61-66; Australian Municipal, Administrative, Clerical and Services Union v Greater Dandenong City Council [2000] FCA 1231; (2000) 101 IR 143 at [42]-[52], [62]; on appeal, Greater Dandenong City Council v Australian Municipal, Administrative, Clerical and Services Union [2001] FCA 349; (2001) 112 FCR 232 at [142], [176]. 214 I do not accept the proposition of law which the Bank advances. Further, the cases upon which it relies, concerned as they are with whether a single corporate decision was actuated by a proscribed motive, are distinguishable from the present case, where one of the matters which Illawong must prove is that no one acting on its behalf made an agreement with the Bank concerning interest rates. 215 While Illawong bears the onus of proving that there was no agreement as to the rate of interest during the Limbo Period, an onus of proof can, in principle, sometimes be discharged by means other than the calling of witnesses by the party who bears the onus. In the present case discovery has been given by both Illawong and State Bank. Some of State Bank's documentation relating to this period has been lost, but much still survives. In excess of 400 pages relating to the Limbo Period have been tendered. Three bank officers who dealt with the Illawong account during that period (namely Mr Rowland, Mr Eaton and Mr Fitzpatrick) have given evidence. Their recollection of the events of 1991 to 1993 is (understandably, given the time which has elapsed) imperfect, yet they give no evidence of any such agreement. 216 The question of whether the onus of proof has been discharged depends upon whether, taking into account all the evidence which has been called, I am persuaded that there was no agreement as to interest rates governing the period 8 April 1991 to 26 July 1993, or any part of it. The answer to that question does not depend upon a rigid rule of law like that which the Bank proposes. 217 However, the failure to call a witness who is in the camp of a party, and likely to have knowledge of the matters in dispute, justifies the drawing of a Jones v Dunkel (1959) 101 CLR 298 inference, that the evidence of that witness would not have helped the party. 218 As well, in deciding whether an onus of proof has been discharged, the Court bears in mind that oral testimony concerning events of as long ago as 1991 to 1993 has an inherent risk of being unreliable: Herron v McGregor (1986) 6 NSWLR 246 at 254-255; Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541 at 551; Watson v Foxman (1995) 49 NSWLR 315. It also relevant here that various of the documents of State Bank relating to this matter have become lost (without it being suggested that the Bank has destroyed them because of their unhelpful nature). Thus there is less basis, in the present case by comparison with many other cases, for drawing inferences from the documentary record, because in the present case it would not be safe to assume that the documentary record available at the trial was one which was accurate and complete. Agreement with Mr White in 1991? 219 The evidence leaves me unsatisfied that there was no agreement as to the interest rate to be paid in the communications between Mr White and bank officers concerning the waiving of penalty interest. It is clear that Mr White was seriously concerned by the fact that State Bank was threatening, in June-July 1991 to apply a penalty interest rate. The impression one gains of him from the evidence is that he is the sort of man who takes decisive action if his interests are threatened. He contacted Mr Rowland on 8 or 9 July 1991 and asked that penalty interest be waived (para [83] above). Further, Mr White's facsimile of 16 September 1991 (para [89] above) makes clear that there was another telephone conversation between Mr White and Mr Rowland, after 12 July 1991. The facsimile of 16 September 1991 gives reason to believe that in the course of the later telephone conversation Mr Rowland was told that the Bank would not be applying penalty interest. In fact, by 6 August 1991 Mr Eaton had decided that not only would penalty interest be waived, but the previous rate of interest would be applied, and Mr Rowland knew of that decision (para [87] above). In that situation, there is a real question about whether Mr Rowland told Mr White not only that penalty interest would be waived, but also that the previous rate would be applied. There is also, it seems to me, a real question about whether Mr White agreed to the application of that previous rate. That possibility is one which has not been negatived. Agreement with Mr Alcock in 1991? 220 As Mr Rowland's file note of 6 August 1991 recorded (para [86] above) there was an appointment made for Mr Eaton to meet Mr Alcock on Monday, 12 August 1991. By that time Mr Eaton had decided that penalty interest would be waived, and the previous rate of interest (13.97%) would apply. Mr Eaton has produced two pages of file notes relating to that meeting. I would infer, from file notes of Mr Eaton dated 12 July 1991 that on 12 July 1991 Mr Eaton and Mr Alcock had spoken on the telephone. Mr Eaton's notes of the meeting of 12 August 1991 record various matters which Mr Alcock told him. One of those is "will fix $85K deposit tomorrow". In fact a credit of $84,871.23 appears in the "16" account on 22 August 1991, in unexplained circumstances. There might or might not have been an agreement about the making of that deposit, or the basis of its calculation. 221 Mr Eaton says that he can actually recall meeting with Mr Alcock at that meeting, and that his notes record matters stated to him by Mr Alcock. Mr Eaton says he does not recall Mr Alcock raising any complaint at that time concerning the continued charging of interest at the previous rate. I accept this evidence. However Mr Eaton does not give any evidence of communicating to Mr Alcock that interest would be charged at the previous rate, or of any discussion on that topic. 222 Mr Eaton's recollection was incomplete concerning his meetings with Mr Alcock. Mr Alcock's recollection was, likewise, incomplete. Mr Alcock was of the view that he had not met Mr Eaton at all until 23 October 1991. In light of the objective evidence in State Bank's file notes, and of Mr Eaton's recollection, Mr Alcock was mistaken in so thinking. 223 Mr Alcock gave affidavit evidence of having complained on 23 October 1991 to Mr Eaton, and in the period between 23 October 1991 and 20 December 1991 to Mr Fitzpatrick, about the interest rate which Illawong was being charged. Mr Eaton does not recall any such discussion. When cross-examined about his dealings with Mr Fitzpatrick in 1991, Mr Alcock did not recall having any dealings with him other than to correspond with him. In these circumstances I could not safely act on his affidavit evidence of having made complaints about the interest rate to Mr Fitzpatrick during 1991. Mr Alcock's letters of 18 and 20 December 1991 to Mr Fitzpatrick [para [96]-[98] above) made no complaint about the Bank's charging of interest at 13.97%. Given that those letters were an extensive listing of Mr Alcock's complaints against the Bank, it is unlikely that he had at any time in 1991 complained about being charged 13.97% interest. 224 An examination of the State Bank's Reference Rate from time to time shows that Illawong had, as events turned out, acted wisely by taking an interest rate which was fixed for three years from April 1988. While interest rates were in decline during 1990 and 1991, they were in decline from figures higher than those at which State Bank had lent to Illawong during the first three year term. 225 During 1992 - and it seems to me more likely that it was from some time after 7 April 1992 - Mr Alcock complained to the Bank about it continuing to charge 13.97%. I am not satisfied that any such complaints were made in 1991, however. 226 In these circumstances, I am not persuaded that there was no agreement, in the course of 1991, to the charging of interest at 13.97%. Agreement Between Mr Fitzpatrick and Mr Alcock on 13 March 1992? 227 Mr Fitzpatrick's contemporaneous notes of the meeting of 13 March 1992 are sketchy, and he has little recollection of the meeting. However, it includes the entries "13.97%. 14.97%". It is likely, given the fact that he had been carrying out a reconstruction of the term loan account (para [100] above) on the alternative hypothesis of 13.97% and 14.97% being charged, that he would have told Mr Alcock about that. Mr Alcock has no recollection of any such discussion taking place. However, from Mr Fitzpatrick's note to Mrs Fahy (para [104] above), and the references in Mr Fitzpatrick's lending proposal of 7 April 1992 to the customer dropping a claim for overcharged interest, and to him having advised the customer of his findings concerning the complaint about overcharged interest, it seems likely that the interest charge was discussed between them. Mr Fitzpatrick came out of the meeting with the clear impression that Mr Alcock had dropped the complaints about interest which he was making in his December 1991 letters. By that time, the Bank had withdrawn its claim to impose penalty interest rates. I am not persuaded that there was no agreement at this time to the charging of interest at 13.97%. Agreement on Rates June/September 1993? 228 Mr Fitzpatrick's reconstruction of the term loan account had extended over the period up to December 1991. On the basis of that reconstruction, he had recommended, on 7 April 1992, that Illawong be given a credit for $32,117. On 4 August 1992 Mr Alcock was told that an interest adjustment of $90,192.25 would be made when the new facility was settled, and that the making of this adjustment would bring the interest rate back to 13.97% (para [111] above). At the meeting on 25 August 1992 (para [114] above) the Bank again offered a credit for interest of $90,192.25, which Mr Alcock understood was in respect of the period up to April 1992 (as shown by his letter of 4 February 1993, para [135] above). By that same letter of 4 February 1993, Mr Alcock requested an additional credit, "from the date we accepted your offer", of the order of $160,000. 229 By his letter of 23 March 1993 (para [139] above) Mr Alcock was proposing a lesser concession than $160,000 on the part of the Bank, namely that it reduce the interest rate from December (1992). Mr Footit's memorandum of 12 July 1993 (para [145] above) recommends an interest adjustment of approximately $120,000, arising from a retrospective adjustment of the rate, so that it became Reference Rate plus 2% from 1 December 1992. The credit of $90,192 which was given on settlement was specifically notified to Illawong's solicitors by the Bank's solicitors on 15 June 1993 (para [144] above). It was the same amount as had been initially offered by the Bank on 25 August 1992. The additional amount of $144,318.26 was the amount which resulted from recalculating the interest at Reference Rate plus 2% from 1 December 1992 until the date of settlement of the new term loan facility. 230 It appears from Mr Whitehead's memorandum of 29 November 1992 (para [126] above) that at one stage in 1992 Illawong may have been seeking a pricing of Reference Rate plus 2% per annum. When there is this evidence that it was once seeking that rate, this increases a little the difficulty of Illawong's task of persuading the Court that it did not ultimately agree to interest, for the period 1 December 1992 onwards, being charged at Reference Rate plus 2%. 231 As mentioned previously, when Illawong gave discovery in this matter, it gave discovery of photocopies of documents. On the original of the facsimile to Mr Gillingham dated 14 September 1993 (para [154] above) Mr Alcock had written in pencil the words, near the reference to "$120,000??" "int reduction agreed because St G lowered interest". 232 When the original of that facsimile came to be produced to the Bank's solicitors (an event which happened on 22 October 2003) those pencil words had been rubbed out. In cross-examination concerning this rubbing out (which occurred after the cross-examination concerning rubbing out of the calculations showing interest calculations in 1997 at the rate of $80,000 per month) Mr Alcock did not agree that it was he who had rubbed the words out in the several weeks immediately before the trial. When asked once if he had any explanation for how the words came to be rubbed out after the plaintiff gave discovery his explanation was: "I can only suggest that my solicitor had been asking me, trying to get to understand what I was talking about with the $90,000 and the $144,000 and I was sending them copies of things and trying to set out detailed explanations of it. That was some many, many months ago. This said this original was not in the my file from which the discovered documents were copied and I really do not know at what point of time that was rubbed out. I can only suggest it may have been rubbed out because the $120,000 was, that a question mark, the 144 was a rate and that would have been part of my working through what happened to explain to my solicitor and barrister what happened in relation to that $120,000 adjustment because they were getting confused between the $90,000 and the 144 and the banks solicitor had put an entirely different inflection on those sums of money and I thought somebody should come forward and say what happened and I was doing that. That was months ago. I think I certainly did not rub it out within the last two weeks. I had no reason to. I took the copy which had that on it out of the file and swapped that. I would be a bit stupid to rub that out when that has already been discovered one way or the other and I was swapping one for the other. That is not what happened." 233 Asked again a little later, he had no explanation for how the words came to be rubbed out. He agreed that the original was in his office from the time that discovery was given until the time he was asked to produce the original, and that he could not image why any of his employees would have rubbed anything off the document. Mr Alcock was aware that the cornerstone of Illawong's case was that there was no agreement, in the period April 1991 to July 1993, between Illawong and the State Bank concerning interest rate. 234 Two days earlier in the cross-examination, when the topic of Mr Alcock rubbing out pencil notations from documents was first raised, his evidence was: "Q. Is that why you have rubbed out on your documents the word "agreement" next to the interest rate? OBJECTION A. I don't know what you are talking about. QUESTION DISALLOWED Q. You had written the words in pencil on a document that has been discovered in this case "interest" we can't make out the next words and then the words "agreed" that was written in pencil on the documents? A. Never. Q. You have rubbed it out since this case started haven't you? A. Never I have never agreed to an interest rate. "

After explaining that he sometimes rubbed out notes on bank statements, where Mrs Davis had written on a bank statement entries in anticipation of what the next bank statement would show, he was asked: "Q. Moving away from bank statements, on a letter that was sent by fax from you to the bank, there where the word "interest" something illegible "agreed" written and you have since this case commenced rubbed those three words out? A. No.

Q. No you deny it? A. Yes.

Q. Someone else might have rubbed it out? A. I don't know. If you show me the document I will tell you what the words were, hopefully." 235 In Allen v Tobias (1958) 98 CLR 367, at 375 Dixon CJ, McTiernan and Williams JJ quoted, at 375, from the judgment of Sir Arthur Channell in The Ophelia (1916) 2 AC 206. "If anyone by a deliberate act destroys a document which, according to what its contents may have been, would have told strongly either for him or against him, the strongest possible presumption arises that if it had been produced it would have told against him …"

In the present case, the suspicion that Mr Alcock had rubbed out the words "int reduction agreed …" because he was conscious that it damaged his case had not been allayed by the end of the trial. Given other difficulties with Mr Alcock's evidence, I am not prepared to regard his evidence as sufficient to allay that suspicion. 236 When Mr Whitehead was being asked about what Mr Alcock had told him in 1996 about what had happened during the period 1991 to 1993, "Q. Was one of the things he told you that Illawong had not been able to pay the full interest rate at 13.97 percent during the limbo period and that the bank had agreed to capitalise the short fall? A. Yes."

State Bank submits that this amounts to evidence from Mr Whitehead that Mr Alcock told him there had been an agreement to interest being charged at 13.97%. It is not necessary to go so far. It suffices that the evidence raises a real question of whether there had been an agreement about interest being charged at 13.97%, and in part capitalised. This piece of evidence has added force when one bears in mind that the phrasing of the question was not a cross-examiner's improvisation, but was quoting to Mr Whitehead the words which Mr Whitehead had used in his letter of 12 September 1996 (para [169] above), where Mr Whitehead quotes his then instructions from Mr Alcock. 237 When the purpose of the new facility was "to repay all existing facilities the Lender has extended to the Borrower upon Drawdown", when Mr Alcock was aware that the Bank was asserting it was entitled to charge interest at 13.97%, and when the proceeds of the new drawdown were in fact applied in paying out the "16" account, that also creates an evidentiary situation which raises a question of whether there was agreement, retrospectively, about the total amount of interest which the Bank could charge in the Limbo Period. 238 The meeting of 21 September 1993 (para [157] above) is of particular significance. The file note of that meeting shows that there was discussion about the amounts which were owing to the Bank, after allowing all three of the interest adjustments which the Bank had made. The discussions concerned how the excess which still existed, after granting those credits, could be repaid. The Limbo Period was by this stage over, the total amount which the Bank was proposing to charge as interest in relation to the Limbo Period was known, and discussions took place about how debts remaining, after that total amount of interest was charged, could be repaid. That is a situation in which there is a realistic possibility that there may have been agreement, in the terms of that discussion, to the total amount which was being charged as interest during the Limbo Period. If there is agreement to the total amount of interest charged during the Limbo Period, that is necessarily agreement as to the rate of interest. Illawong has not persuaded me that there was no such agreement. 239 There is some other evidence, which is not precisely fixed in time, which bears upon the question of whether Illawong has demonstrated that there was no agreement concerning the interest rates to be charged. Another example of the pencil markings which Mr Alcock rubbed out on original documents before they were produced to the Bank is a notation which was made on the bank statement for the "16" account issued on 30 September 1991. That statement covers the period 29 June 1991 to 30 September 1991. It shows an amount of $284,871.23 being debited to the account on 1 July 1991. The last time interest had been debited to the account was on 2 April 1991 (though that debiting of interest had been recredited on 26 April 1991). The calculation which was rubbed out was one which added up numbers of days in April, May, June and July, attributing to those months respectively 28, 31, 30 and "1?" days, to arrive at a total of 90 days. It then calculates the interest chargeable for 90 days at 13.97% on $7.75m (arriving at an answer of $266,961), and the amount of interest on $7.75m for 90 days at 14.97% (coming up with an answer of $286,070.54. The Bank submits that this calculation is of assistance to its case. It may be that this calculation is nothing more than an attempt by Mr Alcock to work out what the correct interest would have been if the Bank had been charging 13.97%, or 14.97%. While the role of this calculation is not explained in the evidence, I do not regard it as being of particular significance. 240 There is also some evidence of a general kind about the Bank's attitude to charging of interest while the Limbo Period was running. Mr Alcock said, in cross-examination,

"A. … I'll concede that every time the question arose, as in Owen's letters to me, the theme was, you know - You're going to cop the 13.97 percent.

Q. That was his theme: You'll be charged at the rate of 13.97 percent; is that correct? A. Yes. HIS HONOUR: Q. Whose theme was that? A. The bank's in general. But certainly Owen's. …"

This fits in with evidence from Mr Eaton that, "From all my recollections of the meetings is that I was firm on the fact that the rate was 13.97%." 241 There is no inherent improbability in a hypothesis that Illawong, having succeeded in having the threat of imposition of penalty interest withdrawn, having then met with insistence during Mr Eaton's period that 13.97% was the rate which would be charged, and having negotiated as hard as it could with Mr Williams, Mr Peden, and Mr Footit for a further reduction in interest rate, came to accept, at the time the new facility was put in place, that it had obtained all the concessions it was going to obtain. It is not an inherently unlikely hypothesis that, in the period of settlement of the new facility to 21 September 1993, its concern was to ensure that it actually received the additional concession which had been negotiated with Mr Footit. I make these observations in terms of what is not an implausible hypothesis, because it is Illawong which bears the onus of proof of absence of agreement on an interest rate. 242 In all these circumstances I am not persuaded that there was no agreement concerning the interest rate to be charged to the account. Applicability of Clause 3.3 of the Memorandum 243 State Bank contends that even if, contrary to its principal submission, the 29 June 1990 Mortgages and the Memorandum contained the relevant contractual provisions concerning payment of interest, it would be Clause 3.3 of the Memorandum which set the interest rate. Clause 3.3 entitled the Bank, in the circumstances where Clause 3.3 applies, to charge a rate which was "the highest of the prevailing interest rates payable on the moneys hereby secured from time to time" plus 2% per annum. The "moneys hereby secured from time to time" included Illawong's unarranged overdraft, and its lease accounts. The interest rate charged on those accounts exceeded 13.97% per annum. No attack was made on the validity of Clause 3.3 of the Memorandum. Thus, if Clause 3.3 applies, State Bank was entitled to charge more interest during the Limbo Period than it in fact charged.

244 Two questions arise concerning the application of Clause 3.3 of the Memorandum. The first concerns the meaning of "due" in the opening words of Clause 3.3, "in respect of moneys not paid on their due date". In Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1, at 8, Gibbs CJ said; "The word "due" is ambiguous; it can mean owing, although not payable until some future date, or it can mean presently payable. The meaning of the word must be determined by the context."

See also Clyne at 15, per Mason J (with whom Aickin and Wilson JJ agreed); Ex Parte Kemp Re Fastnedge (1874) LR 9 Ch App 383 at 387 per Sir G Mellish LJ. Indeed, in the context of section 122 Bankruptcy Act 1966 (Cth) it has been held that a debt is not "due" until it is not only payable, but also any period of grace which might reasonably be expected from past dealings has expired: In Re Newark Pty Ltd (in liq); Taylor v Carroll (1991) 6 ACSR 255; Pioneer Concrete (Vic) Pty Ltd v Stule (1996) 14 ACLC 534; Sutherland v Sunshine Clothing (Aust) Pty Ltd (1995) 13 ACLC 1,808; cf Olifent v Emwest Products Pty Ltd (1996) 14 ACLC 24. A similar approach to when debts are "due" has been applied in the context of section 592 of the Corporations Law and its predecessor section: 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371; Re New World Alliance Pty Ltd (Rec & Mgr Apptd); Sycotex Pty Ltd v Baseler (1994) 51 FCR 425. 245 In Clause 3.3 of the Memorandum, moneys are "not paid on their due date" when they are not only due, but are payable, and have not been paid. The commercial point of Clause 3.3 is to make provision for payment of interest in circumstances where a borrower is in default. There is no default until such time as money has become not only due, but payable. 246 The second matter which needs to be decided concerning Clause 3.3 is whether, before the term loan which was advanced on 8 April 1988 became payable, it was necessary not only for three years to have expired from the date of advance, but also for State Bank to have made a demand. 247 In In Re McHenry; McDermott v Boyd; Barker's Claim [1894] 3 Ch 290 the Court of Appeal considered a loan concerning which the borrower had signed a document describing it as "repayable with interest" on a particular date in the future. The Court held that a limitation period started running as soon as that date had passed. Thus, in that case no demand was necessary before the money become payable. Further, Lindley LJ, at 294 held that, even though there was no express statement whereby the borrower promised to pay on that date, the loan was indeed repayable on that date. 248 Chitty on Contracts, 17th edition, para 36-211 says: "A loan may be made for a specified period (a term loan). In such a case repayment is due at the end of the specified period and, in the absence of any express provision or implication to the contrary, no further demand for repayment is necessary."

To similar effect is Fisher & Lightwood's Law of Mortgage, Australian edition, para 16.7: "As soon as the mortgagor has made default … in payment of the mortgage debt … - that is, where a time for payment is fixed, by non-payment on that day; or where no time is fixed, by non-payment on demand … or, where the mortgage so provides, as soon as there is some other breach of the terms thereof, the mortgagee is entitled to pursue any or all of his remedies against the debtor …" (citations omitted)

If there is a loan for a particular period, it is repayable at the end of that period, unless there is some provision in the contractual documentation which leads one to decide that the parties intended otherwise. 249 Illawong referred me to Pennington, Bank Finance for Companies (Sweet & Maxwell, 1987), at 12: "Term loan agreements always specify the date or dates and manner by which the amount advanced by the lending bank or banks is to be repaid. In the absence of such a provision, the loan would be repayable on the bank or banks giving the borrowing company a reasonable length of notice demanding repayment ( Buckingham & Co v London and Midland Bank Ltd (1895) 12 TLR 70), but it would appear that the borrowing company would be entitled to repay such a loan at any time without giving any notice in advance of doing so." 250 The Buckingham Case which Professor Pennington cites does not justify the proposition for which he cites it. The case concerned a manufacturer, who for many years had had a loan account and a current account with a banker. When the banker discovered that its securities were less valuable than it had thought, it closed both accounts. The action was described, at 70, as one "… to recover damages for a breach of duty in improperly closing his account, whereby he alleged he was injured in his business and credit." The action was a trial with a jury, so the only scope for judicial exposition of the law was in the instructions to the jury. Those instructions contain no such legal statement as that for which Professor Pennington cites the case. The report concludes, at 72, by saying: "The learned Judge left the following questions to the jury:- 1. Was it the course of dealing between the plaintiff and the defendants that the plaintiff was to be allowed to draw upon his open account without reference to his loan account? 2. If yes, then was the plaintiff entitled to a reasonable notice that that course of business would be discontinued? 3. Was such reasonable notice given? The jury answered the first two in the affirmative and the last in the negative and assessed the damages at £500."

When that is the nature of the case, it is nothing but a decision about the facts of that particular case. 251 In the present case, a reading of the provisions of the Facility Letter of 11 December 1987, which I have set out at para [7] above, leads to the conclusion that this loan is one which was repayable, without any demand being necessary, after three years. The fact that the parties contemplated that a review would be carried out prior to expiration of the facility, and that they contemplated that a possible outcome of such a review might be that the loan was refinanced, or that conditions for its repayment might be arrived at, does not detract, it seems to me, from the loan being due, within the meaning of the opening words of Clause 3.3 of the Memorandum, once the three year period had passed. This is because it is only in circumstances where there is a favourable outcome of that review that the loan would not be repayable at the end of the three-year period. 252 Illawong argued that there was nothing to stop the facility from continuing after the three-year period had expired. It is a common enough commercial practice for a financier to enter a "Facility Agreement" with a customer, under which the financier agrees that, on certain conditions, it will make available one or more types of financial accommodation. In the present case, the two types of financial accommodation which the Bank offered to make available by its letter of 11 December 1987, were a fixed interest term loan, and a commercial bill option. If, after the Facility Letter had been accepted by the customer, the Bank had refused to make available the term loan, or had required different conditions to those on which it promised to make the term loan available, or had refused to accept bills of exchange in the circumstances where it had promised, in the Facility Agreement, it would accept bills, Illawong could have sued the Bank on the contract arising from the Facility Letter. Once the Bank has made available to the customer the loan it has promised to make available, it is the terms of the contract of loan which govern the obligations of the customer to pay interest, and to repay. While some of the terms of that contract of loan might be written in the Facility Letter, it is not the contract to make available a facility which at that time governs the obligations of the customer to repay the loan, or to pay interest. Under the Facility Agreement in the present case, Illawong could have, during the term of the facility, repaid the principal sum in whole or part prior to maturity (on paying certain amounts of interest which the Facility Letter set out), and required the Bank to accept bills of exchange. If the Bank accepted those bills of exchange the Facility Letter made provision that, if Illawong wished, the Bank would arrange discounting of the bills. The Facility Letter made provision for the Bank to be able to debit Illawong's operating account with the face value of any bill on the due date of any bill which the Bank had accepted. If that happened, it would be the terms of the contract governing Illawong's operating account which would decide what interest would be charged on the amount so debited to the operating account, and in what circumstances the Bank could require that amount to be repaid. In ways like this, the Facility Agreement was one whereby the Bank conferred on Illawong the facility, or capacity, to require a variety of more particular financial transactions to be entered into. When the Facility Letter said that the "term of the facility is three years", that means that it was during that period of three years that there was the capacity on Illawong to require the Bank to enter into financial transactions. Thus, for example, once the three years had expired, Illawong had no contractual right arising from the Facility Letter to require the Bank to accept commercial bills. 253 For these reasons, I do not accept Illawong's submission that the facility continued beyond three years. 254 The Facility Letter is one which is unlikely to be adopted by bankers as a precedent. It does not make express provision for when the term loan, which is one of the facilities it offers to make available, will be repayable. It is quite clear, however, from the wording of the Facility Letter that the loan which was intended, was one which was a "fixed interest term loan". It would be bending language too much to say that that expression meant that what was being offered was a loan, of indeterminate duration, the interest of which was fixed for a term. A more ordinary meaning of the expression, and the way in which commercial people would understand it, is that the loan itself was one for a term. When the interest is fixed for a term of three years, and the facility under which the loan is granted is one which lasts for three years, it seems to me that the correct construction of the Facility Letter is that the loan itself will be for a term of three years. 255 Some submissions were made by the Bank, about whether the failure of the Bank to conduct such a review prior to the expiry of the three year period arose from circumstances in which Illawong, by not presenting to it any material to enable the Bank to conduct a review, had waived any entitlement to such a review. The Bank made submissions to the effect that Illawong had such an obligation, that it was in breach of that obligation, and hence could not benefit from a failure of the Bank to conduct a review, when that failure had been caused or contributed to by Illawong's failure to request a review or provide any material by reference to which it could be conducted: Alghussein Establishment v Eton College [1988] 1 WLR 587 at 591-594; Plumor Pty Ltd v Handley (1996) 41 NSWLR 30 at 34; New Zealand Shipping Co Limited v Société Des Ateliers et Chantiers de France [1919] 1 AC 1. Those submissions of the Bank do not relate to any issue raised by the pleadings. Though the Statement of Claim as originally filed made complaint about the Bank not conducting a review within the three years of the facility, that portion of the Statement of Claim was struck out, and the topic did not reappear in the pleadings in any other legal guise. Hence I will give no further consideration to these particular submissions of the Bank. 256 The effect of Clause 3.3 being applicable is that, even if the 29 June 1990 Mortgages governed the obligation of Illawong to pay interest, the Bank has not charged more than it is entitled to charge during the Limbo Period. Applicability of Clause 2.1.4 257 The Bank has a subsidiary argument, in the event that it was the Memorandum which governed the payment of interest. That argument is that for much (or perhaps all) of the Limbo Period Illawong did not pay interest on the due date. Clause 2.1.4 of the Memorandum entitles the Bank to charge interest on those amounts of unpaid interest "at the rate or rates hereinafter provided for moneys not paid on the due date" - ie, at the rate which Clause 3.3 permits. If I were mistaken in concluding that the whole of the $7.75m had become due at the start of the Limbo Period, Clause 2.1.4 would permit State Bank to charge interest on late paid interest, in the manner of the Bank's submission which I have just stated. The Allegation that State Bank Should have Lent at its Cost of Funds 258 There is no basis for Illawong's assertion that State Bank was obliged to lend to it at cost of funds. The rate which the Bank agreed to for the three years of the fixed term loan, from April 1988 to April 1991, was cost of funds plus one percent, but there was no obligation on the Bank to charge a rate, after that first three year period, by reference to the cost of funds. There were no customers of the Bank whose facilities had expired and who were offered funds for a variable period at an interest rate that was just the Bank's costs of funds. Though Mr Whitehead gave evidence in chief to the effect that, during his time with the Bank, there was an account in respect of which a variable rate equivalent of cost of funds was charged, in cross-examination he agreed that that evidence was incorrect. 259 There is no basis in the documentation which has been tendered for inferring that the Bank ever charged a rate of interest, for a loan which was not of fixed length, which either was, or was based upon, the cost of funds. The proposition that the Bank ever charged a rate, for a loan which was not of fixed length, which was, or was based on, its cost of funds was not put in cross-examination to any of the witnesses called by the Bank. 260 Various of the offers which State Bank made to Illawong during the Limbo Period, and which Illawong did not accept, were for lending for a term, at a rate considerably less than the rate which State Bank was charging on the expired fixed term loan. It could not be said that those rates provide an indication of the rates which State Bank would have applied, if it had turned its mind to the question of what were "like accounts" to Illawong's. First, those rates were for a fixed period loan, when Illawong's loan, at that time, was not a fixed loan. A contract to pay a particular rate of interest for a fixed period is one which involves the borrower undertaking the risk that market rates might move up during the fixed period. That is a most material difference from the situation of Illawong's loan, which it could have repaid when it chose, if it had the money. Further, the offers which State Bank made were subject to conditions, concerning changes in the St George priority, concerning registration of certain leases, and concerning the granting of a negative pledge, which had not been complied with. Illawong cannot say that it was entitled to receive the same rate that it would have received if conditions were complied with, in circumstances where it did not comply with those conditions.

Accord and Satisfaction 261 State Bank alleges that the circumstances of the granting of the interest concessions of $90,192, $144,318.26 and $3,156.18 in July and September 1993 give rise to an accord and satisfaction of any claim which Illawong has to have overpaid interest in the Limbo Period. 262 Accord and satisfaction is a common law doctrine. It provides the means whereby a cause of action which a plaintiff has can be rendered unenforceable. In McDermott v Black (1940) 63 CLR 161, at 183-185 Dixon J (with whom Rich and McTiernan JJ agreed) said: "The essence of accord and satisfaction is the acceptance by the plaintiff of something in place of his cause of action. What he takes is a matter depending on his own consent or agreement. It may be a promise or contract or it may be the act or thing promised. But, whatever it is, until it is provided and accepted, the cause of action remains alive and unimpaired. The accord is the agreement or consent to accept the satisfaction. Until the satisfaction is given the accord remains executory and cannot bar the claim. The distinction between an accord executory and an accord and satisfaction remains as valid and as important as ever. An accord executory neither extinguishes the old cause of action nor affords a new one … of accord and satisfaction there are two cases, one where the making of the agreement itself is what is stipulated for, and the other, where it is the doing of the things promised by the agreement. The distinction depends on what exactly is agreed to be taken in place of the existing cause of action or claim. An executory promise or series of promises given in consideration of the abandonment of the claim may be accepted in substitution or satisfaction of the existing liability. Or, on the other hand, promises may be given by the party liable that he will satisfy the claim by doing an act, making over a thing or paying an ascertained sum of money and the other party may agree to accept, not the promise, but the act, thing or money in satisfaction of his claim. If the agreement is to accept the promise in satisfaction, the discharge of the liability is immediate; if the performance, then there is no discharge unless and until the promise is performed." 263 As is apparent from Dixon J's statement that "an accord executory neither extinguishes the old cause of action nor affords a new one", the accord need not be contractual. It can take the form "I agree with you that if you do X I will release my cause of action", where there is no obligation on the "you" to do X. However there is no requirement that the accord not be contractual - in some cases, it might be contractual. And there can be different types of contract involved. Thus Phillips JA (with whom Winneke P and Charles JA agreed) said, in Osborn v McDermott [1998] 3 VR 1, at 10, "Thus, there are three possibilities, not two. First, there is the mere accord executory which on the authorities, does not constitute a contract and which is altogether unenforceable, giving rise to no new rights and obligations pending performance and under which, when there is performance (but only when there is performance), the plaintiff's existing cause of action is discharged. Secondly, at the other end of the scale is the accord and satisfaction, under which there is an immediate and enforceable agreement once the compromise is agreed upon, the parties agreeing that the plaintiff takes in satisfaction of his existing claim against the defendant the new promise by the defendant in substitution for any existing obligation. Somewhere between the two, there is the accord and conditional satisfaction, which exists when the compromise amounts to an existing and enforceable agreement between the parties for performance according to its tenor but which does not operate to discharge any existing cause of action unless and until there has been performance."

This is not the occasion to discuss the complications which arise if enforcement of a settlement agreement is sought in equity - State Bank pleads a common law accord and satisfaction, and not any equitable defence to Illawong's claim. 264 To succeed in establishing an accord and satisfaction, the Bank needs to establish that Illawong agreed to give up its claim that it had been overcharged interest, in return for something which the Bank gave it. I am not satisfied that the dealings between Illawong and the Bank should be so characterised. I am satisfied that the Bank understood the credit of $90,142 as being an amount which needed to be refunded if interest were to end up having been charged at 13.97% over the whole period from 8 April 1991 to 26 July 1993. I am also satisfied that the further credit of $144,318.26 is one which the Bank calculated so as to further reduce the interest rate charge to Reference Rate plus 2%, as from 1 December 1992. The additional credit of $3,156.18 was a refunding of interest which had been charged on the overdraft account, arising from the Bank having debited interest which, by allowing the refund of $144,318.26, it refunded. I would also accept that Illawong acted in a way consistent with how it would have acted if the giving of those credits meant that it had no more claims for overpaid interest. At the meeting on 21 September 1993 (which each of Mr Alcock, Mr Davis, and Mrs Davis attended) there were discussions about the interest arrears, and ways in which those arrears could be reduced. Further, there was no further complaint about the interest which had been charged in the 1991-1993 period until 1996. Notwithstanding all that, there is no evidence that the topic of actually giving up the claim that too much interest had been charged during the Limbo Period was raised. Mr Footit was not called (on a basis which I will soon mention). The evidence is in a state where it is possible that there was an agreement for Illawong to give up its claim, but I am not persuaded that there actually was such an agreement. Accordingly the defence of accord and satisfaction fails. 265 There is no inconsistency between my finding that the Bank's defence of accord and satisfaction fails, and my finding that Illawong has not established that there was no agreement as to rates. Rather, those two findings illustrate the elementary proposition that where evidence is inadequate, whoever bears an onus of proof may well fail. 266 There is one evidentiary matter which I should mention, lest this case go further. In an affidavit sworn on 31 October 2003 Mr Alcock gave evidence as follows: "Shortly before settlement of the plaintiff's refinance with the defendant on July 26, 1993, I recall a phone conversation with Mr Footit in words to the following effect - " FOOTIT: "We are getting close to settlement on the refinance. There will be credits to the company for $90,000 which you know about and a further amount of about $120,000. I have done a calculation but I have to check it yet, for a reduction of interest from January 1993 until now, to fall into line with St George." ALCOCK: "Don't forget the company's claim that it has been overcharged since April 1991, because the bank should have charged short term rates. Steve, you still have not given me an answer on the rate in the period since April 1991." FOOTIT: "I don't want to hear about that now I will deal with that later." 267 I do not accept that there was a conversation of the type there set out. Though Mr Footit did not give evidence, it was on the agreed basis that he had no recollection one way or the other about any such conversation having occurred. When the conversation was so long ago, when there is no contemporaneous documentary confirmation of its having occurred, when there was no raising by Mr Alcock of any claim concerning interest charged in the Limbo Period until after he enlisted Mr Whitehead's help in 1996, and when Mr Alcock's evidence in some other instances has been shown to be unreliable, I would not regard that evidence (and oral evidence from Mr Alcock which was sometimes to the same effect) as sufficient to discharge an onus of proof. The Allegation that State Bank Failed to Determine a Rate Applicable to Like Accounts 268 From its starting point that it is the 26 June 1990 Mortgages which govern the payment of interest, Illawong then argues that the duty of co-operation implied in every contract (Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 606-7), and the obligation on a contracting party to act so as not to prevent the other party from fulfilling its obligations (Meehan v Jones (1982) 149 CLR 571 at 591) and the duty of good faith in contractual performance (Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1; Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349) all required the Bank, once the period for which the interest was fixed had ceased, to turn its mind to the question of what were "like accounts" to Illawong's, and apply to Illawong's account the same rate of interest as it found it was applying to those "like accounts". If (contrary to my view) the 29 June 1990 Mortgages governed the payment of interest, and if (contrary to my view) Clause 3.3 of the Memorandum did not, in the circumstances, prevent the application of Clause 2.1.3 of the Memorandum, and hence of the definition of "interest rate" in the Memorandum, I would accept that the implication for which Illawong contends applies. Further, the way in which the Bank went about fixing a rate to charge Illawong in the Limbo Period did not involve, at least at first, a search for "like accounts". By the time of Mr Eaton's memorandum to Mr Whitehead of 30 October 1992 consideration was being given to the question of how loans in a similar position to that of Illawong were treated. I shall assume, without deciding, that over the period 8 April 1991 to 26 July 1993 the Bank was in continuous breach of that obligation. 269 On that assumption, Illawong has not proved that it has suffered any loss in consequence. No plausible contention has been put forward that a "like account" to Illawong's should be described as anything other than an expired fixed rate term loan. For loans of that type, the Bank had two different practices - the first to continue them at the previous interest rate until repaid, the second to adjust the interest rate to Reference Rate plus a margin in the range of 2% to 6%. If the first of those practices had been applied to Illawong during the whole of the Limbo Period, Illawong would have ended up paying more interest, during that period, than it in fact paid. If the second practice had been applied to Illawong during the whole of the Limbo Period, Illawong would likewise have ended up paying more than it in fact paid. It was only after 14 February 1992 that a Reference Rate plus 2% was less than 13.97%. On 8 April 1991 Reference Rate plus 2% was as high as 17.5%. In consequence of being allowed the credit of $144,318.26, Illawong had, in effect, been paying Reference Rate plus 2% since 1 December 1992. The Estoppels in the Reply 270 In its Reply Illawong alleges a series of representations by State Bank, over a period from 23 October 1991 to 19 October 1996. While the detail of the representations vary, their general theme is the same, namely that any claim by the plaintiff for overcharging of interest would be dealt with at the time of refinance or repayment of the money borrowed. One use to which the estoppel is sought to be put is to preclude State Bank from relying on its defence of accord and satisfaction. As I have not upheld that defence, the estoppels do not need to be called on to carry out that task. 271 I accept that there were some occasions, in the period 1992 and 1993, when bank officers told Mr Alcock that they would deal with his claim for overcharging interest when the loan was refinanced. Those representations were carried out, by the Bank granting the three credits it granted in July and September 1993. 272 Before any estoppel by representation can take effect, the representation must be one which is clear and distinct: Legione v Hateley (1983) 152 CLR 406 at 435-437. A representation that a claim would be "dealt with" suffers intractable difficulties in complying with this requirement. The plaintiff seeks to overcome those difficulties by saying that the representation meant not only that the claim would be given consideration and either rejected or granted in whole or part, but also that it would be considered and dealt with in accordance with the proper contractual rights of Illawong. I do not accept that the representation should be so construed. However, even if it were so construed, Illawong cannot demonstrate that it has suffered any detriment, for precisely the same reasons that its contractual claim fails. 273 I do not accept that there were representations by bank officers in the period between 27 July 1993 and November/December 1995 to the effect that any claim for overcharging of interest in the period 8 April 1991 to 26 July 1993 would be dealt with on repayment of the money borrowed. 274 I accept that on 10 October 1996 Mr Whitehead and Mr Alcock met Mr Ward and Mr Williams, and complaint was made about overcharging by State Bank, and that one or other of the bank officers said that they would provide an answer within 10 days. I am not satisfied that that statement by the bank officers led Illawong to alter its behaviour in any way relevant to the claims in these proceedings at all. 275 In these circumstances, the various estoppel allegations do not assist Illawong. Result 276 In light of these findings, the plaintiff's claim will be dismissed. 277 The parties have agreed that questions of costs should be argued once the reasons for judgment on the substantial questions of liability have been delivered. In these circumstances the only order or direction which I now make is to direct that the parties bring in Short Minutes of Order to give effect to these reasons for judgment at a time arranged, within 10 Court sitting days from the date of delivery of these reasons for judgment, with my Associate. On that occasion any argument concerning costs can occur. **********

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