Industry Funds Management (Nominees 2) Pty Ltd v Bellspin Pty Ltd

The documents 12The proposed terms and conditions of the Loan Agreement were contained in a letter of offer dated 14 July 2005 sent to San Marco. That letter made some variations to a number of clauses in an earlier letter of offer dated 12 May 2005 but otherwise incorporated the terms and conditions of the earlier letter. Mr Zagato executed the 14 July 2005 letter on behalf of San Marco on 21 July 2005. Clause 3 of the letters provided that the purpose of the Business Loan was to fund the fit out of the World Square Hotel and that the Commercial Hire Purchase Facility was to be used for the purchase of gaming machines. Clause 4 of the letters dealt with the term of the facilities. The proposed term of the Business Loan was as follows: "Loan for $5M may continue on an interest only basis, with interest to be met by borrowers, until 31/12/2005 or upon such time as the hotel lease comes into full effect and the hotel commences trading, whichever occurs first. Following commencement of the lease, the loan term of 10 years will commence, with first six months to be an on an interest only basis, with amortisation commencing after this period, i.e. loan then to be amortised over a term of 9 years 6 months." 13The proposed term of the Commercial Hire Purchase Facility was as follows: "Three (3) years from drawdown with a nil residual/balloon. Note: Depending on the asset being financed being suitable to the Lender, a longer repayment term may be agreed to ." 14In addition, clause 4 of the letters provided that: "On the expiry of the term of the loans all principal, interest and any other money owing under the loan must be fully repaid by the Borrower." 15Clause 6 of the letters dealt with the applicable interest rate, which was to be calculated daily on the principal balance and payable monthly in arrears (clause 7). For payments not made when due, default interest was to be payable on the overdue amount until it was paid at a rate equal to the then applicable interest rate plus two per cent per annum (clause 7a). 16It is not in dispute that San Marco was a customer of the plaintiff, that Mr Zagato was a director of San Marco and that he was one of the guarantors of the Business Loan and Commercial Hire Purchase facility made available to the company. Neither the terms of these advances and facilities nor the terms of the guarantees are in dispute. Default by the company is admitted and, subject to the questions I am asked to decide, Mr Zagato's prima facie liability to the plaintiff as a guarantor is also not in issue.

Correspondence and file notes 17Both the plaintiff and Mr Zagato directed my attention to various letters and file notes that were written or brought into existence at particular stages of the negotiations between the parties or following consummation of the agreement. Some of that material is referred to in what follows. 18A credit file memo dated 11 May 2005 prepared by Mr Vala dealt with circumstances that predated the finalisation of the terms of the loan to San Marco. It contained the following relevant information: "Business Banking recently issued a letter of offer for the above borrowers as per our CAM dated 13.4.2005. In essence the borrowers wish to proceed with our offer, however seek minor changes to [ sic ] prior to formal acceptance and payments of fees. The most recent CAM approved the following funding $5,000,000 10 year P&I loan (stage 1) $800,000 3 year P&I lease facility (stage 2) $575,000 10 year P&I loan or [ sic ] remaining term of leasehold interest at the time of draw down (stage 3) Amendments sought

1. $5,000,000 10 year P&I facility to change to 6 months interest only + 9.5 years P&I
2. ... Due to the Multiplex guarantee/buy back arrangement as at December 2005, and the trading up period of the new venture, the borrowers continue to seek the $5,000,000 facility to amortise over a 10 year term, however request the first 6 months of the facility or up to end December 2005 which ever occurs first, to be interest only monthly inarrears [ sic ]..." 19The letter of offer dated 12 May 2005, sent to the directors of San Marco, included the six months interest only provision referred to in the 11 May 2005 credit file memo. It was signed by Mr Zagato, by way of acceptance of the offer in that form, on 13 May 2005. 20Mr Vala subsequently prepared a credit file memo dated 11 July 2005. It said that the matter for San Marco "continues to progress towards settlement". It went on to include the following: "The bank will not release funds until a certification from our solicitors is held confirming all security is complete... However, given the borrowers would not [have] commenced trading, the lease would also not have commenced. As such the borrowers seeks to retain the $5m facility interest only until 31.12.2005...and commence the actual loan term from the date of commencement of lease. Upon the commencement of the lease the borrowers seek the loan term to be for a period of 10 years (as per the lease) with the first 6 months interest only for a trading up period as per CFM dated 13.4.2005.

Comments

1. ...
2. Loan for $5M may continue on an interest only basis, with interest to be met by borrowers, until 31/12/2005 or upon such time as the hotel lease comes into full effect and the hotel commences trading, whichever occurs first. Following commencement of the lease, the loan term of 10 years will commence, with first six months to be on an interest only basis, with amortisation commencing after this period, i.e. loan to be amortised over a term of 9 years 6 months...". 21On the following day Mr Vala wrote to the directors of San Marco. The plaintiff contends that this letter was sent following the meeting at which the conversation to which Mr Zagato deposes in paragraph 8 of his affidavit refers. Mr Zagato does not refer to this letter in his affidavit. Portion of the letter is in these terms: "Further to our most recent meeting 11.7.2005, I wish to confirm the outcome of the points raised At this point of time the Bank will not alter from its approval letter dated the 12 th May 2005 and will adhere to the release of construction loan funds on a cost to complete basis. No funding will be provided beyond the approved $5m for construction.

The Bank has agreed to provide the $5,000,000 loan facility as an interest only facility until 31.12.2005, or until such time as your lease commences, which ever occurs first. Upon the commencement of the lease, the approved loan term of 10 tears will commence, comprising 6 months interest only period to allow for trading up period, then reverting to a fully amortising loan of 9 years 6 months... A variation letter will be prepared noting the appropriate changes and will be forwarded to you in due course." 22Two days after this, on 14 July 2005, Mr Vala wrote to the directors of San Marco. The letter was headed "RE: Application for Super Business Loan" and contained the following: "We refer to your recent application for finance and advise that on behalf of Industry Funds Management (Nominees 2) Pty Ltd ("Lender"), we are pleased to offer, subject to the conditions precedent set out below, a loan on the following terms and conditions: Please note the following are variations to our original Letter of Offer dated 12 th May 2005 4. Term Business Loan (Number 1) Loan for $5M may continue on an interest only basis, with interest to be met by borrowers, until 31/12/2005 or upon such time as the hotel lease comes into full effect and the hotel commences trading, whichever occurs first. Following commencement of the lease, the loan term of 10 years will commence, with first six months to be on an interest only basis, with amortisation commencing after this period, i.e. loan then to be amortised over a term of 9 years 6 months." 23Mr Zagato's signature appears on page three of that letter under the heading " ACCEPTANCE OF LETTER OF OFFER ". That signature is witnessed by Tobias Farinha and is dated 21 July 2005. 24Reference has already been made to Mr Vala's email to Mr Zagato dated 5 December 2005. On 24 December 2005 Mr Vala prepared an internal memorandum to Paul Goessler and John Harris. It concerned preparation of the review of the loan to San Marco for the ensuing quarter. It referred to a recent meeting with the borrowers, presumably the meeting referred to in the 5 December 2005 email. It went on in terms that included the following: "The borrowers were seeking a restructure to interest only. However we would prefer to retain a P&I structure over an extended term of say 15 years in total. However Credit policy requires loan terms to be amortised over the 1 st option period, and as such the request to P&I over 15 years would not adhere to policy." 25On 21 February 2006 Colin Steingold, who then acted as San Marco's solicitor, wrote to Mr Vala. This letter is referred to in paragraph 10 of Mr Zagato's affidavit and would appear to have been written following the conversation referred to in paragraph 9 of that affidavit. The letter sought what is referred to as "a short term facility of $750,000 plus replacement of the bank guarantee initially put up by BNZA Bank for a period of six months". The letter makes no reference at all to an interest only period of two years. The penultimate paragraph of the letter is relevant and is in these terms: "It is also envisaged that our client will obtain a revaluation of the business as a going concern in April 2006 on the basis of increasing its borrowings and initially extending the interest only period under such loan. To this extent our client will be discussing with you the ability of Members Equity to enter into such new arrangement." 26I was not referred to any correspondence or file notes after that letter before a credit file memo dated 12 June 2007 prepared by Mr Vala that recorded some events following a meeting with San Marco representatives. The meeting occurred in circumstances where San Marco was experiencing difficulties in meeting its obligations to the plaintiff. For presently relevant purposes it contained the following: " Current arrears (2 payments on loan account and lease facilities) A meeting has been held with the borrowers to discuss current arrears situation and date of clearance of arrears. Borrowers advise the aggressive amortisation of the facility is placing a substantial strain on current cash-flows which in turn has caused current arrears. The borrowers have indicated that these arrears (both payments) will be cleared by the 18 th of June 2007." 27A file memo made by Mr Vala on 24 July 2007 records what occurred at a meeting that day between him and Messrs Farinha, Panagopoulos, Zagato and Fryer. Portions of that memo are in these terms: "Borrowers requested a meeting and tabled the following

1. The borrowers wish to immediately renegotiate the facility and seek a further advance of $500,000 to clear all arrears with Members Equity and separate creditors... This $500,000 was to catch up current arrears with the Bank...
2. The borrowers wish to renegotiate the facility of a longer period and increase to 60% of valuation of $11m.

The Bank further advised that it would not entertain a further increase of $500,000. The Bank clearly explained its current position and that the arrears of the facility was to be rectified. If and when this [ sic ] arrears would be cleared the Bank may consider an interest only period prior to further action, provided

• Arrears was [ sic ] cleared in full..." 28On 25 July 2007 Mr Panagopoulos telephoned Mr Vala. Mr Vala's file note of the conversation included the following: "Received a phone call from James Panagopoulos in regards to the borrowers ability to clear arrears and time frame. Initially borrowers ought [ sic ] to make interest only payments and suspend Principle [ sic ] Payments as they are unable to raise funds to clear arrears in one lump sum. However Mr James Panagopoulos advised the Hotel has the ability to make $30,000 in payments every week from trading cashflow. It was suggested that I put to the Bank that the borrowers maintain $30,000 pw as a repayment schedule to catch up arrears." 29On 30 July 2007 Mr Field, the National Manager, Business Banking Credit for ME Bank, wrote to the San Marco directors in the following relevant terms: "As you are aware the borrower is in default of the terms of the above facilities made available by Industry Funds Management (Nominees 2) Pty Ltd, by failing to make repayments when due. As a gesture of goodwill, the lender may be prepared to refrain from exercising its rights under its facilities and securities for the time being provided the borrower:

1. Maintain repayments of $30,000 per week commencing 30 th July 2007, which is to be maintained until all loan account and CHP account arrears are cleared. 2, Provided San Marco World Square Pty Limited maintain this repayment program, the Bank will provide an abatement of the principal portion of the current Business Loan repayment for a period of 30 days. (August's payment).
2. Provided San Marco World Square Pty Ltd maintain the proposed repayment, the Bank reserves all its rights to either consider a restructure of the Business Loan to interest only for a period of time which is yet to be determined and or, may recommence full recovery action of the facilities... ...Should you have any concerns about the contents of this letter we recommend you seek independent legal advice."

Mr Vala's evidence 30Mr Vala swore two affidavits that were read by the plaintiff in these proceedings. The first was made on 16 March 2010. The second was made on 25 October 2010. 31Between September 2002 and September 2006 Mr Vala was a senior business development manager with ME bank. He was the regional sales manager between October 2006 and September 2007. His responsibilities in these roles included liaising with clients in relation to their applications for funding as well as drafting submissions for credit approval. These would then be submitted to the credit risk committee of ME Bank with a recommendation concerning the terms on which the funding should be approved. The credit risk committee would then decide whether or not funding would be approved and, if so, on what terms. If approved, the client would be sent a written offer. Up until about 13 January 2006 Mr Vala had no delegated authority to make credit approval decisions of any kind and no authority to vary the terms of loans after approval had been given. After 13 January 2006 Mr Vala was given authority to approve loans up to $750,000. 32In his second affidavit Mr Vala said that he recalled the meeting with Mr Zagato and possibly Mr Farhina in or about July 2005. He said that the meeting took place after acceptance by San Marco of the terms of the May 2005 letter of offer. Mr Frauenstein appears to have signed the letter by way of acceptance of the offer it conveyed on 13 May 2005. The offer was open for acceptance until 20 May 2005 unless extended by mutual agreement. The May 2005 letter introduced the interest only term for the first six months from the drawdown or 31 December 2005, whichever first occurred. 33Mr Vala dealt with paragraph 8 of Mr Zagato's affidavit at paragraphs 12 to 15 inclusive of his second affidavit which are relevantly as follows: "12. I recall that at the July 2005 meeting San Marco sought an extension to the interest only period to that of a full 6 months from the date of commencement of the lease. 13. I do not recall the precise conversations at the July 2005 meeting. 14. To the best of my recollection I did not say the following alleged words (or words to their effect): 'Agree to this now and we can always get the interest only extended later once the pub has commenced trading.' To say something like this would be totally against my standard business practice... 15. I cannot otherwise recall any commitment given to alter or provide an extended interest only period to the attendees at the July 2005 meeting beyond what was documented." 34Paragraphs including paragraph 9 of Mr Zagato's affidavit are dealt with by Mr Vala in the following terms: "17. I recall the meeting in early February 2006... However, I recall the meeting was with Zagato, Farinha and Steingold. My colleague John Harris was also in attendance. 18. During the February 2006 meeting, San Marco sought to alter their finance arrangements with ME. 19. I do not recall the precise conversations at the February 2006 meeting. 20. Rather than keeping a file note of this meeting, I asked for a letter in writing [ sic ] confirming the changes sought by San Marco. 21. The letter which is annexure "C" to Zagato's affidavit from Steingold dated 21 February 2006 is such a letter... 22. From reviewing the February 2006 letter, I recall that San Marco sought ME's consent for San Marco to obtain a short term facility from BNZA Bank to be secured by the second ranking mortgage over the Lease. 23. Further, San Marco was going to obtain a valuation in April 2006 and was going to then enter into discussions with ME about a possibility of increasing the borrowings and interest only arrangements." 35Mr Vala's recollections of the matters referred to in paragraph 12 of Mr Zagato's affidavit are as follows: "25. I recall a meeting in late November/early December 2006... 26. I do not recall the precise conversations at the November 2006 meeting but I recall that San Marco sought a restructure of the facilities, including a restructure of payments to interest only. 27. ME did not support the restructure and this was conveyed to San Marco in my email of 5 December 2006...". 36Mr Vala had no recollection of any meeting in February 2007. He did recall the July 2007 meeting referred to in paragraph 16 of Mr Zagato's affidavit, to which he referred at paragraphs 33 to 40 of his second affidavit relevantly as follows: "33. I recall the meeting in July 2007... Exhibited hereto... is a file note of the July 2007 meeting. 34. From my review of the file note of the July 2007 Meeting: (a) the meeting was requested by San Marco; (b) the meeting was attended by myself and Fryer of ME and Zagato, Farinha and Jim Panagopoulos... of San Marco; (c) San Marco was in arrears and further funding was sought from ME; (d) ME may consider an interest only period prior to further action (reserving its rights) provided arrears were cleared in full; (e) it was agreed that Panagopoulos would contact ME within 24 hours to advise how and when arrears will be cleared. 35. On or about 25 July 2007, I had a phone call from Panagopoulos regarding the proposal to repay the arrears. 36. Exhibited hereto...is my file note of the telephone conversation. From my review of the file note: (a) Panagopoulos informed me that San Marco has the ability to make $30,000 per week repayments from trading cash flow; (b) Panagopoulos suggested that I put to ME that San Marco maintain $30,000 per week as repayment schedule to catch up on the arrears.

39. I do not recall the precise conversations of the July 2007 meeting.
40. To the best of my recollection and from my review of the file note of the July 2007 Meeting: (a) I did not make statements to the effect alleged in paragraph 16 of Zagato's Affidavit; (b) I make no comments and/or commitments in relation to the interest only period other than as documented in my file note of the July 2007 Meeting."

Cross-examination of Mr Vala 37Mr Vala was cross-examined in some detail. He agreed that he appreciated that when Mr Zagato was asking for an interest only period that he, Mr Vala, was aware of the impact of interest and capital on the viability of the business. He agreed that he understood that as a matter of importance. He also agreed that at the first meeting with him Mr Zagato had said that San Marco was looking for two to three years' interest only but principal and interest were in effect the terms that were being offered. Mr Vala denied that that was asked for on a number of occasions after that first meeting and said specifically that he explained on a number of occasions why it could not be provided. He accepted, however, that if he explained it on a number of occasions, that would suggest that the topic was raised more than once, in some form or another. 38Counsel for Mr Zagato put the following questions to Mr Vala: "Q. Now, I put it to you that ... the way Mr Zagato first asked for the interest only for two to three years you said to him: 'I'll get my Credit Committee to have a look at that, that shouldn't be a problem'? A. No, I don't believe that would have happened because to have a leasehold asset which is depreciating in value over a period of 10 years if the maximum we can fund is 50 per cent, the loan must amortise from effectively day one if you are fully drawn to 50 per cent lending you can get, so in a year's time the value of the hotel would have diminished slightly, the loan would need to amortise slightly as well to maintain a ratio of 50 per cent. Q. But you knew at all times that you were not the decision maker and that the Credit Risk Committee was the decision maker? A. True. Q. So it is quite conceivable, isn't it, that you could have said something like that -- A. No. Q. - 'I'll get the Credit Committee to have a look at that'? A. No, because it's so basic in lending you wouldn't put that up to the bank; you would maintain your LVR to your maximum. Q. I put it to you that you put that up to Mr Zagato as a possibility? A. No. Q. No? A. No. Q. Are you sure of that? A. Yeah, I wouldn't do that." 39Mr Vala's cross-examination continued a little later in these terms: "Q. You don't think you would have said: 'I'll get my Credit Committee to have a look at that, that shouldn't be a problem' at the first meeting? A. It shouldn't be a problem? Q. Yes. You don't think you said that? A. I don't think I said that. That's way outside the bank's policy if that was the case..." 40Mr Vala was then directed to a meeting in May 2005. He agreed that Mr Zagato was at the meeting. It was suggested to Mr Vala that Mr Zagato once again asked for an interest only period of two years. Mr Vala responded as follows: "A. In May 2005 we had a meeting in regards to they had raised I think additional funding and I believe there may have been an issue that there was a restrictive covenant in that third letter of offer and second letter of offer being like a negative pledge and no further borrowings and the point was raised that additional borrowings had been raised externally. That was one of the points we discussed. I can't honestly recall if he did ask for another interest only period and at that time we also had the discussion of I think Colin Steingold was looking to remove himself from the transaction." 41Mr Vala was then taken to the meeting on 11 July 2005 with San Marco representatives including Mr Zagato. San Marco had by then received the 12 May 2005 letter of offer. Mr Vala referred to the letter and what occurred at the meeting, including the following: "A. San Marco, sorry, yes, sought to amend the guarantee document as well or offer of guarantee instead of cash so they were the sorts of things. They also sought to extend, I think the previous offer letter had an interest only period in there but it was only to expire as at December 2006 [ sic , 2005] and the concern was of San Marco that if commencement of the hotel didn't start until November they would effectively only have one and a half months' interest only so they sought an extension of that for a further six months or six months-- Q. I just want to stop you there. So you remember them being concerned about the shortness of the interest only period? A. Yes. Q. And I put it to you that Mr Zagato said: 'Peter, it'll take at least two years to ramp up the turnover to a stable profitable position, we need at least two years of interest only', at that meeting? A. I can't recall if he said that. I'm sorry, that's the honest answer." 42Finally, Mr Vala's cross-examination then went on to include the following questions and answers: "Q. I put it to you that you said in response to that conversations you have just said a moment ago that honestly you couldn't remember: 'Agree to this now and we can always get the interest only extended later once the pub's commenced trading'? A. I doubt very much I would have made such a statement. Q. But you can't remember the conversation? A. Sorry, I can't say yes or no to that but I can say I doubt very much I would have said that. Q. And you didn't make any notes of that meeting? A. The notes of that meeting would be the actual file note that I sent a copy of to the clients."

Cross-examination of Mr Zagato 43Mr Zagato was also cross-examined. He was taken to Mr Vala's letter from Members Equity to San Marco dated 12 May 2005 and agreed that he signed it on page 13 after carefully reading it. He also agreed that at the time he signed it he was agreeing to the terms of the loan that it proposed. He then gave this evidence: "Q. And you appreciated, didn't you, that what Members Equity was offering by this Letter of Offer of 12 May 2005 was interest only for the first six months or until 31 December 2005 whichever was the earlier, then principal and interest over the remaining term of up to nine years six months, correct? A. When we signed this offer we were still in discussions with Members Equity. It was by no means the final discussion. There was a lot of issues that we were still discussing. Q. Mr Zagato? A. Yes. Q. You signed the acceptance of the Letter of Offer? A. Correct. Q. Knowing that San Marco was committing to Members Equity, that it was accepting the terms of this letter of 12 May 2005; you agree, don't you? A. I agree to that, yes. Q. And you agree to point 4, p 2, of the Letter of Offer 12 May 2005; you agree, don't you? A. Yes. Q. And as at the date of you signing this Letter of Offer you were committing San Marco to interest only for the first six months or until 31 December 2005, whichever was the earlier then principal and interest over the remaining term to nine years six months, correct? A. At that point. Q. That's correct, isn't it? A. Yes." 44Mr Zagato was then taken to the letter from Members Equity to San Marco dated 12 July 2005. He agreed that he would have read that letter at about that time. He also agreed that nowhere in his affidavit did he make any complaint about the content of that letter. Mr Zagato agreed that the "most recent meeting of 11 July 2005" referred to in that letter was the same meeting referred to by him at paragraph 8 of his affidavit. Mr Zagato went on to give the following evidence: "Q. The time that you would have read this letter from Members Equity of 12 July 2005 back in July 2005 you would have appreciated, wouldn't you, that as at 12 July 2005 Members Equity's position was that it would not alter from its approval letter dated 12 May 2005, correct? A. No, I was not under that impression because in meetings that I had with Mr Vala he indicated otherwise to me. Q. And are these meetings which you haven't referred to in your affidavit, is that correct? A. Yes, that's correct.

Q. By having drawn your attention to the third bullet point on p 2 of this letter on 12 July 2005, you agree, don't you, that the likelihood is that you understood Members Equity's position to be as at 12 July 2005 that set out at the third bullet point original p 2 with respect to any interest only period, correct? A. No, because I - look, I don't understand the question. I'd never sighted this letter. A lot of correspondence going to our solicitor Colin Steingold who is a former Director so some of the correspondence may not have come to me." 45Mr Zagato was then taken to the letter from Members Equity to San Marco dated 14 July 2005 and to that part of it that referred to acceptance by San Marco of the letter of offer. He acknowledged that his signature dated 21 July 2005 appeared on page 3 of the letter. His evidence then went on to include the following: "Q. And before you signed your name and you put the date on page 3 of the acceptance of Letter of Offer you read the letter, didn't you, from Members Equity dated 14 July 2005? A. Yes, I did read that. Q. And you understood it, didn't you, upon reading it before you signed it? A. I did understand it, yes." 46The topic was later revisited in these terms: "Q. The date that you signed the acceptance of Letter of Offer, page 3, of the Members Equity letter dated 14 July 2005 you understood, didn't you, that the only terms upon which Members Equity was prepared to offer finance to San Marco were those set out in the letters from Members Equity dated 12 May 2005 and 14 July 2005, correct? A. No, those weren't the only terms. I understand by what Peter Vala had said to us that he would extend the interest only period once we started trading. HIS HONOUR Q. Did it strike you as odd that the letter of 14 July didn't pick up what you say was discussed in the conversation with Mr Vala? A. The letter of 14th of July? Q. Yes. A. I'm not exactly sure of the - of the 14th of July, so the letter we are dealing with now. He kept - Mr Vala kept saying to us that that was the best way of getting the process moving and that we would deal with extending the interest only period once the pub started trading itself and so he could fast track the whole - the whole deal through his credit effectively, that was the effect." 47Counsel for San Marco then went directly to the issue of Mr Zagato's truthfulness: "Q. The truth is, isn't it, Mr Zagato, that what you assert Mr Vala said at the meeting of July 2005 didn't happen, did it? A. It did happen. Q. And the truth is isn't it, Mr Zagato, the evidence you have given as set out in para 8 of your affidavit is a reconstruction, isn't it, influenced by the fact of serious consequences for you if you fail in defending these proceedings, correct? A. That's not correct. The - if we didn't get that interest only period for two years I don't [ sic ] believe the pub really didn't have a chance which is testament to what happened. It was almost suicide not having an interest only period at that length. Q. Mr Zagato, as at 21 July 2005 you knew that there was no interest only period for two years, didn't you? A. No, I assert that Peter Vala had said to us that he would extend the period of our interest once we started trading." 48This evidence is to be compared with what follows: "Q. Mr Zagato as at 21 July 2005 you knew that the position taken by Members Equity was as set out in their letters of 12 May and 14 July 2005 and that those letters said nothing about there being any interest only period for two years; that's correct, isn't it? A. In the document itself, yes, that's correct. Q. And you knew, didn't you, from meetings you had attended with Mr Vala that whatever was discussed at a meeting he would then have to make and put a proposal to the credit people above him, correct? A. That's correct. Q. And you knew that the credit team above Mr Vala, they were the people who were responsible for making any decision about any terms of finance being made available to San Marco, correct? A. That's correct. Q. And you knew that the letters of 12 May and 14 July 2005 came from Members Equity following decisions taken by the credit team, didn't you? A. Mr Vala was quite - was confident that he would have no problem in getting us a two year interest only facility once we started trading through his credit. Q. You knew before the letters of 12 May and 14 July 2005 were sent to San Marco by Members Equity that decisions had been taken by the credit team and that they had authority which Mr Vala didn't have in respect of the terms of finance which could be proposed or offered to San Marco, correct? A. They - they had the powers. Yes, I do agree with that." 49Mr Zagato went on to accept that he knew from reading the letters of 12 May 2005 and 14 July 2005 that whatever recommendation had been made by Mr Vala to the credit team, the credit team was writing to San Marco in quite different terms with respect to any interest only period. He specifically agreed that he knew that from what was said to him by Mr Vala. Moreover, Mr Zagato said that he knew that it was the credit team ultimately who made the decisions as to what terms of finance could be offered to San Marco. That last concession, however, was followed by this: "Q. And you knew, didn't you, that anything said by Mr Vala at any meeting had to be treated with caution because it could be overridden by the credit team, correct? A. There was - not the way Peter Vala put it to us, he was quite confident that he would get it through his credit and it was critical that he did for us." 50A little later Mr Zagato gave the following responses: "Q. Mr Vala had represented to you that, what he recommended to the credit team would be approved, if he told you that in a meeting of July 2005, you knew that then, as at 21 July 2005, didn't you? A. Yes, that - at the time he said that the way to get the - structure the finance was to get this approval done in this form, okay, with the six-month interest only and then, once the pub started trading, he would then go back to credit and he would be able to get us a two-year interest only facility. That was his level of confidence to us. Q. So, are you saying, therefore, that, at the meeting that you attended with Mr Vala in July 2005, he made it quite clear to you that the recommendation he would be making to the credit committee at that time is that any interest-only period would be only until 31 December 2005 or until such time as the hotel lease came into effect or the hotel commenced trading, whatever occurred first? A. That was part of what he said, yes. Q. You clearly understood that, as at 21 July 2005? A. Yes, I understood that. Q. You knew that, with respect to any future application to be made to credit by Mr Vala, ultimately, the decision which would be taken would not be made by Mr Vala, but would be made by the credit team, correct? A. Yes, that's correct. Q. And you knew, didn't you, by 31 July 2005, that, whatever Mr Vala had said to you, would make no difference at all to the position of San Marco if the credit team took a different position to that of Mr Vala, correct? A. Not - not with what he was telling us at the time, no." 51Notwithstanding Mr Zagato's final answer in the preceding extract from the transcript of his cross-examination, he went on to make the following concessions: "Q. You knew though, didn't you, that, as at 21 July 2005, the plaintiff had not agreed to an interest-only period for two years, correct? A. That the plaintiff, being-- Q. Industry Funds Management. A. They had not agreed to it, no, but in conjunction with what Peter Vala had said, I went ahead and signed the guarantee. Q. But you knew that they hadn't agreed to two years interest only at the time that you signed the deed of guarantee and the loan agreement, correct? A. When I signed this, it wasn't in the documents, that's correct. Q. At no time thereafter did you ever make any application, did you, in writing to vary the terms of the loan agreement or the deed of guarantee and indemnity? A. We did, we had quite a few conversations with Peter Vala. Q. Did you do it in writing, Mr Zagato? A. Not that I recall." 52Finally, Mr Zagato's attention was drawn to the terms of the letter dated 21 February 2006 sent by Mr Steingold following the meeting that Mr Zagato had had with Mr Vala, referred to in paragraph 9 of Mr Zagato's affidavit. He agreed that the letter made no reference to an interest only period of two years. Mr Zagato's cross-examination effectively thereafter concluded with the following questions and answers: "Q. As at 21 February 2006, you knew that Members Equity's position was that they would not agree to an interest-only period for two years, correct? A. At that point, yes, we're aware of that then. Q. And you knew, before 21 February 2006, that Mr Vala wasn't prepared to make any recommendation to credit for an interest-only period of two years? A. Oh, well, at that point he was becoming quite difficult to deal with, yes, that's correct."

Plaintiff's submissions 53The plaintiff submitted that Mr Zagato's version of the 11 July 2005 meeting was untruthful or at least unreliable, and that it should not be accepted. In particular, the plaintiff asserted that his version was inconsistent both with the contemporaneous documents created during the period from 11 May 2005 to 21 July 2005 as well as the terms of the transaction itself. 54Clause 7.4 of the Loan Agreement provides in effect that the borrower acknowledges that it has not entered into any transaction document in reliance upon any representation, warranty, promise or statement of the plaintiff or any person on its behalf. Clause 13.7 provides in effect that a variation of any term of the document had to be in writing and signed by the parties. 55In this respect the plaintiff submitted that having regard to the objective intent of the parties, the factual matrix and the commercial circumstances surrounding the Loan Agreement, it is clear both that Mr Zagato accepted the written agreement to be an all-embracing and binding record of its terms and conditions and that he and San Marco acted accordingly. The written agreement was the culmination of protracted commercial negotiations, during the course of which changes to the proposed terms and conditions were carefully documented. For example, variations to the written agreement, which the parties entered into on 13 May 2005, were clearly recorded in the 14 July 2005 letter. There is no evidence to suggest that Mr Zagato did not accept the written agreement to be exclusive or that he treated it as somehow subject to implementation only in accordance with engrafted obligations binding the plaintiff to provide a further two year interest only period in accordance with the terms of the representations said to have been made by Mr Vala.

Mr Zagato's submissions 56Mr Zagato contended that his version of the conversation was credible and should be accepted. This was largely based upon the submission that Mr Vala had accepted that Mr Zagato, or the borrowers generally, were seeking an extension of the interest only period and that in the course of conversations about that Mr Vala represented that the plaintiff would extend the original six month period to two years. As the cross-examination of Mr Vala reveals, he expressly remembered the borrowers being concerned about the shortness of the interest only period. Mr Zagato submitted that the start up business of the hotel was so conspicuously non-viable without a capital repayment holiday that no reasonable commercial entity would have entered into a loan transaction without an enforceable assurance that a substantial interest only period had been, or would become, part of the transaction. 57Mr Zagato submitted that I should accept his version of the conversation that he had with Mr Vala to the effect that Mr Vala represented not merely that he would attempt to convince or persuade the plaintiff's credit committee to agree to an additional interest only period of two years but that it was in fact a foregone conclusion or a formality and that the plaintiff would agree to it.

Consideration 58I am satisfied that Mr Zagato raised the issue of the importance of an interest only period with Mr Vala in conversations with him and even that he may in terms have referred to an interest only period of two years at some stage. Mr Vala agreed that the borrowers' concern about the shortness of the interest only period had been raised with him. However, I am not satisfied that Mr Zagato said to Mr Vala that unless a further interest only period of two years was provided, the business would fail. Mr Zagato's affidavit does not refer to him having said this and I am not prepared to infer or assume that these words accompanied what I otherwise accept were expressions of concern to secure as generous an interest only period as possible. I find it difficult to accept that the plaintiff, or any commercially astute lender in its position, would even have considered advancing funds to San Marco for its venture on any terms that did not include an interest only period of two years in the face of solemn predictions by the company's directors and guarantors that the proposed venture would actually fail without such a concession. It is not without significance that Mr Zagato's description, given in the course of his cross-examination, was one of it being " almost suicide not having an interest only period of that length", rather than a statement of certainty or inevitability. Indeed, the words used in his affidavit were, "[i]t will take at least two years to ramp up turnover of the pub to a stable profitable position". 59I am also not satisfied that Mr Vala ever represented that the plaintiff would alter or amend or renegotiate the terms of the loan so as to provide for such a term if requested or that he represented anything other than that he would refer such a request to the credit committee. My reasons for so finding are as follows. 60First, the interest only period for which the agreement provided expired on 31 December 2005. No complaint is ever made that the plaintiff failed to offer or establish a replacement for it at any time prior to the commencement of these proceedings. It defies belief in my view that if Mr Zagato had entered into a transaction, as he said he did, relying upon a representation that San Marco would receive the benefit of a moratorium upon the repayment of capital for as much as two years, and that nothing to effect that representation was done, that it would not have generated some discernible written trail of complaint from an early time. There simply is none. 61Importantly in this respect, Mr Zagato gave evidence that it was his view, at or about the time of negotiations for the loan, that if he did not get the interest only period for two years "the pub really didn't have a chance", saying "which is testament to what happened". He said that it "was almost suicide not having an interest only period at that length". Given his level of concern about the importance of the issue, it is incredible in my view that no consistently reoccurring complaint of the sort now raised by him in these proceedings was ever made and conspicuously documented or recorded. 62Secondly, and in a related sense, the correspondence and file notes that are generated are conspicuously silent about a two year interest only period. For example, Mr Steingold's letter to the plaintiff on 21 February 2006 clearly follows the February 2006 meeting referred to by Mr Zagato in paragraph 9 of his affidavit but does not speak of the interest only period in terms that reflect or mirror Mr Zagato's version. Mr Steingold spoke of it being " envisaged that our client will obtain a revaluation of the business as a going concern in April 2006 on the basis of increasing its borrowings and initially extending the interest only period under such loan ". He went on to say that to that extent, his client would "be discussing with you the ability of Members Equity to enter into such new arrangement ". This language falls far short of Mr Zagato's currently propounded position. 63The 5 December 2006 email from Mr Vala to San Marco was a reference to attempts to secure a financial restructure. It was unsuccessful, meaning that the consummated transaction remained unchanged. Nothing followed from Mr Zagato or San Marco in response to that email to suggest that the plaintiff was resiling from some form of obligation to extend the interest only period beyond the agreed date of 31 December 2005. 64When Mr Panagopoulos telephoned Mr Vala on 25 July 2007, he did not refer at all to the representations. Indeed, his reference to the borrowers initially seeking to make interest only payments and suspend principal payments, as they were unable to raise funds to clear arrears in one lump sum, was the natural context in which to expect that a reference to the representations might have been found. The absence of any reference to it is significant. 65Similarly, Mr Field's letter of 30 July 2007 ought to have energised a somewhat indignant response from the borrowers if they were in fact the beneficiaries of the alleged representations. It will be recalled that they were experiencing difficulties at that time and Mr Field's letter purports to reserve to the plaintiff the right to choose whether or not a further interest only period might be offered. Mr Field's advice to the borrowers that "[p]rovided San Marco World Square Pty Ltd [maintained] the proposed repayment, the Bank reserves all its rights to either consider a restructure of the Business Loan to interest only for a period of time which is yet to be determined and or, may recommence full recovery action of the facilities..." appears also to have been met with a relevantly deafening silence in circumstances where, on Mr Zagato's account, heated dissent might have been expected. 66Thirdly, the evidence reveals that San Marco was experiencing financial and trading concerns but did not call in aid the plaintiff's failure to make good the alleged representations as either a source of their problems or the way out of them. For example, at the meeting with the plaintiff on 12 June 2007 the borrowers complained that "the aggressive amortisation of the facility [was] placing a substantial strain on current cash-flows which in turn [had] caused current arrears". It is difficult to understand why, in the context of such a meeting, the plaintiff's failure to defer the obligation to restore capital for two years would not have figured prominently. A reference to aggressive amortisation suggests in terms recognition of an obligation to return capital to the plaintiff. No challenge was made to the accuracy of the memorandum purporting to record what occurred at that meeting. 67It will be recalled that it was put to Mr Zagato that any further interest only period was at all times subject, in effect, to the decision of the plaintiff's credit committee. In response to that suggestion he replied that Mr Vala was " quite confident that he would get it through his credit [committee]". In my view those words suggest quite strongly that the provision of the interest only period of two years was even in Mr Zagato's mind a matter of hope rather than expectation, entitlement or certainty. This is also reflected in Mr Zagato's answers in cross-examination when he said that " with the six-month interest only and then, once the pub started trading, [Mr Vala] would then go back to credit and he would be able to get us a two-year interest only facility. That was his level of confidence to us". That is in my view another example of Mr Zagato's understanding that what Mr Vala was offering was an opportunity to have the plaintiff look again at the prospect of extending the interest only period but no more than that. 68Indeed, Mr Zagato agreed that the credit committee had the final say. He accepted that he knew from reading the letters of 12 May 2005 and 14 July 2005 that whatever recommendation had been made by Mr Vala to the credit team, the credit team were writing to San Marco in quite different terms with respect to any interest only period. He also agreed that he knew that it was the credit team ultimately who made the decisions as to what terms of finance could be offered to San Marco. He knew these things because, in effect, Mr Vala was telling him so. 69Nor is it credible in my view that no mention was made about the fact that the 14 July 2005 letter made no reference to a different interest only period. The parties had gone through a course of negotiations in which obviously important issues had been raised and obviously important variations had been agreed. Mr Zagato literally signed off on these. There was no reference to a further interest only period of two years or any term at all other than the one expiring on 31 December 2005. 70Critically, Mr Zagato agreed that at least as early as February 2006 he was aware that the plaintiff would not extend the original interest only period. Whatever may have been done or said by San Marco or its other interested backers, Mr Zagato never raised any complaint at that time that the plaintiff was disregarding the representations he now alleges. This is so despite his clear evidence that as at 21 February 2006 he knew that the plaintiff's position was that they would not agree to any further interest only period of two years. He said instead only that at that time Mr Vala "was becoming very difficult to deal with". 71I am not satisfied that Mr Zagato's version of events referred to in paragraph 8 of his affidavit should be accepted. I find as a fact that Mr Vala did not say the words "we can always get the interest only extended later once the pub has commenced trading" that Mr Zagato attributes to him at the July 2005 meeting referred to in that paragraph. I also find as a fact that Mr Vala did not say to Mr Zagato "that shouldn't be a problem". In forming that view I have considered the foregoing matters as well as the following statements concerning how to approach the evidence that he gave. 72In Commonwealth Bank of Australia v Serobian [2009] NSWSC 302 at [362], Hammerschlag J made the following observations: "[362] Where a party seeks to rely upon spoken words as a foundation for a cause of action, including a cause of action based on a contract, the conversation must be proved to the reasonable satisfaction of the Court which means that the Court must feel an actual persuasion of its occurrence or its existence. Moreover, in the case of contract, the Court must be persuaded that any consensus reached was capable of forming a binding contract and was intended by the parties to be legally binding. In the absence of some reliable contemporaneous record or other satisfactory corroboration, a party may face serious difficulties of proof. Such reasonable satisfaction is not a state of mind that is obtained or established independently of the nature and consequences of the fact or facts to be proved. The seriousness of an allegation made, inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question of whether the issue has been proved to the reasonable satisfaction of the Court. Reasonable satisfaction should not be produced by inexact proofs, indefinite testimony, or indirect inferences: see Briginshaw v Briginshaw (1938) 60 CLR 336 at 362; Helton v Allen (1940) 63 CLR 691 at 712; Rejfek v McElroy (1965) 112 CLR 517 at 521; Watson v Foxman (2000) 49 NSWLR 315 at 319." 73His Honour there referred to what was said by McLelland CJ in Eq in Watson v Foxman (1995) 49 NSWLR 315 at 318-9 in these terms: "Where the conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances. In many cases (but not all) the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition. Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.

What I have said above... is equally applicable, mutatis mutandis, to the causes of action based on contract and on equitable estoppel... with the added requirements, in the case of contract that any consensus reached was capable of forming a binding contract and was intended by the parties to be legally binding... ". 74I have no doubt that Mr Zagato entered into the transaction in the hope that he would be able to secure a further interest only period from the plaintiff. He did not do so, however, in the certain expectation that that would occur. Mr Zagato recognised that anything that was negotiated between Mr Vala and San Marco was subject to final approval by the plaintiff. Whether this is referred to as the credit committee or the credit team is of no consequence. Mr Zagato's present stance is in my opinion a reflection of his optimism that an extension of the interest only period could be secured. That optimism was not the result of any words said by Mr Vala of the sort that Mr Zagato now seeks to attribute to him. There is not even a hint in the documents recording what occurred at critical meetings or in correspondence between the parties that such a contention is well founded. There is even more significantly a complete silence from Mr Zagato about the plaintiff's alleged failure to come good with the extended interest only period when a very loud complaint might have been expected. This is not a case where I am required to decide the issue upon the basis of a bare comparison of Mr Zagato's assertions and Mr Vala's responses. The contemporaneous documentation of events alone favours a rejection of Mr Zagato's version. 75Finally I should note that neither Toby Farinha nor Miguel Farinha was called to give evidence to corroborate Mr Zagato's version of the conversations to which he deposed, at which they are said to have been present and to which they are said to have been parties. The precise current relationship between them and Mr Zagato is not well explained, and certainly not in a way that permits me to determine whether or not they could be considered to remain in his camp. Moreover, at the time Mr Zagato prepared his evidence it would appear that he was unrepresented and that the significance of corroboration of his version of events may not have been as well understood by him as a legally trained person. In forming the views I have formed, therefore, I have not drawn any inference adverse to Mr Zagato by reason of his failure to call the Farinhas.

Orders 76The extent to which the conclusions I have reached will be determinative of the proceedings should not, but may, be the subject of remaining contention between the parties. In the circumstances I will direct the parties within seven days to bring in short minutes of order giving effect to these reasons. Unless otherwise agreed, I will also hear the parties on the question of costs.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 25 October 2011