I accept that in fact he believed these things.
83 To address whether the transaction was an uncommercial transaction within the meaning of s 588FB it is necessary to have some definition of the transaction under consideration. The plaintiffs' pleadings define the transaction narrowly so as to relate only to the payment of $520,000. I regard this as an unduly narrow view. In defining the relevant transaction it is necessary to consider the transaction in some sense to which the considerations (a), (b), (c) and (d) in s 588FB(1) could relate. An unduly narrow definition could exclude benefits and detriments which on a fair view ought to be taken into consideration. In my view the relevant transaction the uncommercial character of which is to be addressed is the loan transaction between JTS1 and RMBL, initiated by Mr Sadri's approach to RMBL on 2 December and concluded with the settlement on 22 December 2005, with all the arrangements incidental to the loan; guarantees, securities, and, in Mr Sadri's concept, the arrangement for JTS1 to lend money to Mr Adams and for Mr Adams to repay Mr Sadri.
84 After then the transaction was over and the event had ended. Workings out of the relationships and obligations thus created in later months and years, with which much evidence dealt, are not part of the transaction and are not relevant for addressing whether it was uncommercial in character. Those later events need to be referred to only briefly. In the early months of 2006 Mr Sadri paid several sums of interest to RMBL, conforming with his guarantee. Later, when there had been defaults and JTS1 had gone into liquidation, RMBL attempted to realise on the security and conducted an auction, which did not result in a sale. RMBL then required Mr Sadri to pay out the debt under his guarantee, and Mr Sadri did so and took an assignment of the securities, particularly of the mortgage of the real property. Later he assigned the mortgage to a company which he controlled. It became altogether clear that far less than the secured debt and other mortgage obligations could be obtained by selling the property. The assignee company foreclosed on the mortgage and came to own the land free of JTS1's equity of redemption. In the long run Mr Sadri incurred a large loss. This chain of events is not in my finding part of the transaction to be considered for the application of s 588FB.
85 There undoubtedly were benefits for JTS1 in entering into the transaction. JTS1, notwithstanding that well over $4 million had been sent to it by subscribers who wished to obtain preference shares, was, in circumstances which cannot be understood, quite unable to pay the mortgage principal or even a significant part from its own resources, and was incurring interest in the order of 60% per annum while in default. For reasons which are also mysterious but existed in fact, JTS1 was not in a position to proceed further with and satisfy the conditions on which the Commonwealth Bank of Australia was apparently ready to lend it something in the order of $4 million if satisfied of matters which, for a well conducted company which had the resources that it appeared to have, should not have been difficult. This part of JTS1's difficulty was in effect solved by Mr Sadri's intermediation with RMBL to obtain a loan of $2.2 million at relatively moderate interest rates, appropriate for a well-considered commercial transaction, unlike the interest charged by Mountainview. The RMBL loan markedly improved this part of JTS1's confused affairs. The people in charge of JTS1's affairs had been unable to bring about any such result, notwithstanding default to Mountainview since September 27, and notwithstanding that the need for refinancing the Mountainview loan had been evident long before that. There were then significant benefits to JTS1 from entering into the transaction. The RMBL loan differed from the Mountainview loan in that RMBL did not require charges over Willow Court Retirement Village as Mountainview had done. This however was not an advantage to JTS1, which had no interest in Willow Court Retirement Village.
86 However there were also very significant detriments. At one point in submissions the defendant's counsel sought to make an analogy between the payment of $520,000 and commission or procuration fee for obtaining finance. It is important to keep in view that Mr Sadri charged no commission for obtaining finance and the payment was of an entirely different character. There is no evidence and it could not rationally be possible that a commission or procuration fee of $520,000 was appropriate for obtaining a loan which in effect was only about three times that amount. Advantages in terms of the extension of the term of the loan and the relative moderation of the interest charges would be entirely blotted out if the payment were to be regarded as a procuration fee. It can only be appraised as what it was, a requirement by Mr Sadri, as a condition of his involvement and of making available the moneys which were made available, that JTS1 should provide $520,000 out of the advance and treat it as if it had been lent to Mr Adams and Mr Adams had disposed of the money lent to him by paying it on to Mr Sadri. Mr Sadri's experience in dealing with Mr Adams over several years showed that it was not practically possible to get Mr Adams to comply with arrangements for repayment of the loan, that the terms of repayment which he had signed were not complied with, and that there were poor prospects that he would be in a position to pay $520,000 to JTS1.
87 It was said (but has not been proved) that the commercial fishing vessel which was the subject of the original loan had been impounded by the Government of New Zealand. Whatever disaster happened there, Mr Adams was no longer engaged in business with the commercial fishing vessel and no longer had it at his disposal. Putting $520,000 into a loan to Mr Adams was a proven failure as Mr Sadri's evidence demonstrated, and lending the money to Mr Adams was much the same as paying out $520,000 without prospect of recovery.
88 Although there were beneficial aspects for JTS1 of entering into the transaction, paying out $520,000 was a severely detrimental aspect. On the other hand the benefit to Mr Sadri from entering into the transaction can fairly be equated with $520,000, a significant matter under paragraph (c) of s 588FB(1). He collected $520,000 which could not be collected from Mr Adams.
89 Other relevant matters include the whole skein of facts referred to in this judgment, and particularly the commercial predicament of the company, in which it was not in a position to incur large obligations or to acquire assets of dubious value, in view of the large skein of obligations which was gathering over it. It had no history of success and prosperity in which it could indulge in taking a chance on Mr Adams.
90 In my finding it could not be expected that a reasonable person in the circumstances of JTS1 would have entered into a transaction in which it paid out $520,000 of good money and received back an obligation by Mr Adams to pay that same sum, after he had failed to pay it to Mr Sadri for several years. It was nothing to do with JTS1's business to see Mr Adams out of his difficulty, and even less to do with JTS1's business to see Mr Sadri out of his difficulty with Mr Adams. A reasonable person in JTS1's position would not have used resources, still less borrowed money to make resources available, to assist the director's brother-in-law when it had large business in hand and many obligations and an urgent need to complete preparation of its real property for the conduct of a college for international students in Tasmania, the completion of which was its only hope of achieving significant income. Getting Mr Adams or Mr Sadri out of a pickle arising from putting an engine in a commercial fishing vessel a few years earlier had nothing whatever to do with JTS1's business.
91 My finding is that a reasonable person in JTS1's circumstances would not have entered into the transaction and accommodated Mr Sadri's wish to be repaid $520,000 by Mr Adams in doing so. The transaction plainly was an uncommercial transaction as defined. Mr Sadri incurred significant obligations to RMBL; he was the contributor and provided the funds, he guaranteed the loan, he agreed to take an assignment if there was a default (and eventually he did) and he repaid the loan as guarantor. These represent his economic function as the lender standing behind RMBL. It was never made clear to me why he acted through RMBL, but plainly he had the economic function of being the lender, and in the light of this his guarantee obligations and burdens are not significant detriments to him. As lender he would reasonably have required payment of interest, perhaps at a higher rate than was paid; but he could not reasonably have required that $520,000 be paid to him, whether or not he also gave up an obligation in that amount which he had been unable to collect for several years.
92 In addressing Mr Sadri's defence under s 588FG(2) I do not regard him as being in any difficulty with respect to the matter in subs (2)(b) which relates to reasonable grounds to suspect that the company was or would become insolvent, or (c) which relates to providing valuable consideration.
93 The information and documents furnished to Mr Sadri by Ms Cavanough gave what would, to a reasonable person, be an indication that JTS1 was in a reasonably sound position, although in need of capital to complete its development and move into a position where it would earn income. In particular Mr Sadri was shown the Jones September valuation which indicated that the company's property was of very high value, in relation to the loan transaction which took place and security for it. There were some adverse indications in that JTS1 was not in a position to comply with conditions imposed by the Commonwealth Bank of Australia within the time available. Mr Sadri did not inspect or have anybody make an inspection of the company's books of account or determine its cash trading position; it should not be found that he had grounds to suspect insolvency for this reason.
94 Mr Jones' valuation of September 2005 is a strange document. When its internal reasoning is analysed it is not possible to understand how the valuation opinion is produced; the reasoning appears to bring into consideration facts and expectations which would have a bearing on the projected value at the time of completion of development, but do not support opinion of value as at the time of the valuation. While its reasoning is confused, in my understanding the valuation opinion at $6.9 million can only be arrived at by assuming that all the projected improvements had been completed. Not all the language in the valuation supports this conclusion, but I think that it must be taken that some such assumption was made. A check valuation brought under consideration the rent provided for by the leases which had been entered into; this consideration would only be relevant when the time arrived when the rent could be collected, and it plainly had not arrived at the time of which the valuation speaks.
95 A lender with the advantage of insight into valuation reasoning would not have regarded it as reliable. However, a person who did not have that advantage could reasonably accept it on its face value as supporting a large secured loan to JTS1; certainly as supporting the loan of $2.2 million which in fact was made.
96 The issue which requires attention is the question of good faith referred to in s 588FG(2)(a).
97 I have regard to the following observations of Nicholas J in Cussen v Sultan (2009) NSWSC 1114 at [36]-[38]
"36 Consistently, in my opinion, in cases concerning an uncommercial transaction, "good faith" should be understood to relate to the uncommercial nature, or possible uncommercial nature, of the transaction, and knowledge thereof. A failure to make enquiries, in some cases, may well be of considerable significance when determining this element of the defence ( Cussen as liquidator of Akai Pty Ltd (in liq) v Commissioner of Taxation [2004] NSWCA 383; (2004) 51 ACSR 530, par 123).
37 What is required to satisfy the onus will vary with the circumstances of the case. There is no set criteria. However, in my opinion, usually a defendant would need to have an understanding of the substance of the transaction sufficient to show that he became a party to it with an honest and proper motive or purpose. Adopting the words of Mansfield J in Smith (p 322) the defendant must demonstrate that in becoming a party to the transaction he acted without an expectation that the transaction was uncommercial. In my opinion, for the defendant to benefit from s 588FG(2)(a) it is necessary to prove that the motive and intention in becoming a party to the transaction was founded on a genuine belief, or knowledge, that the transaction was of an ordinary business kind or was not uncommercial.
38 Such belief or knowledge may well depend upon information obtained by making enquiries to ascertain the character of the transaction prior to becoming a party to it. However, evidence which shows only that the defendant, at the time of becoming a party, was aware that the transaction was, or possibly was, outside normal commercial experience would indicate a motive to profit from, or to take advantage of, an uncommercial transaction at the company's expense. Put another way, the defendant must show that the purpose or motive was not to receive a return or to obtain a bargain of such magnitude that it could not be explained by normal commercial practice (cf: Capital Finance Australia Ltd par 73). Thus the defendant would need to prove the probability that in becoming a party to an impugned transaction it was not his purpose to exploit its inherent uncommerciality."
98 In my view the uncommercial nature of the transaction, and of the requirement as a condition of the loan that $520,000 be made available to Mr Sadri on the footing that the company lent it to Mr Adams, were altogether clear to any reasonable person in the position of Mr Sadri. It was nothing to do with JTS1's business to furnish money to Mr Adams or for his benefit, or to solve Mr Sadri's difficulties in collecting money from Mr Adams. Mr Adams had no standing. He was not a shareholder, he was not an officer. He was the sole shareholder's brother-in-law; and that did not make his affairs any concern whatever of JTS1. It must have been obvious to Mr Sadri as a reasonable person that the obligation which he thought of as being incurred by Mr Adams to the company would do the company no particular good at all but would significantly increase its liabilities without furnishing any correspondingly valuable asset. It was simply nothing to do with the affairs of a company which was developing land for a college in New Norfolk, Tasmania to help out either Mr Sadri or Mr Adams in respect of this transaction arising out of a commercial fishing venture some years earlier. Treating $520,000 in this way was altogether out of scale with solving the company's need to refinance its obligations to Mountainview.
99 At the core of the issue of good faith under (a) is the following passage in the cross-examination of Mr Sadri at T202, 203.
"Q. What I put to you is you didn't care who repaid you the 520,000, as long as it came back to you as part of this transaction, do you agree with that?
A. Well, I - it is Harold that was supposed to repay me, yes.
Q. It was Harold that owed you the money, but you didn't care who paid it back, because you didn't make a distinction in your mind between Mr Adams and the companies which Mr Adams and Mrs Adams were involved with and who were asking you for the money?
A. Yes, they operated them as a single entity, yes, that's correct.
Q. So you didn't think that Mr Adams had separate financial affairs, or that it was him that needed to repay you. You just wanted your $520,000 back, didn't you?
A. Yes, but it was one entity with one family and one entity and that's what was the case.
Q. And so what I also put to you is, have a look at the conversation in paragraph 42 of your affidavit. You see the conversation that you have deposed to - I beg your pardon, do you see the words that you depose to having said beginning 'There is still 520,000 owing'?
A. Yes.
Q. What I put to you is that you never made the distinction at that time between the company repaying you 520,000 and Harold repaying the 520,000. Do you agree with that?
A. Yes, there was no difference the way they operated.
Q. But what I'm putting to you is you say you did not say that the company should borrow enough money to lend to Harold to enable him to repay his personal loan, did you?
A. Yes, that was the internal accounting problem, like the funds I provided we sent to MABA, which was a company, not Harold account.
Q. Precisely. So it was a matter of no moment to you what entity paid you back, as long a someone associated with the Adams/Cavanough family paid the money that Harold had borrowed from you?
A. As far as I'm concerned Harold borrowed and Harold returned.
Q. You know well, don't you, that the money that was used to repay you was advanced to the company, not to Harold?
A. But that was Harold and Barbara's company.
Q. Well, it would have been perfectly open to you to lend $520,000 to Harold which he could have paid you back from out of that money, couldn't he?
A. He was guarantor of that loan."
100 This passage means that in Mr Sadri's mind the interest including the commercial position of the company did not matter because Mr Sadri regarded Ms Cavanough, Mr Adams and the company as a single entity, Ms Cavanough and Mr Adams operated the company as a single entity and "…. it was one entity with one family and one entity…". Involved in this was an understanding that the company's interests were not being served, or regarded at all, by the arrangements to use money borrowed by it to repay Mr Adams' debt to Mr Sadri. This is a clear demonstration that Mr Sadri did not think the company's interests were a matter of concern at all, although they obviously were not being served by the arrangements; in the context of the test in (a), this is a demonstration of the absence of good faith.
101 It would have been grossly obvious to any reasonable person in Mr Sadri's position that this aspect of the transaction was none of JTS1's business, but was an improper exercise of its powers; it needed neither to borrow nor to lend $520,000 of the money which it obtained from RMBL. Mr Sadri did not negotiate or initiate any discussion; he stated this aspect of the transaction as a requirement, and he proceeded when Ms Cavanough fell in with it. Far from being a good faith transaction, it was, to the understanding of any reasonable person in Mr Sadri's position, misuse of a company's resources and powers, a misapplication of its money in an unreasonable and unjustifiable departure from the pursuit of its business objectives. Mr Sadri plainly did not become a party to the transaction in good faith within the meaning of s 588FG(2)(a).
102 It was contended by the defendant's counsel that the remedy sought by the plaintiffs, that is, payment of $520,000 and related relief, was not appropriate. Counsel said
"Any remedy under s 588FF must equate to the benefit 'lost' by the company and 'gained' by Mr Sadri. It is impossible to identify any such 'benefit' that Mr Sadri should be ordered to disgorge. The claim for the sum of $520,000 reflects the liquidator's narrow view of the transaction.'
103 I do not accept this submission; I regard it as clear that the respect in which the transaction was uncommercial directly produced payment of $520,000 to Mr Sadri which he would not otherwise have received, and that this clearly points to the appropriate remedy. It was also contended that the sum of $520,000 was never available to the company or its general body of creditors. I do not regard this as a significant observation and it is altogether clear that the company's obligations were $520,000 greater than they would have been if the transaction had not been uncommercial in this respect.
104 The defendant's counsel contended that payments of interest under the guarantee should be brought into account; counsel spoke of these as a set-off but they are plainly not a set-off because of the lack of close relation with the obligation to be created by an order under s 588FG. In my opinion they have no part in determination of the appropriate remedy.
105 My conclusion is that the plaintiffs are entitled to the remedy which they seek.
106 For these reasons I am of the opinion that the plaintiffs should succeed and I should act under s 588FF(1)(a) and give judgment for the plaintiffs for $520,000, which will have the effect of an order in the terms of subparagraph (1)(a). I will also order that the defendant pay to the plaintiffs interest at the rate usually allowed on judgment debts from the commencement of these proceedings until the present.
107 The Statement of Claim also refers to other grounds of the claim: money had and received by the defendant to the use of the company, money lent and unfair preference within s 588FA. These claims were not supported by the evidence and there was no substantial reliance on them.
108 The orders are: