Consideration
174 Central to the respective cases is whether the Shareholders' Agreement and the Sale of Business Agreement reflected the intentions of the parties and whether the contractual arrangements were unfair from their inception in that they failed to include certain basic protections for Mr Lieu and Landmark. It will also be necessary to determine whether the contractual arrangements subsequently became unfair by reason of the conduct of the respondents after 8 March 1996.
175 In determining whether the arrangement was unfair, the Court will exercise, as was stated in Agius v Arrow Freightways Pty Ltd [1965] AR (NSW) 77 at 89, "... common sense and a sense of justice."
176 In Davies & Anor v General Transport Development Pty Ltd & Ors [1967] AR (NSW) 371, Sheldon J expressed the approach the Court should take as follows (at 374):
... To determine this, (whether a contract or arrangement is unfair, or harsh or unconscionable) requires no more than the common sense approach characteristic of the ordinary juryman and this cannot be communicated indeed it may be clouded by an analysis of decided cases even where there is some analogy in the facts. It is a plain matter of morals not law. ...
177 These observations have been the foundation upon which members of this Court have proceeded to determine applications brought under s 106 and its predecessors.
178 The evidence is conflicting as to what transpired at the meeting between Mr Lieu and Ms Deng on 7 March 1996. Ms Deng's evidence is that she discussed the two draft agreements with Mr Lieu on 7 March 1996. Mr Lieu denied that any such meeting took place. This is but one example of evidentiary conflict. In this regard, I have to state that neither witness presented as completely reliable and truthful. I formed the view that the evidence of Mr Lieu tended towards exaggeration, possibly caused by feelings of bitterness and hostility, perhaps justified, towards to Ms Deng and that the vagueness and evasiveness shown at times by Ms Deng in answer to questions were not entirely due to the difficulty of recalling events that happened as long as 10 years ago. Be that as it may, the way in which I have concluded this matter should be disposed of largely obviates the necessity of ruling, in cases of conflict, where I consider the truth lies. As McHugh J noted in Longman v The Queen (1989) 168 CLR 79 at 107 - 108:
The fallibility of human recollection and the effect of imagination, emotion, prejudice and suggestion on the capacity to "remember" is well documented. The longer the period between an "event" and its recall, the greater the margin for error. Interference with a person's ability to "remember" may also arise from talking or reading about or experiencing other events of a similar nature or from the person's own thinking or recalling. Recollection of events which occurred in childhood is particularly susceptible to error and is also subject to the possibility that it may not even be genuine. ...
179 The evidence discloses that the essential terms of the 1996 Agreements were that Mr Lieu would procure the sale of a 51 per cent interest in the business to Ms Deng for $85,000; Mr Lieu, through Landmark would retain ownership of the remaining 49 per cent interest in the business; the transaction would be structured as a purchase by Dengs Investments of the business from Lieu Investments, with the shares in Dengs Investments being held as to 51 per cent by Ms Deng and as to 49 per cent by Mr Lieu, or a company controlled by him, that company being Landmark; Mr Lieu's purchase right of Ms Deng's shares in the business would at all times have priority over Mr Lieu's purchase rights of the remaining shares in the business so that Landmark would always have a preferential right to acquire Ms Deng's shareholding in Dengs Investments. This was the understanding of both Mr Lee and Mr Meade.
180 Subject to any acquisition by Landmark of Ms Deng's shareholding in Dengs Investments, or vice versa, the business would be managed by Ms Deng, who would be employed by Dengs Investments. She would receive a salary of $35,000 per annum (or such other sum as may be agreed by Landmark) and would devote herself fulltime to the interest of Dengs Investments and use her best endeavours to promote the interests and welfare of Dengs Investments. The profits of the business would then, subject to any contrary agreement between Landmark and Dengs Investments, be paid to Ms Deng and Landmark by way of dividends on the shares in Dengs Investments, such payments to be made every two months.
181 It was claimed by the applicants that it was a term of the alleged prior oral agreement that Landmark would not have to make any payment for its 49 per cent shareholding in Dengs Investments. Ms Deng complained that this allegation was made for the first time with the filing of the amended summons during the proceedings and that Mr Lieu adduced no evidence to support this claim. This is hardly surprising because, at the time of the sale of part of the business by Mr Lieu to Ms Deng in 1996, Mr Lieu owned 100 per cent of the business (through his company Lieu Investments). Ms Deng and Mr Lieu agreed that she would pay him $85,000 for the 51 per cent share in the business. It is inconceivable that Mr Lieu would have to pay any money to retain his 49 per cent interest in the business which he already owned. In my view, this part of the claim does not establish any basis for unfairness. It was not suggested that Dengs Investments called upon Landmark to pay for its 49 per cent shareholding and the evidence is that Landmark never made any payment.
Payment for Stock
182 The applicants claim an alleged prior oral agreement concerning payment for stock. They contended Dengs Investments would be liable to pay any amounts outstanding as at 8 March 1996 in respect of any stock of the business supplied to the business prior to 8 March 1996 and from which the business derived rental income on or after 8 March 1996. Ms Deng denied this was a term of the agreement. Her evidence was that Mr Lieu was responsible for accounts for stock up to 8 March 1996.
183 It is not possible to resolve the two competing versions. Mr Lieu and Ms Deng appear to have recollected the conversations as accurately as they could. Their evidence is given 10 years after the event, albeit, with the help of written agreements and some notes. I therefore do not propose to have regard to the conflicting versions about this matter but to proceed on the basis of what is contained in the agreements.
184 This claim was also raised for the first time in the amended summons. The applicants did not adduce any evidence to support such an agreement. Clause 2 of the Sale of Business Agreement provided that the business' stock was purchased as part of the purchase of the business, and it was given an estimated value of $80,000, which was, of course, included in the total sale price of $166,600.
185 Clause 15 and cl 16 of the Sale of Business Agreement provided that Lieu Investments, as vendor of the business, had paid for the stock as at 8 March 1996. The evidence is that this was not the case and Lieu Investments had outstanding accounts for stock totalling $26,942.59 which subsequently had to be paid and was in fact paid by Ms Deng. Mr Lieu claimed that he used money that he took from the business after 8 March 1996 to pay such accounts.
186 I find that the parties agreement was therefore, that in the usual way, Dengs Investments (as purchaser of the stock) would own and be entitled to derive rental income from the business stock after 8 March 1996, because it had purchased (and therefore owned) it.
187 In my view, there is nothing unfair about Lieu Investments being required to discharge all debts and liabilities prior to the sale of the business. It is an entirely routine and usual term, which appeared in the then current standard Sale of Business Agreement form for New South Wales and accords with the general principle that a vendor of a business should discharge debts of the business it has previously incurred before selling the business to a purchaser. I find that Lieu Investments sold the stock to Dengs Investments. No unfairness arises in respect of this part of the claim.
Clause 30 of the Sale of Business Agreement
188 Clause 30 of the Sale of Business Agreement is as follows:
As to the balance of purchase price of $81,600 such sum shall remain outstanding to the vendor until the Vendor gives the Purchaser six (6) months' notice in writing requiring payment of same.
189 In respect of the balance ($81,600), it is claimed that it was a term of the alleged prior oral agreement that the balance of the purchase price of $81,600 would not in fact be payable by Dengs Investments. Once again, this claim is raised for the first time in the amended summons. The applicants did not call any evidence of an agreement between Mr Lieu and Ms Deng to this effect. Clause 30 of the Sale of Business Agreement did not appear in the draft Sale of Business Agreement of 7 March 1996. It only appears in the final Sale of Business Agreement dated 8 March 1996. The evidence of Ms Deng, Mr Lee and Mr Meade is that Mr Lieu discussed cl 30 at the meeting on 8 March 1996.
190 On balance, and I find, the likelihood is that cl 30 was inserted at the meeting on 8 March 1996. Mr Lieu's evidence is that he does not recall any discussion regarding cl 30 at this meeting. I prefer the evidence of Ms Deng and Messrs Lee and Meade that cl 30 was discussed. However, cl 30 is inconsistent with cl 4 of the Sale of Business Agreement, which requires payment on completion. None of the witnesses who attended the meeting on 8 March 1996 could recall whose idea it was to include cl 30, or why it was included in the Sale of Business Agreement. The applicants contend that the $81,600 simply represented the notional value of the 49 per cent share of the business retained by Mr Lieu.
191 The respondents contend that the adverse consequences of cl 30 being included in the Sale of Business Agreement have been that Dengs Investments, of which Mr Lieu, through Landmark, is a 49 per cent shareholder, had to pay the liquidator the sum of $38,000, as a result of Mr Marsden, the liquidator, seeking the payment of $81,600, as representing a debt to Lieu Investments (in liquidation). Dengs Investments paid the amount claimed, less allowances for the amount of $26,942.59 paid by Ms Deng on behalf of the creditor (Lieu Investments) and $6,056.40, being legal costs, leaving a balance of $48,601. A settlement was reached with the liquidator whereby Dengs Investments paid $38,000. The applicants' contention is that as this amount was never intended to be paid by Dengs Investments, its payment has reduced the dividends or profit of Dengs Investments by $38,000.
192 The uncontested evidence is that Ms Deng and Dengs Investments paid the sum of $38,000 (less accounts paid by the debtor (Ms Deng) on behalf of the creditor (Lieu Investments)) to Mr Marsden, the liquidator, in good faith and on the basis that cl 30 was enforceable in accordance with its terms. Neither Mr Lieu nor Landmark made any complaint at the time about the payment. Assuming that cl 30 was enforceable, it was to Mr Lieu's benefit that Dengs Investments paid the claim pressed by the liquidator.
193 It was submitted on behalf of the applicants that the solicitor who drafted the agreements made an error in their drafting of the arrangements. Instead of providing for the consideration for the 49 per cent of the business to be paid by the issue of 49 per cent of the shares in Dengs Investments to Landmark, they provided instead for Dengs Investments, having paid $85,000, to have to pay a further $81,600 for the business. That was not the intention of either party. The error on the part of the solicitor for Ms Deng had adverse consequences for the respondents because Lieu Investments subsequently went into liquidation and the liquidator, no doubt, relying on the terms of the agreement drafted by Ms Deng's solicitor made a demand for the payment of the $81,600.
194 In my view, to vary cl 30 now would be unfair to Ms Deng and Dengs Investments for a commercial decision taken on 5 February 1999 in the face of a claim from the liquidator on behalf of Lieu Investments (in liquidation). As will emerge later in these reasons, in light of Ms Deng reimbursing herself $85,000 from Dengs Investments, the final result of the transaction was that Dengs Investments paid $81,600 for the purchase of 51 per cent of the shares in Dengs Investments.
195 I therefore decline to exercise my discretion under s 106 to vary cl 30 of the agreement. Nor do I find any unfairness through its operation.
The $85,000 Repaid to Ms Deng by Dengs Investments
196 The applicants claim that the contract or arrangements between the parties became subsequently unfair by reason of the conduct of the respondents since 8 March 1996. The applicants contend that the payment of $85,000 from the bank account of Dengs Investments into Ms Deng's personal account is an example of how the arrangement operated unfairly.
197 It will be recalled that Ms Deng's evidence was that she agreed to, and did pay the applicants $85,000 for her 51 per cent share in the business (via her 51 per cent shareholding in Dengs Investments). There was no agreement, either written or oral, between Ms Deng, nor Dengs Investments and the applicants that Ms Deng's payment of $85,000 be characterised as a loan from her to either the applicants or Dengs Investments. Ms Deng agreed, in cross-examination, that there was nothing in the Shareholders' Agreement or the Sale of Business Agreement that refers to a loan in connection with her purchase of her share of the business.
198 Furthermore, there was nothing in the notes taken by Ms Deng, Mr Meade or Mr Lee in relation to any loan. The word "loan" is not recorded in any of the notes taken by the parties to the transaction, nor does it appear in the Sale of Business Agreement or the Shareholders Agreement or in any affidavit or other document filed by the respondents in the Court.
199 Ms Deng also agreed on four separate occasions, during cross-examination, that she did not expect to be repaid the $85,000 unless she sold her 51 per cent shareholding in Dengs Investments. The evidence of Mr Lee in cross-examination was that, so far as he understood it, the $85,000 was not a loan from Ms Deng to Dengs Investments and that Ms Deng would only be entitled to the $85,000 to be repaid if she subsequently sold her 51 per cent shareholding in Dengs Investments. Mr Meade in cross-examination, also agreed that it was his understanding at the time that Ms Deng purchased her 51 per cent share of the business that the payment by Ms Deng was not a loan to any party.
200 Notwithstanding the agreement between the parties, Ms Deng caused Dengs Investments to pay back to her the purchase price of $85,000. Ms Deng caused Dengs Investments to deposit the amount into a term deposit account. This account had been created with funds drawn from the bank account of Dengs Investments on or about 8 March 2000. These monies were ultimately deposited into her personal bank account on or about 30 November 2001. The sum of $85,000 was kept by Ms Deng. Ms Deng agreed that she had not sold her shares in Dengs Investments. She also agreed that she had effectively paid nothing for her 51 per cent ownership in the business. Furthermore, Ms Deng agreed that the payment to her of $85,000 from the account of Dengs Investments and the creation of the charge were "important financial matters in relation to the affairs of Dengs Investments", yet she did not tell Mr Lieu about either of them.
201 There is no reference to this payment in any of the respondents' affidavit material, or supporting documentation. Upon evidence of this payment being revealed to Ms Deng during cross-examination, Ms Deng gave the following evidence:
Q. And you said to his Honour earlier that at the time you entered into this transaction, you didn't expect that you would have the $85,000 repaid to you unless you sold your shares. Do you remember giving that evidence?