Mark Sensing (Aust) Pty Ltd v Tan [2000] VSC 525

Supreme Court of Victoria|2000-12-19|Before: Byrne J

CONTRACT - misleading and deceptive conduct - false representations - whether representations made - whether representations false - whether reliance - whether loss. GUARANTEE - whether liability of primary debtor discharged - by variation of principal loan agreement - by release of primary debtor - by assignment of principal debt - waiver - estoppel.

In early 1993 the firstnamed defendant, John Siaw Ho Tan, a Sydney scientist, had developed a process whereby foodstuffs might be preserved for a period in excess of two years without refrigeration. This process he called the Cycloflash method of food preservation. For the purpose of exploiting this technology Dr Tan had come to an arrangement with the secondnamed defendant, Frank Flammea, the thirdnamed defendant, Vince Attana, and the fourthnamed defendant, Murray Jackel, who collectively controlled a company, A La Carte to Go Pty Ltd ("ALC"). This company, which had been incorporated in December 1992, was the trustee of the A La Carte Unit Trust under a deed of trust dated 14 December 1992.

In late 1993 Mr Flammea and his associates caused to be incorporated two new companies for the purpose of exploiting Dr Tan's technology and their own food vending technology. A La Carte to Go (Aust) Pty Ltd ("ALCA") was registered on 11 November 1993 and A La Carte to Go International Pty Ltd ("ALCI") on 1 December 1993. These two companies were incorporated by the firm of chartered accountants, Venn Milner & Co Pty Ltd ("Venn Milner"), and their directors included Dr Tan and Mr Flammea, Mr Attana and Mr Jackel. The principal activity of ALCA is shown in the company return as that of trustee and the evidence before me showed that it was the trustee of the A La Carte Australia Unit Trust. The first unit holders of the trust were VM Nominees Pty Ltd, the nominee company of Venn Milner, whose units were held in trust for the Flammea interests and Biosearch (Australia) Pty Ltd, a company whose shares were held by the interests of Dr Tan.

Dr Tan had his own companies. Among these was Shelf Stable Foods Pty Ltd ("SSF") which was incorporated in 1991. Dr Tan was a director of this company together with Ly Tan and Li Ying Tan and he was one of the six members of SSF, holding 32.5% of its issued share capital.

The events with which this litigation is concerned occurred in the first half of 1994. It seems that in February of that year the venturers, Dr Tan, Mr Flammea, Mr Jackel and Mr Attana and their companies lacked the capital to proceed with their project. They then came into contact with a venture finance company, Rhys Capital Ltd, which was a subsidiary of a public investment company, then called Just Australia China Holdings Ltd ("JACH"), which engaged in the business of trading in commodities with China. Rhys Capital introduced the A La Carte project to JACH as a likely business in which it might make an equity investment.

As a consequence of this introduction the firstnamed plaintiff, Mark Sensing (Aust) Pty Ltd ("MSA"), a wholly owned subsidiary of JACH, made three payments towards the A La Carte project: $100,000 on 10 March 1994, $100,000 on 15 March 1994 and $172,000 on 18 March 1994 in circumstances which are in dispute before me. As pleaded, it is said that these sums were paid to ALC, ALCA or ALCI or perhaps to them collectively, but the evidence showed that they were in fact made to ALCA and, in one case, at its request to SSF. MSA, having been unable to recover these sums from the recipient, seeks in this proceeding to recover them from the defendants or, alternatively the sum of $100,000 from Dr Tan and Messrs Flammea and Attana under a guarantee dated 10 March 1994.

MSA alleges in its fourth amended statement of claim filed on 27 November 2000 that the three sums were paid to ALC, ALCA and ALCI pursuant to an agreement made between them for the grant to MSA of an option to subscribe for shares equivalent to 25% of the issued capital of each of ALC, ALCA and ALCI. It is said that these payments were made by way of a loan or, alternatively, as a share purchase holding deposit, repayable in any case in the event that MSA did not exercise the option or purchase the shares. It was not in dispute that MSA did neither of these things. Accordingly, MSA says that the money was repayable. But this did not occur. The claim of MSA is brought, not against ALC, ALCA or ALCI but against Dr Tan, Mr Flammea, Mr Attana and Mr Jackel who, it is said, were guilty of misleading and deceptive conduct or are liable for the misleading and deceptive conduct of ALC, ALCA and ALCI as aiders and abettors, inducers or as persons knowingly concerned with this conduct. The relief sought against them is damages in the amount of $372,000 paid to ALC, ALCA and ALCI which was lost as a consequence of the failure of those companies. The conduct complained of is a series of misrepresentations said to have been made in the course of the negotiations leading to the making of the payments. Alternatively, these misrepresentations, or at least those made by the defendants, are said to constitute actionable breaches of warranty as a result of which MSA suffered the same loss. Next, it is said that Dr Tan, Mr Attana and Mr Flammea guaranteed the obligation of ALC, ALCA and ALCI to repay the first of these payments, the sum of $100,000, paid on 10 March 1994.

Dr Tan has taken no part in the proceedings and he took no part in the trial, either as a party or as a witness. I have been told that he is a bankrupt and that, accordingly, no orders are sought against him.

The defence of Mr Flammea, Mr Attana and Mr Jackel is a much and very drastically amended document. The version upon which the trial was conducted was the fifth amended defence filed on 14 November 2000. In this they admit the payments were made, saying that the first payment, that of $100,000, was made to SSF and the second and third to ALCA. They say, however, that the payments were made under an agreement whereby JACH or MSA agreed to purchase a 25% share in ALC, ALCA and ALCI for $1.25M and that the payments totalling $372,000 were in the nature of part-payment. They deny, too, that they made the misrepresentations alleged and that MSA relied upon them. They deny that the representations were false.

They say, further, that in June 1994 MSA assigned to the secondnamed plaintiff, G&J Poole Pty Ltd, the debt arising from the payments for a consideration of $372,000. This assignment is said to have two consequences upon the MSA claims in this proceeding. First, it means that MSA suffered no loss so that its damages claims must fail. Second, since the assignment did not include the benefit of the guarantee, the claim based on this must likewise fail. To meet this first defence, G&J Poole Pty Ltd was, in the course of the trial, added as a plaintiff.

Further defences to the guarantee claim depend upon an agreement said to have been made on or about 15 March 1994 by MSA, ALCA and ALCI and one Gordon Harold Poole, MSA's managing director. Mr Poole is said to have agreed at this time that, if JACH did not approve the acquisition of the 25% shareholding, he himself would proceed with the investment in its place. This is said to have had the consequence, first, that ALCA and ALCI and the guarantors were released; and second, to raise an estoppel which prevents MSA from making a demand under the guarantee upon the guarantors or, alternatively, a waiver of its entitlement to the return of the $100,000. Finally, it is said that the guarantors are discharged by reason of a variation to the principal agreement.

I conclude this summary of the issues by noting that a counterclaim was filed on behalf of Mr Flammea, Mr Jackel and Mr Attana in which they claim damages for unlawful conspiracy between Dr Tan and MSA. They say that, as a consequence of this unlawful conspiracy, the venture was lost and they lost the prospect of earning very substantial profits. This claim was not pursued and I say nothing further about it.

MISLEADING AND DECEPTIVE CONDUCT AND WARRANTY CLAIMS

The representations or warranties alleged by MSA in its statement of claim are the following:

"8 (a) the firstnamed Defendant had developed technology for an ultra sterilization method of food processing and packaging, known as `Cycolflash', which enabled pre-cooked meats and other food products to have an unrefrigerated shelf life of up to 2 years (`the technology'); (b) the Companies were: (i) the absolute owners of all industrial and intellectual property rights in and to the technology; (ii) absolutely entitled to commercially use and exploit the technology; (iii) entitled to the technology; (c) the Companies were in the process of setting up a business (`the Business') to commercially use and exploit the technology by producing and selling ultra sterilized food; (d) for the purposes of conducting the Business, the Companies were purchasing a sealing machine (`the Machine'); (e) the Companies required the principal sum in order to: (i) apply $172,000.00 thereof towards the purchase price of the Machine; (ii) have working capital with which they could conduct the Business; (iii) entitled to the technology; (f) the Business would be extremely successful and would yield the Companies' shareholders high returns; (g) the A La Carte food production was headed by Dr Tan who was a Doctor of Medicine and held a masters degree in microbiology with honours and a Ph.D. in biochemistry. He had played a major role in the development of the hepatitis B vaccine."

PARTICULARS

The representations were oral and were made by the Defendants to the Plaintiff's directors Mr. Gordon Poole and Mr. Peter Just during early March, 1994. The Tan representations were in writing, oral and to be implied. Insofar as they were in writing, they were included in documentation presented at the presentation by Rhys Capital and documentation made available by the defendants shortly thereafter. Insofar as they were oral, they consisted of statements to that effect at the presentation and by the defendants shortly after that time. Insofar as they were to be implied, they arose from the fact that the discussions were dependent upon involvement of the highly qualified Tan who was claimed to be the inventor of the technology."

The expression "the Companies" was defined earlier in the pleading to mean collectively "ALC and/or ALCA and/or ALCI".

As the case was presented only the allegations contained in paragraphs (a), (b) and (g) were pursued. At the conclusion of the evidence, counsel for MSA stated that the allegations of misleading and deceptive conduct and breach of warranty based on the representations alleged in paragraph 8(g) were not pursued. With respect to the representations as to ownership, I was told in the course of the trial by counsel for MSA that they were alleged to have been made in writing as well as orally and they were particularised as being contained in the documents which are in the following pages of the Court Book: pages 80, 439-42, 448, 461, 466, 471, 472, 477, 478, 485, 483, 529, 543, 574, 577, 578 and 583.

The parties had very little contact before the first payment was made. In February 1994 Mr Flammea provided a quantity of information and material to one David Heycock who was the principal of Rhys Capital, so that it might attract the interest of JACH in the investment. Mr Heycock made a presentation to the board of JACH and distributed to them a folder of promotional material, which he had obtained from the venturers. In this material ALC is referred to as having developed the food preservation technology and generally as being the entity which was and was proposing to promote and sell the preserved food product. The material speaks of the technology as being owned by ALC and it is at least implicit in it that ALC is entitled to use and exploit this technology. There is, however, a difficulty in concluding that the representation to the JACH board by Mr Heycock was a statement made by ALC or ALCA or ALCI as pleaded. It does not appear that any representative of any of those companies was present at his presentation and I am not satisfied that he was then speaking as their agent. It seems equally likely that he was speaking as agent for JACH. But this point was not taken in the defence and I shall pass it by.

Following the Heycock presentation, Mr Flammea was himself invited to meet the JACH board and he did so in late February 1994. Of the board members present on that occasion two gave evidence. These were the managing director, Peter Robert Just, and Mr Poole. There was some dispute about what material Mr Flammea produced to the board but nothing much turns on this. Following the meeting Mr Poole was assigned the task of investigating the proposal and he did so. He arranged meetings with the venturers and discussed with them the immediate position of ALC and where it was going. Mr Poole told me, and I accept, that the directors disclosed to him their dire need for an immediate injection of cash. I accept, too, that he was very quickly persuaded that the ALC group had a valuable product and that the business which they wished to conduct could be very profitable. Indeed, a feature of the evidence before me was the enthusiasm which the witnesses displayed, and even now display, about the market prospects of the Cycloflash product.

I interrupt this account to remark upon the evidence of the witnesses in this case. There was a number of fundamental differences between those in the two camps as to conversations and events. As will appear, many of these concern matters which, although of importance to the witnesses, are not matters which I am obliged to determine in this proceeding. I will go no further than the case requires. Nevertheless, it is appropriate now that I set out my impressions of the principal witnesses whose evidence was in conflict. I preface this by observing that the events with which I am concerned occurred upwards of seven years ago. None of the witnesses appeared to rely upon contemporaneous notes of the events they described and some were candid enough to concede that their recollection was imperfect. It was apparent that Mr Flammea and his associates felt very much aggrieved by the conduct of Dr Tan and Mr Poole as they saw it. I have had regard to this sense of grievance in assessing their evidence. In the case of each of them it became apparent in cross-examination that their recollection of certain events was unreliable. I did not form a favourable impression of these three men as reliable witnesses. In many respects, some of which I shall refer to below, their evidence was contradictory of facts which I find to have been established. In an important respect, the winding up of ALC, they conducted themselves in a way which I consider commercially reprehensible and adverse to their credit. I am most reluctant to act upon their evidence unless it is corroborated by evidence upon which I am prepared to rely or it is adverse to their interest. These three men struck me, too, as relatively naive in commercial matters and ready to interpret events in a way that they would have liked them to have been.

For Leonard Anthony Milner of Venn Milner, the chartered accountant who prepared the trust documentation, the events were routine and he gave evidence without reference to his file. Surprisingly, Mr Milner presented himself as a partisan witness; defensive, argumentative and, at times, aggressive. He did not strike me as a particularly reliable witness.

I was favourably impressed by Mr Poole. He was ready to accept imperfections in his recollection and to make concessions where these seemed appropriate. His evidence as to some disputed conversations was confirmed by that of Mr Just. Most importantly, his evidence on controversial matters was confirmed by contemporaneous documents such as correspondence, reports and minutes of meetings. I am therefore generally inclined to accept his evidence in preference to that of Mr Flammea and his associates.

I return to the narrative. A significant meeting took place at the Tower Hotel in Camberwell on Friday 4 March 1994. Present on behalf of MSA were Mr Just and Mr Poole. Mr Flammea, Mr Attana and Mr Jackel were also there. There was a conflict between the witnesses as to what was said on this occasion about the ownership of the food technology. In this conflict I prefer the evidence of Mr Just and Mr Poole. I find that Mr Just asked Mr Flammea directly whether he or his company owned the Cycloflash technology. In response, Mr Flammea said that it was held by a Tan company and that it had not yet been transferred to ALC but that there was an agreement in place for this to be done. Mr Flammea assured Mr Just and Mr Poole that there would be no difficulty with this and Mr Just accepted this. This is confirmed by Mr Just's recollection that the technology was being brought into the group. It is consistent, too, with the documented efforts of Mr Poole in the month or so following the meeting to have the A La Carte venturers cause the technology to be transferred to themselves. The conversation also turned to financial matters. Mr Flammea told those present that his company was in urgent need of funds to meet its commitments, including the cost of purchasing a new sealing machine.

Mr Flammea said that those present at this meeting agreed upon the terms upon which JACH would participate in the project. He then wrote to Mr Poole on Monday 7 March a letter in which he confirmed "our acceptance of the proposal discussed last Friday". Mr Poole and Mr Just maintained that no firm proposal was put at the Tower Hotel meeting and that the result of their discussions was to await completion of the due diligence then being undertaken by Mr Poole. I am satisfied that no binding contract was then made. His use of the expression that he confirmed an acceptance of an offer by Mr Poole is but an example of Mr Flammea's wishful thinking. I find, however, that a basis for JACH's participation was discussed and that this was along the lines set out in paragraphs numbered 1 to 8 in Mr Flammea's letter. These included an immediate payment of $200,000 to ALCA and a further payment to it of $172,000 to enable it to pay for a sealing machine which it had previously ordered.

By Thursday 10 March Mr Just had prepared a first draft heads of agreement and at 3.45 pm on that day he forwarded it to Mr Poole. On the same day there took place a meeting at which the first cheque for $100,000 was delivered. At the request of Mr Flammea the cheque was made payable to SSF. There was controversy as to where this meeting took place at what time of day and whether Dr Tan and Mr Jackel were present. It is, however, common ground that Mr Poole, Mr Attana and Mr Flammea were there. It is common ground, too, that a document prepared by Mr Poole or at his direction was produced and executed by at least some of those present. This document contains the guarantee upon which MSA relies in making its claim against Dr Tan, Mr Attana and Mr Flammea. In its form as printed it is in the following terms:

"March 10 1994 The Directors Mark Sensing (Australia) Pty Ltd 31 Jersey Road BAYSWATER VIC 3153 The Directors of A La Carte To Go (Aust) Pty Ltd and A La Carte International hereby acknowledge receipt of a deposit of $100,000.00 for the initial purchase of 25% of the Group Shareholding. If after due diligence the Board of JACH does not approve of the purchase - this deposit is refundable within 30 days of written request. We the following directors guarantee return of the deposit as set out in the above terms. .................................... JOHN TANN .................................... MURRAY JACKEL .................................... VICTOR ATTANA .................................... FRANK FLAMMEA"

Again, the resolution of the issues raised in this proceeding do not require me to resolve all of these differences. I accept, however, that Dr Tan was present at the meeting and that he there signed the guarantee. I accept that Mr Attana and Mr Flammea also signed the guarantee at the meeting. These signatures were affixed before the cheque was delivered. I find, too, that, later, the document was signed by Mr Jackel and also by another director Tony Christoforo. I accept Mr Poole's evidence that, at the time he handed over the cheque he had been told and he believed that the Cycloflash technology was still held by a Tan company but that it was being or would be transferred to ALCA.

It seems that when Mr Poole handed over this first cheque he acted within his general authority as chairman and managing director of MSA but he had no instruction from the JACH board to do so. His conduct attracted a rebuke from Mr Just when he learned of it. Nevertheless, Mr Poole remained enthusiastic about the project and the minutes of the meeting of the JACH board of 11 March 1994 record his apology for having caused any embarrassment to the board. He told me that his decision to make the payment was a product of his enthusiasm for the project and his support for the venturers in whom he had confidence. Remarkably, the minutes also record that Mr Poole gave to the JACH board his personal guarantee to indemnify JACH against "any loss as a result of the ALC proposal". The meeting adjourned to enable enquiry to be made as to whether MSA had the ability to fund the acquisition and for Mr Poole to look into three specified matters, including obtaining a debenture over ALC's assets "to cover the first $372,000 payment".

The JACH board met again at 8.00 am on 15 March. Before the board was a report from Mr Just in which he summarised the proposal in terms very similar to those used by Mr Flammea in his 7 March letter, but with an extra term that JACH have an option to acquire a further 25% of ALCA and ALCI from existing shareholders. If exercised, this would raise its interest to a majority shareholding of 56.25%. The board was also told that the $1.25M funds for the acquisition were available. The meeting concluded with a unanimous resolution of the voting directors that the proposal be accepted. The minutes show that Mr Poole reported that the due diligence was still incomplete and that Dr Tan was unable to fund the project further.

On the same day, Tuesday 15 March 1994, Mr Poole went to the ALC office at Flemington and gave to Mr Flammea a second cheque for $100,000. Mr Flammea said that, on this occasion, Mr Poole was excited about the project and that he said "Frank, if JACH don't go ahead with it, I will personally guarantee that I will go ahead with it". Mr Poole conceded that, on this and on earlier occasions, he told Mr Flammea that he would guarantee that the initial $372,000 would be paid pending completion of the due diligence but he denied that he gave a guarantee as Mr Flammea described it. Notwithstanding my general assessment of him I prefer the evidence of Mr Flammea on this point. His version is consistent with the guarantee Mr Poole had given earlier to the JACH board. It accords with my perception of Mr Poole as an enthusiastic and impetuous man who was keen to support Mr Flammea and his associates in their new venture. It is confirmed by the fact that in June 1994 Mr Poole, through his family trust, did in fact propose to play a role like that intended for MSA in March of that year. Mr Poole made this second payment with the blessing of the JACH board and supported by its decision to proceed, although it was clear enough that loose ends needed to be tidied up and documentation settled and executed. He sought and obtained no debenture or guarantee or other security for the repayment of this sum.

The final payment, that of $172,000, was made by Mr Poole on Friday 18 March. At this time, too, no agreement had yet been concluded for JACH or MSA to participate in the project although Mr Poole remained enthusiastic and optimistic that an agreement would be reached. Mr Poole did not then believe that the food preserving technology was owned by ALC or ALCA; he remained confident that this would be achieved. No debenture, guarantee or other security for repayment was sought or obtained.

I pause at this point because it is on this date that the assessment of the representations alleged must be made. A good deal of evidence was led as to the negotiations which followed this meeting and as to the fact, which was undisputed, that no concluded agreement was ever reached between MSA or JACH and the venturers.

In summary, I am satisfied that, early in the negotiations, Mr Poole had been told that ALC owned the Cycloflash technology but that on 4 March and thereafter he had been told and he accepted that Dr Tan or his company owned it and had not yet transferred it. He accepted assurances that this would soon be achieved. The representations, therefore, alleged in paragraphs 8(a) and 8(b) of the statement of claim have been made out but they were modified or changed prior to the making of any of the payments. Whether this is to be understood, as a matter of legal analysis, as a withdrawal of the representation pleaded or as fatal to the contention that MSA relied upon it at the relevant time, it means that the claims based on the representations must fail.

The case of the plaintiffs is that ALC or ALCA did not own the food preservation technology at the time the representations on that matter were made. They contend in paragraph 11 of their statement of claim that the technology was then held by Dr Tan or by one of a number of companies controlled by him.

Such evidence as there was as to the ownership of the Cycloflash technology, suggests that it was held by SSF at all material times. The precise nature, however, of the property rights was never fully identified. Mr Poole said that he understood from the A La Carte promotional material that there were no patents in respect of the technology. Mr Flammea said that he understood that it was not patentable technology and that he told this to Mr Poole. Nevertheless, it was accepted by Mr Flammea and his associates in late 1993 and by them and Dr Tan and Mr Poole in early 1994 that this technology might be passed into the project together with the vending machine technology held by A La Carte and that this might be achieved by transferring the share capital in the companies ALC and SSF into the A La Carte Australia Trust. Accordingly, counsel for the plaintiffs conceded in the course of the trial that the falsity or not of the ownership representations depended upon proof of the absence of an effective transfer of the shares in SSF to ALCA as trustee of the trust. While I accept that this concession is not binding on the plaintiffs, I think that, in the circumstances of this case as disclosed by the evidence, it was a correct statement of the position. Furthermore, it is for the plaintiffs to satisfy me that the SSF shares were not transferred to the trustee company or that, otherwise, the ownership of the Cycloflash technology was not held by a company within the A La Carte group at the time the representations were made in late February 1994 or early March.

Having in this way identified the issue, the evidence of Mr Flammea and of Mr Milner was that ALCA was incorporated on 11 November 1993, the ALCA trust deed was executed on that date and that the shareholders in SSF transferred their shares to the trustee. The trust deed dated 11 November 1993 and the SSF transfers dated 18 November were produced and were in evidence and proved. Likewise, transfers of the shares in ALC to the trustee dated 11 November 1993 were proved and tendered. Mr Milner stated in evidence that the trust structure was set up prior to Christmas and that he recollected the executed SSF transfers being received in his office and that this was in November 1993. To this point, the issue would appear to have been established beyond doubt adversely to the plaintiffs. But, as with so much of this case, this evidence was put in doubt by a number of facts.

First, from 4 March 1994 Dr Tan and Mr Flammea and his associates asserted, contrary to the defendants' present interest, that the transfer of the Cycloflash technology had not yet taken place.

Second, there is evidence suggesting that, on 21 March 1994, Venn Milner sent the ALC transfers to the former shareholders of ALC for their execution and that, in the case of that for execution by Mr Christoforo's company, it was amended in draft and faxed back to the accountants on 3 June 1994. The executed copy of this transfer which is in evidence has been corrected in accordance with this draft. This is one of the transfers which Mr Milner, Mr Flammea, Mr Attana and Mr Jackel swore had been executed in late 1993. This evidence, which was not put to Mr Milner, is strongly suggestive that one, if not all, of the ALC transfers was not executed by the transferor for many months after November 1993. I am, of course, mindful that this relates to the ALC transfers and not to the SSF transfers, which are the important ones for my present purposes.

Third, when ALC went into voluntary liquidation in August 1994 the resolution of its members to do so was passed, not by the trustee as the member of ALC, but by the companies controlled by Mr Flammea and his associates, who were the members prior to the establishment of the trust. This is a fact of some significance because the liquidation was instituted with the assistance of experienced liquidation accountants. All involved would have been aware that the passing of this resolution was of the greatest importance in the life of any company. These former shareholders also participated in the winding-up as its shareholders. The explanations of Mr Flammea and Mr Attana for this conduct were unconvincing. Their conduct leads me to the conclusion either that they were exceedingly neglectful of their responsibilities or that they had not then completed their share transfers to the trustee, ALCA.

Finally, and more puzzling, is the fact that the SSF transfers upon which Mr Flammea and his associates now rely were not produced in discovery until a month or so before the trial commenced and the ALC transfers not until the eve of the trial.

It might have been expected, if these share transfers were in existence in late 1993 that none of these things would have occurred. I add to this my impression that neither Mr Milner nor Mr Flammea was a particularly reliable witness.

Ultimately the question comes down to this. Have the plaintiffs, upon whom the burden lies, satisfied me that the transfers of the SSF shares were not executed before 4 March 1994? I select this date because it was on this date, at the Tower Hotel meeting, that the statements as to ownership of the Cycloflash technology were changed. The pleaded representations must have occurred before that meeting. To my mind, the plaintiffs have not discharged the onus which they bear on this issue.

It is clear that ALCA, the trustee, was incorporated on 11 November 1993. I have no doubt, too, that the trust deed dated the same date was executed about that time. It bears an imprint showing that stamp duty was paid on 30 November 1993. These matters all lend support for the evidence that all the documents came into existence some time in or about November 1993. I have considerable doubt as to whether the ALC shareholders executed their transfers before Christmas as Mr Flammea and his associates and Mr Milner said. The SSF transfers, however, show on their face that the transferors signed them and dated them 18 November 1993. Mr Milner speaks of receiving them executed before Christmas 1993. There is no evidence at all pointing in a different direction. I, therefore, decline to find that the transfers of the SSF shares were not executed before the representations as to ownership were made. The pleaded representations have not, therefore, been shown to be false when made.

I have not overlooked the earlier finding which I have made that, on and after 4 March 1994, Dr Tan and Mr Flammea and his associates told Mr Poole that the technology had not in fact been transferred to them but that they were confident that this would be done. The evidence as to the falsity of the pleaded representations presented on behalf of the plaintiffs, which I have not accepted, would lead to the conclusion that this, too, was an accurate statement of the position. In short, whichever way the case of the plaintiffs is perceived, no misleading and deceptive conduct has been shown.

This is sufficient to dispose of the false and misleading conduct claims and the breach of warranty claims. It is, therefore, unnecessary for me to consider the further submissions put on behalf of the defendants that MSA has suffered no loss. Nevertheless, in deference to them and because some of the facts are important for the resolution of the guarantee claim, I shall shortly state my views upon them.

MSA alleges that its loss is the sum of $372,000 which it paid to ALCA and which has not been repaid.

In paragraph 19B of the defence it is said that MSA suffered no loss because the unsatisfied debt had been assigned for value. It was put that this provided a short and irresistible answer to the MSA claims based on misleading and deceptive conduct. Counsel put it that, by receiving full consideration for the assignment of the debt, MSA had suffered no loss. Furthermore, it was put, the claim could not be brought by G&J Poole Pty Ltd which had itself incurred the loss because there could be no assignment of the s. 52 cause of action.

Counsel for the plaintiffs protested that he had been ambushed by this submission and he sought time to present a supplementary written submission. In fact he presented three such submissions and I have had regard to them, even those which were delivered late in terms of the leave granted.

The argument on this point was based upon the evidence, which showed that the debt of $372,000 created by these payments to ALCA was removed by an entry in the general ledger of MSA on 30 June 1994. The precise nature of this entry was never identified. Counsel for the plaintiffs described it as an assignment and their witness, Mr Poole, said that the debt was "transferred across against G&J Poole Pty Ltd", one of his own companies and the trustee of the Poole Family Trust. He said that this was done because the demand by MSA for repayment made in April 1994 had not been met and, accordingly, his personal guarantee made in March 1994 to the board of JACH meant that he should take on the risk of non-payment himself. This is precisely what counsel for the defendants contended. As with other issues in this case, the evidence blurred this somewhat. The accounts of G&J Poole Pty Ltd show the sum of $372,000, not as a loan assigned or transferred by MSA, but among assets described as shares in unlisted companies, as an "investment in A La Carte To Go Group of Companies". Mr Just's explanation was rather different. He told me that the investment in the ALC venture was not seen as fitting in with MSA's other activities at a time when MSA was considering a float and, further, that there was some discussion as to whether the receivable was doubtful. Accordingly, it was removed from the balance sheet.

The documents in evidence shed a little more light on the transaction. In the minutes of the JACH board meeting of 27 May 1994 at p. 5 mention is made of the transaction. It records the following:

"MSA has provided $372,000 to ALC to date and this amount is shown as a loan to ALC in MSA's accounts. If MSA is floated this amount should be transferred out. G. Poole will transfer the $372,000 to his loan account and asked the JACH Board if they wish to take part in the ALC purchase. Motion by P. Just that R. De Morgan prepare a report for submission to the Board of JACH on the A La Carte To Go proposal as soon as possible. Seconded by D. Heycock. Carried. D. Heycock to give all available information to R. De Morgan by 4 pm this evening."

This report, if it was prepared, is not in evidence. Mr Poole confirmed that these minutes were accurate.

The next meeting of the JACH board took place on 17 June 1994. Item 2(d) includes the following:

"G. Poole - P. Just advised that the MSA Board meeting dealt with the ALC matter and that a guarantee from G. Poole is no longer required. G&J Poole would acquire the rights and interests in ALC from MSA via their loan account."

The accounting entries to which I have referred then take place on 30 June as does a meeting between Mr Poole, Dr Tan and David Alan Armitage, but not Mr Flammea and his associates. It is sufficient for my present purposes that the notes of this meeting in evidence and the Heads of Agreement prepared as a result of the meeting show that the joint venture arrangements were to involve, not MSA, but in its place G&J Poole Pty Ltd or its nominee.

It was submitted that I should make of this that MSA received from the Poole Family Trust full consideration for the assignment and therefore suffered no loss, a submission which counsel for MSA dismissed as fatuous. I shall, nevertheless, address it. The evidence of what, if any, consideration was given for the assigned debt is scanty. The witnesses spoke of a loan account transaction but no accounting entry or document has been produced to show this. It may be that the debt was considered by MSA to be worthless. If consideration passed, it is surprising that there is, on the face of the Poole Family Trust balance sheet of 1994, no entry showing it. If it were necessary for me to reach a conclusion on this point, I should not be satisfied that MSA received full consideration for the assignment and, accordingly, the loss of MSA is unaffected by the assignment.

It is therefore not necessary that I consider the arguments for and against the further submission put on behalf of the defendants that the cause of action for misleading and deceptive conduct is not assignable to the secondnamed plaintiff. In my mind, the short answer to this is that there is nothing in the evidence to suggest that this cause of action was ever assigned. I doubt whether, in June 1994, anybody gave a moment's thought to such a cause of action let alone its assignment. The evidence of assignment, unsatisfactory though it be, suggests that it was a debt which passed to G&J Poole Pty Ltd. Given my previous conclusions upon this cause of action, I do not consider it necessary to go further.

There is no doubt that the guarantee was given by the three directors who are charged with it, that the primary debtor or debtors have not paid and that the guarantors have not paid despite demand. They raise a number of defences.

First, it is said that, under the terms of the 10 March document, the principal debtors, ALCA and ALCI are not obliged to make payment because the condition precedent to this obligation had been satisfied, that is, the board of JACH approved the purchase of 25% of the ALC group shareholding. This purchase must be understood in terms of the Tower Hotel discussions. As I have mentioned in paragraph [24] above, the board of JACH on 15 March 1994 resolved to accept the proposal then before it. Mr Poole appears to have treated this as a commitment by JACH to proceed. Mr Just's expectation following the board meeting was also that the transaction would proceed.

In each case, however, these witnesses were speaking, not of the proposal summarised in Mr Flammea's letter of 7 March, but of a different proposal under which MSA may obtain a controlling interest in the ALC venture. When Mr Flammea spoke of his satisfaction that the joint venture arrangement was being implemented, he was not aware of the new term, which MSA was introducing. This new proposal first appears to have been communicated to the venturers in a letter from Rhys Capital dated 22 March 1994.

It was said to be significant that Mr Poole did not on 15 March, or indeed on 18 March, insist upon the directors signing a document as he did on 10 March. This showed, it was said, that he saw this payment as having a different character, namely a part-payment rather than a further instalment of the deposit. On 11 March he had been directed by the JACH board to discover whether ALC would grant a debenture to cover the $372,000 which was to be paid in advance of agreement. For some reason it seems that he did not pursue this. Indeed, it was not until the MSA letter of 8 April 1994 that the question of debentures appears and then only in the context of a substantial shift in the proposed arrangements. I infer that it was Mr Poole's enthusiasm which again caused him to make payment this time without security.

I conclude from this that JACH did not on 15 March approve the purchase which had been discussed at the Tower Hotel meeting. It was not suggested that it ever subsequently approved this proposal. It was certainly not approved on 15 April or 19 April when 30 day demands for repayment were given. By that time negotiations were under way for a very different type of joint venture and with a board of JACH which was then a great deal more reluctant to participate at all.

I reject, therefore, the submission that the guarantors were released by the discharge of the primary debtors.

The second defence, alleged in paragraph 24B of the defence, is that the parties to the primary loan contract, which was the subject of the guarantee, varied this contract and thereby discharged the guarantors[1].

Mr Poole said that the second and third payments were made on the basis that they, too, were repayable on 30 days request if the transaction did not proceed. It was not suggested, however, that the guarantee was extended to these further sums. It was submitted on behalf of the defendants that the payments increased the indebtedness of the primary debtors and thereby altered the nature of the guarantors' obligation. An essential feature of the principle relied upon is that the variation be effected without the consent of the guarantors. In this case there can be no doubt that Mr Flammea, Mr Attana and Mr Jackel knew of and were delighted that further sums were being paid towards their venture. In these circumstances, I am satisfied that they consented to the variation of the obligation of the primary debtors. Accordingly, they are not discharged from the guarantee.

Third, it was put that, when Mr Poole stated on 15 March 1994 that he would assume responsibility for the role of JACH in the venture if that company did not proceed, he discharged the primary debtors, for the condition precedent contained in the guarantee ceased to be significant. Although I have found that the statement was made, it has no legal effect upon the obligation of ALCA and ALCI to repay the $100,000. Mr Poole was not a party to this contract. No consideration moved from them for his promise, if promise it be. No words of release or discharge were used and I am not persuaded that this is the legal effect of those that were used.

Fourth, reliance was placed on the doctrines of estoppel and waiver. These defences, which are pleaded in paragraph 24C of the defence, likewise depend upon the representation said to have been made by Mr Poole on 15 March that, if JACH did not agree to proceed with the acquisition of the 25% shareholding for $1.25M, he would do so himself. I have found that this representation was made.

Counsel for the plaintiffs submitted that no detriment has been shown. The detriment alleged in paragraph 24C(b) and (d) of the defence is that Mr Flammea and his associates assumed that the acquisition of the 25% shareholding for the sum of $1.25M would proceed and that they caused ALCA to pay the sums of $272,000, subsequently received, towards its working capital and towards the purchase of the sealing machine. The evidence shows that ALCA had already committed itself to the purchase of the sealing machine. The order was placed on the manufacturer on 8 December 1993. There was no evidence which inclines me to find that, if Mr Poole had not made the statement in question on 10 March 1994, ALCA would have dealt with the receipts from MSA any differently or that Mr Flammea and his associates would have caused it to do so. There is certainly no detriment shown to have been suffered by them.

As to unconscionability, counsel for the defendants submitted that MSA knew that his clients assumed the transaction would go ahead, even if MSA itself chose not to do so. The facts relied upon as giving rise to this occurred after the last of the payments and, perhaps, after the money had been applied for the purposes of ALCA. These are, in summary, that Mr Poole seized the opportunity to deal with Dr Tan to the detriment of the interests of Mr Flammea and his associates. Mr Poole said that he did what he did in order to save the venture which was at serious risk of collapsing. I will not descend into the detail of the events of April, May and June 1994. Whatever happened, it does not render unconscionable the enforcement by MSA of its rights under the guarantee. This defence must fail.

For the purposes of this defence, which is alleged in paragraph 24D of the defence, attention returns to the assignment of the $372,000 debt to the Poole Family Trust. What is put is that, where the benefit of the principal debt is assigned by the creditor, and the benefit of the guarantee is not assigned with it, the right of that creditor to recover under the guarantee must at least be suspended so long as the benefit of the principal debt remains assigned[2].

I have already summarised the evidence relating to the removal of the A La Carte debt from the MSA balance sheet. I conclude that this was in some way achieved by transferring the liability of ALCI and ALCA or of one of these companies to the Poole Family Trust where it is recorded as shares in unlisted companies. This is an unusual description, which may be explicable as having been made in anticipation of the agreement discussed on 30 June. In any event, I infer from all of the evidence before me that the benefit of the liability of $372,000 owing to MSA was in some way assigned to the trust. So much was accepted by counsel for both parties in their final addresses.

In answer to this, counsel for the plaintiffs submitted that I should find that the guarantee was also assigned to G&J Poole Pty Ltd as trustee of the Poole Family Trust and that this company is entitled to enforce the guarantee. In his written submissions he referred to the terms of the minute of directors meeting set out in the defence. In the particulars given under paragraphs 19B(a) and 24D(a) of this pleading, mention is made of a resolution of the directors of MSA of 16 June 1994 dealing with this matter. Unfortunately there is no evidence of any such meeting. The transaction is referred to in the minutes of the meeting of the JACH board of 17 June 1994 which I have quoted above at paragraph [46].

There was no evidence that the assignment of the debt from MSA to G&J Poole Pty Ltd was in writing or that notice of it was given to any A La Carte company or to the guarantors. There is no evidence at all of any express agreement to assign to G&J Poole Pty Ltd the benefit of the guarantee. Counsel for the plaintiffs, nevertheless, submitted, in reliance upon Consolidated Trust Co Ltd v Naylor[3] that the assignment of the benefit of the principal debt was sufficient to carry with it the benefit of the security, particularly as this had been called up by the date of the assignment. The difficulty which this submission must address is that there is no evidence of the terms of the assignment. The minute of the 17 June JACH board meeting refers to the transaction as an acquisition of "the rights and interests in ALC" and uses terminology which makes it plain that the assignment had not then occurred. In these circumstances, I am unable to draw the inference that the parties to the assignment agreed that the benefit of the guarantee was to pass to the assignee. I conclude therefore that G&J Poole Pty Ltd cannot enforce the guarantee as assignee and that, with respect to the claim of MSA, the liability of the guarantors has been suspended or has terminated. In either event the claim against the guarantors must fail.

I conclude, therefore, that there should be judgment for the secondnamed, thirdnamed and fourthnamed defendants against both plaintiffs with costs.

[1] Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549 at 558-9

[2] International Leasing Corporation (Vic) Ltd v Aiken [1967] 2 NSWR 427 at 439, per Jacobs JA, quoted with approval by the High Court in Hutchens v Deauville Investments Pty Ltd [1986] HCA 85; (1986) 68 ALR 367 at 373

[3] [1936] HCA 33; (1936) 55 CLR 423. See also International Leasing Corporation (Vic) Ltd v Aiken (1967) 2 NSWLR 427 at 439, per Jacobs JA, and at 451, per Asprey JA

At a glance

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Judgment (78 paragraphs)

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Cases Cited (4)