consideration
72 Marra contended that this case involves "a simple application of settled principle to incontrovertible facts". The "settled principle" relied on by Marra is as set out in Bofinger at [4]-[8] (see [70] above). The "incontrovertible facts" relied on by Marra are:
(1) the establishment of the TCT Overdraft and the guarantee provided by Smeaton Grange in 2006;
(2) the entry into of the Sale Agreement on or about 1 April 2012;
(3) the appointment of the Liquidator to Tri-City Trucks on 8 March 2013, which was an event of default under the TCT Overdraft and the two fixed and floating charges held by St George;
(4) the entry into of the Overarching Deed in or about 5 June 2013 by, relevantly, St George, Smeaton Grange and STMC and, in particular, cl 4.3 thereof;
(5) that the "second leg" of the transaction provided for in the Overarching Deed never occurred;
(6) the demand issued on 11 September 2013 by St George for Tri-City Trucks to make immediate payment of the amount outstanding under the TCT Overdraft;
(7) the payments made by Smeaton Grange on 11 and 19 December 2013 to St George in accordance with the Overarching Deed discharging Tri-City Trucks' indebtedness to St George under the TCT Overdraft; and
(8) the letter sent by St George in January 2014 (wrongly dated 7 January 2013) confirming that the funds drawn from Smeaton Grange's account were credited to the TCT Overdraft to satisfy Smeaton Grange's guarantor obligations in respect of Tri-City Trucks.
73 In short Marra said that, based on those facts, having discharged Tri-City Trucks' indebtedness to St George, Smeaton Grange acquired rights of subrogation which would not be excluded by the existence of a debtor creditor relationship between Smeaton Grange and STMC. Marra further submitted that it was bound to succeed before the primary judge for three reasons: first, there was no agreement excluding the right of subrogation; secondly, the primary judge rejected the Liquidator's allegation of inequitable conduct; and thirdly, the fact of the Deed of Assignment pursuant to which Smeaton Grange assigned its rights which it acquired when it paid out the TCT Overdraft.
74 But this is not a case where all of the facts were "incontrovertible" and uncontested such that the primary judge would find that Smeaton Grange acquired rights of subrogation upon discharging the TCT Overdraft. The facts highlighted by Marra cannot be viewed in isolation. Marra fails to include, nor have any regard to, other facts, some of which were disputed, which were considered by the primary judge. It was the consideration of the totality of the evidence which led her Honour, in the context of what she recognised as a somewhat finely balanced case, to make the findings she did, including, critically, that the evidence supporting the existence of a loan from Smeaton Grange to STMC was stronger than the evidence on which Marra relied in support of its proposition that Smeaton Grange paid out the TCT Overdraft as surety.
75 In summary, Marra says that the primary judge erred in taking certain matters into account or in her treatment of aspects of the evidence. Having considered the evidence before the primary judge and the parties' submissions, in our opinion, there was no error in her Honour's treatment of the aspects of the evidence identified by Marra. The inferences drawn from the facts as found by the primary judge were open and we would not depart from the conclusion she reached. Our reasons for coming to this view follow.
76 It is convenient to commence with the Overarching Deed on which Marra placed significant reliance. Taken in isolation, that deed would establish the case propounded by Marra both before the primary judge and on appeal. But as the primary judge found, the transaction the subject of the Overarching Deed had two legs. The first put in place the Smeaton Grange Variation Facility to be used to pay out the TCT Overdraft, and the second was to create the STMC Commercial Overdraft which, subject to satisfying certain conditions precedent, would be advanced to STMC by St George and was to be applied to pay out the Smeaton Grange commercial loan.
77 As the primary judge found, the objective purpose of the "second leg" was that STMC would repay Smeaton Grange the payments it made to discharge the TCT Overdraft and is consistent with a loan. Marra submitted that it was also consistent with it having a right of subrogation. That may be so absent the other factors which led the primary judge to find that there was a loan from Smeaton Grange to STMC. Putting that to one side, if, as Marra contended, there was no loan, the "second leg" of the transaction would have no purpose and would not have been included in the Overarching Deed because, as submitted by the Liquidator, liability for repaying Smeaton Grange would have rested with Tri-City Trucks not STMC.
78 Central to the appeal is Marra's contention that the primary judge's finding that there was a loan between STMC and Smeaton Grange lacked a proper evidentiary basis. That contention cannot be sustained.
79 First, the absence of a written agreement evidencing the loan from Smeaton Grange to STMC did not preclude the primary judge from determining that there was such an agreement. As submitted by the Liquidator, the absence of a written agreement meant that the determination of who made the payments and their character required consideration of the objective facts and conduct of the relevant parties viewed in light of the surrounding circumstances with a view to deciding whether, by inference or implication, the agreement contended for by the Liquidator existed: see Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 at [369]. Her Honour undertook that task at PJ [83]-[87] setting out those facts and other matters which led her to infer that there was a loan from Smeaton Grange to STMC. Her Honour had regard to the parties' conduct, including what was said and done, what was not said and not done and the commercial circumstances and aims of the parties.
80 At PJ [85] her Honour found that, in the circumstances, the lack of loan documentation was not a matter of significant weight having regard to the familial relationships between the directors of STMC, Smeaton Grange and Tri-City Trucks. Marra contended that familial relationships were simply not relevant to an assessment of the characterisation of the payments. But they are part of the relevant surrounding circumstances and context in which the transactions occurred. Insofar as those relationships were concerned the evidence before the primary judge was that:
(1) Nick Papallo was Tri-City Trucks' administration manager and Michael Gerace often conferred with him and Ralph Gerace about the business;
(2) Mr Papallo was employed by Tri-City Trucks until 1 April 2012 when STMC acquired the Tri-City Trucks business pursuant to the Sale Agreement; and
(3) the transfer of the business from Tri-City Trucks to STMC followed family discussions over a number of years between Michael and Ralph Gerace, Nick Papallo and Mr Papallo about succession planning. Those discussions, which were set out in the February 2016 Affidavit, included statements made by Michael and Ralph Gerace that they would support Mr Papallo's takeover of the business and a statement by Ralph Gerace that he expected his son to be involved in the business at a later stage, which in fact occurred.
81 Mr Papallo gave evidence before the primary judge who accepted the truthfulness of the portions of the February 2016 Affidavit that were accepted into evidence and which her Honour said were "generally unchallenged during Mr Papallo's cross-examination".
82 Secondly, the absence of an oral conversation between Ralph Gerace, the sole director of Smeaton Grange, and Mr Papallo, the sole director of STMC, creating the loan arrangement, of itself is not conclusive.
83 Parts of Mr Papallo's February 2016 Affidavit were read into evidence, he was examined by the Liquidator, cross-examined by Marra and then, with leave, cross-examined by the Liquidator in relation to one aspect of his evidence given in cross-examination. Mr Papallo's evidence given in the February 2016 Affidavit was that the arrangements between St George, STMC, Smeaton Grange and other parties reflected in the Overarching Deed were put in place in order to enable the TCT Overdraft to be paid out; that those arrangements included the grant of a variation of an existing Smeaton Grange facility by St George to be applied to pay out the TCT Overdraft on behalf of STMC; and that the effect of the Overarching Deed and the financial arrangements that followed was that the TCT Overdraft was paid out by Smeaton Grange on behalf of STMC.
84 In his oral evidence Mr Papallo said that he had the discussions with Mr Howes from St George about a loan for the purposes of paying out the TCT Overdraft and the establishment of the STMC Commercial Overdraft - in other words Mr Papallo was the point of contact and was driving negotiations in respect of St George's dealings with STMC and Smeaton Grange. He said that he understood that Smeaton Grange paid out the TCT Overdraft on behalf of STMC; that STMC was liable to Smeaton Grange to repay the monies that it had paid into the TCT Overdraft; and that, although he could not recall, it was possible that the proposal involved STMC paying interest to Smeaton Grange, which he acknowledged was paid for the duration of the facility that was operated by Smeaton Grange.
85 Mr Papallo's evidence was given and considered against the background that, pursuant to the agreement struck with Michael Gerace at the time of the acquisition of the Tri-City Trucks business, STMC took over the TCT Overdraft which was then in credit and in the interim had the use of that facility. The indebtedness created in that account was generated by STMC's operation of the Tri-City Trucks' business and was, in substance, its liability.
86 Neither party called Ralph Gerace to give evidence despite the fact that, according to Mr Marra, he was available to give evidence. The Liquidator submitted that, as sole director of Smeaton Grange, the assignor, he was in Marra's "camp". Marra submitted that the fact of the assignment did not put Ralph Gerace in its camp and the circumstances did not make it "unrealistic" for the Liquidator to call him. We do not accept that to be so. Marra asserts that it has acquired certain valuable rights as a result of the Deed of Assignment which it entered into with Smeaton Grange. Ralph Gerace as the sole director of Smeaton Grange, the company that made the payments and was the assignor of the rights, is clearly in Marra's camp and it would be unrealistic in the circumstances of this case for the Liquidator to call him: see Manly Council v Byrne [2004] NSWCA 123 at [53]. Despite it being open for the primary judge to do so, her Honour did not draw an inference that Ralph Gerace's evidence would not have assisted Marra's case.
87 The primary judge placed reliance on the defences filed by Michael Gerace, STMC and Mr Papallo in the Supreme Court Proceeding. Smeaton Grange was not a party to the Supreme Court Proceeding and thus nothing can be inferred from those pleadings insofar as its position is concerned. Those defences were not treated as admissions on the part of, relevantly, STMC and Mr Papallo by the primary judge: see Laws v Australian Broadcasting Tribunal (1990)170 CLR 70 at 85-86. Her Honour considered them as part of the factual matrix which led her to find that there was a loan from Smeaton Grange to STMC. The defences were each verified by affidavits sworn on 7 August 2015. Her Honour could infer that the allegations contained therein were properly made.
88 Thirdly, we turn to consider the financial records and book entries, another factor on which the primary judge relied to draw an inference that there was a loan from Smeaton Grange to STMC. Marra submitted that those records and book entries do not create an agreement nor establish indebtedness or payment of money in discharge of indebtedness.
89 Both parties relied on Manzi v Smith (1975) 132 CLR 671 (Manzi) which involved an application by a liquidator for a declaration that a payment made by the company was void as a preference and that further payments made by the company to other individuals were a debt owed by the recipients of those payments. The only evidence before the trial judge in that case were entries in the company's books of account. Barwick CJ observed that it was not shown that the appellants were parties to, had agreed to or had knowledge of the journal entries. At 673-674 his Honour said:
… But whilst the entries might in appropriate circumstances afford evidence against the company, they did not constitute evidence in favour of the company and against the appellants; certainly they did not constitute a payment of $35,859 on the 22nd February 1974; nor evidence of such a payment.
We were referred to cases in which a payment of money was held to have been made by means of entries in books of account. But in those cases the entries represented the agreement of the appropriate parties… These decisions, quite clearly, are not authority for the proposition for which they were advanced, namely, that a payment of money was made by the making by the company of a journal entry in the books of account without reference to, or without the agreement of, the persons said to be the recipients of the money. The company's assertions in its books of account did not establish the indebtedness of the appellants or any payment of money in discharge of that indebtedness.
90 In Electrical Enterprises Retail Pty Ltd v Rodgers (1988) 15 NSWLR 473 (Electrical Enterprises) Kearney J said at 489, referring to Manzi, that book entries relied on in that case of themselves did nothing to create an agreement and that to have any effect they must represent the agreement between the parties involved. His Honour also observed at 489 that "provided there is a real agreement or liability the parties can in order to avoid circuity, put their agreement into effect through entries in books of account which represent the balance struck between them". His Honour made the following findings, also at 489:
It seems to me that the subject entries in the books of NEE, supported by the annual accounts and supplemented by the explanations given by Mr Langley to Mr Nygh when considered in the light of corresponding entries in the books of EER, and its annual accounts together with the consolidated accounts of EEL provide evidence establishing an agreement for NEE to on-sell to EER at cost the stock purchased by NEE from suppliers, and consequentially to render the sales to and receipts of payments by franchisees, transactions undertaken by NEE as agent on behalf of EER.
Within a group of associated companies, it is not surprising for internal arrangements to be made informally. Here the inference is readily available of compliant directors of the respective companies agreeing to or tacitly accepting the arrangements propounded by Mr Wright. Mr Langley's statements to Mr Nygh support this conclusion as do the recorded transactions and discussions of the directors of EEL and the adoption by the directors of the various companies of the annual accounts based on such arrangements having been made.
91 A number of observations can be made about the role of the book entries in this case. In contrast to the position in Manzi, the primary judge did not rely on the entries to find that there was a loan agreement between STMC and Smeaton Grange. Her Honour considered that the entries were one element of a number which led her to infer that Smeaton Grange had agreed to loan monies to STMC to pay out the TCT Overdraft. So much is evident from her Honour's reasons at PJ [83]. As was the case in Electrical Enterprises, it was open to her Honour to find that the internal arrangements between STMC and Smeaton Grange were made informally but were supported by the entries in the accounts of STMC and Smeaton Grange.
92 Marra submitted, relying on Cross on Evidence (11th edition, Lexisnexis Butterworths Australia, 2017) at [41130], that s 1305(1) of the Corporations Act 2001 (Cth) (Corporations Act) "does not create any presumption that the books are prima facie true and correct or accurate". It further submitted, citing Whitton v Regis Towers Real Estate Pty Ltd (in administration) (2007) 161 FCR 20 (Whitton) at [59], that the books can be no more than prima facie evidence that an unknown person formed an opinion on an undisclosed basis that the given figure should appear in the accounts.
93 Section 1305(1) of the Corporations Act provides that a book kept by a body corporate under a requirement of the Corporations Act is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book. That section does not make a company's books conclusive evidence of the matters contained therein but recognises that the books are prima facie evidence of the matters stated in them. The weight to be given to that evidence is "to be measured in accordance with the common sense of the tribunal of fact": Australian Securities and Investments Commission v Rich (2009) 236 FLR 1; [2009] NSWSC 1229 at [397].
94 In Whitton commencing at [50] Buchanan J (with whom Marshall and Tracey JJ agreed save in one respect which is not presently relevant) considered the primary judge's finding that a proof of debt provided by the administrator of Regis Towers Real Estate Pty Ltd (Regis Towers) to Mr Whitton, the trustee of Mr Rose's bankrupt estate, was rightly rejected by the trustee. His Honour observed that the primary judge made his decision principally because the books of Regis Towers, which had been relied on for the purpose of the proof of debt, were insufficiently reliable. At [52] his Honour referred to the primary judge's findings, including that Regis Towers had conceded that "there weren't proper books and records kept in relation to [Regis Towers]" and that the administrator had reported the deficiency in the books and records to the Australian Securities and Investments Commission and Regis Towers' creditors. In those circumstances, the primary judge held that the evidentiary value of Regis Towers' books was significantly eroded, comparing s 1305 of the Corporations Act.
95 At [55] Buchanan J described the accounts observing that they were compiled two years after the year to which they related and included "many journal entries, including 'balancing entries' which were the outcome of an undisclosed process of judgment or inference by the staff in the accounting firm which compiled the accounts retrospectively". At [59] his Honour said:
The particular entry (and many others) is not a direct record of an actual transaction. Section 1305 of the Corporations Act does not elevate the entry to prima facie evidence that any such transaction (or series of transactions) exists. It can be no more than prima facie evidence that an unknown person formed an opinion on an undisclosed basis that, in the absence of any directly recordable transaction nevertheless, as a balancing entry, such a figure should appear in the accounts. Mr Harris took the matter no further and, indeed, eroded any weight the entry may have had.
96 But, as the Liquidator submitted, Whitton is a different case to this one. Here the accounts were drawn by Mr Carlo. Mr Carlo gave evidence on behalf of Marra which included, as summarised by the primary judge at PJ [83(4)], that when he prepared the ledgers and balance sheets for the Smeaton Trust for the 2014, 2015 and 2016 financial years, he treated the transfer of $733,175 from Smeaton Grange to the TCT Overdraft as a loan from the Smeaton Trust to STMC; that he understood that the TCT Overdraft was meant to be the responsibility of STMC; and that Smeaton Grange loaned money to STMC which it, in turn, used to discharge the liability under the TCT Overdraft.
97 Contrary to Marra's submission, in our opinion, Mr Carlo's evidence that he made an error in his preparation of the ledgers and balance sheets for the 2014, 2015 and 2016 financial years because he overlooked Smeaton Grange's refinancing with the NAB and because the "second leg" of the transaction did not occur and was never going to occur did not erode any weight that those ledgers and balance sheets may have had. First, her Honour did not accept that evidence. Secondly, unlike in Whitton, there was no evidence that the accounts were compiled retrospectively or that they were the subject of an undisclosed process of judgment or inference. On the contrary, Mr Carlo's evidence was that he had been the accountant for STMC and the Smeaton Trust for some time and that he prepared the ledgers and balance sheets on instructions from those entities.
98 Fourthly, the primary judge found that the 14 monthly payments by STMC to Smeaton Grange, which Mr Carlo treated as interest payments, were consistent with the asserted loan to STMC. Marra conceded that those payments may evidence a loan by Smeaton Grange to STMC but it also contended that Mr Papallo, STMC's sole director, gave evidence that the payments may have been set up by a STMC employee in anticipation of the "second leg" of the transaction which never ultimately proceeded and the monthly transfers were never cancelled. The primary judge found that even if they were made by way of a direct debit of which Mr Papallo was unaware for some months, that did not detract from their probable character as interest payments. The monthly payments from STMC, each equating to the interest payable by Smeaton Grange to St George on its facility, were entirely consistent with a loan. Further, Mr Papallo's evidence was that it was appropriate to make the payments because it was his understanding that STMC was liable to Smeaton Grange for the monies it had paid into the TCT Overdraft.
99 Fifthly, we do not accept Marra's submission that the primary judge's reasoning at PJ [83(8)] was unsound. Marra's criticism is focused on her Honour's observation that there was no contemporaneous evidence to suggest that the parties made an agreement that the advance would not be considered as a loan in the event that the "second leg did not occur". It contended that the primary judge sought to support the finding of a loan by pointing to the absence of a document negating its existence which effectively put the onus on it to prove the non-existence of a loan and contradicted the principle that the party asserting must prove. However, her Honour's reasoning must be considered in context.
100 At PJ [83(8)] the primary judge first, did not accept that the fact that the "second leg" of the transaction did not occur provided a basis for concluding that there was no loan and secondly, accepted that, when the TCT Overdraft was paid out, Smeaton Grange and STMC expected that there would be a "second leg". Her Honour found that it was on that latter basis, namely the expectation that there would be a "second leg" to the transaction, that Smeaton Grange was prepared to make the loan to STMC. The impugned reasoning then follows. Thereafter, her Honour rejected Mr Carlo's evidence that Smeaton Grange's refinancing with the NAB and the fact that the "second leg" did not proceed and was never going to proceed were matters that affected his earlier and correct understanding that Smeaton Grange lent money to STMC which STMC used to discharge its liability under the TCT Overdraft. There was no reversal of the onus of proof.
101 Her Honour did not rely on a lack of evidence to find the existence of a loan. Rather, as submitted by the Liquidator, the primary judge was explaining why Mr Carlo's evidence about why he said he was mistaken in his preparation of the ledgers and balance sheets for the 2014, 2015 and 2016 financial years should be rejected.
102 Sixthly, that the primary judge gave weight to what occurred at the creditors' meeting in January 2015 in the context of an enquiry into whether there was a loan agreement between Smeaton Grange and STMC does not undermine the findings her Honour made.
103 Seventhly, there is no inconsistency in the primary judge's findings at, on the one hand, PJ [36] and [78] and, on the other, PJ [83] and [86]. At PJ [36] and [78] her Honour finds that the payments that discharged the TCT Overdraft came from an account in the name of Smeaton Grange as trustee of the Smeaton Trust from funds borrowed from St George. At PJ [83] and [86] the primary judge finds that the payments made by Smeaton Grange were made on behalf of STMC pursuant to a loan from Smeaton Grange. That the payments came from a Smeaton Grange account is not inconsistent with a finding that Smeaton Grange had agreed to loan those monies to STMC which in turn would make the payment so as to discharge its liability to Tri-City Trucks for its use of the TCT Overdraft. As the primary judge found at PJ [83(9)], it made commercial sense that Smeaton Grange would loan the funds to STMC because the loan would have provided the more likely avenue by which Smeaton Grange could obtain repayment of the funds for which it was liable by reason of its guarantee.