Mulherin v Bank of Western Australia Ltd ; McCann & Ors v Bank of Western Australia Ltd [2006] QCA 175

SUPREME COURT OF QUEENSLAND

CITATION: Mulherin v Bank of Western Australia Ltd; McCann & Ors v Bank of Western Australia Ltd [2006] QCA 175

PARTIES: HENRY DESMOND MULHERIN (plaintiff/appellant) v BANK OF WESTERN AUSTRALIA LIMITED ACN 050 494 454 (first defendant/respondent) MICHAEL GERARD McCANN (plaintiff/first appellant) PHILLIP GREGORY JEFFERSON (plaintiff) JAY ARSCOTT STEVENSON (plaintiff) UNITED (T & C) BRETTS WHARF PTY LTD (IN LIQ) ACN 075 934 011 (second plaintiff/second appellant) v BANK OF WESTERN AUSTRALIA LIMITED ACN 050 494 454 (defendant/respondent)

FILE NO/S: Appeal No 6908 of 2005 / Appeal No 6909 of 2005 / SC No 5504 of 2000 / SC No 3066 of 2002

DIVISION: Court of Appeal

PROCEEDING: General Civil Appeal

ORIGINATING COURT: Supreme Court at Brisbane

DELIVERED ON: 26 May 2006

DELIVERED AT: Brisbane

HEARING DATE: 14 February 2006

JUDGES: McMurdo P, Jerrard JA and Muir J / Separate reasons for judgment of each member of the Court, each concurring as to the orders made

ORDER: Both appeals dismissed with costs

CATCHWORDS: CORPORATIONS – WINDING UP – CONDUCT AND INCIDENTS OF WINDING UP – EFFECT OF WINDING UP ON OTHER TRANSACTIONS – PROTECTED TRANSACTIONS – DEALINGS IN GOOD FAITH – GOOD FAITH – where company requested respondent bank give undertaking to third party – where undertaking given for benefit of company director – where company indebted to respondent bank – where company subsequently entered into liquidation – where liquidators sought setting aside of transaction – whether rollovers of undertaking constituted “a transaction” within s 588FC Corporations Act 2001 (Cth) – whether undertaking constituted uncommercial or insolvent transaction – whether respondent bank made out defence of good faith / ESTOPPEL – ESTOPPEL BY CONVENTION – where priority deed executed – where draft deed unilaterally non-materially altered – where fraudulent signature – whether estoppel by convention arose / Corporations Act 2001 (Cth), s 95A, s 588(1), s 588FB, s 588FB(1), s 588FC, s 588FE(3), s 588FF(1), s 588FG, s 588FG(1), s 588FG(2) / Uniform Civil Procedure Rules 1999 (Qld), r 395 / Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226, cited / Demondrille Nominees Pty Ltd v Kevin R Shirlaw & Anor (1997) 25 ACSR 535, cited / Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705; [2001] NSWCA 305, cited / Re Emanuel (No 14) Pty Ltd (in liq); Macks v Blacklaw & Shadforth Pty Ltd (1997) 24 ACSR 292, cited / Re Mike Electric (Aust) Pty Ltd (in liq) (1983) 1 ACLC 758, cited / Re Newark Pty Ltd (in liq) [1993] 1 Qd R 409, cited / Sydneywide Distributors Pty Ltd & Anor v Red Bull Australia Pty Ltd & Anor (2002) 55 IPR 354; [2002] FCAFC 157, discussed / Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363, cited

COUNSEL: D F Jackson QC, with I K A Erskine, for the appellants / D J S Jackson QC, with S E Brown, for the respondent

SOLICITORS: Stockley Furlong for the appellants / Freehills for the respondent

McMURDO P: These appeals, Mulherin v Bank of Western Australia Ltd (Appeal No 6908 of 2005) and McCann & Ors v Bank of Western Australia Ltd (Appeal No 6909 of 2005), were heard together as were the parties' claims at first instance. The facts and issues in both appeals are fully canvassed in the reasons for judgment of Jerrard JA and Muir J.

In Appeal No 6908 of 2005 I agree with Muir J's reasons for concluding that the primary judge rightly rejected the appellant Henry Desmond Mulherin's claim to priority in repayment of a debt over the priority of the respondent, Bank of Western Australia Ltd ("BankWest") to repayment of a debt because of an estoppel by convention arising out of the Deed of Priority. In the circumstances of this case, there was no estoppel by convention binding BankWest because a party to the Deed of Priority, Mr Li, did not agree or assume the state of facts upon which Dr Mulherin seeks to rely and which would affect Mr Li's priority under the Deed: Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd.¹ Although Mr Li was not a party to Dr Mulherin's action or appeal so that the orders Dr Mulherin sought would not directly affect any entitlement of Mr Li, I cannot see how there can be an estoppel by convention if one party, who would be affected by the assumed or agreed state of facts upon which Dr Mulherin seeks to rely to establish the estoppel, was not aware of those agreed or assumed state of facts. The priorities for repayment under the Deed of Priority could not change without Mr Li's agreement or assumption of the state of facts on which Dr Mulherin now seeks to rely because those assumed or agreed state of facts affected Mr Li's entitlement to priority.

In Appeal No 6909 of 2005 the issue is whether the primary judge rightly rejected the appellant liquidator Michael Gerard McCann's claim that a transaction or transactions of United (T & C) Bretts Wharf Pty Ltd ("UTC"), now in liquidation, were voidable and so should be discharged under s 588FF(1)(e) Corporations Act 2001 (Cth) ("the Act"). The liquidator contended that the transaction or transactions (described by Muir J in [82] of his reasons) were voidable under s 588FE(3) of the Act in that they were insolvent transactions and also uncommercial transactions. Whether or not the transaction or transactions were uncommercial within s 588FB of the Act and insolvent within s 588FC of the Act, I agree with Muir J's reasons for concluding that the primary judge was entitled to find that BankWest became a party to the transaction or transactions in good faith and had no reasonable grounds for suspecting that UTC would become insolvent and that a reasonable person in BankWest's circumstances would have had no such grounds for so suspecting and that BankWest provided valuable consideration under the transaction or transactions by its provision of the guarantee so that BankWest had a defence under s 588FG(2) of the Act.

I would dismiss both appeals with costs.

JERRARD JA: This proceeding was the hearing of appeals in two separate claims, heard together at trial and on appeal. In one claim the appellant plaintiff Dr Henry Mulherin relied on an estoppel by convention to claim that a Deed of Priority bound the respondent Bank of Western Australia Ltd (“BankWest”), such that Dr Mulherin was entitled to priority in repayment to him of a debt of $1,500,000 plus interest and costs, before BankWest was repaid the amount of a loan by it of up to $1,020,000 plus interest and costs. Those loans by Dr Mulherin and BankWest respectively had been made to United (T&C) Bretts Wharf Pty Ltd (“UTC”), that company now being in liquidation.

In the appeal by Dr Mulherin, I have read, and agree with, the reasons for judgment and orders proposed by Muir J. Because I respectfully differ from His Honour’s reasons in the second appeal, I express my own.

In the second claim under appeal its liquidator Michael McCann sought findings that a transaction or transactions of UTC was or were voidable pursuant to s 588FE of the Corporations Act 2001 (Cth). The transaction(s) resulted in UTC being indebted to BankWest for $2 million, together with interest and other charges. The liquidator asked for orders, to be made pursuant to s 588FF(1) of that Act, that BankWest pay the liquidator $2 million and an order that it also pay the interest charges, bank fees, and professional fees relating to the servicing and managing of a cash advance facility for that $2 million granted by BankWest on 29 January 1999. The liquidator also asked for interest.

Both claims were dismissed at the trial. The following summary of the background events relevant to the liquidator’s appeal is taken from the careful description of those by the learned trial judge. In January 1997 UTC and a company Hamilton Stage 2 Pty Ltd (“HS2”) entered into a joint venture which involved the construction and sale by UTC of an apartment tower and water front villas at Bretts Wharf, on land then leased by HS2 and of which that company later became the registered proprietor. The joint venture was Stage 2 of a development at that site. HS2 was to get $2.2million, presumably for its land, and UTC was to get the money from the sale of the villas and apartments. BankWest had assessed the “on completion” value of the Stage 2 development at $19,862,000.² UTC had borrowed extensively to pay for the project.

The Loans to UTC

The judgment under appeal records that UTC borrowed $1million from a Mr Li Kam Ming on 31 January 1997, promising to pay interest of a further $1 million on that amount. Ultimately UTC granted a charge to Mr Li, lodged and registered with the Australian Securities Commission (“ASC”) on 22 December 1997. That charge was actually the second in time and ranked second after an earlier fixed and floating charge granted by UTC to BankWest, lodged with the ASC on 24 September 1997.

The principal loan amount secured by that first ranking fixed and floating charge to BankWest over all the assets of UTC was a loan by that bank of $12.4 million, that loan facility being available on and from 22 September 1997. The $12.4 million was further secured by a first registered mortgage granted over the lease of the Stage 2 land by HS2, registered by BankWest on 29 September 1997. BankWest’s fixed and floating charge registered with the ASC on 24 September 1997 was for a priority amount of $14,888,000, defined in the charge to include advances and further advances, interest, costs, and other amounts. The evidence did not reveal the interest UTC actually agreed to pay BankWest for that $12.4million loan, at first repayable in the latter part of 1998 but which was ultimately finally repayable in March 1999.

UTC also borrowed from Dr Mulherin. On 14 July 1997 he lent it $1million, knowing then both of the earlier loan by Mr Li and the (proposed) BankWest loan. UTC agreed to pay him interest of $400,000. It was agreed he would receive as security a mortgage over land at Sunnybank, contracts for the sale of two of the units in Stage 2 naming him as that purchaser, and a guarantee from one of the directors of UTC. Dr Mulherin was given those executed contracts for units 21 and 26, but they were subject to the mortgage BankWest had by then registered over the Stage 2 land.

Then came more lending. On 28 October 1997 BankWest offered a company United (T&C) Investments Pty Ltd (“UTC Investments”), a one third shareholder in UTC, a loan of $300,000. Security for that loan was a first ranking fixed and floating charge over all of the assets and undertakings of UTC Investments, a first ranking registered mortgage over some land at Carina, and a joint and several guarantee and indemnity from, inter alia, two of the directors of UTC (Stephen Tam and Jasper Tam), and from UTC. Further, there was cross collateralisation with the securities for the BankWest loan of $12.4millon to UTC, such that an event of default under the loan to UTC Investments was to be taken as an event of default under the much more substantial loan to UTC.

Dr Mulherin also lent UTC some more. On 12 December 1997 those two directors Stephen Tam, Jasper Tam, UTC and UTC Investments entered into a deed whereby Dr Mulherin lent a further $400,000, at an interest rate of 32 per cent, with UTC covenanting in the deed that it would not increase $12.4 million borrowed from BankWest without Dr Mulherin’s written consent. Mr Mulherin was promised three securities for that lending. The first was that UTC would take all steps and endeavours to have HS2 give him a Bill of Mortgage over the Stage 2 land, (already mortgaged to BankWest), a mortgage debenture to be granted by UTC which would cede priority to the mortgage debentures registered in favour of BankWest and Mr Li, and a guarantee and indemnity from Stephen Tam, Jasper Tam, and UTC Investments. UTC granted that debenture to Dr Mulherin on 12 December 1997, which was registered as a third registered fixed and floating charge on 24 December 1997. On that same date Dr Mulherin was given three executed contracts for sale in his favour over three units in the proposed Stage 3 development. However, no mortgage was executed by HS2 over the Stage 2 land, and Dr Mulherin did not pursue the question of getting one. He saw no point in doing so until the Stage 2 building was completed.

The $2 million guarantee

On 17 December 1997 BankWest offered UTC a $2 million bank guarantee facility, which offer underlies the transactions which Mr McCann contends, on UTC’s behalf, were voidable. The guarantee offered was to provide a bank guarantee in favour of Hong Kong Bank of Australia Pty Ltd (“Hong Kong Bank”). The securities for the proffered guarantee were to be the existing first charge to BankWest and existing first registered mortgage, guarantees from Stephen Tam, Jasper Tam, a Simon Tam, and UTC Investments, with securities for the guarantee to be cross collateralised with the securities for the BankWest Loan to UTC Investments. An event of default under the guarantee would constitute an event of default under each other’s BankWest Loan. BankWest’s internal documents at that time recorded that the guarantee it was offering was to provide the deposit for a property purchase in Hong Kong by the “Group”³, with the property settlement date set for the end of June 1998. BankWest’s documents also recorded its advice that as at October 1997 there were 20 unconditional contracts for an amount of $13,975,000 for the Stage 2 development, with total pre-sales being approximately $16 million, mostly to owner occupiers. Seventy-two per cent by dollar value of the unconditional contracts were to Australian domiciled purchasers. BankWest’s internal documents also recorded that the “principals” of UTC, Stephen and Jasper Tam – its directors, who held two thirds of its shares – had a “Master Franchise of the LJ Hooker Group in Hong Kong”.⁴

On 17 December 1997 UTC had provided BankWest with a letter of request signed by Jasper Tam, requesting a guarantee on behalf of UTC for payment by BankWest of the guaranteed amount to the Hong Kong Bank, and requesting that BankWest debit UTC’s account with the amount of the guarantee, if called up by the Hong Kong Bank. BankWest’s solicitors thereupon asked UTC’s solicitors for advice on the commercial benefit to each of UTC and UTC Investments of providing unlimited guarantees and indemnities for each other’s BankWest loan, and agreeing to cross collateralise those securities, as security for the guarantee. UTC’s then solicitor replied in writing that the guarantee sought would provide liquidity to both companies to continue to pursue aggressively their joint venture pursuits, and that since UTC Investments was the major shareholder in UTC, any commercial activity by one of the entities necessarily benefited the other. UTC Investments actually held one of the three shares in UTC. It appears UTC’s solicitor construed the query as one more directed to the commercial benefits to UTC Investments of its security being cross collateralised, than one directed to the commercial benefits to UTC of the $2 million guarantee for a deposit on the purchase of Hong Kong land being secured over UTC’s only asset in Australia revealed by the evidence, namely its realisable interest in the Stage 2 development.

BankWest’s internal documents recorded that Mr Evans advised BankWest’s senior credit manager that if the bank guarantee facility was approved as requested, “the Group’s” exposure would increase to $14.7 million. That advice plainly referred to the principal debts to BankWest that would then be owed by UTC and UTC Investments, being $12.4 million by UTC, $300,000 by UTC Investments, and another $2 million by UTC. Mr Evans’ internal memo repeated the advice that the “on completion” value of the Bretts Wharf development had been assessed at $19,862,000 and suggested that the safe lending margin was $14,148,000. Mr Evans suggested that the bank guarantee be limited to $1.5 million. Other documents demonstrate that BankWest’s safe lending margin had originally been calculated at $13,903,000, or 70 per cent of the on completion value of $19,862,000. The senior credit manager approved the guarantee at $2 million.

On 23 December 1997 the then manager of BankWest Commercial Banking Sector in Brisbane, a Mr Evans, met with UTC’s solicitor, at the latter’s request. The meeting was held in BankWest’s Brisbane board room, and present were the solicitor, his brother, and Jasper Tam. Those present communicated to Mr Evans that there was a problem with the guarantee BankWest had undertaken to provide, and that “[i]f this matter didn’t get settled this afternoon then UTC… would lose the block of land that they were looking to purchase, and this was the deposit being provided by way of the bank guarantee.”⁵ Mr Evans spoke with a Mr Rankin from the Hong Kong Bank, by telephone, who was apparently irritated that the guarantee had not been issued in the manner required by the Hong Kong Bank, and who also advised that “[i]f we don’t get this sorted out then the deal won’t go through and UTC will loose their block of land.”⁶ Mr Evans said in evidence that Mr Rankin had explained that UTC, named in the guarantee the bank had provided as “the Customer”, was not an entity which held a customer account with the Hong Kong Bank. Stephen Tam did, and Mr Rankin – and, it appears, UTC’s solicitor and Jasper Tam – asked Mr Evans to re-draft the guarantee to describe Stephen Tam as “the Customer”.

Mr Evans agreed to make that change, and that resulted in the original letter of request and indemnity given by UTC to BankWest being amended, as was requested of Mr Evans, on 23 December 1997, with Jasper Tam, for UTC, initialling the amendments; and also a revised version of the bank guarantee being issued that day, 23 December 1997. It was expressed to expire on 15 August 1998, that change being made to allow for a 30 day settlement period of the presumed contract for the purchase of Hong Kong land. As amended that day, the terms of the bank guarantee were odd, in that the guarantee provided that:

“In consideration of the Beneficiary [the Hong Kong Bank] at the request of the Customer [Stephen Tam] and the [BankWest] (hereinafter called “the Bank”) agreeing to accept this undertaking in connection with a Contract or Agreement entered into between the Beneficiary and the Customer for a borrowing, the Bank HEREBY UNDERTAKES unconditionally to pay to the Beneficiary on demand duly made in writing any sum or sums which may from time to time be demanded in writing by the Beneficiary to an amount not exceeding $2,000,000.00 (two million dollars) (hereinafter referred to as “the said sum”) in the aggregate.” [Italicised words repeat the definition of the terms in the guarantee].

An uncommercial transaction?

As redrawn with some haste on 23 December 1997, that guarantee promised that BankWest would pay the Hong Kong Bank amounts not exceeding $2 million if demanded by the Hong Kong Bank, in connection with a contract or agreement between that bank and Mr Tam for a borrowing. The liquidator’s senior counsel at the trial, and different senior counsel on the appeal, contended that UTC’s undertaking – in the amended letter of request and indemnity – to be liable to BankWest and to repay it when the Hong Kong Bank called up the guarantee given on behalf of UTC’s director, Stephen Tam, for a borrowing by Mr Tam for a purpose not specified in the guarantee by BankWest, was an uncommercial transaction by UTC within the meaning of s 588FB(1) of the Corporations Act 2001 (Cth).

That section provides:

“Uncommercial transactions

588FB(1)[“uncommercial transaction”] A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:

(a) the benefits (if any) to the company of entering into the transaction; and

(b) the detriment to the company of entering into the transaction; and

(c) the respective benefits to other parties to the transaction of entering into it; and

(d)any other relevant matter.”

The submission that it was an uncommercial transaction when UTC undertook a $2 million liability to BankWest, when Mr Tam asked the Hong Kong Bank for a loan of $2 million, focused on the following matters. First, that BankWest, through Mr Evans, had no information at all about the property to be purchased, such as its location, price, current or intended use. The identity of the purchaser was not even confirmed: indeed, the guarantee by its terms did not require that Mr Tam be borrowing $2 million from the Hong Kong Bank to buy real property, let alone real property to which UTC would have any legal or beneficial title or claim. Further, there was no evidence led at the trial about what happened to the $2 million presumably lent by the Hong Kong Bank to Mr Tam. There was no known benefit to UTC from its indemnifying BankWest for Mr Tam’s debt.

Mr Tam, a director of UTC, plainly enough received a benefit, and so too did BankWest, in that its liability to the Hong Kong Bank, when called upon, was secured by UTC’s indemnity to BankWest and UTC’s security given to BankWest. As it happened, BankWest was repaid the principal together with costs, charges, interest, and expenses, in an amount totalling $2,498,833.4.⁷ The liquidator submitted that undertaking that $2 million liability on Mr Tam’s behalf, accompanied by a liability for interest, charges, and the like, with that liability secured against UTC’s Stage 2 venture and to be satisfied from money it received from the sale of units, had the following results. That amount of $2 million was not available, as it might otherwise well have been, for the acquisition of the Stage 3 land, or for the marketing of the Stage 2 units. Nor was it available to discharge debts or legal obligations of UTC, such as UTC’s already substantial debt to BankWest and its other creditors, also repayable only from the same source, sales of Stage 2 units (the evidence did not show any source of revenue for UTC other than sales of the units). The terms of the funding facility⁸ authorised BankWest to retain the equal to $2 million plus one month’s BankWest fees from the net sale proceeds of units. BankWest had required that authorisation as security for the guarantee facility, in the event that the loan for the construction of Bretts Wharf Stage 2 was repaid prior to the guarantee being called upon.

As at 17 December 1997, and irrespective of whatever amounts had been repaid by then, UTC’s “on completion” asset with that assessed value of $19.62 million had already been charged with repayment of:

a $12.4 million loan by BankWest, with interest thereon and associated charges;

$2 million owing to Mr Li;

a further $300,000.00 loan to UTC Investments, with interest thereon;

a $1.4 million loan (with interest) repayment due to Dr Mulherin; and

a further $.4 million loan, at 32 per cent, owing to Dr Mulherin.

Adding the known liabilities, but excluding therefrom BankWest’s interest and charges on its $12.7 million loans and Dr Mulherin’s interest on his $.4 million loan, means the Stage 2 undertaking was then already security for the repayment of $16.5 million. Adding another $2 million to the debt to be repaid from Stage 2 unit sales meant that UTC could expect revenue from Stage 2 would exceed borrowing costs only if BankWest’s interest and other charges on $14.7 million, and Dr Mulherin’s interest on $400,000.00, totalled less than $1.1 million.

Did UTC get a benefit?

The liquidator therefore had the better of the argument with respect to subsections (b) and (c) of s 588FB(1). The critical point is whether the learned judge was entitled to find that UTC derived no benefit from the bank guarantee transaction. If so, the learned judge should have concluded that a reasonable person in the company’s circumstances would not have entered into the transaction. That is an objective inquiry (Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363 at 367); but the liquidator had the onus of proof. The evidence called by the liquidator included evidence from UTC’s then solicitor in 1997 to 1999 about the deed of priority, but the liquidator led no evidence in chief from that solicitor about the circumstances in which the $2 million guarantee was obtained by UTC’s letter of request, and there was no cross-examination about that. The liquidator did not call Jasper Tam, and accordingly the only evidence about the conversation on 23 December 1997 was the evidence called by BankWest from Mr Evans. It was not put to him in cross-examination that his account of those conversations was incorrect.

Accordingly, while all the evidence before the learned trial judge did not establish that UTC had any contingent liability to the Hong Kong Bank because of the borrowing by Stephen Tam of $2 million from that bank, the evidence did not show that UTC did not; nor did it establish whether land was purchased in Hong Kong using that $2 million, or whether UTC acquired a title to it. What it did establish was that UTC’s director Jasper Tam and its Queensland solicitor were party to a conversation with BankWest’s Mr Evans on 23 December 1997, in which it was represented to Mr Evans in the presence of all three men that if the guarantee was not amended, UTC would fail to buy land (in Hong Kong) which it would otherwise buy. Further, a Hong Kong banker made the same representation to BankWest, by conference phone, again with all three there. In the absence of any pleading of fraud or misleading conduct, or any reason to suspect it from the evidence led, those conversations established by BankWest’s evidence justify an inference that UTC’s director Jasper Tam, its solicitor, and its Hong Kong banker, all expected on 23 December 1997 that UTC would acquire title to land in Hong Kong (probably that very day) for which the $2 million would be a deposit.

The liquidator led no evidence that acquisition had not happened as expected. Given the state of the evidence, I respectfully agree with the conclusion by the learned trial judge that the liquidator had not been able to demonstrate that a reasonable person in UTC’s circumstances would not have entered into the transaction of obtaining a guarantee for that $2million from BankWest, by indemnifying BankWest. What UTC got from BankWest was described to BankWest as a deposit, apparently for the purchase of land over which BankWest got no security. The liquidator failed to discharge the onus which the learned trial judge correctly found the liquidator carried, of proving that the December 1997 transaction was an uncommercial one for UTC. At the trial, the liquidator’s then senior counsel cross-examined Mr Evans to considerable effect, demonstrating all the deficiencies in the Bank’s knowledge of what, if anything, was done with the $2million in Hong Kong. The deficiencies included whether or not the $2million was a five or 10 per cent deposit; and how the purchase was financed as to the other 90 or 95 per cent. But that cross–examination, while it may have done much to undermine any defence by BankWest relying on s 588FG(2), did not establish anything about the actual circumstances of UTC’s interest in, and benefit from, the use of the $2 million. The liquidator ultimately failed to lead evidence on which the learned trial judge could be satisfied the transaction was uncommercial in December 1997. BankWest’s evidence did not show it was not, but the liquidator’s did not take the matter further.

An insolvent transaction?

The liquidator’s submission relied on s 588FE(3), contending that the transaction was both uncommercial and an insolvent transaction, entered into, and with acts done for the purpose of giving effect to it, during the two years ending on the relation back day, 6 April 1999, the day Mr Li appointed administrators of UTC. At the trial the liquidator’s case included the submission that on each of 2 October 1998, and 1 December 1998, when the guarantees were “rolled over”, UTC was insolvent. However, the learned trial judge rejected the evidence relied on to establish UTC’s insolvency as at those dates, and ultimately the grounds of appeal by the liquidator, against the reasons – or finding – rejecting that proposition, were abandoned. On appeal the liquidator focused on the argument pursuant to s 588FC(b) that UTC became insolvent because of matters including entering into the uncommercial transaction, and because of persons doing acts giving effect to it. The submission by senior counsel for the liquidator on the appeal was that there was but one transaction, consisting of entering into the guarantee and indemnity, which transaction included the occasions when the guarantee and indemnity were extended or “rolled over”, and which also included a loan agreement subsequently entered into between BankWest and UTC, after the Hong Kong Bank had called up on 29 January 1999 the “rolled over” guarantee given by BankWest on 30 December 1998. On that same day, 29 January 1999, BankWest and UTC entered into a loan agreement postponing UTC’s obligation to repay BankWest the $2 million until 28 February 1999. Security for that loan facility granted 29 January included the first ranking registered debenture mortgage already held by BankWest, its first ranking registered mortgage over the Stage 2 development, (already held), a first ranking registered mortgage limited to $1,020,000 already held over Stage 3 development land, and joint and several guarantees from Jasper Tam, Stephen Tam, and UTC Investments.

UTC’s position had deteriorated quite rapidly in very early 1999. Seven of the unconditional contracts had not proceeded to settlement, and UTC (to the astonishment of BankWest) returned the deposits to the defaulting purchasers in at least five of those contracts. In another, a set-off between a purchaser and another party reduced the cash paid for the unit by at least $1 million. By 2 February 1999, HS2 terminated the Stage 3 venture agreement, because UTC had breached the requirement that it begin construction of the Stage 3 building by 1 February 1999 (UTC could not get construction finance). UTC’s debts to BankWest were all due for repayment by the end of February 1999, and it could not repay them. I agree with senior counsel for the liquidator that in those circumstances, UTC became insolvent because of matters which included entering into that $2 million obligation to indemnify BankWest under the latter’s guarantee.

BankWest’s senior counsel contended on the appeal that the only relevant transaction was the one entered into on 30 December 1998, offering a guarantee from that date until 29 January 1999. That senior counsel submitted that as at 30 December 1998, if UTC did not procure a “roll over” of the guarantee, the high probability was that the Hong Kong Bank would that very day call upon BankWest for the $2 million, creating immediately a liability on 30 December 1998 in UTC to repay BankWest. Accordingly, it was very much a rational commercial decision for UTC to obtain a guarantee on 30 December 1998, because that postponed the date on which it would be called on to indemnify BankWest, an event that would occur whenever the Hong Kong Bank had reason to think BankWest would not renew the guarantee. I observe that logically that submission also applied to UTC’s decision to accept the loan facility offered by BankWest on 29 January; that in turn extended UTC’s liability to repay BankWest by one month. In the intervening period it was possible UTC would obtain some more unit sales.

With due respect to those submissions, if the liquidator had established that the transaction of guarantee and indemnity was an uncommercial transaction for UTC in December 1997, a submission that a transaction which simply deferred for one month the ultimate liability to pay BankWest $2 million (resulting from the December 1997 transaction) could be considered as a “stand alone” transaction for the purposes of s 588FB(1), should be rejected. Considered by itself, any transaction which put off repayment of a significant debt might be commercially justified, but that result would often be irrelevant to whether or not incurring the liability originally was an uncommercial transaction for the borrower, and largely irrelevant to whether or not the company subsequently became insolvent because of matters which included entering into the transaction or acts being done for the purpose of giving effect to it.

I also agree with the liquidator’s submission that BankWest gave effect to the December 1997 transaction both when it “rolled over” each guarantee by giving another as the earlier guarantee expired, when it debited UTC’s account with the $2 million paid to the Hong Kong Bank, and when it provided the loan facility on 29 January 1999 which extended the date for repayment of $2 million by UTC. Each of those acts by BankWest gave effect to the December 1997 transaction whereby UTC undertook a liability to BankWest upon that bank being called upon by the Hong Kong Bank. Had the original transaction been uncommercial, each of those steps would have given effect to an uncommercial transaction, in the sense described by the Full Court of the Federal Court in Demondrille Nominees Pty Ltd v Kevin R Shirlaw & Anor (1997) 25 ACSR 535 at 549. That is, those transactions responded to, or were explicable or made necessary by reason of, the uncommercial nature of the first one. But that does not help the liquidator when its principal argument, that the transaction was uncommercial in December 1997, fails. I would dismiss the liquidator’s appeal.

MUIR J: These reasons are given in appeals from decisions in two separate proceedings which were heard together. Proceeding BS3066 of 2002 concerns a claim by the liquidator of United (T & C) Bretts Wharf Pty Ltd (in liquidation) (“UTC”), the first appellant in appeal number 6909 of 2005, to have declared void under s 588FE of the Corporations Act 2001 (Cth) certain transactions entered into by UTC. The learned primary judge determined that issue against the liquidator. A related question is whether, if the transactions are found by this Court to be voidable, the primary judge erred in finding that the respondent Bank of Western Australia Limited (“the respondent”) made out a defence under s 588FG of the Corporations Act.

In the other appeal (Appeal No 6908/2005), in which the appellant is Dr Henry Mulherin and the respondent is Bank of Western Australia Limited (“the respondent”), the principal issue is whether the primary judge erred in not finding that an estoppel by convention arose in relation to a priority deed executed by Dr Mulherin and the respondent, such that the respondent was estopped from denying that the deed took effect in accordance with its terms.

Background facts

Dr Mulherin lent money to UTC in connection with a real estate development on the Brisbane River at Hamilton known as “Bretts Wharf”. The respondent was UTC’s principal financier in relation to the development.

Late in 1997, the respondent was approached by UTC concerning a prospective borrowing of about $2,000,000 for the purposes of purchasing by “the UTC group” a yacht to use for entertaining in Hong Kong and Brisbane. That proposal did not culminate in a loan.

An officer of the respondent, in an internal memorandum dated 15 December 1997, noted:

“Clients have approached us to request the issue of a Bank Guarantee for an amount of AUD2.0M expiring June 1998. The Bank Guarantee is to provide the deposit for a property purchase in Hong Kong … On the basis that the Bank Guarantee Facility was approved the Group’s exposure would increase to $14.7M.”

A credit risk submission dated 16 December 1997 prepared by the respondent, under the heading “Proposal”, states that a “[s]tandby L.C./Bank Guarantee for $2 million to be used as a deposit for a property acquisition by the Group in Hong Kong” was being sought. It is noted in the document that the “L.C. obviates the necessity to tie up the Group’s cash or overseas credit lines for nearly six months.”

The credit risk submission notes that “[t]he Tams are taking taxation advice from Corporate Capital Partners, a Corporate Advisory Firm who work closely with this office.” It also records that the security was to include unlimited joint and several guarantees from Stephen Tam, Jasper Tam and United (T & C) Investments Pty Ltd (“Investments”).

Mr Regan of Corporate Capital Partners advised the respondent in a fax dated 17 December 1997:

“HongkongBank are happy with the form of the document [presumably the bank guarantee]. They advise that the borrower is in fact Stephen Shu Wing Tam and the object of the guarantee is simply ‘a borrowing’.”

Mr Evans, the commercial banking manager in the respondent’s Brisbane office, had known Mr Regan when the latter was a tax partner at Ernst & Young. Mr Evans had introduced Mr Regan to Mr Stephen Tam. Mr Evans recalls that he was approached by Mr Regan who “… was seeking a bank guarantee for the purpose of purchasing or putting a deposit on a site in Hong Kong.”

The evidence of Mr Evans is that although he received and, by implication, perused the letter of 17 December, he did not speak to Mr Regan or anyone else about it and attached no significance to it at the time. He admitted that “if anyone knew the full details” of the transaction it was Mr Regan. Nor did he seek any further legal advice before changing the identity of the customer in the guarantee. He explained that there was probably insufficient time to obtain legal advice but said that he did not see the need for such advice in any event.

In a letter dated 17 December 1997, the respondent offered to provide to UTC a single-option facility to a limit of $14.4 million for business and investment purposes and to provide a bank guarantee facility for an amount of $2 million.

On 17 December 1997 UTC executed a document entitled “letter of request and indemnity”, addressed to the respondent, under which UTC authorised and requested the respondent to pay to HongkongBank of Australia Limited (“HongkongBank”), on UTC’s behalf, any monies which might be demanded or claimed by HongkongBank from the respondent under or by virtue of a bank guarantee to be given by the respondent in favour of HongKong Bank and to debit UTC’s account with the amount of any such payment together with any costs, charges and expenses relating thereto.

In connection with the 17 December 1997 letter of offer, the Tams provided their personal guarantees and certified that resolutions had been duly passed at a meeting of directors of UTC that:

“(i)the acceptance of the Letter of Offer would be in the interests of the Company;

(ii)the Company accept the offer from the Bank of the Facilities upon the terms and conditions, and in the manner set out in the Letter of Offer.”

It was further certified that the resolutions were passed “after due notification of all disclosable [sic] interests and after those ineligible to vote on the resolution left the meeting and did not vote”. The documents to which reference has just been made were forwarded to the respondent by UTC’s solicitors under cover of a letter dated 18 December 1997.

Minutes of a UTC directors’ meeting dated 19 December 1997 record that the respondent had agreed to make available a bank guarantee.

The solicitors for the respondent, in a letter dated 22 December 1997 to the solicitors for UTC, made the following request:

“Please advise, on your clients’ instructions, what is the commercial benefit to each of the companies in providing unlimited guarantees and indemnities for each others’ BankWest facility and in agreeing to cross collateralise.”

The response, in a letter from UTC’s solicitors that day, was:

“The Bank Guarantee will provide liquidity to both entities to continue to pursue aggressively their various joint venture pursuit. As United (T & C) Investments Pty Ltd is the major Shareholder in United (T & C) Bretts Wharf Pty Ltd, any commercial activity by one of the entities necessarily benefits the other.”

On 23 December Mr Evans received a telephone call from UTC’s solicitor, who told him that HongkongBank would not accept the bank guarantee provided by the respondent. Mr Evans met with the solicitor and Mr Jasper Tam and had a conference call with a Mr Rankin, an officer of HongkongBank. Mr Rankin said that if the matter was not settled that afternoon UTC would lose the block of land it was looking to purchase. Mr Rankin explained that HongkongBank did not have a customer account in the name UTC. The account name was “Stephen Tam” and the guarantee should be changed so that it was given in respect of Tam. Mr Evans acceded to the request.

At this time Mr Evans was unaware of any problem with Stage 2 of the Bretts Wharf development and was aware that Stage 3 was being planned.

Mr Evans did not enquire into the value of the property being purchased, let alone ask to have it identified. This was probably because it was the respondent’s policy not to lend on the security of property out of Australia. In this case, he took the view that there was sufficient Australian security provided by UTC to cover the respondent’s exposure under the bank guarantee. The $2 million, it would seem, was required for payment of a deposit.

There is no evidence that the respondent inquired further into the legitimacy of UTC’s conduct in obtaining the loan facility.

On about 23 December 1997, the letter of request and indemnity, addressed to the respondent and executed by UTC on 17 December 1997, was altered to request that the respondent pay on behalf of HongkongBank all “sums or amounts which may at any time and from time to time be demanded or claimed” by HongkongBank from the respondent on account of Stephen Tam. Tam was described as “the Customer”. Previously UTC had been so described. A bank guarantee dated 23 December 1997 was given by the respondent in favour of HongkongBank under which the respondent undertook unconditionally to pay to HongkongBank on demand $2 million in respect of “the Customer”, Stephen Tam.

On 14 August 1998 the term of the $2 million facility was extended to 1 October 1998 and, in conjunction with that extension, the respondent gave another bank guarantee in favour of HongkongBank in terms of that dated 23 December 1997, except as to expiry date.

Further extensions of the $2 million facility occurred and replacement guarantees were provided until 30 December 1998, when HongkongBank demanded payment under the guarantee dated 29 January 1999. HongkongBank’s stated reason for requiring payment was that the respondent “should look after all of Stephen Tam’s facilities.” An internal memorandum by the respondent’s commercial banking manager dated 5 February 1999 states in that connection:

“We questioned whether the [$2 million] fully repaid all facilities Stephen Tam held with HKSBC and apparently all facilities are repaid with the exception of an amount of interest which is outstanding.”

The respondent’s commercial banking manager, in a memorandum to the respondent’s senior manager credit on 10 August 1998, observed:

“In December 1997, approval was given to provide a [$2 million] Bank Guarantee facility to United (T&C) Bretts Wharf Pty Ltd.

The Bank Guarantee was used as a deposit for a property acquisition by the Group in Hong Kong. Settlement of the Hong Kong property was to coincide with the settlement of the units in the Bretts Wharf project.”

The appellants contend that the HongkongBank guarantee was provided to finance a private borrowing of Stephen Tam. The report as to affairs as at 23 April 1999 submitted by Stephen Tam to the administrators shows a loan by UTC to Stephen Tam of $2,260,700. It is submitted that this evidences a $2 million loan by UTC to Tam.

Administrators appointed to UTC on 6 April 1999 and were appointed liquidators of the company on 15 June 1999.

The evidence relating to the estoppel claim

In April 1998 UTC applied to the respondent for a further advance of $1.2 million for the purpose of acquiring land on which to construct Stage 3 of its Bretts Wharf development. At that time the respondent held a first registered charge over the assets and undertaking of UTC. Mr Li held a second registered charge and Dr Mulherin held a third registered charge. Despite holding the first registered charge, the respondent proposed that a priority deed be entered into spelling out the priorities to be afforded to the securities of the respective lenders. After negotiations between the parties in that regard, a deed was drafted and sent to Dr Mulherin’s solicitors for execution. A copy was also sent to Mr Tam in Hong Kong for execution by Mr Li.

Dr Mulherin altered his copy of the draft priority deed by writing the following addition to clause 2.1:

“(7)The third security has seventh priority for the balance of the money and liabilities secured by the third security.”

Dr Mulherin’s solicitors sent the respondent’s solicitors a copy of the amended document without drawing attention to the amendment. Attached to the document was an execution page purporting to bear Mr Li’s signature. It is common ground that the signature is not that of Mr Li and it was conceded by counsel for Dr Mulherin on the trial that there is no reliable evidence that Mr Li ever signed any copy of the priority deed.

The alteration to the priority deed was not discovered by the respondent or its solicitors until March 1999. Prior to then, the respondent and Dr Mulherin believed that the priority deed was duly executed by all parties and legally enforceable.

In March 1999 the solicitors for the respondent were advised in writing by the solicitors for Mr Li that he had not signed the priority deed. On 6 April 1999 the solicitors for the respondent wrote to Dr Mulherin referring to the respondent’s obligation under clause 10.3 of the priority deed and stating that if UTC did not pay the sum of $8,480,333.20 demanded of it by the respondent, the respondent would enforce its securities. This reference to the priority deed seems to have been a slip on the respondent’s part. Thereafter the respondent proceeded to disregard the priority deed in ordering its affairs. Dr Mulherin agreed in cross-examination that he had no belief in April 1999 that the respondent was representing that the priority deed was binding.

The priority deed recites:

“D.The parties have agreed to regulate the priorities between the First Security and the Second Security and the Third Security in the manner set out in this Deed.”

The order of priorities is set out in paragraph 2.1 as follows:

“2.1The first Security, the Second Security and the Third Security rank in the following order of priority:

(1)the First Security has first priority for the money and liabilities secured by the First Security up to a Principal Amount of $14,700,000 and interest, charges, costs and expenses, whether capitalised or not;

(2)the Third Security has second priority for all money and liabilities secured by the Third Security up to a Principal Amount of $1,500,000 and interest, charges, costs and expenses, whether capitalised or not;

(3)the First Security has third priority for the money and liabilities secured by the First Security up to a Principal Amount of $1,020,000 and interest, charges, costs and expenses, whether capitalised or not; and

(4)the Second Security has fourth priority for all money and liabilities secured by the Second Security up to a Principal Amount of $2,000,000 and interest, charges, costs and expenses, whether capitalised or not;

(5)the First Security has fifth priority for the balance of the money and liabilities secured by the First Security; and

(6)the Second Security has sixth priority for the balance of the money and liabilities secured by the Second Security.”

Clause 2.2, which is also of relevance, provides:

“2.2Subject to any prior right in favour of any other person, all money received by the First Chargee, the Second Chargee, the Third Chargee or any Receiver in respect of the First Security, the Second Security or the third Security must be applied in the order of priority referred to in clause 2.1 after payment of the amounts described in clause 3.”

The first security is defined as “the Security Interests granted by the Chargor to the First Chargee, particulars of which are set out in Schedule 1, together with each additional Security Interest, which is to be treated as part of the First Security under clause 12.1”. The “First Chargee” is a reference to the respondent. The “Second Security” and the “Third Security” refer to securities held respectively by Mr Li and Dr Mulherin. In Schedule 1, under the heading “First Security”, the following securities are specified:

“SCHEDULE 1

First Security

First registered fixed and floating charge 610705 dated 15 September 1997 given by the Chargor to the First Chargee.

Fixed and floating charge dated or intended to be dated at about the same time as this Deed given by the Chargor to the First Chargee over all its assets and undertaking.”

The estoppel argument and the primary judge’s findings

At first instance and on appeal it was argued that the circumstances outlined above gave rise to an estoppel by convention between Dr Mulherin and the respondent on the basis that both of them acted in accordance with the provisions of the priority deed on the assumption that it had been duly executed by all parties.

The learned primary judge held that an estoppel by convention did not arise because:

Dr Mulherin had failed to prove any common assumptions sufficient to give rise to such an estoppel;

the respondent was not aware of the amendments to the deed made by Dr Mulherin; and

as the deeds in existence were not in identical terms there could be no common assumption to ground an estoppel.

These findings are criticised by Dr Mulherin and some of the criticisms have substance. If, as appears to be the case, Dr Mulherin’s handwritten addition to clause 2.1 did not affect the rights of the parties under the priority deed, or otherwise, in any material way, its inclusion would not have entitled the respondent to avoid the deed had it been legally binding.⁹

At least as a general proposition, it is difficult to see why a unilateral non-material alteration to the deed would prevent an estoppel by convention from arising.

When one is looking at a common assumption for the purposes of the doctrine of estoppel by convention, the inquiry is surely as to the substance of such an assumption rather than whether there is a perfect coincidence of beliefs about related minutiae, irrespective of whether any divergence in the parties’ respective understandings has any material legal or practical consequence.

In view of the matters set out below, however, it is unnecessary for me to pursue this question further.

A critical weakness in Dr Mulherin’s case, to my mind, is the absence of Mr Li as a party to the priority deed. The common assumption upon which Dr Mulherin relies is the existence of a duly executed and enforceable tripartite priority deed ordering the priorities of the parties in accordance with clause 2.1. The priority deed was executed by the respondent and Dr Mulherin on the basis that Mr Li would enter into it also and be bound by its terms. Its purpose was to determine priorities, not merely between Dr Mulherin and the respondent, but between Dr Mulherin, the respondent and Mr Li. There was no common understanding merely as to the ordering of priorities between Dr Mulherin and the respondent.

In those circumstances it was not unjust or unconscionable for the respondent to decline to act in accordance with the terms of the priority deed.¹⁰ The reason being, that it had required that the priority arrangement bind all secured creditors and had understood that its requirement had been met. Dr Mulherin proceeded on the same understanding. It is relevant also that the evidence does not establish that Mr Li would be bound to observe the terms of the priority deed whether by virtue of an estoppel or otherwise. Nor does it establish that the respondent, by its conduct, represented that it would be bound by the terms of the deed even if Mr Li was not.

In view of the foregoing, it is unnecessary to rule on the correctness of the submission advanced by the respondent’s counsel, somewhat boldly in the light of recent authority,¹¹ that an assumption of law or as to private rights could not ground an estoppel by convention.

The liquidator’s appeals – introduction

The appellant liquidator of UTC sought at trial to void certain transactions pursuant to s 588FE(3) of the Corporations Act.

That subsection provides:

“(3) The transaction is voidable if:

(a)it is an insolvent transaction, and also an uncommercial transaction, of the company; and

(b)it was entered into, or an act was done for the purpose of giving effect to it, during the 2 years ending on the relation-back day.”

The transactions sought to be set aside were:

“Each of the letter of offer dated 17 December 1997 and the letter of request and indemnity; and each of the letters of variation in respect of the rollovers and the letter of offer dated 29 January 1999.”

These, it was argued, were acts done for the purpose of giving effect to three transactions consisting of:

the initial guarantee requested by UTC and given by the respondent in favour of HongkongBank in December 1997 and the substitution of the guarantee by the respondent in relation to Mr Tam in lieu of such guarantee in relation to UTC and the accompanying loan facility;

each of the extensions of the facilities accompanied by a new bank guarantee in favour of HongkongBank; and

the cash advance of $2 million made on 29 January 1999 when HongkongBank required payment of the bank guarantee maturing on that date.

The “relation-back day” is 6 April 1999, the day on which the administration of UTC commenced.

An “insolvent transaction” is defined in s 588FC as:

“A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:

(a)any of the following happens at a time when the company is insolvent:

(i)the transaction is entered into; or

(ii)an act is done, or an omission is made, for the purpose of giving effect to the transaction; or

(b)the company becomes insolvent because of, or because of matters including:

(i)entering into the transaction; or

(ii)a person doing an act, or making an omission, for the purpose of giving effect to the transaction.”

An “uncommercial transaction” is defined, relevantly, in s 588FB as:

“(1)A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:

(a) the benefits (if any) to the company of entering into the transaction; and

(b)the detriment to the company of entering into the transaction; and

(c)the respective benefits to other parties to the transaction of entering into it; and

(d)any other relevant matter.”

The primary judge’s findings

The primary judge found that any relevant transaction was not “an uncommercial transaction” or “an insolvent transaction”. She found also that the matters listed in each of sub-sections (a) to (c) were effectively three transactions and could not be viewed as a single transaction for the purposes of applying the subject provisions of the Corporations Act.

Her findings in that regard are challenged, as is her conclusion that the existence of an “insolvent transaction” and an “uncommercial transaction” was not established. In the latter respect her Honour found:

“It could not be said, having regard to the financial position of UTC in December 1997 that the transaction was insolvent as defined in s 588FC of the Act as UTC was not insolvent in December 1997 when the third BankWest loan was entered into. Nor did it become insolvent as a result of doing so. It could not be said that the transaction was ‘uncommercial’. UTC was of the belief that the transaction was to its benefit in that it assisted in asset acquirement by its principal and thus the business strength of the UTC group and urged the transaction upon BankWest. The liquidator has not been able to demonstrate that a reasonable person in UTC’s circumstances would not have entered into the transaction. BankWest on the other hand did not make an unusual gain from the transaction. It appeared on its face to be a regular commercial transaction. If, in hindsight, it were thought to be otherwise than a commercial transaction, BankWest satisfies all of the elements of the defences to setting aside the transaction set out in s 588FG. BankWest became a party to the transaction in good faith; at the time it became such a party, BankWest had no reasonable grounds for suspecting that the company would become insolvent and a reasonable person in BankWest’s circumstances would have had no such grounds for so suspecting; and BankWest provided valuable consideration under the transaction by its provision of the guarantee.” (emphasis added)

Evidence and considerations to the “uncommercial transaction” issue

In determining whether an “uncommercial transaction” had been entered into it is arguable that the primary judge looked to the subjective “belief” of UTC as well as applying the objective tests posed by s 588FB. I will return to a consideration of those tests later.

The term “principal” has no precise legal meaning in this context. It appears to be a reference to Mr Stephen Tam, a director of UTC. His brother Jasper Tam was the other director. The company’s shareholders were the two Tams and Investments. The shareholders each held one share. Stephen Tam held 25 per cent of the issued share capital of Investments, Jasper Tam held 15 per cent and five other persons each had holdings varying between five and 20 per cent.

Why the acquisition for himself of assets in Hong Kong by Mr Tam would assist “the business strength of the UTC group” is not apparent, even if it be assumed (in the absence of any evidence to that effect) that the assets acquired or to be acquired would have a greater market value than their acquisition price. The evidence does not suggest that whatever was acquired or was to be acquired by Mr Tam was to be held on behalf of UTC or that it was to be used for the benefit of UTC.

Counsel for Dr Mulherin pointed to the fact that Stephen Tam was a guarantor of the obligations of UTC to the respondent under the subject loan agreements. But the fact that a director may have given guarantees for the benefit of his company does not give rise to any entitlement to have the company reciprocate. A director, of course, stands in a fiduciary relationship with the company and cannot exercise his powers as a director to obtain a private advantage or for any purpose foreign to the power.¹² A director, as a fiduciary, must not place himself in a position in which his duty to act bona fide in the interests of the company is in conflict with his own personal interests. He may be released from such duties and obligations by the members of the company but only if their consent is “fully informed”.¹³

The evidence does not show that after being informed of all relevant facts, all the members of UTC consented to the obtaining of the facilities from the respondent in support of the bank guarantees given by the respondent in favour of HongkongBank.

A meeting of UTC’s directors on 19 December 1997 resolved that the transaction and securities relating to the bank guarantee facility pursuant to the 17 December 1997 letter of offer be approved. The two directors recorded as being present at the meeting were Stephen Tam and Jasper Tam. A meeting on 19 December 1997 of the directors of Investments records that they, too, approved the bank guarantee facility and related securities. There is no evidence that, at the time of either of these meetings, the bank guarantee in the form in which it was eventually executed on 23 December 1997 was in existence in draft form or was in the contemplation of either meeting.

The evidence is unclear as to the use to which the monies borrowed with the aid of the bank guarantee were put. On 23 December 1997 Mr Evans was told that UTC was acquiring land in Hong Kong but there is no credible evidence to support the conclusion that land in Hong Kong was in fact acquired by UTC or was ever intended to be acquired by UTC.

Mr Evans had been informed in writing by a person he trusted, and who was in a position to know the details of the transaction, that the transaction was for the benefit of Mr Stephen Tam. He ignored this information and, when told, in effect, on 23 December that the proposed acquisition was UTC’s he did not query the accuracy of that account.

The report of Mr Hellen, a registered liquidator, shows the liability resulting from the bank guarantee transactions but no corresponding asset. No witness on the trial suggested that UTC had in fact acquired land in Hong Kong. And the respondent’s internal memorandum of 5 February 1999 implicitly acknowledges that the Hong Kong borrowing, in respect of which the respondent provided its guarantee, was that of Stephen Tam.

Mr Hellen’s report

Mr Hellen’s opinions were subjected to some criticism by the primary judge but those criticisms, even if justified, do not cast doubt on the general accuracy of the financial statements prepared by him. On the appeal, the liquidator challenged the admissibility of Mr Hellen’s report on the grounds that the factual basis for the opinions expressed in it had not been established. The abandonment by the liquidator of his contention that UTC was insolvent in December 1997 removes much of the report’s evidentiary importance. It remains of significance however in relation to the uncommercial transaction question as it evidences the fact that UTC acquired no asset as a result of the HongkongBank guarantee transaction. It has relevance also in respect of the respondent’s s 588FG defence.

It is contended by the respondent that as the report was tendered as an expert’s report without objection, its contents, even if inadmissible before tender, have probative value once in evidence. In support of this proposition reference was made to the following passage from the reasons of Branson J in Sydneywide Distributors Pty Ltd & Anor v Red Bull Australia Pty Ltd & Anor¹⁴ in which, after referring to Heydon JA’s reasons in Makita (Aust) v Sprowles (2001) 52 NSWLR 705, her Honour said:

“[7] The approach… of Heydon JA… is, as it seems to me, to be understood as a counsel of perfection. As a reading of his Honour's reasons for judgment as a whole reveals, his Honour recognised that in the context of an actual trial, the issue of the admissibility of evidence tendered as expert opinion evidence may not be able to be addressed in the way outlined in the above paragraph.

…at least in a case where the parties are legally represented, where evidence is adduced from an expert without objection, the trial judge will ordinarily be entitled to assume that all matters crucial to the admissibility of the evidence are conceded by the opposing party…Rarely, if ever, would a trial judge be expected to interfere with the basis upon which represented parties had chosen to conduct their litigation by challenging the basis of an implicit concession concerning admissibility. Apart from other considerations, to do so could impose a significant and unexpected costs burden on the parties.”

In my view, subject to my subsequent qualifications, a party whose counsel fails to object to the admissibility of an expert’s report on the grounds under discussion does not lose the right to argue that the report has no probative value should the factual basis for the author’s opinions not be established.

The circumstances to which the above observations of Branson J were addressed are rather different to those now under consideration. Sydneywide was a passing-off case concerning the packaging and get-up of two competing energy drinks. An expert witness gave evidence as to the behaviour of consumers in the market place and the way in which packaging of products affected that behaviour. The evidence was not objected to at first instance but on appeal it was submitted that the evidence was inadmissible or of no weight because it went to the issue which the trial judge was obliged to determine and because it failed to identify empirical material upon which the opinions expressed therein may have been based.

I doubt very much that Branson J, in the above quoted passage from her reasons, was purporting to state a general proposition that the failure to object to the tender of expert opinion evidence cures the failure to prove the factual basis for the opinion. It has long been established that for expert opinion evidence based on facts “assumed” or “accepted” to have probative value, the facts must be identified and proved.¹⁵ It is against that background that experts’ reports, such as that of Mr Hellen’s, are tendered.

Where, as is increasingly the case, the evidence-in-chief is in the form of statements or affidavits exchanged prior to the hearing, the parties should be able to make a reasonable assessment when the expert’s report is tendered of whether the opinions expressed in it lack, and will continue to lack, proper factual foundation. In such a case it is desirable for opposing counsel to object to the admissibility of the report when it is tendered. But even in such a case there may be a realistic prospect of curing evidentiary deficiencies through cross-examination. Consequently, depending on when in the course of the trial the tender takes place, any ruling as to admissibility will tend to the provisional only. Where the evidence-in-chief is not on affidavit, objections to expert evidence on the basis that the factual basis for the expert’s opinion have not been established will be often premature.

A requirement to take objection at the time an expert’s report is tendered or an obligation to alert the tendering party to the possibility that the admissibility or weight of the report may be challenged on the basis that the facts on which it is based are erroneous or have not been established, may arise through a course of conduct or practice or as a result of counsel’s conduct at or concerning the trial. There is no suggestion here that any matters such as these affect the application of general principles. The contrary is the case. In written submissions at first instance, counsel for the respondent submitted that the expert had “failed to prove the basis for the opinion of insolvency”. Senior counsel who appeared for Dr Mulherin on the trial ignored this submission either deliberately or inadvertently.

I consider, however, that the respondent’s position is somewhat overstated. The written submissions on trial relevantly make their point succinctly and were not elaborated in oral submissions. As I construe them, they do not challenge the incorporation in the expert’s report of schedules of creditors or the legitimacy of the expert’s opinion being expressed on the basis of such schedules. Rather, the challenge appears to be confined to the lack of evidence as to the dates by which and the circumstances in which the debts of UTC as at 2 October 1998 and 1 December 1998 were to become payable.

The details pertaining to UTC’s creditors were extracted by Mr Hellen from the books and records of UTC. They were thus secondary evidence, not mere assertions, assumptions or hypotheses; and objection could have been taken to their admission. Frequently no objection is taken to evidence of this nature unless there is some reason to suspect its accuracy. If objection is taken to any problem arising from deficiencies in form, normally such objection can be addressed promptly by the tendering of documents, the grant of leave to call a further witness or by relaxing the rules of evidence, if appropriate.¹⁶ Presumably, that is why no objection to the receipt of secondary evidence was taken here. The report was properly admitted into evidence.

Conclusion on the uncommercial transaction question

I now turn to a consideration of whether, on the facts set out earlier, the transaction or transactions identified in paragraph [82] above was an “uncommercial transaction”. The test is objective.¹⁷

UTC derived little or no benefit from the bank guarantees and the facilities in support thereof. It did, however, suffer detriment in that it incurred the $2 million liability under the facility agreement as extended or replaced as well as a liability for bank charges and interest. On the other hand, the respondent benefited in that it was paid interest and fees.

Also relevant to whether “a reasonable person in [UTC’s] circumstances” would have entered into the subject facilities is the fact that a director appeared to be the beneficiary of the arrangements and that, on the face of things, he procured this benefit from his company in breach of his fiduciary duties. The series of dealings relating to the facilities and bank guarantees had an appearance of irregularity and demanded, at the very least, careful investigation.

A reasonable person in the company’s circumstances would have had in contemplation a transaction under which UTC obtained a line of credit to facilitate the acquisition of property in Hong Kong. Such a person would have been aware of the conflicting information about the identity of the prospective purchaser and of the legal problems which could arise if a director was subsequently found to have obtained a personal benefit from the use of company funds. Such a person would have been aware also of the difficulty UTC might face in recovering its losses should the transaction be found to be unlawful. In short, there is little about the subject transaction which accords with normal commercial practice.¹⁸

For these reasons I conclude that the subject transaction or transactions constituted a transaction or transactions into which a reasonable person in UTC’s circumstances would not have entered. It was, or they were, “uncommercial”.

UTC’s solvency at relevant times

It is common ground that UTC was insolvent at the time of appointment of the voluntary administrators on 6 April 1999. The primary judge found that insolvency was not proved as at 2 October 1998 or 1 December 1998. The liquidator’s challenge to that finding was abandoned during the hearing of the appeal. The argument which remained was that “the transaction” was voidable under s 588FE(3) as an insolvent and uncommercial transaction and that acts were done for the purpose of giving effect to it during the relation-back period. The transaction is that identified in paragraph [82] hereof and the “acts” are the entering into of each variation of the subject loan agreement. The “insolvent transaction” is alleged to arise as a result of the transaction’s being “an uncommercial transaction” and because UTC became insolvent because of matters including the entering into of the transaction and the doing of acts to give effect to it.¹⁹

Section 95A of the Corporations Act provides that:

“A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.”

Whether a company has or lacks such an ability is to be determined by considering its financial position as a whole, with reference not merely to its strict legal rights and obligations under agreements with creditors and debtors, but by taking into account “commercial realities”.²⁰

A significant consideration on any such determination is often the ability of the company to borrow on the security of its own assets and the willingness of its secured creditors to continue lending despite temporary financial difficulties.

The availability of unsecured borrowings is also relevant where, for example, they are capable of providing temporary liquidity pending the realisation of assets or the obtaining of secured loans.

There is some authority for the proposition that unsecured loans by directors cannot be taken into account.²¹ But where it can be shown that directors are likely to continue to support the company, whether by unsecured loans or otherwise, there is no reason in principle why such support should be regarded as irrelevant. The likely existence of continued support of directors and/or shareholders may be a significant consideration in assessing the solvency of a development project vehicle such as UTC. Its only capacity to pay its debts on or before the conclusion of the development was dependent on the sale of the developed real property for a price higher than the outgoings of the development. In such circumstances, there will tend to be an expectation, once the development is embarked upon financed by loans secured and otherwise, that as long as loan conditions are observed the loans will be extended until the conclusion of the project through sale of the developed lots. That assumes, of course, that lenders continue to have a reasonable expectation that the borrower will have a continued ability to perform its obligations under its loan agreements. And the continued existence of confidence on the part of lenders will depend largely on their assessment of whether the development is likely to result in a net profit or loss.

The directors of UTC guaranteed the company’s obligations to the respondent throughout, as did Investments. There is no evidence that the removal of such support was contemplated in 1997 or 1998 but, in the absence of evidence as to the financial standing of the guarantors, their support is a minor consideration.

In support of Mr Hellen’s conclusion, the appellants relied on oral evidence of officers of the respondent which consisted of:

A concession by Mr Smith, the respondent’s commercial banking manager, that it “must have been apparent” to him on 9 September 1998, having regard to the fact that monies were also owing to Dr Mulherin and Mr Lee that “the situation of UTC was a very tight one”. He said that that fact or condition wasn’t apparent to him at the time.

A further concession by the same witness that if on 1 December 1998 he had “given thought to the position of other creditors” he “would have had serious doubts about UTC’s solvency”. He accepted that his only concern at the time was that there was sufficient security to protect the respondent’s position. He also said “there was nothing that indicated to me at the time [UTC was] insolvent”.

Mr Ribbens, the State manager of the Queensland branch of the respondent at the relevant times, admitted that had he considered a particular memorandum and had he turned his mind to the overall financial position of UTC including the total extent of its borrowings, he would “quite possibly” have been “very concerned”.

These “admissions” to my mind are not particularly weighty and there are some other matters, relied on by the respondent, which provide support for the primary judge’s findings on solvency.

The builder had done some preliminary work on Stage 3 of the project and had lent monies to UTC through a company associated with it. The respondent had made a conditional offer of finance for Stage 3. Some pre-sales had been made but not to the extent necessary to satisfy a pre-condition in the respondent’s offer. Mr Hellen conceded that at least $2 million had been invested in “the land component of the transaction” but treated UTC’s interest in the joint venture as having no value for the purpose of his assessment. Yet Dr Mulherin’s own case was that the interest of UTC in respect of Stage 3 was valuable and there is other evidence to support that conclusion.

Given the nature of UTC’s debts, their relatively modest amount at the dates addressed by Mr Hellen, the support of directors and shareholders and their likely understanding that UTC’s interest in the joint venture in respect of Stage 3 was valuable and worth preserving, it is difficult to sustain a conclusion that insolvency was established as at 2 October and 1 December 1998. And the evidence does not suggest that UTC’s financial position was worse when the bank guarantee transaction was first entered into.

The respondent’s contentions as to whether there was an insolvent transaction by operation of s 588FC

The respondent argues that the entering into of each bank guarantee constituted a separate obligation of indemnity which is to be considered a transaction for the purposes of s 588FC. It is submitted for the purposes of that section and sections 588FB, 588FE and 588FF that “the only relevant transaction is that which created or involved the relevant obligation to indemnify, because it is the transaction creating that obligation which s 588FF can void (if it is a voidable transaction)”. In this case, it is said that the letter of variation dated 30 December 1998 was the relevant transaction because the bank guarantee issued pursuant to that letter was the one which was called up by HongkongBank.

As at 30 December 1998, none of the prior letters of variation created an obligation on UTC to indemnify the respondent. The respondent’s obligations were created by the letter of variation of 30 December 1998 in combination with the facility terms under the letters of offer. The argument proceeds:

“Accordingly, the only relevant transaction which could be voided in respect of [the] BankWest guarantee which was called upon, was that creating UTC’s contingent obligation to indemnify BankWest, namely the letter of variation and incorporated terms of the facility. That is because the only relevant obligation to void was entered into under that letter of variation.”

At the time of the 30 December letter of variation, UTC had already made a prior and existing promise of indemnity in relation to a bank guarantee that was then current. Had UTC failed to incur the contingent obligation under the 30 December letter of variation, BankWest would not have replaced its guarantee, HongkongBank would have called upon the current bank guarantee and UTC’s then current promise of indemnity under the prior letter of variation would have created a debt in favour of BankWest. By entering into the transaction, UTC gained an extension of its contingent liability, thus leaving open the prospects of an ability to continue with the development project.

The entering into of the 29 January 1999 facility was not an uncommercial transaction. By that date, HongkongBank had called on the bank guarantee issued on 30 December 1998 and UTC had become liable to indemnify the respondent consequent upon the promise of indemnity contained in the letter of variation of 30 December 1998. The 29 January facility thus did not create a $2 million liability of UTC to BankWest. It did no more than “regulate the debt that had become owing”.

The liquidator’s contentions in relation to s 588FC

It is argued on behalf of the liquidator that each of the letters of variation in respect of the rollovers and the letter of offer dated 29 January 1998 were acts done for the purpose of giving effect to the agreement which arose on acceptance of the letter of offer dated 17 December 1997 and the letter of request and indemnity.

Conclusion on the insolvent transaction question

In my view, the various extensions of the loan facility and the consequent provisions of fresh guarantees were acts done for the purpose of giving effect to the initial facility agreement in respect of the bank guarantee. The initial facility agreement was entered into in order to support the bank guarantee. It was in contemplation at that time, and at all times thereafter, that if Stephen Tam failed to repay his loan of $2 million to HongkongBank, the facility would need to be renewed or, failing that, UTC would be required to meet its obligations under it or any extension of it. The subsequent extensions of the bank guarantee facility and the issuing of replacement guarantees may thus be seen to be all part of the one transaction which commenced in December 1997 with the initial bank guarantee facility and the bank guarantee. The expression “transaction” is capable of accommodating a series of steps or dealings linked by some unifying plan or purpose or which are designed or implemented to meet a particular objective.²²

In a broad sense it is accurate to say that UTC became insolvent because of matters including the entering into of the bank guarantee facility. That facility gave rise to a debt which was substantial in proportion to UTC’s other liabilities. When UTC was called on to pay it, it was unable to do so. The requirements of s 588FC(b) appear to have been fulfilled but, in view of my conclusion in relation to the s 588FG defence, it is unnecessary for me to express a concluded view on the point.

Does the respondent have a defence under Section 588FG?

The respondent relies on the trial judge’s finding that:

“BankWest became a party to the transaction in good faith; at the time it became such a party, BankWest had no reasonable grounds for suspecting that the company would become insolvent and a reasonable person in BankWest’s circumstances would have had no such grounds for so suspecting; and BankWest provided valuable consideration under the transaction by its provision of the guarantee.”

These findings, if sustainable, attract the operation of s 588FG(1). It provides:

“588FG Transaction not voidable as against certain persons

(1)A court is not to make under section 588FF an order materially prejudicing a right or interest of a person other than a party to the transaction if it is proved that:

(a)the person received no benefit because of the transaction; or

(b)in relation to each benefit that the person received because of the transaction:

(i)the person received the benefit in good faith; and

(ii)at the time when the person received the benefit:

(A)the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and

(B)a reasonable person in the person’s circumstances would have had no such grounds for so suspecting.”

The matters discussed under the heading “UTC’s solvency at relevant times” above sustain the finding that the respondent had no reasonable grounds for suspecting that UTC was insolvent in December 1997. Those matters also support the finding that the respondent had no reasonable grounds for suspecting that UTC would become insolvent because of matters including the entering into of the subject transaction or transactions or the doing of an act or the making an omission for the purpose of giving effect to the subject transaction or transactions.

The respondent had no reason to believe that the Tams, who were guarantors of the obligations of UTC and Investments, were not persons of substance. In December 1997, the Bretts Wharf project appeared to be proceeding satisfactorily. As with any guarantee of the obligations of a third party, there was always the prospect that the guarantor might be called on to meet its obligations. What s 588FG requires, however, is that there be “reasonable grounds for suspecting”; not that there be a possibility of insolvency should matters, not within the defendant’s knowledge and not reasonably capable of being ascertained, come to pass.

I concluded earlier that the transaction was one into which a reasonable person in UTC’s circumstances would not have entered. However, it does not necessarily follow that in entering into the transaction the respondent was not acting in “good faith” ie, that it was not acting with propriety or honesty.²³

Although, in my view, the respondent’s conduct was remarkably casual and somewhat ingenuous and fell short of meeting the standards to be expected of a financier in its position exercising due skill and diligence, it did not act improperly or dishonestly. The transaction plainly had the approval of the permanent governing director of UTC and of its other director. The Tams were also directors of Investments, UTC’s other shareholder. The fact that Stephen Tam had guaranteed the obligations of UTC, although not entitling him to a benefit from UTC, did provide some explanation as to why the shareholders of UTC may have consented to UTC’s conferring a benefit on him. Mr Evans had the added consolation that solicitors were acting for UTC in the subject transactions and were present during the discussion on 23 December. The pressure on Mr Evans to make a prompt decision is also a relevant consideration.

Conclusion

For the above reasons, I would dismiss both appeals with costs.

Footnotes

1. (1986) 160 CLR 226, Gibbs CJ, Mason, Wilson, Brennan, Dawson JJ, 244 - 245. ↩

2. See AR 721 and 722, and [7] of the judgment in Mulherin v Bank of Western Australia Ltd; McCann v Bank of Western Australia Limited [2005] QSC 205. ↩

3. AR 721. ↩

4. AR 721. ↩

5. At AR 270 in the evidence of Mr Evans. ↩

6. Also at 270, evidence of Mr Evans. ↩

7. That figure is deduced from the liquidator’s submissions to the learned trial judge, reproduced at AR 1441, and the respondent’s reply in its written argument on the appeal. ↩

8. Reproduced at AR 734. ↩

9. Halsbury’s Laws of England, 4th ed, para 1378 et seq and para 597 et seq. ↩

10. For the necessity to establish such unconscionability see Grundt v Great Boulder Proprietary Gold Mines Limited (1937) 59 CLR 641 at 674 and 675; Thompson v Palmer (1933) 49 CLR 507 at 547; and M.K. & J.A. Roche Pty Ltd v Metro Edgley Pty Ltd [2005] NSWCA 39 at paras [71] to [75]. ↩

11. Heggies Bulkhaul Ltd Global Minerals Australia Pty Ltd (2003) 59 NSWLR 312; Caboche & Bond v Ramsay (1993) 119 ALR 215; Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387*; Foran v Wight* (1989) 168 CLR 385 at 435, 457 and [1998] 2 VR 70.