Second issue, part (c): the "second credit agreement"
44The defendants say that in early or mid-July 2008, Messrs Allard and Canty negotiated what the defendants call the "second credit agreement". Under that agreement, according to the defendants, TQG agreed to procure the guarantees if Paperlinx would increase TQG's credit limit to $1.6 million; and Paperlinx said it would do so if the guarantees were given. I set out para 10 of the Amended List Response:
10. In or about early mid July 2008, when the indebtedness of Quality Group to Paperlinx under the second credit agreement was exceeding $0.8m, and Quality Group was unable to perform its obligations under the agreement in a timely manner:
(a) Quality Group promised to procedure its directors and group members to personally guarantee the due payment of Quality Group's obligations under the second credit agreement at the request of Paperlinx (the proposed guarantees) in consideration of promises made by Paperlinx to continue supplying paper to Quality Group under the agreement and to increase the credit limit to $1.6m;
(b) Paperlinx promised to continue supplying paper if it received the proposed guarantees; and
(c) Paperlinx also promised to increase the credit limit to $1.6m forthwith upon receipt of the proposed guarantees,
and the second credit agreement would be varied accordingly.
Particulars
Conversation between Paul Canty for the Quality Group and David Allard for Paperlinx in early to mid July 2008.
45I note, in passing, that the language ("increase the credit limit to $1.6 million") is not consistent with Mr Canty's evidence that, hitherto, there was effectively no credit limit in place.
46The evidence of the making of the agreement comes from Mr Canty. According to him, it was made and confirmed in two conversations. The first conversation, he said, was as follows (affidavit sworn 29 May 2013, para 46):
"Mr Allard said: "Paul. I understand there was never any credit limit discussed when we agreed to supply paper last year but we'll need to have a credit limit now,"
I said: "You know this will ruin the Quality Group. It did not expect this cash flow requirement and it can't meet it. You also know that $800,000 is not even one month's purchases for Quality and that we are on 60 day terms."
Mr Allard said: "I can't get head office to allow a greater limit unless we have more security. We'll need personal guarantees from you and your wife and any other companies associated with Quality."
I said: "I'm not happy with that but Quality needs the paper it's already ordered from Paperlinx so I'll just have to live with it, I suppose. But I'm only prepared to agree to giving any personal guarantees by me and my file and companies if the credit limit is increased to allow for at least two months of Quality's paper purchases which as you know are currently about $1.6 million."
Mr Allard said: "OK. I agree."
47Mr Canty said that there were similar conversations thereafter, including, in about mid-July, one as follows (same affidavit, para 48):
I said: "Darren, the guarantee doesn't nominate the increase in the credit limit to $1.6 million we discussed. There's no point in giving guarantees if the increase to the credit limit isn't part of it."
Mr Allard said: "Of course you'll get your credit limit increase. It doesn't need to be in the guarantee documents. But we want the guarantees first. Once we get the guarantees in writing we'll then process the paperwork for your credit limit increase."
48In his affidavit sworn 1 August 2013, Mr Allard denied those conversations.
49Mr Allard's cross-examination on this topic was less than consistent. I do not say this critically; it reflects, in part if not substantially, the confusing nature of the questions put to him and the circuitous way in which, in the course of cross-examination, the topic was approached.
50At one point, after what Mr Faulkner correctly described (written closing submissions, para 53) as "a lengthy series of confusing questions", Mr Allard appeared to accept that the first of the conversations occurred. However, thereafter (when the matter was put more directly), he denied any discussion of, or agreement to, a credit limit of $1.6 million.
51Mr Canty's affidavit account of the conversations is implausible. It starts with something that objectively, must be incorrect: the substance of an observation attributed to Mr Allard that there had been no prior credit limit. Mr Allard's evidence was, first, that there had been such a credit limit at all times; and, secondly, that he was aware of this. And Mr Canty's account concludes with a definite commitment; coming from Mr Allard, to the $1.6 million limit if guarantees were provided.
52According to Mr Canty, the limit was required for two reasons. First, TQG was then doing, he said, more than $800,000 worth of business per month with Paperlinx. Secondly, he said, because it was trading on 60 day terms, it needed a credit limit of $1.6 million.
53Such records as there are shows that TQG was not then doing business with Paperlinx for anything like the amount of $800,000 per month, let alone more. And even if forward orders are considered (that is to say, orders "in the pipeline"), as Mr Bevan submitted they should be, the likely (and in fact achieved) level of business almost never exceeded $600,000 per month, and often was well below that.
54In any event, in my view, the truth comes not from recollections that are; on the one side, faulty, and on the other, tainted by self-interest. It is to be found in the probabilities, viewed objectively, and in contemporaneous documents.
55As to the first point, it is worth reminding ourselves that it is clear from the whole of Paperlinx's evidence that the trade credit insurance that it had with QBE was a necessary aspect of the process of fixing a credit limit for a customer. No doubt, as was put to witnesses, Paperlinx could fix a credit limit that was higher than the limit of insurance; it could "self insure" for the excess. But there is no evidence that, in practice, it did so. There is certainly no evidence that it was prepared to do so for TQG.
56When the discussions alleged by Mr Canty were supposed to have occurred, Paperlinx was in the process of negotiating with QBE to secure an extension of the credit insurance to $1.5 million. QBE was not prepared to do so unless Mr and Mrs Canty and their companies gave guarantees to Paperlinx of the liabilities of TQG. I cannot believe that Mr Allard, who impressed me as a careful, thoughtful, and experienced businessman, would have agreed to increasing the credit limit without knowing that the underlying insurance was in place.
57In this context, the evidence showed that the process of increasing a credit limit did not involve the say-so of just one person within Paperlinx. On the contrary, a particular manager was required to take responsibility for, and put forward, the justification for, whatever limit was sought. That would then be circulated through other levels of management until (depending on the amount, and the approving authorities) a stage was reached when it could be approved.
58It was not put to Mr Allard that he had authority, on his own, to approve the limit that, according to Mr Canty, he did. And the evidence suggests that such an approval would have required the authority of others within the Paperlinx hierarchy.
59If one were to accept Mr Canty's version of the conversation, it would seem that the imposition of a credit limit, as suggested in the first conversation, came as something of a revelation to Mr Allard. But it could not have been because, as I have said, Mr Allard (who I regard as a truthful witness) was well aware of the credit limits that were in place and of the process to be followed to increase them.
60If a revised credit limit was negotiated (and if Mr Allard had had authority to do so), one would have expected it to be discussed with others in Paperlinx and to be documented. Certainly, the voluminous quantities of printed emails that have been put in evidence in this case suggest that events such as the one suggested by Mr Canty, and indeed others that might be thought to be less momentous, were the topic of routine recording and approval in emails. There is a conspicuous lack of such material in the case of the alleged agreement.
61When one is looking at the attitude of others in Paperlinx's management, it is instructive to note that, as I find, two of those managers, Mr Paul Amery and Mr Wayne Stanistreet, saw Mr Canty at the beginning of October 2008. TQG was not then anywhere near $1.6 million in overall indebtedness. But nonetheless, the express purpose of the visit was to get the account into line. That was confirmed in the letter of 3 October 2008, to which I shall turn in a moment.
62As to the contemporaneous documents, there are at least 12, together with the internal record of the limit from time to time to which I have referred already.
63On 29 July 2008, there was an email exchange between Mr Pragasam and Mr Cameron. Mr Pragasam was seeking to have some urgent deliveries made. Mr Cameron set out an action plan - sending the oldest containers first, because detention was costing a lot. He then referred to the "credit limit at 1.2 m" and indicated that there was some $400,000 available which could be utilised. As I have said, Mr Pragasam was not called.
64A few weeks later, on 13 August 2008, Mr Cameron sent an email to Mr Pragasam. It dealt with container loads that were available to be delivered, payments, and the like, and then referred to a proposal to stop billing for back to store and detention charges "which will take us up to the $1.2 m limit".
65On 2 September 2008, Mr Allard prepared, signed, and (he said, and I accept) delivered to TQG's offices a letter in which he set out "our arrangements for payment of your account and the limit that is in place by our insurance company". The letter said that:
(1)the current limit was $1,200,000 net but that Paperlinx would seek to increase the limit; and
(2)payment terms were net 60 days, but "any amounts over this limit of $1,200,000 is [sic] paid as soon as invoices are raised".
66As I have said, I find that the letter was delivered. Mr Canty denied seeing it. I do not accept that denial. Mr Allard's evidence of system was clear. The letter itself is clear evidence of what the credit it was, and the failure to reply to it corroborates that evidence.
67A few days later, on 12 September 2008, Mr Pragasam wrote to Mr Cameron and others, noting that "the account balance as at today is $950,000 leaving available credit of $250,000". Mr Pragasam seems to have been under no illusions as to the extent of the credit limit. In the course of cross-examination, Mr Canty accepted that Mr Pragasam (and Mr Amaratunga) needed to know the credit limit for the purpose of their work, and that he would have told them what it was.
68On 24 September 2008, Mr Cameron sent Mr Pragasam another email setting out what the account balance was and what the amount available was. The two totalled $1.2 million.
69I referred a little while ago to a letter of 3 October 2008. That was prepared following discussions between senior officers of Paperlinx and Mr Canty on 1 October 2008. The letter recorded "the agreement that we have reached in ensuring that we clear all Quality Print Group's incoming stock from Dalton Web ... by 15 December 2008". One of the ways in which that was to be achieved was by increasing "your current credit limit to $1.65m (from $1.2m) effective immediately".
70The letter said that the increase would be temporary only "and will be adjusted back to $1.2m once current orders have been delivered".
71Mr Allard said that Mr Canty signed that letter, by way of acceptance of its terms, and returned it to Paperlinx. The letter has since been lost, but I accept Mr Allard's evidence.
72A letter of 10 November 2008, to Mr Canty, records the disappointment of Paper Australia with the inability of TQG to honour its obligations under the agreement of 1 October (which was confirmed in the letter of 3 October). The letter said that, in those circumstances, a number of steps would be taken, including "reinstating" the limit to $1.2 million.
73There were subsequent emails on 13 November and 10 and 11 December confirming the $1.2 million limit. There is no point in setting out their terms.
74On 3 December 2008, Mr Allard had a conversation with Mr Canty. Following the conversation, Mr Allard sent an email to, among others, Cameron referring to the conversation. According to Mr Allard, Mr Canty said, in the course of that conversation, "he was not at $1.2 million so when could he expect some deliveries". Mr Canty did not deny that evidence.
75The cumulative effect of the documentary evidence, even considered without any regard to the contemporaneous circumstances, is overwhelming. It is utterly inconsistent with the proposition that, in July 2008, an agreement was reached that TQG could have the benefit of a credit limit of $1.6 million.
76In case it should be thought that the temporary limit of $1.65 million was inconsistent with the matter that I referred to earlier - of having a credit limit which did not exceed the amount of insurance - I am satisfied, on the basis of in particular the evidence of Mr Allard, that the QBE limit was net of GST, and that the limit of $1.65 million was inclusive of GST.
77I find that there were no conversations in the terms alleged by Mr Canty at paragraphs 46 and 48 of his affidavit. I regard this aspect also of his evidence as untruthful.
78It follows that the third alleged breach - of the "second credit agreement" - is not made out.