Plaintiff v Defendants

2 By application brought by the plaintiff, Mr Ugrinovski, the Court is asked to determine questions relating to the payment of inter-company loans.[1] The plaintiff seeks answers to the preliminary questions, as well as consequential orders.

3 The principal parties in each proceeding, Mr Ugrinovski and Mr Naumovski, conducted a property development and investment business through corporate entities, trusts and partnerships which were defined in the HOA as 'the Group'.

4 Entities within the Group own real property assets. One entity within the Group, Landstream Group Pty Ltd ('Landstream'), owns and operates a business of designing and building residential and commercial buildings.

5 The HOA contains the following relevant Recitals:

...

(3) Naumovski and Ugrinovski have equal ownership of the shares in the Group, either directly or through personal companies and/or trusts.

(4) Naumovski's ownership in the Group companies is held by the following entities in relation to each of the above:

(a) Naumovski

(b) VAT Holdings Pty Ltd

(c) AVT Holdings Pty Ltd

(d) Naumovski Investments Pty Ltd.

(Naumovski Entities)

(5) Ugrinovski's ownership in the Group companies (Ugrinovski's Interest) is held by the following entities in relation to each of the above:

(a) Ugrinovski

(b) JGU Holdings Pty Ltd

(c) Jovcon Pty Ltd

(d) Ugrinovski Investments Pty Ltd.

(Ugrinovski Entities)

...

(8) Naumovski and Ugrinovski on their own behalf and on behalf of their respective private companies and trusts have agreed to settle the Proceedings on the following basis and subject to full terms being drafted and agreed upon.

(9) The intent of the settlement is to sever the interests and the relationships of Naumovski and all of his companies and trusts and Ugrinovski and all of his companies and trusts.

...

(14) The shares of the Group and/or assets of the Group are to be transferred between:

(a) the Group; and/or

(b) Ugrinovski and/or his related entities; and/or

(c) Naumovski and/or his related entities

so that:

(d) Ugrinovski and/or nominee hold full legal title and beneficial interest in the following assets of the Group:

(i) West Springs site

(ii) Epping Gardens Estate

(iii) Caraval Lane

(iv) Brookside Central

(v) Northlake Shopping Centre

(vi) 35 Bracken Avenue

(vii) 37 Bracken Avenue

(viii) Chisolm House

(ix) Roebuck Way

(x) Leveque Loop

(Ugrinovski Properties)

(e) Naumovski and/or nominees hold full legal title and beneficial interest in the following assets of the Group:

(i) Central Shopping Centre Stage 1

(ii) Central Shopping Centre Stage 2

(iii) Brimbank Gardens Estate

(iv) Edgewater Square

(Naumovski Properties)

(15) The Group pay Naumovski and/or nominee $2.7m cash on the Settlement Date. Such cash is to come from the bank accounts of the Group, with each bank account contributing to the payment in proportion to the account balances that the accounts bears to one another as at 12 June 2015. If the Group or any one account does not have adequate cash in hand at the time of settlement, Ugrinovski shall pay any shortfall to Naumovski.

(16) Subject to clause 15 above, all net income derived between the date of this agreement and the Settlement Date from each property referred to herein shall accrue to the entity entitled to retain or acquire (as the case may be) that property under these terms.

...

(18) On the Settlement Date, Ugrinovski has an option to require Naumovski and/or the Naumovski Entities to transfer all of its shares in Landstream to Ugrinovski and/or his nominee.

(19) On the Settlement Date, Naumovski and/or the Naumovski Entities will transfer all of their shares/units/interests in the companies, trusts and/or partnerships within the Group that currently hold the Ugrinovski Properties, including Geopec Pty Ltd, to Ugrinovski and/or his nominee.

(20) On the Settlement Date, Ugrinovski and/or the Ugrinovski Entities will transfer all of their shares/units/interests in the companies, trusts and/or partnerships within the Group that currently hold the Naumovski Properties to Naumovski and/or his nominee, other than Geopec Pty Ltd.

(21) Prior to Naumovski or the Naumovski entities transferring its shares in Geopec Pty Ltd per clause 19 above, Geopec Pty Ltd will transfer the Edgewater Square and Central Shopping Centre Stage 1 properties to Naumovski or his nominee.

(22) The liabilities and guarantees of the Group are to be transferred between:

(a) the Group; and/or

(b) Ugrinovski and/or his related entities; and/or

(c) Naumovski and/or his related entities.

(d) Ugrinovski and/or nominee take responsibility for approximately $24.4m of the Group's debt;

(e) Naumovski and/or nominee take responsibility for approximately $21.8m of the Group's debt;

(23) All inter-company loans will be repaid or set off before the Settlement Date with any such repayments and set offs not to affect the liability and asset distributions in paragraphs 14, 15, and 22 above.

(24) The parties are to use all reasonable endeavours to:

(a) ensure that all necessary steps are done so that the above orders are effected in the most tax effective way on or before the Settlement Date; and

(b) ensure that the value of the shares, units, interests and assets of the Group are maintained between the date of this agreement and Settlement Date;

(c) ensure that the set-offs and payments referred to in paragraph 23 above do not result in a liability between the Ugrinovski interests and the Naumovski interests following settlement.

(25) In the event that the necessary steps have not occurred to effect the settlement by the Settlement Date, the Court will appoint an independent referee to determine appropriate Documentation and other steps to occur in order to give effect to the settlement, upon order of the Court, if necessary.

(26) Each party releases the other from all claims made in the Naumovski Proceeding and the Ugrinovski Proceeding including any costs order and any claim presently known to the party giving the release.

7 On 24 July 2015, orders were made by consent giving effect to the HOA and requiring the parties to use all reasonable endeavours to ensure that all necessary steps were taken to effect the orders and the HOA by the Settlement Date.

8 The orders provided for the appointment of an independent referee (in the event that the necessary steps had not occurred) to determine appropriate documentation, terms of such documentation and other steps to occur in order to give effect to the orders ('Special Referee').

9 On 12 October 2015, orders were made appointing Mr Leigh Baring Special Referee, so as to give effect to the Court orders of 24 July 2015 ('Appointment Order').

10 Pursuant to the Appointment Order, the Special Referee was required to make a report in writing to the parties and to the Court stating his decision and giving reasons for the decision.[2] On 28 October 2015, the Special Referee provided a report ('Report') to the parties and the Court.[3]

11 The Ugrinovski parties take issue with the Special Referee's construction of clause 23 of the HOA, as reflected in the conclusions expressed in paragraph 2.14 of Part 3 and paragraph 1.3.2 of Part 4 of the Report. They submit that the Special Referee misconstrued clause 23 and that the Court, should decline to adopt part of the Report.

12 The parties agree on the applicable principles relating to the construction of a commercial agreement and the adoption of a report of a special referee under Rule 50.04 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) ('Rules').

13 The applicable principles are uncontroversial. For present purposes, it is sufficient to refer to the recent High Court authority of Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd,[4] in which the Court relevantly observed:

The rights and liabilities under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.

In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.

Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.

...

[A] commercial contract is to be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience'.

Principles regarding adoption of a referee's report

14 A referee's report has no effect unless and until it is adopted by the Court in whole or in part in accordance with Rule 50.04 of the Rules. It is the order of the Court adopting, varying or rejecting a referee's report that has legal consequences.[5]

15 In Wenco Industrial Pty Ltd v WW Industries Pty Ltd,[6] the Court of Appeal considered the authorities regarding the appropriate approach to the adoption of a referee's report, and extracted the following propositions:

(a) First, in exercising the power conferred by r 50.04 to adopt the report of a special referee, the court has a wide power which is to be exercised "as the interests of justice require". This broad mandate should not be the subject of restrictions laid down in advance of judges exercising it. Subject to what follows, it is undesirable to attempt closely to confine the manner in which the discretion is to be exercised.

(b) Secondly, the purpose of rr 50.01 and 50.04 is to provide, where the interests of justice so require, a form of partial resolution of disputes alternative to orthodox litigation. Further, that purpose would be frustrated if the reference were to be treated as "some kind of warm-up for the real contest".

(c) Thirdly, in so far as the subject matter of dissatisfaction with a report is a question of law, or the application of legal standards to established facts, a proper exercise of discretion requires the judge to consider and determine that matter afresh.

(d) Fourthly, where a report shows a thorough, analytical and scientific approach to the assessment of the subject matter of the reference, the court would have a disposition towards acceptance of the report, for to do otherwise would be to negate both the purpose and the facility of referring complex technical issues to independent experts for inquiry and report.

(e) Fifthly, if the referee's report reveals some error of principle, absence or excess of jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact-finding, that would ordinarily be a reason for rejection. In this context, patent misapprehension of the evidence refers to a lack of understanding of the evidence as distinct from the according to particular aspects of it different weight; and perversity or manifest unreasonableness mean a conclusion that no reasonable tribunal of fact could have reached. The test denoted by these phrases is more stringent than "unsafe and unsatisfactory".

(f) Sixthly, generally, the referee's findings of fact should not be re-agitated in the court. The court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee enjoys an appropriate expertise. Thus, the court will not ordinarily interfere with findings of fact by a referee where the referee has based his or her findings upon a choice between conflicting evidence.

...

(i) Ninthly, even if it were shown that the court might have reached a different conclusion in some respect from that of the referee, it would not ordinarily be (in the absence of any of the matters referred to in subpara (e) above) a proper exercise of the discretion conferred by r 50.04 to allow matters agitated before the referee to be re-explored so as to lead to qualification or rejection of the report.

16 The Report contained the following relevant definitions:

Inter-Entity Payables means the various loans and liabilities identified in paragraph 2.13 of Part 3.

Naumovski Transferring Entities means:

1. Resdal Corp Pty Ltd...as trustee for the Resdal Corp Unit Trust;

1. Brimbank Gardens Pty Ltd...as trustee for the Brimbank Gardens Unit Trust;

3. My Home Makeover Pty Ltd.

Ugrinovski Transferring Entities means:

1. Geopec;

2. Home Construction & Design Centre Pty Ltd;

3. Makcorp Property Group Pty Ltd;

4. West Springs Pty Ltd...as trustee for the West Springs Unit Trust;

5. Epping Gardens Estate Pty Ltd; and

6. Landstream Group Pty Ltd.

17 Paragraphs 2.13 and 2.14 of Part 3 of the Report state:

2.13 On the Settlement Date, there is likely to be:

2.13.1 inter-entity loans owing by Ugrinovski Transferring Entities to Naumovski Transferring Entities;

2.13.2 inter-entity loans owing by Naumovski Transferring Entities to Ugrinovski Transferring Entities;

2.13.3 inter-entity loans owing by the Geopec Partnership to Ugrinovski Transferring Entities;

2.13.4 inter-entity loans owing by Ugrinovski Transferring Entities and Naumovski Transferring Entities to the Geopec Partnership;

2.13.5 a loan owing by the Dalbe/Evla Partnership to the Geopec Partnership;

2.13.6 loans owing to Group entities by the Naumovski Entities and the Ugrinovski Entities;

2.13.7 loans and other amounts (including unpaid entitlements of beneficiaries) owing by the Group to the Naumovski Entities and the Ugrinovski Entities; and

2.13.8 amounts owing by Geopec to the partners in the Geopec Partnership representing amounts owing following the dissolution of the Geopec Partnership.

2.14 The Heads of Agreement require that the Inter-Entity Payables will be either paid or set-off. The amounts are not required to be forgiven. Based on the information provided to me, there appears no simple way to set-off the Inter-Entity Payables at an individual entity level. Accordingly, unless the parties can agree to 'group' the Inter-Entity Payables for the purposes of calculating a 'net' figure owed by or to the Ugrinovski Entities or the Naumovski Entities then:

2.14.1 the Naumovski Entities will have to provide sufficient funds to allow the Naumovski Transferring Entities to cash settle the Inter-Entity Payables payable by them;

2.14.2 the Ugrinovski Entities will have to provide sufficient funds to allow the Ugrinovski Transferring Entities to cash settle the Inter-Entity Payables payable by them;

2.14.3 the Naumovski Investment Trust and the Ugrinovski Investment Trust will each have to provide one half of the funds necessary to allow Geopec to cash settle the Inter-Entity Payables payable by the Geopec Partnership; and

2.14.4 Dalbe and Evla will each have to provide one half of the funds necessary to allow the payment of the Inter-Entity Payables payable as a consequence of their tenant in common ownership of Caravel Lane.

1.3.1 The existing bank facilities will be discharged using the proceeds of the facilities referred to in paragraph 1.2

1.3.2 The Inter-Entity Payables will be paid or set-off.

1.3.3 Geopec will transfer Central Shopping Centre Stage 1 and Edgewater Square to the Naumovski Entities.

1.3.4 Geopec will exercise a deed of surrender in relation to the Head Lease.

1.3.5 Dalbe and Evla will transfer Caravel Lane to the Ugrinovski Entities.

1.3.6 The Geopec Partnership will be dissolved.

1.3.7 The Dalbe/Evla Partnership will be dissolved.

1.3.8 The securities in the Naumovski Transferring Entities will be transferred to the Naumovski Entities and any officers appointed by the Ugrinovski Entities will resign.

1.3.9 The securities in the Ugrinovski Transferring Entities will be transferred to the Ugrinovski Entities and any officers appointed by the Naumovski Entities will resign.

1.3.10 Naumovski Entities will receive $2.7 million from the Group entities (with any shortfall coming from the Ugrinovski).

1.3.11 The net income for the Properties for the period 13 June 2015 until 30 September 2015 will be paid to the Naumovski Entities and the Ugrinovski Entities as relevant (with any appropriate directions to real estate agents for the Group being given jointly).

19 The main focus of complaint concerns paragraph 2.14 of Part 3 and paragraph 1.3.2 of Part 4, which the Ugrinovski interests contend demonstrate the Special Referee's erroneous view of the requirements imposed by the HOA with respect to inter-company loans.

20 The parties made specific provision in the HOA with respect to the disposition of inter-company loans between entities in the Group. It is convenient here to re-state clause 23.

All inter-company loans will be repaid or set off before the Settlement Date with any such repayments and set offs not to affect the liability and asset distributions in paragraphs 14, 15 and 22 above.

(a) Clause 23 does not impose an obligation on Ugrinovski (or the Ugrinovski interests as defined in the HOA) to fund the repayment of the inter-company loans;

(b) the Special Referee assumed that clause 23 can only be performed by way of cash payment and that this is an unduly restrictive interpretation of the word 'repaid' in clause 23;

(c) there are myriad ways that the inter-company loans can be 'repaid' by the relevant Group entity debtor without requiring a cash outlay.

(d) cash settlements of inter entity payables, as contemplated by the Special Referee (even if made by the appropriate entity in the Group), would affect the liability and asset distributions provided for in the HOA contrary to the express rider in clause 23.

(a) repayment of the inter-company loans before settlement does not affect the liability and asset distributions because the obligation to repay or set-off such loans stands alone 'and therefore does not affect' the property distribution (pursuant to clause 14), the cash distribution (pursuant to clause 15) or the liability distribution (pursuant to clause 22);

(b) after allowing for set-offs, clause 23 means simply that the inter-company loans must be paid before settlement;

(c) settlement under the HOA can occur even if inter-company loans remain outstanding at settlement because the HOA only obliges the parties to use reasonable endeavours to ensure that the set-offs and payments referred to in paragraph 23 above do not result in a liability following settlement; and

(d) if, having used reasonable endeavours, the parties fail to achieve that outcome such that an inter-company or inter-company loans remain outstanding, settlement nevertheless can proceed.

23 In response, Ugrinovski submits that on the proper construction of the HOA:

(a) Settlement cannot proceed while inter-company loans remain outstanding as the parties are obliged to cooperate to achieve repayment of the inter-company loans before the settlement date.

(b) the various obligations (including the obligation to repay inter-company loans before the settlement date imposed by clause 23) are interdependent; and

(c) an interpretation that the HOA does not require interdependency and mutual performance would be contrary to the commercial object and purposes of the HOA as reflected in Recital 9, which provides:

The intent of the settlement is to sever the interests and the relationships of Naumovski and all of his companies and trusts and Ugrinovski and all of his company and trusts.

24 The following preliminary questions were submitted to the Court for determination:

Whether upon the proper construction of the HOA, clause 23 requires:

(i) that an accounting is taken of all the amounts owing between the companies in the Group (as defined in the HOA), and that after allowing all set offs as between the entities in the Group, the Ugrinovski entities, being the entities acquiring the Ugrinovski Properties (as defined in the HOA), are obliged to pay any net amount owing by them to any Naumovski entities (being the entities acquiring the Naumovski Properties under the HOA);

(ii) the Naumovski Entities to provide sufficient funds to allow the Naumovski Transferring Entities to cash settle the Inter Entity Payables payable by them;

(iii) the Ugrinovski Entities to provide sufficient funds to allow the Ugrinovski Transferring Entities to cash settle the Inter Entity Payables payable by them;

(iv) the Naumovski Investment Trust and the Ugrinovski Investment Trust to each provide one-half of the funds necessary to allow Geopec to cash settle the Inter Entity Payables payable by the Geopec Partnership;

(v) Dalbe and Evla to each provide one-half of the funds necessary to allow the payment of the Inter Entity Payables as a consequence of their tenant in common ownership of Caravel Lane;[7]

25 It is convenient to deal with questions (i), (ii) and (iii) together.

26 There are several things to observe about clause 23. First, inter-company loans are to be repaid or set-off before the settlement date. Neither Mr Ugrinovski nor Mr Naumovski or their respective entities are obliged by clause 23 to finance the repayment of Group inter-company loans. The Special Referee's conclusions in paragraphs 2.14.1 and 2.14.2 of Part 3 of the Report - that the Ugrinovski Entities and the Naumovski Entities will have to provide funds to allow the Group entities to cash settle the Inter Entity Payables - do not reflect the terms of the HOA; the entities acquiring the properties (which are not companies in the Group) are not obliged by the HOA to pay any inter-company loan.

27 It follows that the Naumovski Entities are not, on the proper construction of clause 23, required to provide sufficient funds to allow the Group entities, which Mr Naumovski will control under the HOA, to cash settle the inter-entity loans payable by them.

28 Likewise, the Ugrinovski Entities are not required to provide sufficient funds to allow the Group entities, which Mr Ugrinovski will control under the HOA, to cash settle the inter-entity loans payable by them. Accordingly, the answers to questions (i), (ii) and (iii) are, in each case, no.

29 In paragraph 2.14.3 of Part 3 of the Report, the Special Referee concludes that the Naumovski Investment Trust and the Ugrinovski Investment Trust will each have to provide half of the funds necessary to allow Geopec to cash settle the Inter-Entity Payables (which includes loans) payable by the Geopec Partnership.

30 Geopec is one of the entities in the Group (in its own right and also as trustee for the Naumovski Investment Trust and the Ugrinovski Investment Trust Partnership). Geopec owns and operates Central Shopping Centre Stage 1, Edgewater Square, Chisholm House and North Lake Shopping Centre as trustee for the Naumovski Investment Trust and the Ugrinovski Investment Trust.[8]

31 Clause 23 of the HOA does not require the investment trusts to provide half the funds (or indeed any funds) necessary to allow Geopec to settle outstanding inter-company loans. If Geopec repaid an inter-company loan in its capacity as trustee, it presumably would have a right of indemnity from trust assets pursuant to the trust deed. In the circumstances, the investment trusts may elect to provide funds to Geopec to settle inter-company loans but they are not obliged to do so under the terms of the HOA. Accordingly, the answer to question (iv) is no.

32 Dalbe Properties Pty Ltd ('Dalbe') and Evla Properties Pty Ltd ('Evla') are Group entities as defined in the HOA. They are the registered proprietors as tenants-in-common of land at Caroline Springs ('Caravel Lane').[9]

33 In paragraph 2.14.4 of Part 3 of the Report, the Special Referee states that Dalbe and Evla will each have to provide half the funds necessary to allow payment of the Inter-Entity Payables, specifically loans payable as a consequence of the tenant-in-common ownership of Caravel Lane.

34 It is clear that clause 23 of the HOA engages Dalbe and Evla to the extent that those entities have inter-company loans. Under clause 23, Dalbe and Evla are required to repay or set-off before the settlement date any outstanding inter-company loans. To the extent that the Report states one half of the funds necessary to allow the payment of the Inter entity payables are required to be made on the settlement date, it misstates the obligation expressed in clause 23. Clause 23 does not confine the manner of discharge of inter-company loans to discharge by cash payments, and does not require the repayment or set-off to occur on the settlement date. Clause 23 requires inter-company loans be repaid or set-off before the settlement date. Accordingly, it follows that the answer to question (v) is also no.

35 Having determined in the negative each of the answers to the preliminary questions, the question then arises as to the appropriate order to make and what, if any, ancillary directions should be given in light of the matters addressed during argument.

36 The plaintiff proposes that the Report be adopted in its entirety, save for amendment by:

(a) the excision of paragraph 2.14 of Part 3 and paragraph 1.3.2 of Part 4; and

(b) the addition of paragraph 1.1.8 of Part 4 in the following terms:

1. the parties use all reasonable endeavours to perform clause 23 of the Binding Heads of Agreement dated 13 June 2015 (the HOA) in a manner that does not necessarily require cash payment of the intercompany loans and does not require the Ugrinovski Entities nor the Naumovski Entities to fund the repayment; and
2. failing agreement on the performance of clause 23 of the HOA, the parties must perform clause 23 in the manner outlined by Mr Allison as Option 2 in Mr Allison's affidavit sworn 21 March 2016 (being exhibit U-6).

37 The defendant proposes that the Report be adopted in its entirety, save for the amendment of paragraph 2.14.1 by excision of the words 'The Naumovski Entities will have to provide sufficient funds to allow' and paragraph 2.14.2 by excision of the words 'The Ugrinovski Entities will have to provide sufficient funds to allow'.

38 Both parties agree that the dates for the performance of steps preparatory to settlement set out in paragraph 1 of Part 4 of the Report will need to be amended.

39 As previously stated, clause 23 requires all inter-company loans to be repaid or set-off before the settlement date and specifies that such repayments and set-offs are 'not to affect the liability and asset distributions in paragraphs 14, 15 and 22 of the HOA'. Those liability and asset distributions are as follows:

(a) Pursuant to clause 14, the transfer of shares or assets of the Group between the Group and either Ugrinovski and/or his related entities or Naumovski and/or his related entities so that some assets of the Group become assets of Ugrinovski and other assets of the Group become assets of Naumovski.

(b) Pursuant to clause 15, the payment by the Group of $2.7 million on the settlement date to Naumovski using the funds sourced from the bank accounts of the Group with Ugrinovski to pay any shortfall.

(c) Pursuant to clause 22, the transfer of the 'liabilities and guarantees' of the Group between the Group, Ugrinovski or his related entities and Naumovski or his related entities so that the Ugrinovski interests take responsibility for approximately $24.4 million of Group debt and Naumovski interests take responsibility for approximately $21.8 million of Group debt.

40 The HOA contains a reasonable endeavours clause. Clause 24 of the HOA states:

The parties are to use all reasonable endeavours to:

(a) ensure that all necessary steps are done so that the above orders are effected in the most tax effective way on or before the Settlement Date; and

(b) ensure that the value of the shares, units, interests and assets of the Group are maintained between date of this agreement and Settlement Date;

(c) ensure that the set-offs and payments referred to in paragraph 23 above do not result in a liability between the Ugrinovski interests and the Naumovski interests following settlement.

41 Courts have tended to consider the expressions 'best endeavours' and 'reasonable endeavours' as imposing similar obligations.

42 The High Court majority in Electricity Generation Corporation v Woodside Energy Ltd made several observations about contractual obligations framed in terms of 'reasonable endeavours' or 'best endeavours':

First, an obligation expressed thus is not an absolute or unconditional obligation. Secondly, the nature and extent of an obligation imposed in such terms is necessarily conditioned by what is reasonable in the circumstances, which can include circumstances that may affect an obligor's business. This was explained by Mason J in Hospital Products Ltd v United States Surgical Corporation, which concerned a sole distributor's obligation to use "best efforts" to promote the sale of a manufacture's products. His Honour said:

The qualification [of reasonableness] itself is aimed at situations in which there would be a conflict between the obligation to use best efforts and the independent business interests of the distributor and has the object of resolving those conflicts by the standard of reasonableness... It therefore involves a recognition that the interests of [the manufacturer] could not be paramount in every case and that in some cases the interests of the distributor would prevail.

...

Thirdly, some contracts containing an obligation to use or make reasonable endeavours to achieve a contractual object contain their own internal standard of what is reasonable, by some express reference relevant to the business interests of an obligee.[10]

43 In Transfield Pty Ltd v Arlo International Ltd, Mason J said that a best endeavours clause 'prescribes a standard of endeavour which is measured by what is reasonable in the circumstances, having regard to the nature, capacity, qualifications and responsibilities of the licensee viewed in the light of the particular contract'.[11] In Hospital Products Ltd v United States Surgical Corporation, referring to this passage in Transfield, Dawson J noted that this clearly 'leaves room for a balancing of interests...'.[12]

44 Before further analysis, it is necessary to resolve a question of admissibility. Senior Counsel for Naumovski sought to tender a Draft Profit and Loss Statement and Balance Sheet for the Brimbank Gardens Unit Trust for the year ended 30 June 2014 and for the six month period ended 30 December 2014, and Balance sheets for Resdal Corp Pty Ltd ('Resdal') and West Springs Pty Ltd ('West Springs') as at December 2014.[13]

45 Senior Counsel for Ugrinovski objected to the tender on the grounds of relevance, in particular that extrinsic evidence is not available as an aid to interpretation of clause 23 of the HOA unless ambiguity is found in the clause. It was submitted that there was no ambiguity in clause 23 and thus the documents could not be relevant to the construction issue

46 Senior Counsel for Naumovski agreed that clause 23 was not ambiguous but submitted that the documents were nonetheless relevant because they would enable the Court to consider the objective circumstances known to the parties shortly prior to the settlement which may assist the Court to determine the genesis and commercial object of the HOA.

47 In my view, the documents do contain factual matters which go to the background facts known to the parties on or before the date of the HOA and which relate to its genesis, namely that at the time the parties entered into the HOA, they were aware of the state of the inter-company loan accounts.[14] Accordingly, the documents will be admitted into evidence.

48 That said, the documents establish no more than what objectively must be presumed, namely that the Group entities, through their directors (in each case, Ugrinovski and Naumovski), were aware of the position with respect to inter-company loan accounts.

49 In my view, allowing inter-company loans to remain extant post-settlement sits uneasily with the 'intent of the settlement', namely severance of the interests and relationships of all of Naumovski's companies and trusts and all of Ugrinovski's companies and trusts. Clause 23 is in mandatory terms - it requires inter-company loans to be repaid or set-off before the settlement date (notwithstanding arguably the possibility of that not having occurred is introduced by the reasonable endeavours clause at clause 24(c)).

50 Thus, there is tension between achieving the objective of 'severance of the interests and relationships of Naumovski and all of his companies and trusts and Ugrinovski and all of his companies and trusts' and an outcome where inter-company loans remain outstanding.

51 In furtherance of the stated intent of severance and, having regard to the very explicit way that objective is framed, a reasonable business person would construe the obligations under the HOA in a way which will achieve a permanent unravelling of interests between the respective parties with no further recourse by one to the other.

52 A specific issue has arisen whether the obligation to use 'all reasonable endeavours' to ensure that the set-offs and payments of inter-company loans would include Group entities taking steps of the kind suggested by Mr Allison in his affidavit sworn 21 March 2016 (see paragraphs [58]-[63] below). Without being unduly prescriptive, the answer, in principle, is yes.

53 First, and stating the obvious, Ugrinovski and Naumovski, and all corporate entities in the Group, are each bound by the terms of settlement reflected in the HOA. Each of them irrevocably consented to the making of the court orders giving effect to the HOA.

54 Second, each party has agreed (without admitting liability or fault) that the conduct of the affairs of each of the Group entities are contrary to the interests of the members of the Group as a whole. The parties committed themselves in emphatic terms to severance of their respective interests. Given the stated objective of the HOA, finalisation of the commercial relationship between the respective parties is of the first importance.

55 Third, whilst no entity seeks to avoid the obligation to repay inter-company loans before settlement, a reasonable business person, in the position of the directors of the Group entities, will be pragmatic and flexible as to how the repayment obligation is to be discharged. A reasonable business person will accept that the inter-company loan repayment obligations may be discharged in different ways. In White v Elmdene Estates, Lord Evershed said:

the word 'payment' in itself is one which, in an appropriate context, may cover many ways of discharging obligations. It may (as is well known, though it does not arise in this case) include a discharge not by money payment at all but by what is called 'payment in kind'.[15]

56 Fourth, a reasonable business person will be firmly committed to the bargain struck in the HOA. Merely going through the motions of cooperation without making a proper endeavour to achieve the desired outcome of severance between the respective interests following settlement would be in breach of the obligation to use all reasonable endeavours.

57 Mr Daniel Allison, chartered accountant, was retained by the Ugrinovski interests to give opinion evidence. His evidence was unchallenged.

58 Mr Allison expressed the opinion that from an accounting and taxation perspective there is no impediment to the inter-company loans being paid, set-off or treated in a way that provides for no net cash effect on either party and ensures that there is no liability between the Ugrinovski interests and the Naumovski interests following settlement.[16]

59 Mr Allison outlined three options available to the parties to secure this outcome.

60 The first option involves increasing the secured debt of the entity required to make the payment, using the additional funds to discharge the inter-company loan and then applying those funds to discharge the equivalent amount of secured debt for the entity receiving the payment.[17] This means there would be no overall effect on Group secured debt because the increase in the secured debt of the debtor entity would be matched by the decrease in the secured debt of the creditor entity.

61 The second option involves the Ugrinovski interests providing promises to pay down secured bank debt which is to be taken on by the Naumovski interests at settlement in consideration of the discharge of relevant inter-company loans. Under this option, there is no change to the secured debt facility amounts prior to settlement (though it is evident that arrangements would need to be in place to ensure the debtor entity could increase its secured facility to an amount equivalent to the relevant inter-company loan). The debtor entity would promise to pay the creditor entity at settlement an amount equivalent to the inter-company loan from the creditor entity secured bank debt in consideration for the discharge of the inter-company loan.[18]

62 The third option involves loan consolidations and assignments. In light of the approach taken in argument, it is not necessary to descend into the detail of the third option.

63 Ugrinovski, by his counsel, submitted that the first and second options (and particularly the second option) provide a straightforward way for the parties to perform the obligation to repay inter-company loans in a manner which is consistent with the other terms of the HOA, particularly clause 22 which requires the Ugrinovski interests to take responsibility for approximately $24.4 million of Group debt and the Naumovski interests to take responsibility for approximately $21.8 million of Group debt.

64 For illustrative purposes, the parties focused on the inter-company loan account between West Springs and Resdal, though the approach taken to the repayment of this loan is applicable to repayment of inter-company loans generally.

65 It is common ground that West Springs is indebted to Resdal for approximately $4.9 million. As required by clause 23 of the HOA, the parties are obliged to effect repayment of the debt owed by West Springs to Resdal before settlement. Under the first option, West Springs would increase its borrowings by increasing its secured debt facility by the amount required to discharge the debt to Resdal (approximately $4.9 million). West Springs would then pay Resdal $4.9 million to discharge the inter-company loan. Resdal would apply the funds to repay $4.9 million of its secured debt. This would achieve repayment of the inter-company loan before settlement and would adjust the secured debt between group entities in a way which is consistent with the group debt to be assumed by the respective parties pursuant to clause 22 of the HOA.

66 Under the second option, before the settlement date West Springs would promise to repay at settlement $4.9 million of Resdal's secured bank debt. Resdal would accept the promise as repayment of West Springs' inter-company loan to Resdal, thus repaying the inter-company loan. At settlement, and to complete the arrangement, West Springs would repay the equivalent amount (approximately $4.9 million) of Resdal's secured debt.

67 In this way, the parties can unequivocally adhere to the requirement in clause 23 to repay or set-off inter-company loans before the settlement date without affecting the liability and asset distributions contemplated in the HOA at settlement, including the agreed share of responsibility for Group debt - the Ugrinovski interests would still take responsibility for approximately $24.4 million of Group debt (as required by clause 22(d)) and the Naumovski interests would still take responsibility for approximately $21.8 million of Group debt (as required by clause 22(e)).

68 The issue is how to best facilitate the discharge of that obligation in circumstances where the relevant entities are unable to set-off all inter-company loans. In lieu of set-off, they have to be repaid. Self-evidently, the issue only arises where the relevant entities do not have sufficient cash reserves to make the repayments. It follows that the money required to make the repayments will have to be borrowed by the relevant entity and repayment will need to be effected in a manner which does not affect the other distributions. For example, (unless the parties agree otherwise) it would not be permissible under the terms of the HOA to change the agreed share or asset transfers (clause 14) or the required cash payment to Naumovski (clause 15) or the agreed liability for external debt (clause 22) as consideration for the discharge of an inter-company loan as the parties have expressly provided that settlement of inter-company loans are not to affect the liability and asset distributions in clauses 14, 15 and 22.

69 As co-directors of each of the relevant entities, Ugrinovski and Naumovski must be taken to have been aware of the asset and liability position of each Group entity: those which owed money to each other; those which had sufficient cash reserves to discharge inter-company loan liabilities and those which had insufficient cash reserves.

70 Viewed objectively, in such circumstances it must have been within the contemplation of all parties to the HOA that it would be necessary for Group entities to borrow money to repay loans before settlement where set-offs were not available. This commercial reality, including the stated intent of severance, informs the content of the obligation to use reasonable endeavours in this case. The gloss which complicates the present case is that the parties will need to satisfy the repayment obligation in clause 23 without affecting 'the liability and asset distributions in paragraph 14, 15 and 22' of the HOA.

71 For the reasons discussed above, Mr Allison's suggested first and second options appear to present a comprehensive solution to that dilemma.

72 Further, I infer from the HOA, particularly clause 23 which applies to all inter-company loans, that the parties intended to clear internal loan liabilities from the respective balance sheets of Group entities prior to the disaggregation of the Group, which would occur after settlement. This is also apparent from the fact that in the HOA the parties specifically addressed the respective responsibility to be taken for external debt but not internal debt. It was plainly contemplated that internal debt would be addressed before settlement while the Group was intact. The approach suggested by Mr Allison's first and second options would achieve that outcome.

73 Ugrinovski submits that the first and second options impose no additional obligations on any party. In substance, I accept this submission.

74 The parties to the HOA are obliged to facilitate repayment of inter-company loans before settlement; they are obliged to do so in a way which does not affect other (specified) terms of settlement with the aim of ensuring that there are no liabilities between the Ugrinovski interests and the Naumovski interests remaining after settlement.

75 They also have an obligation to use reasonable endeavours. In the context of the HOA, this involves cooperation in securing finality between respective interests, and doing all things reasonable and necessary to procure the agreed outcome. In my view, this would include taking steps to borrow the required funds and to apply the funds in a way which is consistent with the HOA. Obstruction to or failure to facilitate the taking of such steps by one of the directors would be in breach of the HOA and, given the significant sums involved (in aggregate in excess of $6 million), would present a fundamental obstacle to settlement.

76 Both directors of the relevant Group entity would need to facilitate the application for financial accommodation on a basis which provides for the repayment of the inter-company loans before settlement and reduction of an equivalent amount of secured debt at settlement. Whether settlement can proceed will be dependent upon whether reasonable endeavours have been made.

77 Repayment of inter-company loan liabilities employing the method proposed under Mr Allison's first or second option would ensure there are no inter-company loan liabilities between the Ugrinovski interests and the Naumovski interests following settlement and that all other terms of the HOA can be implemented. A financier may offer different terms for different options or may suggest preferable ways to achieve the same result. As an essential first step, reasonable endeavours must be made by the Group entities which need to borrow funds on a basis which will ensure that inter-company loans are paid before settlement and that all other terms of the HOA can be implemented. Until that step is taken, settlement cannot occur. Failure to take such steps will amount to a breach of the terms of settlement.

78 For completeness, in my view the option of proceeding to settlement leaving outstanding inter-company loan liabilities then agitating fresh litigation by suing for unpaid inter-company loans is not within the spirit of the HOA nor is it likely to be viable. Not only have the parties agreed to severance they have provided releases to each other for 'all claims... presently known to the party giving the release.' It is not necessary to decide the point in these reasons, but the relevant creditor entity would have known that it had a claim for an outstanding loan from the relevant debtor entity at the time the HOA was executed. Any proceeding for recovery of any residual liability remaining after set off is likely to be barred by the release.

79 In light of these reasons, I propose to order that the Report be adopted in its entirety, save for:

(a) the excision of part of paragraph 2.14 of Part 3 commencing with the word 'Accordingly' and concluding with the words 'Caravel Lane',

(b) the excision of paragraph 1.3.2 of Part 4; and

(c) the addition of a new sub paragraph in paragraph 1.2 of Part 4[19], so that paragraph 1.2 will be amended to read:

(a) the parties use all reasonable endeavours to perform clause 23 of the Binding Heads of Agreement dated 13 June 2015 (the HOA) in a manner that does not necessarily require cash payment of the intercompany loans and does not require the Ugrinovski Entities nor the Naumovski Entities to fund the repayment.

(b) the Naumovski Entities and the Ugrinovski Entities will finalise the financing arrangements necessary to allow the parties to take responsibility for the Group debt contemplated by clause 22 of the Heads of Agreement.

80 I will also amend the dates for the performance of steps preparatory to settlement set out in paragraph 1 of Part 4 of the Report.

[1] Plaintiff's summons in proceeding S ECI 2014 000189, 23 November 2015, amended by leave granted on 9 May 2016, [1(a)] ('Amended Summons)'.

[2] Order of Almond J dated 12 October 2015.

[3] Report of the Special Referee dated 28 October 2015, Exhibit U2.

[4] (2015) 325 ALR 188, 197-8 [46]-[48], [51] (French CJ, Nettle and Gordon JJ) (citations omitted). See also Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640, 656 [35] (French CJ, Hayne, Crennan and Kiefel JJ).

[5] Astor Properties Pty Ltd v L'Union des Assurance de Paris (1989) 17 NSWLR 483, 490 (Cole J).

[6] [2009] VSCA 191; (2009) 25 VR 119, 126-7 [17] (Redlich and Bongiorno JJA and Beach AJA) (citations omitted).

[7] Each capitalised term has the meaning given to it in the Special Referee's Report.

[10] [2014] HCA 7; (2014) 251 CLR 640, 659 [41], 660 [43] (French CJ, Hayne, Crennan and Kiefel JJ).

[11] (1980) 144 CLR 83, 101 (Mason J).

[12] [1984] HCA 64; (1984) 156 CLR 41, 144 (Dawson J).

[13] Documents marked for identification NMFI1, NMFI2, NMFI3.

[14] For principles of contractual construction - surrounding circumstances, see Retirement Services Australia (RSA) Pty Ltd v 3143 Victoria St Doncaster Pty Ltd [2012] VSCA 134; (2012) 37 VR 486, [84]-[94] (Warren CJ, Harper JA and Robson AJA) citing Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 and Prenn v Simmonds [1971] 1 WLR 1381.

[15] (1959) 3 WLR 185, 16; affirmed in White v Elmdene Estates (1960) AC 528.

[16] Affidavit of Daniel Allison sworn 23 November 2015, [5]; Further Affidavit of Daniel Allison sworn 21 March 2016, [2].

[17] Further Affidavit of Daniel Allison, 21 March 2016, [8].

[18] Allison affidavit, 21 March 2016, [12].

[19] The new sub paragraph will be in the terms proposed in paragraph b(i) of the plaintiff's Proposed Form of Order, but not in the form of a new paragraph 1.1.8. Amendments to paragraph 1.2 are in italics.