Smith v Wikramanayake

Smith v Wikramanayake - [2007] NSWSC 136 - NSWSC 2007 case summary — Zoe

[11]

1 This is a case about Lavender Lodge, an aged care facility ("the facility") at 286 Warren Street Lavington near Albury in the State of New South Wales. The parties and the claims 2 Mr David Smith, the first plaintiff, is an expert in the provision of aged care. He is a qualified accountant and chartered secretary. He has been associated with Mr John James, the second plaintiff, for some years. Plus 55 Village Management (Albury) Pty Ltd ("Plus 55"), the third plaintiff, is Mr Smith's company. 3 The first and second defendants are Mrs Margaret and Mr Prenitha Wikramanayake (collectively "the Wikramanayakes"). Both the Wikramanayakes are chartered accountants. 4 Registered title to the land upon which the facility is built is in the name of the third defendant, Wagga Road Pty Ltd ("the Company"). The shares in the Company are held by the Wikramanayakes. 5 The principal controversy is whether in 2004 Messrs Smith and James and the Wikramanayakes entered into an oral agreement under which Messrs Smith and James would be granted equity in the facility in the form of a one-third share each through allocation of units in a unit trust to be formed to hold the facility and to be known as the Wagga Road Trust, and one-third each in the Company which was to be the trustee. 6 Plus 55 also brings a claim for moneys alleged to have been spent by it in connection with the facility for the benefit of the Company which, it is alleged, constituted loan moneys from Plus 55 to the Company repayable on demand. A Trade Practices claim was abandoned during the hearing. 7 The Company brings a cross-claim for moneys representing bonds paid by residents of the facility to Plus 55 for which it has not accounted to the Company. It also brings a claim for unpaid rent. A claim for a declaration that the Company was entitled to terminate an agreement for lease of the facility executed on 15 October 2004, under which the Company agreed to lease the facility to Plus 55 for a period of two years or such other period as may be agreed between the parties, was abandoned during the hearing. A Trade Practices claim was also abandoned. The background 8 The significant events surrounding the dispute are set out below. 9 The site on which the facility stands was originally owned by a company called Combined House Pty Ltd ("Combined House") which had retained Messrs Smith and James as consultants in 1999. Combined House had lodged a development application for 24 apartments. It ran out of money at the point at which it had a slab on the ground. The Wikramanayakes were approached by Messrs Smith and James as possible financiers. 10 There was a discussion in December 2002 at which Mr Smith told the Wikramanayakes that proposed arrangements between Messrs Smith and James and Combined House would entitle Messrs Smith and James effectively to operate Combined House, borrow funds for the project, build it, and sell it without interference from the current directors or shareholders. They proposed that the Wikramanayakes lend funds to Combined House on security of a first mortgage over the land and a floating charge over Combined House to secure the entire sales proceeds when the facility was sold. Mr Smith said he anticipated it would cost $800,000 to build and that the projected sales value at $85,000 per unit would be in excess of $2M. Mr Smith said that about $25,000 was needed at that stage to give the directors of Combined House some money and to pay a solicitor outstanding legal costs. Mrs Wikramanayake expressed a willingness to advance that amount initially, provided Messrs Smith and James obtained the necessary authorities to give them absolute rights to act for Combined House. She also said the Wikramanayakes would need to see that Messrs Smith and James held the title deed in their possession. 11 The question of remuneration arose. Mr Wikramanayake asked how Messrs Smith and James would be remunerated. Mr James said they would like to split the profits on the project, once sold, equally. Mr Wikramanayake expressed agreement with this so long as the Wikramanayakes controlled all the sale proceeds. Mr James said he would draw up the documents so that the Wikramanayakes would be in control of the property under their first mortgage and receive the sales proceeds under the floating charge. 12 Apparently no such document was prepared but it is common cause between the parties that there was an arrangement between them that when the facility was sold the profit would be so split. No specific time was agreed by which the facility was to be sold but it seems that the anticipation was that it would be sold soon after completion. 13 In March 2003, pursuant to an application from Combined House, the Wikramanayakes lent moneys to Combined House on the strength of a first mortgage and took a fixed and floating charge over its assets and undertaking on the basis that Combined House would receive $380,000 from the net proceeds of sale. It was envisaged that the 24 apartment facility would be completed by the end of June 2004. 14 There was a further discussion in the middle of May 2003 between Messrs Smith and James and the Wikramanayakes. Mr Smith talked of the possibility of upgrading and expanding the facility and the parties discussed the possible purchase of a bus. Mr James informed the Wikramanayakes that under a deed of indemnity he and Mr Smith "are Combined House". He said that they would not be able to sell the property in a line until the Occupation Certificate and Building Certificate had been issued, which would be obtained by them prior to completing the transaction. Mr James suggested that the Wikramanayakes should consider buying the shares in Combined House. The Wikramanayakes agreed to consider the proposal, do some research on the tax aspects, and get back to them. 15 The Wikramanayakes decided not to purchase the shares in Combined House. They also decided not to buy the bus. 16 In the first week of January 2004 there was a meeting at the Wikramanayakes' home in Dover Heights. Mr Wikramanayake was attending the cricket test match at the Sydney Cricket Ground which he left during the lunch break to meet with Mr Smith. The subject of the meeting was the possible enlargement of the facility. The Wikramanayakes were going on holiday the next day and Mr Wikramanayake pointed out that there was not much time to discuss the ramifications of building more units. However, he authorised Mr Smith to get quotes for the new kitchen which would be needed and to come up with a concept plan for his consideration upon his return. Mr Wikramanayake was not challenged on his version of what occurred at this meeting. 17 The Wikramanayakes left for Egypt the following day on holiday. They returned on about 22 January 2004. 18 On 10 February 2004 the parties flew to Albury to inspect the facility. 19 On 24 February 2004 the Wikramanayakes met with Mr Smith. An agenda for that meeting is in evidence. The discussion at that meeting is dealt with in detail by Mr Wikramanayake in his principal affidavit of 28 August 2006 in the proceedings. Mr Wikramanayake's version is not the subject of any response in any affidavit from Mr Smith or Mr James. Mr James says that Mr Smith and he had many meetings with the Wikramanayakes during 2003 and 2004.

[12]

20 According to Mr Wikramanayake, on 24 February 2004 Mr Smith told the Wikramanayakes that he had clients interested in purchasing the facility in a line. He told the Wikramanayakes that he had informed those clients that there would be close to 60 units and that the clients had expressed strong interest. However, Mr Smith said, the reality was that they may have to bite the bullet and purchase the land from Combined House and operate the facility themselves. Mr Smith said that he had set out an agenda of the items that would be required if they were to be owners and operators. The three things Mr Smith said he had done were firstly, he had considered operating income and costs, secondly, he had obtained a concept plan of how many residential units could be built on the site, and thirdly, he had prepared a list of additional start-up costs that would be required if they were to be owners and operators. Mr Smith talked about the possibility of funding from the Commonwealth government and spoke of the operating profits they might earn. Further, according to Mr Wikramanayake, Mr Smith said that once the 24 units were built "you" (meaning the Wikramanayakes) would end up with a balance sheet having assets comprised of a building worth $1.6M and cash of $2.7M. On the liabilities side would be the mortgage of $1.6M and a liability to residents of $2.6M. 21 Mr Wikramanayake says Mr Smith further said words to the effect "we will give you one-third of the profits we make on the operation." Mr Wikramanayake says he replied to the effect: "This is a lot of information to take in. We will need a break down of the figures to support the revenue and costs. If we do not sell the units in a line, then you will have to wait until the project is completed to take your profit from the sale. Once we develop this into a mature business then a number of larger institutions will want to buy this. We are happy to run this on the basis of the operating profits until then. In ten years time I don't want to be doing this. I believe that we can build something substantial and then sell the whole enterprise. The Commonwealth licences alone are worth $30,000 each and we will get these for nothing. The 56 licences will be worth $1.7 million." 22 Mr Wikramanayake then attributes to Mrs Wikramanayake a statement to the effect that: "Many of these things are outside the $1.3 million that we agreed to advance. You will have to cost these items. Where you have items such as the kitchen, furniture and fittings and the bus, I will arrange for my bank to lease these, so that it does not form part of the funds that we will advance under our mortgage. We will also have to arrange with our bank to provide finance for the acquisition of the property." 23 In addition to the agenda of 24 February 2004 which has some handwritten notes on it, the plaintiffs place reliance on some additional handwritten notes partially in the hand of Mr Wikramanayake and partially in the hand of Mrs Wikramanayake. In particular, there is at the foot of the handwritten note what might be described as a truncated balance sheet with assets and liabilities above which there is a hieroglyph which contains a 3, and three lines leading to it all in a circle, with an arrow to a block in which appears the letters "M&P" and beneath that "1.6k". The hieroglyph could be construed as the fraction one-third. 24 There appears to be no dispute that without Commonwealth funding a 24 unit facility would have done no more than break approximately even. 25 According to Mr Wikramanayake, there was a further meeting at Bexley on 19 April 2004. This meeting is dealt with in detail in his affidavit of 26 August 2005 and by Mrs Wikramanayke in her affidavit of 26 August 2005. At the time of this meeting there were some difficulties with the builders and completion of the facility was behind schedule. The Wikramanayake's mortgage was repayable by 30 June 2004. According to Mr Wikramanayake he expressed the view that there did not seem to be much choice other than to acquire the land from Combined House and operate the facility. It is at this meeting, according to the Wikramanayakes, that a proposed corporate structure was discussed and drawn by Mr James on a whiteboard. According to Mr Wikramanayake, Mr James said they should have three companies, a company with a property trust underneath to own the property, an operating company, and a third company to employ the staff of the facility. Mr James proceeded to draw on the whiteboard a proposed structure. After that he filled in proposed names for these entities being "Wagga Road Properties Pty Ltd" and "Plus 55 Village Managements Pty Ltd". According to Mr Wikramanayake, there was no agreement as to the name for the staff company although he recalls "Wagga Road Staff" may have been mentioned. He says that Mr James then wrote down the shareholders and the owners of these entities. The Wikramanayakes were reflected as the shareholders and owners of the "Asset Company" and Mr Smith of the "Operating Company". 26 There was discussion about the fact that the operator would sign contracts with prospective residents and that all funds would flow to the operators' company. Mr Wikramanayake says he pointed this out as a significant departure from the original agreement where they (the Wikramanayakes) would hold a mortgage and a floating charge and receive all the moneys from the proceeds of sale. He says Mr James agreed that 100 per cent of the security deposit would be refunded by the operator to the owner and Mr Smith agreed with this. Mr James said there would be a lease between the resident and the operator and there would be a similar assignment which would be a mirror image of this lease between the operator and the owner so that all the bond moneys would flow from the operator to the owner. 27 Mr Wikramanayake says there was a discussion about how bond moneys received from residents would be dealt with. Mr James referred to provisions of the Aged Care Act 1997 (Cth) with regard to the application of bond moneys. Mr James informed the Wikramanayakes that if a resident departed they would have to reimburse them for 70 per cent of the bond and that 30 per cent of the bond would be an amount for rent over two years. 28 Mrs Wikramanayake gives her version of this meeting in her principal affidavit which, on the important matters, reflects the same substance deposed to by Mr Wikramanayake, that is, that they were going to buy the land, that all bond money should be passed over to them, and the nature of the structure proposed by Mr James. She describes the meeting as having occurred in April 2004. She ascribes to Mr Wikramanayake a statement that: "since we have to buy the land, the property will be owned by Margaret and I. All bond money should be given to us to decrease the amount of our mortgage and loan."

[13]

29 She says that she recalls Mr James drawing three boxes for three companies on a whiteboard which included a separate employment company and Mr Smith saying that the employment company should be removed from the owner of the operating company and the owner of the land-owning company. Mr Smith asked whether she had a person experienced in employing people who could take on the role as shareholder to which she responded that she would ask her mother, who was the only person who might do this. 30 Mr James, on the other hand, says that "one day in or about January 2004" he attended a meeting at the Bexley office of Mr Smith with the Wikramanayakes who said they had just come back from Melbourne and that they did not wish to find a buyer for the site any longer but wanted to keep it. He says Mrs Wikramanayake said "we want you and David to run the business for us. We will provide the funding, you and David will provide the skill and expertise in the industry. Would you be prepared to do that and how would we go about it?" He says that he then stood at the whiteboard and drew a series of diagrams showing an "Asset Company", an "Operating Company", a "Staff Company" and a "Unit Trust". It is at this meeting which he and Mr Smith say oral agreement was reached when, according to Mr James, the Wikramanayakes said, "We can set up three companies and get moving. We will split the profits three ways between us, John and David", in response to which Mr James said, "David and I will probably nominate another entity to take our shareholdings in the Asset Company some time down the track but I agree to that proposal", and Mr Smith agreed. Mr Smith's version is that he said "we need to keep the property company separate with a blind trust behind it. Shares in the trust and the property company can then be divided between us as we see fit", and the Wikramanayakes agreed. 31 The Wikramanayakes deny that any conversation under which Messrs Smith and James were to receive equity in the facility took place. 32 On 20 May 2004 Messrs Smith and James obtained amendment of the Development Consent for the site providing the space to allow the construction of an additional 32 units on the existing site. 33 The Wikramanayakes acquired Plus 55 as a shell company and Mr Smith was appointed sole director and shareholder. Also, by June 2004 the Wikramanayakes had established the Wagga Road Trust with the Company as trustee. 34 On 30 June 2004 the Wikramanayakes gave an end of financial year lunch at the Catalina Restaurant in Rose Bay. Mr James' wife, Debbie-Gai was there. She says a conversation took place in which Mrs Wikramanayake said (having asked Mrs James whether she was happy with the project and she having responded that she was) "that's good because you own one-third of it". Mrs Wikramanayake denies this conversation outright. 35 Mr Smith's wife, Lynette Ellen, says that prior to Christmas 2003 she attended a dinner at a restaurant known as Level 41 where there was a toast to the "partnership" and to Lavender Lodge. She also told of a party "around Christmas time 2004" to celebrate Mrs Wikramanayake's 50th birthday. As it happens, according to Mrs Wikramanayake, she turned 50 in February 2003. 36 In 2004 Combined House defaulted and the loan was called up. This resulted in a settlement under which the Company purchased the land for $407,581.30. The Company obtained finance from the National Australia Bank which took a first registered mortgage over the property for approximately $700,000. Of this, $495,042.76 was drawn down to complete the purchase. The Wikramanayakes lent the further funds to the Company which were necessary to enable the purchase to proceed. As at 1 July 2005, the funds advanced by the Wikramanayakes stood at $1,201,707.52 with interest accruing.

[14]

37 The facility was officially opened on 23 August 2004 and Mr Smith (through Plus 55) commenced operating the facility. 38 On 15 October 2004 the Company and Plus 55 entered into a written agreement ("the lease agreement") which recorded that the Company was the proprietor of the land and was in the process of building 108 units, 24 of which comprising stage one had been completed and were ready for occupation. 39 The lease agreement was prepared by Mr Richard Kitchens, solicitor of Hurstville, on Mr Smith's instructions. 40 The lease agreement recited that on completion of the units the Company had agreed to grant, and Plus 55 had agreed to accept, a lease of the whole of the land and units and to allow Plus 55 to enter into loan/licence agreements with residents. Under cl.1 of the lease agreement the Company would grant, and Plus 55 would accept, the lease of stage one. Under cl.2, the term of the lease would be for a period of two years or such other period as may be agreed between the parties. Under cl.3, during the period, Plus 55 would pay to the Company $16,200p.a. on a pro-rata basis for each unit being occupied pursuant to a loan/licence agreement. Under cl.4 Plus 55 would operate the facility. Under cl.5 the Company would provide maintenance when required. In addition, it would "…make or loan refunds to residents exiting the facility in accordance with the terms and conditions contained in the Residence Agreement". 41 The document was entered into urgently to enable an application to be made to the Commonwealth for funds. Mr Wikramanayake says he agreed to sign it as a preliminary statement of intent, Mr Smith agreeing to prepare a proper lease. 42 On 12 October 2004 Mr Smith and Mr Jones succeeded in obtaining a further Development Consent allowing the construction of an extra 32 units on the existing site. 43 On 18 October 2004, according to Mr Wikramanayake, there was a further meeting between Messrs Smith and James and the Wikramanayakes at the Bexley office. Mr James had not yet prepared the lease. According to Mr Wikramanayake, Mr Smith referred to the Company structure and he asked the Wikramanayakes whether they were in a position to finance stage two even though stage one had not been sold. Mr Wikramanayake said he would have to talk to his banks about it but their preference would be to wait until the first 24 units were sold. He attributes to Mr Smith the statement that their marketing program was just starting to work, it would probably require another three or four months but because of the Commonwealth round (which I understand to be the elimination process for Commonwealth funding) he needed to commence building work on stage two. He said that Mr James and he had been talking about the concept of them raising money and asked the following question, "Would you be prepared to admit us as equity partners in the trust?" To this Mr Wikramanayake replied: "Well, if you share the financial burden equally then we are happy to look at having you as partners. I have already approached Lorenzato. He is a finance broker and I am meeting him on the 21st. He will need statements of assets and liabilities and at least the last two years tax returns. You will also need to nominate who the borrower is going to be and show that the borrower has the financial capacity to service the debt." 44 Mr James is then asserted to have said, "I haven't prepared accounts for the last two years but my accountant, Chris, is also a finance broker. He is up in Queensland, I will ask him to assist us as well." Mr Wikramanayake said, "We'll let your accountant nominate his financiers so that we are not all approaching the same people." 45 Mr Wikramanayake's version of this meeting was not challenged.

[17]

48 In contrast to the earlier email, the later email contains no email address of the sender and no email address of the recipient. It also has the date 13/11/2006 at the foot in a different font. Mr Smith was unable to explain this date. There was no evidence about the circumstances under which it was written. All that was led from Mr Smith was that it was his email to Mr Berecry of Astara Funds Management and Mr Berecry was based in Wollongong. 49 On 7 March 2005 the Commonwealth notified Plus 55 that an application that it had made for Commonwealth funding had been unsuccessful. This turn of events had a negative effect on the profitability prospects of the facility. 50 By 21 March 2005 the defendants had consulted solicitors who wrote to Mr Smith on that date seeking, amongst others, that Plus 55 account to the Company for the entirety of bond moneys received until certain debts associated with the purchase, construction and fit-out of the facility were paid. 51 In response to this letter Plus 55 sent a facsimile dated 21 March 2005 to the Wikramanayakes in which the following is said: "One of the issues to be discussed and resolved is the issue of the Share Entitlements of both John and myself in both Wagga Road Properties Pty Ltd and the Wagga Road Unit Trust. The letter fails to mention that two thirds of both the Share and Unit entitlements in the Project Structure belong to John and/or myself, currently being held on Trust by yourselves, with the remaining portion, being one-third to be held by yourselves as part of the agreed structure." 52 This appears to be the first objectively corroborated instance of it being asserted to the Wikramanayakes that Messrs Smith and James had an entitlement to two thirds of the share and unit entitlements in the project structure. 53 On 8 July 2005 the Company took possession of the facility and has operated it since. 54 At this point a little needs to be said about how the facility operated, apparently as a consequence of the statutory regime which applies to such facilities.

[19]

57 In addition to bond moneys, residents pay a recurring fee to the operator for the accommodation. The evidence reveals that for the financial year to 30 June 2005 Plus 55 received $124,879. 58 Financial statements of Plus 55 for the year ended 30 June 2005, unsigned by Mr Smith but accompanied by a compilation report signed by an accountant, show that for that year Plus 55 made an operating loss of $456,882, Plus 55 having incurred expenditure $581,761 against income of $124,879. Its balance sheet reveals plant and equipment at a figure of $42,581 - note 7 to that entry discloses that this figure is derived from motor vehicles at a cost of $45,000 less depreciation of $2,419. 59 Of the bond moneys so received, according to those financial statements, by Plus 55, $499,896 was paid over to the Company. A further $315,025 was expended by Plus 55, according to it, in furtherance of the development or operation of the facility, for the benefit of the Company. These amounts are shown in the financial statements as loans to the Company, that is both the bond moneys accounted for and other items of expenditure including items described as Capital Kitchen, Capital Stage 1 and Capital Stage 2. Leaving aside whether these amounts could properly be described as loans, the balance on its figures, unaccounted for, is $508,079. None of the entries were supported by any primary documentation tendered by the plaintiffs in the proceedings, although Mr Smith gave evidence that this material "was part of the discovery process". 60 According to Mr Smith, Plus 55 presently has cash of about $6,000. 61 I turn now to the principal claim. The oral agreement alleged 62 By their verified Further Amended Statement of Claim dated 18 November 2005, the plaintiffs allege that on or about 5 February 2004 Messrs Smith and James on the one part, and the Wikramanayakes on the other, entered into an oral agreement under which Messrs Smith and James would provide their expertise for the development and continuing operation of the facility, and the Wikramanayakes would maintain existing funding and provide future funding to develop and extend the facility which was to be operated and administered by Mr Smith through his company to the parties' mutual benefit. The agreement is alleged to be partly express and partly implied. 63 There are pleaded a number of express and a number of implied terms. 64 There is pleaded an express term of the oral agreement that the facility (then under construction) would be completed and retained by a trustee for the benefit of the parties and operated as an aged care facility for their benefit. 65 There is pleaded an express term that the facility's profits would be shared between Mr Smith as to a one-third share, Mr James as to a one-third share, and as to a one-third share, the Wikramanayakes jointly. 66 There are also pleaded express terms as to the corporate structure that would be implemented to operate the facility, which would include an operating company and a staff company to employ staff to work in the facility at the direction of the operating company. 67 The critical term of the oral agreement pleaded by the plaintiffs is an express term that Messrs Smith and James: "would by the time of the commencement of operation of the facility be granted equity in the facility in the form of a one-third share each through allocation of units in a trust to be formed and known as the Wagga Road Trust which was to become the beneficial owner of the site and the facility as it then existed and as it was to be extended into the future." 68 There is pleaded an implied term that Mr James and the Wikramanayakes and the Company (being the trust company envisaged) would rely on the expertise of Mr Smith and permit him and the operating company of which he was sole director to operate the facility without undue interference. 69 In their particulars to the oral agreement the plaintiffs say (perhaps inconsistently with the primary averment of an express oral agreement) that the oral agreement was partly implied, the implication being said to arise from preceding discussions throughout late 2003 and 2004, the continuing work of Messrs Smith and James in developing and operating the facility, the partial funding of the facility by the Wikramanayakes, the operation of the facility by Plus 55 of which Mr Smith was the sole director and shareholder, and the acceptance by the defendants of bond moneys paid to the Plus 55 by residents on their occupation of the facility. 70 Although the Further Amended Statement of Claim sought an order that each of Messrs Smith and James is beneficially entitled to a one-third right and interest in the shareholding of the Company, no term of the agreement to sustain that claim was pleaded. During final submissions I gave the plaintiffs leave to amend the pleading to plead that term. The amendment made was as follows: "It was a further express term of the Oral Agreement that the first and second plaintiffs would be allocated a one-third share each in the shareholding of the asset company, the third defendant." 71 The defendants deny the oral agreement and each of the express and implied terms pleaded. 72 They accept that in 2004 an oral agreement was entered into that Plus 55 would operate the facility upon its completion. They say that the agreement was that if and when the facility was sold by the Company the profit, on sale, would be divided in the proportions of one-third each to Messrs Smith and James and the remaining third to the Wikramanayakes. In order for a profit to be yielded the mortgage finance would first have to be repaid. 73 The central question for determination in these proceedings is thus whether the oral agreement asserted by the plaintiffs, namely that Messrs Smith and James would each be the recipients of one-third of the equity in a unit trust and the Company, as opposed to profits realised upon sale of the facility. The approach to be adopted 74 Where a party seeks to rely upon spoken words as a foundation for a cause of action, including a cause of action based on a contract, the conversation must be proved to the reasonable satisfaction of the Court which means that the Court must feel an actual persuasion of its occurrence or its existence. Moreover, in the case of contract, the Court must be persuaded that any consensus reached was capable of forming a binding contract and was intended by the parties to be legally binding. In the absence of some reliable contemporaneous record or other satisfactory corroboration, a party may face serious difficulties of proof. Such reasonable satisfaction is not a state of mind that is obtained or established independently of the nature and consequences of the fact or facts to be proved. The seriousness of an allegation made, inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question of whether the issue has been proved to the reasonable satisfaction of the Court. Reasonable satisfaction should not be produced by inexact proofs, indefinite testimony, or indirect inferences: see Briginshaw v Briginshaw (1938) 60 CLR 336 at 362; Helton v Allen (1940) 63 CLR 691 at 712; Rejfek v McElroy(1965) 112 CLR 517 at 521; Watson v Foxman (2000) 49 NSWLR 315 at 319. Was there an oral agreement as alleged? 75 There is no contemporaneous or reasonably contemporaneous written record of, or memorial to, the oral agreement.

[28]

95 There is, on the plaintiffs' side, a lack of precision as to what was said during the critical conversation. 96 According to Mr James, at the whiteboard meeting Mrs Wikramanayake informed him and Mr Smith that they did not want them to find a buyer for the site but wanted to keep it and wanted Messrs Smith and James to run it. The Wikramanayakes would provide the funding and Messrs Smith and James would provide the skill and expertise in the industry. He says that after he gave his explanation of the proposed structure which included an Asset Company which would retain the assets and keep the profits of the business, a Unit Trust which would be used to raise further capital if it became required, and an Operating Company which would have the bare minimum of staff, the Wikramanayakes said: "Let's go ahead then. We will obtain the amended consent and start on the kitchen straightaway. We can set up the three companies and get moving. We will split the profits three ways: between us, John and David". 97 According to Mr James he then said, "That is fine. David and I will probably nominate another entity to take our shareholdings in the Asset Company some time down the track but I agree to that proposal." Mr Smith said, "So do I". 98 Both Messrs Smith and James were cross-examined upon what was said at the whiteboard meeting. When asked to recall what was said, Mr James omitted any reference to splitting the profits or having any shareholdings in the Asset Company as deposed to in his principal affidavit. Mr Smith, when cross-examined as to what was said at the whiteboard meeting, likewise made no mention of dividing shares in the trust and the Company as deposed to in his affidavit sworn that day. 99 Mr James produced a copy said to be the best of his recollection of what he drew on the whiteboard. The chart contains boxes and also notes. In the boxes appear the words "Asset Company", "Operating Company" and "Staff Company". There is also a box with the words "Unit Trust" and a question mark in it. On the diagram there is an arrow line from the Asset Company box to the Unit Trust box which is also straddled by a question mark. Adjacent to the box with Asset Company in it are the words "Wagga Road Properties Pty/Ltd Directors/Shareholders Wikramanayakes". Adjacent to the box with Operating Company in it are the words "Plus 55 Village Managements Pty Ltd Director/Shareholder David Smith." Adjacent to the box with Staff Company in it are the words "Wagga Road Staff Pty Ltd Director Shareholder Margaret Wikramanayake's Mother". There are further comments on the document including a notation beneath the Unit Trust box which says "For Further Capital Raising if Necessary". There is also a note which reads "Limited Officers Staff for Commonwealth Accreditation Aged Care Act 1997". The notes, he said, were there to explain to his legal advisers what in effect came to be rather than what was agreed. 100 When put to Mr James that these notes were inconsistent with the plaintiffs' case that they were to have an interest in the Asset Company, in that the notes reflect the directors and shareholders to be the Wikramanayakes, he gave evidence that those notes were not and could not have been on the whiteboard because neither Wagga Road Properties (i.e. the Company) nor Plus 55 Village Management (Albury) (i.e. Plus 55) had, as at the time of the meeting, been incorporated. The parties are agreed that the Company was incorporated on 29 April 2004 and Plus 55 on 6 May 2004. 101 Mr James' oral evidence before me was that at the time of the whiteboard meeting all he drew was boxes with descriptions in them and that there were no accompanying notes at all. This evidence is inconsistent with his affidavit evidence in which he twice says expressly that he wrote accompanying notes. He also does not explain the use of question marks with respect to the Unit Trust. He was not asked in cross-examination what he says were contained in the notes which, according to his affidavit, he wrote at the time.

[29]

102 In his affidavit of 7 February 2007 Mr James again refers to the diagram and there makes the point about it not being a precise copy of what he drew in that it refers to Wagga Road Properties, Plus 55 Village Management and Wagga Road Staff which at that stage had not been incorporated. Even at this late stage he did not say, as he now says, that there were no comments written on the whiteboard. 103 Mr Smith in his affidavit of 7 February 2007 also refers to the diagram and to the recreation of it by Mr James. He says that the diagram refers to the companies which came to be formed and says as those companies had not yet been incorporated he did not believe their names would have been used on the whiteboard at the time. He does recall the words "unit trust" being drawn on the whiteboard. He goes on to refer to a conversation during the course of "that meeting in January 2004" to the effect that he said "we need to keep the property company separate with a blind trust behind it. Shares in the trust and the property company can be divided between the three of use as we see fit", to which he says the Wikramanayakes consented. 104 Mr Smith, when challenged on his version of the conversation at the whiteboard meeting, claimed that he had made notes at that meeting. He said that the date of January 2004 came from meeting notes to which he referred when he "made the original statement of claim." When asked where the notes were he said he imagined they were in his office at Bexley. He could not recall whether the notes had been discovered although he had looked at them in the last six months. He conceded understanding the importance of such notes in the context of the present dispute saying that if such notes had not been discovered, it was by oversight. Counsel for the defendants made a call for them. No such notes were produced. I found Mr Smith's evidence concerning dating the meeting from notes to be unsatisfactory and I do not accept it. It also sits uneasily with Mr Weaver's submission that the most likely candidate for the whiteboard meeting is 24 February 2004. 105 The Wikramanayakes deny the versions of Messrs Smith and James of the whiteboard meeting conversation. They were firm in their evidence that the names of "Wagga Road" and "Plus 55 Albury" were discussed and comments put up on the whiteboard. There is contemporaneous support for this on the agenda document which refers to "Plus 55 Albury". Other things they say were discussed are reflected in the comments on the diagram including the reference to the participation of Mrs Wikramanayake's mother and the Aged Care Act (Cth). Mr Weaver put that no weight should be given to the annotation reflecting the Wikramanayakes' shareholding in the Asset Company. In my view, it provides additional support for the evidence of the Wikramanayakes and is inconsistent with the plaintiffs' case. The fact that Plus 55 and the Company were not yet incorporated did not preclude names for them being suggested at that time. 106 Mr Bell SC for the defendants put that the question marks on the diagram were inconsistent with any firm agreement to form a unit trust.

[30]

107 There is substance in this submission because even if the plaintiffs' version of the conversations is accepted, it does not establish any firm agreement to form such a unit trust. Mr James' version is that he said the Asset Company would be linked to a unit trust which would be used to raise further capital if it became required. This is consistent with the question mark and the notation under the Unit Trust box on the diagram. His version is also that he and Mr Smith said they would probably nominate another company to take their shareholdings in the Asset Company sometime down the track. Mr Smith's version is that he said: "We need to keep the property company separate with a blind trust behind it. Shares in the trust and the property company can then be divided between the three of us as we see fit." 108 This is further support, in my view, for the version of the Wikramanayakes. 109 The evidence of Messrs Smith and James was, in my view, unsatisfactory in a number of important respects including as to when the meeting occurred, what was said, and what was written on the whiteboard. 110 In the case of Mr Smith I am not satisfied that his evidence concerning the notes he said he took was truthful. 111 The Wikramanayakes on the other hand were, in my view, unshaken in cross-examination and I prefer their evidence over that of Messrs Smith and James as to what was said at the whiteboard meeting. Each is commercially astute. Their version of events sits comfortably with the contemporaneous material such as it is and with what I consider to be the inherent commercial probabilities with which I deal below. 112 Mr Weaver made some attack on the Wikramanayakes about their detailed affidavit evidence about the meetings, putting to each of them that they had sought to memorise their detailed recounting in their affidavits. It was clear that each had a very firm grasp of the critical factual matters and an understanding of the financial and commercial considerations which applied during the course of their dealings with the plaintiffs. I consider that their grasp of the facts was because they were accurately recounting what they recalled. 113 In his most recent affidavit, Mr Smith then refers to further conversations between January 2004 and June 2004 in which the Wikramanayakes are asserted to have asked, "Who do you want to hold your shares?" to which Mr Smith says he replied, "My shares in the Company can go in my name but I would like the units in the trust to be held in the name of my superfund." The Wikramanayakes deny these conversations. Once again, there is no specificity as to the time or context of these newly deposed to conversations. There is nothing contemporaneous or objective to support them and I am not satisfied that they occurred. I accept the evidence of the Wikramanayakes that they did not occur. 114 The plaintiffs place reliance on the second email to Mr Berecry. Leaving aside the anomalies apparent on its face when compared with the first email to Mr Berecry, its unexplained context, and the absence of any evidence establishing that it was received, it came at a time when the parties were in dispute and does not, in my view, provide any contemporaneous or reasonably contemporaneous support for the conversation which the plaintiffs must establish. A month later Mr Smith was asserting that two thirds of both the share and unit entitlements belonged to Mr James and himself. The second email to Mr Berecry makes no mention of a split in the share entitlements. It is also open to the reading that at the time units were actually held by Messrs Smith and James, which was not the case. 115 Additionally, there was no challenge to Mr Wikramanayake's version of the October 2004 conversation in which he says Mr Smith asked whether the Wikramanayakes were prepared to admit him and Mr James as equity partners, and I accept it. Such a statement was inconsistent with the existence of the agreement alleged by Messrs Smith and James and any belief on their part in its existence. 116 The plaintiffs also place reliance on the conversations which Mrs Wikramanayake is alleged to have had with Mrs Smith and Mrs James. As to Mrs Smith, she says that the toast to the partnership happened some time prior to Christmas 2003 which, on any version, is before any alleged equity split arrangement. The conversation does not assist the plaintiffs. There is additional doubt about Mrs Smith's evidence given that she is clearly wrong as to Mrs Wikramanayake's 50th birthday. 117 References to "partnership" by the parties here do not, in my view, assist the resolution of the dispute because that terminology is equally consistent with a profit share arrangement and a co-shareholding or unitholding arrangement. 118 So far as the conversation with Mrs James is concerned, I accept Mrs Wikramanayake's evidence that she did not make the statement to Mrs James that she owned one-third of it. A statement to that effect would have been inconsistent with the commercial probabilities and with the conversations deposed to by the Wikramanayakes, which I have accepted, and the commercial positions taken by them. Moreover, even if made, I do not consider it would establish the terms of the agreement, or assist in the establishment of the terms of the agreement, which the plaintiffs plead. The commercial probabilities 119 I consider that the commercial considerations inherent in the circumstances of this case, as at and prior to April 2004, make it less likely than not that the agreement which the plaintiffs assert was made. 120 The inherent commercial considerations here certainly do not, I consider, support the probability that such an agreement was made. 121 Mr Weaver submitted that the commercial imperative behind the agreement for which the plaintiffs contend is that once the facility was to be held and operated rather than sold, there being no timeframe contemplated for sale, one would have expected Messrs Smith and James to require an arrangement giving them an interest in the underlying endeavour to protect them. They had put in, and were going to put in further, time and effort. But for such agreement, he argued, they would in effect have nothing. 122 Mr Weaver argued that there was support for the plaintiffs in that the Wikramanayakes never informed them of any intention to sell the facility in the short-term, and that a unit trust was formed within months of the whiteboard meeting having occurred which was consistent with the commercial imperative of the plaintiffs obtaining an equity interest. 123 The Wikramanayakes' position was that the sale of the facility was always a possibility or contemplation but realistically it could not be sold until it was a viable operation. 124 Mr Bell put that the commercial imperative went the other way. It was the Wikramanayakes who had put in all the money and taken the risk. They had control of the underlying asset (subject to any security held by any outside lender) and the arrangement contended for by the plaintiffs amounted to them giving up this control by passing a majority of the equity in it to the plaintiffs. Mr Weaver's response to this was that the defendants had such control as was given to them by virtue of being security holders.

[35]

139 Under the lease agreement the Company undertook a contractual obligation to Plus 55 to meet repayments to residents exiting the facility in accordance with the terms and conditions of the agreements between Plus 55 and the residents. 140 Instead of paying the moneys so received over to the Company, Plus 55 used them, it says, to the Company's benefit. 141 Apart from the fact that I do not consider that on the evidence Plus 55 has established any contract of loan, at best, in my view, Plus 55 would be entitled as a defence to having to account for the bond moneys it has received and should have paid over to the Company, to plead an equitable set-off to the extent that it used that money for the benefit of the Company. It is difficult to see how bond moneys for which Plus 55 accounted to the Company because it was obliged to could properly be described as a loan to the Company. 142 The utilisation of the funds by it in that manner does not, it seems to me, give rise to any loan. The effect of the loan it now pleads (without particulars) would enable it to recoup (in addition to not having to account for the bond moneys it received) moneys spent for the benefit of the Company which it ought to in the first instance have paid over to the Company but did not. Apart from the fact that Plus 55 has not established any agreement to that effect, an arrangement with such an outcome would be commercially inherently unlikely. 143 The loan claim therefore fails. Cross-claim for bond moneys 144 In the Statement of Amended Cross-Claim, the Company pleads an implied term of the lease agreement that Plus 55 was obliged to pay over to it all bond moneys received from residents. In final submissions the Company sought to rely on an express oral agreement to that effect which had not been pleaded. I gave it leave to amend the cross-claim to plead such an agreement. The amendment pleads that the Company entered into an express agreement with Plus 55, or alternatively confirmed an earlier agreement, that the bonds received by Plus 55 from residents entering into occupation of the facility would be paid to the Company. 145 As to the implied term, it is said to be derived from cl.5(ii) of the lease agreement where the Company undertook to make all loan refunds to residents exiting the facility. I am satisfied that such a term is necessarily to be implied from the terms of the lease agreement in accordance with established principle: Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337. An obligation to refund the residents' bond moneys must mean that the Company was to receive the moneys which were taken in by Plus 55. The term is reasonable, obvious, capable of clear formulation, consistent with the express terms of the lease agreement and required for it to operate. 146 As to the express agreement, the Company relies on part of the conversation recounted at the whiteboard meeting deposed to by Mr Wikramanayake in his affidavit of 26 August 2005 during which Mr James said all the bond moneys would flow from the operator to the owner. It also relies on a conversation said to have occurred by Mr Wikramanayake on 30 August 2004 (which has not been challenged) during which he complained to Messrs Smith and James that they had used the residents' money to solve a problem faced by Mr James as a developer. Mr Wikramanayake went on to say that his understanding was that all bond moneys would be paid to them, and Mr James agreed. 147 There seems little doubt that the parties contemplated and agreed that the bond moneys would be paid to the Company. The terms of the lease agreement provide objective contemporaneous support for this.

[37]

149 I accordingly find that such an agreement was entered into and that Plus 55 is obliged to account to the Company for such of the bond moneys as was received by it and not paid over to the Company, less the amount which it expended for the benefit of the Company. 150 Plus 55 received $1.323 M of which its financial statements show it paid to the Company $499,896. 151 Plus 55's primary obligation was to account for all bond moneys. In so far as it alleges that moneys so received by it were used to the benefit of the Company, it bears the burden of showing it. It sought to do this by relying on its financial statements dated 30 June 2005 which reflect in note 6 loans to Wagga Road Properties Pty Ltd totalling the amount it says was expended. 152 On its own version, that is according to its financial report for the year ended 30 June 2005, Plus 55 spent for that financial year a maximum of $315,025 for the benefit of the Company so that on its figures $508,079 is unaccounted for. 153 The Company disputes that Plus 55 spent $315,025 for the benefit of the Company and challenges three items shown in Plus 55's unsigned financial statements as at 30 June 2005 being the following: a $40,151 reflected as Capital Kitchen. The Company concedes that kitchen expenditure of $17,261.84 has been established, it appearing in Plus 55's accounts as at 31 March 2005, and relies on the evidence of Mrs Wikramanayake, upon which she was not challenged in her principal affidavit that there have been no invoices produced to substantiate the difference of $22,889.16. Mrs Wikramanayake further says that she knows of no major new equipment having been bought since August 2004; b $34,734 described as Capital Compliance Stage 1, in respect of which Mrs Wikramanayake says have never been verified to any invoices she has seen. No primary records were produced by Plus 55 and no detail proposed in respect of how this figure is derived. Mrs Wikramanayake was not challenged on this. c $78,927.88 for Legals, although the figures claimed in the accounts for Legals is not that amount but $61,131. Mrs Wikramanayake's evidence is that the legal fees have never been substantiated as relating to the Company or to Plus 55. No primary records were tendered and she was not challenged. 154 Plus 55 draws attention to the fact that for the year ended 30 June 2005 it operated at a deficit, that is, a trading loss of $456,882. It bought a bus for $30,000 and a wagon to transport residents of the facility. This is where, it submits, the shortfall went. It puts that all payments were made in consultation between the parties and that the Company has retained the benefit of the trading expenditure because these are moneys spent by Plus 55 to allow the facility to get up and running. It puts that it cannot be the Company's case that it could take the whole of the bond moneys but to expect Plus 55 to operate a facility on no income. 155 There are a number of difficulties with this submission. Firstly, Plus 55 did receive income and, at the time it agreed to operate the facility, it anticipated substantial funding from the Commonwealth, which it is not suggested would be passed over to the Company. Secondly, the operating loss which Plus 55 sustained is its loss and the submission appears to amount to the proposition that the Company would indemnify it against a trading loss incurred under the stewardship of Messrs Smith and James for which there appears to be no basis. Thirdly, within that trading loss is payment to Messrs Smith and Jones of consultancy fees of $110,745, payroll expenses of $186,640, and rent of $124,000. The proposition put by Plus 55 would mean that the Company must reimburse Plus 55 for the consultancy fees paid to Messrs Smith and James, for other salaries paid by Plus 55 in order to trade, and for the rent which Plus 55 agreed to pay the Company, a proposition which in my view is untenable. 156 Even if there were evidence that Plus 55 paid its expenses in consultation with the defendants, that would not give it an indemnity. Plus 55 did not draw attention in its submissions to the evidence it relied upon in that regard. 157 So far as the bus and wagon are concerned, it was not suggested that these assets belong to the Company. Mr Smith's evidence was that a bus was purchased for $30,000 and another vehicle for $15,000. These vehicles clearly seem to be the fixed assets of $45,000 contained in Plus 55's balance sheet as at 30 June 2005. There is no basis for requiring the Company to pay to Plus 55 the amount paid by the latter to acquire these assets when it keeps, retains, and has the use of them. 158 Finally, it was put by Plus 55 that the Court should infer that working capital would be required as the facility developed and that the source of the working capital was the bond moneys, the benefit of which would remain with the facility. That inference is not open because it is directly inconsistent with the express oral agreement which the Company has established with respect to the bond moneys and the implied term in the lease agreement to account for those moneys which I have found. 159 I accordingly reject the submission that Plus 55's trading loss and the cost of the vehicles it bought are for the Company's account. 160 Of the $315,025 (in addition to the bond moneys of $499,896 which it paid over) which Plus 55 says it expended, I consider that it has not established $22,889.16 in respect of Capital Kitchen, $34,734 in respect of Capital Compliance Costs and $61,131 in respect of Legal Fees, making a total of $118,754.16. 161 In my view, on the state of the evidence, Plus 55 has established that it has expended $196,270.84 for the benefit of the Company and has accounted for $499,896 of bond moneys making a total of $696,166.84. 162 It received $1.323 M and having accounted for $696,166.84 is in my view obliged to account for the difference being $626,833.16.

At a glance

Court

Decision date

Before

Source

Judgment (41 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (5)

Cited By (3)