Solvency Mutual Guarantee Co v Froane

Ringrong, then known as 901 Whitehorse Road Pty Ltd, both on its own behalf and as trustee of the 902 Whitehorse Road Property Investment Trust executed a cross deed of covenant in favour of the Bank dated 6 June 1989 (the "cross deed"). Under the cross deed Ringrong guaranteed the repayment to the Bank of moneys advanced by the Bank to the "customers", which included the following companies within the Samuel Group:

Edmic Investments Pty Ltd Kablan Constructions Pty Ltd Samuel Engineering (Vic) Pty Ltd 602 Whitehorse Road Pty Ltd Mitcham Leisure Pty Ltd Mont Albert Village Centre Pty Ltd Ledave Pty Ltd Advanced Concrete Technology Pty Ltd Yourbend Pty Ltd Tamworth View Pty Ltd Fifteen Thornton Crescent Pty Ltd 677 Boronia Road Pty Ltd Kentnow Pty Ltd 4.2 Supplementary cross deed of covenant dated 22 November 1989 Hermas had not been included as a customer in the cross deed dated 6 June 1989. A letter from the Bank to Mr Samuel dated 24 August 1989 outlined some of the terms and conditions of increased facilities to Hermas and other companies, which were conditional on Hermas being one of the parties to the cross deed. Hermas executed, as covenantor, a further cross deed of covenant in favour of the Bank dated 22 November 1989 (the "supplementary cross deed"). Hermas is also named in the second part of the schedule to that supplementary cross deed as a "customer". Pursuant to clause 16 of the cross deed dated 6 June 1989 and clause 25 of the supplementary cross deed dated 22 November 1989, Hermas was deemed to be a customer named in the first-mentioned cross deed. 4.3 Terms of the cross deed Ringrong's obligations as covenantor are set out in paragraph 1 of the cross deed which provides: "The Covenantor HEREBY COVENANTS to pay to the Bank free of all deductions upon service upon the Covenantor of the Bank's written request for payment .... all and every sums and sum of money whatsoever which shall for the time being be owing or unpaid to the Bank by each of the said persons companies partnerships and firms (hereinafter called "the Customer")(and although that the whole or some part of such sums of money be then represented and/or secured by any mortgages ... issued by the Bank to or for the benefit or at the request of the Customer either alone or jointly or in common with any other or others and whether or not the Customer shall for the time being be legally liable to pay the same to the Bank and whether or not default shall have been made by or demand made on the Customer in respect thereof) for or in respect of all loans advances credits or banking accommodation heretofore made created or given by the Bank or now or which may hereafter be made created or given by the Bank to for or on account or at the request of the Customer or in respect of any indebtedness from the Customer to the Bank on any account whether now existing or which may hereafter be opened or by any means whatsoever including all sums in which the Customer is or may hereafter become liable immediately or contingently to the Bank..."

4.4 Competing contentions about the availability of the cross deed to support a winding-up petition Counsel for the respondent argued that no winding up order should be made against Ringrong on the present petition because there is a bona fide dispute as to its indebtedness to the Bank. In part that argument depends on the claim that Ringrong is not bound by the cross deed because of the circumstances of its execution and because of financial arrangements between the companies in the Samuel Group on the one hand, and the Bank on the other. The first contention is that Ringrong is not bound by the cross deed because no consideration was given to Ringrong by the Bank in return for its agreement to execute the cross deed or the consideration which was given wholly failed. Specifically, it was submitted that Ringrong executed the cross deed in consideration of the Bank's promising an overdraft facility, which the Bank did not provide. Ringrong's second assertion is that the financial arrangements between the Bank and the Samuel Group constituted a contract of which the Bank is in breach; or, alternatively, raised an estoppel as against the Bank. The Bank is said to be estopped from contradicting the conclusion that companies in the Samuel Group could borrow from the Bank up to 100% of the total cost of specific projects without being obliged to repay moneys advanced or capitalised interest until each relevant project had been developed and sold. 4.5 Consideration for Ringrong's entry into the cross deed Mitcham Leisure Pty Ltd ("Mitcham Leisure") operated a gymnasium, known as "Workout 602", at 602 Whitehorse Road, Mitcham until 27 January 1989. Mitcham Leisure was indebted to the Bank in the sum of $75,000 being the debit balance of its overdraft. On 8 August 1986 the Bank had agreed to provide an overdraft facility with a limit of $75,000. Immediately thereafter the account went into debit in the sum of $66,187.84. The business was transferred to 901 Whitehorse Road Pty Ltd and it was relocated to premises at 28 Maroondah Highway and continued under the name "Workout Ringwood". 901 Whitehorse Road Pty Ltd was made subject to the cross deed as a customer under that name by being included in the Second Part of the Schedule to the cross deed and in the First Part of the Schedule to the supplementary cross deed. On this aspect Mr Samuel gave evidence that since March 1989 negotiations had taken place between himself and Mr Bruce Michell, who, in about mid-1987, succeeded Mr Parkes as manager of the William Street, Melbourne branch of the Bank. Those negotiations were related to an overdraft facility for 901 Whitehorse Road Pty Ltd (as Ringrong was then known). In discussions it was agreed that if the company were to assume the liabilities of Mitcham Leisure, the Bank would then provide an overdraft facility to 901 Whitehorse Road Pty Ltd on an ongoing basis. Mr Samuel's evidence is that he executed the cross deed on behalf of Ringrong pursuant to an agreement whereby the Bank would provide an overdraft facility to Ringrong. In paragraph 24 of Mr Samuel's affidavit sworn 6 November 1992, it is deposed that the granting of an overdraft facility to Ringrong was discussed between himself and Mr Michell at a meeting on 21 March 1989. According to Mr Samuel, Mr Michell advised that Ringrong had no real assets and he would like the comfort of guarantees from other companies within the Samuel Group to support the proposed overdraft to be granted to Ringrong. It is not disputed that the Bank did not provide an overdraft or any other facility to Ringrong. The Bank does not concede that it was required to give Ringrong an overdraft facility in return for Ringrong's execution of the cross deed, but contends that in any event, any obligation on it to provide Ringrong with an overdraft was conditional on Mitcham Leisure's debt first being extinguished. It is common ground that the liability of Mitcham Leisure to the Bank, which was about $75,999 when the trading activities of Mitcham Leisure were taken over by 901 Whitehorse Road Pty Ltd, was never discharged. A diary note of the Bank dated 10 August 1989 indicates that the overdraft would be transferred once the debt was cleared. It states that: "...The overdraft on account of Mitcham Leisure is being progressively repaid by distributions from 901 Whitehorse Road Pty Ltd and when fully extinguished, the $75,000 0D [overdraft] limit will be transferred to the new company." [namely Workout Ringwood]. Mr Samuel gave evidence that in or about October 1990 he had discussions about the overdraft facility of Mitcham Leisure with a Mr Ian Warriker, who by then had become the Bank manager responsible for the Samuel Group accounts. Mr Samuel's evidence was that in the course of that conversation he expressed concern that Ringrong had not received the overdraft facility which it had been offered. According to Mr Samuel, nothing was said by Mr Warriker to indicate the Bank's insistence that Mitcham Leisure's liability would first have to be discharged before funds would be advanced on overdraft to Ringrong. Counsel for Ringrong referred to a diary note of the Bank dated 17 October 1990, according to which "Workout Ringwood" was to assume the liability for Mitcham Leisure's debt in the form of a fully drawn advance which would be repaid over three years. Under the heading "Workout Ringwood Pty Ltd", that Bank diary note states: "FDA [fully drawn advance] is established in order to liquidate present debt o/a Mitcham Leisure P/L over a three year term." There is a corresponding reference under the heading "Mitcham Leisure Pty Ltd", which provides:

"The company is now being wound down. Accordingly, debts are to be transferred to FDA into Workout Ringwood P/L to clear over three years." Counsel for Ringrong argued that the note suggests that the debt was to be transferred in the form of a fully drawn advance and, accordingly, it was more likely than not that Ringrong was to obtain as well an overdraft facility, which in turn provided the incentive for Ringrong to execute the cross deed. Counsel for the Bank contended, first, that there was no need for consideration to support the cross deed, because it constituted an agreement under seal. In addition, the Bank points to the opening paragraph of the cross deed reproduced above, which is said to identify consideration which included continuing to provide funds under existing arrangements, forbearing to call up moneys immediately due, and giving further advances to the companies listed in the Schedule to the cross deed. Alternatively, on the Bank's argument, if the cross deed was not under seal and did not, in terms, identify other consideration to support it, consideration moved from the Bank to third parties. According to the Bank's evidence, further advances were made to other companies in the Samuel Group after 6 June 1989. Those advances are enumerated in Mr Peter Walton's affidavit sworn 10 May 1993 and can be described in a summary way as follows:

(a) 602 Whitehorse Road Pty Ltd On 24 July 1990, the Bank advanced $850,000 by way of a commercial bill facility with a variable interest rate. The terms were partly contained in a letter from the Bank to Mr Samuel dated 24 July 1990. (b) Mont Albert Village Centre Pty Ltd On 21 March 1989, a commercial bill facility of $3.2 million previously provided to Mont Albert Village Centre Pty Ltd, also at a variable interest rate, was increased to $5.1 million. It was increased again on or about 17 October 1990 to $7.1 million. (c) Advanced Concrete Technology Pty Ltd On 6 October 1988, the limit on the overdraft provided to Advanced Concrete Technology Pty Ltd was increased to $100,000, and on 27 September 1989 to $300,000. In June 1990, a separate fully drawn advance facility held by the company was increased from $350,000 to $400,000. In addition, in August 1989, the Bank provided Advanced Concrete Technology with a variable commercial bill facility of $300,000 at a variable interest rate. (d) Fifteen Thornton Crescent Pty Ltd On 12 December 1986, the Bank provided this company with a fixed rate commercial bill facility for $450,000 over a period of four years. On 29 November 1990 the facility was extended for a further year. (e) 677 Boronia Road Pty Ltd In August 1989, a commercial bill facility at a variable interest rate which had been provided by the Bank to 677 Boronia Road Pty Ltd was increased from $300,000 to $1.4 million. The limit on the overdraft facility on the company's current account was increased from $100,000 to $125,000. (f) Hermas On 10 August 1989 the Bank provided to Hermas an overdraft of $300,000 and a commercial bill facility of $500,000 again at a variable interest rate. On 24 July 1990 it increased the commercial bill facility by $280,000 to a total of $780,000 and provided an additional fully drawn advance facility of $275,000. 4.6 Evidence bearing on alleged agreement by Bank to defer repayment until after completion of projects, or alleged estoppel. In Mr Samuel's affidavit sworn 26 October 1992, he deposes that the Bank developed a regular practice of allowing each company to finish each respective building project and to sell it before it required repayment of capital and accrued interest. He refers to a summary of six projects undertaken by Samuel Group Companies since 1985 which were financed by the Bank and in relation to which, according to Mr Samuel, the Bank waited until the building had been sold before requiring repayment of capital and accrued interest. Mr Samuel deposes that the arrangement continued until late August 1992 when the Bank terminated its relationship with the companies in the Samuel Group and with Mr Samuel and his wife. He refers to various assurances from the Bank and demonstrations of what is said to be the Bank's acquiescence in the course of operations which I have just described. In another affidavit sworn 6 November 1992 Mr Samuel outlined a history of his Group's dealings with various managers of the Bank. That history was to the effect that funding arrangements of the kind described earlier had been allowed to proceed from 1984 to about 1987 when Mr John Parkes was the Bank's manager with responsibility for the accounts of companies in the Samuel Group. In 1987 Mr Michell replaced Mr Parkes and was the manager for the Samuel Group until late 1989. According to Mr Samuel, Mr Michell confirmed and adhered to the previous arrangements that had been reached with Mr Parkes. In essence, these were that following approval, all stages of each project would be funded by the Bank with interest accruing thereon to be capitalised and paid out at settlement from the proceeds from the sale or sales of the relevant property after it had been fully developed by a member company of the Group. From mid 1987 to late 1989 Mr Michell was supervised by his regional executive Mr Brian Reiter. Mr Samuel deposes to having met Mr Reiter on 21 August 1989, when Mr Reiter made it clear to him that the "ANZ Bank were not fair weather bankers", and that previous arrangements reached with Mr Parkes and with Mr Michell would be honoured. This arrangement with the Bank subsisted, on Mr Samuel's version, notwithstanding that the Bank in various documents and correspondence had referred to certain facilities provided to the Samuel Group from time to time as being subject to review. For example, the letter from the Bank to Mr Samuel dated 24 July 1990 already referred to as noting the advance of $850,000 to 602 Whitehorse Road Ringwood, referred to facilities made available to Mitcham Leisure Pty Ltd, Ledave Pty Ltd, Advanced Concrete Technology Pty Ltd, Tamworth View Pty Ltd, Hermas, and Fifteen Thornton Crescent Pty Ltd as "basic, subject to annual review". The same letter included this passage under the heading "GENERAL CONDITIONS": "(a) All facilities shall be repayable on demand but unless and until demanded shall be repayable in accordance with the Term/Repayment Arrangements applicable to each facility as set out herein. (b) The Bank reserves the right to: (i) Review the basis on which variable rate facilities are provided (including any/all interest rates, margins and fees and the timing of the charging thereof) at any time during the term of such facilities, but at least annually; and (ii) Withdraw the facilities if, in the opinion of the Bank, there has been any material adverse changes in the financial condition or operations of the Customer." However, no such reservation of a right to carry out an annual or other review was contained in an earlier letter dated 30 March 1989 from Mr Michell on behalf of the Bank to Mr Samuel. That letter detailed increased facilities to Edmic Investments Pty Ltd, 602 Whitehorse Road Pty Ltd, 677 Boronia Road Pty Ltd, Advanced Concrete Technology Pty Ltd and Mont Albert Village Centre Pty Ltd. The only express reference to repayment was in respect of the increased advance to 677 Boronia Road Pty Ltd as to which it was said: "Facilities to be repaid from sale of the projects in due course." The letter also contained the following observation in respect of Mont Albert Village Centre Pty Ltd that: "The facilities totalling $5.4m are less than the total projected cost of the project and ultimate funding needs will be reviewed with you from time to time as necessary." On 15 September 1989 Mr Samuel transferred his accounts to the Bank's Box Hill Regional Office, where Mr Colin Spradbury was the Regional Executive. Mr Spradbury delegated the day-to-day monitoring of the Samuel Group account to a manager of the Bank, Mr Phillip Austin. On 12 September 1989 Mr Samuel met Mr Austin, who is said to have remarked that Mr Samuel had an unusual arrangement with the Bank whereby interest was not paid on a regular basis but rather was capitalised and paid at the completion of each project. Under the management of Mr Warriker, the arrangements with the Bank continued. In April 1991, however, Mr Warriker was replaced by a new account manager, Mr Walton. Mr Samuel's recollection is that at their first meeting Mr Walton said "I am a cowboy and I am going to catch you property developers and show what sort of thieves you are". From that time, Mr Samuel says, it was made clear that the Bank wished to change the nature of its relationship with the Samuel Group of companies. At or about the end of 1991 Mr and Mrs Samuel retained Pitcher Partners, a firm of accountants, to formulate a proposal whereby the Samuel Group and three other groups of companies in which the Samuels owned less than 100% of the issued shares might be enabled to trade out of their financial difficulties. On 16 April 1992, Pitcher Partners wrote to the Bank a letter which included this passage in respect of some of the companies in the property group: "Property Companies The following is a summary of the situation relating to the four main properties, namely: Debt to Minimum Projected ANZ Value Net Rentals 1/2/92 to 31/12/95 $000's $000's $000's Mont Albert Village P/L9,000 4,670 1994 Projected 1,344 (3-7 Hamilton Street) net rental at 11% capitalisation 602 Whitehorse Rd P/L 3,970 3,970 Amount of loan- 1,486 (602 Whitehorse Road, estimate of value Mitcham) Edmic Investments P/L 5,894 3,460 1994 Projected 1,307 (27-31 Thornton Cres, net rental at Mitcham) 11% capitalisation 677 Boronia Road P/L 1,149 600 Estimate of value 169 20,013 17,700 4,306 In relation to all the ANZ debts outstanding, the amounts include a significant amount of capitalised interest. The proposals in relation to these properties and debts are as follows, namely:

1 All net rents on these properties are to be retained by the bank as "interest". The expected rentals are set out on the projected rental schedules. These schedules record projected net rentals from these properties through to 31 December 1995 of an estimated $4,306,000, assuming all the properties are held for that length of time. It needs to be stressed that the figures are NET after paying all unrecovered outgoings and other items such as maintenance, marketing costs, costs to complete, management and accounting costs. 2 The Samuels' responsibility is to ensure that the bank receives the total "minimum value" allocated to these properties of $12,7 million. Provided a total of $12,7 million is received (excluding rents), the Samuels (and all associated interests) are to be released from their responsibility for this segment of their debts. In the event that more than $12.7 million is obtained, this surplus is to be shared 75% to ANZ and 25% to the Samuels. Any allocation of surplus to the Samuels to be applied in reduction of their debts in the business and personal property companies until fully repaid. The structure of this part of the proposal is designed to ensure the Samuels work hard to achieve at least a minimum value for the properties, but at the same time give them an incentive to do much better than the minimum value. Of course, their share of the surplus goes to the ANZ Bank anyway and therefore there are no monies going out of the system. 3 In relation to 602 Whitehorse Road, there is litigation against the Victorian Government for failing to honour a lease agreement. In the event that damages are received from this litigation, this money is also to go to the ANZ as part of the $12.7 million. In relation to this action, the bank will need to fund the legal cost which will necessitate the bank's lawyers examining the matter to form a view as to whether continuing the litigation is worthwhile. 4 Control of the properties is to remain with the Samuels and the bank is not to appoint agents. However, Pitcher Partners are to be given a monthly reporting role to the bank to keep the bank fully informed in relation to the management and control of the properties so that the bank can be satisfied that they are being managed and marketed expeditiously and to the bank's satisfaction. 5 The primary objective of managing these properties will be to maximise their sale value rather than maximising short term rental receipts. Obviously, the key issue here is rent free periods and free fit-outs, followed by higher rents, as compared to lower rents in the short term. Where fit-outs have to be provided, these will need to be funded out of net rentals or by the bank. Obviously, all rental proposals will be submitted to the bank with full details and a recommendation by this firm before any money is expended. 6 The cash flows of the four properties are to be pooled in terms of funding any cash outlays."

The letter then went on to formulate the following proposal in respect of companies in the business group: "A summary of the bank debt at the present time and the projected debt at 31 December 1992 is as follows: $000's Cash Current Projected Flow ANZ Debt ANZ Debt Reference 1/2/1992 31/12/1992 Kablan CF2 756 405 Actech CF3 1,130 1,023 Tamworth View CF4 74 59 Workout Ringwood - Gym CF6 60 33 Ledave - Residence CF7 200 192 15 Thornton Cres-Office 476 476 2,696 2,188 Again, the current ANZ debts include a substantial value of capitalised interest. The proposals in relation to the above business and personal property company debts are as follows, namely: 1 The Samuels are responsible to pay the entire current debt of $2,696,000 before they and all their associated entities receive a release from the bank in this area. 2 All debts are to attract interest at a rate of 10% per annum, except for the Actech debt. 3 In relation to the Actech debt, the amount outstanding far exceeds the value of assets in this entity and the business cannot earn sufficient to pay interest on the debt of $1,139,000, plus reduce the debt. Accordingly, it is proposed that this debt be interest free, but there is a requirement for it to be reduced by a minimum of $100,000 per annum. The offer by the Samuels to repay this entire amount very much represents an offer of "hurt" money by them. 4 Provided interest is paid on all the debts (except Actech) and the $100,000 per annum is paid by Actech there is to be no default on these loans, and they are not to be called up prior to 31 December 1995. 5 It is possible that the Thornton Crescent property will be sold to reduce debt. A mechanism needs to be agreed for the auction and sale of this property. The Samuels could then move their office into one of the adjoining Edmic offices or vacant buildings elsewhere. 6 The Kablan bank balance assumes that monies owing from Mont Albert Village of $410,000 and P S Balwyn of $189,000 are transferred. These amounts are still owing to Kablan for the construction of these buildings. The transfer of these monies is an important part of these proposals. Moneys are also still owing from the Orlando Lane property construction. 7 The bank is to be given all securities it requires in relation to all the business and personal property companies.

8 Pitcher Partners to provide the ANZ with monthly reports in relation to all entities in this sub group. 9 As mentioned in previous reports Kablan may need a working capital facility." 4.7 Competing contentions as to the effect of the evidence relevant to the alleged agreement or estoppel On behalf of Ringrong, the indebtedness to the Bank of some companies in the Samuel Group is denied on the ground that the Bank resiled from funding arrangements to which it had earlier agreed or is estopped from asserting that those arrangements no longer obtain. As well, Ringrong has pointed to the difficulties which the Bank has conceded it has had in arriving at a reconciliation of the various accounts which yields a single, final amount in which it asserts the Samuel Group is indebted to it. Ringrong concedes that some companies in the Group, particularly those in the business group are indebted to the Bank but contends that the Bank has not discharged the onus of proving in sufficient detail the precise amount owed to it by each of those companies. Counsel for Ringrong have pointed to a letter from the Bank to Mr Samuel dated 24 July 1990 and submitted that although the letter purports to confirm details of borrowings and their terms and conditions, the Bank was attempting to strengthen its position and impose new and further terms upon the existing arrangements. Mr Samuel has deposed that he did not sign an acknowledgment of the letter, and contends that, as a result, the proposed new terms were not accepted by him as binding the Group. The Bank, on the other hand, asserts that it is able to rely on the strict terms of the various loans and other forms of financial accommodation, which entitle it to repayment before the land or project which had been the subject of a particular advance had been fully developed or sold. In particular, the Bank disputes the existence of any term or condition of its arrangements with the Group which precluded it from making a demand for repayment before realization of a particular property or project. In the alternative, the Bank argues, if it does remain bound by a condition or estoppel of the kind for which Ringrong contends, the restriction on its ability to call up the advance enures only for the benefit of companies in the property group. The affidavit of Mr Samuel sworn 6 November 1992, the letter from the Bank dated 30 March 1989 and other documents are said to support this alternative proposition. The Bank points, for example, to its letter of 30 March 1989, which commenced with these paragraphs: "Following our recent discussions, I confirm the following increased facilities: Edmic Investments Pty Ltd Overdraft $ 100,000 (- $270,000) Commercial Bills $5,000,000 (+ $370,000) $5,100,000 The $100,000 increase has been approved in respect of fit out costs incurred with recent lettings. 602 Whitehorse Road Pty Ltd Commercial Bills $2,950,000

An increase of $150,000 has been approved in respect of the proposed refurbishments to the company's Mitcham property. 677 Boronia Road Pty Ltd Overdraft $ 125,000 Commercial Bills $1,900,000 (+ $375,000) $2,025,000 On our calculations, the $375,000 increase in Commercial Bill facility plus the $556,000 funds currently held on term deposit should enable completion of the projects at 677 and 679 Boronia Road. Facilities to be repaid from sale of the projects in course. Advanced Concrete Technology Pty Ltd Overdraft limit $300,000 has been formalised, in effect, an increase of $200,000. Mont Albert Village Centre Pty Ltd Overdraft $ 300,000 Commercial Bills $5,100,000 (+ $1,900,000) $5,400,000 Increase of $1,900,000 is in respect of the higher cost of this project following commencement delays and increase in its size. The facilities totalling $5.4m are less than the total projected cost of the project and ultimate funding needs will be reviewed with you from time to time as necessary."

It is only in respect of 677 Boronia Road Pty Ltd, a property company, that it is stipulated that "facilities [are] to be repaid from sale of the projects in course". 5. RINGRONG'S LIABILITY FOR DEBTS INCURRED BY HERMAS The Bank further contends that if there had been an arrangement between the Bank and the Samuel Group property companies to the effect contended for by Ringrong, that arrangement cannot have legal operation in relation to the loan to Hermas. Hermas no longer has the land at 28 Maroondah Highway as a result of separate Supreme Court proceedings between the parties as to the contract of sale and the Bank argues that it cannot be required to wait for the sale of land in which no member of the Samuel Group any longer has an interest. In his affidavit of 6 November 1992, Mr Samuel denies that Hermas is indebted for the amount claimed or at all. He further deposes that no statement had been received from the Bank since July 1991, and that neither he nor Hermas ever received proper accounting from the Bank as to how the amount claimed had been calculated. In his affidavit sworn 6 October 1991 in support of the Bank's motion filed 7 October 1992, Mr Walton deposes that Hermas owed the Bank $1,389,498.68 as at 12 August 1992. Mr Samuel acknowledged in his affidavit of 12 October 1992 that Hermas had borrowed from the Bank "the majority" of the deposit of $1 million on the purchase of the property at 28 Maroondah Highway under the contract of sale from Zagame dated 25 July 1989. However, he asserted in his next affidavit sworn 15 October 1992 that it was not until a few days before Hermas entered into that contract, and well after 6 June 1989 when the cross deed was executed, that the Bank was advised of the proposed purchase. The liability of Hermas to the Bank was the subject of a separate, specific proposal by Pitcher Partners in their letter to the Bank of 16 April 1992 from which extracts related to other companies in the Samuel Group have been set out earlier in these reasons. Pitcher Partners' proposal in respect of Hermas was: "Hermas Pty Ltd This property is located at 28 Maroondah Highway, Ringwood and is the property in which the Workout Ringwood Gym is located. There are other tenants in this property. The current debt to ANZ is $1,060,000, with the projected debt at 31/12/1992 (refer cash flow 12) being $907,000. The reduction arises from the net rents received from this property. However, you will be aware that the bank's advance was to pay the initial "deposit" on this building and there is still $4 million owing to the vendor. The repayment of this $4 million is overdue and there is litigation between the vendor and the Samuel interests. Because of the litigation with the vendor in relation to the unpaid purchase consideration, there is complete uncertainty in relation to any ongoing tenure for the Workout Gym. Proposals in relation to this Hermas property are as follows, namely: 1 The bank to retain all net rentals and any cash that can be salvaged out of the litigation with the vendor. There is also a suggestion of professional negligence from former legal advisors. 2 The Samuels have personally guaranteed the vendor in this matter. In the event that the Samuels have to seek protection under Part X of the Bankruptcy Act, the bank's agreement to support the Samuels in any such proposal is requested. The benefit to the bank of this support would be to maintain these overall proposals in place." The Bank argues that, whatever be the correct analysis of Ringrong's liability as guarantor of the debts of other companies in the Samuel Group, the inference is irresistible that Hermas has at all times been indebted to the Bank for an amount in excess of, or close to $1 million. Moreover, the evidence discloses that the litigation between the vendor, Zagame, of the property at 28 Maroondah Highway Ringwood, and Hermas as purchaser was settled on terms that the contract be rescinded. It is from this premise that the Bank contends that as Hermas no longer had any interest in the subject land, any agreement under which the Bank would stand out of its money until the development and sale of the property had been completed, has long since ceased to avail Hermas, and, through it, Ringrong. 6. DOES THE BANK HAVE STANDING TO APPLY FOR WINDING UP OF RINGRONG? In the light of the history and the competing contentions which have been canvassed above, two questions have to be answered in order to determine whether an order should be made that Ringrong be wound up. The first is whether the Bank has standing to make the application as a creditor of Ringrong. Since this application was filed on 17 September 1992, that is before the coming into force of various provisions of Act No 210 of 1992 (the Corporate Law Reform Act 1992), s 1383 of the Corporations Law has the effect that Part 5.4 of the Corporations Law as in force before 23 June 1993 as part of the "old winding up law" continues to apply for the purpose of determining this application. Section 462 of the old winding up law provides, so far as is relevant: "(2) Subject to this section, any one or more of the following may apply for an order to wind up a company on a ground provided for by subsection 460(1) or section 461: (a) the company; (b) a creditor (including a contingent or prospective creditor) of the company; (c) a contributory; (d) the liquidator of the company; (e) the Commission pursuant to section 464 or 453; (f) an official manager of the company appointed under Part 5.3; (g) a person (other than the Commission) who has been granted leave under section 453; or (h) the Insurance and Superannuation Commissioner appointed under the Insurance and Superannuation Commissioner Act 1987. ... (4) The Court shall not hear an application by a person being, or persons including, a contingent or prospective creditor of a company for an order to wind up the company unless and until: (a) such security for costs has been given as the Court thinks reasonable; and (b) a prima facie case for winding up the company has been established to the Court's satisfaction. (5) Except as permitted by this section, a person is not entitled to apply for an order to wind up a company." If the Bank has a valid right to enforce the cross deed of covenant against Ringrong it is at least a contingent or prospective creditor and so within s 462(2)(b). The basis on which Ringrong claims not to be liable on the cross deed is that its execution of that document was solely in consideration of the provision to it of an overdraft facility up to a limit of $75,000 which was never made available. To make out that contention Ringrong has to persuade the court first that consideration was not imported by its execution of the cross deed as an agreement under seal. To that end Counsel referred to the proposition in Halsbury 4th Edn Vol 12 p 506 that certain documents, although sealed, are not deeds including "an agreement signed by directors and sealed with the company's seal". In support of that proposition Halsbury cites Solvency Mutual Guarantee Co v Froane (1861) 7 H & N 5. It is by no means clear from a reading of that authority, at least in the version preserved in the English Reports (158 ER 369), that it supports the proposition for which it is cited by Halsbury. It is not cited for that or any other proposition by Norton on Deeds 2nd Edn (1928). However even accepting the proposition in the terms formulated by Halsbury, I am not persuaded that it applies to the present cross deed of covenant which is referred to throughout its text as "this Deed of Covenant" and which is not signed by Mr and Mrs Samuel on behalf of 901 Whitehorse Road Pty Ltd as Ringrong was then known. Their signatures appear only as those of the director and secretary in whose presence the common seal of the company was affixed in accordance with its articles. Furthermore, the deed was executed twice by 901 Whitehorse Road Pty Ltd, once apparently by way of binding itself in its own right. Secondly as recited in the attestation clause it was "EXECUTED by 901 Whitehorse Road Pty Ltd in its capacity as trustee of the 902 Whitehorse Road Property Investment Trust". That second execution was apparently in compliance with a clause in the "parent" cross deed of covenant dated 10 May 1988 which corresponded with cl 24 of the cross deed of 6 June 1989 which is in these terms: "That if any further or additional trusts are created for Michael Samuel or Edna Samuel or for any Customer or for any child, spouse, grandchild, lineal descendants or remoter issue of the said Michael Samuel or Edna Samuel or if a trust is created under which any of the Customers hereto have or may be entitled to a beneficial interest thereunder then the Bank may require that the trustee of any of the aforesaid trusts execute and give to the Bank a Deed of Covenant in the form or to the effect of this Deed of Covenant in respect of the indebtedness to the Bank of each of the Customers and also in respect of the indebtedness to the Bank of such trustee and upon execution of such Deed of Covenant such trustee shall for the purposes of this Deed of Covenant be deemed to be a Customer and the provisions of this Deed of Covenant shall extend and apply to the indebtedness of such trustee to the Bank in like manner in all respects as if the name and address of such trustee and particulars of the relevant trust or trusts had been set forth in the Schedule hereto as one of the Customers." The indications to which I have referred suffice to show that the cross deed of covenant was intended to be finally executed by Ringrong as its deed. As well, the deed or a counterpart was apparently delivered to the Bank. No particular technical form of words or acts was necessary to render the instrument the deed of the party which had executed: Macedo v Stroud [1922] 2 AC 330 at 337 citing Blackburn J in Xenos v Wickham LR 2 HL 296 at 312. For these reasons I am satisfied that Ringrong is bound by the cross deed of covenant even if no consideration passed from the Bank to it to support the agreement embodied in the deed. Even had I not been compelled to the conclusion just expressed, I would have held Ringrong to be bound by the cross deed because I consider that the Bank provided adequate consideration for the obligation thereby undertaken. That consideration was identified in the prefatory paragraph to the cross deed in these terms: "IN CONSIDERATION of all or any loans advances credits or banking accommodation whether made created or given on the signing hereof or that may hereafter be made created or given in its discretion by AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED (hereinafter called "the Bank") to for or on account or at the request of all or any one or more of the persons companies partnerships and firms whose names and addresses are set forth in the Schedule hereto on private joint or partnership account whether by allowing them or any one or more of them to overdraw any account or accounts or by paying or discounting Bills of Exchange or Promissory Notes or by any other means whatsoever and/or of forbearance on the part of the Bank to immediately demand and sue for payment of any moneys now owing to the Bank by all or any one or more of the said persons companies partnerships and firms each of the undersigned (hereinafter called "the Covenantor") DOTH HEREBY severely and as a separate and independent agreement binding the Covenantor AGREE with the Bank in manner following that is to say ...." Clearly loans or further advances were made to other "customers" in the Samuel Group after the execution of the cross deed as contemplated in that recital. Nor were all of those loans or further advances made to companies in the property group which, it has been contended, were the beneficiaries of the Bank's alleged agreement, discussed below, to capitalize interest, defer repayments and make further advances until the relevant property had been sold. At least Advanced Concrete Technology Pty Ltd and Fifteen Thornton Crescent Pty Ltd from the business group were provided with further loans or extensions of existing loans after 6 June 1989. Moreover, the suggestion that Ringrong's being bound to the cross deed was only in consideration of financial accommodation to Ringrong itself is contradicted by the fact that the cross deed of 6 June 1989 was also executed by Samuel Engineering (Vic) Pty Ltd notwithstanding that the same company in its capacity as trustee of the Michael Samuel Family Business Trust was already named as a customer in the First Part of the Schedule to the cross deed. In any event, consideration did move not only from the Bank to third parties at Ringrong's request, but directly to Ringrong itself. That consideration was in the form of the Bank's promise made in or shortly before March 1989 to provide an overdraft to 901 Whitehorse Road Pty Ltd, as Ringrong was then known. On the view which I take it is immaterial whether the Bank ever fulfilled that promise or whether it was conditional on 901 Whitehorse Road Pty Ltd's assuming the liability to the Bank of Mitcham Leisure Pty Ltd. The Bank's promise was either conditionally or unconditionally enforceable upon execution of the cross deed and if Ringrong had become entitled to, but not been provided with, the overdraft facility, it would have had an action in damages against the Bank. It is not necessary, in the light of the view just expressed, to reach a conclusion on whether the promised overdraft was to eliminate the Mitcham Leisure liability or was to increase Ringrong's indebtedness to the Bank above and beyond the amount of the liability of Mitcham Leisure which was to be assumed. However, on balance I am persuaded that the provision of the facility to Ringrong was conditional on the extinguishment of Mitcham Leisure's debt to the Bank. On the transfer of the gymnasium business, Mitcham Leisure Pty Ltd became, as I apprehend, a mere "shell", so it was essential for the Bank to have its liability of about $75,000 extinguished or taken over by another member of the group with some prospects of repaying the debt. There was nothing to suggest that the gymnasium business would generate a significantly greater cash flow under Ringrong's ownership than it had when conducted by Mitcham Leisure. I therefore consider it more likely than not that the Bank required the Mitcham Leisure overdraft, which had apparently been provided to meet the operating expenses of the gymnasium, to be extinguished before making available a further accommodation to meet ongoing expenses of the same kind. This conclusion is consistent with the Bank's diary note of 10 August 1989. Nor is it contradicted by the later diary notes of 17 October 1989. The effect of those diary notes is that the liability of Mitcham Leisure which, to that point was being progressively repaid by distributions from Ringrong, was to be immediately extinguished by conversion to a fully drawn loan account in the name of "Workout Ringwood". That fully drawn account in turn was to be repaid over three years after which "Workout Ringwood" would be entitled to an overdraft facility similar to that previously enjoyed by Mitcham Leisure. This analysis of the arrangement is supported by the acceptance by Mr Samuel under cross-examination that the amount of the proposed additional overdraft to Ringrong was also to be $75,000. If the analysis which I favour is rejected, there is no explanation in the evidence for the coincidence in amount between the existing overdraft of Mitcham Leisure and the proposed additional facility for Ringrong. For these reasons, I conclude that at the date of its application to this court, the Bank was at least a contingent creditor of Ringrong. In all the circumstances of the case, including those discussed below, in the event that s 462(4) of the old winding up law applies because the Bank was then a creditor only because Ringrong's was a contingent or prospective debt, it is a proper exercise of the court's discretion to dispense with the provision by the Bank of security for costs and to proceed with the hearing of the application.

7. HAS THE BANK PROVED RINGRONG'S INSOLVENCY? On an application under s 460 of the old winding up law, the court may order the winding up of a company that is unable to pay its debts. The inability of a company to pay its debts is not defined under the old winding up law or the provisions of the Corporations Law applicable to it. On the authorities as collected in McPherson The Law of Company Liquidation 3rd Edn pp 54 and 55 the requisite inability may comprehend an excess of liabilities over assets or an inability to meet current demands. Thus, because the Bank, in the course of the hearing, disavowed any reliance on the statutory demand which it had served on Ringrong on 17 August 1992, it bore the onus of proving on the balance of probabilities that Ringrong is insolvent, either in the strict sense that its liabilities exceed its assets, or in the commercial sense that it is unable to meet its debts as they fall due. 7.1 Is Ringrong insolvent irrespective of the cross deed? Given the state of its balance sheet as at 1 June 1993 and on the assumption that, as it has not carried on any trading activity since in or about July 1992, there has been no significant alteration in its assets and liabilities since 1 June 1993, the answer to this question turns solely on the efficacy of the forgiveness of the debt of $45,175 due from Ringrong to Mr and Mrs Samuel. There is no evidence that the forgiveness was ever embodied in a deed and Mr Samuel conceded under cross-examination that Ringrong gave nothing in return for being released from its debt. Accordingly, I uphold the submission of Counsel for the Bank that the forgiveness of the debt owed to the Samuels, being unsupported by any consideration, was ineffectual at law or in equity. As the learned authors of Chitty on Contract 25th Edn Vol 1 put it as p 811 citing Pinnel's Case (supra), amongst other authorities: "The employment of a sealed instrument [of release] dispenses with the necessity for consideration. But a mere parol release, whether oral or in writing, without valuable consideration amounts to nudum pactum and is normally insufficient to effect a discharge either at law or in equity." Although the conclusion just reached has the consequence that Ringrong is insolvent in the strict sense, I would not have based a winding up order on that insolvency without giving Ringrong an opportunity to make effectual the forgiveness of the debt by Mr and Mrs Samuel by procuring from them a release under seal. However, for reasons which are outlined below it is unnecessary to afford Ringrong that opportunity. 7.2 Is Ringrong insolvent by reason of its liability under the cross deed? There is a general principle that a winding up order will not, as a matter of discretion, be made on the basis of a debt which is bona fide disputed, provided that the dispute is based on some substantial ground. In Re K L Tractors Ltd [1954] VLR 505, at 509 O'Bryan J said: "The general proposition that a winding-up order will not be made on a debt that is bona fide disputed by the company must be read subject to this that the Court must see the dispute is based on a substantial ground. It is not enough to show simply that the company believes it has a defence or a set-off or even that it has obtained leave to defend the action for enforcement of its alleged debt ...; it must also show that its dispute is based on a substantial ground." That passage was approved by Kaye J in Re Convere Pty Ltd [1976] VLR 345, where his Honour went on to observe, at 350: "But to constitute a relevant consideration the debt must be disputed on a substantial ground and it is for the company to show that the dispute is based on a substantial ground." The court has a discretion as to how far it should go towards resolving the dispute in order to see whether or not the company should be wound up. In Re QBS Pty Ltd [1967] Qd R 218 at 255 Gibbs J said: "The court hearing the petition can go into evidence to consider whether or not the dispute is bona fide, i e, whether the claim is disputed on some substantial ground... It seems to me that in every case it becomes necessary for the court to exercise its discretion as to how far it will allow the question whether or not the dispute is bona fide to be explored. In some cases it may be very easy to decide this question on the petition and affidavits in reply. In other cases however it may be difficult to determine whether or not the dispute is bona fide without determining the merits of the dispute itself. In some cases convenience may require that the court decide the question whether or not the debt exists, but in other such cases it may appear better to allow that question to be determined in other proceedings before the petition for winding up is heard." The Privy Council in Bateman Television Ltd (in liquidation) and Another v Coleridge Finance Company Ltd [1971] NZLR 929 had to determine an appeal from the judgment of the Court of Appeal of New Zealand affirming the judgment of Macarthur J making winding-up orders. The disputed questions of indebtedness had been fully investigated before the learned trial judge. This statement of the principles governing the exercise of discretion by the trial judge was formulated at 932 by Lord Upjohn who delivered the advice of the Board: "In such cases the general rule is, no doubt, that no order will be made on a petition founded on such debts. But each case must depend upon its own circumstances and it is a question for the discretion of the Judge; a discretion to be exercised judicially, which is not open to review unless it is shown to be exercised on some wrong principle, or that the Judge relied on some fact irrelevant for the purpose, or omitted consideration of a relevant fact or finally that he was wholly wrong. As their Lordships have already pointed out, the disputed questions of indebtedness were fully investigated in a lengthy hearing before the learned Judge with oral and documentary evidence and he held that both the appellant companies were insolvent. Their Lordships add the very important fact that from start to finish neither side ever suggested to Macarthur J that the petitions should be dismissed or even stayed on the ground of disputed debts pending the bringing of appropriate proceedings at law to determine these matters." The propositions quoted above from Re QBS Pty Ltd (supra) and Bateman Television Ltd v Coleridge Finance Co Ltd (supra) were later affirmed by the Privy Council in Brinds Limited v Offshore Oil NL (1986) 60 ALJR 185, after which their Lordships continued, at 188: "In the instant case, having regard to the nature of the dispute and the course which the proceedings took, it was almost inevitable that the trial judge should determine whether the debt was repayable on demand or only on 12 months' notice. As the Full Court observed, the question whether the debt was due and payable was ... inextricably interwoven with the questions of the motives and purposes of Adler, and in turn, with the bona fides of Macintosh. ... Accordingly we are of opinion that once all the evidence was in, for the learned Judge to have then dismissed or stayed the petition would have been a wrongful exercise of discretion. In reality he had no alternative but to proceed to determine the matter. To do otherwise would have caused injustice to both parties."

For Ringrong it is contended that its indebtedness to the Bank under the cross deed is the subject of a bona fide dispute on two grounds. The first is that it did not become bound by the cross deed because the requisite formalities were not observed or the Bank did not provide Ringrong with the overdraft facility on which its entry into the cross deed was conditioned. For the reasons indicated above in discussing whether the Bank has established standing as a creditor, that ground cannot avail Ringrong. It thus remains necessary to consider whether the Bank is precluded from relying on the cross deed by the agreement of the Bank not to demand repayment of principal or capitalized interest from any member of the Samuel Group until the relevant property or project had been fully developed and sold. Ringrong's related alternative contention is that the Bank brought itself within the doctrine of estoppel as expressed in the joint judgment of Mason CJ and Wilson J in Waltons Stores (Interstate) Ltd v Maher and Anor [1987-1988] 164 CLR 387 at 406 where it was stated: "The foregoing review of the doctrine of promissory estoppel indicates that the doctrine extends to the enforcement of voluntary promises on the footing that a departure from the basic assumptions underlying the transaction between the parties must be unconscionable. As failure to fulfil a promise does not of itself amount to unconscionable conduct, mere reliance on an executory promise to do something, resulting in the promisee changing his position or suffering detriment, does not bring promissory estoppel into play. Something more would be required. Humphreys Estate suggests that this may be found, if at all, in the creation or encouragement by the party estopped in the other party of an assumption that a contract will come into existence or a promise will be performed and that the other party relied on that assumption to his detriment to the knowledge of the first party." Ringrong advances the contention, not made in Bateman Television Ltd v Coleridge Finance Co Ltd (supra), that the resolution of the dispute which it has raised on those two, alternative, bases, should await the bringing of appropriate proceedings at law to determine it. However, even taking the view available on the whole of the evidence which is most favourable to the establishment of the agreement or the estoppel for which Ringrong contends, I have been constrained to reject this argument. If there was an agreement of that general kind, the deferral of liability to repay the Bank could not be regarded as extending to a time after which the relevant member of the Samuel Group had ceased to have any realizable interest in the land or other property concerned. I am also inclined to favour another implied limitation on the period of the deferral, namely that it could not enure for the benefit of the relevant member of the Samuel Group after the amount of advances made by the Bank in respect of a particular property or project together with capitalized interest had exceeded the reasonably realizable value of the property or project upon completion. On this analysis, Hermas, and through it Ringrong as guarantor, has become immediately liable to the Bank for close to or in excess of $1,000,000 in respect of the advance which provided the deposit for the purchase of 28 Maroondah Highway Ringwood. That is sufficient to demonstrate Ringrong's present insolvency. However, even if it were not, I regard that immediate insolvency as having been proved by the manifest inability of several companies in the business group to repay their current debts. That was conceded, at least in respect of Advanced Concrete Technology Pty Ltd, by Pitcher Partners in their proposal of 16 April 1992 which was apparently formulated on behalf of all companies in the Samuel Group. Moreover, since the hearing of the present application concluded, the Bank has on 24 May 1994 obtained judgment in the Supreme Court of Victoria against Mrs Samuel and Ledave Pty Ltd in the sum of $9,498,651.22 as sureties under the cross deed for, amongst others, Hermas. There must be added to these matters the concession by Mr McCoy, the accountant for the Samuel Group, who collaborated with Pitcher Partners in their proposal, that if the Bank were to call up the Samuel Group's total indebtedness, each company in the Samuel Group would be insolvent having regard to the likely realizable value of the Samuel Group's assets. Moreover, I am inclined to think that, even if it is still open to invoke the arguments based on the agreement or estoppel in respect of some companies in the Samuel Group, those arguments can afford no more than a set-off or counterclaim to each principal company to which they are available. As a guarantor, Ringrong cannot take advantage of a set-off or counterclaim which can be set up by a principal debtor; Indrisie v General Credits Ltd [1985] VR 251. For all of these reasons I consider that the Bank has succeeded in establishing to the requisite degree of satisfaction that Ringrong is insolvent having regard to its liability under the cross deed. 8. CONCLUSION For the reasons already indicated, I have concluded that the Bank, in case it was a contingent or prospective creditor at the date of its application, should be allowed to proceed with its application, and that it has discharged the onus of proving that Ringrong is insolvent. There being no other impediment to the exercise of the court's discretion under s 460 of the old winding up law, an order will accordingly be made that Ringrong be wound up.

I certify that this and the preceding forty one (41) pages are a true copy of the reasons for judgment of his Honour Justice Ryan

Associate: Date: Counsel for the applicant: Mr R Finkelstein QC with Mr D J O'Callaghan Solicitors for the applicant: Freehill Hollingdale & Page

Counsel for the respondent: Mr R Kendall with Mr A Panna Solicitor for the respondent: D E Phillips

Hearing dates: 10-11 May, 2-3 June, 29-30 June 1993