Spalla v St George Wholesale Finance Pty Ltd

ST GEORGE WHOLESALE FINANCE PTY LTD (ACN 001 834 886), ST GEORGE MOTOR FINANCE PTY LTD (ACN 007 656 555) and ANDREW STEWART HOME and ANDREW WILLIAM BECK

AND: ST GEORGE WHOLESALE FINANCE PTY LTD (ACN 001 834 886), and ST. GEORGE MOTOR FINANCE LIMITED (ACN 007 656 555)

ANTHONY PATRICK SPALLA, IRLMOND PTY LTD (ACN 006 313 870) (Receivers and Managers appointed) and APS (WHOLESALE) PTY LTD (ACN 062 248 962) (Receivers and Managers appointed)

THE COURT: 1 The first appellant Mr Anthony Patrick Spalla controlled the companies Irlmond Pty Ltd ("Irlmond") and APS (Wholesale) Pty Ltd ("APS") which conducted the Essendon Mitsubishi dealership. The first and second respondents (collectively referred to as "St George") provided finance for Essendon Mitsubishi by way of a floor plan. 2 Over the years the Spalla companies fell into substantial arrears in moneys due to St George. Following extensive negotiations in late 1998 and early 1999 St George on 12 February 1999 appointed the third respondent, Mr Andrew Stewart Home, and the fourth respondent, Mr Andrew William Beck, to be Receivers and Managers of the property of the Spalla companies. 3 The appellants claimed that the grounds relied on for the appointment did not exist. Their alternative case was that in the circumstances, having regard to the general course of dealing and in particular to an agreement said to have been reached in February 1999, St George was estopped from appointing receivers and managers and/or it would unconscionable for it to do so. The appellants sought declarations that the appointment was invalid and appropriate injunctions. St George brought a cross claim seeking declarations as to validity of the appointments and judgment for money claims. Finkelstein J dismissed the appellants' claims for relief and gave judgment for St George on the cross claim.

February 1994 arrangements 4 For some years up to 1993 the Spalla companies dealt with St George and incurred liabilities. The details of this are not relevant for present purposes. In February 1994 new arrangements were made with St George. 5 It is accepted that the terms of the facilities are to be found in or are constituted by the following documents: a bailment plan agreement with Irlmond dated 21 February 1994, a bailment plan agreement with APS dated 21 February 1994, a deferred payment agreement dated 21 February 1994, a demonstrator plan agreement dated 21 February 1994, a letter of offer dated 11 February 1994, a supplementary letter of offer dated 12 April 1994 and a deferred retail delivery agreement dated 21 February 1994. 6 The nature and effect of these facilities can be summarised as follows. The principal agreement is the bailment plan agreement between the first respondent ("St George Wholesale") and APS. By that agreement St George Wholesale agreed that APS could order new vehicles on behalf of St George Wholesale and that those vehicles would be bailed to APS. The letter of offer sets the limit of this facility at $3.5 million. Upon a sale of a vehicle the bailment plan agreement provided (by cl 17) that the purchase price (less commission) should belong to St George Wholesale and that APS must account for that money to St George Wholesale in specie. However, the letter of offer stated that "all vehicles on floor plan are to be paid out in full within 48 hours from the time of delivery to a customer". It is accepted that the provisions of the letter of offer override any inconsistent provisions in the bailment plan agreement. 7 The bailment plan agreement with Irlmond was in the same terms as the APS agreement. It was entered into to finance the purchase of used and demonstrator vehicles. According to the letter of offer, the limit on the facility for the purchase of used vehicles was $1.45 million and for demonstrator vehicles the limit was $350,000. 8 The deferred payment agreement related to the bailment plan agreement with APS. Under the terms of that agreement APS was obligated to pay St George Wholesale for vehicles that had been bailed to it forthwith upon those vehicles being delivered to a customer. However, it was understood that vehicles would be sold on terms where the purchase price was not payable on delivery. Accordingly, the deferred payment agreement provided that in respect of such sales, provided they were made to an approved customer, the payment of the price to St George Wholesale could be deferred until the customer paid for the vehicle or the expiry of thirty days from the date of the delivery of the vehicle to the customer, whichever first occurred. The letter of offer stated that the limit of the deferred payment facility was $800,000 which amount was to be deducted from the new vehicle facility limit. 9 St George took various forms of security in respect of the obligations owed to them under the facility agreements. These included debentures granted by Irlmond and APS. In addition, by an agreement dated 23 February 1994, Mr Spalla and Anstella Nominees Pty Ltd (Anstella) guaranteed the obligations of Irlmond and APS. 10 By the Sales Tax Assessment Act 1992 (Cth) sales tax is imposed on the last sale by wholesale of all goods manufactured in or imported into Australia. The legislation contemplates that the excise will only be paid on one dealing with new goods. Speaking generally, it is imposed only on the last wholesale sale of new goods. To accommodate sales tax obligations, the arrangements made had the result that title in new vehicles would pass from St George to APS to Irlmond to the customer. With used vehicles, including trade-ins, title did not pass through APS but went straight from St George to Irlmond and thence to the customer. Thus APS was the company which incurred sales tax obligations.

Subsequent dealings in 1994 11 Almost immediately Irlmond was operating in excess of the facility limits. It was also, in the words of the learned trial judge, "desperately short of working capital". It decided to make use of the proceeds received on the sale of vehicles as part of its working capital instead of remitting that money to St George. It used the proceeds in its business for longer than the 48 hours permitted by the letter of offer. Moreover, APS allocated new vehicles that had been sold and paid for to the deferred payment facility thereby effectively obtaining a further credit for thirty days. An audit conducted by St George in July 1994 disclosed that Irlmond had received approximately $1.15 million from the sale of vehicles which had not been paid to St George. After allowing for certain credits the amount outstanding was around $934,000. Moreover, APS could not satisfy a sales tax liability of about $450,000. An arrangement had been entered into to pay this debt by monthly instalments. 12 On 1 August 1994 Mr Spalla met with St George executives. They told him that St George intended to serve a notice of default, but that it would not be acted upon. Mr Spalla was told there would be a reconciliation of all amounts outstanding under the deferred payment facility. This involved writing to all deferred debtors to ascertain the extent of their debt to Irlmond. Also Mr Spalla was told that St George staff would attend at the dealership to monitor sales and to collect incoming funds. It was suggested to Mr Spalla that he should seek an alternative financier. Notwithstanding claims in evidence by St George executives Messrs Hiller, Bell and Phillips to the effect that St George acceded to Mr Spalla's protest at contact being made with deferred debtors, letters were in fact written on 10 August to such debtors. The result of those enquiries disclosed that Irlmond had received approximately $550,000 from deferred delivery customers but had not passed on that amount to St George. On 1 August 1994 notice of default was served on Irlmond. A few days later St George made arrangements for their employees to attend at the dealership each day to review its operations, to prepare delivery book and stock reconciliations and to collect cheques for vehicles that had been sold and paid for. 13 In August 1994 St George agreed to extend the time which Irlmond had to pay out the price of vehicles from 48 hours to 72 hours. This came to be referred to as the "three day float" or "three day roll". From 23 August a St George employee attended the dealership each afternoon to collect cheques due to St George. Weekly audits of vehicles were undertaken. However by the end of 1994 St George would conduct the only two stock audits each month, one for new vehicles and one for used vehicles. In its books St George treated Spalla companies account as "an impaired asset", that is to say an account with a client that was unlikely to be able to pay all of its debts in full.

1995 to early 1998 14 Throughout this period the Spalla companies were still short of working capital. They continued to make use of the proceeds of the sale of motor vehicles for operating capital rather than paying those funds to St George. To make it appear that money was not due to St George the following practices were adopted. As had occurred previously, vehicles that had been sold and paid for were allocated to the deferred payment facilities. Further, instead of making payments for other vehicles within the 72 hour period, Irlmond would often draw cheques and retain them until the monthly audit. When the audit took place Irlmond would inform the auditors, Coopers & Lybrand, that the cheques for those vehicles were "in transit" when they were in fact retained in a drawer at the dealer's premises. The cheques would be forwarded to St George shortly after the audit. Any amount found due to St George as a result of the audit would be paid within five to ten days. Another practice adopted was to delay the delivery of vehicles, and therefore the receipt of funds, until shortly after the monthly audit.

1998 15 Throughout 1998 St George's dissatisfaction with the Spalla companies increased, although there was internal disagreement as to what steps should be taken. Mr Bill May, the Sydney-based head of St George's Loan Management Unit on 19 March 1998 wrote to Mr Hiller, stating that Irlmond was "to be given six months to sell the dealership or alternatively automotive finance is to revert within thirty days to explain why this should not be the case". Mr Hiller, also in Sydney, and those responsible for the account in Melbourne demurred. Mr Hiller responded to Mr May by indicating that the Irlmond account was profitable producing $10 million of retail business each year and that he did not support an "exit strategy". But Mr May wrote again that if the Risk Board of St George said that the facility should be terminated it would be left to "the Automotive Division to appeal that decision if they so wish". 16 In fact Essendon Mitsubishi traded profitably for the year ended 30 June 1998 and earned approximately $431,000 before tax, a big increase on the previous year's profit of some $40,500. However, the learned trial judge observed that "the fact that the business was trading profitably did not alleviate its cash shortage problems". 17 In July 1998 APS had incurred a sales tax liability for $547,272 which it was unable to pay. An accountant wrote to the Australian Taxation Office ("ATO") on behalf of APS offering to pay the sales tax by monthly instalments of $50,000. Although there was no response to this offer from the ATO, APS began paying the instalments. A total of five were made. As at 25 February 1999 the balance outstanding including interest and late penalties was $321,078.74. On that date the ATO served on APS a notice under s 74 of the Sales Tax Assessment Act 1992 requiring payment of that amount. St George was not told that there had been a failure to pay sales tax in July 1998, or that the tax was being paid by instalments. 18 From August 1998 the monthly audits which had been conducted by Coopers & Lybrand were taken over by St George itself and carried out under the supervision of Mr Daniel Cahill. 19 Audits conducted by Mr Cahill on 24 August, 15 September and 8 October showed a deteriorating position in the amounts overdue by the Spalla companies for payment. By 22 October $575,000 was still outstanding. This caused concern within St George. The view was expressed that Irlmond should take an equity partner or obtain another financier, possibly Capital Finance Ltd ("Capital"). 20 About the end of October Mr Spalla met with Mr Beed of St George. Mr Beed said to Mr Spalla during the meeting words to the effect "we have to come clean and tell Sydney the truth, but you will have to go somewhere else". 21 By now it was the firm view of most of the St George executives connected with the dealership that the continuation of the facilities represented an unacceptable commercial risk for St George. In part this was due to the fact that the dealership was experiencing a significant deterioration in sales, of the order of 20 per cent. 22 Mr Spalla approached Capital to see whether it was willing to provide finance. At the same time he instructed Mr David Still, the dealership's internal accountant, to discontinue the practice of allocating vehicles that had been sold and paid for to the deferred payment facility. A result of this instruction was that the audit conducted on 13 November disclosed that in excess of $2 million was owing to St George, apart from the debt due under the deferred payment facility which was around $1 million. By reason of the size of the debt that was owed to St George it was not paid out within seven to ten days of the audit as was the usual practice. However the amount was paid by the time of the December audit. 23 Failure to pay the debt within a short period after the November audit resulted in service on 25 November 1998 of notices of demand upon Irlmond and APS under the bailment plan agreement and the two debentures. Each demand required immediate payment. The amounts were APS $947,781.82 Irlmond $100,436.94 There was disputed evidence as to what was said when Messrs Phillips and Beed served the demands on Mr Spalla. However Mr Beed accepted in cross‑examination that Mr Phillips had conveyed to Mr Spalla the idea that service of the documents was a formality and that he did not have to worry about the demands at least for the time being. His Honour said: "It is not possible to conclude with any certainty what was said to Mr Spalla when the notices were served. Taking St George's case at its highest, it seems to me that Mr Spalla was informed that if the amount of indebtedness specified in the notices was paid, the notices would not be acted upon. And, as it turned out, the amount due to St George Wholesale was paid." 24 Discussions then took place between Mr Spalla and Mr Phillips as to the possibility of Capital taking over financing of the dealership. Within St George it was thought it would be necessary to release part of its debt to make the account sufficiently attractive for Capital. The suggestion was raised that St George would release $1.2 million of the amount due to it if Mr Spalla personally undertook to pay St George $700,000 by instalments. 25 Sales declined in December. The audit on 22 December disclosed "funds in transit" to be somewhere between $1.5 and $2 million. In addition, apart from money due under the deferred payment facility, St George was owed a further $1.2 million of which approximately $900,000 was overdue for payment. 26 On 14 January 1999 Capital refused Mr Spalla's application to finance the dealership. He told St George of this on 20 January and a meeting was arranged for 25 January. In the meantime another audit was conducted on 20 January. Apart from funds in transit and the amount to become due under the deferred payment facility, this audit disclosed that St George was owed $1,732,949 of which approximately $1.1 million was overdue for payment. 27 The meeting on 25 January was attended by Mr and Mrs Spalla, Mr Still, Mr Phillips and Mr Cahill. Mr Phillips told Mr and Mrs Spalla that there were only three options available, an equity contribution by the Spalla family or an equity partner, sale of the business, or appointment of a receiver. Mr Phillips told Mr Spalla that he could be given three weeks to attract equity or sell the business. Mr Spalla asked for time to consider the options and to have a meeting with Mr Hiller. Those requests were agreed to. 28 Mr Spalla approached Capital again. About the end of January Capital told Mr Spalla that it might be interested in providing finance if additional security were provided. 29 At 1 February a considerable amount of the indebtedness due at the 20 January audit remained unpaid. Excluding the debt due under the deferred payment facility the amount unpaid was approximately $910,000. 30 On 2 February Mr and Mrs Spalla and their accountant Mr Cummings met with Messrs Phillips and Beed. Mr Cummings said that it appeared to him that the Spalla companies had a deficiency of liabilities over assets of at least $2.2 million. Sale of the business or appointment of a receiver were discussed. Mr Spalla asked for sixty days in which to sell the business and Mr Phillips' response was that he would be given seven days to advise of his proposed strategy. Mr Spalla said in relation to Capital that: "As there was no additional security with St George why should he provide security to them." 31 There was also a discussion about the possibility of withholding payments from other creditors of the Spalla companies, and in particular the ATO, to maximise the return to St George. At the conclusion of the meeting it was agreed that the parties would meet again on 8 February to discuss the position and come up with a proposal. 32 On 4 February Mr Cahill attended to conduct a further audit. Apart from funds in transit and any amount that would fall due under the deferred payment facility, the indebtedness to St George was approximately $1.78 million. Of this amount approximately $1.188 million was overdue for payment. Mr Still explained that the total debt comprised approximately $400,000 in respect of vehicles that had been sold since the last audit and the balance represented amounts that had been included in the December and January audit. 33 During the course of the audit Mr Still provided Mr Cahill with a list of thirteen new vehicles that had been sold and paid for. St George was owed $310,458.41 in respect of those vehicles. A cheque for that amount was given to Mr Cahill on the following day, Friday 5 February. The cheque was dated 4 February. When the cheque was given to Mr Cahill it had not been counter-signed by Mr Spalla. Mr Cahill took the cheque to Mr Spalla for his signature. There was conflicting evidence as to what was said when the cheque was signed. His Honour accepted Mr Spalla's version that he told Mr Cahill not to bank the cheque because the bank, National Australia Bank Limited ("NAB"), was not in funds. He requested Mr Cahill to speak to him before presenting the cheque on the following Monday 8 February to ascertain whether there were funds in the account. His Honour found that the cheque was delivered to Mr Cahill and accepted by him on the basis that it would not be presented for payment on 5 February and would not be presented on 8 February unless Mr Spalla informed St George that there were funds in the account. 34 Also at the 4 February meeting St George requested that Irlmond open an account with St George Bank and deposit money that was due to Irlmond in that account. The account was opened that day or the next and deposits were made. 35 A meeting was held on 8 February attended by Mr and Mrs Spalla, Messrs Hiller, Phillips and Cahill from St George and Mr Gary Moore from Mitsubishi Motors. Mr Moore explained that if a receiver were appointed Mitsubishi Motors would allow 30 days for the business to be sold before terminating the franchise. There was then some discussion concerning the level of debt to St George. Mr Spalla said he thought it was of the order of $2.25 to $2.3 million. Mr Spalla then submitted a written proposal that he would pay $700,000 to obtain a release of all indebtedness not exceeding $1.55 million on the basis that the bailment agreements would remain in place for 120 days by which time the balance of the debt would be paid. This proposal was rejected. Mr Hiller said that St George might write off $1.15 million and advance $400,000 to the dealership if Mr Spalla agreed to pay $700,000 to St George. Mr Hiller said St George might agree to allow Mr Spalla 30 - 45 days to find an alternative financier. The cheque previously referred to was, according to Mr Spalla, discussed. He says that he was told that the cheque would be banked and he objected that there were still no funds in the account. It seems his Honour accepted Mr Spalla's version, notwithstanding that the St George witnesses denied the cheque was discussed. 36 Irlmond's solvency was discussed. Mr Spalla told the meeting that Irlmond was "technically insolvent". He accused St George of allowing Irlmond to trade while insolvent. The St George representatives rejected the accusation. The meeting concluded in the early afternoon and it was agreed that it would resume at 5.00 pm. 37 After the Spallas left the St George office at the conclusion of the morning meeting, Mr May decided to present the cheque that afternoon with a request for a special clearance. His Honour said: "It was no doubt apparent to Mr May, and to everybody else from the St George companies, that the cheque would not be honoured. It is clear enough that Mr May intended to secure a dishonour of the cheque to assist the St George companies in enforcing their securities if that course was to be followed." 38 The meeting resumed at 5.00 pm, although without Mr May or Mr Moore. Mr Spalla again suggested that St George should forgive $1.55 million and he would put $700,000 into the business so that it could continue to trade. Mr Hiller rejected this proposal. Ultimately however a proposal was agreed upon as follows: "The St George companies would allow the dealership to continue to operate so that it could be sold, provided that the debt due to St George did not exceed $2.25 million and that Mr Spalla procured his family to make the payment of $700,000 to reduce that indebtedness. After taking into account the three day float of approximately $800,000, that would then leave a balance owing of around $750,000. That amount, with interest, was to be repaid to St George over seven and a half years. Acceptance of the proposal was subject to the approval of the St George directors." 39 A further meeting took place on the following day, Tuesday 9 February. In attendance were Mr and Mrs Spalla, Messrs Phillips and Cahill and Mr Mario Salvo, a friend of Mr Spalla. A new proposal was put forward by Mr Spalla. The dealership would pay $1 million to St George by two instalments, the first on 12 February and the second on 19 February. Mr Salvo said that he would advance the $1 million for these payments. In return St George would allow Mr Spalla 120 days to obtain a new financier and in the meantime the facilities would remain in place. If a new financier was found St George would be required to write off $1.15 million of the debt due to it. If the business was not refinanced within the 120 days St George would be free to take whatever step it desired to protect its interest. For their part Messrs Phillips and Cahill required that there be a significant degree of supervision and control over Irlmond to ensure that during the 120 day period all amounts due to St George would be paid within 48 hours of receipt. It was also proposed that if there was a "substantial breach" of these controls, St George would be entitled to act to protect its interests. Finally a further audit would be conducted the following day to confirm the actual state of the indebtedness. After the meeting Mr May was asked to give his approval to the proposal. He did so late on 9 February subject to certain conditions, one of which was that the indebtedness to St George did not exceed $2.238 million. 40 On 10 February the Spallas and Mr Salvo met with Mr Phillips. He told Mr Spalla that the proposal discussed the previous day was acceptable to St George provided certain conditions were satisfied, including the condition that the indebtedness did not exceed $2.238 million. At the time of the meeting Mr Cahill was conducting an audit, the result of which was not then known. Mr Spalla told Mr Phillips that in his view it was likely that the indebtedness was as high as $2.4 to $2.5 million. Mr Phillips said that if the debt did exceed $2.238 million receivers would be appointed. 41 Mr Cahill's audit was completed on the following day 11 February. During the course of this audit Mr Cahill discovered what he described as "discrepancies" in some of the documents that he was examining. This discovery led him to look more closely at the vehicles that had been allocated to the deferred payment facility to ascertain whether any of those vehicles had been paid for. At this stage Mr Cahill identified sixteen vehicles which had been paid for but in respect to which no payments had been made to St George. The amounts involved totalled $422,463.49. As a result the total amount due to St George exceeded $2.8 million. Mr Cahill informed Mr Phillips of this who in turn telephoned Mr Spalla. Mr Phillips summarised the contents of this conversation in an email to Mr May in the following terms: "The crunch came when it was discovered that numerous DPF [deferred payment facility] creditors had paid but the funds were not forwarded to us. Tony claims to have no knowledge of this fact … ." 42 The meeting took place on 12 February between the Spallas and Messrs Cummings, Phillips and Cahill. There was a discussion about whether Mr Spalla would put further funds into the business. He said he would only do so if he was given a guarantee that the business would be allowed to continue to trade. No such guarantee was forthcoming. Mr Salvo then joined the meeting. He said he was no longer interested in putting any money into the business but he would purchase the business for $1 million subject to the approval of Mitsubishi Motors to a change of dealership and subject also to St George providing him with full plan facilities. The proposal required St George to write off $1.15 million and to come to some satisfactory arrangement with Mr Spalla concerning the balance of the debt. Messrs. Cumming, Phillips and Cahill left the room apparently to consider the proposal. When they returned about an hour later Mr and Mrs Spalla were advised that the receivers had been appointed to Irlmond and APS and that they were in attendance at the business premises. 43 Mr Cahill told Mr Phillips that they would probably find further outstanding amounts as they continued making enquiries. Mr Spalla's own assessment of $2.238 million did not include the $420,000 referrable to the sixteen deferred vehicles identified on 11 February. Thus on his own assessment the figure outstanding was $2.66 million.

Sales Tax 44 St George Wholesale relied on APS' failure to pay sales tax in the sum of $547,272.39 on 21 July 1998, of which $321,078.74 remained outstanding as at 12 February 1999 as an event which gave rise to the right to enforce the charge under clauses 8.1(a) and 8.2(i) of the APS debenture. When the receivers were appointed, the St George companies were not aware that a significant proportion of the July sales tax was outstanding. However it was not in dispute before the primary judge or before us that having elected to enforce their security, the St George companies are entitled to rely upon any ground which justifies the appointment. 45 The appellants did not contest the sales tax liability. They contended, however, that the liability did not authorise the appointment of the receivers on three grounds. The first is that the non‑payment did not crystallize the charge, because that had happened in 1994, and could not happen again. The second is that there had been no default in the payment of sales tax because APS had come to an arrangement with the ATO to pay the amount due by instalments, and was up to date with its payments. The third is that the St George companies were estopped from relying on the non‑payment as a ground for appointing the receivers. 46 The first ground is based on a misunderstanding of the relationship between clauses 8.1 and 8.2 of the APS debenture. Clause 8.1 is in part as follows: "The moneys owing or so much as shall remain unpaid shall immediately become payable and this charge shall become immediately enforceable at the option of the Mortgagee on the happening of any one or more of the following events without the necessity for any notice or demand: (a) (Automatic crystallization) if any of the events specified in (clause 8.2) shall occur; (b) (Default in moneys owing) if default be made by the Company in due and punctual payment of any part of the moneys owing at any time due and payable by the Company to the Mortgagee …." Clause 8.2 provides in part: "Every floating charge created under or pursuant to this charge shall automatically crystallize ipso facto upon the happening of any one or more of the following events without the necessity for any notice or demand or intervention by the Mortgagee: … (g) if any ground referred to in the Corporations Law shall arise upon which any court may order the winding up of the Company." … (i) [Failure to remit sales tax] if the Company is liable and has for a period in excess of seven days been liable to pay an amount or amounts to the Commissioner of Taxation for Sales Tax and at that time the total of such amount or amounts exceeds $10,000.00;" 47 Clause 8.2(i), like the other listed events, has its own operation as a crystallizing event. But it has another independent operation, by force of clause 8.1(a), as an event which renders the charge enforceable. Clause 8.1(a) is a drafting device employed to avoid the need to write out in clause 8.1 each of the events in clause 8.2. So understood, despite the words "Automatic crystallization", clause 8.1(a) does not depend upon the occurrence of a crystallization. If the fact that the charge crystallized in 1994 means that it cannot have done so again in 1999, a matter we need not decide, that does not prevent the St George companies relying on the occurrence of a clause 8.2 event as a justification for enforcing the charge under clause 8.1(a). 48 The second ground involves s 66(1) of the Sales Tax Assessment Act, which provides that the Commissioner may extend the time for payment of tax or "allow it to be paid by instalments". It was submitted that the Commissioner had impliedly agreed to allow the tax to be paid by instalments. The facts we have stated make it impossible to accept this submission. The ATO did not respond to Mr Landers' letter of offer. The ATO's acceptance of the monthly payments cannot amount to an implied acceptance of the offer. The ATO was entitled to the money, and its banking of the cheques cannot in the circumstances disable it from requiring immediate payment of the unpaid amount. The imposition of late payment penalties on the unpaid amount, the serving of the s 74 notice, and the ATO's demand for payment of the total amount outstanding, are inconsistent with the existence of the agreement alleged. 49 For the reasons given in paragraphs 71 to 74, the estoppel argument, and the related unconscionable conduct claim, must be rejected. Accordingly St George Wholesale was entitled to appoint the receivers pursuant to clause 8.1(a).

Default in payment 50 The primary judge also held that St George was entitled to appoint receivers because APS had made default in payment of money due and owing to St George Wholesale. The appellants conceded before his Honour that APS owed St George Wholesale approximately $2,000,000 as at 12 January 1999, of which about $1,400,000 was due and payable. His Honour found that whatever the total indebtedness may have been, APS owed $512,000 before the January audit. Accordingly, on whatever basis the parties had agreed payments should be made, APS was in default in the payment of at least that amount. It was unnecessary for his Honour to determine the actual amount (over and above the $512,000) that was owing. The appellants did not seriously contest the indebtedness found by the primary judge. Rather they relied on the estoppel/unconscionable conduct defences that we have rejected in paragraphs 71 to 74. Accordingly this ground for the appointment of receivers and managers should be sustained.

Insolvency 51 We deal with this ground for appointment when considering the challenge to the appointment of receivers to Irlmond.

Default in payment 52 The appellants conceded a prima facie liability in Irlmond of $375,187.89. This was made up of two amounts found by the primary judge to be due. The first was for $45,672.74 in respect of the sale of two vehicles the subject of the demonstrator plan with St George Finance. This debt was not disputed before his Honour. The second was for $329,515 being the proceeds of sale of twenty‑one vehicles that Mr Still had acknowledged during the two February audits as having been sold and paid for. His Honour said it was likely that the price of one of the vehicles had not been received by 12 February 1999, but did not adjust the global figure to allow for the likelihood. Having regard to the way in which the appeal was conducted we need not perform that exercise. For the same reason we need not determine the actual amount due by Irlmond. 53 We will proceed on the basis that the amount that was due and payable by Irlmond was $375,187.89. The appellants submitted that this amount was expunged by what was described as a "contra" of $800,000 on account of the value of vehicles that had been traded in on the purchase of new vehicles. Clause 6(e) of the Irlmond bailment plan agreement provides in part as follows: "Every trade‑in acquired by the Bailee shall (if covered by the limits of his authority hereunder from Wholesale existing at the time but not otherwise) be deemed to have been purchased by him as agent for Wholesale whether he discloses to the other party the fact of agency or not and he shall be deemed to have paid to the other party as agent for Wholesale an amount equal to the trade‑in allowance on the trade‑in and Wholesale shall reimburse the Bailee in the manner and to the extent set out below." 54 The manner in which the reimbursement amount is calculated is not of present relevance. In practice, the purchase price of the trade‑in vehicle was set off against the amount owing to St George Wholesale in respect of the sale of the vehicle against which the trade‑in was effected, leaving the balance payable to St George. The primary judge found that as at 12 February 1999 Irlmond had in its possession used vehicles to the value of approximately $900,000. But his Honour said there were two reasons why there could be no set‑off. The first was that as at 12 February 1999 the value of the vehicles under the used car facility was in excess of the facility limit. His Honour did not say why this denied a set‑off. But presumably it was based on the words in brackets in clause 6(e) - "if covered by the limits of his authority hereunder …". The respondent challenged this conclusion, contending that these words did not refer to the limits contained in the letter of offer. His Honour's second reason was that there was no evidence as to what proportion of these vehicles were the subject of a trade‑in. He was of the view that the appellants carried the burden of establishing that there were trade‑ins, and they had not discharged it. However, on the appeal the appellants relied upon an affidavit of Mr Spalla which had been filed before the Registrar on the taking of accounts pursuant to orders made by his Honour. In the affidavit Mr Spalla referred to a document headed "Used vehicle stock" which is an inventory, prepared by the receivers, of the used vehicles as at 12 February 1999. Mr Spalla says that from his knowledge of the dealership and the ages of the vehicles, he was able to ascertain that a large number of the vehicles described in the document were trade‑ins. He was unable to be precise as to the proportion, but his estimate was that it was at least 80%. He estimated their value at $800,000. He reached this conclusion in reliance on the Glass's Guide value of about 80% of the amount shown in the stock list. Irlmond was entitled to reimbursement of 85% of that amount. Thus it was entitled to a credit of $707,000, being 85% of 80% of 80% of $1,300,000. 55 After the taking of accounts the matter came back to the primary judge for the making of final orders. Doubtless the Spalla affidavit was by then in the Court file, and was in that sense before his Honour. But it was common ground that he was not taken to it, and it is unlikely that he was aware of its existence. It was an affidavit on which Mr Spalla would unquestionably have been subjected to sustained cross‑examination had it been in existence at the trial. In those circumstances we decline to permit it to be relied on in the appeal. There being no evidence of the proportion of the used vehicles in Irlmond's possession on 12 February 1999 that were trade‑ins, the contra asserted has not been made out. 56 Even if we had permitted reliance to be placed on the Spalla affidavit, we would not have concluded that the appellants were entitled to a set‑off which equalled or exceeded $375,187.89. The "Used vehicle stock" document shows vehicles worth $1,641,838. In his oral evidence Mr Stewart a chartered accountant who conducted an investigation into the affairs of Irlmond and APS, said that that sum had to be reduced by $206,650 on account of vehicles that had been sold and removed as at 12 February. The inventory also discloses vehicles valued at $718,039 which were on the floor plan. Accordingly the $1,641,838 is to be reduced by the two last‑mentioned figures, to produce the value of vehicles not on the plan. The figure is $717,149. According to Mr Spalla, the trade‑in proportion of used vehicles was 80%, giving a trade‑in value of $573,719. Mr Spalla claims that Glass's value is 80% of the vehicle's value, which gives $458,975. In the course of explaining a quite unrelated issue, Mr Stewart gave evidence about the value of one trade‑in vehicle in the inventory - a Mercedes Benz valued in the inventory at $266,618. He expressed the opinion that its Glass's value was $100,000 less than that. The Glass value should therefore be reduced to $358,975. Assuming that no other vehicle on the list has been overvalued, on the whole of the relevant evidence we would have concluded that the set‑off for trade‑in vehicles, if available, was $305,132.15, that is to say, 85% of $358,975. Thus the set‑off is less than the amount conceded by the appellants to be due and payable by Irlmond ($375,187.89). 57 On the basis of the same document as Mr Stewart, Mr Spalla asserts a starting figure of $1,300,000. He does not explain where this comes from. We cannot derive it from the document. But if the sums of $206,650 (vehicles sold and removed) and $718,039 (vehicles on the floor plan) are deducted from Mr Spalla's figure, the set‑off is reduced to $240,000 or thereabouts. 58 Thus, even if the appellants had been permitted to rely upon the Spalla affidavit, we would have rejected the contention that the Irlmond debt was expunged by the assumed set‑off. 59 In view of our acceptance of the primary judge's second reason for rejecting the set‑off claim, we need not resolve the question of construction of clause 6(e) raised by the first. 60 At one stage in the course of argument it may have been suggested that the three day float figure was to be deployed in reduction of the debt payable by Irlmond. The matter was not explored, and any such suggestion has no substance. The three day float figure is not a credit to the dealer which can be offset against the amount payable. It is a debt that is due but not yet payable.

Insolvency 61 We will initially deal with APS and Irlmond together. The primary judge concluded that both companies were insolvent at the time the receivers were appointed. His Honour relied upon the following matters: · Mr Spalla conceded at one or other of the 8 February 1999 meetings that the companies were "technically" insolvent. His Honour said he did not see any distinction between technical insolvency and insolvency. · At the 2 February 1999 meeting Mr Cummings said that Irlmond and APS had a deficiency of assets of $2,200,000. · Mr Stewart gave evidence that both companies were insolvent. He arrived at this conclusion in part by reason of the fact that the dealership had a working capital deficiency of at least $1,177,000 and a balance sheet deficiency of $5,559,000. · Irlmond's account with the National Bank was drawn to its limit and the dealership had no other means of obtaining cash. · Irlmond and APS were not able to pay all their debts. For example, the sales tax that was due and payable on 21 July 1998 had not been paid by the time the receivers were appointed. The outstanding debt due to St George Wholesale had not been paid. · Irlmond's business was deteriorating, and according to Mr Still, January was a "dreadful month". 62 The appellants contended that the primary judge had overlooked various relevant matters in coming to his conclusion that Irlmond was insolvent. The first was that St George's solicitor, Mr Carroll, had advised the appellants that Irlmond was not insolvent because of St George's support. A file note dated 8 February 1999 records Mr Spalla saying that Mr Carroll had said the dealership was "not insolvent until [St George] decides not to support him". Mr Carroll was not at the meeting. We find it odd that a company whose financier claims it is insolvent can answer the claim by saying that it is not insolvent because the financier has not yet withdrawn support. In any event, rather than Mr Carroll's opinion being evidence of solvency, it is evidence that Irlmond was insolvent on 12 February 1999, for at that stage St George had withdrawn support, and on Mr Carroll's view, once that happened, the dealership was insolvent. 63 The appellants also complain that the primary judge did not take into account Mr May's rejection of Mr Spalla's comment at one of the 8 February meetings that the dealership was insolvent. It appears to have been common ground that Mr May's remark was merely intended to protect St George from any claim that it had permitted the dealership to continue trading when it knew it was insolvent. 64 Then it was said that the primary judge had not taken into account that Irlmond had "close to a million dollars in trade‑ins". This was put on the basis that the "contra" argument was unsuccessful. As we have said, there is no evidence of the proportion of the used vehicles that were trade‑ins, and thus no evidence of the value of the trade‑ins. 65 It was submitted that various sources of funds available to Irlmond had been overlooked by the primary judge: the National Bank overdraft, Mr Spalla's $700,000 and Mr Salvo's $1,000,000. The evidence of Mr Cox, the business banking manager in charge of Irlmond's account, tends against the view that further credit would be available from the National Bank. He agreed that the conduct of the account was becoming more unsatisfactory in late January and early February 1999. The prolonged period of being overdrawn or irregular was unusual. On 9 February he handed Mr Spalla a letter in which he said - "After the trials and tribulations we had last year, we can't continue to support you when you blatantly issue cheques without a thought that the expected settlement monies may for some reason or other be delayed". The Bank's credit manager had run out of patience. The dealership's other two accounts had no overdraft facilities, and in early February had negligible or small credit balances. So there was no real buffer there to offset any overdrawing on the main account. As at 10 February that account was overdrawn by about $363,000, which was well in excess of what the Bank was prepared to tolerate. Mr Cox spoke to Mr Spalla to try to get in some money from Mrs Spalla's term deposit. Mr Spalla "authorised" the transfer of $264,000 from his wife's account, but she later refused to sign a formal authority and required the funds to be repatriated, which they were. As at 8 February Mr Cox told Mr Spalla that if he couldn't work within the $100,000 overdraft limit, he would have to provide further security. The only security offered, a charge over unencumbered plant and machinery, was not considered satisfactory. Mr Cox wanted "tangible" security, and it was not forthcoming. On all that evidence it is clear that the Bank could not be regarded as a source of further credit. It was running out of patience, further security was being sought, and Mrs Spalla was not prepared to make her funds available. One of the other two sources of credit, Mr Salvo's $1,000,000, was not to be an injection of funds but the price he was prepared to pay for the dealership. There was no evidence that Mr Spalla's promised $700,000 was in fact available. It was never tendered. The primary judge was amply entitled to find that as at 12 February Irlmond's account with the Bank was drawn to its limit and the dealership had no other ready means of obtaining cash. 66 It was conceded by the appellants that it was more difficult for them to establish solvency in the case of APS because of its larger debt to St George ($512,000) and its sales tax liability ($321,078). However, three matters were relied on: the accommodation reached with the ATO as to the outstanding sales tax, the ongoing support of St George, and the fact that no demands had been made or writs served on APS. We have dealt with the first and second, and the third cannot neutralise the other material clearly indicating that APS was insolvent. 67 Accordingly, the insolvency of each company justified the appointment of the receivers. We deal elsewhere with the submission that St George is estopped from making the appointment, and that the earlier crystallization of the charge precluded it from doing so. 68 At times in the course of argument it seemed to be suggested that Irlmond was entitled to another contra arising out of the three day float. As we understood the argument it was that because Irlmond was not obliged to account to St George for the sale of non‑deferred vehicles until the expiration of 72 hours after sale, it was entitled to a credit of between $800,000 and $1,000,000. This submission was primarily directed to establishing, for the purpose of the estoppel argument, that the appellants' overall indebtedness had never exceeded $2,238,000. But because it may have been deployed as a contra argument, we should deal with it here. The argument assumes that the February 1999 audit was conducted on the basis that no allowance was made for the three day float. The assumption is contrary to the evidence. Mr Cahill gave evidence that from August 1998 to February 1999 he had conducted audits of vehicles at the appellant's premises, until the end of 1998 on a monthly basis. In the early part of 1999 the audits were more frequent. Mr Cahill explained the way in which the August 1998 audit was carried out as follows: "The reconciliation carried out as part of the August audit identified that there were thirty six funds in transit and thirty seven funds to be collected. The total of the thirty seven funds to be collected was $995,972. Twenty nine of the thirty seven funds to be collected fell within the normal payment requirements which allowed the dealer to remit the funds within three days of the St George. The remaining eight funds to be collected fell within one to three days outside the normal payment requirement which meant that the audit was rated unsatisfactory." 69 It appears that the reference to "funds" is trade jargon for vehicles. It appears therefore that the August credit made allowance for the three day float. All the audits were conducted on the same basis, and thus the assumption on which the appellant's second contra argument, if it was put as such, is not made out. Reliance was placed for the appellants on the following passage in the cross‑examination of Mr Cummings: "The audit that was undertaken on 10 and 11 February was an audit to work out the up‑to‑date figure and it included the three day float, correct? --- That would be correct. It was therefore prepared on a quite different basis to the audits that were conducted throughout 1998 which excluded the three day float? --- Yes, I agree with that." 70 The conflict between Mr Cahill's evidence and Mr Cummings' was not the subject of any finding by the primary judge. In our view the evidence of Mr Cahill is to be preferred. He carried out the relevant audits. Mr Cummings was not involved. Mr Cahill was cross‑examined at great length, but it was not put to him that he had not conducted the audits on the basis he said he had, or that he conducted the February audit on a basis different from that on which he had conducted the earlier audits.

Estoppel 71 The appellants' argument on estopped was put in two ways. First it was said that by representations and conduct St George led the Spalla companies to believe, and they did believe, that no reliance would be placed on any of the grounds that would justify the appointment of receivers. Secondly, it was said that St George was saying to the Spalla companies "that it would continue to provide ongoing full finance and otherwise support the dealership financially to the extent necessary to get it in a position to sell or refinance". 72 His Honour dealt with the first basis as follows: "As to the first proposition, it is no doubt true that for many years (probably for the whole of the period between 1994 and 1998) St George Wholesale was willing to overlook the fact that Irlmond and APS were late in the payment of the debts due to St George Wholesale. I also accept that, despite their protestations to the contrary, Messrs Hiller, Phillips, Beed and Cahill were aware of certain of the practices employed by Irlmond and APS as a means of delaying payments to St George Wholesale. In particular I am satisfied that they were aware that Irlmond retained cheques that were described as "funds in transit" as a method of delaying payment. Further, I am of the view that those officers were also aware of the practice adopted by Irlmond of deferring the delivery of vehicles that had been sold so as to delay the receipt of funds that would have to be paid to St George Wholesale. I must say that I found the evidence of Messrs Phillips, Beed and Cahill on these aspects of the case quite unsatisfactory. In the case of Mr Hiller, his denial of knowledge was made in his affidavit but he readily conceded his actual state of knowledge during cross-examination. I am inclined to the view that Mr Hiller did not give proper attention to the contents of his affidavit before it was sworn. As it turned out, Mr Cummings said he had discussed all of these practices with them and there is no reason to doubt this evidence. However, although Mr Spalla, with some support from Mr Cummings, said that Messrs Phillips and Cahill were also aware of the improper use that had been made of the deferred payment facility, I doubt this to be so. The evidence of Mr Spalla was that there had been many discussions about the use of the facility. But he did not descend to any detail. The documents that have been discovered by the respondents do not support Mr Spalla. They tend to suggest that there was no knowledge of this practice. Here I include those documents in which reference was made to the need to ascertain the "true" state of indebtedness of Irlmond and APS. I have no doubt that the St George companies were not aware of the "true" indebtedness at any particular point in time. The need to discern the "truth" is not evidence of knowledge of the improper use that had been made of the deferred payment facility. In this connection also there is a revealing answer given by Mr Still to the first question put to him in his cross-examination. There had been evidence that one of the purchasers whose contract had been improperly allocated to the deferred payment facility was the King of Punjab, the business name of a restaurant. Apparently this had caused some amusement within the dealership. The transcript records the following: 'Q: Mr Still, tell his Honour what the joke was about the King of Punjab? A: The King of Punjab was a restaurant down I think Maribyrnong way. We put that vehicle on deferred to see how it would go. St George accepted it and we paid it out 30 or 40 days later as a normal course of events but deferred.' This indicates to me that although the misuse of the facility had been going on for some time, Mr Still did not believe that the St George companies had knowingly acquiesced to the practice. If Irlmond and APS, through Mr Spalla, did believe that the strict contractual rights that governed the relationship between the parties would not be enforced, they cannot show that that belief was induced by the conduct of the St George companies. In that regard I do not accept that conduct that amounts to no more than mere acts of indulgence can constitute a promise or assurance that late payment would forever be indulged or would be indulged until notice to the contrary was given so as to found an estoppel: Tool Metal Manufacturing Co Ltd v Tungston Electric Co Ltd [1955] 1 WLR 761; John Burrows Ltd v Subsurface Surveys (1968) 68 DLR (2d) 354. Here the conduct relied upon amounts to nothing more than mere acts of indulgence. In any event, Mr Spalla did not say that the St George companies had promised or assured Irlmond or APS that they would always overlook late payments. Indeed, Mr Spalla said that when he was served with the notices of default in November 1998, he understood that the St George companies were seeking immediate payment of all the money that was due to them and that Irlmond and APS were obligated to make those payments. This is not consistent with a belief that late payments would be tolerated or, at the least, that they would be tolerated after the service of the notices. Leaving aside the issue of late payments, there is no basis in the evidence for concluding that St George Wholesale was estopped from appointing receivers if sales tax was not paid. It is true that in 1994 there had been a significant default in the payment of sales tax followed by an agreement with the ATO that the tax could be paid by instalments. It is also true that the St George companies were aware that there were other occasions when sales tax was not paid on time. But it does not follow from this that if sales tax was not paid on the due date for payment, on some other occasion the St George companies had represented that they would take no action. Moreover, I do not believe that Mr Spalla was of that opinion." 73 His Honour then turned to the second basis and said: "Much of what I have said in relation to the estoppel claim is also directly relevant to the claim that the appointment of the receivers was unconscionable conduct in contravention of s 51AC(1) of the Trade Practices Act. In my view the true position was that the St George companies had given Mr Spalla every reasonable opportunity to make arrangements to avoid the appointment of receivers. He had been told in September 1998 to obtain another financier or sell the dealership. When the notices of demand were served Mr Spalla was told that they would not be acted upon because the parties were hopeful that Capital would take over the finance. St George Wholesale offered to release some of the debt due to it to assist in that regard. It continued to accept late payment without real complaint. It allowed Irlmond and APS to exceed the limits of their facilities. It did all of these things with the risk that its own financial position may suffer. In the end the St George companies appointed receivers to protect their position. They were entitled to do so and were not acting unconscionably in making that appointment." 74 In our view his Honour's conclusion was plainly correct. This was a case of considerable indulgence being extended by St George over the years. If indulgence of this kind were to result in financiers being prevented from exercising their legal rights in the way suggested by the appellants, financiers would be forced to adopt very draconian approaches. This would not be to the benefit of borrowers. Moreover, any indulgences, or reliance thereon on by the appellants, were overtaken by the intense negotiations in January and February 1999. The Spalla companies were given a last chance on very specific conditions. As the evidence shows, those conditions were not met and the St George companies were entitled to enforce their rights. 75 It follows that we would dismiss the appellants' appeal.

THE CROSS APPEAL The Issues Raised 76 Although at trial the respondents succeeded in having the applicants' claims against them dismissed, and in having their own cross claims against the applicants allowed, the respondents have cross appealed against several aspects of the primary judge's reasons for judgment. 77 The issues raised in the notice of cross appeal relate essentially to two matters. The first is the cheque dated 4 February 1999 for $310,458.41 drawn on Irlmond's account with NAB and given by Mr Spalla to Mr Cahill. 78 His Honour concluded that the cheque was delivered to Mr Cahill and accepted by him on the condition that it would not under any circumstances be presented for payment on 5 February, and also that it would not be presented on 8 February unless Mr Spalla had first informed St George that there were funds in the account. 79 It followed that his Honour found that the sum of $310,458.41 was not due and payable by Irlmond as at 12 February 1999, the day on which the receivers and managers were appointed to APS and Irlmond at the behest of St George. That sum could not, therefore, be relied upon as a basis for their appointment to Irlmond. It followed also that there could be no order against Irlmond for recovery of that sum. 80 The second issue is the liability of Irlmond to St George Wholesale for the amounts payable by APS in respect of new vehicles. In relation to both issues in the cross appeal, it is presumed that it is advantageous to St George to fix Irlmond with liability for debts incurred by APS.

First issue - the cheque for $310,458.41 81 It will be recalled that although an audit was conducted on 20 January 1999, Mr Cahill attended at the dealership to conduct a further audit on 4 February. During the course of that further audit Mr Cahill was provided with a list of thirteen new vehicles that had recently been sold and paid for. St George Wholesale was owed $310,458.41 by APS in respect of those vehicles. It was that debt that lay behind the cheque for that amount drawn on Irlmond's account which was given to Mr Cahill on the following day, Friday 5 February 1999. 82 It will also be recalled that there was a conflict between Mr Cahill and Mr Spalla as to what was said by Mr Spalla when he signed the cheque. According to Mr Spalla, he told Mr Cahill not to bank the cheque because the account on which it was drawn was not in funds. Mr Spalla said that he asked Mr Cahill to speak to him before presenting the cheque on the following Monday, 8 February, to ascertain whether there were funds in the account. 83 Mr Cahill agreed that he was asked not to bank the cheque on the Friday. He had no recollection, however, of having been asked by Mr Spalla to speak to him before banking the cheque on the Monday. The cheque was presented, and dishonoured, on that day.

The primary judge's findings 84 The primary judge preferred Mr Spalla's recollection of the conversation on 5 February to that of Mr Cahill. His Honour reasoned that Mr Spalla's recollection was more likely to be correct because: · there were no funds in Irlmond's NAB account to meet the cheque; · there was real doubt as to whether there would be funds in that account on the following Monday; · on 4 February St George had requested Irlmond to open an account with the St George Bank and to deposit money that was due to Irlmond in that account. The account was opened on either 4 or 5 February. It could be assumed that monies were deposited into that account. · there was an email dated 5 February 1999 from Mr Phillips to Mr Hiller where the discussion was described in the following terms: "Tony has told us this morning that the cheque for $310,458 drawn on his NAB account will be difficult/impossible to cover. At best it seems that $50k to $100k can be put through today but we will not know this until later this afternoon." 85 The respondents' cross appeal challenges his Honour's findings in relation to the cheque. His Honour stated: "The cheque in the sum of $310,458.41 requires separate consideration. I have already explained the circumstances surrounding the delivery of that cheque. In my view those circumstances show that it was the intention of the parties that the cheque was not to become operative until a condition had been fulfilled, that condition being that Irlmond should have sufficient funds to place in its account to enable its banker to meet the cheque. That is to say, delivery of the cheque was conditional: see e.g. Goeldner v Marshall (1913) 15 WALR 50; Jones v Thomas (1922) 65 DLR 491; Scafidi v Johnson 420 So2d 1113 (La 1982); Engelcke v Stoehsler 544 P2d 582 (Or 1975); Osburn v Lucas 502 P2d 1382 (Or 1972). This is not a case, of which New London Credit Syndicate v Neale [1898] 2 QB 487 is an example, where the drawer is impermissibly seeking to set up an oral agreement to contradict or vary the terms of the cheque. Here, the promise to pay constituted by the cheque was not an effective promise until there had been satisfaction of the condition. There being no evidence that the condition has been fulfilled, it follows that I must conclude that Irlmond is not liable to St George Wholesale on the cheque. For the sake of completeness, I should mention that I have considered but rejected a possible argument that the condition upon which the cheque was delivered was confined to one where the funds were in the NAB account on Friday, 5 February 1999 or Monday, 8 February 1999 and that the condition ceased to operate thereafter. Whilst I accept that the matter is not free from doubt, I am of the view that by reason of the fact that Irlmond had opened an account with the St George Bank and that it was not likely to make use of its account with the NAB (a fact known to all parties) the condition that was imposed and accepted was as I have found it to be."

86 In support of the respondents' contention that the primary judge erred in finding against their claim in relation to the cheque for $310,458.41, the respondents submitted that:

· Pursuant to s 27 of the Cheques and Payment Orders Act 1986 (Cth) ("the Cheques Act") the delivery of a cheque by the drawer or an endorser may be shown to have been conditional, or for a special purpose only, and not in order to issue the cheque or transfer it by negotiation, as the case may be. The primary judge had found that it was the intention of the parties that the cheque not become operative until a condition had been fulfilled, that condition being that Irlmond should have sufficient funds to place in its account to enable its banker to meet the cheque. His Honour had erred in law in failing to hold that, even if the cheque was subject to this condition, the condition was ineffective because it contradicted the terms of the cheque, and the promise of payment thereby. His Honour ought to have held that although there could be a conditional delivery of a cheque, there could not be a conditional drawing. In order for there to be a conditional delivery of a cheque as contemplated by s 27 of the Cheques Act the condition had to be extraneous to the character of a cheque as a mandate to the bank to pay on demand. Otherwise, the condition contradicted the unconditional character of a cheque. It was impermissible to seek to derogate from the entitlement of the holder to demand immediate payment.

· Even if the cheque were subject to the condition which his Honour ascribed to it, that condition should be limited in point of time to Irlmond having sufficient funds in its bank account on 5 February 1999, and on 8 February 1999. The condition should, on the evidence, have been treated as having ceased to operate thereafter.

87 The appellants were content to adopt his Honour's reasoning as their submission in opposition to this aspect of the respondents' cross appeal.

Conclusion 88 Prior to the enactment of the Cheques Act in 1986 the Bills of Exchange Act 1909 (Cth) applied to all bills of exchange including, of course, cheques. Thereafter, a specific statutory regime governed all aspects of the law relating to cheques. 89 A convenient starting point in dealing with the issues arising out of this part of the cross appeal is s 10 of the Cheques Act. This provides that a cheque is an unconditional order in writing with the following characteristics: · it is addressed by a person to another person (being a bank); · it is signed by the person giving it; · it requires the bank to pay on demand a sum certain in money. 90 An instrument that does not have all of these characteristics, or that orders an act to be done in addition to the payment of money, is not a cheque for the purposes of the Cheques Act, though it may still be a negotiable instrument. 91 Section 12 of the Cheques Act expands upon the definition contained in s 10. It provides that an order to pay on a contingency is not an unconditional order to pay. The happening of the event does not make the order an unconditional order to pay. This section follows closely s 16 of the Bills of Exchange Act 1909. The effect of s 12 of the Cheques Act is that a cheque must not be expressed to be payable upon a contingency. 92 The classic formulation of the underlying principle is to be found in Carlos v Fancourt (1794) 5 TR 482 at 486; 101 ER 272 at 274: "Certainty is a great object in commercial instruments, and unless they carry their own validity on the face of them they are not negotiable: on that ground bills of exchange which are only payable on a contingency, are not negotiable, because it does not appear on the face of them whether or not they will ever be paid." 93 In Rosenhain v The Commonwealth Bank of Australia (1922) 31 CLR 46 a document purporting to be a bill of exchange drawn by a company in the United States of America upon the defendants in Melbourne was in the following terms: "Sixty days after sight … pay to the order of [the company a specified sum of money] with interest at the rate of 8 per cent. per annum until arrival of payment in London to cover …." 94 It was held that the document was not a bill of exchange within the meaning of the Bills of Exchange Act 1909 since it was not an order in writing requiring a sum certain in money to be paid at a fixed or determinable future time. The order to pay money was conditional upon documents being handed over on acceptance, and this operated against the requirements of the relevant legislation. 95 Section 14 of the Cheques Act provides that an order to pay is an order to pay on demand if: · the order is expressed to require payment on demand, at sight or on presentation; or · no time for payment is expressed in the instrument containing the order. 96 Section 14(2) also provides that an order to pay is not an order to pay on demand if the order is expressed to require, or requires by implication, payment otherwise than on demand, at sight or on presentation, or is expressed to require or requires by implication payment only at or before a particular time or where the instrument containing the order is presented at or before a particular time. 97 Section 16 of the Cheques Act provides specifically for the post-dating of cheques. This is in accordance with a long line of authority recognising the validity of such cheques, some of these cases having been decided before 1882, the year the Bills of Exchange Act was passed in England. Section 16(3) provides that for the purpose of determining whether a post-dated instrument is a cheque, the fact of its post-dating shall be disregarded. A post-dated cheque may operate as a form of escrow. 98 So far as delivery is concerned, s 3 defines delivery in relation to a cheque as meaning the transfer of possession of the cheque from one person to another. The significance of delivery is made clear by s 25 which provides that a contract arising out of the drawing or an endorsement of cheque is incomplete and revocable until delivery of the cheque. 99 Section 27 of the Cheques Act which is expressly made subject to s 28, is central to the issues raised in relation to this part of the cross appeal. The relevant sections provide as follows: "27. Subject to section 28, the delivery of a cheque by the drawer or an endorser may be shown to have been conditional, or for a special purpose only, and not in order to issue the cheque or transfer it by negotiation, as the case may be. 28. (1) The drawer of a cheque shall (a) as regards a holder in due course - be conclusively presumed to have made an effective delivery of the cheque so as to complete the drawer's contract on the cheque; and (b) as regards a holder who is not a holder in due course - be presumed unless the contrary is proved, to have made an effective delivery of the cheque so as to complete the drawer's contract on the cheque. …" 100 The expression "holder in due course" is defined in s 50. The term "holder" is defined in s 3. It is clear that Mr Cahill, who received the cheque on 5 February from Mr Spalla, was relevantly the "holder". He was not, however, "a holder in due course". An original payee cannot be a holder in due course. It follows that, pursuant to s 28(1)(b), there was a presumption of effective delivery so as to complete the drawer's contract on the cheque, but a presumption which, unlike the position where the "holder" is a "holder in due course", was capable of being rebutted. 101 By virtue of the definition of a cheque in s 10(1) the contract between the parties (viz the drawer and the holder) represented by the cheque was required to be in writing. That means that consideration must be given to the effect of parol evidence of other conditions, said to have been part of the agreement between the parties, upon the representations ordinarily implicit in the drawing and delivery of a cheque. 102 At common law, the parol evidence rule precluded the use of extrinsic evidence in determining the meaning or legal effect of words used in a written contract: see for example Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337. In the present case, the cheque delivered, within the meaning of that expression in the Cheques Act, to Mr Cahill on behalf of St George was not post-dated, the most common method of converting a cheque into an escrow. It appeared on its face to be unconditional, and to satisfy all of the requirements of s 10 of the Cheques Act. It would only be as a result of the admission of parol evidence of the oral representation by Mr Spalla to Mr Cahill that the contingent nature of the liability to complete the contract, and pay to the holder the sum stated in the cheque, would become apparent. The first question to be considered is whether this parol evidence could be admitted to rebut the presumption of effective delivery which would normally be applicable from the drawing and delivery of a cheque. 103 The parol evidence rule is subject to a large number of common law exceptions. It is also these days perhaps more often breached than observed. The effect of s 28(1)(b) of the Cheques Act, with its provision that the presumption of effective delivery so as to complete the drawer's contract on the cheque can be rebutted by evidence of contrary intent, is plainly to create a further statutory exception to the rule. This is scarcely surprising. It has long been a common law exception to the rule that parol evidence is admissible to establish by contemporaneous oral agreement that the contractual arrangement expressed in the written instrument was intended to be conditional upon the occurrence of a specified event - see for example Pym v Campbell (1856) 6 E & B 370. 104 Section 27 of the Cheques Act is plainly based on s 26(2)(b) of the Bills of Exchange Act 1909. That section relevantly provides: "26. (2) As between immediate parties, and as regards a remote party other than a holder in due course, the delivery: … (b) may be shown to have been conditional or for a special purpose only, and not for the purpose of transferring the property in the bill. But if the bill be in the hands of a holder in due course, a valid delivery of the bill by all parties prior to him, so as to make them liable to him, is conclusively presumed." 105 Section 26(2)(b) is itself virtually identical to s 21(2)(b) of the Bills of Exchange Act 1882 (UK). In the context of that section, where the contingent nature of the delivery "may be shown" by evidence, the effect of the relevant provisions is, according to Byles on Bills of Exchange (26th ed) (at 399), "…not to alter the rule of common law excluding parol evidence to vary a written agreement, but in conformity with the common law it allows, except as against a holder in due course, evidence to be given either that there was no delivery by the defendant with the intention of transferring property in the instrument … or that delivery was subject to the fulfilment of a condition suspending the operation of the instrument, and that the condition has not been fulfilled; in other words, that the instrument was a mere escrow." 106 The case of Goeldner v Marshall (1913) 15 WALR 50 (to which the primary judge referred) provides an example of a straightforward application of s 26(2)(b) of the Bills of Exchange Act 1909. It involved an action brought against the drawer on a dishonoured promissory note. At trial, evidence was led by the defendant drawer to show that, at the time of delivery to the plaintiff holder, the parties had orally agreed that the bill would not be presented until certain other bills of a third party held by the drawer had been paid. At first instance, the evidence was rejected as being inadmissible by reason of the parol evidence rule. On appeal it was held that the evidence should have been admitted for the purpose of showing that the bills were delivered on a condition, upon non-fulfilment of which they did not become operative. McMillan A-CJ observed, in reference to s 26(2)(b) at pp 51-52: "…I think the evidence shews an agreement, not to vary the bill, but to prevent it coming into operation till something happened which never did happen. Under these circumstances I think that the evidence was admissible, and it is admitted there is no answer to it. It is stated on one side that the condition has not been fulfilled, and there is no contrary allegation on the other. In my opinion, therefore, the defendant put forward a good answer to this claim, and he should have succeeded in the court below." 107 There is Canadian authority to the same effect - see Commercial Bank of Windsor v Angus Morrison (1902) 32 SCR 98, in which the Supreme Court applied Pym v Campbell (supra), and Jones v Thomas and Norman (1922) 65 DLR 491 (to which the primary judge also referred). The position in New Zealand is the same - see Equitable Securities Ltd v Neil [1987] 1 NZLR 233 at 239-40. 108 The same point was made by the Court of Appeal in New London Credit Syndicate v Neale [1898] 2 QB 487. That case concerned the admissibility of extrinsic evidence of a contemporaneous oral agreement to renew a bill of exchange. This evidence was, the Court of Appeal held, inadmissible. As A L Smith LJ made clear at p 490 a distinction exists between parol evidence admitted to show that the instrument was not to take effect as a contract until a condition was fulfilled, and parol evidence which contradicted the very terms of the written agreement: "It has been held over and over again, that evidence of a contemporaneous oral agreement is not admissible to vary the effect of …[a written] instrument. If the evidence be to the effect that the document is only delivered as an escrow, or that it is not to take effect as a contract until some condition is fulfilled, it is admissible. But that is not this case. This document was signed and handed over as a bill of exchange, but there was an oral agreement that at maturity it should be renewed, if the defendant required it. In other words, although the written document states that the bill is to be met upon a day certain, the parol evidence is that it is not to be then met. Nothing is more clearly settled than that evidence of such an agreement is not admissible." 109 See also, to the same effect, Jeffries v Austin (1725) 1 Stra 674, where, in an action upon the case upon a promissory note brought by the person to whom it was payable, Chief Justice Eyre permitted the defendant to show that it was delivered as an escrow, viz, as a reward in case he procured the defendant to be restored to an office. That event having not occurred, there was a verdict for the defendant. Note also Hitchings and Coulthurst Co v Northern Leather Co of America [1914] 3 KB 907 where evidence of a contemporaneous oral agreement not being an agreement suspending the coming into force of the contract contained in the promissory note, but being an agreement in defeasance of the contract contained in the written instrument, was held not to be admissible. 110 The distinction was also addressed, albeit with less precision, by Sir W Page Wood VC in Druiff v Parker (1868) LR 5 Eq 131 at 137-8: "The classes of authorities which have been cited … are of two kinds. One is a class - where the instrument, as written and propounded, is admitted to be the instrument which, at some future time, is to be the agreement of the parties. No fault is found with the instrument; but it is said that it is not to come into effect, except conditionally, and that as the condition has not yet been fulfilled, no agreement has been come to between the parties. … The other class of authorities is of this kind - where a Defendant has been allowed to say: 'This document which you produce against me, shewing my signature to it, does not express the real and true agreement which was entered into between us.'" 111 The distinction between what is permissible by way of parol evidence, and what is not, appears to be a fine one, but it is not a distinction without a difference. The imposition of the condition upon the presentation of the cheque by Mr Spalla had the effect, in our opinion, of suspending the operation of the cheque, and converting it into an escrow. It did not otherwise contradict the express terms of the written instrument. It was, therefore, both at common law, and pursuant to s 27 of the Cheques Act, a valid condition, and one in relation to which parol evidence could be given. 112 While the admission of evidence of Mr Spalla's oral representation may well have the effect of contradicting the requirement contained in s 10 of the Cheques Act that a cheque be payable on demand, it does so in a way which is plainly contemplated by ss 27 and 28 of the Cheques Act, and without introducing into the cheque itself an express term to this effect. Given that the Cheques Act permits the suspension of payment on demand by post-dating a cheque, there seems no reason in principle why different forms of escrow should not be viewed as compatible with the provisions of that Act. 113 In Weaver and Craigie, The Law Relating to Banker and Customer in Australia, reference is made to a decision of the Queensland Court of Appeal dealing with s 27 of the Cheques Act. In Thusi Pty Ltd v Neonbrook Pty Ltd [1999] 1 Qd R 429 the Queensland Court of Appeal accepted that a cheque handed by a third party to the respondent had been so handed by way of security for the payment of a debt owed by a borrower on the condition that it was not to be used or presented until the borrower defaulted in the payment of the loan on the due date. Williams J observed that s 27 was probably a statutory reflection of the common law principles stated by the Privy Council in Macdonald v Whitfield (1883) LR 8 App Cas 733 at 745. He stated at 436 that: "… since s. 27 a cheque may be delivered on condition that it not be negotiated unless a third party defaults in making a payment on a certain date. In those circumstances the condition would have to be satisfied before the cheque could be presented for payment; the drawer could not be said to have dishonoured payment until the condition had been satisfied." 114 That reasoning of the Court of Appeal in Thusi provides support for the conclusion arrived at by the primary judge that the condition imposed by Mr Spalla was a condition upon delivery which could properly be proved, and which displaced the presumption that delivery of the cheque was intended to complete the contract that it represented. His Honour's acceptance of Mr Spalla's evidence did not contradict the terms of the written instrument but resulted merely in a suspension of the operation of the cheque. 115 It follows that in our opinion the primary judge was correct in treating the cheque as, in effect, having been delivered in escrow, thereby rejecting the claim for $310,458.41 as a separate basis for finding that monies were due and payable on 12 February 1999, and also rejecting any claim for that amount against Irlmond. 116 As regards the respondents' separate contention that the primary judge ought to have found that the condition upon delivery expired no later than 8 February 1999, it is necessary only to say that his Honour, having considered all of the evidence, declined so to find. We can discern no error in his Honour's approach to this issue or in his reasoning. There is no basis for any appellate intervention in relation to his Honour's findings which were, in this instance, findings of fact - see Devries v Australian National Railways Commission (1993) 177 CLR 472 at 479 and State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (in liq) (1999) 160 ALR 588.

Second issue - Irlmond's liability to St George Wholesale in respect of new vehicles

The primary judge's findings 117 When his Honour came to deal with the respondents' submission that Irlmond was liable to St George for the amounts payable by APS, he considered the effect of each of the APS and Irlmond bailment plan agreements. His Honour found that, as originally intended, the effect of those agreements was that St George Wholesale became the owner of all vehicles purchased. New vehicles were bailed to APS, and all other vehicles were bailed to Irlmond. APS and Irlmond were authorised to solicit offers to purchase the vehicles. The theory was that upon being informed that an offer had been received, St George Wholesale would decide whether it would sell the vehicle to which the offer related. If it were a new vehicle, St George Wholesale would sell that vehicle to APS which in turn would sell the vehicle to Irlmond. If the offer related to a used or demonstrator vehicle, the vehicle would be sold directly by St George Wholesale to Irlmond. There would then be a sale to the customer. The purchase price, less commission, would be held on trust for St George Wholesale, to be accounted for, in effect, in specie. 118 His Honour then dealt with the effect upon those bailment agreements of the letter of offer, and of the course of dealing between the parties. He found that by extending the time within which the payment was to be made, first to 48 hours and then to 72 hours, the parties contemplated that the bailee (Irlmond or APS) was free to use the money in the meantime. The consequence was that the purchase price received was not, as originally intended, held upon trust for St George Wholesale. The relationship between the bailee and the owner of the property had altered to become one of debtor/creditor rather than trustee/beneficiary. 119 His Honour also found that notwithstanding the express provisions of the bailment plan agreements, the effect of the letter of offer, and of the course of dealing between the parties, resulted in Irlmond being authorised to pass good title to each vehicle that it sold. He found that the condition precedent set out in cl 17(ii) of each of the bailment plan agreements (which clause provided that the passing of any property from St George Wholesale was subject to that company first being paid) had been the subject of a variation. As his Honour observed: "Either the condition precedent was overridden by the letter of offer or its operation was waived." 120 After dealing with a number of claims by St George for various amounts said to be due and payable by Irlmond in relation to used and demonstrator vehicles, his Honour turned directly to the contention by St George Wholesale that Irlmond was also obliged to account to St George Wholesale for the proceeds of the sale of new vehicles. This contention was put in several ways. It was submitted that Irlmond should be deemed to have converted the vehicles sold when it failed to account to St George for the monies received within the period of three days permitted by the float. It was also submitted that upon the proper construction of cl 3.1 of the deed poll of 26 May 1998 Irlmond had assumed the obligations owed by APS to St George. Then it was submitted that by reason of the operation of s 7(7) of the Chattel Securities Act 1987 (Vic) St George Wholesale was subrogated to the rights of APS in respect of the purchase price for the new vehicles which had not been paid by Irlmond. 121 In rejecting each of these submissions, his Honour stated first, in relation to the issue of conversion: "The first basis that is put forward to support this contention is that all new vehicles for which St George Wholesale had not received payment have been converted by Irlmond and that it became liable to account to St George Wholesale for the purchase price on a claim for money had and received on the basis that St George Wholesale had waived its claim in tort. There is no substance to the allegation that Irlmond converted vehicles to its own use when it sold those vehicles to its customers. As I have said earlier in my reasons, Irlmond was entitled to sell and deliver new vehicles to its customers on the basis that contemporaneously with such a sale taking place title in the vehicle would pass from St George Wholesale to APS and then to Irlmond to enable the customer to obtain good title. In any event, each sale and delivery was made with the tacit consent of St George Wholesale and thus there could be no conversion of its goods: compare Tozer Kemsley & Millbourn (A'Asia) Pty Ltd v Collier's Interstate Transport Service Ltd (1956) 94 CLR 384. There being no conversion, St George Wholesale has no claim in restitution in respect of the money received by Irlmond." 122 His Honour then turned to the deed poll and continued: "I will now deal with an argument that by the terms of a deed poll made on 26 May 1998, Irlmond assumed the obligations owed by APS to St George Wholesale and St George Finance. The deed poll was executed at the request of St George Finance to deal with a sales tax problem that had arisen. The nature of the problem was not explained in any detail. In any event, it is not necessary to dwell on the precise purpose of the deed. The deed was made by Irlmond and APS in favour of St George Finance. It conferred no benefit on and was not declared to be made in favour of St George Wholesale. The covenants in the deed upon which St George Wholesale relied impose obligations upon Irlmond to perform or to cause APS to perform obligations that are owed to St George Finance or to indemnify St George Finance against loss if APS fails to meet its obligations. There being no provision in the deed which confers a benefit on St George Wholesale, it follows that its reliance on the deed as a source of obligation is not made out." 123 Finally his Honour addressed the operation of the provisions of the Chattel Securities Act 1987 (Vic): "The next contention with which I must deal is that Irlmond is liable to pay St George Wholesale the purchase price received on the sale of all new vehicles by reason of certain provisions in the Chattel Securities Act 1987 (Vic). By that Act (s 7(7)), where a person holds a "security interest" (as defined) over goods and that security interest is extinguished in consequence of the operation of subsections 7(1) or (2), the holder of the security interest is subrogated to the rights of the supplier of the goods, including the right to have recourse to any part of the purchase price for the goods which has not been paid. St George Wholesale says that it had a security interest over all vehicles bailed to APS and that by reason of subsection 7(7) it is subrogated to the rights of APS in respect of those vehicles thus entitling it to recover the purchase price from Irlmond." 124 His Honour then set out the relevant provisions of the Chattel Securities Act. These included the definition of "security interest" in s 3, and the operative provisions in ss 7(1) and (2). They are as follows: "3(1) In this Act- … "Security interest" means an interest in or a power over goods (whether arising by or pursuant to an instrument or transaction or arising on the execution of a penalty enforcement warrant issued under the Magistrates' Court Act 1989) which secures payment of a debt or other pecuniary obligation or the performance of any other obligation and includes any interest in or power over goods of a lessor, owner or other supplier of goods; … 7. Extinguishing of security interest (1) Subject to section 8, if a secured party has - (a) an unregistered security interest (whether or not over registrable goods or interstate registrable goods); or (b) a registered inventory security interest - in goods but is not in possession of the goods and a purchaser purchases or purports to purchase an interest in the goods (otherwise than at a sale in pursuance of a process of execution issued by or on behalf of a judgment creditor) for value in good faith and without notice when the purchase price is paid (or, if the price is not paid at one time, when the first part of the purchase price is paid) of the security interest from a supplier being - (c) the debtor; or (d) another person who is in possession of the goods in circumstances here the debtor has lost the right to possession of the goods or is estopped from asserting an interest in the goods against the purchaser- the security interest of the secured party is extinguished. … (2) Subject to section 8, if a secured party has a security interest in a motor car within the meaning of the Motor Car Traders Act 1986 but is not in possession of the motor car and a purchaser purchases or purports to purchase an interest in the motor car (otherwise than at a sale in pursuance of a process of execution issued by or on behalf of a judgment creditor) for value in good faith and without notice when the purchase price is paid (or, if the price is not paid at one time, when the first part of the purchase price is paid) of the security interest from a licensed motor car trader within the meaning of the Motor Car Traders Act 1986, the security interest is extinguished. … (7) If a security interest is extinguished under sub-section (1), (1A) or (2), the secured party shall be subrogated to the rights (if any) of the supplier and any predecessor in title of the supplier in and in respect of the goods, including the right to receive any part of the purchase price for the goods which has not been paid." 125 His Honour assumed, without deciding, that by reason of the APS bailment plan agreement St George Wholesale held a "security interest" over the vehicles that were bailed to APS. He noted that it was not in dispute that this interest, if it existed, was unregistered. His Honour then concluded: "The effect of subsections 7(1) and (2) is to extinguish a security interest over goods when those goods have been purchased for value and in good faith. The subsections will only operate to extinguish a security interest if a purchaser is otherwise unable to obtain good title to the goods sold. To put the matter another way, if the purchaser of goods encumbered by a security interest acquires those goods free of that interest without having to rely on subsections 7(1) or (2), those subsections will have no operation in respect of that sale. In that circumstance the condition for the operation of subsection 7(7) will not be satisfied and no right of subrogation would arise. That is what has occurred in the case of the sale of vehicles by Irlmond. In consequence of the arrangements that subsisted between Irlmond, APS and St George Wholesale, when a vehicle was sold by Irlmond the purchaser obtained a good title free of any security interest independently of the operation of subsections 7(1) or (2). That is, the security interest, if it existed, was not extinguished by the operation of subsections 7(1) or (2). It follows that subsection 7(7) conferred no rights upon St George Wholesale. In view of the conclusion that I have reached it is not necessary to further consider the operations of s 7. But I do not wish to leave this part of the case without indicating that there seems to me to be other bases for contending that St George Wholesale did not acquire a right of subrogation under subsection 7(7)."

The respondents' submissions on the cross appeal 126 In respect of the liability of Irlmond to St George for the purchase price of new vehicles sold, the respondents submitted:

· The primary judge had erred in failing to hold that Irlmond did not obtain good title to any new vehicle which had been sold to it by APS, and then sold by Irlmond to a customer, unless St George Wholesale received payment within three days of the receipt by Irlmond of the purchase price. By cl 17(ii) of the APS bailment plan agreement, the making of any sale by St George Wholesale was subject to the condition precedent that the price payable in respect of any such sale be paid to St George Wholesale. Only then would property pass from St George Wholesale. The three day float did not convert St George Wholesale from being the owner of vehicles into a mere unsecured creditor. It followed that if St George Wholesale were not paid within three days of a retail sale, Irlmond was liable to St George Wholesale in conversion. St George Wholesale was entitled, in accordance with well established principles, to waive its right to sue for the tort, and to seek instead to recover the monies in restitution as monies had and received - Winfield & Jolowicz On Tort (14th ed) at 756-9. Alternatively, when Irlmond received monies from the retail customer it received them (less the retail margin and sales tax) on trust for St George Wholesale - Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 at 581-2 per Lord Wilberforce.

· Under cl 4.2 of the deed poll dated 26 May 1998 Irlmond, as mortgagor, was liable to make actual payment to St George Finance of secured money of a contingent nature. The secured money included money which the borrower (APS) was contingently liable to pay St George Finance under the 1994 APS bailment plan agreement. Under that agreement, APS was contingently liable to pay St George Finance as guarantor. Hence, Irlmond, as mortgagor, was obliged to pay St George Finance the monies for which APS was contingently liable to pay St George Wholesale for new vehicles under the APS bailment plan.

[This argument differed from the contention which had been advanced before the primary judge, and which had been founded upon cl 3.1 of the deed poll, rather than cl 4.2. His Honour had concluded, correctly it was conceded on the appeal, that cl 3.1 could not be relied upon in support of the contention that Irlmond was liable to St George Wholesale for the obligations of APS. The respondent contended that that consequence would, however, flow from cl 4.2, upon its proper construction.]

· Irlmond was also liable to St George Wholesale in respect of the proceeds of new vehicles by reason of the operation of s 7(7) of the Chattel Securities Act 1987 (Vic). St George Wholesale had a "security interest" in the new vehicles within the meaning of s 3 of that Act. By subsections 7(1) and (2) that security interest was extinguished on a purchase of any such vehicle by a retail customer from Irlmond in good faith and for value without notice. Section 7(7) provided that if a security interest were extinguished under s 7(1) or (2), the secured party would be subrogated to the rights (if any) of the supplier and predecessor in title of the supplier in and in respect of the goods, including the right to receive any part of the purchase price for the goods which had not been paid. Irlmond was relevantly the supplier, and APS its predecessor in title. Hence, St George Wholesale was subrogated to APS's right to sue Irlmond for the unpaid purchase price of new vehicles.

The appellants' submissions in response to this aspect of the respondents' cross appeal 127 Save for seeking to meet the respondents' belated attempt to rely upon cl 4.2 of the deed poll, the appellants contented themselves with adopting the reasoning of the primary judge in answer to the contentions advanced on the cross appeal. In relation to the respondents' proposed reliance upon cl 4.2, the appellants submitted that leave to amend the grounds of cross appeal should be refused, both because of the prejudice which would flow to the appellants from permitting the respondents to amend their grounds at this stage, and because there was no merit in any event in the amended ground.

Conclusion 128 The first issue to be addressed is whether the respondents should be granted leave to rely upon cl 4.2 of the deed poll of 26 May 1998 as a possible basis for holding Irlmond liable to St George in respect of the purchase monies for new vehicles. As noted earlier, the respondents' argument before the primary judge was based upon cl 3.1 of the deed poll rather than cl 4.2. 129 The appellants opposed leave being granted to the respondents to rely upon cl 4.2 because this was not the basis upon which the case had been conducted below. They submitted that had the respondents sought to rely upon cl 4.2 before the primary judge, evidence which was not called by the appellants might have been adduced to meet that case. 130 It is unnecessary, in our opinion, to resolve the question of any possible prejudice of this type to the appellants. Even if leave were granted to the respondents to amend their notice of cross appeal to enable them to rely upon cl 4.2, the construction argument upon which they rely would fail. 131 Clause 3.1 of the deed poll deals with the performance of the mortgagor's obligations. It provides: "3.1 Performance of all obligations In addition to its obligations under this mortgage the Mortgagor must: (a) duly perform all of its other obligations (both positive and negative) at any time owed to St George; and (b) duly perform or cause to be performed all of the obligations of any Borrower or Security Provider at any time owed to St George whether or not the Mortgagor has consented to the Borrower undertaking such obligations." 132 Clause 4.2 of the deed poll provides as follows: "4.2 Payment following an Event of Default If an Event of Default occurs the Mortgagor must pay the Secured Money to St George immediately upon demand. Payment must include actual payment on account of Secured Money which is of a contingent nature and clause [ ] applies accordingly." 133 The cross claim brought by the respondents in this proceeding pleaded cross-collateralisation based specifically upon cl 3.1 and cl 3.2 of the deed poll. Clause 3.1 was relied upon as the basis upon which Irlmond supposedly became liable for the obligations of APS. No claim was made before the primary judge against Irlmond for monies owing to St George Finance. The claims made below were made only by St George Wholesale against Irlmond for monies allegedly owing by Irlmond to St George Wholesale. 134 The reason why the primary judge rejected the respondents' submissions in reliance upon cl 3.1 was that the deed poll was made in favour of St George Finance, and conferred no benefit in favour of St George Wholesale. St George Wholesale could not therefore rely on the deed as a source of obligation by Irlmond. Implicit in his Honour's reasoning was an inability on the part of St George Wholesale to rely on cl 3.1 because of a failure to identify with precision how any particular liability of APS to St George Finance could be identified, and how Irlmond could therefore be said to have assumed that liability. 135 The mortgagors under the deed poll were Irlmond and APS. The reference to St George in cl 4.2 is to St George Finance. The respondents submitted that cl 4.2, upon its proper construction, required that Irlmond, as mortgagor, pay the Secured Money to St George Finance immediately upon demand. 136 The expression "Secured Money" is defined in cl 1.1 of the deed poll as meaning any money which, at any time, "… (b) the Mortgagor or the Borrower in any capacity and whether alone or with others: (i) is actually or contingently liable to pay St George under the provisions of the Bailment Plan Agreement; or (ii) may become actually or contingently liable to pay to St George in the future pursuant to the Bailment Plan Agreement." 137 The respondents submitted that the borrower for these purposes was APS. The "Bailment Plan Agreement" was the APS bailment plan agreement. So, in cl 4.2, Irlmond agreed to pay to St George Finance "Secured Money". "Secured Money" meant money owed by APS to St George Finance under the APS bailment plan agreement. Under that agreement, APS was obliged to pay monies contingently payable to St George Finance. Clause 4.2 therefore bridged the gap that cl 3.1 had failed to bridge, and established a liability in Irlmond for the APS liability which was, of course, the liability in respect of the purchase monies for new vehicles. 138 In response to these submissions the appellants submitted that the definition of "Secured Money" upon which the respondents relied required further recourse to the definition in cl 1.1 of the term "Borrower". That term was defined in cl 1.1 as meaning: "a person who at any time in any capacity has obligations to St George in respect of which the Mortgagor has given a guarantee or indemnity to St George and may include the Mortgagor". (emphasis added) 139 The respondents' argument, however plausible it might seem, still required that the mortgagor be a person other than the borrower. Thus, if the borrower were APS, the mortgagor must be Irlmond. The borrower, APS, might owe obligations to St George Finance, but Irlmond had not given a guarantee or indemnity to St George Finance in respect of any such obligations. Thus, the respondents' reliance upon para (b) of the definition of "Secured Money" failed in limine to the extent that it fixed upon APS as borrower being contingently liable to pay St George Finance under the provisions of the bailment plan agreement. APS was not a "Borrower" as defined in the deed poll. The elaborate edifice built upon this primary assumption could not, therefore, be sustained. 140 In our opinion the appellants' submission regarding the proper construction of cl 4.2 of the deed poll is correct. It follows that there is no substance in the respondents' contentions based upon that clause. Leave to amend the grounds of cross appeal should be refused. 141 Irlmond was also said to be liable to St George Wholesale for the tort of conversion. The respondents submitted that the primary judge had erred in failing to hold that after the expiration of the three day float period, when the purchase monies Irlmond had received had not been paid to St George, Irlmond was deemed to have converted the new vehicles which it had sold. The respondents were entitled to waive their right to sue in tort, and to seek to recover the monies received by Irlmond as monies had and received. Alternatively, those monies could be recovered by way of proceedings for breach of trust. 142 In our opinion the respondents' submission in this regard is misconceived. While it is true that cl 17(ii) of the APS bailment plan agreement provided that a sale took place only when St George Wholesale received the payment for the new vehicles from the purchaser, the primary judge expressly found that the terms of this agreement had been varied both by the letter of offer, and by the course of dealing between the parties. His Honour found that the relationship between Irlmond and St George had become that of debtor and creditor rather than trustee and beneficiary. 143 It was, in our opinion, entirely open to his Honour to have made that finding. It was also open to his Honour to have found that Irlmond had authority, without reference back to St George Wholesale, to pass title to retail customers. His Honour concluded that a series of simultaneous sales took place with property passing from St George Wholesale to APS, then to Irlmond, and finally to the customer. Clearly the arrangement existed in this form, with APS interposed, for sales tax purposes only. On this view, however, Irlmond was authorised to pass title in the new vehicles to the customers. It could not, therefore, be deemed retrospectively to have converted those vehicles merely because three days later it did not, in accordance with its contractual obligations, pay the purchase price, for which it was liable to account, to St George Wholesale. There was no conversion ab initio. 144 There is another reason why the conversion argument must fail. Irlmond could not be liable for the proceeds of the sale of the new cars because Irlmond was not the bailee of those vehicles. Indeed, Irlmond was not a party to the APS bailment plan agreement. Clause 17(ii) of that agreement applied only to vehicles that were bailed pursuant to that particular agreement. The clause was not applicable because it only operated where the bailee, APS, "in anticipation of the sale of any goods" obtained any monies from a customer "on account of the retail price of that sale to that customer". APS did not obtain any monies from any customer "on account of the retail price of that sale to that customer" because APS did not deal with any retail customer. APS dealt only with Irlmond. It sold new vehicles to Irlmond, and Irlmond then sold them to the retail customers. To the extent that APS ever received any money it was on account of the sale as between APS and Irlmond, a wholesale transaction. Clause 17(ii) of the APS bailment plan agreement could not therefore render Irlmond liable in conversion to St George Wholesale. 145 Similarly, in relation to the Irlmond bailment plan agreement, cl 17(ii) of that agreement could not apply because new vehicles in Irlmond's hands were not bailed to Irlmond pursuant to that agreement. The only vehicles that were bailed to Irlmond under that agreement were used vehicles. Once again, the cl 17(ii) analysis relied upon by the respondents as a basis for their claim for conversion must fail. 146 Finally, we are not persuaded by the respondents' submission that s 7 of the Chattel Securities Act 1987 (Vic) renders Irlmond liable to St George Wholesale in respect of the new vehicles sold. 147 It was argued that under s 7(1) and (2) of that Act St George Wholesale held a "security interest" in the new vehicles bailed to APS and sold by Irlmond. That "security interest" was extinguished upon delivery to the retail customer. As a result of s 7(7) of that Act St George Wholesale was subrogated to the rights of APS in respect of those vehicles, thereby enabling St George Wholesale to recover the purchase price from Irlmond. 148 The primary judge considered that the effect of ss 7(1) and (2) was to extinguish a security interest over goods when those goods have been purchased for value, and in good faith. When, however, as in the present case the purchaser of goods encumbered by such an interest acquires those goods free of that interest without having to rely upon ss 7(1) and (2) of the Act, the condition for the operation of s 7(7) will not be satisfied, and no right of subrogation will arise. We regard his Honour's analysis of the operation of those provisions as correct. We would therefore reject the respondents' contentions regarding the operation of the Chattel Securities Act 1987 (Vic). 149 It follows that we would also dismiss the respondents' cross appeal. I certify that the preceding one hundred and forty-nine (149) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey, the Honourable Justice Sundberg and the Honourable Justice Weinberg.

Associate: Dated: 12 November 1999 Counsel for the Applicants: P R Hayes QC and I D Martindale

Solicitors for the Applicants: Feingold Partners Pty Ltd

Counsel for the Respondents: A C Archibald QC and D P Gilbertson

Solicitors for the Respondents: Corrs Chambers Westgarth

Date of Hearing: 24 - 25 August 1999