Spalla v St George Wholesale Finance Pty Ltd

IRLMOND PTY LTD (RECEIVERS & MANAGERS APPOINTED) and

APS (WHOLESALE) PTY LTD (RECEIVERS & MANAGERS APPOINTED)

APS (WHOLESALE) PTY LTD (RECEIVERS & MANAGERS APPOINTED)

REASONS FOR JUDGMENT 1 On 12 February 1999 the first respondent, St George Wholesale Finance Pty Ltd (St George Wholesale), and the second respondent, St George Motor Finance Limited (St George Finance), appointed the third respondent, Andrew Stewart Home, and the fourth respondent, Andrew William Beck, to be the receivers and managers of the property of the second applicant, Irlmond Pty Ltd (Receivers and Managers appointed) (Irlmond), and the third applicant, APS (Wholesale) Pty Ltd (Receivers and Managers appointed) (APS). 2 The receivers were appointed purportedly in pursuance of the power to appoint receivers and managers conferred upon the St George companies under debentures granted by Irlmond and APS. By each debenture Irlmond and APS respectively charged its property in favour of the St George companies to secure the payment of money that was owing or that might become owing to the St George companies. Each charge was fixed in respect of certain property and "floating" over all other assets. Each debenture provided that the charge would become enforceable at the option of the mortgagees on the happening of a number of defined events. Those events included default in the payment of any money due and payable by the mortgagor to the mortgagees and the occurrence of any event that gave rise to the automatic crystallisation of the floating charge. Provision was made for the automatic crystallisation of the floating charge in a variety of circumstances including where there were grounds upon which a court might order the winding up of the mortgagor, where the mortgagor had for a period in excess of seven days failed to pay sales tax of an amount that exceeded $10,000 and where either mortgagee had made a demand in writing for the repayment of a debt due to it. 3 In the case of Irlmond, the grounds upon which the mortgagees relied in appointing the receivers were an alleged default in the payment of money due to one or other of them, the fact that a demand for the payment of a debt had been served and the alleged insolvency of the mortgagor. The receivers were appointed to the property of APS by reason of its failure to pay sales tax in the sum of $547,272.39 on 21 July 1998 of which amount $321,078.74 remained outstanding as at 12 February 1999, by reason of its alleged failure to pay money that was due and owing to St George Wholesale, by reason of its alleged insolvency and by reason of the service of a demand for the repayment of a debt. 4 The applicants, being the mortgagors and their principal shareholder, Mr Anthony Patrick Spalla, bring this proceeding for the principal purpose of obtaining a declaration that the appointment of Messrs Home and Beck as receivers and managers of the property of the mortgagors is invalid. They seek an injunction restraining the receivers from trespassing upon the property of Irlmond and APS. They also seek a declaration that in appointing the receivers the St George companies engaged in unconscionable conduct in contravention of s 51AC(1) of the Trade Practices Act 1974 (Cth). That subsection provides: "(1) A corporation must not, in trade or commerce, in connection with: (a) the supply or possible supply of goods or services to a person (other than a listed public company); or (b) the acquisition or possible acquisition of goods or services from a person (other than a listed public company); engage in conduct that is, in all the circumstances, unconscionable." 5 Each debenture contains a proviso for redemption. The applicants seek an order that the St George companies provide a statement of the amount due under each debenture, or that the amount due be determined on the taking of accounts, and a further order that upon payment of the amount due the property of the mortgagors be relieved from the burden of the charges. 6 The applicants also seek to recover from the respondents damages and other relief, both at common law and under the Trade Practices Act. However, with the consent of the parties I have deferred hearing this aspect of their claim. 7 For their part, St George Wholesale and St George Finance bring proceedings by way of cross-claim against the present applicants and Stella Spalla, the wife of Mr Spalla, seeking a number of orders. First they ask for a declaration that the appointment of Messrs Home and Beck was authorised by the charges granted by Irlmond and APS. They seek judgment on a number of money claims the details of which I will come to later in these reasons. They also ask for damages for the alleged commission by the cross-respondents, Mr Spalla, Irlmond and APS of the tort of interference with contractual relations. 8 In order to understand the issues that give rise to the dispute between the parties it is necessary to say something of the history of their relationship. Irlmond and an unrelated company, Zeldon Pty Ltd (Zeldon), owned and operated two motor vehicle dealerships, one known as Heidelberg Mitsubishi and the other known as Essendon Mitsubishi. The companies had been granted a franchise to conduct those businesses by Mitsubishi Motors Australia Ltd (Mitsubishi Motors). The finance that was required to operate the two businesses was provided by the St George companies at a time when they were subsidiaries of Barclays Bank and traded under different names. The agreements pursuant to which that finance was provided are not all in evidence but it is nevertheless possible to detail the nature of the arrangements in broad outline. 9 The principal facility took the form of a bailment floor plan. Under this facility the financiers agreed to purchase vehicles at the request of Irlmond and Zeldon and then bail those vehicles to the companies. Irlmond and Zeldon would offer the vehicles for sale and upon a sale taking place were obliged to account to the financiers for the proceeds of sale less an agreed commission. 10 There were limits to the finance that was provided. The limits applied to specific categories of vehicles, namely new vehicles, demonstration vehicles, used vehicles and vehicles for the use of the directors. With regard to the provision of finance for new vehicles there was what was termed a deferred payment facility. The object of that facility was to permit the dealer to sell new vehicles on terms without being obliged to pay the purchase price to the financiers when a sale took place. The facility allowed the dealer to sell a new vehicle to an approved customer with the payment of the price to be deferred. The dealer was then obligated to pay for the vehicle within thirty days of the date of the delivery of the vehicle or when it received payment of the price, whatever first occurred. The facility was put in place to accommodate the requirements of fleet purchasers and those whose purchases were being financed. 11 By late 1991 Irlmond and Zeldon had failed to account to their financiers for substantial amounts that had been received on the sale of vehicles. The extent of their liability was of the order of $303,737.40. In a letter dated 4 November 1991 the financiers noted that it had been agreed that this sum (referred to as "conversion", "conversion amount" or "conversion loan") would be paid at the rate of $5,000 per calendar month. It is not clear whether any monthly payments were made, however, the amount of conversion stood at $305,745.53 as at 17 June 1992. 12 In the latter part of 1993 it was decided that Irlmond and Zeldon would dissolve their relationship with Irlmond taking over the Essendon Mitsubishi business and Zeldon the Heidelberg business. At that time the indebtedness to the financiers was around $2,400,000. In an agreement dated 2 December 1993, where the formalities of the dissolution are recorded, Irlmond agreed to assume responsibility for $1,100,000 of this debt. 13 In February 1994 St George Wholesale and St George Finance agreed to provide finance for the Essendon Mitsubishi dealership now being conducted by Irlmond. 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. 14 For present purposes it will suffice if I summarise the nature and effect of these facilities. The principal agreement is the bailment plan agreement between 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 $3,500,000. Upon a sale of a vehicle the bailment plan agreement provides (by clause 17) that the purchase price (less commission) shall belong to St George Wholesale and that APS must account for that money to St George Wholesale in specie. However, the letter of offer states 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. 15 The bailment plan agreement with Irlmond is 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 $1,450,000 and for demonstrator vehicles the limit was $350,000. 16 The deferred payment agreement relates to the bailment plan agreement with APS. Under the terms of that agreement APS is 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 provides that in respect of such sales, provided they are made to an approved customer, the payment of the price to St George Wholesale could be deferred until the customer pays for the vehicle or the expiry of thirty days from the date of the delivery of the vehicle to the customer, whichever first occurs. The letter of offer states that the limit of the deferred payment facility was $800,000 which amount was to be deducted from the new vehicle facility limit. 17 The demonstrator plan agreement takes the form of a hire purchase agreement in respect of such vehicles as Irlmond may request and St George Finance is willing to supply. The agreement provides that Irlmond will acquire the vehicles for the purposes of resupply. However Irlmond covenanted not to sell the vehicles unless it had elected to purchase them and had paid the purchase price. The limit of finance available under this facility was $350,000. 18 In addition to providing these facilities, St George Wholesale and St George Finance agreed to accept the sum of $700,000 in satisfaction of the obligation that had been assumed by Irlmond to pay $1,100,000 of the debt that had been incurred by Irlmond and Zeldon. The letter of offer records that this sum was to be paid by an instalment of $300,000 and the balance by ten monthly payments of $40,000 each. In August 1994 it was agreed that the limit under the new vehicle bailment facility would be increased by $400,000 to enable Irlmond to bail a sufficient number of vehicles to raise $400,000 to enable it to immediately apply that sum in satisfaction of its obligation to pay the balance of the $700,000. 19 The St George companies took various forms of security in respect of the obligations owed to them under the facility agreements. I have already mentioned the debentures granted by Irlmond and APS. They form part of that security. In addition, by an agreement dated 23 February 1994, Mr Spalla and Anstella Nominees Pty Ltd (Anstella), the fourth cross-respondent, have guaranteed the obligations of Irlmond and APS. 20 I should explain the role of APS in these arrangements. By the Sales Tax Assessment Act 1992 (Cth) an excise known as 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 goods. Accordingly, speaking generally, it is imposed only on the last wholesale sale of new goods. Having regard to the nature of the arrangements put into place between the parties which will be explained in a little more detail later, all dealings in new vehicles pass through APS and all dealings in used vehicles pass through Irlmond. The result is that APS is the company that incurs the obligation to pay sales tax on the sale of new vehicles. 21 Almost immediately after its facilities were put into place Irlmond was operating in excess of the facility limits. It was also desperately short of working capital. To deal with this shortage, Irlmond decided to make use of the proceeds received on the sale of vehicles as part of its working capital instead of seeing that money paid to St George Wholesale. (Later in these reasons I will consider upon whom the obligation to make payments to St George Wholesale was imposed). What Irlmond did was to use the proceeds in its business for longer than the forty-eight hours permitted by the letter of offer. This period was known as the "two day float". Not only did Irlmond remit the proceeds to St George Wholesale well after the due date for payment, 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. 22 In response to concerns expressed by the St George companies, on 22 July 1994 Horwath & Horwath, the accountants who acted on behalf of Irlmond, sent a submission to them explaining some of the difficulties that were being experienced by Irlmond. The submission identified the difficulties as "cashflow difficulties … stock control and accounts". The cashflow problems were said to have been caused by the payment of the $400,000. The problem with regard to the accounts was attributed to a change to a new computer system. Finally it was noted that current levels of stock held by the dealership were excessive and needed to be reduced. 23 At about the same time St George Wholesale conducted an audit of the dealership to determine, among other matters, precisely what amount was due and payable under the various facilities. The audit involved an inspection of the vehicles at Irlmond's premises for the purpose of identifying that the vehicles owned by St George Wholesale were in the possession of Irlmond. If they were not an explanation was sought as to why the vehicles could not be located. This process enabled the identification of vehicles that had been sold and in respect of which payment was due to St George Wholesale. 24 The audit disclosed that Irlmond had received approximately $1,150,000 from the sale of vehicles which had not been paid to St George Wholesale. After allowing for certain credits the amount outstanding to St George Wholesale was around $934,000. The extent of the financial difficulties facing Irlmond and APS was also evidenced by the fact that APS could not satisfy a liability to pay sales tax of approximately $450,000. An arrangement had been entered into to pay this debt by monthly instalments. There were competing views within the St George companies whether the whole of the debt due to it was recoverable.

Some thought it was necessary to raise a provision in the accounts of St George Wholesale showing the debt to be bad or doubtful. 25 On 1 August 1994 Mr Spalla met with Mr Peter Bell, then the state manager of St George, Mr Wayne Phillips, a state manager, and Mr Peter Beed, a senior manager with St George. Mr Spalla was told that the St George companies intended to serve a notice of default in respect of the outstanding indebtedness but that it would not be acted upon. Mr Spalla was advised that there would be a reconciliation of all amounts outstanding under the deferred payment facility. This involved writing to all deferred debtors to ascertain whether and to what extent they were indebted to Irlmond. Mr Spalla was also informed that St George staff would attend at the dealership to monitor sales and to collect incoming funds for payment to St George Wholesale. Not surprisingly, the St George companies were of the view that it would be preferable if Irlmond and APS obtained their finance from another financier. It was suggested to Mr Spalla that he should approach Australian Guarantee Corporation Limited (AGC) to ascertain whether it would take over the finance that was being provided by the St George companies. 26 The proposed reconciliation of the outstanding deferred debtors would have revealed to the St George companies (if it was not already known by them) that Irlmond or APS was improperly allocating vehicles to the deferred payment facility as a means of obtaining an extension of time for payment. A number of witnesses called by the St George companies said that Mr Spalla had strenuously objected to contact being made with the deferred debtors. Mr Bell said that in mid 1994 he raised the issue with Mr Spalla on a number of occasions and was told by him that if the deferred debtors were approached this would put Mr Spalla "out of business". Mr Phillips gave similar evidence. Mr Hiller, the general manager of St George Wholesale and St George Finance, said that he recalled Mr Spalla speaking with him about Mr Bell's proposal and saying that if his customers were approached in the manner proposed it would indicate to them that Irlmond was in financial difficulty and this would ruin Irlmond's business. Mr Hiller said that as a result of these entreaties he agreed that there would be no audit. 27 No doubt the reason that this evidence was led was to support a submission that Mr Spalla wished to hide the fact that Irlmond and APS were using the deferred payment facility as a means of obtaining working capital for the business and that he was concerned that if the improper use of that facility was discovered the St George companies would refuse to provide finance to Irlmond and APS. If the statements attributed to Mr Spalla were made in the circumstances described by the three witnesses that would not only provide strong support for the conclusion that Mr Spalla was intent on concealing from the St George companies the misuse of the deferred payment facility but also that he was concerned to hide the true extent of his companies' financial difficulties. 28 However, the evidence of Messrs Hiller, Bell and Phillips on this point cannot be accepted. It turned out that on 10 August 1994 a letter had been written to each deferred facility debtor seeking written confirmation that the debtor had purchased a vehicle from Essendon Mitsubishi and enquiring whether the price had been paid and, if not, when the price was due to be paid. The letter was written on Essendon Mitsubishi letterhead and was signed by Mr Spalla. The letter stated that the information was being requested by Essendon Mitsubishi's auditors for the purposes of their annual audit of the accounts. The result of those enquiries did indeed disclose that Irlmond had received payments of approximately $550,000 from the so-called deferred delivery customers but had not passed on those amounts to St George Wholesale. Mr Mark Cummings, now a member of Grant Thornton, Chartered Accountants, but then a member of Horwath & Horwath, had conducted the reconciliation. He said, and this was not contested, that he had advised St George Wholesale of the result of the reconciliation. He also said that at no time had his client, Mr Spalla, suggested that the reconciliation should not be conducted. 29 The fact that the reconciliation was conducted in August 1994 and that the results were made known to St George Wholesale suggests that Messrs Hiller, Bell and Phillips are mistaken in their recollection of the events. I should indicate that the fact that the reconciliation had been conducted only became apparent when the files of Grant Thornton were produced on subpoena during the course of the trial. Neither the applicants nor the respondents held any documents that disclosed the fact that a reconciliation had been undertaken in August 1994 and it is apparent that Mr Spalla did not recall this fact. 30 The production of the relevant documents by Grant Thornton caused Mr Hiller and Mr Phillips to say that the events to which they had referred in their evidence in chief related not to the reconciliation that had been conducted by Horwath & Horwath but to another audit that was proposed to be undertaken by the St George companies. It is possible, but I think unlikely, that the St George companies had intended to conduct their own audit of the deferred payment facility in 1994. If they did and had so advised Mr Spalla, it would not be surprising if Mr Spalla had taken objection on the basis that it would cause harm to the business. I have no doubt that the goodwill of the business would not have been improved by an audit conducted by St George shortly after the audit by Horwath & Horwath. More to the point, however, if the St George companies had proposed a further audit and if Mr Spalla had objected to it, I do not believe that his objection was for the purpose of preventing discovery of the misuse of the deferred payment facility. The St George companies had already been advised of that misuse by Horwath & Horwath and Mr Spalla would have known that to be the case. 31 In this connection I should also point out that when confronted with evidence that a reconciliation of the deferred payment facility had been carried out in August 1994, Mr Phillips said that he had intended to refer to some later proposal, perhaps one made in 1995 or 1996. Ultimately a draft letter was produced indicating that Coopers & Lybrand, the firm retained by St George Wholesale to audit the affairs of all its car dealer clients, had proposed to conduct an audit of the deferred payment facility in early 1997. Perhaps this was the occasion to which Mr Phillips was referring. I assume that this proposed audit was not carried out. This may have been in consequence of a request by Mr Spalla. But, as a I say, I do not accept that if Mr Spalla did object to an audit in 1997 (as to which there is no real evidence) that objection was for the purpose of hiding the true facts from the St George companies. 32 Returning to the events of 1 August 1994, on that day a notice was served on Irlmond advising that it was in default of its obligations by failing to pay St George Finance funds received on the sale of vehicles. A few days later the St George companies 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. 33 On 5 August 1994 a provision was made in the books of account of St George Wholesale that the debt due by Irlmond was, to the extent of $910,000, a bad or doubtful debt. 34 By 9 August 1994 the level of indebtedness immediately payable under the facilities had fallen to about $300,000. However, the St George companies still believed, as was the fact, that Irlmond was experiencing considerable difficulty in meeting its obligations to its creditors. It had monthly commitments of approximately $113,500 which included payments to be made to Preston Motors (a supplier of spare parts) and payments to be made on behalf of APS in respect of sales tax under the arrangement by which the outstanding tax was being paid by instalments. 35 Some time in August 1994 (it is not altogether clear precisely when) Mr Hiller agreed to extend the time within which Irlmond had to pay out the price of vehicles that had been sold and delivered from forty-eight hours (as provided in the letter of offer) to seventy-two hours. In a letter written by the respondents' solicitors, this extension was described "as a temporary concession granted by [St George Wholesale] and was not intended to be permanent". However it does appear that it became a permanent arrangement and was later referred to as the "three day float" or the "three day roll". 36 From 23 August 1994 the degree of monitoring of Irlmond's business by St George staff was reduced. An employee attended the dealership each afternoon to collect cheques due to St George Wholesale. Weekly instead of daily audits of vehicles were undertaken. 37 Late in August 1994 Horwath & Horwath presented a submission to St George containing a proposal for the future relations between the dealership and the St George companies. The proposal suggested a restructuring of the facilities to take account of a new Daewoo dealership that Irlmond proposed to acquire. Irlmond requested a cash advance of $850,000 of which $600,000 would be applied to reduce its current indebtedness to St George Wholesale and the remaining $250,000 would be used for working capital. After some negotiations St George Wholesale agreed to lend $650,000 to Anstella, another company controlled by Mr Spalla, to be applied to reduce the indebtedness to St George Wholesale. At the time that debt was around $600,000. 38 During the remainder of 1994 St George Wholesale continued to closely monitor the account with Irlmond and APS. The account was treated as an "impaired asset", that is an account with a client that was unlikely to be able to pay all of its debts in full. Indeed, St George Wholesale increased its provision to $1,250,000. However, by year's end the St George companies were conducting only two stock audits each month, one for new vehicles and one for used vehicles. Later this was altered to one monthly audit in respect of both new and used vehicles. 39 It is not necessary to recount in any detail the events between the beginning of 1995 and early 1998. However the following matters should be noted. Throughout this period Irlmond and APS 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 pay those funds to St George Wholesale. To make it appear that money was not due to St George Wholesale, Irlmond and APS made use of the following practices. As had occurred previously, vehicles that had been sold and paid for were allocated to the deferred payment facility. I have pointed out that this had the practical effect of extending the time for payment for those vehicles by thirty days. Further, instead of making payments for other vehicles within seventy-two hours after the price had been received, Irlmond, who made all of the payments to St George Wholesale on behalf of APS, 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 Irlmond's premises. The cheques would be forwarded to St George shortly after the audit. Any amount found to be due to St George Wholesale 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. 40 Mr W (Bill) May is the head of the loan management unit of St George Wholesale. This unit is located in Sydney. On 19 March 1998 Mr May wrote to Mr Hiller, and others within St George Wholesale, stating that Irlmond "is to be given 6 months to sell the Dealership or alternatively Automotive Finance is to revert within 30 days to explain why this should not be the case". Those responsible for the account in Melbourne did not agree. Nor did Mr Hiller who was also stationed in Sydney. Mr Hiller responded to Mr May by indicating that the Irlmond account was profitable (producing $10,000,000 of retail business each year) and that he did not support an "exit strategy". Mr May was not deterred. He wrote that if the Risk Board of St George said that the facilities should be terminated it would be left to "the automotive division to appeal that decision if they so wish".

41 As events turned out, in the financial year ended 30 June 1998 the dealership traded profitably. It earned approximately $431,000 before tax. In the previous financial year the profit was only $40,527. However, the fact that the business was trading profitably did not alleviate its cash shortage problems. 42 Moreover, in July 1998 APS had incurred a liability to pay sales tax in the sum of $547,272 which it was unable to pay. Mr E Landers, a public accountant retained by APS, wrote to the Australian Taxation Office offering to pay the sales tax by monthly instalments of $50,000. Although there was no response to this offer APS began paying the instalments. Five payments were made. As at 25 February 1999 the balance outstanding, including interest and late payment penalties, was $321,078.74. The St George companies were not informed that there had been a failure to pay sales tax in July 1998 nor were they aware that the tax was being paid by instalments. 43 From August 1998 the monthly audits that had been conducted by Coopers & Lybrand were taken over by St George Wholesale. They were carried out by or under the supervision of Mr Daniel Cahill, a dealer manager in the Automotive Finance section of St George Wholesale. According to Mr Cahill, St George Wholesale became involved in the audit of Irlmond because of concerns about its financial position. However, the fact is that at this time (that is August 1998) St George Wholesale took over the audit of a number of its vehicle dealer clients. 44 Mr Cahill conducted his first audit on 24 August 1998. The audit disclosed "funds in transit" to St George Wholesale totalling $520,660. The audit also disclosed that excluding funds due on the deferred payment facility, $995,972 was payable to St George Wholesale of which approximately $221,960 had been received by Irlmond more than three days before the audit. 45 The next audit was conducted on 15 September 1998. That audit disclosed that $830,210 was owed to St George Wholesale of which $45,553 was owing outside the normal trading terms. There was a deterioration in the position as disclosed by the next audit which was conducted on 8 October 1998. The total amount then outstanding to St George Wholesale was $959,983 excluding funds in transit and vehicles on the deferred payment facility. Of the amount outstanding $260,348 was overdue for payment. Ordinarily the total amount of the debt would be paid out within a week or so of the audit. However, Irlmond had suffered such a severe downturn in its business that the debt could not be paid. As at 22 October 1998 $575,000 was still outstanding. 46 This caused concern within the St George companies. Mr Phillips was of the opinion that Irlmond should take in an "equity partner" or look to obtain finance elsewhere. Capital Finance Limited (Capital), a competitor of St George, was regarded as a likely substitute financier. 47 According to Mr Spalla, in September or October 1998, he met with Mr Beed to discuss the deteriorating financial position of Irlmond. Mr Spalla said that during the course of the meeting Mr Beed said to him words to the effect that "we have to come clean and tell Sydney the truth, but you'll have to go somewhere else". Mr Spalla said that he took this to mean that the various practices that he had adopted to defer making payments to St George Wholesale must come to an end. His case is that Messrs Phillips, Beed and Cahill were aware of those practices and had tolerated them for many years and that Mr Beed's statement is evidence of that knowledge. 48 Mr Beed accepts that he made the statement that Mr Spalla has attributed to him. Of course he denied any knowledge of the practices. He said that by saying it was necessary to tell Sydney "the truth" he meant that it was necessary to inform Sydney of the precise amount that was then owed by the dealership. Mr Beed said that this conversation occurred on about 15 September 1998, shortly before he prepared a report which recommended terminating relations with Irlmond and APS. 49 I am convinced that Mr Beed is incorrect about the date of the conversion. On 27 October 1998 Mr Beed had received an e-mail message from Mr Phillips which read: "You must then speak to Tony [Spalla] and advise that we can NOT tolerate the fact that we have an audit that was completed weeks ago and yet still not cleared it!! Please find out what the outcome of the meeting with Craig Stanley and where he is with the preparation of up to date accounts. It would be naive to think that Capital would pick them up with no statutory accounts since 1997 which in themselves would not paint a bright picture. If all payout from the audit are not received immediately you can tell Tony that we will be forced to complete another audit in order to ascertain our TRUE position." 50 In my opinion the conversation between Mr Spalla and Mr Beed was in consequence of this instruction to Mr Beed. Whether it is evidence of the fact that officers of the St George companies were aware of the practices adopted by Irlmond and APS to defer making payments to St George Wholesale is a matter to which I will return. 51 On 29 October 1998 Mr Phillips sent an e-mail to Messrs Cahill and Beed which read: "The message is clear. All payouts MUST be in today and default notices issues agreement obtained etc. etc. and you can tell Tony it will be curtains!!" 52 By now it was the firm view of most people within the St George companies who were 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: a drop of the order of twenty per cent. As Mr May put in an e-mail to Mr Phillips on 3 November 1998: "What is critical here is to exit this relationship based on your recent correspondence and the fact that ongoing risk has become unacceptable on the back of falling sales, tight liquidity and the fact that an element of conversion [unpaid debt] is appearing." Mr May's intention was to "exit" the facility by Christmas. 53 As a result of his conversation with Mr Beed, and perhaps with other representatives of the St George companies, Mr Spalla realised that he had to take immediate steps to obtain finance for the dealership from another source. He approached Capital to see whether it was willing to provide that finance. At the same time Mr Spalla instructed Mr David Still, the company's internal accountant, to discontinue the practice of allocating vehicles that had been sold and paid for to the deferred payment facility. The result of this instruction was that the audit conducted on 13 November 1998 disclosed that in excess of $2,000,000 was owing to St George Wholesale apart from the debt due under the deferred payment facility which stood at around $1,000,000. The debt of $2,000,000 was made up as follows. Approximately one half was represented by "funds in transit". Of the balance, approximately $607,000 represented money that had been owing to St George Wholesale outside normal trading terms. Mr Still explained that the amount of indebtedness had increased to around $2,000,000 because Irlmond and APS no longer made improper use of the deferred payment facility. 54 By reason of the size of the debt that was owed to St George Wholesale it was not paid out within seven to ten days of the audit as was the usual practice. However it does appear that the amount was paid by the December audit. 55 The failure to pay the debt within a short period after the November audit resulted in the service on 25 November 1998 of notices of demand upon Irlmond and APS under the bailment plan agreements and the two debentures. Each demand required immediate payment to the St George companies of all money that was due and payable to them together with interest. In the case of the notices served upon APS the amount estimated to be owing was $947,781.82. The amount allegedly due by Irlmond was estimated to be $100,436.94. 56 There are varying accounts of what transpired at the time the notices were served. Messrs Phillips and Beed were in attendance at Irlmond's premises when service was effected. Mr Phillips served the notices by handing Mr Spalla a sealed envelope containing the notices. Mr Spalla said that he was told by Mr Phillips that the service of the notices was only a formality and that he, Mr Spalla, need not bother opening the envelope because the St George companies did not intend acting on the notices. Mr Phillips said that when he handed the envelope to Mr Spalla he said: "We're not going to close you down tomorrow provided Capital takes you out. If we had wanted to close you down, we could have done that years ago." Mr Phillips said that he went on to say: "If you don't come up with the money then it will be left to the powers that be to determine whether to appoint a receiver." He said that he explained to Mr Spalla that the only reason why the St George companies were allowing Irlmond to continue to trade was because of the prospect of obtaining refinance from Capital. Mr Beed supported the evidence of Mr Phillips to some extent. According to Mr Beed, Mr Phillips said: "We're not going to close you down tomorrow while you're discussing the matter with Capital." However, he agreed with the suggestion put to him by counsel for the applicants that Mr Phillips had conveyed to Mr Spalla the idea that the service of the

documents was a formality and that he did not have to worry about the demands at least for the time being. 57 In support of a submission that it should be accepted that when the notices were served it was made clear to Mr Spalla that they would not be acted upon, counsel for the applicants pointed to an e-mail sent by Mr Phillips to Mr May on 10 December 1998 which referred to the service of a "without prejudice letter of demand" as confirmation of Mr Spalla's version of what occurred. I do not think that this is the proper inference to be drawn from the e-mail. Each demand contained the following sentence "Without prejudice to the generality of this demand for the whole of the moneys owing, the estimate of moneys owing as at 23 November 1998 is [in the case of Irlmond, $100,436.94 and in the case of APS, $947,781.82]". It is likely that Mr Phillips' reference to a "without prejudice" demand was taken from this sentence. 58 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. 59 Following the service of the notices there were a series of discussions between Mr Spalla and Mr Phillips concerning the means by which Capital might taken over the financing of the dealership. It was accepted that it would be difficult to have Capital, or any other financier for that matter, agree to take over the account having regard to the size of the debt due to St George Wholesale. The view had been formed within the St George companies that it would be necessary to release part of that debt to make the account attractive. This was discussed with Mr Spalla. It was suggested that St George Wholesale would release, or covenant not to sue for, $1,200,000 of the amount that was due to it if Mr Spalla personally undertook to pay St George $700,000 by instalments. This proposal was reiterated in a letter to Mr Spalla dated 2 December 1998. 60 The next audit of the dealership was conducted on 22 December 1998. It followed a month of declining sales. The audit disclosed that there was a large volume of "funds in transit". Although not altogether clear from the evidence, I estimate the amount of those funds to total somewhere between $1,500,000 and $2,000,000. In addition, apart from money due under the deferred payment facility, St George Wholesale was owed a further $1,219,201 of which approximately $900,000 was overdue for payment. 61 Another audit was conducted on 20 January 1999. Apart from funds in transit and the amount due or to become due under the deferred payment facility, this audit disclosed that St George Wholesale was owed $1,732,949 of which approximately $1,100,000 was overdue for payment. 62 On about 14 January 1999 Mr Spalla was advised that his application to Capital to finance the dealership had been refused. He informed the St George companies of Capital's attitude on 20 January 1999 and a meeting was arranged for 25 January 1999 to discuss the position. 63 Those in attendance at the meeting on 25 January 1999 were Mr and Mrs Spalla, Mr Still, Mr Phillips and Mr Cahill. Mr Phillips said that he told Mr and Mrs Spalla that it appeared to him that there were only three options available to the dealership: that equity be put into the business either by Mr Spalla's family or an equity partner, that the business be sold or that a receiver be appointed. Mr Phillips said that he told Mr Spalla that he might be given three weeks within which to attract equity or sell the business. Minutes of this meeting were prepared by either Mr Phillips or Mr Cahill. I accept them to be an accurate record. According to those minutes Mr and Mrs Spalla asked for time to consider the options and Mr Spalla also requested a meeting with Mr Hiller. Both requests were agreed. 64 Notwithstanding the refusal by Capital to finance the business, Mr Spalla approached Capital to ascertain whether it would reconsider its decision. Some time around 29 January 1999, Mr Spalla was informed that Capital might be interested in providing finance to the dealership if Capital was provided with additional security, that is additional to security over the business. 65 As at 1 February 1999 a considerable amount of the indebtedness found to be due to St George Wholesale at the 20 January 1999 audit remained unpaid. Excluding the debt that was due under the deferred payment facility, the amount unpaid was approximately $910,000. 66 Although there was not much evidence directed to it, there was a meeting between Mr and Mrs Spalla and Mr Phillips on 1 February 1999 which Mr Phillips described as "a meeting … to discuss the way forward given that Capital have declined the application [for finance]". I am unable to say what, if anything, was resolved at this meeting. 67 There was an important meeting held on 2 February 1999 at St George's offices in Melbourne. Mr and Mrs Spalla were in attendance with their accountant Mr Cummings from Grant Thornton. Mr Dench from that firm also attended. Messrs Phillips and Beed were there on behalf of the St George companies. At the meeting Mr Cummings said that it appeared to him that Irlmond and APS had a deficiency of assets over liabilities of at least $2,200,000. A sale of the business was discussed. A file note made by Mrs Spalla indicates that the sale was regarded as a "priority". The appointment of a receiver over the assets of Irlmond and APS was also discussed. Mrs Spalla's file note has two entries in relation to this topic. One reads: "Wayne [Phillips] can arrange receiver he has the power." The other reads: "don't sell they will close it down." She also noted the following: "running out of time and options." It is likely that this comment was in reference to a request by Mr Spalla that he be given sixty days within which to sell the business. Mr Phillips' response was that Mr Spalla would be given seven days to advise of his proposed strategy. The position of Capital was referred to in an e-mail sent by Mr Phillips to Mr May shortly after the meeting had concluded. In that e-mail Mr Phillips noted that Capital had been discussed at the meeting, presumably in relation to the suggestion that it might still be willing to provide finance if additional security was available. According to the e-mail Mr Spalla "simply told them [Capital] that as there was no additional security with St George so why should he provide security to them." It is likely that something along these lines was said by Mr Spalla. There was also a discussion about the possibility of withholding payments from other creditors of Irlmond and APS, in particular the ATO, to maximise the return to St George. The proposal that was mooted involved providing money to Mrs Spalla in return for Mr Spalla arranging the affairs of Irlmond and APS in such a way that creditors other than the St George companies would not be paid. At the conclusion of the meeting it was agreed that the parties would meet again on 8 February 1999 to discuss the position and come up with a proposal. 68 On 4 February 1999 Mr Cahill attended at the dealership to conduct a further audit. In his evidence Mr Spalla said that this was unusual because it had not been agreed that an audit take place and also because monthly audits were usually conducted in the second or third week of each month. However, he later conceded that he had, albeit reluctantly, agreed to the audit so that both he and the St George companies had available to them up to date information that was required for the discussions that were to take place on 8 February 1999. 69 The result of the audit that was conducted on 4 February 1999 was as follows. Apart from funds in transit and any amount that would fall due under the deferred payment facility, the indebtedness to St George Wholesale was approximately $1,780,000. Of this amount approximately $1,188,000 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. In other words, Irlmond and APS were well behind in their payments to St George Wholesale. 70 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 Wholesale 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 1999. The cheque is dated 4 February 1999 and it is not clear whether Mr Cahill had requested that he be given a cheque in respect of the thirteen vehicles or whether it was merely handed to him. 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 is a conflict in the evidence as regards what was said when the cheque was signed. Mr Spalla said that he told Mr Cahill not to bank the cheque because the bank on which the cheque was drawn (the National Australia Bank Limited (NAB)) was not in funds. Mr Spalla said that he requested Mr Cahill to speak to him before presenting the cheque on the following Monday, 8 February 1999 to ascertain whether there were funds in the account. Mr Cahill agrees that he was asked not to bank the cheque on Friday. However, he says that he has no recollection of being requested to speak to Mr Spalla before banking the cheque on Monday. 71 I have no doubt that Mr Spalla's recollection is to be preferred. First, there were in fact no funds in the NAB account to meet the cheque. Second, there was real doubt whether there would be funds in the account on the following Monday. On 4 February the St George companies had requested Irlmond to open an account with the St George Bank and deposit money that was due to Irlmond in that account. The account was opened on 4 or 5 February 1999 and I assume that deposits into that account were made. Third, there is an e-mail dated 5 February 1999 from Mr Phillips to Mr Hiller where the discussion is 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." In these circumstances I find 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 1999 and it would not be presented on 8 February 1999 unless Mr Spalla informed St George that there were funds in the account. 72 The next event in the chronology is a meeting on the morning of 8 February 1999 attended by Mr and Mrs Spalla, Messrs Hiller, Phillips and Cahill from the St George companies and Mr Gary Moore from Mitsubishi Motors. In addition to the evidence given by a number of the participants concerning what occurred at this meeting, I have the hand written notes of Mrs Spalla, notes made by Mr May and typed minutes of the meeting prepared by one of the St George representatives. 73 It appears that the initial discussions were between Mr and Mrs Spalla and Mr Moore. Mr Moore explained that the position of Mitsubishi Motors was that if a receiver was appointed to the assets of Irlmond, Mitsubishi Motors would allow thirty days for the business to be sold before terminating the franchise. Then there was some discussion concerning the current level of indebtedness to St George Wholesale. Mr Spalla said that he thought that it was of the order of $2,250,000 to $2,300,000. Mr Spalla then submitted a written proposal to deal with the St George Wholesale debt. The proposal was that he would pay $700,000 to obtain a release of all indebtedness not exceeding $1,550,000 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. The proposal was rejected. Mr Hiller said that St George Wholesale might write off $1,150,000 and advance $400,000 to the dealership if Mr Spalla agreed to pay $700,000 to St George Wholesale. Mr Hiller said that the St George companies might agree to allow Mr Spalla a period of thirty to forty-five days to find an alternative financier.

74 It is possible that at this meeting there was also a discussion about banking the cheque that had been delivered on the previous Friday. Mr Spalla says that he was told that the cheque would be banked and he objected on the basis that there were still no funds in the account. The others deny that the cheque was discussed but Mr May's file note suggests that it might have been. His notes record the following: "$310K cheque to be banked". It seems that this notation was made during the meeting having regard to what appears both before and after the entry. The question of Irlmond's insolvency was discussed. Mr Spalla said that he informed the meeting that Irlmond was "technically insolvent". He accused St George of allowing Irlmond to trade whilst insolvent. Mr May rejected this accusation. The meeting concluded in the early afternoon and it was agreed that it would be resumed at 5.00 pm. 75 After Mr and Mrs Spalla left St George's offices at the conclusion of the morning meeting, Mr May decided to present the cheque that afternoon with the requirement that it be specially cleared. 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. 76 The meeting resumed at 5.00 pm as had been arranged. However, neither Mr May nor Mr Moore were in attendance. There was a discussion about the possibility of Mr Spalla reducing the current indebtedness to St George Wholesale. The extent to which St George Wholesale was prepared to forgive the debt due to it was also raised. Mr Spalla again suggested that St George Wholesale should forgive $1,550,000 and that he would put $700,000 into the business so that it could continue to trade. Mr Hiller rejected this proposal. Mrs Spalla made the following entry in her diary: "can't continue. hit brick wall". Ultimately, however, a proposal was agreed by all parties. It took the following form. 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 Wholesale did not exceed $2,250,000 and that Mr Spalla procured his family to make a 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. 77 A further meeting was held on 9 February 1999. 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 $1,000,000 to St George Wholesale by two instalments, the first on Friday, 12 February 1999 and the second on Friday, 19 February 1999. Mr Salvo said that he would advance the $1,000,000 needed to make these payments. In return the St George companies 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 Wholesale would be required to write off $1,150,000 of the debt due to it. If the business was not refinanced within the period of 120 days, the St George companies would be free to take whatever step they desired to protect their interests. An important aspect of the proposal, no doubt insisted upon by Messrs Phillips and Cahill, was that there would be a significant degree of supervision and control over Irlmond to ensure that during the 120 day period all amounts due to St George Wholesale would be paid within forty-eight hours of receipt. It was also proposed that if there was a "substantial breach" of those controls, the St George companies would be entitled to act to protect their interests. Finally it was agreed that a further audit would be conducted on the following day, 10 February 1999, to confirm the actual state of the indebtedness to the St George companies. 78 After the meeting Mr May was asked to give his approval to the proposal. He did so late on 9 February 1999 subject to certain conditions, one of which was that the indebtedness to St George Wholesale did not exceed $2,238,000. It is likely that around this time Mr May decided to appoint receivers over the property of Irlmond and APS if the proposal did not proceed to a concluded agreement. 79 On 10 February 1999, Mr and Mrs Spalla and Mr Salvo met with Mr Phillips. Mr Spalla was told that the proposal that had been discussed the previous day was acceptable to the St George companies provided certain conditions were satisfied. He was told that one condition was that the indebtedness to St George did not exceed $2,238,000. At the time Mr Cahill was conducting an audit to establish the indebtedness to St George Wholesale. The result of the audit was not known when the meeting took place. Mr Spalla told Mr Phillips that in his view it was likely that the indebtedness was as high as $2,400,000 to $2,500,000. Mr Phillips said that if the debt did exceed $2,238,000 receivers would be appointed. This threat was recorded by Mrs Spalla in her diary. 80 The audit that Mr Cahill commenced on 10 February 1999 was not completed until 11 February 1999. During the course of the 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 Still identified sixteen vehicles which had been paid for but in respect of which no payments had been made to St George Wholesale. The amounts involved totalled $422,463.49. As a result the total amount due to St George Wholesale exceeded $2,800,000. 81 Mr Phillips telephoned Mr Spalla and told him what had been discovered. Mr Phillips summarised the contents of this conversation in an e-mail 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 and it was David Still that conceded." 82 A meeting took place on the morning of 12 February 1999 at which Mr and Mrs Spalla, Mr Cummings, Mr Phillips and Mr Cahill were present. There was a discussion about whether Mr Spalla could put further funds into the business. He said that 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. According to Mr Spalla, Mr Phillips said: "Just give us the money or we will close you up." Perhaps Mr Phillips did say something along those lines, although it is an unlikely comment to make given the circumstances. Mr Salvo then joined the meeting. He said that he was no longer interested in putting any money into the business but that he would purchase the business for $1,000,000 subject to the approval of Mitsubishi Motors to a change of dealership and subject also to the St George companies providing him with floor plan facilities. The proposal required St George Wholesale to write off $1,150,000 and to come to some satisfactory arrangement with Mr Spalla concerning the balance of the debt. 83 Messrs Cahill, Phillips and Cummings left the room apparently to consider the proposal. When they returned about an hour later Mr and Mrs Spalla were advised that receivers had been appointed to Irlmond and APS and that they were in attendance at the business' premises. 84 This is a sufficient summary of the relevant facts for present purposes. Later it will be necessary to return to the facts when dealing with the specific contentions that have been raised by the parties. But before turning to those contentions I must say something about the effect of the bailment plan agreements and how they operated in conjunction with the letter of offer. 85 In the first place it is accepted by the parties that the bailment plan agreement with APS is the agreement that governs the acquisition and sale of new vehicles (referred to therein as tax free goods), and the bailment plan agreement with Irlmond is concerned with demonstrator vehicles (tax paid goods) and second-hand vehicles (used goods). 86 Clause 4 of each agreement provides that St George Wholesale "may from time to time approve of the Bailee [APS in the case of new vehicles and Irlmond in the case of demonstrator and second-hand vehicles] ordering goods on its behalf under this Agreement." That is to say, St George Wholesale is to become the owner of the vehicles the subject of the bailment plan agreements. In this context reference should also be made to clause 6 where it is provided that "all tax free goods … shall be purchased in the name of and on behalf of [St George] Wholesale", that "all tax paid goods … shall be purchased … as agent for [St George] Wholesale" and that "all used goods (not being a trade-in) … shall be purchased … as agent for [St George] Wholesale." 87 Under the agreements (by clause 7(a)) the bailee is required to keep all bailed vehicles in its possession at its business premises or other approved place of display. Irlmond has business premises but APS does not. It is to be assumed that the parties proceeded on the assumption that APS was entitled to keep the new vehicles bailed to it at Irlmond's premises. 88 Clause 12(a) provides that: "(t)he Bailee shall be merely a bailee for safekeeping of the goods upon the terms of this Agreement until termination of the Bailee's right to possession". The bailee's right to possession continues until the happening of certain stipulated events, one of which is "the sale of the goods by [St George] Wholesale": clause 12(b)(iii). 89 Clause 13 authorises the bailee, during the bailment period, to obtain offers to purchase the tax free goods. If an offer is received, St George Wholesale must be advised of it and it may in its absolute discretion sell the goods to the bailee by wholesale. 90 Clause 17 provides: "If the Bailee in anticipation of the sale of any goods obtains any moneys from a customer on account of the retail price of the sale to that customer or the making of a Finance Agreement with that customer such moneys shall belong to Wholesale in its right as owner of the goods and the Bailee shall unless Wholesale otherwise agrees in writing immediately on receiving such moneys account for the same to Wholesale in specie or in such other manner as Wholesale may from time to time in writing approve PROVIDED THAT:- (i) In respect of tax free goods any accounting by the Bailee to Wholesale pursuant to its obligations under this clause shall if there is a Distributor be with a view to recoupment by Wholesale of the Distributor's liability or anticipated liability in respect of such goods and any such accounting shall be sufficient discharge to the Bailee; and (ii) The making of any sale by Wholesale whether to the Distributor the Bailee the Guarantor the customer or to any other person shall be subject to a condition precedent that the price payable to Wholesale in respect of such sale is paid to Wholesale and in the case of tax free goods any loan made by Wholesale to any Distributor in connection with the goods is repaid PROVIDED THAT nothing in this sub-paragraph shall prejudice Wholesale's rights under Clause 10(b); (iii) The Bailee shall not be entitled to set off any commission to which he is entitled against his liability to account for such moneys or to deduct his commission from such moneys except strictly in accordance with such permission as Wholesale may from time to time give in writing." Provisions similar to clause 17 apply to the sale of tax paid goods and used goods: clauses 13 and 15 respectively. 91 In summary, the effect of the bailment plan agreements is as follows. St George Wholesale becomes the owner of all vehicles purchased under the agreements. New vehicles are bailed to APS and all other vehicles are bailed to Irlmond. APS and Irlmond are authorised to solicit offers to purchase the vehicles. Upon being informed that an offer has been received, St George Wholesale is to decide whether it will sell the vehicle to which the offer relates. If the offer relates to a new vehicle, St George Wholesale will sell that vehicle to APS who in turn will sell the vehicle to Irlmond. If the offer relates to a used or demonstrator vehicle, that vehicle will be sold to Irlmond. There will then be a sale to the customer. The purchase price, less commission, is held on trust for St George Wholesale. 92 The letter of offer effects an important change to these arrangements. It provides that Irlmond or APS (as the case requires) is to have forty-eight hours from the delivery of a vehicle within which to pay the amount due to St George Wholesale. This term was clearly intended to override any inconsistent provision in the bailment plan agreements. It overrides the provision which provides that the money received on a sale "shall belong to St George Wholesale". The reason it does so is that by extending the time within which the payment is to be made, the parties contemplated that the bailee (Irlmond or APS) was free to use the money in the meantime. The consequence is that when the purchase price is received it is not held upon trust for St George Wholesale. A person who has the custody and administration of property on behalf of another is a trustee of that property: Taylor v Davies [1920] AC 636 at 651. So also is a person who has received a property which he is to hold, apply or account for separately to another: Cohen v Cohen (1929) 42 CLR 91 at 100. But a person who is only obliged to pay money to another is a debtor in respect of that money and not a trustee. 93 I should also mention that there are two other respects in which the regular dealings between the parties did not conform to the provisions of the bailment plan agreements. First, St George Wholesale was never requested to approve the purchase of new vehicles. All new vehicles were purchased from Mitsubishi Motors and were on "automatic release", that is, when ordered the vehicles would be delivered to Irlmond and invoiced to St George Wholesale and automatically placed under the floor plan facility. Second, when an offer to purchase a vehicle was received from a customer, that offer was never submitted to St George Wholesale. Throughout the currency of the bailment plan agreements, Irlmond was permitted to effect a sale of all vehicles, new, used and demonstrator, without St George Wholesale ever being requested to make a decision whether to sell those vehicles to Irlmond or APS. 94 In these circumstances, notwithstanding the provisions of the bailment plan agreements, the course of dealing between the parties resulted in Irlmond passing good title to each vehicle that it sold on the basis that there was a contemporaneous sale by St George Wholesale to Irlmond or APS so that title could pass at the time of sale. Thus, the condition precedent to a sale by St George Wholesale set out in clause 17(ii) was not intended to have

effect. Either the condition precedent was overridden by the letter of offer or its operation was waived. 95 I now turn to consider the various bases upon which the appointment of the receivers is challenged. Here it is necessary to look at those events which the St George companies say justified the appointment. 96 Earlier I summarised those provisions of each debenture that set out the events upon the occurrence of which receivers could be appointed. It is now necessary to set out the relevant provisions in full. 97 Clause 8.1 of each debenture relevantly provides: "8.1 Enforceability 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;" 98 Clause 8.2 of each debenture relevantly provides: "8.2 Crystallization 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: … (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; (j) (Mortgagee in possession) if a mortgagee or other encumbrancer shall seize or enter into possession of or exercise or purport to exercise any power of sale in relation to the whole or any part of the property of the Company or any guarantor; (k) The Mortgagee makes a demand in writing for repayment of all or any of the principal sum." 99 I will begin by considering the appointment of the receivers to APS. First it is said that APS made default in the payment of money due and owing to St George Wholesale. The applicants concede that APS owed St George Wholesale approximately $2,000,000 as at 12 February 1999 of which they say that approximately $1,400,000 was due and payable. Mr Cahill says that the total indebtedness as at 12 February 1999 was $2,298,305.26 as disclosed by his audit on 11 February 1999. 100 On the evidence it is clear that a significant proportion of the debt (whether the total is approximately $2,000,000 or approximately $2,300,000) was owing before the January audit. That amount is $512,000. Thus, at the very least, on whatever basis the parties had agreed payments should be made, APS was in default in the payment of money that was due and owing to St George Wholesale. 101 It was submitted that the actual amount that was due and payable to St George Wholesale on 12 February 1999 was much greater than $512,000. However, it is not necessary to determine whether this is so because of the significant debt that had not been paid. 102 Second, St George Wholesale relied upon the failure to pay the sales tax that fell due for payment on 21 July 1998 as an event which resulted in the automatic crystallisation of the floating charge under clause 8.2 and therefore gave rise to the right to enforce the charge under clause 8.1. It seems clear enough that when the receivers were appointed on 12 February 1999 the St George companies were not aware that a significant proportion of the July sales tax was outstanding. But, having elected to enforce their security, the St George companies are entitled to rely upon any ground that justifies its conduct, whether or not it was known, to assist at the time of the appointment. 103 Third, the St George companies relied upon the demands for repayment that were served on 23 November 1998 and the failure to comply with those demands in a timely fashion. I will put to one side the issue whether what was said by Mr Phillips on the occasion when the demands were served would preclude the St George companies relying upon their service as an event which justified the enforcement of the charge. While there is much to be said in favour of that view it is not necessary for the issue to be resolved. 104 Upon the service of the demands the St George companies had the option of enforcing each charge. But they did not do so before 12 February 1999, some two and a half months after the service of the demands. In my view, notwithstanding the discussions that were taking place between the parties in the meantime, the proper inference to be drawn is that the St George companies elected not to exercise the option that was available to them: cf Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 646. Thus the service of the demands was not an event that justified the appointment of receivers on 12 February 1999. 105 Finally, there is the alleged insolvency of APS. I will consider that issue when I deal with the same allegation in respect of Irlmond. 106 I now turn to consider whether there were grounds that justified the appointment of receivers to Irlmond. The St George companies rely upon a number of events as giving rise to the enforceability of the charge granted by Irlmond. It will not be necessary for me to deal with them all in detail for the reason that it is clear that at least one event had occurred that justified the appointment. 107 First I will consider whether Irlmond was in default in the due and punctual payment of any money that was due and payable to the St George companies. The applicants say that subject to the availability of certain set-offs, "the amount due and payable by Irlmond on 12 February 1999 was no greater than $679,000 and in fact [was] substantially less". They contend that certain set-offs to which Irlmond was entitled would have eliminated the debt. 108 Clause 26 of each bailment plan agreement provides as follows: "A Certificate signed by the Managing Director, Deputy Managing Director, Secretary, Manager, or Branch Manager of the Guarantor or other person authorised by the Guarantor in that behalf that as at the date stated in such Certificate any sums have been paid or received or not paid or received by any party hereto, or that any sums or fees are payable or recoverable in respect of any goods taken on display and/or that goods are held under bailment plan and/or that goods are modified goods and/or are new goods and/or are tax free goods and/or are tax paid goods and/or modification works and/or the limits or conditions of any approval given by Wholesale under Clause 6(b) hereof and/or that a transaction is one of consumer supply and/or that goods are or have been bailment goods or demonstrator goods and/or the amount of any loss damage or liability the subject of any indemnity by the Bailee herein shall at all times and in all Courts be prima facie evidence hereof." 109 St George Finance is the guarantor under the bailment agreements. The rights and obligations of the guarantor are to be found in clauses 20, 21 and 24. They provide: "20. Subject to Clause 8(f) the Guarantor at the request of the Bailee (as testified by the Bailee's execution hereof) guarantees to Wholesale the due observance and performance by the Bailee of all the obligations and indemnities binding upon or attaching to the Bailee hereunder. This guarantee shall not be affected by any time or indulgence granted by Wholesale. 21. The Bailee shall in consideration of the guarantee referred to in the last preceding clause pay to the Guarantor on demand any amount paid by it under the said guarantee and shall also pay to the Guarantor on demand from time to time a fee or charge calculated at such rate on the Guarantor's potential liability or calculated on such other basis as may prior to the delivery to the Bailee of particular goods be fixed by the Guarantor from time to time for the purpose of this clause and notified to the Bailee. For the purpose of this clause 'potential liability' means the total of:- (i) Any amount for which the Guarantor is from time to time contingently or presently liable under its guarantee. (ii) Any sums which the Guarantor has paid or caused to be paid pursuant to its guarantee. … 24. (a) Wholesale and the Guarantor respectively may pay on behalf of the other of them any moneys which such other may be bound or entitled to pay hereunder. Wholesale and the Guarantor and any Distributor - (i) May pay or cause to be paid any moneys payable by the Bailee to any third party in respect of any goods and the sum paid shall be deemed a debt due by the Bailee to the party paying the same or causing it to be paid; (ii) Are irrevocably authorised to appropriate any moneys paid by the Bailee or any sum due to him (whether for deposits or otherwise) by Wholesale or the Guarantor or any Distributor as the case may be towards any debt or liability owing to him." 110 Purportedly in pursuance of clause 26, Mr Phillips, a manager of St George Finance, signed a certificate which reads: "Certificate of amount owed to St George Motor Finance Ltd ACN 007 656 555 by Irlmond Pty Ltd ACN 006 314 870 trading as Essendon Mitsubishi ('Irlmond') This is a certificate given in accordance with clause 26 of the Bailment Plan Agreement dated 11 November 1993. By this certificate, I, Wayne Stephen Phillips, being a Manager of St George Motor Finance Limited, hereby certify: The sum payable by Irlmond to St George Motor Finance Ltd at 12 February 1999 in respect of new vehicles is $2,298,305.26. The sum payable by Irlmond to St George Motor Finance Ltd at 12 February 1999 in respect of used vehicles is $679,715. This certificate is intended to be prima facie evidence of the matters referred to herein." 111 In his evidence Mr Phillips conceded that he made no independent enquiry to ascertain the quantum of the debt that he certified was due to St George Finance. He agreed that he had obtained the information for his certificate from Mr Cahill. In an affidavit that was filed in this proceeding Mr Cahill quantified and explained the amounts said to be owing by Irlmond. He said that those amounts totalled $679,715. One thing that should be noted about Mr Cahill's evidence is that he was not able to specify to whom this debt was owing. In his affidavit he described the creditor as "St George" which he defined to mean St George Bank, St George Wholesale and St George Finance. 112 There is no evidence to suggest that St George Wholesale had called upon St George Finance to honour the guarantee given by clause 20 of the bailment plan agreements. Nor is there any evidence of a demand having been served on Irlmond by St George Finance pursuant to clause 21. Indeed, it is to be inferred from the evidence that St George Finance had not been asked to honour the guarantee and that no demand was served on Irlmond. A significant number of documents have been discovered by St George which have been tendered in evidence. It appears that almost all documents that came into existence between August 1998 and the date of the appointment of the receivers have found their way into evidence in one way or another. None of those documents makes any reference to the guarantee nor to the assumption by St George Finance of any obligations under that guarantee. If such an event had occurred I am sure it would have been mentioned in the documents or by one of the St George witnesses. 113 In those circumstances I decline to act on the certificate. Accordingly it is necessary to consider the evidence of Mr Cahill substantiating the claims. 114 The first amount claimed is the sum of $39,149.96 which was said to be payable under a deferred retail delivery agreement entered into in 1998. In 1998 two vehicles were transferred from the APS bailment plan facility and transferred to the deferred retail delivery agreement. They were sold for $39,149.96 and the amount was not paid to St George Wholesale. The obligation to make that payment was imposed upon APS and not Irlmond. The deferred retail delivery agreement does contain provisions which assume the existence of a guarantee by Irlmond of the obligations of APS. But no such guarantee was produced and I cannot infer that one was ever executed. It follows that the debt, the quantum of which is not disputed, is owed by APS and not by Irlmond. 115 The second claim is for a debt in the sum of $45,672.74 in respect of two demonstrator vehicles the subject of the demonstrator plan agreement with St George Finance which were sold by Irlmond. The debt is not disputed. 116 The third claim is for $32,045 in respect of the sale by Irlmond of three vehicles. Mr Cahill said that the terms of sale required payment of the purchase price to be made within seven days. One vehicle had been sold on 4 February 1999 and the remaining two vehicles were sold on 9 February 1999. The applicants say that the first purchaser did not pay the price for his vehicle until after the appointment of the receivers. It is unlikely that the second purchaser paid the purchase price before 12 February 1999. Thus, whilst it appears that the amount in question was not due for payment on 12 February 1999, it became payable shortly thereafter. 117 The fourth amount claimed is the sum of $56,780 in respect of three used vehicles sold by Irlmond between 10 February and 12 February 1999. By reason of the "three day float" that amount could not have been due and payable as at 12 February 1999. Further, part of the purchase price was satisfied by the trade-in of a Saab motor vehicle. The applicants say that the floor plan value of that vehicle should be deducted from the amount claimed. In this regard reference should be made to clause 6(e) of the bailment plan agreements. That clause provides: "(e) 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. (i) In respect of any used goods including trade-ins Wholesale shall reimburse the Bailee in respect of the expenditure incurred by the Bailee as its agent provided that the fixed percentage only of the purchase price or the true wholesale value (whichever is the lesser) shall be reimbursed after the Bailee has complied with paragraph (f) hereof and the balance (if any) shall be reimbursed when the goods are disposed of. (ii) For the purpose of this sub-clause: 'true wholesale value' of any goods shall mean the sum fixed by Wholesale from time to time as being the true wholesale value of such goods and the sum so fixed shall be final and conclusive between the parties thereto." 118 The manner in which the dealer advised St George Wholesale that a trade-in vehicle had been purchased was explained by Mr Cahill. He said that Irlmond has a computer system on which it entered all trade-in vehicles. That system is connected to computer facilities at St George. Once an entry of a purchase is made, St George staff check to ensure that the used car facility would not be exceeded by the addition of the trade-in vehicle. They also carry out checks to determine whether another finance company has a lien over or other interest in the trade-in vehicle. If these enquiries indicate that all is in order, the trade-in vehicle is allocated to the bailment plan agreement with Irlmond. Then the purchase price of the trade-in vehicle is set-off against the money owing to St George Wholesale in respect of the sale of the new vehicle, leaving the balance payable to St George. 119 As regards to the Saab, Mr Cahill said that St George has records which would indicate whether it had been placed on the floor plan. However, those records were not produced, despite a call being made for their production. There being no suggestion that the Saab should not have been allocated to the Irlmond bailment plan, I would infer that it was or should have been placed on that facility. However, I am not able to say what credit was or should have been allowed to Irlmond in respect of the trade-in vehicle. In those circumstances, only $16,000, being the amount of the purchase price paid in cash, is owing to St George Wholesale. That amount became payable after the appointment of the receivers. 120 Next there is a claim for $287,346.12 in respect of ten vehicles that were sold to Brighton Classic Cars between 10 and 12 February 1999. The purchaser traded in two vehicles which were given a value of $322,000. The applicants say that no allowance has been made for the trade-in vehicles and they were placed on the used car bailment plan. Mr Cahill said that St George Wholesale had not placed the trade-in vehicles on the used car bailment plan because it has concerns about the value attributed to them. That is not a satisfactory explanation for declining to allow a set-off. Clause 6(e) requires St George Wholesale to reimburse Irlmond (in effect by a set-off) either the amount of the trade-in allowance, in this case $322,000, or the true wholesale value of the trade-in vehicles, whichever is the lower figure. Mr Cahill did not say what is the true wholesale value of the trade-in vehicles and I have no way of determining that amount. In result, I cannot be satisfied that any particular amount is payable to St George Wholesale. 121 Then there is a claim for $329,515 being proceeds of the sale of twenty-one vehicles that Mr Still had acknowledged during the two February audits as having been sold and paid for. The applicants do not dispute that these vehicles had been sold and only faintly dispute that the purchase price had been received; although it is likely that in respect of one sale, which occurred on 10 February 1999, the price had not been received by 12 February 1999. The applicants assert that many of these sales were the subject of a trade-in. But there is no evidence to that effect. As it seems to me that the applicants carry the burden of establishing that there were trade-ins, and they have failed to do so, I must find that the amount claimed (apart from the proceeds of the sale of one vehicle) was due and payable as at 12 February 1999 and that the balance claimed became due and payable thereafter. 122 On 10 and 11 February 1999 Irlmond delivered four cheques drawn on its banker and made payable to St George Wholesale in respect of the sale of a number of vehicles. Those cheques were for $8,647.41, $24,616.00, $127,063.90 and $201,476.64 respectively. Each cheque was presented for payment shortly after the appointment of the receivers and was dishonoured. The fact of dishonour is not an event upon which St George can rely to support the appointment of the receivers. But there appears to be no answer to the contention that, upon dishonour, Irlmond became liable to pay to St George Wholesale the value of the cheques and that sum is now due and owing. 123 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. 124 The applicants assert that notwithstanding the fact that Irlmond is indebted to St George Wholesale for the various amounts that I have found to be due, there should be set-off against those amounts the value of the used vehicles that were in the possession of Irlmond on 12 February 1999 on the basis that Irlmond had the right to require St George Wholesale to purchase those vehicles under its bailment plan agreement. According to the evidence, which I must confess is a little unclear on this aspect, Irlmond had in its possession used vehicles to the value of approximately $900,000 that had not been bailed. The applicants say that I should deduct this amount, or at least eighty-five per cent of this amount (being the approximate value of the vehicles for bailment plan purposes) from the amount found to be due to St George Wholesale in order to arrive at the true state of indebtedness. Of course, that would result in there being no indebtedness to St George Wholesale. 125 There are two answers to this contention. The first is that as at 12 February 1999 the value of the vehicles under the used car facility was approximately $1,700,000. This was in excess of the facility limit. In that circumstance Irlmond did not have the right to bail further used vehicles without the consent of St George Wholesale. There is no evidence that such consent would be forthcoming. The second answer is that the mere potential of placing vehicles under the used car facility is not a sufficient reason, indeed it is no reason, for reducing the debt due to St George Wholesale. 126 Next, St George Wholesale contends that when Irlmond received the purchase price of each vehicle sold it held that money on trust for St George Wholesale. I do not accept that this was so. It is accepted by all parties that St George Wholesale is the owner of all new vehicles that are bailed. On a sale of a vehicle by Irlmond to a customer, title in that vehicle passes in the following way. In the case of new vehicles, title passes from St George Wholesale to APS, then to Irlmond and then to the customer. In the case of used vehicles, title passes from St George Wholesale to Irlmond and then to the customer. In accordance with ordinary contractual principles each person in the chain was obliged to pay the price of the vehicle to the person from whom title is obtained. Thus, in the case of new vehicles, the customer was obliged to pay the purchase price to Irlmond, Irlmond was obliged to pay the price to APS and APS was obliged to pay St George Wholesale. 127 In practice, payments of the purchase price did not follow this course. On the receipt of the purchase price from the customer Irlmond did not make any payment directly to APS. Instead Irlmond remitted the money to St George Wholesale on behalf of APS and also made payments of sales tax on behalf of APS. It thereby discharged the obligations of APS to pay the purchase price to St George Wholesale and to pay sales tax to the ATO. But this practice did not alter the legal relations between the parties. In particular, it did not constitute Irlmond as trustee of the proceeds of sale of new vehicles. On the sale of a new vehicle Irlmond became a debtor of APS and it discharged that indebtedness by making payments for the benefit of APS. 128 St George Wholesale also contends that Irlmond was obliged to account to it for the proceeds of the sale of new vehicles. 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. 129 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. 130 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. 131 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. 132 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 Chattels 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. To deal with this argument it is necessary to refer to the relevant provisions of the Act: 133 "Security interest" is defined in s 3 to mean: "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, but does not include a possessory lien or pledge;" 134 Subsections 7(1) and (2) provide: "(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 where the debtor has lost the right to possession of the goods or is stopped 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 of the security party is extinguished." 135 "Security party" is defined in s 3 to mean: "the holder of a security interest and includes the lessor in relation to a lease of goods and the owner in relation to a hire-purchase agreement;" 136 I will assume, without deciding, that by reason of the bailment plan agreement St George Wholesale held a security interest over the vehicles that were bailed to APS. It is not in dispute that this security interest, if it existed, was unregistered. 137 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. 138 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. 139 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). 140 Finally, on this aspect of the case, I must deal with the contention that both Irlmond and APS were insolvent at the time the receivers were appointed. There was a good deal of argument directed to this question but, in the end, I have little doubt that insolvency has been established. First there is the concession that was made by Mr Spalla. True, it is that he only admitted making the statement that the companies were "technically insolvent", but I do not appreciate the distinction between that form of insolvency and any other. Then there is the evidence of Mr Cummings who at the meeting on 2 February 1999 said that Irlmond and APS had a deficiency of assets of $2,200,000. There is also the evidence of Mr Paul Stewart, a chartered accountant in the firm of which the receivers are partners. He had conducted an investigation into the affairs of Irlmond and APS and has reviewed such of the books and records of those companies as he was able to find. His evidence was 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. Further, Irlmond's account with the NAB was drawn to its limit and the dealership had no other ready means of obtaining cash. There is also the fact that Irlmond and APS were not able to pay all of their debts. As I have mentioned, the sales tax that was due and payable on 21 July 1999 had not been paid by the time of the appointment of the receivers. The outstanding debt due to St George Wholesale had not been paid. The business was deteriorating and, according to Mr Still, January was a "dreadful month". In my view the fact that the companies were insolvent is an inescapable conclusion from the evidence. 141 The position thus far reached is that, for the reasons stated above, the charge created by each debenture had, at the option of St George Wholesale and St George Finance, become enforceable thereby permitting the appointment of receivers to the property of Irlmond and APS. The issue that now arises is whether there is some basis for contending that St George Wholesale and St George Finance were not entitled to exercise their power to appoint receivers. Two arguments were put forward in support of the proposition that St George Wholesale and St George Finance were precluded from so doing. First, it is said that they are estopped from relying upon any of the events that gave rise to the enforceability of the charge. The second argument is that the appointment of the receivers was contrary to s 51AC(1) of the Trade Practices Act thereby justifying the grant of relief under s 80 or s 87 restraining the continuation of the receivership. 142 Once it was thought that there were many types of estoppel. Jordan CJ in Discount & Finance Ltd v Gehrig's NSW Wines Ltd (1940) 40 SR(NSW) 598 at 602 - 603 identified them as estoppel by deed, common law estoppel, estoppel by representation and estoppel by acquiescence. To this list his Honour may have added estoppel by judgment, issue estoppel, an estoppel of the Henderson v Henderson (1843) 67 ER 313 variety, and estoppel by convention. 143 In the trilogy of cases Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387, Foran v Wight (1989) 168 CLR 385 and Commonwealth v Verwayen (1990) 170 CLR 394, an attempt was made to unify these categories of estoppel. For most purposes, in particular for what is commonly known as promissory estoppel, the elements that must be satisfied for an estoppel to arise have been summarised by Brennan J in Waltons Stores, supra, at 428 -429: "In my opinion, to establish an equitable estoppel, it is necessary for a plaintiff to prove that (1) the plaintiff assumed that a particular legal relationship then existed between the plaintiff and the defendant or expected that a particular legal relationship would exist between them and, in the latter case, that the defendant would not be free to withdraw from the expected legal relationship; (2) the defendant has induced the plaintiff to adopt that assumption or expectation; (3) the plaintiff acts or abstains from acting in reliance on the assumption or expectation; (4) the defendant knew or intended him to do so; (5) the plaintiff's action or inaction will occasion detriment if the assumption or expectation is not fulfilled; and (6) the defendant has failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise." See also Verwayen, supra, at 444 - 446 per Deane J. 144 The applicants found their argument on estoppel on two broad propositions. First, it is said that by representations and conduct the St George companies led Irlmond and APS to believe, and they did believe, that no reliance would be placed on any of the grounds that I have found would justify the appointment of receivers. The second basis was enunciated by senior counsel for the applicants in the following language: "What St George was in effect saying to the dealer was 'we will continue to provide ongoing floor plan finance and otherwise support you financially to the extent necessary to get you in a position to sell or refinance'". 145 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. 146 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. 147 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. 148 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. 149 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. 150 Finally there is the insolvency of the two companies. There is no suggestion that Mr Spalla believed that the St George companies would not act on that insolvency if they were minded to do so. If he was of that belief, it was not brought about by any conduct on the part of the St George companies. 151 The suggested promise that the St George companies would continue to support Irlmond and APS until they were able to dispose of the dealership or obtain refinance is also not made out on the evidence. It is clear that in the latter part of 1998 and the first few weeks of 1999, Mr Spalla was encouraged to make the dealership as attractive as possible to entice another financier to take over the account or to encourage a prospective purchaser to acquire the business. As Mr Hiller said, that was the reason why St George Wholesale contemplated writing off a substantial portion of its debt. Of course it was in the interests of not only Mr Spalla and his companies but also of the St George companies that the business to be sold or refinanced. However, Mr Spalla had been told in October 1998 that the St George companies wished to terminate the facilities. In many of the important discussions that took place thereafter the possible appointment of receivers was raised. Thus Mr Spalla knew that if the dealership was not sold or refinanced, the St George companies might well appoint receivers if an event occurred that justified their appointment. Indeed, nowhere in the evidence is it suggested that Mr Spalla was promised or given an assurance that this would not occur. 152 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. 153 The last aspect of the applicants' case with which I must deal is the claim for redemption. Irlmond and APS have a right to redeem the charges granted by them on payment of principal interest and costs. It is a right which cannot be disputed: Tasker v Small (1837) 40 ER 848. The St George companies only oppose the making of redemption orders on the ground that they will be futile because neither Irlmond nor APS has the funds to pay out the amounts that will be required to effect a redemption. However, that is not so obviously clear, especially in the case of Irlmond, that I should refuse to make the orders. Accordingly I will grant to Irlmond and APS the relief that they seek in this regard. 154 Now I turn to consider the cross-claim. First, in view of the findings that I have made, it is apparent that the St George companies are entitled to a declaration that the appointment of the receivers and managers was lawful. 155 Second, as to their money claims, I have determined the amounts that are due and payable to the St George companies in the process of considering whether there were grounds for the appointment of the receivers. The St George companies are entitled to judgment for the amounts that I have found to be due to them. 156 Third, there is a claim against Mr Spalla and Anstella under the guarantee given by them. It is not disputed that those parties are liable to judgment under the guarantee for the amounts payable to the St George companies. The St George companies no longer pursue their claim under the guarantee against Mrs Spalla. Accordingly that claim will be dismissed as will the other causes of action that were pleaded but not pursued. 157 Mrs Spalla asks for her costs and an order that they be taxed on an indemnity basis. It was put that the claim against Mrs Spalla was hopeless and brought for the improper purpose of putting pressure on Mr Spalla to discontinue the proceeding. 158 In my view it is preferable to deal with the question of costs on a somewhat different basis. In the course of resolving the various issues raised by the parties, whilst the St George companies were successful on most issues, there were a number of areas where their submissions were not upheld. Thus I do not think that the St George companies should receive all of their costs of the claim and cross-claim. In my view the proper order to make is that they recover eighty per cent of their costs except to the extent that they relate to the proceedings against Mrs Spalla. As a matter of form it is appropriate to order that Mrs Spalla recover her costs of the cross-claim although it is unlikely that she has incurred any separate costs. In any event I do not think it appropriate that her costs be taxed on an indemnity basis. 159 The parties should bring in minutes of orders to give effect to these reasons. I have already circulated draft minutes that should assist the parties in that regard.

I certify that the preceding one hundred and fifty-nine (159) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.

Counsel for the Applicant: Mr P R Hayes QC Mr I D Martindale

Solicitor for the Applicant: Feingold Partners Pty Ltd

Counsel for the Respondent: Mr A Archibald QC Mr D Gilbertson

Solicitor for the Respondent: Corrs Chambers Westgarth

Date of Hearing: 29, 30 & 31 March 1999 1, 7, 8, 9, 12, 13, 14 & 16 April 1999