VL Finance Pty Ltd v Legudi [2003] VSC 57

6. For many years Mr Legudi, senior, and his wife and his children carried on a family business of manufacturing and selling ladies wear from premises which they owned in North Melbourne. At the outset Mr Legudi, senior, was in charge of the operation and his sons did as he said. But as the years went by the sons began to take on an increasing role in the management of the business and Mr Legudi and his wife did less.

9. Early in the 1970's Neil Curwood, who is a chartered accountant, began to act as the Legudis' external accountant and in 1972 the business was structured or restructured as a corporate group consisting of a non-trading holding company called Legudi Holdings Pty Ltd ("Holdings"), an operating company, Legudi & Sons Pty Ltd ("Sons"), and a land holding company, Legudi Freehold Properties Pty Ltd ("Properties"). For operating reasons all group finance was channelled through Sons, but Properties provided security on an as and when needed basis.

12. Mr Legudi's eldest son, Anthony Legudi, started in the business after leaving school at the age of 14 or 15 in the mid 1950's. To begin with, his responsibilities were confined to cleaning the sewing machines each night ready for the staff the next morning. Until the age of 22 he received no pay other than the occasional pound for pocket money on the occasions that he needed it. But over time his skills and responsibilities and his remuneration grew. Ultimately, he was responsible for sales including sales to major retailers, and for some designs, and when the business was re-structured as a group in 1972 he was appointed as a director of Sons and Properties while retaining his other roles.

15. Mr Legudi's second son, Charles (Carmelo) Legudi, had principal responsibility for all other areas of production and manufacture, but the evidence does not reveal anything as to his level of formal education or work history in the business. At relevant times he was not a director of either Sons or Properties.

18. Mr Legudi's third son, Frank (Francesco) Legudi, was responsible for cutting and factory floor production. He left school in the 1950's after failing to complete year six and, like Anthony Legudi, he started in the business on menial tasks and advanced from there. He did not undertake any formal education after leaving school and he did not have as much business ability or confidence as his brother Anthony. But he too was appointed a director of both Sons and Properties in 1972 when the group structure was set up.

21. Mr Legudi's youngest son, Ross Legudi, was a qualified accountant and acted as the full time in house accountant for the group. Together with Charles Legudi he played the key management role in the group. But he was not a director of Sons or Properties.

24. During 1990 the group came under considerable financial pressure. Its principal banker, Australian and New Zealand Banking Group Ltd, greatly devalued its real property securities and thus as I would infer reduced facility limits. The group's other major financier was the plaintiff, VL Finance Pty Ltd, which had extended both loan and debt factoring facilities to the group, and while the evidence does not go so far I suspect that it too was looking at its position. In any event it became apparent to Mr Curwood that Sons was approaching the point at which it would be deemed insolvent unless something were done to improve its balance sheet. Mr Curwood advised Charles and Ross Legudi that if the company were to continue it would be necessary to replace some of Sons' debt with equity by the issue of shares to family members.

27. At that time Sons was indebted to VL Finance Pty Ltd in an amount of approximately $2 million and the indebtedness was secured by charge over the assets of Properties. With that in mind, Mr Curwood devised a plan which involved the assignment or novation of the VL Finance indebtedness from Sons to Properties, thus creating a debt in the same amount due from Sons to Properties; a loan of some $2 million by Properties to family members; the use of that $2 million by the family members to subscribe for $2 million worth of 12% non-cumulative participating redeemable preference shares in Sons; and the use by Sons of the $2 million so subscribed to repay its indebtedness to Properties. In the result it was intended that there would be an improvement of $2 million in the net assets of Sons, and no decline in the net assets of Properties (because its new indebtedness of $2 million to VL Finance would be matched by the new indebtedness of $2 million of family members to Properties)

30. Other advantages of the plan as conceived by Mr Curwood were that there would be no immediate need for family members to pay cash for their shares (because the whole transaction could be effected by means of a round robin of book entries); Sons would qualify for a tax deduction on the 12% dividend payable on the shares, but without having to pay the dividends immediately (because the dividends could be accrued in the accounts of Sons); and that family members would qualify for a personal tax deduction on interest payable by them on the loan from Properties[1], but without having to pay the interest immediately (because the interest obligation of the family members could be accrued in the accounts of Properties).

33. Mr Curwood prepared a lengthy document explaining the proposal and presented it at a meeting with the four Legudi sons. He and they had a long discussion about the future of the group and about the proposal. In the course of that discussion Charles Legudi asked a large number of questions delving deeply into all aspects of the matter and Ross Legudi also asked a number questions. Anthony and Frank Legudi spoke less but they listened to the questions asked by their brothers and they heard the answers which were given. All four brothers expressed concerns about the prospect of bringing in the family and making them debtors of the group, but ultimately a consensus was reached that the proposal should be implemented.

36. A further meeting followed with Mr Legudi senior and the Legudi sons, at which Mr Legudi senior expressed fears about his standing in the community if Sons were to be deemed insolvent. Again it was agreed that the proposal should be accepted.

39. At a meeting of directors of Sons held on 10 September 1990 it was resolved that the capital of the company be increased by $2 million by the creation of 2 million 12% non-cumulative participating redeemable preference shares of $1.00 each, and subsequently the preference shares were allotted amongst the four sons, their wives and children and their sisters.

42. By journal entries reflected in the 1992 financial statements of Sons, each of the family members was shown as the holder of the preference shares for which they had subscribed, and as having an accrued entitlement to the dividends payable on the shares for that year. By corresponding journal entries reflected in the 1992 financial statements of Properties, each of the family members who had subscribed for preference shares in Sons was shown as indebted to Properties on current account in the amount of the moneys that they had subscribed for shares in Sons, and as indebted to Properties on current account for the interest accrued due on that debt in the 1992 year.

45. No formal loan agreements were ever brought into existence. The only documentary evidence of the loans were the journal entries and the annual general ledger and financial statements of the companies. The only documentary record of the terms of repayment of the loans was that the liabilities of the family members to Properties in respect of the loans were recorded in Properties' financial statements as current assets. In evidence, Mr Curwood said that the loans were so recorded because, in the absence of agreement as to a fixed term, an accountant treats such loans as at call.

48. A similar position is reflected in the 1993 financial statements of Sons and Properties. In the Sons financial statements, the family members are shown as holders of the preference shares and as being entitled to the 12% dividend which accrued in the 1993 year as well as to the 12% dividend which had accrued in the 1992 year, and in the Properties financial statements, the family members are shown as current debtors in respect of the principal amount of the loan advanced to them to acquire their preference shares and as a current debtor in respect of the interest which accrued on the loan in the 1993 year as well as the interest which had accrued in the 1992 year. As at 30 June 1993 the amount of such indebtedness, including accrued interest, of Anthony Legudi is shown as $170,768 and the amount of such indebtedness of Frank Legudi, including accrued interest, is shown as $341,555. The same appears in the 1993 Annual Return of Properties which was signed by Anthony Legudie purportedly on 5 May 1994 in his capacity as a director and lodged with the Australian Securities and Investments Commission on 30 May 1994.

51. The 1994 Annual General Ledger and a draft 1994 balance sheet for Sons show a different position. They reflect that during the 1994 financial year both Charles and Anthony Legudi became concerned about the exposure of their wives and children as debtors to Properties. As a result they arranged that each of the wives and children should transfer their preference shares to them and that as transferees they should take over the wives' and children's indebtedness to Properties. At much the same time Anthony Legudi arranged for the transfer to his wife of his interest in their family home.

54. According to the Properties 1994 Annual General ledger and draft balance sheet, as at 30 June 1994 Judith, Giannina, Franca and Katherine Legudi transferred their preference shares to Anthony Legudi with the effect of increasing his indebtedness to Properties to $735,321 and reducing their indebtedness to Properties to nil. The change is also reflected in the 1994 draft balance sheet of Sons, which shows that during the 1994 year each of Giannina, France and Katherine Legudi ceased to be preference share holders and that the preference shareholding of Anthony Legudi increased by the same amount.

57. Otherwise the 1994 Annual General Ledger and draft 1994 balance sheet are consistent with the 1993 financial statements, in that they show the accrual of dividends in Sons and the accrual of further interest on the family members' debts to Properties, and hence that as at 30 June 1994 the total indebtedness of all family members to Properties stood at $3,096,083 as compared to $2,876,883 as at 30 June 1993.

60. The 1994 Annual Return of Properties as lodged shows a different position again. It states that the figure for current debtors is $2,876,883 (which is the same as the 1993 total figure) and therefore excludes the interest shown in the 1994 Annual General Ledger as having accrued due during the 1994 year. It is not clear why that is so. One possibility is that the interest was waived, although that was not suggested in evidence. Another possibility is that the figure was simply a mistake. The 1994 Annual Return was not prepared by Mr Curwood, but rather by a firm called Maddisons. They had taken over as Anthony Legudis' accountants by the time he lodged the return on 3 July 1995, and by that stage the group was in liquidation.

63. As the financial position of the group worsened in 1994 the directors invited Bradmill Industries to become a 50% shareholder by subscribing additional equity capital. Bradmill expressed interest but it was not prepared to subscribe until satisfactory completion of due diligence. Bradmill did, however, provide for the immediate needs of the group by making available a loan of $500,000, but it took as security for repayment of the loan a charge over the assets of Sons. The Legudis hoped that the debt would be converted to equity upon the completion of the Bradmill due diligence, and they were confident that Bradmill would proceed. But contrary to expectations, after completing its due diligence Bradmill determined that it would not proceed and it called up the $500,000 loan for immediate repayment. The debt could not be paid, and on 24 August 1994 Bradmill appointed Robert Michael Scales as receiver.

66. According to Anthony Legudi's evidence the receiver sold Sons' assets and orders for a mere $160,00 to interests associated with Bradmill. That in turn triggered the security which VL Finance held over Properties' assets, and they were later sold for an amount which Anthony Legudi said in evidence he considered to be grossly under value. On 10 October 1994 Richard Gell Mansell was appointed liquidator of Sons by order of the Court and of 1 March 1995 Stirling Lindley Horne was appointed liquidator of Properties.

69. By deed made 5 June 2000 Stirling Lindley Horne as liquidator of Properties purported to assign to VL Finance Pty Ltd the indebtedness of Anthony Legudi (said in the deed to be $735,321.00) and the indebtedness of Frank Legudi (said in the deed to be $367,666.00), for the sum of $9,000.

72. On 26 June 2000 VL Finance Pty Ltd gave notice of the assignment to Anthony and Frank Legudi and demanded payment of the debts.

76. By its writ filed on 29 June 2000, VL Finance claims as assignee under the deed that it is entitled to recover the debts which were owed to Properties by Anthony and Frank Legudi.

79. In their defence the Legudis deny the existence of the debts. In the alternative they plead that if they did incur the debts, they were acting under a special disability of which Properties took unconscientious advantage[2] and in the further alternative that the debts were statute barred[3]. There is also a plea that the transaction was avoided by operation of Part 2J.3 of the Corporations Law, but it was not pursued at trial.

82. The plaintiff's response is that in the context in which the loans were made it was an implied term of the loans that they would not be repayable until reasonable notice was given, or alternatively until the group passed from the control of the family, and since demand was not made until 22 June 2000 the Writ was well within time. Alternatively, it is said, the 1994 annual return is a sufficient acknowledgment to attract the operation of s. 24(3) of the Limitations of Actions Act.

89. In the end, very little of the defendants' case at trial was devoted to the contention that the debts do not exist. In effect it amounted to no more than assertions of the defendants from the witness box that the loans transaction was just book entries conceived by Charles Legudie and Mr Curwood and that there could not have been any loans in reality because not one of the family members got any cash in their hands. But Mr Stark, who appeared for the defendants, did not seek to make anything of the witnesses' assertions. In the course of his final submissions he contented himself with the observation that the gist of his non-existence case was really the product of his unconscientious advantage argument.

92. In the circumstances I think it suffices to say of the book entries point that, in the absence of any suggestion of sham, there is no reason why loans agreed to by made by a family company to members of the family cannot be created orally or by conduct and sufficiently evidenced by book entry[4], and that it is enough to dispose of the consequences of the lack of cash in hand contention to observe that it has been the law since Spargo's case that obligations may effectually be set off one against another, leaving a net balance due, without any money changing hands.[5]

96. I consider that the unconscientious advantage argument is equally lacking in substance. As I understood the argument as it was finally formulated, it was that I should accept that Anthony and Frank Legudi did not understand the nature of the preference share proposal, and in particular that they did not understand that it would have the effect of making them debtors to Properties, and thus that the case is one of non est factum.

99. In point of principle that contention seems to be misconceived. The plea of non est factum may apply in circumstances where a defendant signs a document in the belief that the document is fundamentally, totally or radically different from what in fact is signed[6]. But its effect is limited to rendering such a document void or perhaps more accurately voidable[7]. It does not operate to annihilate transactions which are not in writing - although that may be the consequence of the doctrine of mistake - and whilst mistake might have been argued, it was not and it constituents are different[8]. Hence, even if Anthony and Frank Legudi had been fundamentally, totally or radically mistaken about the nature of their applications for preference shares or the annual returns which Anthony Legudi signed or perhaps even the resolution for the creation of the shares, the plea of non est factum would not avail the defendants. It may be that it would avoid those documents. But the avoidance of those documents would not affect the loans which were made by Properties.

102. In point of fact, however, the problems for the defendants seem to me to be just as great regardless of whether the matter is approached on the basis of non est factum or on the basis of the doctrine of mistake.

105. It was urged upon me that I should accept that the defendants' lack of education, limited ability to read and write English, limited degree of involvement in the management of the group and, in the case of Frank Legudi, health problems which he has suffered since the 1990s, meant that Anthony and Frank Legudi so much trusted to their brothers Charles and Ross that they simply signed where indicated without any comprehension of what was involved.

108. I am not persuaded that that was so. I do not consider that Anthony or Frank Legudi were under any illusions as to the terms or effect of Mr Curwood's proposal.

111. I accept that they may have started out their working lives with a limited degree of formal education and that, once perhaps, their ability to read English may have been limited. But after seeing and hearing them give evidence I do not consider that to be any longer the case. In my opinion they lacked nothing in business acumen or the ability to comprehend written or spoken English or to communicate, when it suited them to do so. They did sometimes appear to have difficulty in understanding the accounting concepts about which they were asked, and in reading the financial statements which were placed before them. But according to my observations they only ever gave that appearance when they believed that it helped their case to do so. At other times, when they forgot about keeping up the act, they demonstrated remarkable competence in both respects as they strived to establish a point in their favour.

114. Mr Curwood deposed, and I accept that Anthony and Frank Legudi appeared to understand when the proposal was explained to them in 1990; that they discussed it at length at two separate meetings; and that they had no hesitation in claiming a deduction in their personal tax returns for the interest obligation incurred to Properties. Other evidence makes plain that Anthony Legudi had no hesitation in attempting to shield his wife and children from exposure when things became difficult in 1994. I also observe that if there were any truth in the claim that they were dependent upon the advice and skill of Charles and Ross Legudi and trusted in them implicitly, it is only to be expected that both of those men would have been called as witnesses. But neither of them was. I draw the inference that anything which either of them might have had to say on the subject would not have assisted the defendants.[9]

117. Those considerations taken together with the remainder of the evidence satisfy me that Anthony and Frank Legudi knew in 1990 that the group was facing insolvency; knew that the balance sheet had to be improved; knew that it required an increase in equity; and knew that in order to fund that equity they, like the other members of the family who subscribed for preference shares, had to become debtors to Properties, and they were prepared to do so.

121. I turn to the Legudis' contention that the debts are statute barred. Their argument is that, in the absence of any stipulation as to the date of repayment, it must be taken that the debts were repayable on demand; that it follows that time began to run when the debts were created; that the debts were created when the preference shares were issued and the interest accrued; and thus that all of the debts, except perhaps for one day's interest, became barred before the Writ was filed on 29 June 2000[10].

124. I think that argument is correct. In Ogilvie v Adams[11] Fullagar J expressed the principle in these terms:

"The common law has always regarded the fact of indebtedness as a continuing detention by the debtor of the creditor's money, and this whether the creditor brought an action of debt or an action in indebitatis assumpsit. Therefore if A lends money to B, then instantly B is detaining A's money. In order to prevent a cause of action for recovery arising in A instantaneously on paying the money, the parties must expressly contract out of that situation by words clearly inconsistent with that situation."

128. In my opinion there is nothing in the evidence before me to suggest that any words were spoken before or at the time of the loans from Properties to Anthony and Frank Legudi to the effect that Properties' cause of action for recovery of the loans would not arise instantaneously on the making of the loans. It is true that in Ogilvie v Adams Fullagar J observed elsewhere in his judgment[12] that it is not always necessary that words be used to prevent the cause of action arising. Depending upon the contractual relationship between the parties it may be that it is an implied term of the relationship that the cause of action is not to arise until some period of notice is given. But if there is to be a departure from the prima facie position it may only be on the basis that an intent to change the prima facie position is necessarily implicit in the contract. It is not enough that there may be some purpose or motive by reason of which the loan was made but as to which the contract is not directed. Thus, as Fullagar J said of the implied terms of repayment which arise out of the banker/customer contractual relationship, [13]:

"In the case of banker and customer, one has to investigate (usually) the implied contract or contracts between the parties created by the particular mercantile relationship, but if one finds something to alter what would otherwise be the effect ...that something must (in order to effect the alteration) be found in the contractual relationship between the parties, not in some purpose or motive, real or supposed, by reason of which the loan was made and with respect to which the contract is silent. " (Emphasis added.)

132. I see nothing in the contractual relationship between Properties and Anthony and Frank Legudi which necessarily implies that Properties' cause of action for recovery of the loans was not to arise upon the making of the loans

135. It was urged on behalf of VL Finance Pty Ltd that what was said in Ogilvie v Adams should no longer be regarded as representing all the law on the subject. Subsequent authorities, it was submitted, show that the test now is one of whether it is reasonably open to infer that the parties would have agreed that the cause of action to recover the loans should not accrue until some sort of reasonable notice was given, and reference was made to the decisions of Bryson J in Gleeson v Gleeson[14] and of the Full Court of South Australia in Brooker v Pridham [15].

138. In my opinion the subsequent authorities mentioned do not express a test different to that which Fullagar J enunciated in Ogilvie v Adams, and if they did they would be in error. A term may not be implied in a contract, except as a matter of law or custom, unless it is necessary to give business efficacy to the contract[16]. There is no room for implication simply on the basis that the term may be regarded as reasonable.

141. Certainly, in Gleeson v Gleeson, Bryson J criticised the reasoning in Ogilvie on the basis that Fullagar J had referred to the issue before him as turning on a question of law. As Bryson J put it:

"Fullagar J was of the view that the meaning of the words in a written document recording the terms of the loan when standing alone was a clear rule of law; with respect, it may be doubted whither the rule is a rule of law, as the need to construe the instant document according to its terms can never be escaped.[17]

145. But if I may say so with respect, the criticism is misdirected. Read as a whole, Fullagar J's judgment leaves no doubt that the exercise is always one of construction. The point which Fullagar J made about the "rule of law" is simply that, in undertaking the exercise in construction, one needs remember that the meaning of the expression "on demand" is so much settled by rule of law that it is to be read as "immediately due", unless there be express words or necessary implication to establish contrary intention. As Fullagar J put it[18]:

"...the meaning of the words in such a writing [scil., a contract of loan] are settled by as rigid a `rule of law' as that rule of the common law which establishes that, in a will... `to my issue who shall be living at my death', the word `issue' means `descendants of every degree' and does not mean merely `children'. _But the contract rule, like the wills rule, is a rule of construction in the sense that other words being part of the contract may drastically alter what would otherwise have been the meaning of the words in question..._Of course the speculative builder may say, in his contract or in his acknowledgment, that the money is to be repaid when the houses are sold...And those circumstances are themselves of the kind which may provide the law with criteria on which to imply if necessary into the requirement of the demand some requirement of reasonableness in the nature of notice." (Emphasis added.)

149. In Gleeson v Gleeson Bryson J also made the observation that:

"Generally, a simple contract of loan which does not provide for the time of repayment is understood to create an obligation to repay immediately, and reference in the contract to repayment on request or on demand does not alter this. However in more complex contracts references to a demand for payment are usually construed as meaning what they say, so that the need to a demand has substance."[19]

153. But that observation hardly suggests a departure from the principles identified in Ogilvie. It is not altogether clear what Bryson J envisaged should be included in the category of "more complex" cases. The three authorities referred to by Bryson, J as illustrative of the "more complex" case category are all to do with the distinction between the obligations of a principal debtor and those of a surety. They are directed to a rule of law that in a contract of suretyship (as opposed to a contract of loan) the words "on demand" ordinarily mean that no cause of action accrues until demand is made. But insofar as they have anything to say on the meaning of the words "on demand" in a loan contract, they are consistent with the view that the loan is immediately due.

156. In any event, Gleeson v Gleeson is a case about the construction of a written loan contract, in which the express terms of the contract yielded a clear implication that notice must be given before the debt would be due. That is not this case. There is nothing in Gleeson v Gleeson that supports the existence of some broad principle of construction of the kind for which VL Finance Pty Ltd contends which is applicable to the facts of this case.

159. That leaves for consideration the decision of the South Australian Full Court in Brooker v Pridham. In that case the facts were that a company which had been incorporated prior to 1947, and into which some of the members had deposited surplus capital funds, merged with another company in 1950-51 and there arose a newly incorporated merged company into which were absorbed the assets and liabilities of the merging companies including the member deposits. In 1962 another company purchased the assets of the merged company and it repaid the merged company's bank overdraft, and thereafter until the merged company went into liquidation in 1972 it did not trade but prepared annual financial statements which identified the member deposits as deferred liabilities. Upon liquidation the liquidator rejected the members' proofs of debt on the basis that the deposits were statute barred. It was held that they were not.

"The shareholders' deposit account creditors and the directors of the new company clearly expected that the balance of the accounts after ordinary deposits and withdrawals would be available indefinitely for use as working capital. Detail is not available, but the ordinary withdrawals must have been preceded by some form of notice, at least as much notice as involved in a withdrawal from a current account at a bank, see Joachimson v Swiss Bank Corp, supra. All must have assumed that such a creditor could not withdraw the entire balance of his account without some notice. The relationship of the parties, the course of conduct of the parties in relation to the operation of the accounts and the common assumption that the funds would be in use as working capital, combine to compel the implication of an agreement that liability to repay would not arise until at least some notice was given. It seem to me therefore that there was no immediate liability to repay and no right of action."[20]

"If a loan is not to be treated as being of that species which is continuously recoverable at all times, then there must be a basis for asserting that the arrangements between the parties were contrary to such a legal situation eg because of the imposition of qualifications as to specific notice of mode of withdrawal or the requirement for some additional act or event before and action could be brought. Alternatively, some other feature of the arrangements between the parties may clearly negative the operation of the normal rule... In the instant case...it is manifest that, as from the time when the deposit accounts were transferred to the company, such were the drawing limitations associated with them that in no sense could it be said that the deposits were payable instantly in full and there was simply no basis on which the principle stemming from Norton v Ellam...could possibly operate. ...the evidence overwhelmingly suggests that there was then no right of immediate payment in full vested in the deposit holders. The only reasonable inference to be drawn was that it was mutually agreed that the deposits should stand without further interest accruals and not be payable or paid or be subject to a pro rata payment until the net financial position of the company was resolved."[21]

171. It was submitted on behalf of VL Finance Pty Ltd that the words used by King CJ and Olssen J in the passages set out above represent a departure from the view expressed by Fullagar J in Ogilvie v Adams (that the something which justifies departure from the normal rule is not to be found in some purpose or motive, real or supposed, by reason of which the loan was made and with respect to which the contract is silent). But, read in context, the passages referred to permit of no such notion. The conclusion drawn by King CJ and Olssen J was simply that it had to be a term of the contract that the member loans would not be repayable without notice (because, in the absence of such a term, the contract would fly in the face of all that the parties had done). As an exercise in the construction of a contract constituted of conduct, that approach accords with established principle[22]. There is nothing in either judgment that sanctions the implication of contractual terms not necessary for business efficacy. Properly understood, Brooker v Pridham represents an application of orthodox principles of contractual construction to the facts of that case. I see nothing in it to support a relaxation of the approach which was adopted in Ogilvie v Adams.

174. One thing, however, which is significant about Brooker is that in point of fact it represents almost the exact converse of the position in this case. In Brooker it had to be supposed that moneys were irrecoverable without notice because the moneys had been put in by way of long term deposits to be used as working capital. And they were recorded in the accounts as such. Here, I think it must be supposed that the moneys represented by the loan debts could be needed by Properties at any time to maintain the operations of the group. That is why it was appropriate that they were recorded in the books of account of Properties as current assets.

177. Much was made in the final submissions of VL Finance Pty Ltd of the evidence that Anthony and Frank Legudi never had the sort of money which would be required to repay their Properties' loans, and it was submitted it followed that the parties must have contemplated that the debtors would be given time to pay if ever called upon to do so. It was also pointed out that the terms of issue of the preference shares conferred a right of redemption on Sons which could only be exercised upon notice, and it was said that the implication was that the same sort of notice would be given when the loans were called. But I do not think that either of those arguments is persuasive.

180. Doubtless the members of Properties hoped that it would not be necessary for Properties to call for the repayment of the loans. Possibly, it was thought that with luck and with time sufficient profits would one day be generated in Sons to redeem the preference shares, and then that it would be possible to repay the Properties' loans without need of further funds. Indeed Mr Curwood said it was intended that the preference share capital remain invested indefinitely and it was unlikely that Sons would have generated sufficient to redeem the shares without the injection of further capital or a sale of the business.

183. But whatever be the position about that, it does not detract from the conclusion that the loan funds had to be immediately available to Properties, to be used when needed, and thus that they should be regarded as immediately due. Unless the moneys borrowed from Properties were immediately available to Properties at call, there would have been little reality in the apparent increase in group equity created by the issue of the preference shares in Sons. But the evidence is that the apparent increase in group equity was intended to exist in reality just like the loan debts which VL Finance Pty Ltd seeks to enforce, were intended to exist in reality. They were intended to improve the solvency of the group. The existence of a requirement that Sons give notice of intention to redeem is not inconsistent with that. It says nothing to detract from the necessity for the loan funds to be available to the group immediately the need arose.

186. Having regard to all the circumstances, I see nothing sufficient to warrant departure from normal rule that, in the case of a loan for which no time for repayment is set, the debt is immediately due without any prior notice. I consider that the only reasonable inference open is that the loans were immediately due.

190. The last point to be dealt with is therefore the contention raised by VL Finance Pty Ltd in reply that, even if the debts were payable without notice, so that time began to run immediately the loans were made, the 1994 Annual Return constituted an acknowledgment which caused time to start running again.

193. The question of what amounts to an acknowledgment is a question of construction, and there is high authority that the decided cases are of little value as precedents[23]. It is plain, however, that an acknowledgment needs to be in writing and it needs to be signed by the debtor or his agent and it needs to be "given to the creditor". On the other hand, it need not specify the amount of the debt precisely, provided it is ascertainable from extrinsic evidence[24] and, as with the Statute of Frauds, it is permissible to combine a number of instruments in order to make up the one acknowledgment.

196. Of the criteria just mentioned, the requirement that an acknowledgment be "given to the creditor" is perhaps the most difficult to define precisely. As the authorities now stand, it no longer necessary that an acknowledgment be sent or delivered to the creditor.[25] But it remains that it must expressly or implicitly be "addressed to the creditor",[26] and it is here that problems arise. Thus, whereas in England it has been held that a list of a testator's debts in an executor's affidavit for probate is not an acknowledgment given to the testator's creditors (because it is not addressed to the creditors),[27] it has been held in Ireland that an acknowledgment in a will can be treated as an acknowledgment (because it is in substance expressive of the debtor's intention to admit the debt to the creditor).[28] Again, whereas early English authority has it that the recital of a debt in a deed between debtor and creditor is not an acknowledgment of the debt,[29] later English authority is to the effect that facts stated in pleadings and affidavits in previous proceedings between debtor and creditor can constitute an acknowledgment (because, although they are made to the court, they are implicitly addressed to the creditor).[30]

199. More recently, it has been held in England that a withholding tax certificate signed by a debtor is an acknowledgment (because, although its preparation is required by the revenue law, it is prepared for the benefit of the creditor in respect of whom the tax is deducted)[31]; it has been held in Australia that a proposal for the adjustment of debts under a rural reorganisation plan is an acknowledgment of the debts (because, although the proposal is for submission to the registrar of the plan, it is the intent of the plan that the registrar furnish affected creditors with a copy of the proposal)[32]; and it has been held in both England and Australia that a company's balance sheet may constitute an acknowledgment of the company's indebtedness to the creditors shown in the balance sheet (because it must be taken that the balance sheet is prepared for use by creditors).[33] But it has also been held in England that a record in a building society's accounts of the amount of a deposit is not an acknowledgment (because it is not given to the depositor).[34]

202. The reasoning throughout these cases is hardly constant and some of the earlier decisions may now be doubted in light of later decisions. It is probably also fair to say that the trend of authority is in favour of a relaxation of the requirements of an acknowledgment and therefore of treating as acknowledgments an increasing array of documents signed by or on behalf of a debtor. But while there is now high authority in Australia that a debtor need not intend to communicate an acknowledgment to the creditor or his agent (it is enough that the acknowledgment is actually communicated to the creditor)[35], it remains the position in Australia as it is in England that a document does not constitute an acknowledgment unless it is in substance expressive of the debtor's intention to admit the debt and to have the document produced and used for that purpose.[36]

205. VL Finance Pty Ltd argued that in as much as a company's balance sheet may be regarded as an acknowledgment of the debts of the company shown in the balance sheet, an annual return signed by one director of the company should be regarded as an acknowledgment of the debts owed by the director to the company which are shown in the return. It was also submitted that the return should be treated as an acknowledgment by the other directors of the debts shown as owed by those directors to the company, on the basis that the directors as a whole were under an obligation to lodge the annual return and because the one director who signed the return should be regarded as impliedly authorised by each of the other directors to make the acknowledgment on his behalf. It followed, it was submitted, that the 1994 Annual Return which was signed and lodged by Anthony Legudi qualifies as an acknowledgment of the debt owed to Properties by Anthony Legudi and also of the debt owed to Properties by Frank Legudi.

208. The 1994 Annual Return does not refer specifically to the debt to Properties owed by Anthony Legudi or the debt to Properties owed by Frank Legudi. Relevantly, it refers only to the total of member loans in an amount of $2,876,883 (being the total as at 30 June 1993 to which I made reference earlier in these reasons). But it was said that the 1993 accounts are admissible as extrinsic evidence to show that the amount of $2,876,883 included the debt of $170,768 owed by Anthony Legudi as at 30 June 1993, and the debt of $341,555 owed by Frank Legudi as at 30 June 1993, and that by parity of reasoning with the decisions in Read v Price[37] and Jones v Belgrove Properties Ltd[38], it is to be concluded that the return was an acknowledgment of those individual debts.

211. Finally, it was submitted, the acknowledgment should not be thought to be confined to the amounts of the directors' indebtedness as at 30 June 1993, because although the 1994 annual return referred only to the total of $2,876,883 (which was the total indebtedness as at 30 June 1993) it was permissible to have regard to the extrinsic evidence constituted of the 1994 Annual General Ledger and draft balance sheet and to treat the figure shown in the return as having been misstated because of error. On that basis, it was said, it should be treated as if it were an acknowledgment of total member indebtedness of $3,096,083 and, within that, of a debt owed by Anthony Legudi in the amount of $735,321 and of a debt owed by Frank Legudi in an amount of $367,660.

214. I do not accept those submissions. In my opinion an annual return is not capable of constituting an acknowledgment by the directors of the company of debts which they owe to the company. It may perhaps be an acknowledgment by the company (in the same way that a balance sheet may be an acknowledgment by the company), because it may be supposed that the return is intended for use by the company's creditors. But I do not consider that it is an acknowledgment by the directors, because in my view it cannot be supposed that the return is made out to be used by the directors' creditors. The return is not made to the company. It is made by the company. Nor is the return prepared for the use and consideration of the company. It is designed and prepared for the use of others. Moreover, even if all the directors of the company are under a personal obligation to ensure that the return is made out and filed, I do not consider that the return is expressive of an intention on the part of the directors to admit such of their debts to the company as are shown in the return and to have the return produced by the company and used for that purpose. Therefore, regardless of whether the return comes to the attention of the company, I am unable to see that it is an acknowledgment made to the company.

217. That being so, it is unnecessary for me to determine whether the 1993 financial statements might have been used as extrinsic evidence that the amount of $2,876,883 shown in the 1994 Annual Return included the individual indebtedness of Anthony Legudi and Frank Legudi in the amounts of $170,768 and $341,555 shown in the 1993 financial statements. I am, however, of the opinion that it would not have been permissible to look to the 1994 Annual General Ledger or the 1994 draft balance sheet as extrinsic evidence that the amount of $2,876,883 included the individual indebtedness shown in those 1994 documents. The evidence does not persuade me that those documents were ever approved by the directors. Given the events which occurred, I think it likely that the documents remained in draft and were not approved before commencement of the liquidation.

220. I add that even if the return could be regarded as an acknowledgment of Anthony Legudi's indebtedness, I do not consider that it could be regarded as an acknowledgment of Frank Legudi's indebtedness. In my opinion the fact that one director completes and signs an annual return is not of itself sufficient to prove that another director authorised its completion and filing in that form, or at least authorised its execution as an acknowledgment of his indebtedness to the company. A fortiori in this case where the company was already in liquidation by the time of filing.

223. In the end, however, these questions as to the use which might be made of extrinsic evidence and as to the extent to which one director might be taken to bind another, are in this context hypothetical. The basis of my decision is that the Annual Return of 1994 was not an acknowledgment for the purposes of s.24(3) of the Limitation of Actions Act 1958.

227. Before concluding these reasons for judgment, I should mention that Mr Woodward drew to my attention the fact that the deed of assignment was executed in the name of the liquidator instead of Properties, and that because an order had not been made vesting the debts in the liquidator before the deed was entered into, the deed was not effective as a legal assignment[39]. He submitted, nevertheless that it was effective as an equitable assignment and that it was appropriate that I exercise my discretion to dispense with the joinder of Properties (now that it has been deregistered). Given the conclusion I have reached upon the Limitation of Actions Act, it is unnecessary that I exercise that discretion. But in case it matters I record that I would have been prepared to do so if the debts were not statute barred.

231. For the reasons given, I hold that the loans were made and are due in the amounts which are claimed, but that they are now statute barred by s.5 of the Limitation of Actions Act 1958.

234. It follows that there should be judgment for the defendants. I will hear counsel on the form of orders.

[1] On the basis that the loan could be regarded as taken to acquire the preference shares as an income producing asset.

[2] And presumably, although it is not said so in terms in the defence, that the loans are thus unenforceable.

[3] By s. 5(1)(a) of the Limitation of Actions Act 1958

[4] Valoutin v Furst [1998] FCA 339; (1998) 154 ALR 119; Hancock v Porteous ( 1999) ACSR 124

[5] (1873) 8 LR Ch App 407, 414; and see Federal Commissioner of Taxation v Steeves Agnew & Co (Vict) Pty Ltd (1951) 82 CLR 406, 421 and Pro-Image Studios Ltd v Commonwealth Bank of Australia (1991) 9 ACLC 671, 674

[6] Saunders v Anglia Building Society [1970] UKHL 5; [1971] AC 1004, 1024-5; Petelin v Cullen [1975] HCA 24; (1975) 132 CLR 355, 360.

[7] See Cheshire & Fifoot's Law of Contract, 8th Aus Ed at [12.71]

[8] Taylor v Johnson [1983] HCA 5; (1983) 151 CLR 422 at 432-3

[9] Jones v Dunkell [1959] HCA 8; (1959) 101 CLR 298; cf. Ferrcom Pty Ltd v Commercial Union Assurance Co. of Australia Ltd (1991) 22 NSWLR 398,418

[10] The limitation period is six years: see s. 5(1)(a) of the Limitations of Actions Act 1958

[11] [1981] VicRp 92; [1981] VR 1041,1043

[14] [2002] NSWSC 418

[15] (1986) 41 SASR 380; 10 ACLR 428

[16] Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR. 337, 345-6; Byrne v Australian Airlines Ltd [1995] HCA 24; (1995) 185 CLR 410, 440

[22] The authorities are analysed in Vroon BV v Foster's Brewing [1994] VicRp 53; [1994] 2 VR 32, 79-83

[23] Spencer v Hemmerde [1922] AC 507, 519

[24] McGuffe v Burleigh (1898) 78 LT 264; Jones v Bellgrove Properties Ltd [1949] 2 KB 700; Dungate v Dungate [1965] 1 WLR 1477

[25] Jones v Bellgrove, supra_; Stage Club Ltd v Millers Hotels Pty Ltd_ [1981] HCA 71; (1981) 150 CLR 535, 566

[26] In re Compania de Electridad [1980] 1 Ch 146, 193-4; Hipworth v Maher (1952) 87 CLR 355, 344

[27] In Re Beavan [1912] 1 Ch 196, 205; Lloyd v Coote [1915] 1 KB 242, 246

[28] Millington v Thompson [1852] 1 Ir Ch R 236, 238; Howard v Hennessy [1947] IR 336, 338

[29] Batchelor v Middleton [1848] EngR 241; (1848) 6 Hare 75; 67 ER 1088; cf Howcuff v Bonser [1849] EngR 196; (1839) 3 Ex 491; 154 ER 939

[30] Flyn v Flyn [1969] 2 Ch 403, 411

[33] Jones v Bellgrove, supra; Stage Club Ltd v Millers Hotels Pty Ltd, supra

[34] Wilson v Walton (1903) 22 TLR 408, 409

[35] Stage Club Ltd v Millers Hotels Pty Ltd, supra at 566

[36] Hipworth v Maher supra at 345; Jones v Bellgrove, supra

[37] [1909] 2 KB 724 at 737-8

[38] [1949] 2 KB 700 at 705

[39] cf. Utsa v Ultratune Australia Pty Ltd (1996) 14 ACLC 1262, 1277