FEDERAL COURT OF AUSTRALIA

McAdam v Chylos Pty Ltd [2015] FCAFC 161

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The notice of contention be dismissed.

3.    The appellants pay the respondent’s costs of the proceeding, as agreed or assessed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT

Introduction

1    The issue which lies at the heart of this appeal is whether the appellants have established appellable error on the part of the primary judge who declined to grant any relief after finding that the respondent (Chylos) was entitled to set off certain disputed loans to the appellants against dividends declared and payable to the appellants (see Executors of the Estate of Bruce James McAdam v Chylos Pty Limited [2015] FCA 423).

2    The background to the dispute is largely uncontested. It may be summarised as follows.

3    Mr Bruce McAdam (and, after his death, the executors of his estate) and his wife, Shirley, have at all relevant times been shareholders of Chylos. Chylos operated a Jax Tyres store in Orange, New South Wales. Chylos was one of several companies that were the subject of the proceedings below, which were commenced in 2010. The proceedings, which involved many parties and included the Jax group of companies, were in the nature of an oppression suit, which reflects the fact that commercial relationships between the relevant parties had become very strained. There were also previous proceedings in other courts which involved some of the same parties.

4    Following an almost three week trial in 2014 before the primary judge, but before closing addresses were heard, the proceedings in this Court settled in all respects other than the dispute which gives rise to this appeal. This dispute, which is of a relatively narrow compass and involves an amount of less than $50,000, was the subject of a further one day hearing before the primary judge on 2 April 2015.

5    As the primary judge observed several times, the evidence in the trial was far from pellucid. The accounts of Chylos for the financial year ended 30 June 1999 recorded negative entries among its liabilities of $20,000 in respect of each of Mr and Mrs McAdam. Since the financial year 2000, Chylos’ accounts have recorded as assets loans owed to the company by Mr and Mrs McAdam in the amount of $24,116 each (save for the 2006 accounts which did not record any loans as owing by the McAdams to Chylos).

6    Since the financial year 2007, Chylos purported to set off dividends declared and owing to the McAdams against the asserted loans.

7    Until Mr McAdam passed away in 2012, Chylos’ accounts were sent each year to him by a Mr Hurrell (who was also a shareholder in Chylos as well as having interests in the Jax group of companies and with whom Mr McAdam fell into dispute). It is important to note that Mr Emmett, who appeared for the appellants in the appeal, conceded that an inference could be drawn that Mr McAdam had been provided with a copy of the signed 2000 accounts (which recorded the loans to the McAdams as assets of Chylos), within a reasonable time after Mr Hurrell received them. Mr Hurrell gave evidence below that his custom was to pass a copy of the accounts onto Mr McAdam after Mr Hurrell received them from Mr Smedley. Prior to the mid-2000s no complaint was made by Mr or Mrs McAdam in respect of the recording of the asserted loans in Chylos’ accounts.

8    There is a dispute as to whether the appellants pleaded the issue which now gives rise to the appeal. The original pleaded claim focussed directly on an amount of $88,332 which, according to the appellants’ interpretation of the 2000 accounts, was a debt due to Chylos by the McAdams. On the first day of the hearing before the primary judge in July 2014, upon realising that they had misunderstood the accounts, the appellants did not press that part of their case relating to the $88,332 claim. Instead, in opening, they contended that the amounts shown in the 2000 accounts, totalling $48,332, were never advanced to them. They contended that this new claim was within the existing pleading.

9    On 24 April 2015 (i.e. following the one day resumed hearing on 2 April 2015), and in response to an invitation by the primary judge, the appellants’ solicitor described the relief sought in respect of the disputed loans in the following terms:

1.    A declaration that the Ninth Defendant (“Chylos”) was and is not entitled to deduct from or set off against dividends, declared by it to be payable to the Second Plaintiff (“Mr McAdam”) and/or the Fourth Plaintiff (“Mrs McAdam”), or any part of the amount of $24,167 represented in the financial accountants (sic) of Chylos (for the financial years in and after the year ending 30 June 2001) as due to it by Mr McAdam and Mrs McAdam respectively.

2.    A declaration that the dividends payable by Chylos to Mr McAdam and Mrs McAdam after 2001 were payable without deduction or set-off therefrom of the whole or any part of each of the said sums of $24,167.

3.    An order that Chylos pay to the Estate of Mr McAdam and to Mrs McAdam such sums as have been deducted by Chylos since 2001 (on account of the respective liability of $24,167) from dividends payable to Mr McAdam and Mrs McAdam respectively.

4.    Liberty to the parties to apply on three days’ notice.

The primary judge’s reasons summarised

10    The primary judge refused to grant any of the relief sought by the appellants. His Honour described as “meagre” the evidence concerning the existence of the disputed loans. His Honour referred to the 2000 accounts but noted that, although they contained a director’s signed declaration, apparently made pursuant to a board resolution, no such resolution was included in the evidence. His Honour also commented on the anomaly which appeared in the 2000 accounts in which receivables in the form of loans to each of the McAdams in the amounts of $24,166.71 and $24,166.72 respectively were recorded under the heading “current assets”, while the 1999 accounts reported “negative liabilities” in the amount of $20,000 to each of the McAdams under the heading “current liabilities”. As the primary judge observed, it was “not altogether easy to make sense of this”; it might have been expected that loans made by the company would be recorded as assets of the company and not liabilities.

11    The primary judge further noted that the negative liability of $40,000 in the 1999 accounts was apparently replaced by a receivable of $48,333.43 in the 2000 accounts. He commented that this change might be explained in various ways, including that the books were being “straightened out” by moving the loan from the liabilities section of the accounts to the assets section; or they might be entirely different transactions.

12    His Honour further emphasised the limited nature of the evidence relating to the disputed loans. Naturally there was no direct evidence from Mr McAdam, who had passed away. One of the other primary shareholders of Chylos, Mr Hurrell, had no recollection of the relevant entries and Mr Smedley, who was a director of Chylos at the relevant time and a 50 per cent shareholder, gave no evidence. The accountant who prepared the Chylos accounts for the year ending 30 June 2001, Mr Denton, gave evidence and explained that he used the 2000 accounts as the starting point for his work, but he had had no personal role in drawing the accounts for the 1999 or 2000 years. Mr Denton’s knowledge of the relevant matters was entirely derived from the accounting records.

13    While emphasising its limitations, the primary judge assessed other relevant evidence, including the evidence given by Mr Hurrell. His Honour also referred to a file note dated 15 March 2009, which had been written by the late Mr McAdam and was addressed to his son, Marcus McAdam, in which was relevantly recorded (underlining omitted):

13-3-2009

MARCUS –

Re Chylos (Jax Orange)

(last dividend McAdam was 1998)

Chylos balance sheet 30/6/2008 shows debit balances BJM/MM each $24,167

Composition of the debt need to be established from Paul Denton

But in any case

Not to be included in balance sheet

(probably debited to Hurrell’s credit balance of $77,500)

…

14    The primary judge found that the file note showed that Mr McAdam’s position at that time was that he did not know about the loan and not that he knew there was no loan. His Honour also made reference to evidence given by Mr Marcus McAdam, that his late father had told him that neither he nor Shirley McAdam had received a loan from Chylos. Without doubting that this was Mr Marcus McAdam’s genuine recollection of what his father told him, the primary judge said that he preferred the file note dated 15 March 2009 as an independent record of Mr McAdam’s state of mind.

15    Given the limitations in the evidence, the primary judge concluded at [15] that there was no evidence of the nature of the disputed loans.

16    His Honour then referred to s 1305 of the Corporations Act 2001 (Cth) (the Act), which provided:

1305    Admissibility of books in evidence

(1)    A book kept by a body corporate under a requirement of this Act is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book.

(2)    A document purporting to be a book kept by a body corporate is, unless the contrary is proved, taken to be a book kept as mentioned in subsection (1).

17    His Honour stated that s 1305 did not have the effect of elevating a book entry to the status of prima facie evidence of the transaction which it recorded, citing Whitton as Trustee of the Estate of Rose v Regis Towers Real Estate Pty Ltd (In Administration) [2007] FCAFC 125; (2007) 161 FCR 20 at [59] and Livingspring Pty Ltd v Klivger Partners [2008] VSCA 93; (2008) 20 VR 377 at [37]. His Honour suggested that the 2000 accounts provided prima facie evidence that a director of Chylos, probably Mr Smedley (who signed those accounts), believed that Mr and Mrs McAdam owed money to Chylos.

18    After stating that he was satisfied that the evidence demonstrated that Mr McAdam was provided with copies of the Chylos accounts as they became available, including that he had received a copy of the 2000 accounts by at least 2003, the primary judge viewed the following two matters as being inconsistent with the appellants’ claim that the loans did not exist. First, even though Mr Bruce McAdam could not recall the loans when he wrote the 15 March 2009 file note, on 24 September 2003 a deed entitled “Shareholders and Associated Parties Deed” (the Deed) was executed between various parties who had had an interest in a group of companies (broadly, the Jax Group) which it was thought at the time would be acquired by Coles. The Deed recorded that Mr and Mrs McAdam would receive 16.67 per cent of the eventual sale price received from Coles in respect of Chylos and that Mr Hurrell was obliged under the Deed to provide the 2003 accounts to Mr and Mrs McAdam within four weeks. As noted above, the primary judge accepted that the 2000 accounts, which recorded the disputed loans, had already been provided to Mr McAdam. Accordingly, the primary judge reasoned that he would have expected that if the loans had been in dispute this would have appeared in the Deed as a matter requiring resolution in some way. In those circumstances, an inference could be drawn that there was no such dispute.

19    The second matter which his Honour relied on in inferring that there was no dispute about the existence of the loans was an email dated 25 July 2005, which was authored by an accountant for the Jax Group called Mr Skyring (the Skyring email). The email, which was sent to Mr Marcus McAdam and copied to Mr Hurrell, broadly described the components of a further proposed deed to settle the parties’ long-running commercial disputes. There was no mention in the email of any mechanism to resolve any dispute between the parties about the disputed loans from Chylos. His Honour acknowledged his earlier finding that Mr Bruce McAdam had forgotten about the loans by 2009 when he made his 15 March 2009 file note, but this was not inconsistent with the conclusion that the loans existed and were not disputed. His Honour described the wider commercial dispute between the Hurrells and the McAdams as an “Icelandic saga”. The fact that Mr McAdam had forgotten about the loans was described by his Honour as a “minor point of detail” in that context and was readily explicable, particularly also given the passage of time.

20    It is convenient to set out the relevant parts of Mr Skyring’s email:

Hi Marcus

Please review my attempts to summarise the loan movements etc we discussed Friday.

Please review and advise if I missed something.

Other matters I recall requiring inclusion in deed (or otherwise) are:-

1.    McAdam loan in JT to be formally forgiven in 2005 year

…

10.    All efforts to divest Chylos Investment. MM/IFH to receive proceeds of any sale personally (unless agreed otherwise)

…

16.    Shareholder Deed to encapsulate above points and also move on from past differences for ever [!].

[“JT” is a reference to Jax Tyres Pty Ltd and “MM/IVH” are references to Marcus McAdam and Mr Hurrell respectively].

21    After again noting the “paucity” of the evidence and the impossibility of knowing what generated the disputed loans, the primary judge concluded at [23] that “it is clear that they were not in dispute up to and including 2005”. He drew an inference that the loan entries in Chylos’ accounts reflected “an underlying reality which was accepted, even if that reality’s nature cannot now be shown”.

22    The primary judge found at [24] that the onus of proving that the loans did not exist rested with the appellants. However, regardless of the onus his Honour stated that he was “affirmatively satisfied that the loans did exist”, because Chylos had shown to his satisfaction that they did.

23    Finally, the primary judge noted at [25] that, despite the obscurity of the appellants’ pleading on the issue of the disputed loans, he was not satisfied that the point that the loans did not exist had been abandoned by the appellants.

The appeal

24    The notice of appeal contained the following three grounds:

1.    The learned trial Judge erred in finding that the loans referred to in the judgment below at [2] (the Loans) existed as debts owed by Bruce McAdam and the fourth plaintiff to the ninth defendant: judgment below at [24].

2.    The learned trial Judge erred in holding that the plaintiffs bore the onus of proving that the loans did not exist: judgment below at [24].

3.    In the alternative to appeal ground 2, the learned trial Judge erred in failing to hold that the Loans never existed as debts owed by Bruce McAdam and the fourth plaintiff to the ninth defendant.

25    The orders sought by the appellants in their notice of appeal were that:

1.    Appeal be allowed.

2.    Set aside order 1 made by the learned trail (sic) Judge on 6 May 2015 and in lieu thereof order that the ninth defendant pay to the second and fourth plaintiffs the sum of $48,332.00 together with interest thereon.

3.    Order that the ninth defendant pay to the second and fourth plaintiff’s (sic) costs of the appeal and of the proceedings before the learned trial Judge.

26    The submissions advanced on behalf of the appellants and the respondent in respect of the notice of appeal will, where relevant, be summarised below.

Notice of contention

27    Chylos filed a notice of contention which raised the following grounds:

1.    The Court’s dismissal of the Appellants’ claims against the Respondent at [26] should be affirmed on the ground that the Appellants’ claim, as put at trial, and reflected in the orders sought, was not pleaded.

2.    The Court ought to have held that paragraphs 106 to 115 of the Second Further Amended Statement of Claim did not state the material facts on which the Appellants relied, which were necessary to give the Respondent fair notice of the case made by the Appellant (sic) at trial, contrary to Rule 16.02(1)(d) of the Federal Court Rules 2011.

3.    The Court ought to have held that the Fourth Further Amended Originating Process at paragraph 14 and the Second Further Amended Statement of Claim at paragraph 116, failed to state the relief that was sought or claimed by the Appellants at trial, contrary to Rules 16.02(1)(f) and 16.02(4) of the Federal Court Rules 2011. The relief sought by the Appellants at trial was different, and was set out by the Court at [2].

Disposition of the appeal

28    The focus of the appellants’ challenge was directed to the primary judge’s finding that the loans which were recorded in Chylos’ accounts existed. That finding was said to be in error irrespective of whether it was correct of the primary judge to conclude that the appellants carried the onus of proving the non-existence of the loans.

29    It is convenient to deal with each of the three grounds of appeal in turn.

Appeal ground 1

30    Before focussing directly on the appellants’ central contention that the primary judge erred in finding that the disputed loans existed as debts owed by the McAdams to Chylos, it is appropriate to outline two important preliminary matters, namely:

(a)    the nature of an appeal under s 24 of the Federal Court of Australia Act 1976 (Cth) (the FCA Act);

(b)    the nature of fact-finding in a civil proceeding and the need to give effect to s 140 of the Evidence Act 1995 (Cth) (the Evidence Act).

31    Nature of appeal: The relevant principles regarding the nature of this appeal may be summarised as follows:

(a)    an appeal under s 24 of the FCA Act is not an appeal in the strict sense, but is an appeal in the nature of a rehearing (Allesch v Maunz [2000] HCA 40; (2000) 203 CLR 172 (Allesch) at [23] per Gaudron, McHugh, Gummow and Hayne JJ and CDJ v VAJ [1998] HCA 67; (1998) 197 CLR 172 at [111] per Gaudron J); and

(b)    in an appeal by way of rehearing the appellant must establish an error in the judgment at first instance, whether that error be one of law, fact or in the exercise of a discretionary power. As the plurality stated in Allesch at [23] (footnotes omitted):

… the powers of the appellate court are exercisable only where the appellant can demonstrate that, having regard to all the evidence now before the appellate court, the order that is the subject of the appeal is the result of some legal, factual or discretionary error….

32    Fact-finding: Putting to one side for the moment the issue whether the primary judge correctly found that the appellants carried the onus of proof, reference should be made at the outset to s 140 of the Evidence Act. Section 140(1) obliges a Court in a civil proceeding to find that the case of a party is proved if the Court is satisfied that the case has been proved on the balance of probabilities. Section 140(2) then provides the following non-exhaustive list of matters which the Court may take into account in deciding whether it has the requisite satisfaction:

(a)    the nature of the cause of action or defence;

(b)    the nature of the subject matter of the proceeding; and

(c)    the gravity of the matters alleged.

33    In Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 (Briginshaw), Dixon J made the following well known observations at 361-362 concerning proof of a fact:

The truth is that, when the law requires the proof of any fact, the tribunal must feel an actual persuasion of its occurrence or existence before it can be found. It cannot be found as a result of a mere mechanical comparison of probabilities independently of any belief in its reality. No doubt an opinion that a state of facts exists may be held according to indefinite gradations of certainty; and this has led to attempts to define exactly the certainty required by the law for various purposes. Fortunately, however, at common law no third standard of persuasion was definitely developed. Except upon criminal issues to be proved by the prosecution, it is enough that the affirmative of an allegation is made out to the reasonable satisfaction of the tribunal. But reasonable satisfaction is not a state of mind that is attained or established independently of the nature and consequence of the fact or facts to be proved. The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of the tribunal. In such matters "reasonable satisfaction" should not be produced by inexact proofs, indefinite testimony, or indirect inferences.

34    As the Court of Appeal of New South Wales observed in Amalgamated Television Services Pty Limited v Marsden [2002] NSWCA 419 at [59] per Beazley, Giles and Santow JJA, this passage from Briginshaw was explained by the plurality in Neat Holdings Pty Limited v Karajan Holdings Pty Ltd [1992] HCA 66; (1992) 67 ALJR 170 at [2] per Mason CJ, Brennan, Deane and Gaudron JJ:

The ordinary standard of proof required of a party who bears the onus in civil litigation in this country is proof on the balance of probabilities. That remains so even where the matter to be proved involves criminal conduct or fraud ((1) See, e.g., Hocking v. Bell [1945] HCA 16; (1945) 71 CLR 430, at p 500; Rejfek v. McElroy [1965] HCA 46; (1965) 112 CLR 517, at pp 519-521). On the other hand, the strength of the evidence necessary to establish a fact or facts on the balance of probabilities may vary according to the nature of what it is sought to prove. Thus, authoritative statements have often been made to the effect that clear ((2) Briginshaw v. Briginshaw [1938] HCA 34; (1938) 60 CLR 336, at p 362; Helton v. Allen [1940] HCA 20; (1940) 63 CLR 691, at p 701; Hocking v. Bell [1944] NSWStRp 31; (1944) 44 SR (N.S.W.) 468, at p 477 (affirmed in Hocking v. Bell (1945) 71 CLR, at pp 464, 500); Rejfek v. McElroy (1965) 112 CLR, at p 521; Wentworth v. Rogers (No.5) (1986) 6 NSWLR 534, at p 539 or cogent ((3) Rejfek v. McElroy (1965) 112 CLR, at p 521) or strict ((4) Jonesco v. Beard (1930) AC 298, at p 300; Briginshaw v. Briginshaw (1938) 60 CLR, at p 362; Helton v. Allen (1940) 63 CLR, at p 711; Hocking v. Bell (1944) 44 SR (N.S.W.), at p 478 (affirmed in Hocking v. Bell (1945) 71 CLR, at pp 464, 500); Wentworth v. Rogers (No.5) (1986) 6 NSWLR, at p 538) proof is necessary "where so serious a matter as fraud is to be found" ((5) Rejfek v. McElroy (1965) 112 CLR, at p 521). Statements to that effect should not, however, be understood as directed to the standard of proof. Rather, they should be understood as merely reflecting a conventional perception that members of our society do not ordinarily engage in fraudulent or criminal conduct ((6) See, e.g., Motchall v. Massoud [1926] VicLawRp 43; (1926) VLR 273, at p 276) and a judicial approach that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct. As Dixon J. commented in Briginshaw v. Briginshaw ((7) (1938) 60 CLR, at p 362; and see, also, Helton v. Allen (1940) 63 CLR, at p 711):

The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved ... .

clear and cogent evidence to prove matters of the gravity of fraud or crime are, even when understood as not directed to the standard of proof, likely to be unhelpful and even misleading. In our view, it was so in the present case.

35    In Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833; (2001) 117 FCR 424 at [24] and [25], Allsop J (as he then was, Drummond and Mansfield JJ agreeing) made the following observations concerning appeals on question of fact:

24 What is error in any given case depends, of course, not only on the evidence, but also on the nature of the findings or conclusions made by the primary judge. The demonstration of error may not be straight-forward where findings or conclusions involve elements of fact, degree, opinion or judgment or when the findings or conclusions in question can be seen as made with the advantage of hearing the evidence in its entirety, presented as it unfolded at the hearing with the opportunity over the course of the hearing and adjournments for reflection and mature contemporaneous consideration and assessment, in particular in a long and complex hearing….

25 This is not to elevate ordinary factual findings to the protected position of those based on credit, but it is to make clear, first, the advantages of the trial judge and, secondly, the need for demonstration of error. The inability to identify error may arise in part from the unwillingness of the appeal court to be persuaded that it is in as good a position as the trial judge to deal with the issues, because of the kinds of considerations referred to at [24] above. Or, it may be that the nature of the issue is one such that (though not a discretion) there cannot be said to be truly one correct answer. In such cases the availability of a different view, indeed even perhaps the preference of the appeal court for a different view, may not be alone sufficient....

36    Against that background, it should be noted that the appellants acknowledged in the appeal that they needed to demonstrate appellable error on the part of the primary judge. They contended that the primary judge fell into error in the following ways:

(a)    neither the Deed nor the Skyring email justified the primary judge’s view that the absence of any reference in either of those documents to the disputed loans supported an inference that Mr Bruce McAdam knew that the loans existed in Chylos’ accounts but he did not dispute them. The appellants submitted that the two documents were either equivocal on the issue whether or not the disputed loans existed or, alternatively, supported their case that the parties to those documents believed that there were no such loans;

(b)    the primary judge erred in not construing the file note dated 15 March 2009 as supporting the appellants’ case and also erred in not giving more weight to Mr Marcus McAdam’s evidence that his father told him that there were no loans received from Chylos by either Bruce or Shirley McAdam;

(c)    the primary judge erred in not giving weight to a second file note dated 23 March 2009, which was also prepared by Mr Bruce McAdam, and which supported the appellants’ case because, when properly construed, it indicated that Mr Bruce McAdam did not believe that the disputed loans existed; and

(d)    the primary judge misapplied s 1305 of the Act.

37    For the following reasons we consider that the appellants have not established any appellable error by the primary judge.

38    Deed and Skyring email: In summary form, the appellants sought to justify their challenge to the significance which the primary judge gave to these two documents on the following grounds:

(a)    clause 7.1 of the Deed contains various options regarding the divestment of shares in Chylos held by the McAdams and Mr Hurrell, all of which depended upon Mr Smedley (who was not a party to the Deed) giving his consent. One option was to sell the shares to a third party; another option was to sell the business and properties owned by Chylos to a third party and then liquidate the company; a further option was to attempt to sell the shares to Mr Smedley. The Deed further provided that, if Mr Smedley did not give his consent to any of these options Bruce McAdam could put the McAdam shares in Chylos to Mr Hurrell or a nominee for an amount of $130,000 (cl 7.3). Clause 7.4 dealt with the “McAdam divestments from Chylos”. Clause 15.1 provided that settlement would occur upon the McAdam interest receiving relevant payments and divesting all assets (including the Chylos shares). Clause 15.2 provided that the McAdam interests would have no further claims against any of the Jax Related Entities (which was defined to include Chylos) once the former had received all amounts due to them under that Deed;

(b)    the appellants emphasised that extensive provision was made elsewhere in the Deed in respect of other loans between the Jax companies and the McAdam interests which, they submitted, supported their case that the disputed loans did not exist because otherwise they would have been dealt with in a similar fashion;

(c)    the Deed was executed on behalf of Mr Bruce McAdam by Mr Marcus McAdam under power of attorney;

(d)    notwithstanding that neither Chylos nor Mr Smedley were parties to the Deed, the appellants submitted that it is “implausible” that if the parties really understood that there were loans from Chylos to the McAdams some provision would not have been made in the Deed for dealing with those loans;

(e)    as to the Skyring email, the appellants submitted that it took the matter no further because it simply provided for all “efforts to divest Chylos investment” and, if the parties to the then proposed settlement believed that there were outstanding loans, it is surprising that, in the context of a proposed divestment, no provision was made in respect of them; and

(f)    given the complexity of the relevant commercial relationships, it was not a natural inference that Mr Bruce McAdam was aware that the accounts recorded the loans and, if any inference was available, it was that the parties to the settlement documents believed that there were no such loans.

39    None of these matters reveals any appellable error on the part of the primary judge for the following reasons. First, the inferences which his Honour drew from the Deed and the Skyring email were made against the background of his Honour’s finding (which is not contested in the appeal) that Mr Bruce McAdam was given a copy of the 2000 accounts before the Deed was executed and, necessarily therefore, before the subsequent Skyring email was sent. Those signed accounts provided details of the disputed loans. It was open to his Honour to then draw the inference that he did concerning the significance of the absence of any reference to the loans in either the Deed or the Skyring email. In coming to that conclusion, the primary judge did not need to make any finding one way or the other as to whether Mr McAdam had also received copies of Chylos’ subsequent accounts. Consistently with the evidence of Mr Hurrell, he probably did, but it may well be that the primary judge found it unnecessary to rely upon that matter in circumstances where, unlike the 2000 accounts, the accounts for 2001 and 2002 which were in evidence were unsigned and it was not clear whether signed copies in the same form as those which were in evidence were provided to Mr Bruce McAdam. For reasons which will be developed shortly, we do not consider that the probative weight which the primary judge gave to the 2000 accounts involved a misapplication of s 1305 of the Act.

40    Secondly, and related to the first point, we are not satisfied that the appellants have established relevant error in the primary judge’s analysis of, and conclusions regarding, the Deed and the Skyring email. In assessing the appellants’ challenge to the inference drawn by the primary judge to the omission from the Deed and Skyring email of any reference to the asserted loans it is important to focus upon the precise terms of that inference. The inference was that there was no dispute between the relevant parties as to those loans (i.e. the primary judge did not draw the inference contended for by the appellants, as set out at [36(a)] above). His Honour did not infer from those documents that the loans did not exist. He did not need to go that far because he had already found that the loans were recorded in the Chylos accounts for 2000 (and other years) and that the accounts were made available to Mr Bruce McAdam. Insofar as the 2000 accounts are concerned, his Honour considered that, at the very least, Mr Smedley believed that the loans existed. There was no evidence that Mr Bruce McAdam did anything to raise any questions about the loans until March 2009, when he created the first file note. In those circumstances, it was open to the primary judge to attach some probative weight to the fact that the loans were omitted from the Deed and the Skyring email, which suggested that there was no dispute about the loans in 2003 and 2005 respectively, at least insofar as the parties to those documents were concerned. It may well be that this “negative evidence”, standing alone, would not have warranted the drawing of that inference. Indeed, viewed in isolation from all the other evidence, the omission of any mention of the loans in the Deed and the Skyring email might suggest that the loans simply did not exist. But these documents did not stand alone. They were created against the background of loans being recorded for several years in Chylos’ accounts, including the 2000 financial year. In those circumstances, the relevant inference was open to be drawn and no appellable error has been established in respect of the primary judge’s analysis and reasoning.

41    Thirdly, as noted above, the inferences drawn by the primary judge were also informed in part by his Honour’s understanding and appreciation of the wider commercial context in which the issue concerning the disputed loans arose. His Honour drew on that wider appreciation (informed no doubt by the almost three week trial in 2014) when he stated that, even though there was no evidence which disclosed the nature of the loans, it was understandable that noone could recollect the details of the loans given that they comprised such a small transaction in the overall complex Jax Group business operations and in circumstances where the issue arose some 15 years after the event (see [14], [21] and [22] of the primary judge’s reasons for judgment). Mr Emmett fairly and properly acknowledged that it was a relevant consideration that there were numerous claims arising from the complex commercial relationships and that the “Icelandic saga” had been going on for many years. This reinforces the need for caution in determining whether the primary judge has erred in his fact-finding.

42    15 March 2009 file note and Marcus McAdam’s hearsay evidence: The primary judge drew an inference from the terms of the file note that Mr Bruce McAdam was ignorant of the origins of the loans. The appellants contend that the use of the word “established” in the file note supported their case that the loans did not exist. No appellable error has been established concerning the primary judge’s analysis and findings in respect of this document. The words used by Mr McAdam do not on their face constitute a denial by him of the existence of the loans. The words “composition of the debt need to be established from Paul Denton” are directed not to the issue whether or not the debt existed but rather to its composition. Furthermore, it is significant that Mr McAdam then proceeded in his file note to say “but in any case”, the debt should not be included in the balance sheet. It is necessarily implicit in that statement that Mr McAdam’s state of mind at the relevant time was not one which flatly denied the existence of the loans.

43    Nor has any relevant error been established in respect of the primary judge’s assessment of the evidence given by Mr Marcus McAdam as to what he was told by his late father that neither he nor his mother had received a loan from Chylos. It was reasonably open to the primary judge to prefer Mr Bruce McAdam’s 15 March 2009 file note, rather than act upon what Mr Marcus McAdam said he was told by his father, in concluding that Mr Bruce McAdam’s position was that he did not know about the loans, not that he knew that there were in fact no loans. On this point, Mr Emmett again fairly and properly acknowledged that when the primary judge admitted Mr Marcus McAdam’s statement into evidence, senior counsel appearing for the McAdams stated to the Court that the weight to be given to the evidence was a matter for the primary judge to determine after hearing submissions.

44    Bruce McAdam’s 23 March 2009 file note: The primary judge placed no reliance on Mr Bruce McAdam’s file note dated 23 March 2009. The appellants contend that this was in error because the file note supported their case. We do not accept that contention.

45    It is convenient to set out the relevant terms of the file note:

BRUCE J McADAM

CHARTERED ACCOUNTANT    23.3.2009

DEAR MARCO – FAX 9907 2219

1.    I HATE TROUBLING YOU, BUT THE CHYLOS. POSITION IS UNSETTLING TO SAY THE LEAST.

2.    PERHAPS YOU MAY ENLIST ANDREW SKYRING’S ASSISTANCE?

3.    McADAM IS SHOWN ON CHYLOS BALANCE SHEET AS DEBTOR TOTAL $48334

(THIS, SUBSTANTIATED, IS TAXABLE McADAM)

4.    PAUL DENTON, CHYLOS ACCT, SHOULD PROVIDE DETAILS. !!! (ONLY INVOLVEMENT HAS BEEN BY HURRELL)

5.    …

    DEBTOR $48,334

PS The Problem … $168.324 IS A MAJOR MATTER TAX PROLEM. (sic) – POSSIBLY SHOULD BE DEBITED TO HURRELL CREDIT.

46    The notable features of this file note are:

(a)    on its ordinary construction, the file note appears to have been written by Bruce McAdam (who was a chartered accountant) to his son expressing Bruce McAdam’s concerns regarding the tax implications of the McAdams being shown on Chylos’ balance sheet as debtors. It may be inferred that this concern related to the possible application of Division 7A of the Income Tax Assessment Act 1936 (Cth), which dealt with loans to shareholders of private companies;

(b)    the file note does not record Bruce McAdam as denying the existence of the debt. Rather, it is evident that Bruce McAdam was very concerned about the possible tax implications for him and his wife if the debt was substantiated; and

(c)    in requesting his son to make further inquiries into the matter, Bruce McAdam was not saying that the debt did not exist but rather that it needed to be substantiated, which is consistent with the primary judge’s finding that Bruce McAdam had apparently forgotten about the disputed loans and was not denying their existence.

47    In all these circumstances, we do not accept the appellants’ contention that the file note supported their case. On the contrary, if anything, it supports the relevant findings made by the primary judge.

48    Section 1305 of the Act: The primary judge did not misconstrue or misapply this provision. Consistently with the authorities relied upon by the appellants (see [17] above), the primary judge concluded at [17] of his reasons for judgment that the provision did not elevate a book entry to the status of prima facie evidence of the transaction which it records. Consistently with those authorities, the primary judge concluded at [18] that the 2000 accounts provided “prima facie evidence that a director, probably Mr Smedley, believed that Mr and Mrs McAdam owed money to Chylos” (noting that it was probably Mr Smedley’s signature which appeared on the copy of the 2000 accounts which were in evidence below).

Appeal ground 2

49    In assessing the appellants’ case concerning burden of proof, it is important to bear in mind that parties to litigation are generally bound by the way in which they conduct their cases at trial (see Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1 at 11). In the Fourth Further Amended Originating Process filed on 28 February 2013, the relief sought by the appellants in respect of the Chylos matter was pleaded as follows (underlining in original):

14.    Anthony Bruce McAdam and Marcus Dominic McAdam as executors of the estate of Bruce McAdam and Shirley claim:

(a)    a declaration that they are not indebted to the Ninth Defendant in the sum of $88,332 or at all; and

(b)    an order that Chylos account for the funds from the sale of the Orange Property.

50    In the Fourth Further Amended Statement of Claim dated 25 July 2014, the relief sought in respect of the Chylos matter was expressed as follows:

116.    Bruce McAdam and Shirley McAdam claim:

(a)    a declaration that they are not indebted to Chylos in the sum of $88,332 or at all; and

(b)    an order that Chylos pay the dividend or distribution of funds from the sale of the Orange Property as alleged in paragraph 108(b) above to Bruce McAdam and Shirley McAdam.

51    Paragraph 108(b) of the pleading was as follows:

108.    Following the sale of the Orange Property, Mr. Hurrell caused or permitted the accounts of the company to record:

…

(b)    a net debt owed by Bruce McAdam and Shirley McAdam to the company in the sum of $48,332.

52    In the appellants’ opening written submissions dated 18 July 2014 in the proceedings below, the appellants referred to the fact that the 2000 Chylos accounts recorded the disputed loans. They submitted that no explanation had been advanced for why those loans were so recorded. Reference was also made to the fact that, despite this, Chylos had declared dividends and purported to set off the dividends against the asserted loans and that it was not entitled to do so. The Court was asked to grant declaratory relief that the loans were not owing and to order Chylos to pay the dividends to which the McAdams were entitled.

53    On 2 April 2015, towards the end of the resumed hearing, the primary judge said that he would find it useful if the appellants could send him “a piece of paper with the declarations you want written on it, lest I accidentally make some other declaration”. This invitation was taken up by the appellants’ solicitors who provided to the primary judge on 24 April 2015 the terms of the relief which they sought which included, but was not confined to, the proposed declaratory orders (see [9] above).

54    As is evident from [49]-[51] above, the terms of the declaratory relief sought by the appellants varied over time. However, all the iterations of that proposed relief, including the version provided by the appellants under cover of the letter dated 24 April 2015, were in the form of negative declaratory orders. Mr Emmett correctly acknowledged that, consistently with legal authority, the appellants carried the burden of proof of establishing all the elements upon which the proposed declaratory orders were based, including the assertion that the loans did not exist (see Hume v Monro (No 2) [1943] HCA 7; (1943) 67 CLR at 474 per Latham CJ; Massoud v NRMA Insurance Limited (1995) 8 ANZ Ins Cas 61-257 at 75,876-75,877 per McLelland CJ in Eq.; Warner v Hung, in the matter of Bellpac Pty Limited (Receivers and Managers Appointed) (In Liquidation) (No 2) [2011] FCA 1123 at [46] per Emmett J, which was upheld on appeal in Hung v Warner, in the matter of Bellpac Pty Ltd (Receivers and Managers Appointed) (In Liquidation) [2013] FCAFC 48 at [23]-[31] per Jacobson, Gordon and Robertson JJ; and Haritos & Ors v Commissioner of Taxation & Ors [2015] VSCA 79 at [24] per Osborn JA (with whom Ferguson and Kaye JJA agreed)).

55    The appellants also sought an order concerning the dividends which the McAdams claimed they were entitled to receive from Chylos. There were also various iterations of the terms of that proposed order, as is apparent from the extracts set out in [49]-[51] above. The reference to [108(b)] in [116] of the Fourth Further Amended Statement of Claim does not make sense because [108(b)] refers not to any dividend, but rather refers to the alleged debt owed by the McAdams to Chylos. The terms of order 3 as expressed in the 24 April 2015 letter are set out in [9] above. That proposed order refers in its terms to sums having been deducted since 2001 by Chylos from dividends “on account of the respective liability of $24,167”, which is a clear reference to the disputed loans.

56    As noted above, in the appeal, Mr Emmett did not press the appellants’ claim for declaratory orders but he did press proposed order 3 (the order for payment). Does that mean that the appellants did not carry the burden of proof in respect of that particular order in the trial below? For the following reasons, we would answer that question “no”:

(a)    the order for payment, in each of its iterations, was always ancillary to the declaratory orders sought by the appellants, in respect of which they correctly accept that they carried the burden of proof;

(b)    the evidentiary foundation for the order for payment was the same as for the declaratory orders, namely the non-existence of the disputed loans;

(c)    the trial was conducted on that basis;

(d)    the appellants cannot circumvent the burden of proof which they carried in the trial by now jettisoning their claims for declaratory relief in the appeal and then seeking to have the appeal conducted on an entirely artificial basis as though the only relief which was, and is, relevant is an order in terms of proposed order 3. Such a course flies in the face of the way in which the appellants conducted their case below; and

(e)    in any event, within the terms of proposed order 3, even if that order was viewed in isolation from the terms of the declaratory orders which accompanied it, it is far from clear that the respondent (and not the appellants) would carry the burden of proof in circumstances where the order makes express reference to the set off being the amounts representing the disputed loans. Thus the appellants themselves raised the disputed loan as a component of their proposed order for payment.

Appeal ground 3

57    The appellants contend that, even if they did bear the burden of proof, the primary judge erred in not finding that the loans never existed. This contention must also be rejected for the reasons given above in respect of ground 1. There was no error on the part of the primary judge in finding that the loans existed. His Honour made clear at [24] of his reasons for judgment that he was affirmatively satisfied that the loans did exist independently of his view that the plaintiffs carried the burden of proof on that issue. It must necessarily follow that, if the matter fell to be determined by reference to the proposition that it was the appellants who carried that burden, having regard to the fact that no appellable error has been demonstrated in respect of the primary judge’s finding that the loans did exist, the appellant would fail to discharge that burden.

Notice of contention

58    In view of the appellants’ failure to establish any of their three grounds of appeal, the appeal must be dismissed. It is not necessary, therefore, to determine the notice of contention.

Conclusion

59    For these reasons, the appeal should be dismissed and the notice of contention also dismissed. The appellants should pay the respondent’s costs of the proceeding as agreed or assessed.

Associate:

Dated:    16 November 2015