FEDERAL COURT OF AUSTRALIA

Frauenstein v Farinha [2007] FCA 1953

 CORPORATIONS -  business ventures – whether carried on by partnerships – where plaintiff made payments in connections with businesses – characterisation of payments – allotment of shares – whether accounts of businesses underestimate revenues earned and overstate expenses incurred – whether unfair or oppressive conduct occurred – whether majority shareholders should be required to buy shares in companies of minority shareholders.

Corporations Act 2001 (Cth), ss 232, 288, 344, 461

Partnership Act 1892 (NSW), s 1

CARL FRAUENSTEIN AND ORS v TOBIAS FARINHA AND ORS

NSD2135 OF 2006

EMMETT J

10 DECEMBER 2007

SYDNEY

FIRST CROSS-CLAIM

SECOND CROSS-CLAIM

REASONS FOR JUDGMENT

INTRODUCTION.. 3

AMENDMENT. 6

THE WITNESSES. 8

THE ISSUES. 9

THE ESTABLISHMENT OF THE BUSINESSES AND THE DEMISE OF TRUST. 10

RESOLUTION OF THE ISSUES. 32

Business Structures. 33

Characterisation of Carl’s Payments. 40

Allocation of Carl’s Payments. 41

Identification of the Debtors. 46

Capital of World Square. 55

Accounting Deficiencies. 59

Oppression. 62

$550,000 Loans. 65

CONCLUSIONS. 67

INTRODUCTION

1                     The first plaintiff, Carl Frauenstein (Carl), and the first three defendants, Tobias Farinha (Toby), Miguel Farinha (Miguel) and Marco Zagato (Marco) have been jointly involved in three businesses.  The businesses consist of a restaurant business known as “Moda” carried on at the Westfield Shopping Mall at Bondi Junction, a café business known as “Momo” also carried on at Westfield at Bondi Junction and a bar and gaming lounge business known as “Equilibrium” carried on in the World Square Shopping Centre in George Street, Sydney.  Toby is Miguel’s father and Marco’s father-in-law.  It is convenient to refer to Toby, Miguel and Marco jointly as the Farinhas.  I shall generally refer to corporate entities connected with the Farinhas as the San Marco Group. 

2                     While the relationship between Carl and the Farinhas began as one of trust and cooperation, the relationship has soured and they have lost trust in each other.  As a consequence, they have engaged in expensive litigation to resolve issues that should sensibly have been resolved by mediation or other extra curial means. 

3                     The three businesses have been carried on by the fourth, fifth and sixth defendants, San Marco Bondi Junction Pty Limited (Bondi Junction), San Marco Piccolo Pty Limited (Piccolo) and San Marco World Square Pty Limited (World Square) respectively.  That is to say, Bondi Junction carries on the Moda business, Piccolo carries on the Momo business and World Square operates the Equilibrium business.  However, as will become apparent, the Moda and Momo businesses have tended to merge into one business carried on by Bondi Junction. 

4                     A significant issue in the proceeding is whether Bondi Junction, Piccolo and World Square carry on the businesses beneficially or in some nominee or trustee capacity.  The Farinhas say that Bondi Junction, Piccolo and World Square carry on their respective businesses as nominee for various partnerships.  They say that a partnership, consisting of Toby Bondi Junction Pty Limited (Toby Bondi Junction), Marco Bondi Junction Pty Limited (Marco Bondi Junction) and Miguel Bondi Junction Pty Limited (Miguel Bondi Junction), which are controlled by Toby, Marco and Miguel respectively and Carl Bondi Junction Pty Limited (Carl Bondi Junction), which is controlled by Carl, carries on the Moda and Momo businesses.  They also say that Cine San Marco Pty Limited (Cine) which is controlled by the Farinhas, and Carl World Square Pty Limited (Carl World Square), which is controlled by Carl, carry on the Equilibrium business in partnership. 

5                     All of the relevant corporate entities have been joined as parties to the proceeding, either as plaintiffs or defendants.  Cine and Toby Bondi Junction, Marco Bondi Junction and Miguel Bondi Junction seek orders, by way of cross-claim, that the alleged partnerships be wound up and that an account of profits and losses be taken. 

6                     It is common ground that Carl and the Farinhas were to be involved in corporate entities that were to engage in one way or another in the conduct of the three businesses.  Further, it is not disputed that Carl made payments exceeding $1,800,000 in connection with the three businesses.  However, there is a dispute between the parties as to how those payments should be characterised.  Carl claims that all of the payments should be characterised as advances on loan account.  The Farinhas say, on the other hand, that the payments should be treated as contributions to the equity of the alleged partnerships. 

7                     There is another dispute as to the identity of the entity or entities to which Carl’s payments were made.  Carl adduced evidence from Ms Fiona Marie Bateman, a chartered accountant who specialises in forensic accountancy.  Ms Batemen reported that, following a detailed examination of the books and records of various entities involved with the businesses, she was unable to determine how some of the payments should be allocated among the three businesses. 

8                     There are also particular disputes between the parties concerning the share capital of World Square.  The first dispute concerns a written agreement involving Carl, Toby and Marco dated 20 July 2005 (the Letter Agreement), whereby it was agreed that, if a binding written agreement relating to their interest in the World Square project was not entered into by 7 September 2005, then, at the option of any of the parties, Toby and Marco were to arrange for the repayment of all monies invested by Carl in the World Square project and Carl’s interest in the project would be transferred to the other parties.  Carl claims that the option was not properly exercised or, if it was, that there is no longer any agreement on foot. 

9                     The second dispute concerns the purported allotment of a substantial number of shares in the capital of World Square to the eighth defendant, Equal 54 Pty Limited (Equal 54).  The Farinhas now say that, by reason of failure to comply with the Constitution of World Square, the purported allotment was ineffective.  Carl, on the other hand, says that, whether or not the allotment was effective, it was an instance of unfair and oppressive conduct in relation to the affairs of World Square.  Equal 54 was joined as a defendant but, having regard to the contention by the Farinhas that the allotment was ineffective, it has not played a substantive part in the proceeding. 

10                  Carl owns 40% of the issued capital of Bondi Junction and 40% of the issued capital of Piccolo.  Until the purported allotment to Equal 54, Carl held 30% of the issued capital of World Square.  Carl claims that the affairs of World Square, Bondi Junction and Piccolo have been conducted in a manner that is oppressive or unfairly prejudicial to or unfairly discriminatory against Carl in his capacity as a shareholder and in a manner that was or would be contrary to the interests of the members of those companies as a whole.  He therefore claims orders, under s 461 of the Corporations Act 2001 (Cth) (the Corporations Act), that the Farinhas or entities associated with them be required to buy his shares in those three companies for a value determined on the basis that the alleged unfair or oppressive conduct had not occurred. 

11                  The allegations of oppressive conduct involve an examination of allegations made by Carl of under reporting of revenue of the three businesses and overcharging of management, administration and other fees payable by the three businesses to the San Marco Group.  The parties accept that the question of the value to be attributed to Carl’s shares in the three companies, if the relief claimed by him were to be ordered, should be the subject of a further hearing at which further evidence could be adduced and further submissions would be made. 

12                  Carl and the second plaintiff, Carpe Diem Initiatives Pty Limited (Carpe Diem), also seek declarations that Carpe Diem lent $550,000 to Toby and Marco or alternatively to the seventh defendant, Cockle Bay San Marco Pty Ltd (Cockle Bay), in order to fund a payment to Sherbet Creative Enterprises Pty Ltd.  Cockle Bay is controlled by the Farinhas.  In the further alternative, Carl and Carpe Diem sought a declaration that the loan was guaranteed by Toby and Marco, without saying who was the borrower.  They claim that the loan fell due to be repaid to Carpe Diem on 30 November 2005. 

13                  As I apprehend the contentions of the parties, it is now common ground that, in March 2005, loans totalling $550,000 were made to Cockle Bay.  However, the Farinhas say that the loan was made by Carl personally and not by Carpe Diem.  Carl and Carpe Diem seek judgment in favour of Carpe Diem against Cockle Bay and do not press for declarations that the repayment of the loans to Cockle Bay was guaranteed by Toby or Marco. 

14                  The stance adopted by the Farinhas in relation to the loans totalling $550,000 is an essentially tactical one.  The tactical consideration appears to be that, if a partnership that involved Carl personally came into existence, the taking of accounts may require a further payment by Carl.  If the loans of $550,000 are owing to Carl, there may be a right of set off.  In the light of the conclusions that I have reached that no partnership was entered into involving Carl personally, the issue may not matter. 

AMENDMENT

15                  Following the end of the oral evidence, Carl applied for leave to amend the statement of claim further and to file a further amended originating process.  It is fair to say that certain of the amendments were prompted by questions raised in the course of argument.  The amendments relate to the recovery of the payments made by Carl.  The amendments were proposed under two rubrics, namely, “Monies Lent” and “Monies Had and Received”.  Prior to the amendment application, the originating process had claimed declarations that the payments made by Carl had been advances to World Square, Bondi Junction and Piccolo on loan account.  The originating process also claimed orders that those companies repay the amounts.  Thus, it was clear that Carl had claimed repayment of the monies that he had paid and the proceeding was conducted on the basis that he was seeking repayment.  Insofar as the amendments sought recovery of monies advanced on loan account, the proposed amendments did not change or extend the nature of the claims made in the proceeding.  Accordingly, there was no real opposition from the Farinhas in relation to that aspect of the proposed amendments.

16                  However, the claims under the rubric “Monies Had and Received” gave rise to difficulties.  The Farinhas said that, in so far as the proposed amendments sought to raise claims on common money counts, the pleading was defective because it failed to plead properly a case of unjust enrichment.  The Farinhas contended that it would be necessary for Carl to establish that each of the three companies was in fact enriched unjustly to the extent that it had received the monies in question, either on the basis of a total failure of consideration, or on the basis of some mistake as to the legal relationship which existed between the parties. 

17                  The Farinhas contended that they would be prejudiced by an amendment to plead such a case at that stage because they had conducted their defence up to that time on the basis of the existing pleadings, which did not call for the adducing of evidence, so they say, as to the precise manner in which the payments by Carl should be allocated between the three businesses.  They contended that any cause of action must depend upon some notion of unjust enrichment, which they said they had not had the opportunity to address.  More importantly, however, the Farinhas indicated that, in answer to such claims, they would wish to raise the defence of change of position.  While they accepted that the existence of a partnership had been an issue addressed by them in the conduct of the proceeding, the question of whether or not Bondi Junction, Piccolo and World Square had in fact received payments from Carl to the use of those companies had not been addressed.  The Farinhas said that such matters would need to be addressed by further evidence.  They claimed that they would require at least several weeks before such evidence could be adduced.

18                  It was not suggested that the Farinhas might have adopted a different course in the conduct of the proceeding if the proposed amendments had been pleaded originally.  Accordingly, any unfairness to the Farinhas and the entities associated with them resulting from the proposed amendments, was able to be accommodated by affording them the opportunity to adduce additional evidence.  In the circumstances, I granted leave to Carl to make the amendments under both the rubric of “Money Lent” and the rubric of “Monies Had and Received”, on the basis that the first to seventh defendants would be entitled to file a defence to any further amended statement of claim and would be afforded the opportunity of adducing evidence and making further submissions in relation to the issues raised by that defence.  However, after several weeks, the Farinhas indicated to the Court that they do not wish to adduce further evidence on the new questions. 

THE WITNESSES

19                  Carl and the Farinhas are all South African born but they now live in Australia.  Carl is qualified as a mechanical and aeronautical engineer.  In 1990 he became a management consultant and worked in that capacity from 1992 until 2000 when he retired.  Toby has been involved in running restaurant, hotel and liquor store businesses for over 40 years. 

20                  Carl was introduced to the Farinhas through a solicitor, Mr Colin Steingold.  Another connection between Carl and the Farinhas, prior to the events that are the subject of the proceeding, was Mr Alan Saidman, an accountant who acts for both Carl and the Farinhas.  While each of Messrs Saidman and Steingold may have been able to throw light on factual matters that are in dispute between Carl on the one hand and the Farninhas on the other, neither of them was called to give evidence by either side.  While mechanisms would have been available for either to be called as a witness by the Court, if necessary, neither side availed itself of such mechanisms. 

21                  Carl met Mr Saidman in 1997 when Mr Saidman became his accountant.  In 2001, Mr Saidman introduced Carl to Mr Steingold who then became Carl’s solicitor.  In 2003, Mr Steingold introduced Carl to the Farinhas. 

22                  Carl gave evidence in chief both by affidavit and orally and was cross examined.  Carl’s oral evidence in chief was clear and unequivocal.  Some of his evidence as to relevant conversations given by affidavit were not disputed by the Farinhas.  Despite the fact that Carl’s evidence may have been rehearsed, I consider that he should be accepted as a truthful witness.  Accordingly, in so far as the conversations that occurred between Carl on the one hand and the Farinhas on the other are relevant to the issues, I accept the evidence given by Carl as a reliable version of those conversations.  In several instances, Carl did not give evidence in chief in relation to important conversations.  In those instances, I consider that the version given by Toby is a reliable version of the communications that occurred orally. 

23                  Carl, Toby, Marco and Miguel all gave oral evidence in the proceeding and each was cross-examined.  Each swore affidavits, some of which were quite extensive.  The affidavits dealt with numerous conversations between them concerning the projects at Bondi Junction and at the World Square development.  The evidence in chief in relation to significant disputed conversations was given orally.  On the other hand, several affidavits sworn by the Farinhas accepted that the conversations deposed to by Carl took place as he said and those parts of the Farinhas’ affidavits were tendered as admissions.  In all of the circumstances, I have some confidence in making findings concerning the substance of relevant conversations. 

THE ISSUES

24                  In his written submissions to the Court, Carl formulated eight factual issues.  The Farinhas did not quarrel with that formulation.  Some of the issues are interrelated and overlap.  The issues as I propose to address them may be summarised as follows.

(1)        Whether the Moda, Momo and Equilibrium businesses were owned by Bondi Junction, Piccolo and World Square beneficially, or whether those three companies were nominees of partnerships, consisting of entities associated with the Farinhas and Carl, which acted as trustees of trusts associated with the Farinhas and Carl.

(2)        Whether payments made by Carl in connection with the businesses should be characterised as contributions to equity (whether of partnerships or otherwise) or as advances on loan account and, if the latter, to whom.

(3)        Whether the option conferred by the Letter Agreement was effectively exercised and, if so, whether any agreement is still on foot.

(4)        Whether the purported allotment of shares in the capital of World Square to Equal 54 was effective.

(5)        Whether the accounts of the Moda and Momo businesses underestimate the revenues earned in relation to those businesses and whether management fees, consultancy fees, administration expenses and training costs that have been charged to the three businesses by the Farinhas, or entities associated with them, were properly charged to those businesses.

(6)        Whether the affairs of World Square, Bondi Junction and Piccolo have been conducted in a manner that would attract the exercise of jurisdiction under s 461 of the Corporations Act.

(7)        Whether the loans totalling $550,000 that were made to Cockle Bay in March 2005 were made by Carl or by Carpe Diem.

25                  I shall state my conclusions in relation to each of those issues.  That will involve factual findings and some legal conclusions from those findings.  In that regard, it is necessary to describe in some detail the dealings between Carl and the Farinhas that led to the establishment of the businesses and their falling out. 

THE ESTABLISHMENT OF THE BUSINESSES AND THE DEMISE OF TRUST

26                  Bondi Junction was incorporated on 24 February 2004.  On 31 March 2004, Toby and Mr Steingold were appointed as directors of Bondi Junction.  At that stage, Carl had no involvement with any of the proposed ventures. 

27                  In late April or early May 2004, Carl and Mr Steingold had discussions concerning the possibility of the two of them participating with the Farinhas in the three proposed ventures.  Shortly thereafter, a discussion involving Carl, Mr Steingold and the Farinhas took place.  Carl gave no evidence in chief about such a discussion.  However, in cross-examination he did not deny that such a discussion took place and I accept that it did. 

28                  In the course of the discussion, Toby said that the Farinhas were happy to do the Bondi Junction deal with Carl and Mr Steingold on a 50/50 basis, with Carl and Mr Steingold being the financiers and the Farinhas managing the businesses.  Mr Steingold said that he and Carl were happy with that.  Toby said that, for the World Square business, the Farinhas would want a controlling interest so they would do that on a 60/40 basis, again with Carl and Mr Steingold as the financiers.  Carl and Mr Steingold both said that was fine with them.  Toby then asked Mr Steingold to draw up a partnership agreement for the ventures after he had spoken to Mr Saidman.  Mr Steingold said that he would. 

29                  Another meeting took place at Mr Saidman’s offices at some time in the first part of 2004.  Toby says that the meeting was attended by Marco, Miguel, Carl, Mr Steingold and himself.  Miguel also gave evidence about such a meeting but I do not regard Miguel’s evidence of the meeting as reliable:  he made no mention of it in a statement that was provided in connection with the proceeding and was unable to give a satisfactory explanation, when giving oral evidence, as to how he subsequently came to recall the meeting.  Marco also gave evidence of a series of meetings that he attended at Mr Saidman’s offices during April and May 2004, some of which were attended by Carl.  He said that the way in which the businesses would be structured was discussed.  Carl gave no evidence in chief about such a meeting.  However, while he said in cross-examination that he did not recall such a meeting, he did not deny that a discussion such as deposed to by Toby may have occurred.  In the circumstances, it is difficult to form any firm view as to the precise discussion that occurred at any such meeting.  However, on the balance of probabilities, I consider that such a meeting occurred and proceeded substantially as deposed to by Toby. 

30                  At the meeting, Toby told Mr Saidman that Carl, Mr Steingold and the Farinhas had agreed that Carl and Mr Steingold would take 50% and the Farinhas would take the other 50% of the Bondi Junction businesses as a partnership, and that the Farinhas would take 60% and Carl and Mr Steingold would take 40% of the World Square business as a partnership.  Toby asked Mr Saidman whether he had any suggestions as to how they should structure the arrangements so as to be most tax effective for everybody.  Mr Saidman asked whether they planned to sell the businesses in the future.  Toby said that they may want to sell the Bondi Junction operation when it was up and running and profitable. 

31                  Mr Saidman said that it would probably be best if they established ‘hybrid trusts’ for each of their usual family trusts and made them the partners in the partnerships.  He said that he would form new nominee companies to carry on the businesses on behalf of the partnerships.  He said that the new companies would only be nominees of the partnerships, so that all income would flow through to the hybrid trusts and the companies would file nil returns for tax purposes.  He said that each of the participants would hold shares in the nominee companies in proportion to their interests in the businesses.  Mr Steingold said that he would draw up agreements on that basis.  No one gave any evidence as to the meaning of the term “hybrid trust”.  It could possibly refer to a trust that had characteristics of different kinds of trust, such as a discretionary trust and a unit trust.  Nothing appears to turn on the meaning of the term. 

32                  World Square was incorporated on 4 June 2004 with an issued capital of 10 shares.  Of those shares, 6 were issued to Cockle Bay and 2 were issued to each of Carl and Steingold.  Toby, Miguel, Marco and Mr Steingold were appointed as directors of World Square.  On 8 June 2004, Marco, Miguel and Carl were also appointed directors of Bondi Junction. 

33                  On 24 June 2004, Carl received a draft partnership deed from Mr Steingold.  At about the same time, Toby and Marco also received a copy of the draft.  The draft was expressed to relate to the conduct of a restaurant business at the Westfield Shopping Mall at Bondi Junction.  It provided that Bondi Junction would act as nominee of the partnership in accordance with the directions of the partners.  The partners were to be companies controlled by each of Toby, Miguel, Marco, Carl and Mr Steingold, which were referred to in the draft respectively as Toby Co, Miguel Co, Marco Co, Carl Co and Colin Co.  Companies by that name have never existed.  According to the draft partnership deed, the respective proportions of the partners in the partnership were to be:

Toby Co:                                     25.84%

Miguel Co:                                    7.50%

Marco Co:                                  16.66%

Carl Co:                                      25.00%

Colin Co:                                     25.00%

The draft partnership deed provided expressly that Bondi Junction was not to be a member of the partnership.  It also provided that the partnership was to be managed and controlled by a committee to consist of nominees appointed by each partner. 

34                  After he received the draft Carl considered it in some detail and made a number of handwritten notations on the draft.  Where he did not make a note against a provision of the draft, he placed a tick.  He said that the tick simply indicated that he had read, but had no comment on, the provision.  He denied that it signified any approval of the provision. 

35                  Carl also showed the draft to Mr Jonathan Hendy, a lawyer friend of his from South Africa, who happened to be visiting Sydney at the time.  Mr Hendy made some handwritten notes on the draft and handed it back to Carl shortly before he, Mr Hendy, returned to South Africa.  Carl did not discuss the draft with Mr Hendy and he did not consider Mr Hendy’s notes particularly carefully.  Mr Hendy’s notes recorded that, under the structure proposed by the draft, a partnership would own the restaurant business and that Bondi Junction would conduct the business.  His notes indicated that the partners would participate in profits and losses.  The notes also indicated that the partnership was “not limited” and said “liability not restricted”. 

36                  The Farinhas did not consider that the draft partnership deed was acceptable. They thought that it favoured Carl and Mr Steingold unfairly.  In any event, nothing further was done in relation to the draft. 

37                  On 5 August 2004, Mr Steingold sent to Mr Saidman a draft Unit Trust Deed establishing “the Carl Bondi Junction Trust”.  Mr Saidman responded on 6 August 2004, saying that he had reviewed portions of the draft trust deed and expressed a preference that “Carl’s trust” should also be a party to the trust deed and that certain units should be issued directly to that trust rather than to Carl.  

38                  On 13 August 2004, Mr Saidman sent to Carl a copy of a communication received from the Australian Taxation Office (ATO) that assigned a tax file number and an Australian Business Number for the Carl Bondi Junction Trust and its trustee.  At around the same time, Carl Bondi Junction and Carl World Square were incorporated.  It is tolerably clear that those companies were intended to be trustees of trusts ultimately controlled by Carl and that they were intended to be members of the partnerships that were to be formed to carry on the three businesses. 

39                  On 10 September 2004, Mr Saidman sent two letters to Carl, one relating to the Carl World Square Trust and one relating to the Carl Bondi Junction Trust.  The letters enclosed trust deeds establishing the Carl World Square Trust and the Carl Bondi Junction Trust respectively, together with draft minutes of meetings of the directors of Carl World Square and Carl Bondi Junction.  The letters also attached invoices for fees due to Mr Steingold’s firm in connection with the preparation of the trust deeds and ancillary documents.  Carl paid those invoices. 

40                  The trust deeds for Carl World Square Trust and Carl Bondi Junction Trust were apparently executed in early October 2004 since, on 12 October 2004, Mr Saidman’s personal assistant thanked Carl for dropping off the signed documents in the previous week.  However, there is no evidence as to whether resolutions were passed or contemplated by the draft minutes that Mr Steingold sent to Carl. 

41                  On 8 February 2005, Mr Saidman sent to Mr Steingold a copy of the first two pages of the trust deed establishing the Carl World Square Trust.  The copy of the first two pages shows that the deed bore the date 10 September 2005 and that it had been duly stamped.  The balance of the deed was not in evidence.  There was no evidence as to what the trust property was or who the beneficiaries are.  Whether the trust deed established a hybrid trust is totally unclear. 

42                  Piccolo was incorporated on 30 June 2004, when Toby, Miguel, Marco, Mr Steingold and Carl were appointed directors.  As at 30 June 2004, the issued capital of each of Piccolo and Bondi Junction was 100 shares.  50 shares in Piccolo were held by San Marco Group Pty Limited and 50 shares in Bondi Junction were held by Cockle Bay.  25 shares in each of Piccolo and Bondi Junction were held by each of Carl and Mr Steingold. 

43                  During August 2004 Carl told Mr Steingold that he was no longer prepared to lend him funds for the ventures on the terms that Mr Steingold wanted.  As a consequence, there was a falling out between Carl and Mr Steingold.  Carl told Toby and Mr Saidman, at a meeting in mid-August 2004, that he would be happy to walk away from the ventures if they did not want him to participate, having regard to his falling out with Mr Steingold.  Toby said that they wanted Carl with them.  In late August and in early to mid September, Carl had discussions with Toby concerning the basis upon which Carl would take over either part or all of Mr Steingold’s interest in the ventures. 

44                  In early October 2004, the Momo business opened for trading.  Work was continuing on the Moda premises at that stage.  It appears that the landlord was required to carry out further works to strengthen a floor to support a mezzanine level. 

45                  On 11 October 2004 Mr Saidman wrote to Toby, saying that he was enclosing a “draft memorandum” that he had prepared to give effect to what he understood the arrangements to be with Mr Steingold.  He said that he had not passed it on to either Carl or Mr Steingold at that stage, since he thought he would first get Toby’s confirmation.  Carl subsequently received a copy of the letter with the enclosed memorandum.  There are at least three versions of the memorandum and the circumstances surrounding the preparation of the successive versions are somewhat obscure. 

46                  The terms of the memorandum are not particularly significant in themselves, in that they deal with the proposed arrangements with Mr Steingold.  However, all of the various versions of the memorandum refer to a proposed partnership in relation to the World Square development.  Thus, the memorandum again corroborates the evidence of the Farinhas to the effect that the parties contemplated that a partnership would be established.  On the other hand, the terms of the memorandum also indicate that, at that stage, no finality had been reached as to the terms of any partnership. 

47                  On 23 December 2004, Mr Steingold ceased to be a director of World Square, Piccolo and Bondi Junction.  On 7 February 2005, 15 shares in the capital of Bondi Junction were transferred from Mr Steingold to Carl and 10 shares were transferred from Mr Steingold to Cockle Bay.  The consequence was that the shareholdings in Bondi Junction were then Farinhas 60% and Carl 40%.  On 21 and 22 March 2005, 64 shares in the capital of World Square were issued to Cockle Bay, 23 shares were issued to Carl and three shares were issued to Shadean (World Square) Pty Ltd (Shadean), a company controlled by Mr Steingold.  At the same time, the two shares in World Square held by Mr Steingold were transferred to Shadean.  The consequence was that the shareholdings in World Square were then the Farinhas 70%, Carl 25% and Mr Steingold 5%. 

48                  By March 2005, the design for the World Square project had been finalised and timelines for construction had been prepared.  A building contract was entered into for a sum of $6,500,000 with construction to start in March or April 2005.  

49                  On 30 March 2005, Carl wrote to Marco concerning a proposed guarantee for additional funding from the Bank of New Zealand.  The letter began as follows:

“To date, I have fully funded my personal obligations to the project.  I have furthermore fully funded the obligation of Colin Steingold in the project.  I have also partially funded a small portion of the San Marco Group obligations in the project.  I have now been approached to provide further support in the form of a bank guarantee to the value of $AUS750,000.”

The letter went on to set out the conditions upon which Carl would be prepared to give a bank guarantee.  Marco responded on 31 March 2005, indicating that certain of Carl’s conditions would not be agreed to, since they involved a dilution of the Farinhas’ shares in the ventures.

50                 In early April 2005 Moda opened for trading. 

51                 On 13 April 2005 Carl wrote to Toby concerning the World Square project.  He began by referring to the proposed San Marco World Square Partnership and the status of participation.  He said that the proposed participation in the partnership was 60/20/20 and the “managing company” was registered accordingly.  Carl said, however, that that was always subject to finalising the individual contribution of each participant.  To that end, he said, Mr Steingold approached him for a loan that would enable him to participate to the level of a 20% partnership. 

52                 Carl then went on, in his letter, to describe the breakdown of his relationship with Mr Steingold such that Carl could not provide funding to Mr Steingold.  Carl referred to a proposal whereby Mr Steingold would participate to 5%.  Carl said that he had not heard back from Mr Steingold since writing to him on 31 March 2005 and that he was therefore withdrawing from negotiating as to any more proposals for Mr Steingold to have 5% of the World Square project.

53                  Carl also said that he was not going to consider or accept any “proposed partnership participation” until such time as an amicable funding structure was agreed.  He said that he had been funding in excess of 45% of the project needs and therefore requested that no partnership structure or participation be deemed to be agreed until such time as a fair agreement could be concluded based on participation, contribution and risk exposure.  He suggested that the four directors of World Square call a meeting as soon as practicable to resolve the matter. 

54                  The references to a partnership in Carl’s letter support the Farinhas’ contention that a partnership structure was contemplated.  However, it is clear from the terms of the letter that no consensus as to the terms of any partnership had been reached at that stage.

55                  On 21 April 2005, Mr Saidman sent to ANZ Private Banking, Carl’s bankers, a letter of 21 April 2005 from Marco and Miguel.  Mr Saidman’s letter said that the interests held by Carl in the various ventures were held by entities owned and controlled by him rather than by him personally.  The letter also said that the ventures were “operated as partnerships” and that Carl’s entities had partnership shares equal to the percentages set out in the enclosed letter.  The enclosed letter, signed by Marco and Miguel, said as follows:

“We would like to confirm that Carl Frauenstein has 40% of the two ventures in Westfield Bondi Junction being San Marco Bondi Junction Pty Ltd trading as Moda Bar & Restaurant and San Marco Piccolo Pty Ltd trading as Momo’s Bar and Café.  Carl currently has 25% of San Marco World Square Pty Ltd and is negotiating a further 5%.  We also confirm that Carl Frauenstein has invested $1,658,930 in the three ventures mentioned above.”

56                  There was no evidence that the letter was sent to Carl, who says that he does not recall seeing the letter, notwithstanding that it was being sent to his own bankers.  The Farinhas place some store on the contents of the letter.  However, while it confirms the parties’ intention of establishing partnerships, it does not itself constitute evidence of the establishment of any partnership at that stage. 

57                  On 17 May 2005, Carl met with Toby and Miguel at Moda.  Carl said that he was particularly concerned about the lack of transparency and management of the finances for the ventures.  He said that he had no accurate idea of how the businesses were trading and how the capital expenditure was going.  Carl suggested that they should have formal operational budgets agreed for all ventures and in particular for Momo and Moda.  He said that the budgets for Momo and Moda would need to be agreed before mid-June and the budget for World Square before mid-August, when the Equilibrium business was to open.  Toby said that he agreed.  Carl said that he could not be expected to put more money into the ventures without having agreed to budgets and the degree of expenditure.  Toby said that he would see to it that those matters were “actioned”. 

58                  On 18 May 2005, Carl sent an email to Marco and Mr Saidman, in which he referred to the meeting with Toby and Miguel on 17 May 2005.  The email summarised the points discussed and agreed at the meeting under the following topics:

·                    management of business;

·                    sale of business to other parties (arms length sale);

·                    sale of business at time of death;

·                    sale of business in the event of default of agreement;

·                    contribution to the establishment of the business;

·                    contribution when running the business (this contribution scenario should be kept separate from the “establishment” scenario);

·                    format of contributions; and

·                    cost of partnership agreement.

Carl ended the email by saying to Mr Saidman:

“We need your input here as soon as possible, please.  I would like to get your input incorporated in the agreement (I have sent you Tim’s draft in electronic format in the event it is of benefit).  I would then like to send the draft off to Tim to finalise.”

Carl followed that email with another email to Mr Saidman on 30 May 2005 asking whether the matter was being followed up and actioned, since he had not heard anything back.

59                  On 12 June 2005, Carl had a discussion with Toby, in which he told Toby that he was not happy with the status of things.  He referred to the meeting on 17 May 2005 and said that he had minuted the points they had agreed on, which he had followed up with an email on 30 May 2005, to which he had not received a response.  Toby agreed that they needed to attend to the matter and suggested a meeting with Mr Saidman as soon as possible.  Carl said that he was not willing to put in any more money until such time as he had budgets agreed and a better insight into the trading of the restaurants and the expenditure for the restaurants.  Toby said that he would speak to Marco and that he would get that information to Carl. 

60                  On 20 June 2005, Carl, Marco, Miguel and Mr Saidman attended a meeting at Mr Saidman’s office.  Mr Saidman sent an email to Carl and Marco on 21 June 2005, attaching a memorandum recording the points that were discussed on 20 June 2005.  The email confirmed that the points did not reflect any agreement but reflected the issues that were tabled and discussed.  Mr Saidman suggested that once they had all had a chance to think about the issues they should reconvene and try to reach an agreement. 

61                  The attached memorandum was headed “Partnership issues to be agreed re San Marco World Square Pty Limited, San Marco Bondi Junction Pty Limited”.  The memorandum contained a preamble as follows:

“A meeting was held on 20^th June 2005…  Various issues were raised regarding proposed clauses to be inserted in a Partnership Agreement in the above two businesses and the following is a list of those issues.  These issues are set out for consideration and do not constitute an agreement at this stage.”  [emphasis added]

Various issues were then set out under the following headings:

Budgets

Regular Management Meetings

Voting Rights

Expenditure Limits

Come-along and Tag-along Clauses

Exit Mechanism for Carl

Position in the Event of Death

Refurbishment

Management Fees

Different Shareholdings

Access to Businesses

Default Provisions

Rights of First Refusal

Head Office Expenses

Financial Contributions

It is clear that, at that stage, no consensus had been reached. 

62                  On 23 June 2005, Carl sent an email to Mr Saidman and a copy of the email was provided to the Farinhas at the same time.  In his email, Carl said that he wanted to summarise his sentiments.  He made a number of complaints including the following:

·                    he was over contributing substantially;

·                    he had been required to sign a bank guarantee for $AUS1 million out of the blue;

·                    project costs on Moda went from $AUS1.7 million to $AUS2.3 million then to $AUS2.8 million and then stood at $AUS3.2 million;

·                    the World Square construction contract had a current value of $AUS7.4 million and he had no idea as to the value of the contract until construction started;

·                    week to week project cost management was not taking place; and

·                    he had no idea of what the project cost situations were.

63                  Carl suggested in his email that there were “two scenarios going forward”, being either a partnership or mezzanine finance.  Under the rubric “Partnership”, Carl suggested:

“(a)     we split everything 70/30;

 (b)      we split our respective agreements with Colin 70/30;

 (c)       a partnership agreement is in place with:

(i)        full visibility…

(ii)       full monthly reporting,

(iii)      full visibility of what is planned and what is happening…

(iv)      an exit opportunity for me anytime after five years…

(v)       a put option or ‘forced sale’ clause should any party be in breach of significant and material items after ‘written notice…etc’;

 (d)      I will ignore any over contribution on my side from an ‘interest payment’ point of view but will not be required to provide any further funds;

 (e)       my over contribution loan account will take priority over respective ‘ownership based’ contribution loan accounts;

 (f)       I will roll over my loan with Toby and Marco for three months…

 (g)      I will roll over my loan with Miguel for three months…”

64                  Under the rubric “Mezzanine Finance”, Carl proposed the following:

“(a)     we convert all the loans I have with them into Mezzanine…

 (b)      the interest rate will be 12.5% and will be adjusted upwards and downwards with the bank rate…

 (c)       is a minimum of three years…

 (d)      I sign the Members Equity agreement but will have a side letter from Sam Marco, Toby, Miguel, Cockle Bay indemnifying me from all guarantees…

 (e)       should my guarantees be required for longer than the period of the Mezzanine loan, the loan shall continue until such time as the guarantees are released.”

Carl said that his “absolute preference” was the partnership scenario and would only go to the mezzanine finance scenario if the Farinhas were not comfortable to have him as a partner on the terms he suggested. 

65                  Carl’s email was the subject of discussion at a meeting subsequently held on 28 June 2005.  At the meeting, Toby said that the Farinhas would like to take up the partnership scenario but could not agree to change their shareholding in the ventures such that the shareholding of Momo and Moda was the same as the shareholding in World Square.  Marco said that they would address all of Carl’s issues about financial reporting and make sure that he got timely reports on the ventures as he wanted.  Carl said that he was not prepared to make any further funds available to the ventures until they had budgets agreed and that was not an unreasonable requirement.  Marco said that he would get the budgets done as soon as possible. 

66                  On 5 July 2005, Mr Steingold transferred 5 shares in World Square to Cockle Bay and transferred 5 shares to Carl.  The result was that Cockle Bay held 70% of the capital of World Square and Carl held 30%. 

67                  On 14 July 2005, Carl had a further meeting with Toby and Marco at which Carl provided them with an Excel spreadsheet showing Carl’s understanding of the total cash input for the ventures.  The spreadsheet showed that Carl had already contributed $1,850,000.00, which represented an over contribution of $759,265.61 on one view, or an over contribution of $808,397.22 after adjustments for training and administration costs.  Marco said that he could not say that the figures were correct but that “the logic is certainly right”.  Carl suggested that the Farinhas should pay interest on Carl’s over-contribution.  Marco agreed to that proposal with effect from 1 July 2005. 

68                  On 18 July 2005, Carl departed Australia for Los Angeles on his way to Canada.  Prior to his departure from Australia, Carl gave power of attorney to Mr Tim Somerville, a solicitor.  On 20 July 2005, Mr Somerville, acting as Carl’s attorney, signed the Letter Agreement.  The Letter Agreement relevantly provided as follows:

“1.       The parties shall use their endeavours to cause a binding written agreement to be entered into between the entities controlled by them respectively relating to the interest of the parties in the World Square Project by 7 September 2005.

 2.        If no such written agreement is entered into (by reason only of the parties being unable to agree to the terms of such agreement, after negotiating in good faith) by 7 September 2005 then at the option of any of the parties, to be exercised before 14 September 2005, Tobias Farinha and Marco Zagato shall arrange for the repayment of all monies invested by Carl Frauenstein or any entity under his effective control relating to the World Square Project within 12 months of any party exercising such option, whereupon all interests of Carl Frauenstein in such project shall be transferred to the other parties equally, or their nominees.”

The terms of the Letter Agreement have some significance in relation to the question of whether a partnership agreement had been entered into.  The clear assumption underlying the Letter Agreement was that no binding agreement was on foot at that stage. 

69                  On 1 August 2005, Carl received a document requiring him to act as a guarantor on a loan of $1,970,000 from Multiplex, which was the builder of the World Square premises where the Equilibrium venture was to be located.  The guarantee was subsequently executed on Carl’s behalf by Mr Somerville under the power of attorney granted by Carl.  On 3 August 2005, Carl received a text message from Marco saying that there was no time for discussions or signing an agreement in relation to the loan.  Carl telephoned Marco and told him that he could not give further signatures or guarantees until such time as Marco, Toby and Miguel had executed formalised agreements for loans totalling $550,000.  Carl also said that he needed those loans to be secured by the people who are providing guarantees.  Marco replied that he was not happy but conceded that Carl’s request was not unreasonable.  He said that Toby would not agree to give personal guarantees for the loans. 

70                  Over the weekend of 6 and 7 August 2005, Carl received a telephone call from Toby.  Carl told Toby that he was very unhappy with everything that had taken place.  Toby said that he understood Carl’s position but that they needed him to get Mr Somerville to sign the Members Equity loan documents.  Carl said that he was not prepared to sign anything until his position was secured in relation to the $550,000 loan to Cockle Bay.  He said that he had sent documents to Mr Somerville and wanted him to draw up the documentation for Toby and Marco to sign.  Toby said that Carl was making it very difficult for him and gave Carl an assurance that he would repay every cent that he owed.  Carl said that the difficult position was not of his making and that, if the Farinhas paid back the loans of $550,000, he would have more than enough money to cover his side.  Toby said that the document had to be signed on Monday, 8 August 2005 and told Carl that he should trust him and that he would repay every cent owed.  Carl again said that he was not happy but that it appeared that again he had no choice.  He told Toby that his resources were being seriously stretched by the way things were going.  Carl gave instructions to Mr Somerville on 8 August 2005 to sign the Members Equity loan documents. 

71                  Early in the morning of 5 September 2005, Carl asked Mr Saidman by email for Mr Saidman’s documented notes of the points about which agreement had been reached at their meeting held on or around 28 June 2005.  Mr Saidman replied early in the afternoon saying that he had just spoken to Toby and that he thought that they all needed to sit around the table:

·                    to review the figures that Ms Judy Kyu, the office manager of the San Marco Group, had prepared, which he stressed had not been audited; and

·                    to finalise the items that he believed that they had essentially, but not finally, agreed on as to the terms of the partnership agreement, so that a solicitor could be instructed to draw a contract setting out those agreements.

72                  Carl responded by email shortly afterwards, saying that the partnership agreement was the first priority that should have been addressed and completed prior to spending any money.  He pointed out that there was a deadline on the partnership agreement of 7 September 2005 unless otherwise agreed to by all parties in writing.  That was clearly a reference to the Letter Agreement.  Carl also said that the current financial status still required a bit of work on his side, which could involve obtaining further information.  He said that he doubted that they would be able “to put it to bed” before 7 September 2005 and that he would not be able to satisfy himself that the figures accurately reflected the current status.  He went on to say that it was his understanding that most points concerning the partnership agreement were agreed but that, because he did not have Mr Saidman’s notes of their last meeting, he was unable “to make a call” on what was still outstanding. 

73                  Later in the afternoon, Mr Saidman responded by email, attaching another copy of his memorandum of the 20 June 2005 meeting.  He said that, as far as he could recall, that memorandum set out the discussions that they had, save for a few subsequent issues that were discussed on 28 June 2005.  He said that the issues that he thought still required resolution were as follows:

·                    Carl was going to make a proposal as to how the training costs should be split.

·                    Carl was going to make a proposal as to how the San Marco administration costs should be accounted for.

·                    They needed to agree on remuneration for the Farinhas for managing the ventures.

·                    Some of the detail in the memo of 20 June 2005 needed to be agreed to.

Mr Saidman asked Carl to let him know how Carl wanted to progress the matter and said that he thought it would be better to resolve the outstanding issues around the table rather than for a solicitor to be instructed on an incomplete basis. 

74                  Also on 5 September 2005, Toby and Carl had a discussion at Carl’s home in Mosman concerning a bank guarantee with BNZA.  Carl said that he would telephone BNZA to arrange a meeting.  Carl and Toby also discussed the proposed partnership agreement.  Carl said that, unless he was shown otherwise, he understood that all aspects of the agreement had been agreed to and that the only step remaining was that it needed to be drafted into a legal document.  Toby agreed to instruct Mr Saidman to forward all the documents relevant to the partnership agreement to a solicitor to be suggested by Mr Saidman, so that the Letter Agreement could be complied with.  Carl prepared minutes of those discussions, which he subsequently gave to Toby. 

75                  On 6 September 2005, Carl met Toby in Mr Saidman’s office.  Before Mr Saidman joined them, Toby told Carl that he was worried about Carl’s exposure.  He said that there was a lot happening, that he was worried and that the Farinhas were over exposed with the restaurants, the World Square project and “the building”.  Toby told Carl that he had been very good “to us”.  After Mr Saidman joined them, Toby told Mr Saidman that he was very worried about Carl’s exposure and suggested that Carl consider exiting the World Square venture.  Carl said that he would have to think about things overnight and that they could not achieve anything without having Marco and Miguel present.  Toby and Carl agreed to meet the following day, 7 September 2005.  Carl pointed out that 7 September 2005 was the deadline under the Letter Agreement. 

76                  Carl met Toby at the Momo premises at about 12.30 pm on 7 September 2005, when Toby asked Carl whether he had received a letter that Toby said he had faxed the previous day.  Carl said that he did not know what Toby was talking about and that he had not received a letter. 

77                  Shortly afterwards, Marco joined them. Carl said that they needed to finalise the shareholders agreement and that it was 7 September 2005 and they had not yet discussed the final terms.  Toby gave evidence that he said that the deadline could be extended by mutual agreement although Carl gave evidence that Toby said they would extend the deadline by mutual agreement.  Carl made a diary note upon his returning home from the meeting in which he said that Toby had agreed to extend the deadline at Carl’s request and that he, Toby, would inform Mr Somerville the next morning.  I accept Carl’s version of the discussion. 

78                  In the middle of the afternoon of 7 September 2005, Carl received a facsimile from Toby dated 6 September 2005, in which Toby expressed disagreement with the contents of Carl’s minutes of their discussion on 5 September 2005, which Carl had given to Toby.  In relation to the proposed partnership agreement, Toby said that his understanding was that, when they met with Mr Saidman on 20 June 2005, there were certain essential matters that Carl raised that he was going to follow up on as follows:

·                    Carl was going to follow up and advise how best to deal with the training costs.

·                    Carl was going to advise how he thought the San Marco head office administration costs should be dealt with: they were unresolved as to what salaries would be paid to members of the Farinha family for working at the various ventures. 

·                    They still needed to agree as to which matters required unanimous consent. 

Toby said that, although an outline of various points was discussed, the parties were not resolved on certain essential terms.  The matters mentioned by Toby correspond fairly closely to the matters mentioned in Mr Saidman’s email to Carl late in the afternoon of 5 September 2005. 

79                  Toby’s facsimile then went on to say that he thought that they were not in a position to forward documents to a solicitor regarding the partnership arrangements until the matters so raised were finalised.  Toby also confirmed that Carl said he wanted to speak to Mr Saidman regarding the spreadsheet and that discrepancies should be provided to Mr Saidman so that Mr Saidman could finalise the schedule.

80                  On 8 September 2005, Carl left a voice mail message when Toby did not answer his mobile phone.  Carl asked Toby to ring Mr Somerville about the extension of the Letter Agreement.  Later that day, Toby telephoned Carl and asked that Carl meet with Toby, Marco and Miguel at Carl’s home at 3 pm the following day.  Carl again asked Toby to speak to Mr Somerville straight away about the Letter Agreement. 

81                  On 9 September 2005, Toby arrived at Carl’s home without Miguel and Marco and suggested that they have lunch together without Marco and Miguel.  During the course of lunch, Toby told Carl that he, Carl, should consider not being part of the World Square project because it was a very high risk.  Toby also said that he was worried that Carl and Marco did not seem to get on together.  Carl said that the only problem he had with Marco was when Marco made commitments, such as to provide employment and revenue figures, and did not deliver.  Carl said that, if there was a funding concern that meant that he had to exit the venture in order to allow another investor so that the venture succeeds, he would do that on the basis that his exit would be treated in a fair and equitable manner. 

82                  Later in the course of lunch, Carl said that he was concerned that Toby had not yet spoken to Mr Somerville regarding the extension of the Letter Agreement.  Toby said that there was no need to be concerned because he always keeps his word.  Toby suggested that they meet the following day with Marco and Miguel.  On the following day, 10 September 2005, Carl was unable to speak to Toby because his mobile telephone was switched off.  He then spoke to Marco who said that Toby had gone home because he had a sore throat.  Carl said that he had been hoping to meet with Toby, Miguel and Marco to discuss their agreement. 

83                  At 9.06 am on 12 September 2005, Carl sent a facsimile in response to Toby’s facsimile of 7 September 2005.  After referring to the BNZA facility, Carl said that the meeting in Mr Saidman’s office of 20 June 2005 was not the last meeting and therefore Mr Saidman’s memorandum of that date was not the most recent status of the agreement.  Carl suggested that they meet with Mr Saidman to discuss and determine what, if anything, was still outstanding.  Carl also agreed that they should meet with Mr Saidman as soon as possible in relation to the current costs spreadsheet.  He said that he had met with Marco on the afternoon of 10 September 2005, when they had agreed that they should meet with Mr Saidman to discuss all the items at hand prior to Marco’s departure on 13 September 2005.

84                  Toby replied at 4.51 pm on 12 September 2005, agreeing with Carl’s comments in relation to the BNZA facility.  Toby also confirmed that he had met with Carl on at least three occasions in an attempt to discuss matters outstanding under the proposed partnership arrangement.  He pointed out that the memorandum of 20 June 2005 from Mr Saidman clearly highlighted unresolved issues, being issues that continued to be unresolved.  He said that their understanding was that they had not reached any agreement on the partnership issues and that, despite repeated attempts, Carl did not wish to discuss the matter but rather preferred to resolve the amounts owing to him.  Toby also confirmed that they should meet with Mr Saidman as soon as possible to discuss any issues arising under the costs spreadsheet. 

85                  The language of Toby’s email makes clear that it was his understanding, at that stage, that no agreement had been reached as to the terms of any partnership agreement.  That is not necessarily inconsistent with there being a partnership in existence.  However, when coupled with the language of the Letter Agreement, it is clearly inconsistent with there being any express partnership agreement.  That is confirmed by the events of the following days.

86                  At 6.51 pm on 12 September 2005, Carl received an email from Toby to which was attached a letter signed by Marco and Toby.  The letter relevantly said:

“We hereby give you notice that we are exercising the option under the letter agreement of 20 July 2005 entered into between Tobias Farinha, Marco Zagato and Carl Harold Herbert Frauenstein (‘Letter Agreement’) to purchase your interest in the World Square Project as set out in the Letter Agreement.”

Carl responded by facsimile of 14 September 2005, relevantly saying:

“1.       I do not accept that the letter of 20 July 2005 accurately reflects the arrangements between us; and

2.         Even if the option you refer to is valid (which is not admitted here) it is not capable of exercise as the condition precedent to this exercise has not been fulfilled.  That is to say you have not negotiated with me in good faith to achieve the written agreement referred to in clause 1 of the letter of 20 July 2005.

Accordingly I do not recognise your purported exercise of the option as valid and I reserve my rights.”

87                  Over 14, 15 and 16 September 2005 there was an exchange of correspondence between Carl and the Farinhas concerning a dispute that World Square had with Sherbet Creative Enterprises and NJ Electrical Contracting Services Pty Ltd.  In essence, Toby was seeking Carl’s agreement to a proposed settlement of the dispute.  Carl adopted the stance that he did not know enough about the affairs of World Square and in any event would not contribute any further funds. 

88                  In the meantime, on 15 September 2005, by facsimile letter, Toby responded to Carl’s facsimile of 14 September 2005.  Toby “categorically” rejected Carl’s contention that the Farinhas had not negotiated in good faith to achieve a written partnership agreement.  He again referred to “a number of critical issues relating to the partnership arrangement” in relation to which Carl was to revert back to Toby.  The letter asserted that the Farinhas had never heard back from Carl in relation to those issues, which concerned training costs, head office administration costs and salaries for Miguel and Marco.  Toby went on to refer to meetings that had taken place between Carl and Toby in early September 2005. 

89                  On 18 September 2005, Carl met with Toby again.  Toby told Carl that he wanted Carl in the venture and suggested that Carl work through the financials that week and raise any issues so that they could “put them to bed”.  They agreed to meet again on Thursday, 22 September 2005.  On 19 September 2005, Carl wrote to Toby saying that, in the light of their meeting on 18 September 2005 and Toby’s suggestion that the Farinhas and Carl meet on Thursday, 22 September, Carl would not respond to Toby’s facsimile letter of 15 September 2005 pending the outcome of their meeting.  Carl also said that he was working through the financials as Toby had suggested. 

90                  On 20 September 2005, Mr Saidman sent to Carl a note of the items that he said Toby had suggested should be discussed at the proposed meeting on Thursday, 22 September 2005.  The relevant items included the following:

·                    Carl’s comments on the cost spreadsheet;

·                    Sale of Moda and Momo;

·                    Losses in Moda and Momo and ongoing losses;

·                    Settlement of dispute with Sherbet;

·                    Agreement as to any amounts due to Carl for the World Square project;

·                    Repayment to Carl of outstanding loans.

91                  Carl met with the Farinhas and Mr Saidman at Mr Saidman’s office on 22 September 2005.  Toby began by saying that the meeting was called to see how they were going to move forward and how best to do that.  Mr Saidman suggested that the Farinhas “go away and work out what the budget is” and how much the World Square venture still required.  Mr Saidman said that he did not think it was fair to expect Carl to inject any funds into any venture until such time as he had been given budgets and an opportunity to approve them.  Toby said that he accepted that. 

92                  On 26 September 2005, Carl wrote to Toby and said that, in the light of the meeting on 22 September 2005, Carl would continue to withhold his response to Toby’s facsimile letter of 15 September 2005. 

93                  On 4 October 2005, Carl asked Mr Saidman to send him copies of the register of members of World Square because, he said, he wanted to confirm that it was up-to-date and that 30% of the shares were held by Carl World Square.  Carl sent that request after he had consulted with a solicitor, Ms Linda Johnson of Mallesons Stephen Jaques.  Carl apparently received a response to his request to Mr Saidman because, on 7 October 2005, he sent a further email to Mr Saidman saying that he, Carl, was puzzled that his shares in World Square were registered in his personal name.  He asked why Carl World Square had been set up. 

94                  Mr Saidman responded on 10 October 2005 saying:

“You should recall (but maybe you don’t) that the structure in both ventures was a partnership of entities.  In the case of World Square the entities are Cine San Marco Pty Ltd and Carl World Square Pty Ltd acting as trustee for the Carl World Square Trust (I think that is the name of your trust). 

The partnership of those two entities is administered/represented by the company San Marco World Square Pty Ltd which simply acts as a nominee entity representing the partnership.  It has been done that way because it is very cumbersome to reflect the full name of the partnership every time and we decided that it was preferable to using a registered business name. 

If you think it through you will appreciate that San Marco World Square itself, as a simple nominee or quasi trustee will never have value as it will always only be the legal owner but not beneficial owner of assets.  As a result the shares in that entity really can be held anywhere and my advice was that I preferred them to be held in an entity or person that did not have beneficial ownership of the business assets. 

Hope that clarifies things.”

95                  The structure outlined by Mr Saidman in his reply is the structure for which the Farinhas contend in this proceeding.  However, while the contemporaneous material indicates that the parties had in mind putting in place such a structure, it does not support a conclusion that any such structure was actually in place at any given time.  While the various entities were indeed formed, there is no evidence to suggest that any of them adopted the arrangements summarised by Mr Saidman in his response to Carl. 

96                  On 8 October 2005, Carl met with Toby.  Although Carl expected Marco and Miguel to attend also, they did not.  The principal discussion related to loans of $550,000, which were repayable in November 2005.  Toby said that they needed Carl to roll the loans over.  Carl said that he would consider doing so but first they would have to draw up new loan agreements.  Toby asked Carl to make a proposal as to how Carl wanted to proceed.  Carl said that he would do so. 

97                  On 13 October 2005, a further meeting was held at Mr Saidman’s office attended by Carl, the Farinhas and Mr Saidman.  Some discussion took place concerning the question of whether solicitors should be instructed to prepare an agreement.  Mr Saidman suggested Mr Greg Peach of Musgrave Peach. 

98                  On 4 November 2005, Mr Saidman sent to Carl a draft agreement for Momo and Moda, which had been prepared by Musgrave Peach.  Mr Saidman said that he was forwarding the draft at the request of Marco and had been requested to say that the agreement was sent to Carl in draft form and did not constitute an offer or commitment in any way.  Mr Saidman’s email went on to say that an agreement for the World Square project had not yet been prepared but that it would essentially mirror the agreement for the Bondi Junction ventures, subject to some qualifications that he set out. 

99                  The draft agreement related to a proposed partnership of the following parties in the following shares:

Toby Bondi Junction Pty Limited                                            35.5%

Miguel Bondi Junction Pty Limited                                            4.5%

Marco Bondi Junction Pty Limited                                             20%

Carl Bondi Junction Pty Limited                                                40%

The other parties to the agreement were Carl, the Farinhas and Cockle Bay, Piccolo and Bondi Junction.  The draft provided that the partners acknowledged that Bondi Junction had been acting as the nominee and agent of the partners in conducting the Moda business and Piccolo had been acting as nominee and agent of the partners in conducting the Momo business.  The draft provided that the relationship between the partners, on the one hand, and Bondi Junction, on the other, was that of “independent contractors” and that nothing in the relevant clause meant or implied that a relationship between them was one of partnership or joint venturers.  There was a similar provision in relation to Piccolo.

100               On 8 November 2005, Mr Saidman sent an email to Carl saying that he had received a note from Ms Johnson at Mallesons telling him that she was acting for Carl, that she had received the documents and that she would be reviewing them.  Mr Saidman also said that he had received a call from Musgrave Peach saying that they had received a call from Ms Johnson to the effect that she could not review the agreements without the figures.  Ms Johnson also questioned whether the structure was a partnership and insisted that the loan issues with Miguel, Tony and Marco be dealt with independently.  On 10 November 2005, Mr Saidman sent a further email to Carl saying that he had spoken to Toby, who suggested that it might be better, if Carl’s solicitor had any issues, that they try to resolve them. 

101               However, all discourse came to an end 10 November 2005, when the official opening of Equilibrium took place.  On that occasion, there was a confrontation between Carl and Mr Steingold, after which Carl recounted the incident to Toby.  There was another incident later in the evening when Mr Steingold pushed Carl to the ground and kicked him.  Carl demanded of Toby and Marco that Mr Steingold be removed.  However, apparently nothing was done. 

102               On 14 November 2005, Toby and Carl had a conversation in which Carl said that, after what had happened at the opening of Equilibrium, he had decided that it was best for him not to be involved anymore.  Toby and Carl then went to Mr Saidman’s office where they met Marco and Miguel.  Carl handed to Mr Saidman his resignation as a director of Piccolo, Bondi Junction and World Square.  Toby asked Carl not to do that.  Carl said that he did not want “this sort of stuff in [his] life”.  

103               Toby then told Carl that they had an investor that they could bring into World Square.  Carl said that they needed to work out how they were going to settle all the matters and that his first priority was to have the loans to Toby, Marco and Miguel either paid back or have formal loan documentation executed.  Carl said that, until he could reconcile the financials, he was not going to put any money into any venture and presently was not able to do so. 

RESOLUTION OF THE ISSUES

104               After 14 November 2005, there were no further attempts made to reach agreement between Carl on the one hand and the Farinhas on the other as to joint participation in the three ventures.  It was some time before the proceeding was commenced.  However, as from 14 November 2005, the parties were in effect at issue.  It is now necessary to deal with the various issues identified above. 

Business Structures

105               The cross-claims allege that in late April or early May 2004, Carl, Mr Steingold and the Farinhas orally agreed to establish the three businesses and agreed that the businesses would operate as a partnership of discretionary trusts, with the partnership being represented by a nominee company for each business.  They allege that the shareholding in each of the nominee companies would be in accordance with the interests each party held in the businesses as follows:

·                    Moda and Momo:  Carl 25%, Mr Steingold 25% and the Farinhas 50%.

·                    Equilibrium:  Carl 20%, Mr Steingold 20% and the Farinhas 60%.

106               It is clear enough that such an understanding was in fact reached by the individuals involved.  Indeed, that is substantially Carl’s claim, in so far as he alleges that the individuals involved undertook a quasi partnership or joint venture.  However, no legally binding agreement ever came into existence.  It was clearly the intention of Carl and the Farinhas to enter into arrangements whereby the three businesses would be carried on by a partnership of some sort and the entities intended for those structures were incorporated during the period, the parties never reached consensus as to the arrangements.  While draft partnership agreements were prepared both in June 2004 and November 2005, neither was satisfactory to the parties and neither was ever signed. 

107               The preparation of the draft partnership agreements tends to corroborate the evidence given by Toby and Marco that, at a meeting with Mr Saidman in early 2004, the Farinhas and Carl received a proposal that the businesses be carried on through partnerships.  The drafts are consistent with the notion that the businesses would be carried on by Bondi Junction, Piccolo and World Square as “nominees” of partnerships of corporate entities controlled by Carl, the Farinhas and Mr Steingold. 

108               Nevertheless, it is clear that the drafts had no contractual effect and were never more than drafts. While the June 2004 draft mentioned Bondi Junction and the individuals, it did not identify any specific corporate entities that were to be the partners in the proposed partnership.  While the existence of that draft suggests that the individuals in question were intending to cause a partnership to be formed, in order to be involved in the conduct of the businesses at some stage in the future, it certainly does not evidence the existence of any partnership at that time.  While the November 2005 draft referred to the companies that had been formed in the second half of 2004, it contained blank spaces for the insertion of further particulars of, for example, the capital contributions of the partners and the service fee to be paid to Cockle Bay for the provision of administrative services.  The agreement also referred to a proposed deed of agreement to be entered into by the parties. 

109               Thus, while it may be possible to conclude that, in late April or early May, Carl, the Farinhas and Mr Steingold formed an intention or reached a common understanding that they would establish partnerships along the lines demonstrated by the draft agreements, I am not persuaded by the evidence that any such partnership was ever established. 

110               The Farinhas contend that, whether or not a formal partnership agreement was entered into, Bondi Junction, Piccolo and World Square operated the businesses as nominees.  They refer to several matters as supporting that conclusion. 

111               First, they refer to the steps that were taken in August 2004 and thereafter, by Messrs Steingold and Saidman, to establish the structures that had been suggested earlier in the year.  However, there was no evidence of any record of either of Carl World Square or Carl Bondi Junction engaging in any activity that might be considered to be the conduct of a business in partnership, albeit through a “nominee”.  There was no evidence whatsoever that either of Carl World Square or Carl Bondi Junction made a decision to enter into a partnership agreement or to be engaged in any partnership business.  There was no evidence of any accounting record to suggest that either of those companies was at any time engaged in any business activity whatsoever.  On the other hand, accounting records were kept in the name of World Square, Bondi Junction and Piccolo in relation to the conduct of the Equilibrium, Moda and Momo businesses. 

112               The second matter relied on by the Farinhas relates to diagrammatic representations of proposed structures for the ventures that were brought into existence in September and October 2004.  On 6 September 2004, Mr Gaddin of Mr Saidman’s firm sent to Ms Kyu diagrammatic representations of the proposed structures.  The diagram for the World Square venture showed a partnership between Cine as to 60% and Carl World Square, as trustee for Carl World Square Trust, as to 40%.  The diagram for Moda and Momo showed two partnerships with the same partners in the same proportions as follows:

Marco Bondi Junction as trustee for Marco Hybrid Trust                               16.67%

Miguel Bondi Junction as trustee for Miguel Hybrid Trust                                3.75%

Toby Bondi Junction as trustee for Toby Hybrid Trust                                   29.57%

Carl Bondi Junction as trustee for Carl Hybrid Trust                                          50%

Marco Bondi Junction and Miguel Bondi Junction had both been incorporated on 27 August 2004.  However, Toby Bondi Junction was not incorporated until 22 September 2004. 

113               The third matter to which the Farinhas refer is Mr Saidman’s memorandum of 11 October 2004.  That memorandum began as follows:

“This memorandum is intended to set out the arrangements which have been agreed to be entered into between the partners in the World Square development.

The partners are Cine San Marco Pty Limited, Carl World Square Pty Limited and Colin World Square Pty Limited. 

This arrangement supersedes all previous understandings between the parties and has been agreed to in resolution of a dispute which has developed between Carl Frauenstein and Colin Steingold.  The arrangement is as follows –

•          Colin and his family will have no entitlement whatsoever to San Marco Bondi Junction or San Marco Piccolo.

•          Colin World Square will have an entitlement to a 5% partnership share in San Marco World Square.

•          It is intended that the relative partnership shares in the World Square development will be Cine San Marco 70%, Carl San Marco 25%, Colin San Marco 5%.

…

•          It is recorded that the parties behind each of the entities are as follows:

-           Cine San Marco: Tobias Farinha, Marco Zagato, Miguel Farinha

-           Carl World Square: Carl Frauenstein

-           Colin World Square: Colin Steingold

…” [emphasis added]

In subsequent versions of the memorandum the word “proposals” was substituted for the word “understandings” in the third paragraph and corrections were made to some of the company names.  It is curious that the memorandum, which was brought into existence several weeks after the diagrams sent by Mr Gaddin showing Mr Steingold with no interest, indicated that Mr Steingold continued to have a 5% interest. 

114               On 18 February 2005, Mr Saidman sent to Mr Steingold a further version of his memorandum, which bore the date 18 February 2005.  There were no significant changes from the earlier versions of the memorandum.  However, the 18 February 2005 version had a diagram attached to it suggesting that the Equilibrium business was being conducted by World Square as manager of a partnership consisting of the following:

Cine                                                                                                   70%

Carl World Square (as trustee for Carl World Square)                        25%

Colin World Square                                                                             5%

115               In his covering letter of 18 February 2005, Mr Saidman said that he and Mr Steingold had spoken some time ago about the World Square arrangements and that he, Mr Saidman, had said that he would prepare a memorandum.  Mr Saidman said that, because of Carl’s absence, he had been unable to finalise the memorandum but that he had now had an opportunity to meet with Carl and Toby to run through the memorandum with them.  Mr Saidman said that he believed that the memorandum set out the understanding, but asked for any comments that Mr Steingold might have. 

116               Carl said in evidence that he had no recollection of meeting to discuss the memorandum but may have received a copy of Mr Saidman’s letter.  Carl said, however, that he had never seen the diagram and there is no evidence to suggest that it was ever sent to him. 

117               While the various reincarnations of Mr Saidman’s memorandum of 11 October 2004 tend to corroborate that discussion took place in late April or early May 2004 as deposed to by Toby and Marco, they also indicate the state of fluidity that existed at all relevant times concerning the arrangements between the parties.  As at October 2004, while Momo had just opened for trading, neither Moda nor Equilibrium was yet operating.  The significance of the letter of 18 February 2005 is that it indicates that, even by that time, no finality had been reached concerning the proposed structure for the ventures. 

118               The fourth matter is that, on 9 June 2005, Mr Saidman sent to Carl a completed tax file number application form for Carl World Square Trust.  The form stated that the applicant, Carl World Square Trust, was to start business on 10 September 2004 and that the main activity from which the applicant was to derive the majority of its business income was as a partner in a partnership operating a hotel, bar and restaurant.   The form named Carl World Square and Cine as organisations associated with the applicant.  Carl signed the form and returned it to Mr Saidman, who sent it to the ATO.  That action is consistent with a clear intention on the part of Carl to participate in the establishment of partnerships as alleged by the Farinhas.  However, it does not evidence their establishment. 

119               The fifth matter is that tax returns were filed on behalf of Bondi Junction, Piccolo and World Square that do not disclose any trading by those companies.  On 9 March 2006 Mr Saidman wrote to Marco concerning Bondi Junction.  In the letter, Mr Saidman confirmed that he had advised the ATO that Bondi Junction is not required to lodge an income tax return for the financial year ended 30 June 2005.  Mr Saidman said that the basis of that advice was Marco’s confirmation to him that Bondi Junction had not traded in its own right but had acted as nominee of an underlying partnership of four trusts.  On 7 April 2006, Mr Saidman wrote to Marco confirming the advice that he said he gave to the participants in the Moda and Momo restaurants.  He described the structures as involving partnerships of discretionary trusts with Bondi Junction and Piccolo acting as nominees or representatives of the trusts, along the lines contended for by the Farinhas. 

120               However, there is no evidence that tax returns were filed on behalf of any entities disclosing trading in respect of any of the three businesses.  I do not consider that any weight at all should be given to Mr Saidman’s letters on the question of whether partnerships were actually established.  As I have said, Mr Saidman was not called to give evidence. 

121               Sixthly, the Farinhas point to correspondence with financiers in which it was said that the ventures were operated as partnerships in which Carl’s entities had partnership shares.  Most of the correspondence was sent by Mr Steingold, although correspondence with Carl’s own bankers is in a different category.  In any event, while the correspondence is consistent with an intention on the part of Carl and the Farinhas to establish partnerships, it does not advance the question of whether or not the partnership structures were actually put in place. 

122               Seventhly, on 11 July 2005, Carl World Square granted general power of attorney to Mr Timothy Somerville.  The power was limited to the affairs of the grantor “in relation to its investment in the World Square Sydney project including its interest in San Marco World Square Pty Limited”.  Once again such a grant is consistent with an intention to establish the structures contended for by the Farinhas.  It does not establish one way or the other whether the structures were actually established. 

123               Finally, the Farinhas rely on the Letter Agreement, in so far as it records that the parties are to use their best endeavours “to cause a binding written agreement to be entered into between the entities controlled by them respectively relating to the interest of the parties in the World Square project”.  They also point to the fact that the Letter Agreement refers to the repayment of all monies “invested” by Carl or any entity under his effective control.  However, as I have indicated, the Letter Agreement rather confirms lack of agreement or consensus at that stage.  It certainly does not support a finding that the businesses were in fact being carried on by partnerships as alleged by the Farinhas. 

124               Under s 1 of the Partnership Act 1892 (NSW), it is sufficient, for a partnership to come into existence, that the parties reach an arrangement to carry on business in common with a view of profit.  Thus, if I were able to conclude that some parties were carrying on business in common with a view to profit, the fact that they were still negotiating as to the terms of a more formal agreement would not preclude a finding that a partnership had come into existence. 

125               However, a difficulty for the Farinhas’ contentions is determining the time at which any partnership came into being.  At the time when much of the expenditure was being incurred in relation to the establishment of the Moda and Momo businesses, the putative partners did not exist.  Further, there is simply no evidence of any adoption by any of the relevant entities, once they were formed, of any business or assets such that it could be said that the entities were thereafter carrying on a business in common.  For example, there are no accounts of any partnership.  No tax returns appear to have been filed on behalf of any partnership.  While Carl and the Farinhas may have intended that World Square, Bondi Junction and Piccolo would act in some way as nominees or agents or trustees, there is no evidence to support a conclusion that they were carrying on the businesses in which they were engaged otherwise than in their own right and for their own benefit. 

126               No one has suggested that any partnership came into existence involving Carl and the Farinhas as individuals.  The only conclusion that is available on the evidence is that, while Carl and the Farinhas certainly intended to establish structures along the lines of those contemplated by the draft partnership agreements to which I have referred, the three businesses were in fact carried on by the so-called nominees in their own right.  None of World Square, Bondi Junction or Piccolo ever undertook any juridical act that could give rise to a trust or disposition of any interest in the businesses carried on by them. 

127               Even if there were a partnership structure as alleged by the Farinhas, that structure involved the three operating companies acting as “nominee”.  That must involve the nominee entering into arrangements with third parties in its own name.  It must be the legal owner of assets of the partnership and would be the party to any contractual arrangements entered into by the partnership.  There is no evidence to suggest that the three operating companies entered into contractual arrangements as agent for the partners such that they incurred no personal liability. 

128               I am not persuaded that any of the businesses has been carried on by any entities other than Bondi Junction, Piccolo and World Square.  It follows that the cross-claim by Toby Bondi Junction Pty Limited and Marco Bondi Junction Pty Limited and the cross-claim by Cine must be dismissed. 

Characterisation of Carl’s Payments

129               All of the payments were made by Carl himself.  No payments were made by any of the companies that are alleged by the Farinhas to have been members of partnerships.  Nobody has suggested that Carl himself was a party to any partnership.  There has been no suggestion that Carl made the payments by way of loan or advance to the alleged partnership companies so that they could make a contribution to capital.  There is simply no evidence to support a conclusion that the payments made by Carl were contributions to the equity of a partnership by a member of a partnership. 

130               As I have indicated, there was no concluded agreement that could constitute a partnership involving Carl and the Farinhas or involving corporate entities associated with them.  More particularly, none of the discussions that occurred concerning the possible formation of a partnership was directed to the capitalisation of the proposed partnerships.  There was no discussion concerning any contribution to the capital of any proposed partnership.  Even if it could be concluded that, at some stage, the parties had reached agreement that they were carrying on a partnership, there is no evidence that the monies or funds provided by any of the parties was to be treated as a contribution to capital or equity of any partnership.  There is certainly no suggestion that contributions made by the parties were to be regarded as contributions to the share capital of any corporate entity, such as Bondi Junction, Piccolo or World Square. 

131               While there may have been agreement as to the proportions in which the parties would share in profits and losses, the parties did not ever reach consensus as to what they would contribute to the capital of any proposed partnership.  Even if there had been a partnership arrangement, there is no reason to treat any of the payments made by Carl as a contribution to capital or equity.  Even if there were partnerships, there is no evidence that the payments were intended as anything other than loans repayable on demand. 

132               Carl and the Farinhas were parties to a joint venture in the sense that they were pooling resources with a view to sharing in the profits of the three businesses.  The Farinhas and Carl were each to contribute funds in the agreed proportions.  The Farinhas would contribute their skill and expertise in the management of the proposed businesses and were to be remunerated for that contribution.  The mechanism or structure for their joint venture was to be a series of corporate entities that ultimately had an interest in the businesses to be conducted by Bondi Junction, Piccolo and World Square.

133               However, the draft partnership agreements that were brought into existence and the structure diagrams made no mention of funding of the ventures in general or contribution to capital in particular.  On the other hand, it is clear that the substantial sums that were contributed both by Carl and by the Farinhas were not intended as gifts.  Carl gave evidence of discussions concerning loan accounts.  There was no discussion about any arrangement for repayment of any of the advances.  It is inherently more likely than not, that, pending the formalisation of the structure that the parties intended to put in place, the payments that were made by Carl, and any payments that may have been made by or on behalf of the Farinhas, were to be treated as advances on loan account, repayable on demand or upon reasonable notice. 

134               I consider that the payments made by Carl, and any contributions made by the Farinhas or entities associated with them, should be treated as advances on loan account to one or other of the entities carrying on one of the three businesses.  Demand for repayment has been made by Carl, at latest, by the commencement of the proceeding. 

Allocation of Carl’s Payments

135               From time to time, Carl was provided with documentation purporting to record contributions to the ventures and intercompany balances.  However, the information provided to him was less than satisfactory and he complained vociferously about its inadequacies. 

136               On 16 August 2005, the day after he returned from Canada, Carl asked Marco to provide him with the latest financials and reconciliations as well as the budgets, as they had agreed in their meeting on 14 July 2005.  Marco said that he was still working on the budgets but would get Ms Kyu to send the financials to Carl.  On 18 August 2005, Carl received by email a balance sheet for World Square as at 17 August 2005, a balance sheet for World Square as at June 2005 and four pages of reconciliations of payables for World Square. 

137               The balance sheet as at 18 August 2005 showed inter-company loans as follows:

Bondi Junction                                           $822,459.61

Piccolo                                                          $7,000.00

Multiplex loan                                            $930,635.70

Cine                                                       $2,410,927.90

“Carl Frauenstein’s Company”               $103,073.60

Total:                                                    $4,259,826.81

The balance sheet as at June 2005 showed inter-company loans as follows:

Bondi Junction                                           $953,959.61

Multiplex loan                                            $930,365.70

Cine                                                       $1,910,927.90

“Carl Frauenstein’s Company”               $103,073.60

Total:                                                    $3,898,326.81

There was no explanation of the difference. 

138               Following receipt of those documents, Carl spoke to Ms Kyu and asked when the loan accounts were going to be correctly allocated.  He pointed out that the loan account as between Bondi Junction and World Square was still in the books, even though there was at that time a bank account for World Square.  Ms Kyu responded that they were working on a spreadsheet outlining the contributions and costs to make sure that it was all in order before it was given to Carl to review. 

139               On 29 August 2005, Carl received a spreadsheet that he was told had been prepared by Ms Kyu.  The documents are not self-explanatory.  One sheet was headed “Summary of Partners’ Contribution and Payment”.  That sheet showed total contribution by Carl of $1,590,411.60.  The next sheet showed a breakdown of Carl’s financing as follows:

Carl paid to Bondi Junction                                                           $1,498,030

Carl paid to World Square ($103,074 less $10,692

for John Hollis Pty Ltd)                                                                      $92,382

Total payments made by Carl to 30 June 2005                             $1,590,412

140               A further sheet contained detail that was said to be taken from the general ledger of World Square and Bondi Junction in respect of “Carl Frauenstein’s Company”.  The detail showed total credits of $103,073.60 for World Square and of $1,609,030 for Bondi Junction.  The credits correspond, in a number of instances, with payments made by Carl to which I shall refer below in more detail.  However, they are not identical with those payments. 

141               Three payments shown in the ledger for World Square correspond with payments made by Carl.  In relation to Bondi Junction, there were credits corresponding with eight payments made by Carl.  However, there was no record of several other payments made by Carl.  While the amounts of the payments recorded correspond with amounts actually paid by Carl, the dates do not correspond with the actual dates of payment.

142               On 31 August 2005, Carl had a discussion with Miguel and Marco, in the course of which he said that he would like to get together later in the week to discuss the financials.  When asked by Marco whether there was a problem, Carl said that there was nothing that he would like to discuss at that time.  When pressed by Marco, Carl said that one point was that the BNZA facility was not recorded as a joint facility, notwithstanding that Carl had provided guarantees.  A very emotional argument then ensued, without any resolution of the dispute. 

143               At the meeting that Toby had with Carl on 5 September 2005, Toby also asked Carl whether he had reviewed the spreadsheet that had been provided to him on 29 August 2005.  Carl said that he had reviewed it to some degree and that his first review revealed a number of discrepancies, some of which Marco already knew about and which Marco said that he would correct.  Carl said that he would continue to review the spreadsheet and would request additional and supporting information as and when, and if, required. 

144               On 20 September 2005, Carl sent an email to Ms Kyu saying that Toby had asked him to review the spreadsheet provided to him on 29 August 2005.  Carl asked for the latest version of the spreadsheet and asked for the following information in order to continue with his review:

1.         Full details of all employment costs for all three ventures.

2.         Details of inter-company loans recorded in the balance sheet from Bondi Junction to World Square and from Bondi Junction to Piccolo.

3.         Detailed records of all loan accounts.

145               On 21 September 2005, Carl sent an email to Mr Saidman summarising the points made by Toby at their meeting on 18 September 2005.  Carl’s email went on to say that he had continued reviewing the spreadsheet and had asked Ms Kyu to send him the latest version as well as supporting documentation that would allow him to reconcile the spreadsheet accurately.  Carl said that Toby had made it clear that the objective that Toby wanted to achieve at the proposed meeting of 22 September 2005 was for Carl to say whether he wanted to be in or out of the World Square project and to set a plan for the way forward.

146               On 22 September 2005, Ms Kyu sent amended spreadsheets to Mr Saidman, who forwarded them to Carl later that day.  The documents included balance sheets for Piccolo and Bondi Junction as at June and August 2005.  The balance sheet for Bondi Junction as at August 2005 showed inter-company loans for Bondi Junction as follows:

Owing by:

Piccolo                                             $519,613.03

World Square                                  $822,459.61

Owing to:

Cockle Bay                                   $1,168,721.30

Carl Frauenstein                            $1,498,030.00

The balance of inter-company loans was a liability of $1,324,678.66.  The documents also included capital expenditure for Bondi Junction “T/as Moda” and Bondi Junction “T/as Momo”.  Finally, there was a further copy of the detail from the general ledger of World Square as at 30 June 2005, showing the same figures as had been enclosed with the spreadsheets provided to Carl on 29 August 2005. 

147               Ms Bateman was retained to conduct an examination of the books and records of Bondi Junction, Piccolo and World Square and the businesses carried on by them in order to determine how the payments made by Carl were applied.  She endeavoured to identify from the financial records the manner in which the funds paid by Carl were actually dispersed. 

148               Ms Bateman has expressed the opinion that the books and records examined by her suggest that part of the amounts paid by Carl were applied for the purposes of the three businesses as follows:

Equilibrium                                            $666,045

Moda                                                   $114,083

Momo                                                      $5,569

However, the books and records made available to Ms Bateman do not enable her to allocate the balance of the payments made by Carl. 

149               The Farinhas have not advanced a positive case as to how the payments were applied for the purposes of the three businesses.  That question loomed large as an issue in the proceeding from an early stage.  Ms Bateman’s report as to her difficulty in effecting an allocation was provided to the Farinhas in February 2007.  While the Farinhas engaged Mr Glen Harris, a forensic accountant, Mr Harris was ultimately not called to give evidence.  However, parts of his report were tendered on behalf of Carl. 

150               Mr Harris confirmed that Carl’s payments had not been recorded in full in the books of the various companies.  They were recorded in the financial accounts of Bondi Junction and Piccolo as follows:

Bondi Junction:                                            $1,636,003.60

Piccolo:                                                          $132,473.60

Total:                                                         $1,768,477.20

Mr Harris noted the variance of $42,141.95 from Ms Bateman’s total of $1,810,619.15.  Mr Harris expressed the view that the variance resulted from the payment by Carl to creditors directly that was not recorded in the accounts.  Mr Harris said that his investigations of current management of the companies indicated that they did not dispute the total of $1,810,619.15 arrived at by Ms Bateman. 

151               Mr Harris was unable to express any opinion as to what the correct allocation should be, since that was beyond the scope of the report that he had been instructed to give.  However, he confirmed that the current allocation in the books of the companies is clearly incorrect. 

152               As I have indicated above, Ms Bateman’s opinion is that $666,045 of the total payments made by Carl was applied for the purposes of the Equilibrium business and $119,652 was applied for the purposes of either the Moda business or the Moma business.  Ms Bateman was unable to identify, from the accounting records and other materials made available to her in relation to the three businesses, how the payments made by Carl were in fact applied except to the extent indicated. 

153               The issue concerning Carl’s payments is not so much how the funds were actually applied, but to whom the advances on loan account were made.  Where payments were made by Carl to third parties, those payments can fairly be treated as advances made to the company carrying on the business in respect of which an obligation was owed or monies were payable to that third party.  That is part of the exercise conducted by Ms Bateman in identifying the businesses in respect of which the payments have been applied. 

Identification of the Debtors

154               Where there was a discussion prior to a payment by Carl as to the purpose of the advance, it is reasonable to treat the advance as having been made to the one of the three companies for whose purposes it was made.  The relevant borrower or debtor is to be determined on the basis of the discussions that took place between Carl, on the one hand, and one or other of the Farinhas, on the other, in connection with the request to make the relevant advance.  Accordingly, it is necessary to examine the circumstances in which the various payments were made by Carl 

155               In late April or early May 2004, in the course of a discussion about the possible participation of Carl and Mr Steingold, Miguel showed Carl a fee proposal from Thomas Bucich Design for the interior design works for the proposed Momo restaurant and asked Carl to pay $5,500 towards the cost of the works.  Miguel said that a joint account would be opened soon but in the meantime Carl should pay the amount into the account of Cockle Bay.  Mr Steingold asked Carl to fund his, Mr Steingold’s, share.  On 3 May 2004, Carl paid $5,500 into the account of Cockle Bay.  That payment should be treated as an advance to the entity that subsequently engaged in carrying on the Momo business. 

156               On 20 May 2004, Miguel sent to Carl a copy of an invoice from Thomas Bucich Design for $11,000 addressed to San Marco Group for design consultancy fees for an architectural presentation in respect of the project at the World Square site.  After receipt of the invoice, Carl spoke to Miguel and asked Miguel what he wanted him to do.  Miguel said that it was necessary to pay Thomas Bucich so that the design and artwork for the presentation would be done.  He said that otherwise they might not win the site.  Carl said that he would pay 40%, representing his and Mr Steingold’s share.  He asked whether a joint account had been set up and where the payment should be made.  Miguel said that he would speak to Marco and have an email sent to Carl with the details. 

157               On 24 May 2004, Carl spoke to Marco.  Carl told Marco that Miguel had asked him to make a payment of $4,400 for the World Square project and asked Marco for details of the World Square bank account so that the funds could be paid into the correct account.  Marco replied that he would let Carl know but that, in any event, it did not matter which account received the funds because he had instructed Ms Kyu to keep separate records for each payment so that they could track their respective loan accounts.  Marco confirmed that the funds contributed would be on loan account. 

158               On 24 May 2004, Carl received an email from Ms Kyu and Miguel saying that a bank account had not yet been opened for the World Square project and asking that, in the interim, Carl deposit his portion of the cost into an account of Cockle Bay.  Carl caused a payment of $4,400 to be made into Cockle Bay’s account on 25 May 2004.  That payment should be treated as an advance to the entity that subsequently engaged in carrying on the Equilibrium business. 

159               Shortly after that, Carl had a conversation with Marco concerning the payment of contributions.  Marco asked Carl to pay his contributions into the Cockle Bay account until the legal entities had been set up.  He said that the creditors would be paid from the Cockle Bay account but that if they decided to pay a creditor direct, they would let Carl know to whom the payment should be made.  Carl said that that was fine and asked for the bank account details.  Carl also asked how they were going to keep track of the respective contributions made by the parties, particularly as they were all paying contributions into one account.  Marco said that they would keep a spreadsheet detailing each person’s contribution and what it was applied to, so that they could manage each person’s respective loan accounts in the ventures until such time as separate bank accounts had been opened for each venture.  He said that, when the projects were finished and the ventures were trading, they would adjust all the loan accounts in the ventures to reflect what Ms Kyu’s reconciliations showed.  Carl said that that was okay.  Carl asked that Marco let him know from time to time when he needed Carl’s proportion of funds.

160               In early June 2004, Steingold asked Carl to pay $40,000 to Clayton Utz in respect of a deposit needed to secure a lease of the premises in the World Square project.  Clayton Utz were the solicitors for the landlord of the World Square premises.  On 10 June 2004, Carl paid $40,000 to Clayton Utz.  That payment should be treated as an advance to the entity that subsequently engaged in carrying on the Equilibrium business. 

161               On 15 June 2004, Carl was asked by an employee of the San Marco Group to pay $34,652.20 into Cockle Bay’s account.  He was told that that represented 50% of invoices received for interior design and furniture for the Bondi Junction businesses.  On 25 June 2004, Carl paid $34,652.20 into Cockle Bay’s account.  That payment should be treated as a joint advance to the entities that subsequently engaged in carrying on the Moda and Momo businesses. 

162               On 23 June 2004, Carl received from the Farinhas a budget for the set up cost of the businesses.  Following receipt of that document, Carl spoke to Marco and asked him when and how much external funding they were going to get.  Carl said that he needed to know that so that he could do cash flow projections and planning.  Marco said that they would probably get around $7,500,000 externally and would apply for that well ahead of time so that the cash burden would be limited to the balance, being the amount shown in the budget less $7,500,000. 

163               On 30 June 2004, Carl received an email from Marco requesting that he transfer the sum of $479,377.80 into the bank account of Bondi Junction.  The email said that that sum represented the balance of the June 2004 fit out Budget Progress Payment of $523,930, less three payments already made by Carl as follows:

10 May 2004:                                                             $5,500.00

25 May 2004:                                                             $4,400.00

25 June 2004:                                                           $34,652.20

164               Carl spoke to Marco on 2 July 2004 and said that he assumed that the Farinhas would be making a payment of $643,000 as their contribution towards fit out costs.  Marco replied that that was right and that it would be in accordance with the fit out budget that had been provided to Carl.  Carl asked for invoices to be sent to substantiate the payments before he made the requested payment.  Marco said that the money was needed urgently and asked that Carl make the payment because it was not practical to send him all of the invoices from the numerous suppliers.  On 2 July 2004, Carl transferred the sum of $479,377.80 to the bank account of Bondi Junction.  On that day, invoices specific to the World Square project totalling $164,453 were paid.  To that extent, the payment should be treated as an advance to the entity that subsequently engaged in carrying on the Equilibrium business.  There is no evidence as to how the balance was applied.  In those circumstances, the balance should be treated as a joint advance to the entities that subsequently engaged in carrying on the Moda, Momo and Equilibrium businesses. 

165               In early August 2004, Marco requested Carl to pay $85,000 towards the Bondi Junction project.  He said that that was Carl’s portion of the cost.  On 9 August 2004, Carl paid $85,000 into the bank account of Bondi Junction.  That payment should be treated as a joint advance to the entities that subsequently engaged in carrying on the Moda and Momo businesses. 

166               Shortly after that payment, Carl asked Miguel for a payment reconciliation report confirming the various payments that had been made and where the funds had been applied.  Miguel asked Carl to send an email confirming what he had contributed.  Accordingly, on 20 August 2004, Carl sent an email to Miguel indicating that his records showed that six payments had been made totalling $643,430.  Ms Kyu responded on 23 August 2004 saying that she would email a reconciliation the following day and that there were some figures missing for World Square. 

167               On 6 October 2004, Carl received an email from Marco and Ms Kyu attaching a document said to be a payment reconciliation for the ventures.  The email requested Carl to remit $600,000 to Bondi Junction’s bank account as the “September 2004 contribution”.  A spreadsheet attached to the email stated that Carl had contributed $648,930 to the ventures, of which $486,751.72 had been applied to Momo and Moda and $162,173.28 had been applied to the World Square project. 

168               After receipt of the spreadsheet, Carl told Marco that it was inaccurate in so far as the apportionment was concerned.  Marco said that he would recalculate the required contributions of each party based on their correct shareholdings.  Marco then said that, in any event, they needed Carl to contribute a further $600,000 towards the costs of the ventures and that that should be paid into the bank account of Bondi Junction.  Carl replied that, according to his calculations, he had a credit in terms of contribution.  Marco said that he appreciated that the numbers were a bit off because of the incorrect ownership allocation. 

169               Marco then asked if Carl could make a payment of $350,000 in the meantime.  He asked Carl to pay $200,000 direct to Sherbet Creative Enterprises Pty Limited, which was the head contractor and architect for the fit out of the Moda and Momo premises, and asked Carl to pay the other $150,000 into the bank account of Bondi Junction.  Marco said that was partly for electrical works for Moda and Momo and that the balance was for the World Square project.  Carl asked whether World Square yet had a bank account.  Marco replied that World Square was not yet registered for GST and that it would not be possible to claim the GST back.  On 11 October 2004, Carl paid $200,000 to Sherbet Creative Enterprises and also transferred $150,000 to Bondi Junction’s bank account.  The payment of $200,000 should be treated as a joint advance to the entities that subsequently engaged in carrying on the Moda and Momo businesses.  In the absence of other evidence, I consider that it is more likely than not, that the whole of the sum of $150,000 was applied for the purposes of the World Square project and, accordingly, that payment should be treated as an advance to the entity that subsequently engaged in carrying on the Equilibrium business. 

170               In late October 2004, Marco told Carl that further progress payments were needed for the ventures.  Carl asked how much was needed and Marco asked for at least $250,000.  There is a dispute as to the conversation that took place concerning the sum of $250,000.  Carl says that Marco told him that the Farinhas were carrying training costs and would be making their own contributions.  Marco says that he told Carl that they were applying the existing funds to cover the working capital requirements and further funds were required to cover the shortfall and to fund the fit out of Moda.  Carl says that he asked for another set of financials, including payments made for the equipment lease, which, he said, impacted on the budget.  On 1 November 2004, Carl transferred $250,000 into the bank account of Bondi Junction.  There was no evidence as to the use to which those funds would be put or how they were in fact applied.  In those circumstances, the payment should be treated as a joint advance to the entities that subsequently engaged in carrying on the Moda, Momo and Equilibrium businesses. 

171               In early November 2004, Marco and Carl had a further conversation, in which Marco told Carl that they needed to pay $200,000 to Sherbet Creative Enterprises.  Marco says that he told Carl that it was for the Moda fit out.  Carl says that Marco told him that it was for both Bondi Junction and World Square.  Carl also says that he still did not have reconciled financials and was reluctant to pay without being able to make a reconciliation.  He said that Marco told him that the contribution was needed urgently and he would ask Ms Kyu to send him the financial information.  Marco, on the other hand, says that Carl referred to escalating costs and asked when Moda was expected to open.  Marco says that he replied that he hoped it would be in early December but to accelerate the fit out at that time of year might cost more and that it might be better to do it in the New Year.  On 9 November 2004, Carl transferred $200,000 to Bondi Junction’s bank account.  On that day and the following day, payments totalling $95,503 were made in respect of costs concerning the World Square project.  To that extent, the payment should be treated as an advance to the entity that subsequently engaged in carrying on the Equilibrium business.  It is more likely than not that the balance of the $200,000 was paid to Sherbet Creative Enterprises for the fit out of the Bondi Junction premises.  To that extent, the payment should be treated as a joint advance to the entities that subsequently engaged in carrying on the Moda and Momo businesses. 

172               In early January 2005, Carl told Marco that he, Carl, had contributed more than his required share of funding and that he expected some funds to come back once the Westfield landlord contribution had been received.  Marco responded that there had been unexpected costs of Moda and Momo that had led to over expenditure.  Carl asked him for details of the over expenditure.  However, he received no details. 

173               During January 2005, Toby and Carl had a discussion concerning legal representation.  Carl expressed discomfort with Mr Steingold continuing to act, having regard to the bad blood that had developed.  On 19 January 2005, following that discussion, Marco and Carl met Mr Bede Mooney of Somerville & Co solicitors and instructed him to review the proposed lease for the premises in the World Square development.  Carl subsequently received an invoice for the sum of $2,365.55 for the advice provided by Mr Mooney.  Carl paid the invoice for $2,365.55 on 16 February 2005.  That payment should be treated as an advance to the entity that subsequently engaged in carrying on the Equilibrium business. 

174               In mid-April 2005, Carl had a meeting with Marco in which Marco told him that they needed to pay certain creditors in respect of the World Square project and that, unless the creditors were paid, there would be a delay in the project.  Carl told Marco that he had already over-contributed and had also lent $550,000 to assist the Farinhas with their contributions.  He told Marco that the Farinhas would have to bring in their share so that the contributions were equal to their respective ownerships. 

175               Carl also pointed out that he still did not have the “financials” that he had been promised some time previously.  He asked who the creditors were that needed to be paid urgently.  Marco said that Carl should speak to Ms Kyu.  He said that it was critical and that they were a bit short of cash. 

176               On 18 April 2005, Carl spoke to Ms Kyu, who told him that there were certain creditors who were threatening to down tools unless parts of their invoices were paid.  Carl subsequently met with Ms Kyu, when she gave him a document headed “San Marco World Square Pty Ltd Aged Payables [Summary] 18/04/2005”.  Ms Kyu told Carl which of the World Square creditors were the critical ones that needed to be paid and how much should be paid.  The details that Ms Kyu gave him amounted to $106,390.  Carl said that he would transfer $110,000 so that Ms Kyu could pay those creditors and could apply the balance of $3,610 at her discretion in paying other World Square creditors.  On 19 April 2005, Carl transferred $110,000 to the bank account of Bondi Junction.  Clearly enough, that payment was for the purposes of the World Square project.  That payment should be treated as an advance to the entity that subsequently engaged in carrying on the Equilibrium business. 

177               On 18 May 2005, Marco told Carl that it was necessary to pay an establishment fee in respect of a loan offer from Members Equity for the World Square venture.  Marco asked if Carl could do that since the funding they were waiting for had not yet arrived.  Carl said that he was not happy about it but supposed he would have to pay.  On 19 May 2005, Carl and Marco signed required documents for a loan from Members Equity.  On 19 May 2005 Carl paid $31,875 to Members Equity by way of establishment fee.  That payment should be treated as an advance to the entity that subsequently engaged in carrying on the Equilibrium business. 

178               At around that time, Carl attended a project meeting for the World Square venture.  After the meeting, Marco asked Carl to pay money owing to De Martin and Gasperini for concrete work for the World Square venture.  Carl said that he would pay the supplier direct but was not happy about the way things were being handled.  On 20 May 2005, Carl paid $60,507 to De Martin and Gasperini.  That payment should be treated as an advance to the entity that subsequently engaged in carrying on the Equilibrium business. 

179               A bank account for World Square was opened on 6 June 2005.  On 6 June 2005, Carl paid a fee of $6,250 for a $1,000,000 bank guarantee for World Square.  That payment should be treated as an advance to the entity that subsequently engaged in carrying on the Equilibrium business. 

180               On 29 June 2005, Carl had a discussion with Marco in which Marco asked Carl to pay outstanding invoices in respect of fees due to John Hollis Pty Ltd, the quantity surveyor for the World Square venture.  Marco said that he would make sure that Carl would be reimbursed on the drawdown of the proposed loan from Members Equity.  He said that the reports from the quantity surveyor were needed, before Members Equity would release any of the loan funds.  On 29 June 2005, Carl paid $10,692 to John Hollis Pty Ltd for work completed in connection with the World Square venture.  That payment should be treated as an advance to the entity that subsequently engaged in carrying on the Equilibrium business. 

181               Shortly before Carl left Australia for Canada on 18 July 2005, Miguel asked him for further assistance in the sum of $140,000 as a security deposit for Members Equity.  He said that, if the security deposit was not paid, Members Equity would not release the loan funds and it would not be possible to pay the builder for the World Square project.  Marco subsequently joined in Miguel’s request.  After he arrived in Los Angeles, Carl had further discussions with Marco by telephone, concerning the proposed further payment of $140,000.  Carl said that he was very unhappy about the matter and was always being put under pressure to make funds available.  He then had a discussion with Marco concerning the need to have a partnership agreement signed by a particular date. 

182               Carl arranged for the sum of $140,000 to be transferred into the bank account of World Square on 21 July 2005.  However, on 28 July 2005, Carl sent an email to the Farinhas saying that he had been informed that the drawdown had not taken place and that it was not anticipated to happen that week and that no date had been fixed.  He therefore asked for return of the sum of $140,000 that he had transferred the previous week.  He said that, since the sole purpose for the payment was for the bank guarantee for the drawdown, there was no purpose in the money lying in an account earning little, if any, interest while he was paying interest on his side.  Marco responded on the following day, saying that the $140,000 had already gone “towards the $350,000 bank guarantee”.  That payment should be treated as an advance to the entity that subsequently engaged in carrying on the Equilibrium business. 

183               On the basis of those findings, the payments in question, the recipient and the agreed purpose were as follows:

Date of Payment              Recipient                              Purpose                                                Amount

3 May 2004                       Cockle Bay                           Momo                                                   $5,500.00

25 May 2004                     Cockle Bay                           Equilibrium                                           $4,400.00

10 June 2004                     Clayton Utz                          Equilibrium                                         $40,000.00

15 June 2004                     Cockle Bay                           Momo and Moda                              $34,652.20

2 July 2004                        Bondi Junction                    Momo, Moda & Equilibrium         $314,924.80

                                                                                           Equilibrium                                       $164,453.00

9 August 2004                  Bondi Junction                    Momo and Moda                              $85,000.00

11 October 2004               Sherbet                                 Momo and Moda                            $200,000.00

11 October 2004               Bondi Junction                    Equilibrium                                       $150,000.00

1 November 2004             Bondi Junction                    Momo, Moda & Equilibrium         $250,000.00

9 November 2004             Bondi Junction                    Equilibrium                                         $95,503.00

                                                                                           Momo and Moda                            $104,497.00

16 February 2005              Somerville Co                       Equilibrium                                            $2365.55

19 April 2005                     Bondi Junction                    Equilibrium                                       $110,000.00

19 May 2005                     Members Equity                  Equilibrium                                         $31,875.00

20 May 2005                     De M & Gasperini               Equilibrium                                         $60,507.00

6 June 2005                       Bank                                      Equilibrium                                           $6,250.00

29 June 2005                     John Hollis Pty Ltd             Equilibrium                                         $10,692.00

21 July 2005                      World Square                      Equilibrium                                       $140,000.00

184               On the basis of that summary, I conclude that the payments shown in the table as for being for the purposes of Equilibrium should be treated as advances to World Square.  The amounts shown as being advanced for the purposes of Momo or of Momo and Moda should be treated as advances to Bondi Junction and Piccolo jointly, since the parties seem to have treated the two businesses at Westfield Bondi Junction as being more or less a single enterprise.  The amounts shown as being advanced for the purposes of Momo, Moda and Equilibrium should be treated as advances to Bondi Junction, Piccolo and World Square jointly.   There should be judgment for Carl against the appropriate borrowers.  

Capital of World Square

185               In August 2005, the Farinhas approached Mr James Panagopoulos concerning possible investment by Mr Panagopoulos, or an entity associated with him, in the Equilibrium venture.  Miguel told Mr Panagopoulos that a partner was leaving the Equilibrium venture and that they wanted someone new to get involved.  There was discussion concerning Mr Panagopoulos taking a 30% interest.  In late August, Mr Panagopoulos said that he was definitely interested.  The negotiations continued during August and September. 

186               At the same time, Toby and Carl were engaged in discussions about the outstanding issues in relation to their proposed partnership arrangements.  The timing of the discussions with Mr Panagopoulos casts considerable doubt on the good faith of the Farinhas in endeavouring to reach agreement with Carl as to the terms of the proposed partnership arrangements.  There were several matters that required consensus, as indicated in Toby’s response, of 7 September 2005, to Carl’s minutes of 5 September 2005.  

187               The most significant of those matters involved how to deal with charges made by the Farinhas, and entities associated with them, for training costs, head office administration costs and salaries.  Toby intimated to Carl that the time for resolution of the outstanding matters would be extended.  Whether or not Toby clearly said that the time would be extended, I am satisfied that he intentionally led Carl to understand that it was not necessary to finalise the outstanding matters on that day.  Having regard to the discussions that were taking place with Mr Panagopoulos at the time, without any intimation to Carl, I am not persuaded that the precondition for the exercise of the option was satisfied.  I do not consider that the only reason why no agreement was entered into by 7 September 2005 was that the parties were unable to agree to the terms of such agreement, after negotiating in good faith.  The Farinhas did not want to enter into an agreement at that time.  They were not negotiating in good faith. 

188               However, in the events that have subsequently occurred, the dispute concerning the exercise of the option under the Letter Agreement has become essentially irrelevant.  Carl claims that any agreement concerning the purchase of his interest in World Square was repudiated by Toby and Marco, because there has been no offer or attempt by them to arrange for “the repayment of all monies invested” by Carl or any entity under his control relating to the World Square project within 12 months.  In the proceeding, Carl claims to have terminated any agreement that was still on foot by reason of that repudiation. 

189               While the Farinhas contended that an obligation arising out of the Letter Agreement remains on foot, they did not advance substantive submissions in support of the continued existence of any obligation or agreement.  Whether or not the Farinhas negotiated in good faith, and whether or not the option was validly exercised, I consider that any agreement to acquire Carl’s shares in World Square is no longer on foot.  There has been no attempt by the Farinhas, either before the period of 12 months expired, or at all, to arrange for the repayment of all monies invested by Carl. 

190               In the second half of September 2005, Mr Panagopoulos instructed his solicitor, Mr Dennis Galimberti, to communicate with Mr Steingold concerning documentation of the proposed arrangements for the taking of an interest in the World Square project.  On 2 December 2005 Mr Panagopoulos caused a payment of $200,000 to be made to Cockle Bay.  The payment was made on behalf of Equal 54, a company controlled by Mr Panagopoulos.  On 20 December 2005 further payments totalling $1,200,000 were made on behalf of Equal 54 to Cockle Bay. 

191               The evidence does not disclose the details of any arrangement between Mr Panagopoulos and Equal 54, on the one hand, and the Farinhas or entities associated with them, on the other hand, as to the consideration for those payments.  Nevertheless, it is tolerably clear that Equal 54 paid $1,400,000 to acquire an interest in the Equilibrium venture, although the precise nature of the interest is quite unclear. 

192               On 16 December 2005, Mr Galimberti wrote to Mr Steingold, who was then acting for the Farinhas.  The letter asked for evidence that Mr Panagopoulos was a director of World Square and was a shareholder of World Square as to 30%.  The letter enclosed an executed counterpart of a deed of partnership.  At about the same time, World Square and Cine executed a counterpart of the deed of partnership.  It is clear enough that the three parties to the deed of partnership intended that it become binding at about that time.  The deed recited that Equal 54 and Cine, who were described as the partners, intended to become partners in the business known as the “Equilibrium Hotel” with retrospective effect from the commencement of the opening of the Equilibrium Hotel on 29 September 2005.  The deed recited that that business was conducted for the partnership by World Square. 

193               Clause 3.2 of the deed provided that the respective proportions of the partners in the partnership were:

Cine:                                     70%

Equal 54:                              30%

Clause 3.3 provided that the objects of the partnership were to conduct the business of operating the Equilibrium Hotel from premises situated at parts of Levels 8, 9, 10 and 11 of “World Square Retail” in George Street, Sydney.  Clauses 3.4 and 3.5 provided that World Square would at all times act “as nominee” of the partnership in accordance with the direction of the partners, but that World Square was not a member of the partnership.  Clause 3.6 provided that the partners would share in the profits and losses of the partnership in the respective proportions referred to above, with effect from the commencement date.  Clause 6.1 provided that the partners would be entitled to shares in World Square in those same proportions. 

194               On 21 December 2005, Mr Panagopoulos became a director of World Square.  On 3 March 2006, Cockle Bay applied for the allotment of 630 shares in the capital of World Square and Equal 54 applied for the allotment of 300 shares.  Thereafter, entries were made in the register of members of World Square reflecting the issue and allotment to Cockle Bay and Equal 54 of 630 and 300 shares in the capital of World Square respectively. 

195               One of the claims made in the proceeding by Carl is that that conduct was unfair and prejudicial to him as a shareholder of World Square.  Mr Panagopoulos and Equal 54 were joined as defendants and were separately represented.  However, as I have said, in the course of the hearing, counsel for the Farinhas announced that there had been a failure to comply with the Constitution of World Square in connection with the purported allotment of shares to Cockle Bay and Equal 54 and that the allotments were ineffective. 

196               Clause 49.1 of the Constitution of World Square provides that rules regarding the offer of shares applied for or to be issued are as set out in Schedule 11 to the Constitution.  Schedule 11 relevantly provides that, before issuing shares of a particular class, the directors must offer them to the existing holders of shares of that class.  As far as practicable, the number of shares offered to each existing shareholder must be in proportion to the number of shares of that class that is properly recorded in the register of members as already held by that shareholder.  Schedule 11 specifies the procedure for the making of such an offer.  Schedule 11 then provides that the directors may issue any shares not taken up under the offer as they see fit but not at a price that is less than the price at which they were offered to the existing shareholders. 

197               There is no evidence that the shares held by Carl were other than ordinary shares.  The shares purportedly issued to Equal 54 and Cine were not expressed to be of any particular class and must be taken to be of the same class as those held by Carl.  In the course of the hearing, the Farinhas indicated that, having regard to the circumstances just recounted, steps were being taken to rectify the register of World Square to remove reference to the allotments of 3 March 2006.  However, Carl then moved for urgent interlocutory relief restraining any interference with the register of members of World Square.  Carl contended that he may have an election as to the remedy that he would seek as a consequence of the conduct that he asserts constituted unfair and oppressive conduct in relation to the affairs of World Square. 

198               An undertaking was then proffered on behalf of World Square and the Farinhas that no steps would be taken to rectify the register of members of World Square pending the final resolution of this proceeding.  The proceeding continued on the basis that there had been a purported allotment of shares to Cockle Bay and Equal 54 and that Carl was seeking relief in the proceeding on the basis that such allotments had taken place.  In the meantime, counsel then appearing for Mr Panagopoulos and Equal 54 withdrew and those defendants thereupon submitted to such order as the Court sees fit to make, other than an order as to costs. 

199               It is not disputed that payments totalling $1,400,000 were made by or on behalf of Equal 54 to Cockle Bay in connection with a proposed acquisition by Equal 54 of some interest in the Equilibrium business, whether direct or indirect.  Carl claims that that matter is relevant to the question of the value of Carl’s interest in World Square or the Equilibrium business.  However, it is by no means clear how the payments made by or on behalf of Equal 54 are to be characterised. 

200               One of the allegations made by Carl in the proceeding is that the effect of the deed of partnership was to divest the Equilibrium business, then owned by World Square, and to vest it in the partnership consisting of Equal 54 and Cine.  However, the partnership deed does not purport to do so.  Further, there is no evidence of any other juridical act on the part of World Square that could have the effect of divesting an interest in the Equilibrium business.  

Accounting Deficiencies

201               Section 286 of the Corporations Act relevantly provides that every company must keep written financial records that correctly record and explain its transactions and financial position and performance and would enable true and fair financial statements to be prepared and audited.  A director who fails to take all reasonable steps to ensure compliance with those requirements contravenes s 344 of the Corporations Act.  Financial records is defined in s 9 of the Corporations Act to include:

·                    invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers;

·                    documents of prime entries; and

·                    working papers and other documents needed to explain the methods by which financial statements are made up and adjustments to be made in preparing financial statements for the three companies by Cine and Cockle Bay.

202               General accounting practice would require supporting documentation such as detailed invoices, wage records, management agreements, working papers, banking records and the like to support journal entries.  Detailed invoices, cash dockets and the like are normally kept to support cash expenses.  Group certificates, job specifications, employment contracts and details of duties are normally kept to support salaries of wages shown as expenses in the accounts.  Ms Bateman found no such material available in the course of her examination.  Section 288 of the Corporations Act contemplates that financial records may be kept electronically.  However, if financial records are kept in electronic form, they must be convertible into hard copy, which must be made available within a reasonable time to a person who is entitled to inspect the records.  It is clear enough that there has been a failure on the part of Bondi Junction, Piccolo and World Square to satisfy the requirements of s 286 of the Corporations Act.

203               The records kept on behalf of the corporate entities show that consultancy and management fees were charged to World Square by Cockle Bay and Cine in 2006 as follows:

·                    Management fees:                            $132,385

·                    Consultancy fees:                             $120,833

However, Ms Bateman reported that she was not provided with any documentary evidence to support the charging of such fees or the charging of similar fees to Piccolo and Bondi Junction.  She was provided with no invoices or working papers detailing the work performed in respect of which such fees were charged. 

204               Ms Bateman’s report also indicates that administration fees were charged by Cockle Bay or Cine for the 2006 year as follows:

·                    Piccolo:                                              $86,875

·                    Bondi Junction:                                 $220,625

·                    World Square:                                     $6,018

No documentary material in relation to such administration fees was provided to Ms Bateman to support the charging of the fees to those companies. 

205               Finally, Carl complains about the charging of training costs to Piccolo, Bondi Junction and World Square.  A sum of $66,915 appears to be in issue.  Ms Bateman reported that there was no documentary evidence to support the charging of such costs to Bondi Junction. 

206               In addition, Carl complains about under-reporting of revenue in respect of the Momo and Moda businesses.  In May or June 2005, Carl arranged with Ms Saga Hassinen, who was restaurant manager of Momo from March to December 2005 and restaurant manager of Moda from that time until February 2006, to provide him with revenue breakdown cover reports in respect of the businesses.  Ms Hassinen provided Carl with such reports. 

207               Ms Bateman endeavoured to reconcile the revenue breakdown cover reports provided by Ms Hassinen with profit and loss accounts prepared on behalf of Bondi Junction and Piccolo.  Ms Bateman reported that the revenue disclosed by the reports for Momo for the period from 6 October 2004 to 31 August 2005 was under-reported in the profit and loss account for Piccolo by the sum of $76,028.  The revenue disclosed by the reports for Moda for the period 1 March 2005 to 31 October 2005 was under reported in the profit and loss account for Bondi Junction by the sum of $135,734. 

208               The Farinhas sought to adduce evidence towards the end of the hearing that was designed to explain those discrepancies.  The evidence was not in admissible form and, in any event, I indicated that I would have severe reservations as to whether the material, even if admissible, would be admitted at that late stage.  In the event, the Farinhas did not press the matter and no evidence was adduced to explain the discrepancies reported by Ms Bateman. 

209               At various stages during the course of the hearing, counsel for the Farinhas foreshadowed an explanation for the discrepancies.  However, in the result, as I have indicated, no evidence was adduced to explain the discrepancies.  In the circumstances, I can only conclude that the accounts that have been provided for the Moda and Momo businesses are inaccurate, in under-reporting revenue.  Further, in the absence of any evidence concerning the basis upon which charges were made to Piccolo, Bondi Junction or World Square for management fees, consultancy fees, administration fees and training costs, the expenses were not properly incurred by those companies.

210               On the other hand, of course, if Cine or Cockle Bay, or other entities within the San Marco group were able to show that they have provided services, they may be entitled to recover some fees on a quantum merit or other similar basis.  There is, however, no evidence before me that would support a finding that the charges were made pursuant to any express agreement made by any of the parties.

211               General accounting practice allows for the rolling over of financial accounts from one year to another.  Thus, closing balances for one period should agree with opening balances for the following period.  While that occurred with the Bondi Junction and Piccolo accounts, it did not occur for the accounts of World Square.  Rather than rolling one year into the next, the accountants who prepared the accounts for World Square created new financial accounts for subsequent years. 

Oppression

212               Section 232 of the Corporations Act provides that the Court may make an order under s 233 if, relevantly, the conduct of a company’s affairs is oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member of members.

213               Carl contends that the arrangements proposed in relation to the three ventures were undertaken as part of a quasi partnership or joint venture.  He contends that, while it may well be that the parties intended that the quasi partnership or joint venture would be conducted through the structure described by Mr Saidman, in the events that occurred, the only entities engaged in the businesses were World Square, Bondi Junction and Piccolo.  The contributions that Carl made by way of the payments that I have described above form an essential part of the arrangements entered into in relation to the ventures to be carried on by the three companies. 

214               While Carl was a director of the companies, it is clear that the administration of the companies was in the hands of the San Marco Group.  To the extent that the administration was inadequate, that inadequacy must be laid at the feet of the Farinhas, who undertook, through the San Marco Group, to provide such services. 

215               For present purposes, the only significance of the under-reporting of revenue and the overcharging of expenses, is that they are matters relied upon by Carl in support of his contention that the affairs of the three companies have been conducted in a manner that is unfairly prejudicial to him as a shareholder of the three companies.  For the purposes of the present proceeding, I conclude that the charges that I have described above were made in circumstances where there is no material to support a conclusion that the companies in question were liable for the charges.  I also conclude, for the purpose of the present proceeding that revenue of the two businesses carried on by Bondi Junction has been under-reported in the books of Bondi Junction.

216               It was not intended that administrative and other services would be provided by the San Marco Group without charge.  However, the basis of the charges was never agreed.  Charges have been made to Bondi Junction, Piccolo and World Square by the San Marco Group, or entities associated with the Farinhas, for head office administration costs, training costs and salaries.  There has been no authorisation for such charges and no agreement as to their quantum.  It is possible that services have in fact been provided and that the charges that have been made are fair and reasonable.  However, there was no hint of any evidence from the Farinhas to demonstrate the detail and precise nature of the services provided or the justification for the charges, despite the report of Ms Bateman, putting those matters in issue.  I can only conclude, on the basis of the evidence adduced to date, that the charges have been made without any entitlement to do so.  

217               The wholly inadequate recording of the details of the payments made by Carl is indicative of a failing in the maintenance of proper records.  In the absence of any evidence of an accounting nature from the Farinhas, I can only conclude that the accounting records maintained by the San Marco Group on behalf of the companies were inaccurate and inadequate.  The Farinhas have accepted, at least for the purposes of the proceeding, that Ms Bateman’s conclusions are correct.  Those conclusions indicate that the spreadsheets provided to Carl were quite inaccurate in recording the payments made by him and the allocation of the payments to the particular businesses. 

218               In addition, the controversy concerning the allotment of shares in World Square is a further indication that the affairs of that company have been conducted in a manner that is oppressive and unfair to Carl as a shareholder.  Whether or not the allotment was effective or was a complete nullity, there is no doubt that the directors of World Square intended to make an allotment to Equal 54 that would have the effect of diminishing, to the point of extinction, any value that Carl’s shares in the capital of World Square may have had.  Indeed, the payment made by Equal 54 suggests, although not conclusively, that the Equilibrium business conducted by World Square had significant value.  The evidence, while it is not conclusive, gives rise to an inference that Equal 54, through Mr Panagopoulos, was prepared to pay $1,400,000 to acquire a 30% interest of the Equilibrium business. 

219               In the circumstances, I am satisfied that the affairs of each of the three companies have been conducted oppressively to, unfairly prejudicially to, and unfairly discriminatorily against Carl as a shareholder.  The Farinhas control the majority of the share capital of the three companies.  I consider that it would be appropriate, therefore, to require the Farinhas, or entities associated with them, to purchase Carl’s shares in the three companies for a value that is determined after taking appropriate account of the underreporting of revenue and the overcharging of expenses and ignoring the purported allotment to Equal 54. 

220               The evidence before me at present does not enable any attempt to be made to arrive at an appropriate value.  However, I will afford the parties the opportunity of making further submissions as to the mechanism that should be adopted for determining an appropriate value.  That mechanism would include the adducing of further evidence, if need be, on behalf of both parties as to the way in which the value should be determined.  In so far as the Farinhas are able to establish a reasonable basis for determining the value of administrative services provided to the companies by the San Marco Group, that value would be taken into account in valuing the shares in the companies held by Carl. 

$550,000 Loans

221               In late February or early March 2005 Marco approached Carl and said that the Farinhas needed more funds to pay creditors.  Carl replied that he had put in more than his required share and that he had set his budget and relied on his money for mezzanine finance income.  He said that it was up to Marco and Toby to make funds available in proportion to their ownership of the companies.

222               Marco then said that, at the moment, they were stretched because their “the Market Street building project” was behind schedule and asked Carl whether he could help them by making a loan to Marco and Toby, so that they could meet their obligations.  Marco said that they would pay interest along the lines of a previous loan that had been made to Toby. 

223               Carl said that he could only consider helping them for two months.  Marco asked whether Carl could make it three months and said that he was 100% sure he could repay the amount.  Marco said that Sherbet Creative Enterprises was shouting for payment of invoices and needed $300,000.  Marco said that it would also be good if Carl could lend them an extra $250,000 so that they could pay some other bills. 

224               Carl said that it seemed that he had no choice and that he would lend the money to Marco and Toby so that they could make their contribution.  Carl also said that they had to make a very firm commitment to repay the money by the end of May.  Carl said that an interest rate of 12.5% plus an establishment fee would be charged.  He asked about security but Marco said that second mortgage security over their homes might prejudice negotiations that were being conducted with banks for further facilities.  Marco said that he and Toby would give personal guarantees.  Carl said that if he was personal guarantees that he would get his money back by 1 July 2005, he would make the loan. 

225               At some stage thereafter a document describing the loans was signed by Miguel and Marco.  Underneath the signature of each was the following:

“Accepted and providing personal guarantees for the capital amount and all fees payable under the loan.”

The document referred to drawdown dates of 11 March 2005 for a sum of $300,000 and 15 March 2005 for a sum of $250,000.  The document referred an annual interest rate of 14%, payable in advance, and establishment fees of $2,071.23 and $1,438.36, for the two loans.  The document stated a repayment date of 1 July 2005.  There appears to be no other written evidence of the loans. 

226               In oral evidence, Miguel accepted that he signed the document but said that he did so on behalf of Toby, at the insistence of Carl.  As I have said earlier, Carl and Carpe Diem do not assert any personal liability on the part of Miguel, but claimed, in the alternative, a declaration that Toby and Marco were personally liable for the loan.  As I have also earlier indicated, I do not understand any claim now to be pressed in respect of personal liability on the part of Toby and Marco.  The only question is the identity of the lender.

227               On 27 July 2004, a deed was entered into between Carpe Diem and Miguel and his wife in order to evidence a loan by Carpe Diem to Miguel and his wife.  That loan was secured by a mortgage in favour of Carpe Diem.  The relevance of that evidence is that it indicates that, where a loan had previously been made to one of the Farinhas, it was made by Carpe Diem.  That has some relevance to the identity of the lender who made the loans totalling $550,000 to Cockle Bay. 

228               I consider that the loans were made by Carpe Diem and not by Carl personally.  The most telling evidence in support of that conclusion is the stance adopted by the Farinhas in a proceeding commenced in the District Court of New South Wales by Carpe Diem for recovery of the loan.  The proceeding was commenced by Carpe Diem against Toby and Marco and Cockle Bay.  In its amended statement of claim, verified on 10 May 2006, Carpe Diem asserted that, in early March 2005, Carpe Diem agreed to make a loan to Toby and Marco in the amount of $550,000.  The terms of the loan were then pleaded, including a variation concerning the date for repayment of the loan.  The statement of claim then asserted that Carpe Diem, at the request of Toby and Marco, advanced $300,000 of the loan to Sherbet Creative Enterprises on 11 March 2005 and on 15 March 2005, at the request of Toby and Marco, advanced $240,990.41 of the loan to Cockle Bay, being the balance of the loan after deducting the establishment fee and interest on the loan to 30 March 2005.  The statement of claim alleged, in the alternative, that the loan was made to Cockle Bay.

229               In his amended defence filed in the District Court, which was sworn on 18 July 2006, Toby asserted that in or about the middle of February, Marco, on behalf of Cockle Bay, entered into an agreement with Carpe Diem whereby Carpe Diem agreed to lend $250,000 to Cockle Bay.  Toby asserted that on 11 March 2005, Carpe Diem provided $300,000 to Sherbet Creative Enterprises as part of Carl hybrid trust’s partnership contributions to the partnership operated through Bondi Junction.  No suggestion was made in the defence that any loan was made by Carl personally.  In his defence sworn on 18 July 2006, Marco made the same assertions as Toby did in his defence.  That is to say, neither of them denied that loans were made by Carpe Diem.  There was no suggestion that the loans were made by Carl personally. 

230               The District Court proceeding was subsequently discontinued and it is common ground, in the present proceeding, that the loans totalling $550,000 were made to Cockle Bay.  The payments were in fact made by Carpe Diem.  There is no evidence to suggest that the payments were made by Carpe Diem on behalf of Carl or any other person.  Further, interest was paid by Cockle Bay to Carpe Diem on thirteen occasions from 31 March 2005 to 3 May 2006 at the rate of 14% per annum.  No suggestion was made that the interest was payable to Carl.  It is common ground that 14% was the agreed rate of interest. 

231               In the circumstances, there should be judgment for Carpe Diem against Cockle Bay in the sum of $550,000 together with any interest remaining unpaid at the date of judgment. 

CONCLUSIONS

232               For the reasons indicated above, I have reached the following conclusions on the issues stated above:

(1)        No partnership involving Toby Bondi Junction, Marco Bondi Junction, Miguel Bondi Junction and Carl Bondi Junction has come into existence and no partnership involving Cine and Carl World Square has come into existence.  Further, the Moda, Momo and Equilibrium ventures have been carried on by Bondi Junction, Piccolo and World Square respectively in their own rights.

(2)        The payments made by Carl should be characterised as advances on loan account as follows:   

Piccolo                                                                                      $5,500.00

World Square                                                                        $816,045.55

Bondi Junction and Piccolo jointly                                          $424,149.20

Bondi Junction, Piccolo and World Square jointly                   $564,924.80

Carl should have judgment accordingly. 

(3)        There is no entitlement for the Farinhas, or entities associated with them, to acquire Carl’s shares in World Square. 

(4)        The purported allotment of shares in the capital of World Square to Equal 54 was made in contravention of its Constitution and would be liable to be set aside.

(5)        The accounts of the Moda and Momo businesses underestimate the revenues earned by those businesses and management fees, consultancy fees, administration expenses and training costs charged to the three businesses by the San Marco Group, or entities associated with the Farinhas, have not been properly charged to those businesses.

(6)        The Farinhas, or entities associated with them, should be required to purchase Carl’s shares in Bondi Junction, Piccolo and World Square for a consideration to be determined after further evidence and argument.

(7)        Carpe Diem is entitled to recover the sum of $550,000 from Cockle Bay and should have judgment accordingly.

233               I propose to fix a further time for further hearing to determine the price at which Carl’s shares should be purchased and by whom.  At this stage, it is not appropriate to make any order as to costs. 

Associate:

Dated:         10 December 2007