Summary Judgment Denied in Loan Account Dispute

The court denied summary judgment due to triable issues regarding the limitation period and the accuracy of loan account entries. The plaintiff sought recovery of amounts owed under loan accounts, while the defendant raised claims that the amounts were statute-barred and disputed the accuracy of the entries.

Supreme Court New South Wales

Medium Neutral Citation: [COMPANY] v [NAME] [2015] NSWSC 369 Hearing dates: 30 March 2015 Date of orders: 31 March 2015 Decision date: 31 March 2015 Jurisdiction: Common Law Before: Beech-Jones J Decision: (1) The defendant be granted leave to file an amended defence in the form of the draft found behind Tab 8 of the court book.

(2) The plaintiff's notice of motion dated 11 July 2014 and the amended notice of motion filed in Court on 30 March 2015 be dismissed save so far as they seek costs.

(3) Direct the parties to exchange and file written submissions on costs, which are not to exceed five pages together, with any material in support on or before 5.00 pm on 13 April 2015.

(4) Direct the parties to exchange and file any submissions in reply, which are not to exceed three pages in length, on or before 5.00 pm on 16 April 2015.

(5) Direct the parties to send electronic versions of the submissions on costs and material in support to the associate to Beech-Jones J.

(6) The proceedings be listed before a Registrar at 9:00am on 5 May 2015 for directions. Catchwords: SUMMARY

JUDGMENT – loan account of company associated with ex-director – reliability of accounts – Limitation Act 1969 – whether cause of action confirmed – summary judgment refused. Legislation Cited: - Corporations Act 2001 (Cth) – s 1305 - Limitation Act 1969 - s 14, s 54 - Uniform Civil Procedure Rules 2005 – 13.1 Cases Cited: - Australian Securities & Investments Commission (ASIC) v Rich [2005] NSWSC 417 - Dey v Victorian Railways Commissioners (1949) 78 CLR 62 - Footman Bower & Co Ltd, Re [1961] 1 Ch 443 - [COMPANY] v Commissioner for Railways (NSW) [1964] HCA 69; 112 CLR 125 - Ogilvie v Adams [1981] VR 1041 - Santos Coffee Company Pty Ltd v Direct Freight Express Pty Ltd [2010] NSWCA 14 Category: Procedural and other rulings Parties: [COMPANY] – Plaintiff [NAME] – First [COMPANY] Defendant Representation: Counsel: [redacted] [NAME]

Solicitors: [redacted] [NAME](s): 2014/130441 Publication restriction: Nil

Judgment 1. On 11 July 2014 the plaintiff, [COMPANY] ("[NAME]"), filed a notice of motion seeking summary judgment against each of the two defendants, [NAME] and [COMPANY] ("[NAME]"). In circumstances I will describe, [NAME] decided not to press its application for summary judgment against [NAME] but persisted in seeking summary judgment against [NAME]. At the hearing of this application on 30 March 2015, it filed an amended notice of motion to reflect that position as well as refining the amount sought to be recovered from [NAME].

2. Various descriptions of the standard that [NAME] must meet to obtain summary judgment are set out by Barwick CJ in [COMPANY] v Commissioner for Railways (NSW) [1964] HCA 69; 112 CLR 125 at 129-130. I will not repeat them save to note that if there is a real question to be determined (see Dey v Victorian Railways Commissioners (1949) 78 CLR 62 at 91) that is, if a triable issue is raised, then summary judgment should not be ordered.

3. In this case, [NAME] contends that summary judgment should be given in respect of "part of the claim" against [NAME] (see Uniform Civil Procedure Rules 2005, 13.1(1)(a).) To that end, it seeks judgment for part of the debt said to be owing by [NAME] and to proceed to trial in respect of the remainder, namely its claim for interest. It was common ground that UCPR 13.1(1)(b) enabled the Court to enter judgment for part of the debt and to determine the balance. This approach is perhaps supported by that part of UCPR 13.1(b) which refers to a defendant having no defence "except as to the amount of any damages claimed". If the rule does permit this, it appears that its operation provides an exception to the doctrine of merger, although it is not necessary to consider this further.

Background 1. [NAME] was a senior employee and director of [NAME] for decades. He is the sole director and shareholder of [NAME]. [NAME]' employment with [NAME] ceased sometime around September 2010 following a fallout between himself and the principal of [NAME]. By that time, [NAME] had been the managing director of [NAME] for a number of years. He and [NAME] together owned 15% of the shares in [NAME]. They had previously owned 30%, but sold 15% in 2009. For a number of years [NAME] and [NAME] had the benefit of loan accounts with [NAME]. The terms on which those accounts operate have proved difficult to ascertain. It appears that they were not reduced to writing.

2. These proceedings were commenced in April 2014. [NAME] seeks recovery of the amounts said to be owing by each of [NAME] and [NAME] under their respective loan accounts. The amounts sought in the statement of claim were $116,598.42 from [NAME] and $445,909.22 from [NAME]. However, proving an entitlement to recovery of those amounts has been a difficult task. In its summary judgment application, [NAME] has not pursued any claim for interest and, as noted, it ultimately only sought summary judgment against [NAME]. Further, the amounts sought from [NAME] have been revised following the undertaking of a so-called substantiation audit of the loan account entries for the period after 30 June 2009 by the company's external accountant, [NAME].

3. The defendants have had their own difficulties. [NAME] has been unwell. He filed a defence in an affidavit with the benefit of what appears to have been only spasmodic legal assistance. His defence admits some matters, briefly queries some others, and does not contain any positive assertions. His affidavit is something of a ramble. Besides various complaints about a lack of substantiation, it does not descend to discuss the loan accounts in any detail even though, as managing director, [NAME] could be expected to have some detailed knowledge of their operation.

4. Eventually it emerged from one iteration or another of the defendants' written submissions that [NAME] asserted two claims against [NAME] which, if accepted, would exceed the amount said to be owing under his loan account. It appears to have been the emergence of these claims that resulted in [NAME] not pressing its claim for summary judgment against [NAME]. There also emerged from the defendants' written submissions an amended defence which raised those assertions as well as a claim that recovery of the amount owing for both loan accounts is statute barred under the Limitation Act 1969. In the circumstances which I will shortly describe, leave was sought to file this amended defence at the hearing of this application.

Summary judgment application 1. [NAME]'s application for summary judgment against [NAME] had two steps. First, [NAME] contended that it had established, to the requisite standard, that the indebtedness of [NAME] as at 30 June 2009 was $166,909.71. Second, by reference to [NAME]'s audit, [NAME] contended that it established that there was no triable issue in respect of the accuracy of the subsequent entries and they can be reconciled with the amount owing as at 30 June 2009 to yield an amount said to be currently owing of $175,044.80 exclusive of interest.

2. On behalf of [NAME], issue was taken with the proposition that [NAME] had established the first step, and issue was taken with certain entries identified by [NAME] for the period after 30 June 2009. Further, as hinted at already, on behalf of [NAME] it was contended that there is a triable issue that the amounts said to be owing as at 30 June 2009 were, in part, irrecoverable by the operation of s 14 of the Limitation Act 1969. To raise that contention, [NAME] had to seek leave to file the amended defence that I referred to earlier. In the end, [NAME] did not resist such leave being granted and reserved its position in respect of costs. Leave will be granted. [NAME] further contended that certain acts of [NAME], on behalf of [NAME], constituted a confirmation of its cause of action for the purposes of s 54 of the Limitation Act with the consequence that, even if [NAME]'s reliance on the Limitation Act was otherwise established, the time bar was postponed.

3. I will deal with each of the steps in [NAME]'s argument in turn.

Position as at 30 June 2009 1. [NAME] pointed to a number of items of evidence as demonstrating that there was no triable issue in respect of its contention that the amount owing by [NAME] as at 30 June 2009 was $166,909.71. First, it pointed to the financial accounts of [NAME] for the financial year ended 30 June 2009 which were signed by [NAME] on or about 20 November 2009. Note 7 to the accounts records loans to companies associated with the directors in the amount of $4,130,471. The accounts describe these loans as non-current, a matter I will return to. [NAME] also tendered a document described as a "Lead Sheet" prepared by [NAME] which contains a breakdown of the loans of the directors and their associated companies for the years 2009 to 2014. [NAME] also pointed to a ledger for [NAME]'s loan account which supported those allocations as well as a summary of the loan account for the years 30 June 2003 to 2011 which had been prepared by [NAME]. Finally, [NAME] pointed to a passage in [NAME]' first affidavit filed 20 January 2015, in which he stated: "In 2009 after I sold half my shareholding to [NAME], my loan account was reduced to $145,926.90 and the loan account for the second defendant was $166,909.71, (being annexure "A" to the letter dated 20 May 2011 from [COMPANY] at page 67 of Exhibit RW1.)" ([COMPANY] is the firm of accountants for whom [NAME] works.)

1. Counsel for the defendants contended that this extract from [NAME]' affidavit did not constitute an admission by him as to the state of the indebtedness of [NAME]'s loan account as at 30 June 2009, but was simply a reference by [NAME] to what [NAME], through [NAME], had asserted to him was the indebtedness. It was submitted that this was evident when one reads this paragraph in the context of the balance of the affidavit, and in particular those passages in which [NAME] discussed his health problems and the difficulties he has encountered in obtaining documents and other verification from [NAME] concerning the state of his loan accounts from time to time. In a further affidavit, [NAME] swore that he did not intend by the above statement to make any admission as to either his or [NAME]'s indebtedness. 2. [NAME]'s reliance on [NAME]' signature on the accounts for the financial year 2009 was overstated. Neither the effect of [NAME]' signature or any resort to the necessary understanding a director must have concerning accounts which they sign, warrants a conclusion on an application such as this that [NAME] accepted that a component of the entry in Note 7 was that there was a debt owing by [NAME] to [NAME], much less of the amount claimed by [NAME]. At one point I was invited to draw an inference that [NAME] must have seen the lead sheet or perhaps the ledger prior to signing the accounts. I cannot draw an inference of that kind on a summary judgment application, especially in circumstances where [NAME] swore that he could not recall seeing any such documents prior to signing the accounts.

3. That said, the cumulation of the accounts, the lead sheet reconciling the accounts, and the ledger provide a reasonably strong basis for ascertaining [NAME]'s indebtedness as at 30 June 2009. All of these documents are business records. Further, the accounts and the ledger fall within in s 1305(1) of the Corporations Act 2001 (Cth) and thus are prima facie evidence of their contents (see Australian Securities & Investments Commission (ASIC) v Rich [2005] NSWSC 417 at [223]ff per Austin J.)

4. While I accept that [NAME]' statement in his affidavit simply represents his understanding of the material provided to him by [NAME], it is noteworthy that there is no attempt by him in his affidavit to provide any detailed basis for undermining the entries in the ledger at least up to 30 June 2009. It was to be recalled that he was the managing director during that period and it was his personal company's loan account. While I would not be prepared to conclude on this application that he was provided with ledger entries for [NAME]'s account, it can be expected that he would be able to address much of the substance of the entries in the ledger beyond simply throwing his hands up and claiming that there is a lack of verification.

5. Counsel for the defendant sought to undermine the accounting records concerning [NAME]'s indebtedness as at 30 June 2009 by pointing to a number of potential discrepancies that he contends are revealed by the evidence concerning the state of the loan account from time to time. The most significant of the discrepancies is a number of entries that were included in the ledger for [NAME]'s loan account some time after 30 June 2009 which totalled $235,265, which [NAME] later reversed when conducting the substantiation audit that I referred to earlier. In relation to that, [NAME] stated as follows: "In my opinion, as a result of my audit, I consider this entry was made in error. I have caused it to be reversed [ … ]. The error arose because an attempt was made to equalise the directors loan accounts which on the basis of my review was incorrectly done in the year ending [30 June] 2011".

1. It was contended that the existence of such a large yet so poorly explained error undermines the veracity of the ledger and the accounts for [NAME]'s loan account prior to 30 June 2009, bearing in mind that there was no such substantiation style audit conducted for that period. I do not accept that contention. The corrected entries appear to be self-evidently anomalous. Subject to what follows, the entries referable to the period prior to 30 June 2009 appear to be consistent with a pattern of [NAME] and [NAME] drawing moneys from [NAME] and then later receiving dividends.

2. Counsel for the defendant also pointed to two entries referable to the period prior to or around 30 June 2009 as casting doubt on the ledger's veracity. The first relates to the financial year 2004/2005. The summary of the ledger prepared by [NAME] referred to earlier contains an entry "RW share ongoing from [COMPANY]", and a debit, that is an increase in the indebtedness, of $52,891.81. Counsel submitted the entry was suggestive of a credit in favour of [NAME] or at least [NAME], rather than a debit. Without knowing more about the transaction, I do not attach any weight to this submission. A party can "share" in a profit or they can "share" in a loss. In circumstances where [NAME] has placed before this Court evidence of [NAME]'s indebtedness, a mild query about such an entry does not undermine that evidence. [NAME] was in a position to explain that transaction and in particular, whether it was one in which the shareholders either profited or lost, but chose not to.

3. Counsel for the defendant also pointed to the absence of any credit in the ledger for [NAME]'s loan account which was referable to the receipt of dividends for the financial year 2009. As stated, at some time during 2009 [NAME] and [NAME] sold half of their shareholding. Nevertheless, both [NAME] and [NAME] were still entitled to a 15% share of the substantial dividend declared by [NAME] for that year. In particular, it seems that [NAME] was entitled to approximately seven and a half per cent share of that dividend. However, the ledger does not contain any entry referable to [NAME]'s dividend entitlements. Various possible explanations for this were provided by counsel for [NAME], but they all remain unsupported by the evidence. I accept that there is an issue to be tried in relation to this aspect of [NAME]'s indebtedness, but it is not sufficient to create a triable issue in relation to the balance of the indebtedness as at 30 June 2009.

4. The other issue raised by counsel for the defendant in respect of [NAME]'s indebtedness as at 30 June 2009 was the Limitation Act. Counsel contended that the proceedings were framed on the basis that loans to [NAME] were repayable on demand and thus it followed that the cause of action to recover them accrued on the date that the advances were made (see Ogilvie v Adams [1981] VR 1041). It was further contended that it followed that any credits to the loan accounts were to be taken as payments of non-statute barred advances before they were taken as payment of statute barred advances (see Santos Coffee Company Pty Ltd v Direct Freight Express Pty Ltd [2010] NSWCA 14 per Allsop P, Giles JA and [NAME]). Whether that is so depends upon whether what is involved is a "true running account" ([NAME] at [41]).

5. The potential application of these principles to this matter can be accepted for the purposes of this application, although the description of these loans in the accounts as "non-current" may perhaps cast some doubt upon the contention that they were repayable on demand. In any event, counsel for [NAME] responded to this contention by submitting that [NAME] and through him, [NAME], had confirmed [NAME]'s debt and thus suspended the operation of the limitation period (see Limitation Act s 54). Two acts said to constitute the confirmation were identified. The first is the signature of [NAME] on the accounts for the 2009 financial year. However, as noted, that entry only concerns the entirety of the amount owed by companies associated with the directors and does not specify the amount of [NAME]'s indebtedness.

Accordingly, it is not sufficient to conclude on a summary judgment application that [NAME]'s right or title to bring its cause of action was acknowledged by [NAME] and through him, [NAME] (see Limitation Act s 54(2)(c)(i) and 54(4)).

6. The second act of confirmation was said to be the various credit entries that were applied to the loan account, however those entries were included at the instigation of [NAME] and not, at least according to the evidence of [NAME], himself or [NAME]. It is, at the very least, sufficiently arguable that, in those circumstances, they do not amount to [NAME] making a payment in respect of [NAME]'s right or title in its cause of action (see in Re Footman Bower & Co Ltd [1961] 1 Ch 443, 449-450; Limitation Act s 54(2)(a)(ii)).

7. In the end result, I am satisfied that [NAME] has raised a triable issue in relation to the application of s 14 of the Limitation Act to so much of [NAME]'s claim as concerns [NAME]'s alleged indebtedness as at 30 June 2009. It follows that there is a triable issue in relation to so much of [NAME]'s indebtedness that predates 30 April 2008, that date being six years prior to the commencement of these proceedings. It also follows from what I have stated earlier that there is a triable issue in relation to the alleged failure of [NAME] to credit [NAME] with an amount referable to its dividend entitlements for the financial year 2009.

Post 30 June 2009 entries 1. There remains to be considered the various debit and credit entries to [NAME]'s loan account for the period after 30 June 2009. As part of his substantiation audit, [NAME] prepared a revised schedule. Counsel for the defendant indicated that he took issue with a number of entries described as "cash drawings" in that schedule, and in particular those entries in which the underlying bank statements reveal that cash was transferred to [NAME]' bank account and not to [NAME]. [NAME] addressed these entries in his affidavit. He explained that the entries recorded a "cash advance or series of advances made to [NAME]". He said that they were "treated as a payment to [NAME]", an assertion which I restricted to being used as evidence that they were treated in the accounts of [NAME] as a payment to [NAME]. [NAME] expanded upon this explanation as follows: "Cash advances were made in this way as an advance on an annual dividend payment. The payments were therefore effectively payments in advance of a dividend that would be declared at the end of the year. The advances were thus treated as debits to the loan accounts. When the year-end dividend was declared, the corresponding dividend entitlement would be credited to the loan account either fully or most often partially offsetting the amount of cash advances made during the year. This practice of making advances on the loan accounts in anticipation of dividends has been in practice with the plaintiff since at least the late 1990s".

1. There does not seem to be any serious dispute that the practice described in this extract from [NAME]'s affidavit was followed. However, the present difficulty is in identifying the legal authority upon which payments made to [NAME] were allocated to [NAME]'s loan account. At this point there is no evidence of any agreement by [NAME] reflecting that accounting treatment. At any final hearing, I expect this issue will be of little moment because, if no agreement to that effect can be demonstrated, then [NAME] would simply be liable to pay these amounts and not [NAME]. However, as only summary judgment is sought against [NAME] and not [NAME], it does have significance at this point.

2. Counsel for [NAME] contended that [NAME] could not dispute these debits to its loan accounts while "accepting" the credit referable to its receipt of dividends. He sought to characterise this as a form of approbation and reprobation on the part of [NAME]. I disagree. There is no inconsistency in [NAME]'s position at this point. It accepts credits to its loan account as they relate to its dividends entitlement as a shareholder. [NAME] disputes only some debits because the cash payments involved were sent to [NAME]' bank account and not [NAME]'s bank account. The rights asserted by it in accepting the credits to its loan account on the one hand and the liability denied by it in rejecting the allocation of debits to its loan account on the other, are of a completely different character. I am satisfied there is a triable issue raised in relation to this issue.

3. Finally, counsel for the defendant took issue with the deduction from [NAME]'s loan account in the 2013 financial year of $32,400. It does not appear to have any underlying cash transfer associated with it. There is clearly a triable issue raised in respect of [NAME]'s entitlement to recover that amount.

Conclusion 1. On my calculations, the amount of the indebtedness claimed by [NAME] from [NAME] referable to 30 April 2008 is just under $64,000 and the approximate amount of the dividend for the financial year 2009 that may have been payable to [NAME] was $24,000. The amount in issue in respect of the cash transfers to [NAME] after 30 June 2009 that were allocated to [NAME], is approximately $73,500 and the figure mentioned in [27] is $32,400. On my calculations, the total of these amounts exceeds the amount claimed by [NAME]. It follows that its application for summary judgment must fail.

Other Matters 1. At the hearing of the motion it was evident that, even if the application for summary judgment failed, there are a number of contentions about costs to be determined which will turn upon, inter alia, why the application might be unsuccessful.

Accordingly, I will make directions for written submissions in respect of costs and allow sufficient time for the parties to consider the published version of this judgment. Unless the parties otherwise request, the Court will determine costs on the papers. However, it is appropriate to note three matters relevant to that question.

2. First, as noted, at the hearing of the motion the defendants sought leave to file and serve an amended defence. In the ordinary course they will be required to pay the costs thrown away by reason of that amendment.

3. Second, as I understand the position, prior to the hearing of this motion of the summary judgment, the defendants had stated that they would only seek leave to file an amended defence if summary judgment was not granted. However, as it became clear that [NAME] sought to resist summary judgment on the basis, inter alia, of a Limitation Act point which was not pleaded in the original defence, it was necessary for the defendants to apply to amend the defence during the hearing. As events transpired, one of the principal reasons for it being successful in resisting summary judgment was the Court's conclusion that a triable issue was raised that recovery of so much of the loan account as was referable to events prior to 30 April 2008 may be statute barred.

4. Third, another significant reason why [NAME] was able to successfully defend summary judgment was that it took issue with the method of allocating advance payments of dividends to [NAME] which were cash transfers to [NAME]' account. This "defence" only appeared to assume any significance once summary judgment was no longer pressed against [NAME]. As I have stated, it may disappear again at final hearing. As noted, [NAME] contends that it only decided not to pursue summary judgment against [NAME] because of his two unpleaded, but asserted, counter-claims which are now expressed in the proposed amended defence.

5. Finally, I note that during the hearing, counsel for the defendant contended that if the matter was to proceed to trial, his client would be entitled to discover and possibly administer interrogatories in relation to every transaction on the two loan accounts going back over decades. I do not agree. At least so far as [NAME]'s loan is concerned, as at 2002 the balance was nil so that all the amounts sued on by [NAME] arise after that time. The only assistance that [NAME] could obtain by inquiring into transactions prior to then would be, in effect, if it sought to assert that the account should have been in credit in its favour at that point. However, prima facie, any claim for a credit at that time on its part is now statute barred. If [NAME] wishes to scrutinise such transactions, it would have to positively assert, that is, plead and properly particularise, matters that somehow allowed it to bring such transactions to account. Its amended defence does not do so.

6.

Accordingly, the Court orders as follows:

1. The defendant be granted leave to file an amended defence in the form of the draft found behind Tab 8 of the court book.

2. The plaintiff's notice of motion dated 11 July 2014 and the amended notice of motion filed in Court on 30 March 2015 be dismissed save so far as they seek costs.

3. Direct the parties to exchange and file written submissions on costs, which are not to exceed five pages together, with any material in support on or before 5.00 pm on 13 April 2015.

4. Direct the parties to exchange and file any submissions in reply, which are not to exceed three pages in length, on or before 5.00 pm on 16 April 2015.

5. Direct the parties to send electronic versions of the submissions on costs and material in support to the associate to Beech-Jones J.

6. The proceedings be listed before a Registrar at 9:00am on 5 May 2015 for directions.

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