Application of Dalton and Schaeffer as executors of the estate of the late John Herman Schaeffer

The plaintiffs, Bettina Dalton and Joanne Alison Schaeffer (Executors), are the executors of the estate of the late John Herman Schaeffer (Estate). Mr Schaeffer (Deceased) died on 14 July 2020. Probate on his will dated 14 August 2019 was granted to the Executors on 28 January 2021.

The Executors have brought these proceedings by summons filed 16 August 2023 (summons) seeking an order pursuant to s 63 of the Trustee Act 1925 (NSW) (Trustee Act) for the opinion, advice and direction of the court as to whether they are justified in lodging an appeal in their capacity as executors against the judgments and orders made by Stevenson J in earlier proceedings in this court (earlier proceedings) and, if the answer is “yes”, paying the entire costs of the appeal of all appellants from the Estate.

On 28 April 2022, Patrick Naegeli commenced the earlier proceedings against the Executors, Rasay Pty Ltd (Rasay) and The Footage Company Pty Ltd (Footage), seeking to recover $6.5 million from each of them under a Deed of Guarantee and Indemnity dated 29 October 2019 (Guarantee) which had been executed by the Deceased, Rasay and Footage.

The Deceased was the sole director and shareholder of each of Rasay and Footage at the date of his death.

The Guarantee was given in favour of the “Human Enhancement Project”, which is an unincorporated association of which Mr Naegeli and his mother, Dita Naegeli, are members. Mr Naegeli brought the earlier proceedings in his capacity as a member of the Human Enhancement Project.

In summary, by the Guarantee, the Deceased, Rasay and Footage guaranteed the obligations of CRB Investment Holdings Pty Ltd (CRB) under a Cash Funding Agreement dated 30 December 2018 (Cash Funding Agreement) pursuant to which the Human Enhancement Project (as lender) loaned $500,000 to CRB (as borrower). Under the terms of the Cash Funding Agreement, CRB was required to repay Mr Naegeli the sum of $6.5 million over the course of 12 months commencing on 26 April 2019, a return to Mr Naegeli of interest at the rate of 1,200% per annum.

On 3-5, 12 and 19 April 2023, Stevenson J heard the earlier proceedings.

On 4 May 2023, Stevenson J delivered judgment in the earlier proceedings: Naegeli v Dalton and Schaeffer as Executors of the Estate of the late John Herman Schaeffer [2023] NSWSC 466 (First Judgment). In the First Judgment at [12], Stevenson J set out the following summary of conclusions:

On 9 June 2023, Stevenson J delivered a further judgment in the earlier proceedings: Naegeli v Dalton and Schaeffer as Executors of the Estate of the late John Herman Schaeffer (No 2) [2023] NSWSC 626 (Second Judgment). In the Second Judgment at [7], [9]-[10] and [16]-[17] respectively, Stevenson J made the following further determinations on three outstanding issues:

On 16 June 2023, Stevenson J made the following orders (Orders) in the earlier proceedings as a result of the determinations made in the First Judgment and the Second Judgment (using the shorthand expressions defined above):

On 10 July 2023, the Executors, Rasay and Footage filed a notice of intention to appeal.

On 14 September 2023 (14 days prior to the hearing before me), the Executors, Rasay and Footage filed a notice of appeal which appealed the whole of the decision made by Stevenson J in the First Judgment and the Second Judgment and sought to set aside certain of the Orders (Appeal).

The grounds of the Appeal are set out in detail below following my analysis of the First Judgment.

On 28 September 2023 (the day of the hearing before me, of which Mr Naegeli was not a party), Mr Naegeli filed a notice of cross appeal seeking to set aside part of the First Judgment, set aside orders 1, 2, 5 and 8 of the Orders, vary orders 3 and 6 of the Orders such that the judgment sum be $6.5 million, vary order 9 of the Orders to the effect that all of the Executors, Rasay and Footage pay Mr Naegeli’s costs as agreed or assessed and for the Executors to pay Mr Naegeli’s costs as agreed or assessed (Cross Appeal).

The single ground of the Cross Appeal is also set out in detail below following my analysis of the First Judgment.

As the Appeal was filed two weeks in advance of the hearing of the summons, the issue before me to determine is no longer whether the Executors are justified in lodging the Appeal but whether the Executors are justified in maintaining the Appeal.

The evidence before the court in these proceedings was as follows:

At the hearing on 28 September 2023, I made an order that the confidential written advice of senior counsel and the controlled money statement were to be kept confidential and were not to be published. Portions of this judgment have been redacted to respect the confidentiality of the financial position of Rasay and Footage.

At the hearing, Mr M Condon SC appeared as counsel for the Executors instructed by Glass Goodwin.

The judgment debt of the Executors as at 29 October 2023 pursuant to orders 2, 3 and 6 of the Orders was $745,871.49. This amount has been calculated as $500,000 plus interest at the rate of 10% per annum, compounding on a daily basis, from 29 October 2019 to 29 October 2023. The judgment debt has continued to accrue interest at that rate since 29 October 2023.

As at the present time, the Executors do not know the amount of the costs of Mr Naegeli to be agreed or assessed, 80% of which they have been ordered to pay pursuant to order 8 of the Orders.

The Orders provide that Mr Naegeli cannot recover against the Executors, Rasay and Footage any more than $6.5 million in total on account of the judgment.

Further:

[redacted]

[redacted]

[redacted]

[redacted]

[redacted]

[redacted]

[redacted]

[redacted]

[redacted]

The Executors, Rasay and Footage estimate that their costs of the Appeal will be between $70,000 and $100,000, based on the Appeal hearing running for one day.

[redacted]

It is also asserted that success in the Appeal will benefit the Estate, Rasay and Footage in the following manner:

The applicable legal principles governing an application for advice such as this one under s 63 of the Trustee Act are outlined below.

In considering the general legal principles to an application for judicial advice on whether a trustee is justified in commencing an appeal against a decision of the court, Parker J in Application of Rinehart: 2020/142504 [2020] NSWSC 1624 at [126]-[162] set out a convenient summary of the authorities on the issues to be considered, the relevant excerpts of which are set out below (case names appearing in bold are added):

In the course of applying these principles in Rinehart, Parker J said at [179] and [196]:

There are two further decisions of this court which are relevant to the legal principles that apply in the present case.

In Re Bideena Pty Limited (as trustee for the Bideena Pty Limited Superannuation Fund) [2016] NSWSC 735, Sackar J, after referring to the remarks of Palmer J in Re Application of Macedonian Orthodox Community Church St Petka Inc (No 3) [2006] NSWSC 1247 at [80], stated at [43]-[44]:

In In the matter of Mudgee Dolomite & Lime Pty Ltd (No. 4) [2021] NSWSC 393, Williams J, in considering an application for orders that certain liquidators would be acting properly and would be justified in defending an appeal, summarised the applicable legal principles as follows:

In my view, the principles I should apply in determining the central question under s 63 of the Trustee Act of whether the Executors are justified in bringing and maintaining the Appeal in the present case are those which are derived from Frost, Attia, LM Investment, Rinehart and Mudgee, which can be distilled to the following:

In determining whether there are reasonable and arguable grounds for the Appeal, it is appropriate for me to set out an analysis of the First Judgment against which the Appeal has been brought. In doing so, it is also necessary for me to consider matters which are relevant to the grounds expressed in the Cross Appeal.

I have considered the First Judgment in full, which runs to 414 paragraphs. The analysis below assumes a familiarity with the First Judgment. I have not sought to reproduce the findings and reasoning in the First Judgment beyond what is necessary to determine the present application, but even reduced to those essentials, the analysis below is necessarily lengthy.

Unless the context indicates otherwise, the paragraph references below are to specific paragraphs of the First Judgment where the various findings were made by Stevenson J.

Central to the determination of the earlier proceedings are several findings in relation to the circumstances surrounding the execution of the Guarantee by the Deceased on 29 October 2019. Due to the deaths of both Mr Blinkworth and the Deceased prior to the hearing of the earlier proceedings, the only evidence relevant to the execution of the Guarantee available to Stevenson J was that contained in the contemporaneous documents and the oral and affidavit evidence of Mr Naegeli.

Stevenson J concluded that Mr Naegeli was an honest witness seeking to do his best to give the best of his memory (at [15]), had no reason to doubt the accuracy of Mr Naegeli’s account of what happened, and was a reliable informant (at [40]). The fact that Mr Naegeli had made audio recordings of a number of his conversations with the Deceased meant there was no dispute about the accuracy of the detailed account that Mr Naegeli gave of those conversations and may explain why he was not challenged on them (at [50]).

Initial Meeting between Messrs Naegeli, Blinkworth, Aloisi, Schaeffer and James

Mr Naegeli first met Messrs Blinkworth, Aloisi, Schaeffer (the Deceased) and James on 3 July 2018 during a four-hour meeting in Mr Blinkworth’s office in the Sydney CBD (Initial Meeting). Mr Naegeli, Mr Blinkworth and Mr Aloisi were present at the Initial Meeting in person. The Deceased and Mr James were present via telephone link (at [55]).

During the Initial Meeting, the Deceased said to Mr Naegeli (at [62]):

During the Initial Meeting, either Mr Blinkworth or Mr James put a proposal to Mr Naegeli (First Proposal). In effect, the terms of the First Proposal were that Mr Naegeli would transfer $20 million USD to CRB and, in return, CRB would make 12 monthly repayments to Mr Naegeli totalling $68 million USD, or a 340% return on Mr Naegeli’s investment (at [71]-[77]).

Mr Naegeli said that he personally did not have access to $20 million (at [73]). In response, either Mr Blinkworth or Mr James asked Mr Naegeli if he could find a group with a minimum of $20 million to transfer to CRB and in return they would enter a separate agreement to give him a 2.5% return monthly for 12 months, totalling $6 million (at [74]).

Although the Deceased was, at times, in attendance via telephone, he did not participate in discussions concerning the First Proposal (at [78]).

A short time after the Initial Meeting, Mr Naegeli was provided with a copy of CRB’s “Corporate Profile”, which listed the Deceased as a person involved with CRB and included a biography of the Deceased, although there was no evidence that the Deceased had any involvement in the creation of the Corporate Profile (at [80]-[83]).

Despite evidence that the Deceased disagreed with the substance of the Corporate Profile, the Deceased’s actions suggested that he was happy to assist in the establishment of CRB’s “credibility” (at [85]).

Between 21 September 2018 and 31 December 2018, Mr Blinkworth spoke with Mr Naegeli by telephone on no less than 30 occasions (at [87]). In addition, Mr Naegeli travelled to Sydney at the request of Mr Blinkworth from 20 November 2018 to 23 November 2018, 5 December 2018 to 14 December 2018 and 27 December 2018 to 31 December 2018, at which times, and on no less than five occasions, the Deceased was included in the conversation via telephone and showed a genuine interest in Mr Naegeli (at [87]).

During one conversation, the Deceased said that Mr Blinkworth had spoken at length to him about Mr Naegeli and that Mr Blinkworth really liked him as a person and what he was pursuing and he totally trusted Mr Blinkworth’s judgment and also said “I would really like to hear more and share my experiences with you, I feel this can mutually benefit us, once you enter into the [Cash Funding Agreement] we will become partners, your life will change forever, we will work together and help you on your way.” (emphasis added) (at [88]).

In around October 2018, Mr Naegeli engaged a solicitor, John Gdanski, and an accountant, George Sim (at [89]).

By 3 December 2018, CRB had prepared a draft “Cash Funding Agreement” (Draft CFA), using a structure similar to the Cash Funding Agreement ultimately executed (at [92]).

On 8 December 2018, Mr Naegeli wrote to Mr Gdanski in relation to the Draft CFA, in which he mentioned that he had managed to get Mr Blinkworth to agree to a personal guarantee but he did not “believe it would be worth much or be exercisable as it would purely be a contract between myself” and Mr Blinkworth (at [95]).

Stevenson J accepted Mr Naegeli’s evidence in cross examination that he made this statement “because it’s an agreement between me personally and him, not the group investing. So it’s not valuable to the group investing, it’s only valuable to me” (at [97]-[98]).

On 13 December 2018, Mr Naegeli provided the Draft CFA to Mr Gdanski for his advice, and Mr Gdanski retained Donald Farrands of the Victorian Bar to advise in relation to the proposed agreement (at [103]-[104]).

Mr Farrands advised that the proposed “agreement contains significant risks and heavily favours the Borrower and puts the Lender at potential risk” (at [105]).

Accordingly, Mr Naegeli did not enter into the First Proposal on the terms set out in the Draft CFA (at [107]-[108]).

On 15 December 2018, Mr Naegeli, Mr Blinkworth and the Deceased discussed the possibility of a second proposal (Second Proposal) (at [113]).

On 17 December 2018, Mr Naegeli wrote to Mr Blinkworth expressing that he was embarrassed about the advice received from Mr Farrands, which Mr Naegeli seems to have seen as preventing the First Proposal from proceeding (at [114]-[115]).

Ultimately, the parties did not continue with the Second Proposal (at [117]).

On 22 December 2018, Mr Blinkworth wrote to Mr Naegeli asking him to call, which “may just sort all your dreams out” (at [118]).

Later on 22 December 2018, Mr Naegeli and Mr Blinkworth had the following conversation (together, the Third Proposal) (at [119]):

According to Stevenson J, the first set of italicised words in the Third Proposal extracted above suggest a continuing involvement of the Deceased in the transaction, albeit at some remove, and of a role that he played in encouraging Mr Blinkworth to encourage Mr Naegeli to commit to a transaction with CRB (at [120]).

In relation to the second set of italicised words in the Third Proposal extracted above, Stevenson J referred to the following portion of Mr Naegeli’s cross examination evidence (at [121]):

Stevenson J made the following remarks in relation to this evidence (at [122]):

On 28 December 2018, Mr Naegeli met Messrs Blinkworth and Aloisi at CRB’s office and Mr James attended the meeting “at times” by telephone (at [123]).

At the meeting, Mr Naegeli asked several times why he was being offered returns 5 times what they had discussed over the last few months and whether there was “a catch” (at [124]).

Stevenson J saw this evidence as having importance because of what was said by the Executors of the improvident nature of the transaction represented by the Cash Funding Agreement from the point of view of the borrower CRB and the extremely high effective interest rate represented by the payment structure, finding that what must be borne steadily in mind is that the terms were proposed by CRB, the prospective borrower, and not by Mr Naegeli as the prospective lender, and what was important was that the extraordinarily generous “payment structure” was not Mr Naegeli’s idea (at [125]).

Mr Blinkworth replied that the Deceased had got him thinking that he should give Mr Naegeli “a go” and that there were enough profits coming from the sovereign wealth fund of the Malaysian government to easily make the arrangement happen (at [126]).

On 29 December 2018, Mr Blinkworth sent Mr Naegeli a draft of what became the Cash Funding Agreement (at [134]).

On 30 December 2018, Mr Naegeli, without seeking prior legal advice, executed the Cash Funding Agreement (at [135]-[136]).

The Cash Funding Agreement provided for 12 “revenue payments”, each of $500,000, to be paid monthly commencing on Friday, 26 April 2019, and thereafter a final payment of “the original amount of the cash transfer” (in effect a return of capital) “at the end of the month after the 12th payment” (at [142]).

Stevenson J found that the terms of the Cash Funding Agreement were generous to the lender but that the generous or improvident terms were those proposed by the borrower and were similar to those that had earlier been proposed in the context of the First Proposal and the Second Proposal (at [143]).

On 26 April 2019, the first interest payment of $500,000 was due to Mr Naegeli (at [144]).

On 15 May 2019, Mr Naegeli travelled to Sydney to meet Mr Blinkworth and Mr Aloisi and Mr Naegeli was shown several of what Mr Blinkworth claimed to be classified documents relating to purported projects between CRB and governments which would provide funds to CRB to pay Mr Naegeli (at [146]-[148]).

On 24 May 2019, Mr Blinkworth telephoned Mr Naegeli and said he would send him documents that demonstrated that CRB would be obtaining access to US$160 million, US$60 million from a letter of credit issued by HSBC Bank to Barclays Bank, for the exclusive benefit of CRB as ultimate beneficiary, and would pay Mr Naegeli $3 million in advance to make up for the late payment (at [149]).

Mr Naegeli was shown several documents which, on their face, appeared to show that CRB had a standing line of credit for US$60 million from an account at HSBC Bank PLC in the United Kingdom for the use of CRB via an account at Barclays Bank UK (at [150]).

Stevenson J accepted the following unchallenged evidence given by Mr Naegeli that while he did not understand the documents, he believed that they were legitimate and he was encouraged by the reference to US$60 million being held for the exclusive use of CRB and by the promise by Mr Blinkworth that he would be paid (at [151]-[152]).

Throughout May and June 2019, Mr Naegeli said he had approximately six regular telephone conversations with Mr Blinkworth and the Deceased where Mr Naegeli would raise his concerns about a lack of security in the Cash Funding Agreement and the lack of receipt of payments under it (at [153]). During each of these calls, either Mr Blinkworth or the Deceased, or sometimes both, said to Mr Naegeli there was no need for concern, he would receive his investment in 13 months, and “If anything ever did go wrong we will pay you from our personal funds” (at [154]). They also referred to a recent lengthy profile on the Deceased published on the Domain website on 17 May 2019 which described him as an “art and trophy home collector” (at [155]).

Mr Naegeli gave evidence that during May and June 2019, he had conversations with the Deceased in which the Deceased said “I entered these and it’s not public knowledge so you have to remain the same if you want to continue being in this with us”, to which Mr Naegeli responded (at [156]):

Stevenson J found that the emphasised passages above show how closely the Deceased saw himself as being aligned with the interests of CRB (at [157]).

Stevenson J extracted several passages from Mr Naegeli’s unchallenged evidence concerning the circumstances in which a Deed of Guarantee was proposed, as follows (at [162]-[166]):

Stevenson J found that he was not able to draw an inference from this conversation that the Deceased was under Mr Blinkworth’s influence but found that it showed that the Deceased expressed confidence about Mr Blinkworth arising from their business relationship (at [168]). Stevenson J also found that the companies to which the Deceased referred that ultimately executed the Guarantee on 29 October 2019 were Rasay (owner of the Bondi Property) and Footage (at [168]).

Mr Naegeli said that either Mr Blinkworth or the Deceased asked him to prepare the deed and travel to Sydney for them to execute it and that each of Mr Blinkworth and the Deceased gave their personal details for inclusion in the deed, including the various companies referred to by the Deceased (at [169]).

The Guarantee was prepared by Mr Naegeli, who is not a lawyer, without legal assistance using several other forms of guarantee as a template but the form of guarantee that Mr Naegeli created was bespoke in nature (at [170]-[171]).

On 26 July 2019, Mr Naegeli travelled to Sydney and attended CRB’s offices for a meeting between Mr Naegeli and Mr Blinkworth in person and the Deceased on the telephone, during which Mr Blinkworth and the Deceased said that “they would like to go over the Deed and have their lawyers look over it and suggest any necessary changes”, referring to the Guarantee (at [172]-[173]).

Mr Naegeli gave the following evidence in relation to the circumstances of the 26 July 2019 meeting (at [174]):

Mr Naegeli executed the Guarantee on about 18 July 2019 (at [176]).

Stevenson J, recognising a lack of direct evidence, concluded that Mr Naegeli left the form of Guarantee with Mr Blinkworth on the basis that, or on the assumption that Mr Blinkworth would, in due course, execute the Guarantee and arrange for the Deceased to execute the Guarantee (at [177]).

Mr Naegeli then left Sydney on 1 August 2019 without an executed Guarantee or any of the payments owed to him under the Cash Funding Agreement and expressed frustration to Mr Blinkworth, advising that he would commence legal proceedings to recover the money he was owed, and then had exchanges during calls with Mr Blinkworth on 28 and 29 October 2019 concerning the execution of the Guarantee by him and the Deceased which concluded by Mr Naegeli saying “I am beginning to doubt your credibility and I require a lawyer or Justice of the Peace to witness the execution of the Deed” (at [178]-[179]).

Stevenson J then set out an excerpt from the cross examination of Mr Naegeli about his statement to Mr Blinkworth that he was “beginning to doubt his credibility” (at [180]):

Stevenson J said that although initially troubled by this evidence, his Honour accepted that Mr Naegeli’s reference to beginning to doubt Mr Blinkworth’s “credibility” was that he was beginning to doubt Mr Blinkworth’s creditworthiness (at [181]).

Stevenson J said that in relation to Mr Naegeli’s stated requirement to have a lawyer or Justice of the Peace witness the execution by Mr Blinkworth and the Deceased of the Guarantee, Mr Naegeli gave this evidence (at [182]):

Stevenson J held that Mr Naegeli’s insistence that a lawyer or Justice of the Peace witness Mr Blinkworth’s and the Deceased’s signatures does suggest that, unsurprisingly, he was concerned to ensure there was no argument about their signing and valid execution of the Guarantee (at [183]).

On 29 October 2019, Mr Blinkworth on his own behalf and the Deceased on his own behalf and on behalf of Rasay and Footage, executed the Guarantee each in the presence of a Justice of the Peace as a witness, Dr Danny-Glen Raiz (at [184] and [190]-[195]).

Dr Raiz deposed to having been contacted by Mr Blinkworth, meeting with Mr Blinkworth and the Deceased (neither of whom he had met before), confirming their identify, and witnessing the execution of the Guarantee by Mr Blinkworth and the Deceased respectively (at [185]-[186]).

Stevenson J concluded that Dr Raiz made no mention of any hesitation or reluctance on the Deceased’s part and found that his signature appears on the signature page and his initials appear at the foot of the page on which the names of the guarantors are listed on the Guarantee (at [187]). Stevenson J noted there was no evidence of what transpired between Mr Blinkworth and the Deceased leading up to the execution of the Guarantee, when and in what circumstances the Deceased first saw the form of Guarantee, when he was provided with a copy of the Guarantee and what opportunity Mr Schaeffer had to consider the terms of the Guarantee (at [188]).

Stevenson J found that on the date that the Deceased executed the Guarantee, 29 October 2019, CRB had failed to pay seven payments of $500,000 each that were due under the Cash Funding Agreement; those due on the last Friday of each of April, May, June, July, August, September and October 2019: a total of $3.5 million (at [202]). Stevenson J said that the effect of the provisions in the Guarantee, and in particular of cl 2.2, was that, by executing the Guarantee the Deceased assumed an obligation to pay that amount “immediately” and “without demand”, and there was no evidence as to whether the Deceased had any appreciation that this was the effect of his execution of the Guarantee, it being unlikely that he did (at [203]-[204]).

The events following the execution of the Guarantee by Mr Blinkworth and Mr Schaeffer were outlined by Stevenson J, involving conversations between Mr Naegeli, Mr Blinkworth and the Deceased in which the Deceased said that now that the Guarantee was executed, he trusted that Mr Naegeli would not commence proceedings against CRB and that they all had to remain patient (at [205]-[207]). Stevenson J also referred to Mr Naegeli’s various requests of Mr Blinkworth to obtain the signed Guarantee, which he ultimately received and arranged to be certified on 25 January 2020 (at [208]-[209]).

Mr Blinkworth then died on 28 January 2020 and when Mr Naegeli attended the funeral on 14 February 2020, he had concerns about the Cash Funding Agreement because nothing at the funeral demonstrated the lavish lifestyle of Mr Blinkworth (at [210]-[213]).

After that time, Mr Naegeli met and spoke by telephone to the Deceased in February 2020 and June 2020 and provided him with a certified copy of the Guarantee, on which the Deceased obtained the advice of Neil Matthews (at [214]-[231]).

On 14 July 2020, the Deceased died in a traffic accident (at [232]).

Stevenson J found that s 12CB of the ASIC Act (prohibiting unconscionable conduct in trade or commerce in connection with the supply of financial services to a person) was engaged because Mr Naegeli issued a financial product, was dealing with that financial product, did so otherwise than on his own behalf and provided a financial service in trade or commerce (at [242]-[275]). This left for consideration the vital question of whether Mr Naegeli engaged in conduct that was, in all the circumstances, unconscionable (at [276]).

The Executors submitted that Mr Naegeli had engaged in unconscionable conduct in requesting that the Deceased execute the Guarantee, and leaving it to procure the Deceased’s execution of the Guarantee in circumstances where, it was submitted that Mr Naegeli knew or believed that CRB would not and could not make any payment under the Cash Funding Agreement and thus that the Guarantee was bound to be called on whereas the Deceased did not know these matters (at [286]).

Stevenson J dealt with that submission in the following terms ([287]-[289]):

The reality of the financial position of CRB at the relevant time was described by Stevenson J from profit and loss accounts for the years ended 30 June 2019 and 30 June 2020 which showed a net loss of $481,132.20 and $865,377.40 respectively and balance sheets which showed a similarly parlous position with negative total equity of some $481,000 for the year ended 30 June 2019 and $1.346 million for the year ended 30 June 2020, including a debt to the Deceased of $676,446.89 (at [290]-[293]).

Stevenson J determined that while Mr Naegeli knew that CRB had not made the payments under the Cash Funding Agreement, he was unaware of these financial circumstances of CRB (at [294]).

The circumstances of the Deceased executing a guarantee of CRB’s obligations to Bloomingville Hong Kong Ltd on 3 April 2018 were the subject of particular analysis by Stevenson J, the structure recited as follows (at [308]):

In return for advancing €600,000, Bloomingville was to be paid interest payments totalling €5 million by CRB, together with the “additional sum” of €30,000 (at [309]).

Stevenson J concluded that the loan terms recorded in the loan agreement were extremely generous to Bloomingville and were similar in structure to those that were proposed by Mr Naegeli as part of the First Proposal and those ultimately recorded in the Cash Funding Agreement and thus reflected in the Guarantee (at [311]).

The Deceased sought legal advice from Neil Matthews prior to executing the Bloomingville guarantee, who advised him not to sign it but against this advice the Deceased did execute it (at [312]-[313]).

Stevenson J determined that the fact that the Deceased was prepared to execute the Bloomingville guarantee in the face of Mr Matthews’ advice may show that he then had confidence in Mr Blinkworth’s commercial activities and also shows that he was capable of making his own mind up about whether or not to commit to the obligations under the Bloomingville guarantee (at [318]).

The Executors submitted to Stevenson J that the Deceased was in the “thrall” of Mr Blinkworth, and that the Deceased had “complete confidence” and “blind trust” in Mr Blinkworth (at [320]).

Due to the deaths of both the Deceased and Mr Blinkworth, the only evidence in relation to the history of the relationship between the Deceased and Mr Blinkworth prior to the introduction of Mr Naegeli was that of Bettina Dalton (who is one of the Executors and was the Deceased’s de facto partner at the time of his death), and the contemporaneous documents.

Stevenson J concluded that the Deceased had a significant commercial relationship with Mr Blinkworth prior to the events which gave rise to the earlier proceedings (at [26]-[36]).

Stevenson J determined in relation to the Executors’ submission that the Deceased was in the “thrall” of Mr Blinkworth that it overstated matters but the conclusion was open that the Deceased had confidence in Mr Blinkworth’s commercial acumen and Mr Naegeli accepted that the Deceased trusted what Mr Blinkworth was saying to him and to Mr Naegeli (at [321]).

Stevenson J considered that there was no basis to conclude that Mr Naegeli was privy to what the relationship was between Mr Blinkworth and the Deceased and that from Mr Naegeli’s point of view, the Deceased “was walking in lockstep with Mr Blinkworth in encouraging Mr Naegeli to invest his funds in CRB” (at [322]).

Stevenson J concluded that “if anyone was under Mr Blinkworth’s influence, it was Mr Naegeli” (at [323]).

Having concluded that the Deceased had a significant commercial association with Mr Blinkworth prior to the events with which these proceedings are concerned (at [36]), Stevenson J made further findings about them having a longstanding business relationship and there being no evidence that Mr Naegeli had any detailed knowledge of the relationship between the Deceased and Mr Blinkworth (at [324]-[327]).

Stevenson J determined that the Deceased was actively involved in seeking to persuade Mr Naegeli to invest in CRB (at [328]).

Stevenson J summarised the relationship between the Deceased and Mr Naegeli on the following terms (references omitted):

The Executors submitted that the Guarantee was improvident because of Mr Blinkworth’s alleged misconduct, the Deceased’s promise to pay a sum which bore no relationship to the amount loaned, and the Deceased gained nothing from it (at [330]).

Stevenson J, in relation to statements made by Mr Naegeli to the effect that the Deceased had been “led astray by Mr Blinkworth” and that Mr Blinkworth had “said things that we found out afterwards were not correct”, held (at [332]):

As far as the allegedly improvident terms of the Cash Funding Agreement were concerned, Stevenson J emphasised that the terms were proposed by the borrower, CRB, and not Mr Naegeli (at [333]).

Stevenson J summarised the following facts as relevant to a determination that the Deceased’s decision to execute the Guarantee was a voluntary act by a sophisticated businessman (at [334]-[339]):

Stevenson J concluded that the effect of cl 2.2 of the Guarantee was that as soon as the Deceased executed it, he became liable without demand to pay $3.5 million to Mr Naegeli and it appears that the Deceased did not then appreciate that this was the case (at [340]).

Stevenson J further determined that the conduct of Mr Naegeli relevant to this aspect of the case was no more than he drafted the Guarantee in terms that had that effect and left it to Mr Blinkworth to procure the Deceased’s execution of it, which Stevenson J did not see anything that in all the circumstances was unconscionable about that conduct (at [341]).

Stevenson J then concluded in relation to whether Mr Naegeli had engaged in any unconscionable conduct (at [342]-[343]):

Section 12BF(1) of the ASIC Act provides that a term of a small business contract is void if the term is unfair, the contract is a standard form contract and the contract is a financial product or a contract for the supply of services that are financial services.

Stevenson J concluded that the Guarantee was a “small business contract” as defined in s 12BF(4) of the ASIC Act because one of the parties to it was Footage which employed 4 persons and therefore fewer than 20 persons and the upfront price payable under the Guarantee was nil and therefore did not exceed $300,000 or $1 million (at [346]–[359]).

Stevenson J held that the Guarantee could not be characterised as a “standard form contract” considering the factors in s 12BK of the ASIC Act (for which Mr Naegeli had the onus of proving otherwise) and that the Guarantee was a one-off or bespoke document prepared by Mr Naegeli, who is not a lawyer, at the request of the parties who were to execute it (at [360]-[371]).

For this reason, Stevenson J found that s 12BF of the ASIC Act was not engaged (at [372]).

Section 12BG(1) of the ASIC Act provides that a term of a contract referred to in s 12BF(1) is unfair if it would cause a significant imbalance in the parties’ rights and obligations arising under the contract, it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term and it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Stevenson J determined that because Mr Naegeli had advanced $500,000 on behalf of the Human Enhancement Project referred to in the Cash Funding Agreement and CRB had failed to make any of the payments under the Cash Funding Agreement, obtaining the Guarantee was reasonably necessary to protect his legitimate interests and those of the Human Enhancement Project, and therefore s 12BG was not engaged (at [373]-[381]).

Section 7 of the CR Act provides:

“Unjust” is defined in s 4 of the CR Act to include “unconscionable, harsh or oppressive”.

It was common ground before Stevenson J that as corporate defendants, Rasay and Footage were not entitled to relief under the CR Act due to the operation of s 6(2) of the CR Act (at [384]).

Stevenson J found the Guarantee to be unfair within the meaning of the CR Act, in accordance with the following reasoning (at [397]-[403]):

Based on this conclusion, Stevenson J considered it would not be just to relieve the Deceased and the Estate from all obligation under the Guarantee and at the very least the Deceased should be held to his agreement to guarantee the payment to Mr Naegeli of the principal amount of $500,000 (at [405]). An order to that effect with interest accruing at the rate of 10% per annum from day-to-day was then made (at [409]-[410]).

The grounds of the Appeal on which the Executors, Rasay and Footage rely are as follows (using the shorthand expressions in this judgment and containing my annotations in italics):

The single ground of the Cross Appeal on which Mr Naegeli relies is that Stevenson J “erred in finding that clause 2.1 of the Guarantee was, in the circumstances as properly established by the evidence and any available inference, unjust for the purposes of the Contracts Review Act 1980: Judgment [403]”.

At the hearing before me, the Executors advanced several grounds in support of their application for advice as to whether they would be justified to maintain the Appeal. I was also provided with the confidential written advice of senior counsel for the Executors.

Grounds 1 to 4 of the Appeal challenge the basis for the conclusion reached by Stevenson J that Mr Naegeli did not act unconscionably within the meaning of s 12CB of the ASIC Act.

Ground 1 is a generalised challenge to this conclusion of Stevenson J.

Ground 2 focuses on the terms of the Guarantee being improvident, the inevitability that Mr Naegeli would enforce the Guarantee, the high interest rate of 1,200% per annum, the lack of negotiation of the Guarantee by the Deceased, the known relationship of the Deceased trusting Mr Blinkworth and that Mr Naegeli left it to Mr Blinkworth to procure the execution of the Guarantee by the Deceased, Rasay and Footage.

Ground 3 is directed at the Guarantee being an unfair contract, the lack of awareness of CRB’s existing defaults, Mr Blinkworth’s misconduct, the Deceased’s trust in Mr Blinkworth, Mr Naegeli’s motivations to cultivate Mr Blinkworth, Mr Naegeli’s lack of trust in Mr Blinkworth, Mr Naegeli’s knowledge that CRB could not make payments under the Cash Funding Agreement and CRB’s insolvency.

Ground 4 challenges the findings that the Deceased entered the Guarantee freely, voluntarily and unhesitatingly when the Deceased was under the influence of Mr Blinkworth, that Mr Naegeli did not act unconscionably when he drafted and procured the execution of the Guarantee of an improvident transaction and that the Deceased knew at the time he signed the Guarantee that payments due under the Cash Funding Agreement had not been made.

Central to the arguments advanced by the Executors on these grounds was that Stevenson J misconstrued the relationship between the Deceased and Mr Blinkworth and, in fact, the Deceased did not have a close understanding of the financial affairs of CRB and had acted in blind trust in respect of Mr Blinkworth. The improvident nature of the transaction also forms an essential part of the argument.

The argument is that the blind trust of the Deceased in Mr Blinkworth, in circumstances where Mr Naegeli provided the Guarantee to Mr Blinkworth to procure the Deceased’s execution when the consequences or immediate effect of the Guarantee had not been explained to him ought to have rendered the terms of the Guarantee unconscionable or caused the onus to fall to Mr Naegeli to satisfy the court that the transaction was fair, just and reasonable.

The Executors also propose to challenge the finding by Stevenson J at [181] of the First Judgment that “what Mr Naegeli meant in his affidavit when he said he was beginning to doubt Mr Blinkworth’s ‘credibility’ was that he was beginning to doubt Mr Blinkworth’s creditworthiness”. The Executors say this will have implications for the decision by Mr Naegeli to entrust Mr Blinkworth with the task of procuring the execution of the Guarantee by the Deceased.

The Executors assert that Stevenson J fell into error by concluding that the Guarantee was not a standard form contract within the meaning of s 12BK of the ASIC Act because Mr Naegeli had the bargaining power due to his threat to sue CRB, the threat limited the prospects of negotiation of the Guarantee by the Deceased, there was no evidence that there was an opportunity to consider the terms of the Guarantee by the Deceased and the terms of the Guarantee did not take into account their specific circumstances.

The exposition of this ground canvasses much of what is to be covered by the argument in support of the unconscionable conduct grounds.

The Executors point to error by Stevenson J in concluding that the terms of the Guarantee were not unfair within the meaning of s 12BG of the ASIC Act on the basis that those terms were not necessary to protect Mr Naegeli’s legitimate interests because he only executed the Cash Funding Agreement to foster an ongoing relationship with Mr Blinkworth. This ground appears to be relatively confined in its presentation.

The Executors contend that Stevenson J ought to have concluded from the circumstances of the execution of the Guarantee that it should be set aside in whole pursuant to s 7 of the CR Act. This ground again focuses on the circumstances which led up to the execution of the Guarantee which are also to be the subject of consideration in the challenge posed by grounds 1 – 4 of the Appeal.

The Executors argue that because Mr Naegeli had not pleaded any claim for interest to be calculated in accordance with the Guarantee, Stevenson J erred in concluding that interest should accrue on that basis. This ground of the Appeal appears to be one which will be resolved on matters of procedural fairness.

I consider that the grounds in the Appeal are all reasonable and arguable.

In reaching this view, I have taken account of the confidential written advice of senior counsel for the Executors.

As the advice of senior counsel placed before me is confidential, it is not appropriate for me to canvass specifically the issues that are raised within it.

In the finest traditions of the Bar, Mr Condon SC candidly drew my attention to the fact that he appeared at the trial of the earlier proceedings before Stevenson J, is briefed in the Appeal and had also provided the confidential advice that was before me on this application. With the same degree of candour, he also drew my attention to relevant passages from Attia at [95]-[96] and LM Investment at [75]-[80] (respectively quoted in Rinehart at [137] and [138]-[142]). In light of these matters, it is appropriate that I say something about the advice that was before me and the part that it has played in my determination of this application.

I agree with the following observations made by Callaghan J in LM Investment at [79]-[82] (part of which are quoted in the extract of Rinehart above, but worth repeating), which are based on the notion that counsel who has acted at a trial cannot be considered completely independent when providing an opinion on which the court can act in an application for judicial advice in respect of an appeal (footnotes omitted):

I agree with Parker J’s comments on these passages in Rinehart at [162] which conclude that “advice from independent counsel is not a condition of advice being granted” and the further observation from Parker J that “the absence of independent advice clearly may be a relevant factor” and “Attia illustrates the type of deficiencies which can emerge and defeat the application when the advice is a work of advocacy rather than dispassionate analysis”.

Adopting this approach, while I have treated the confidential advice of senior counsel in the present case with caution, in my opinion, it is the considered work of a very experienced counsel who has finely balanced the multitude of factors relevant to whether the Appeal should be pursued or not. It does not purport to be, nor does it read like, a submission or a work of advocacy (unlike the advice before Ward CJ in Eq, as her Honour, the President, then was, in Attia based on her Honour’s comments at [95]-[96]).

For that reason, I consider that I have been assisted by the confidential advice in determining the application before me.

I have not formed and do not express any opinion on the merits or prospects of success of the Appeal. A consideration of the merits of the Appeal would require much more in depth deliberation of matters that will be the subject of full argument at the hearing of the Appeal.

But it is clear from the construction and form of the grounds of the Appeal that they have been carefully drafted to target particular aspects of the reasoning in the First Judgment, as outlined by the arguments presented by the Executors that I have summarised above.

The application became more complicated, but in another sense more straightforward, because Mr Naegeli filed the Cross Appeal. In assessing whether it is in the interests of the Estate to maintain the Appeal I have proceeded on the basis that the Cross Appeal will continue to hearing and determination regardless of whether the Appeal does so.

The ground in the Cross Appeal alleges that Stevenson J erred at [403] in finding that the Guarantee was unjust for the purposes of the CR Act.

Stevenson J’s determination at [403] was informed by the reasoning that:

Again, I have not assessed the merits or prospects of success of the ground of the Cross Appeal. But it is clear that consideration of it will involve many of the findings which are the subject of challenge by the Executors in the Appeal in relation to unconscionable conduct as outlined by the Executors in the hearing before me that I have summarised above.

In light of the Cross Appeal, the argument about those findings will occur regardless of whether the Appeal is maintained.

[redacted]

[redacted]

[redacted]

[redacted]

It is estimated that the costs to be incurred by the Executors, Rasay and Footage in the Appeal will be between $75,000 and $100,000.

In any event, the incremental costs that will be incurred by the Estate in maintaining the Appeal will be modest due to the significant overlap between several grounds of the Appeal and the ground of the Cross Appeal. In my opinion, resisting the Cross Appeal will require the Executors to engage solicitors and counsel to prepare and appear at the hearing of the Cross Appeal in almost exactly the same way as prosecuting the Appeal will require because the hearing of the Appeal and the Cross Appeal will canvass many of the same field of facts and contentions to resolve each of them.

[redacted]

In my opinion, the payment of costs of the Appeal in the order of $75,000 to $100,000 from the Estate by the Executors (including the costs of Rasay and Footage) would be a reasonable and appropriate step to take in an attempt to achieve success in the Appeal and the Cross Appeal and therefore the outcome of enabling distributions to be made from the Estate to the beneficiaries under the will of the Deceased.

Taking into account the conclusions I have expressed above that there are reasonable and arguable grounds in the Appeal and that it is reasonable and appropriate for the Executors to maintain the Appeal and pay the costs of the Appeal from the Estate, I consider that it is in the interests of the Estate for the Appeal to be maintained and for the costs of the Appeal to be paid from Estate.

For the reasons expressed above, I make the following orders: