Abod Pty Ltd v Kingston Finance Pty Limited

This proceeding arises from a contest between interests associated with David Scheinberg on the one hand and Richard Scheinberg on the other. It concerns the distribution of approximately $36 million from family trusts in which each set of interests is a beneficiary. The contest relates to the validity of interest obligations under back-to-back loan agreements between a number of related party companies of which David Scheinberg and Richard Scheinberg were directors at the relevant times.

The back-to-back loan agreements have been ongoing for many years. Since at least 1998, the parties have utilised the ‘benchmark interest rate’ under Pt III, Div 7A of the Income Tax Assessment Act 1936 (Cth) (ITAA). I was informed that this rate did not change frequently; was independently determined and easily identifiable; and was considered to be a reasonable figure for unsecured debt finance. The adoption of this rate is evident in calculations of interest going back to the 1990s. One document in evidence records ‘Interest at Div 7A rate on compounded balance’ and ‘Div 7A rate applied from 1998’. David Scheinberg is a director of the plaintiff trust companies. Richard Scheinberg was, but is no longer, a director. David Scheinberg now perceives that it would be advantageous to his interests if the accrued interest were not paid, and that the parties receive their distributions from the trust without any deduction for such interest.

The prior adoption and use of the Division 7A ‘benchmark interest rate’ appears to have been designed to avoid the risk that the loan arrangements would be deemed to be dividends under s109D(1) of the ITAA. That section provides:

Subdivision D of the ITAA excludes certain transactions from the deeming provisions. Section 109N provides that a loan will not fall within the deeming provision under s109D if, among other things, the interest rate payable on the loan is at least the ‘benchmark interest rate’. That rate is defined in s109N(2) as follows:

A number of agreements were tendered – some dated 1 July 2011 (referred to as the Main Loan Agreements) and others dated 10 February 2006 (referred to as the Related Loans). All of the loans are unsecured and repayable on written demand or no later than ten years from the drawdown date. Not all loan agreements were in evidence.

The threshold issue is whether two clauses in common form contained in the loan agreements are void for uncertainty. The first clause is in the following form:

The second clause is in a different form but the effect is similar. The interest obligation is contained in a clause that provides:

The definition of Interest Rates provides:

I set out in Shield Lifestone Holdings Pty Limited v LSKF Holdings Pty Limited [2018] NSWSC 335 at [17] and [18] the broad general legal principle in relation to uncertainty as follows:

The precise issue in this case is whether the relevant interest obligations are void for uncertainty and ‘incapable of any definite or precise meaning’ because ‘some matter is left to be determined by one of the contracting parties’: Godecke v Kirwan (1973) 129 CLR 629 at 642 (Walsh J). I am quite satisfied that, as a matter of principle, the fact that ‘some matter’ is left to be determined by one of the parties to a contract is not necessarily fatal to the validity of a commercial contract. That must be so logically where the determination of the ‘matter’ by the party to whom the power of determination is given, is expressly or by necessary implication subject to a standard of reasonableness or to some other objective criterion, parameter or guideline. In that sense, the determination by the party is justiciable. As Mason J said in Meehan v Jones (1981-82) 149 CLR 571 at 589:

The reasoning in Victorian Producers Co-Operative Co Ltd v Edwards & Ors (1993) 62 SASR 415 at [10]; Drambo Pty Ltd v Westpac Banking Corporation Ltd [1996] FCA 1665; (1996) 2 ACCR 479 at 532; Morehuman (Australia) Pty Ltd v Talimor Pty Ltd [2006] NSWSC 1027 at [18]; Perpetual Nominees Ltd v Parist Holdings Pty Ltd [2005] NSWSC 1345 at [32] and Trad Financial Services Pty Ltd v Trad [2013] NSWSC 1691 at [83] supports the general principle that I have explained. To the extent that Cross v National Australia Bank (unreported, FCA, 29 April 1994) suggests otherwise, I do not agree. Among other things, the explanation given by Sundberg J in Drambo v Westpac Banking Corporation at 532 as to why Cross should not be followed, is persuasive.

In this particular case, the ‘matter’ left for determination by one party is not only the applicable interest rate. In the absence of agreement, the interest is payable ‘at such times, for such periods and at such rates’ as the lender may determine from time to time (emphasis added). In this context, I do not think that the obligation of the lender to determine ‘times’ and ‘periods’ in relation to the payment of interest renders the interest obligation void. In commercial contracts such as these related party loan agreements, involving multiple back-to-back unsecured loans repayable on demand, the application of a standard of reasonableness is not difficult to infer or imply. I am satisfied that there could be no realistic difficulty in arriving at a reasonable resolution of either the applicable interest rate, or the times at which interest should be payable, or for what periods it should be paid. And if the parties cannot agree, the court is capable of doing so.

I reiterate that this issue of construction arises in the context of family trusts with a long history of operation. The loans are back-to-back, unsecured and repayable on demand. They are not arms-length transactions. There are obvious practical and reasonable constraints on the selection of the applicable times at which, and the periods for which, interest should be charged. I accept the submission of counsel for the participating defendants, which warrants repeating:

For those reasons, the plaintiffs are not entitled to the declarations that they seek. I therefore dismiss the summons with costs.