JNN Investments Pty Ltd v Francis

1. [1]

   The plaintiff, JNN Investments Pty Ltd (JNN), seeks possession of land located at 12088-12100 Golden Highway, Uarbry being lots 1 and 2 in DP1028319 (“the land”), and judgment in the sum of $187,239.41 together with interest and costs. The right to possession is said to arise under a mortgage given by the defendant, George Francis (Mr Francis) over each of the lots. The plaintiff and the defendant are the registered proprietors as tenants in common in equal shares of the land.

2. [2]

   The mortgage was executed on or about 25 May 2018 and registered on 23 April 2020. It was executed consequent upon a joint venture agreement between the parties to develop a quarry on the land. The plaintiff alleges that the mortgage was given to secure repayment by the defendant of that part of his 50% contribution to the expenses of setting up and running the quarry which were advanced by it to the defendant. The defendant agrees that he executed the mortgage but alleges that the director of the plaintiff, John Newton, represented to him that the mortgage would not be enforced unless the Australian Tax Office (ATO) issued a notice to take the land to satisfy any tax liabilities which the defendant owed.

3. [3]

   The defendant has filed a cross-claim seeking payment from the plaintiff in the sum of $261,257.78. That is said to be the total of amounts paid by Mr Francis for various expenses in relation to the business resulting from the joint venture agreement.

Background

1. [4]

   Mr Newton had by 2015 been a builder for about 30 years. He first met Mr Francis in about 2011 when he engaged him as a stonemason and bricklayer on residential construction projects on which Mr Newton or one of his companies was engaged. In about 2015 Mr Newton and Mr Francis discussed the difficulty of sourcing quality stone supplies in the Sydney market, and the possibility of developing a quarry to supply construction operations. Mr Francis said that two of his brothers ran a quarry operation in Cattai, and that they would purchase as much quality stone as could be provided.

2. [5]

   Mr Newton, his wife Natalie, and Mr Francis inspected various sites around New South Wales, and in the second half of 2016 they finally found the subject property being Lot 2 of the land at Uarbry. Mr Francis said that he negotiated with the estate agent and agreed a price of $210,000 in August 2016. Contracts were exchanged on 16 September 2016 with JNN and Mr Francis as purchasers as tenants in common in equal shares. The deposit of $21,000 was paid equally by JNN and Mr Francis. Settlement of the purchase took place on or about 9 December 2016. Mr Francis paid another $10,000 towards the purchase, with the balance of $191,443.84 and stamp duty of $6,360 being paid by JNN.

3. [6]

   The agreement generally between them was that JNN and Mr Francis would each contribute equally to the proposed business including for establishment costs such as the purchase of the land and would share equally in the profits. I will return to the agreement in more detail later.

4. [7]

   The parties agree that Mr Francis was unable to pay more than he did at the time and was also unable to pay much by way of other expenses, but there was a dispute about when he disclosed that to Mr Newton. Mr Francis said that he told Mr Newton about his financial situation before contracts were exchanged, but Mr Newton said that Mr Francis only told him that he could not come up with the funds to complete the purchase shortly before settlement was due. Nothing particularly turns on this dispute.

5. [8]

   In August or September 2017 the adjoining property, Lot 1 of the land, was purchased by JNN and Mr Francis as tenants in common for $50,000, with that price being paid by Mr Francis.

The partnership agreement

1. [9]

   In the meantime, on 8 December 2016 JNN and Mr Francis entered into a partnership agreement, which relevantly provided:

2. [10]

   A development application was lodged, and the application was approved on 17 January 2018.

3. [11]

   On 10 April 2018 the company intended to run the quarry business, Southern Cross Sandstone Quarries Pty Limited (SCSQ), was registered.

4. [12]

   Mr Newton said that by this time JNN had paid all the expenses because Mr Francis said he did not have the funds to do so. It was in those circumstances that the mortgage came to be executed. The trigger for the mortgage appears to have been concern arising from problems Mr Francis was having with the Australian Tax Office, as he disclosed in January 2018. I will deal with the detail of that when discussing the circumstances of the execution of the mortgage later in the judgment.

The mortgage

1. [13]

   The mortgage appears to have been prepared by the plaintiff’s present solicitors. It described the land as being the two lots without differentiating the shares of JNN and Mr Francis, but Mr Francis was said to be the mortgagor and JNN was the mortgagee. It contained six clauses in what was described as Annexure “A”, of which only three clauses were of any real relevance for the disputes now to be resolved. Those clauses were these:

2. [14]

   The mortgage incorporated memorandum Q860000. Clause 6 of that memorandum provided:

3. [15]

   Annexure “B” to the mortgage was a spreadsheet prepared by Natalie Newton. It contained five columns headed, Date, Description, Amount, John, and George. The dates ranged from 10 September 2016 to 12 April 2018. The Amount column contained what was paid for the item in the Description column regardless of who had paid it. The columns headed John and George then contained the allocation of who had paid for the item.

4. [16]

   The three money columns were totalled. Those totals were $364,025,67, of which John had paid $284,631.27 and George had paid $79,395.40. The amount George had paid was then deducted from half of the overall total to produce a figure of $102,617.43 said to be owing to JNN. It may be observed that this figure was first described as the Principal Sum in cl 1 of the mortgage.

5. [17]

   Between January 2019 and July 2019 stone was cut at the quarry and sold.

6. [18]

   Disputes arose from time to time between the parties, particularly in relation to Mr Francis entering into equipment leasing. In that regard, an issue arose because the cutting saw wheel on equipment obtained by Mr Francis broke in August 2019. There was a need to replace it, and Mr Francis said he did not have any funds to do so. By February 2020 a creditor in relation to the equipment, Snapper Trading, sued SCSQ for some $50,215.

7. [19]

   According to Mr Newton, Mr Francis had no more money to contribute to the business, JNN was not prepared to contribute any more funds, Mr Newton was concerned about insolvent trading, and a decision was made to liquidate SCSQ. A liquidator was appointed on 1 April 2020.

8. [20]

   The mortgage was registered on 23 April 2020.

9. [21]

   JNN made demand on Mr Francis for $214,680.37 on 24 June 2020. When that was not met, a s 57 Notice was issued on 10 July 2020 claiming the same amount. The statement of claim was filed on 18 September 2020.

The course of the hearing

1. [22]

   The hearing was conducted in an efficient and economical way by Mr Altan of Counsel for the plaintiff and Mr Cassimatis of Counsel for the defendant. It was clear early on that a significant issue in the case was the amount of money said to be owing to JNN under the mortgage. The issue arose because what was ultimately secured was not just what was identified in the first instance as the Principal Sum ($102,617.43), but also (in cl 2),

2. [23]

   In addition, there was a dispute about what moneys were said to be owing to Mr Francis that formed the basis of his cross-claim. To that end, the parties agreed that those questions should be referred to a Referee who would provide a report to the Court.

3. [24]

   There were delays in obtaining the report from the Referee. Upon its receipt, the matter was re-listed. Mr Cassimatis initially argued that aspects of the report should not be accepted. I directed that the defendant file a notice of motion seeking that the report be rejected, and a date was fixed for the hearing of that notice of motion. When the defendant’s solicitor ascertained that the plaintiff would not be challenging the findings in the report concerning the moneys that had been expended by the defendant, the defendant withdrew his objection to the report. In those circumstances, an order will be made adopting the Referee’s report.

4. [25]

   Affidavits were sworn by Mr Newton, Natalie Newton, Mr Francis and Paul Volpe who was JNN’s accountant and became the accountant for SCSQ. Natalie Newton is John Newton’s wife and another director of JNN. The evidence suggested that it was Natalie Newton who looked after the books and financial side of JNN. She was said to be the person who had prepared spreadsheets which assumed some importance at the hearing. Indeed, when Mr Newton was being cross-examined on the spreadsheets he said that Natalie had prepared them and that questions should be directed to her about things he was asked. At one stage, I indicated that there were some questions I would like to ask Ms Newton, yet she was not required for cross-examination, and was not called at all. The result is that at least I can confidently accept her evidence where it differs from Mr Francis’s evidence.

5. [26]

   The plaintiff sought to rely on a further affidavit from Mr Volpe concerning the relationship between JNN and other companies controlled by Mr and Mrs Newton. I declined to permit reliance on the affidavit because of the lack of due notice to the defendant. Mr Volpe was not required for cross-examination.

The issues

1. [27]

   At the outset, the parties had, in accordance with the Practice Note, provided a statement of the issues. As the proceedings developed, it seemed to me that other issues had arisen. On the occasion the proceedings were re-listed to deal with the Referee’s report, I outlined what I saw as the issues, and asked the parties to add to those if they saw fit.

2. [28]

   In the result, the issues for determination are these:

   1. (1)

      Did the agreement about equal contributions and sharing profits equally mean that Mr Francis was entitled to claim for amounts he has expended, and can any such amount be set-off against what is owing under the mortgage?

   2. (2)

      Should equipment leasing costs incurred by Mr Francis be taken into account in determining what is said to be owed to JNN or Mr Francis?

   3. (3)

      Was there an agreement that the mortgage would only be enforced if demand was made on Mr Francis by the Australian Tax Office?

   4. (4)

      Was the plaintiff entitled to make a demand pursuant to the mortgage prior to 31 March 2023?

   5. (5)

      What amounts are owing to each of JNN and Mr Francis?

   6. (6)

      Was it a requirement under the mortgage that any demand was invalid unless the correct amount owing to JNN (as determined by the Court) was demanded?

(1) Did the agreement about equal contributions and sharing equally profits mean that Mr Francis was entitled to claim for amounts he has expended, and can any such amount be set-off against what is owing under the mortgage?

1. [29]

   The case pleaded by the plaintiff was this:

2. [30]

   The Defendant’s answer to that pleading was to deny par 3 and say:

3. [31]

   A relatively identical pleading appears in the defendant’s cross-claim.

4. [32]

   Subparagraph (i) is inconsistent with cl 60 of the Partnership Agreement, where the following appears:

5. [33]

   The evidence, including the defendant’s own evidence, does not support a number of the contentions pleaded by the defendant, including subpars (ii) and (iii) of the defence and cross-claim. Subparagraph (ii) finds no support in the partnership agreement which says nothing about Mr Francis contributing “by way of time and effort”.

6. [34]

   Perhaps in support of subpar (iv), Mr Francis gave this evidence of what he claimed was said after he negotiated the price of $210,000 for lot 2:

7. [35]

   However, subpar (iv) is inconsistent with all of Mr Francis’s evidence about not having any money except, it would seem, to purchase Lot 1. On Mr Francis’s evidence, the position was that he said to Mr Newton:

8. [36]

   The whole of the pleading set out is inconsistent with the acknowledgement of the debt of the Principal Sum in the mortgage, regardless of the defendant’s allegations that the mortgage would only be enforced in the event that the ATO made a claim on the defendant.

9. [37]

   Mr Newton’s evidence in his affidavit was this (at par 11):

10. [38]

    Mr Newton confirmed a number of time in cross-examination that the arrangement for equal contributions and sharing profits equally was what was agreed. Mr Volpe’s unchallenged evidence was to the same effect.

11. [39]

    Similarly, and despite what is pleaded in the defence and cross-claim, Mr Francis said in cross-examination:

12. [40]

    However, he modified that position somewhat a little later, when he gave this evidence:

13. [41]

    That evidence, as it concerned JNN, was also inconsistent with what appears in the Partnership Agreement. Despite being shown cl 60 of the Partnership Agreement, Mr Francis would not accept that he had any liability to repay the purchase price personally. He gave this evidence:

14. [42]

    When he was asked about the mortgage, Mr Francis gave this evidence:

15. [43]

    Yet, the mortgage he signed, after taking legal advice from his brother Joseph, said this:

16. [44]

    It is difficult to determine if Mr Francis was being dishonest, or if for some reason, not readily discernible, he really believes the evidence he gave. It is quite inconsistent with the documents he signed, the partnership agreement and the mortgage. I do not accept this evidence of Mr Francis, and it causes me to be very wary in accepting his evidence generally, particularly where it conflicts with Mr Newton’s evidence.

17. [45]

    It is necessary to say something about the evidence of Mr Newton because criticism was made of his evidence that it was not reliable, and in one case, false. The principal criticism was that Mr Newton’s recollection of events was poor. Transcript references were provided of the occasions in Mr Newton’s evidence where his recollection was said to be poor. Most of these matters were for trivial things, or in other cases because the matter concerned figures and money matters which Mr Newton said was Natalie Newton’s responsibility.

18. [46]

    The assertion that Mr Newton gave false evidence arose from this exchange:

19. [47]

    A little later, this evidence was given:

20. [48]

    Mr Cassimatis came back to the matter later:

21. [49]

    An examination of the transcript discloses that the question Mr Cassimatis asked, to which Mr Newton said he had never dealt with Mr Hayes, but he “may have once” when he went to the yard with Mr Francis, was:

22. [50]

    Mr Newton’s evidence about that matter was consistent; he had not dealt with Mr Hayes from time to time; rather, there was once occasion when he had met him at M2E’s yard with Mr Francis.

23. [51]

    My assessment was that Mr Newton gave his evidence honestly, and to the best of his recollection. That recollection was generally good although not perfect in some details. He made appropriate concessions in relation to the equipment which Mr Francis leased. Where his evidence conflicts with that of Mr Francis I prefer his evidence without any hesitation. It finds support in the contemporaneous documents: the partnership agreement, the mortgage, and the covering letter from Joseph Francis returning the executed mortgage (a matter to which I will come later in this judgment), as well as from Natalie Newton’s unchallenged evidence.

24. [52]

    The evidence of both Mr Newton and the evidence Mr Francis gave where he said they agreed to share equally (at [39] above) satisfies me that, in the first instance, the basis of the arrangement was that the parties would enter into a joint venture to purchase land and operate a quarry on the land; that they would contribute equally to the land purchase, the establishment costs and the running costs of the arrangement; and that they would share equally in the profits. It was also clear from the outset that Mr Francis would not, in the first instance, be contributing equally to the costs of the land and the establishment expenses because he had a cashflow problem from clients in his pre-existing business.

25. [53]

    It is clear from both cl 60 in the Partnership Agreement and from the execution of the Mortgage itself, particularly by reason of cl 1, that the amounts paid for by JNN, effectively on behalf of Mr Francis until such time as he had the money to pay, were to be repaid to JNN by Mr Francis personally. The only suggestion, apart from Mr Francis’s unreliable evidence, that any repayment might come out of the profits derives from cl 5 of the mortgage. That clause, in the first instance, assumes that, in the ordinary course, Mr Francis would likely have repaid JNN what he owed by the time the business commenced production – “if any part of the Principal Sum remains outstanding”.

26. [54]

    JNN submits that all the mortgage is concerned with is amounts paid by JNN on behalf of Mr Francis, with the result that no account should be taken of amounts paid by Mr Francis towards the joint venture. JNN points to two parts of the mortgage terms to justify that approach. First, cl 1 says:

27. [55]

    The difficulty with JNN’s submission is that, from the outset, amounts paid by Mr Francis were set off against moneys paid by JNN. The Schedule attached to the mortgage identifies not only $284,631.27 paid by JNN but also $79,395,40 paid by Mr Francis. That latter sum is deducted from half of the total of the amounts paid by both parties. That produces the figure of $102,617.43 which, in the first instance, is said to be the “Principal Sum” in the mortgage.

28. [56]

    Further, after the relationship between the parties broke down, and after the joint venture company, SCSQ had been wound up, the letter of demand of 24 June 2020 and the s 57(2)(b) notice of 10 July 2020 both adopted the same approach; namely to calculate what each had contributed, and then to subtract Mr Francis’s contributions from half of the total of the moneys expended by both. The spreadsheet forwarded with the June demand makes that clear.

29. [57]

    The parties have conducted themselves from the start on the basis that contributions to the joint venture are to be taken into account in calculating what is owed to JNN. It is entirely consistent with the evidence of both Mr Newton and Mr Francis that the parties were to make equal contributions to the venture. The terms of cll 1 and 2 of the mortgage must be construed in the light of the basis of the calculation of the Principal Sum in cl 1, and in the light of the circumstances giving rise to the execution of the mortgage.

30. [58]

    In circumstances where the Referee has determined that Mr Francis paid amounts totalling $96,101.91 in relation to expenses of the business, 50% of that amount must be taken into account. JNN submitted that Mr Francis would need to establish that he had an equitable set-off, that is, it must be a claim that impeaches the plaintiff’s title to the mortgage: Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (5th Edition 2014 Lexis Nexis); Commonwealth Bank of Australia v MLD Financial Services & Management Pty Ltd [2015] NSWSC 1476 at [32] to [37].

31. [59]

    In Murphy v Zamonex Pty Ltd (1993) 31 NSWLR 439 Giles J said at 465:

32. [60]

    In the present case, the cross-claim is directly connected with the claim, because it informs the amount being claimed under the mortgage. The matter can be tested in this way: if it were proved that Mr Francis had contributed more than 50% of the expenses of the business, there could be no default under the mortgage.

33. [61]

    Accordingly, subject to a consideration of the issue concerning the leasing of equipment, the amount of $48,050.96 should be set off against what is otherwise owing to JNN.

(2) Should equipment leasing costs incurred by Mr Francis be taken into account in determining what is said to be owed to JNN or Mr Francis?

1. [62]

   The Referee excluded from the sum said to be owed to the defendant the amount in relation to the Saw Lease and the Equipment Payout. In doing so, the Referee said:

2. [63]

   As the Referee correctly says, the issue about whether the saw lease and the equipment payout are to be brought to account are for the Court’s determination. There is not really much dispute about the evidence concerning the entry into the leasing arrangements; rather, the issue appears to be whether, although Mr Francis leased the equipment, he should be entitled to make a claim for it because it was used in the business.

3. [64]

   Mr Newton gave evidence that he did not consent to Mr Francis entering into lease agreements of equipment on behalf of SCSQ. Mr Newton said that he received an email from a finance company in February 2018 referring to a meeting Mr Francis had regarding leasing machinery for the quarry. The finance company wanted financial and other information. Mr Newton said that he had not been at the meeting and was not aware of it. He said that he did not want to incur further obligations until the business was selling stone and operating.

4. [65]

   Natalie Newton’s unchallenged evidence was:

5. [66]

   Mr Newton agreed that he lent Mr Francis $10,000 for the deposit on the equipment being obtained from ME2. This loan was repaid by Mr Francis, as the spreadsheets make clear.

6. [67]

   Mr Newton said that on 20 September 2018 Mr Francis forwarded him an email from Snapper Trading Pty Limited regarding supply of an excavator, wheel loader, bucker fittings and transport which he had purchased on finance. Mr Newton said that he did not agree to the lease of the equipment being in the name of SCSQ.

7. [68]

   Mr Francis agreed that the equipment was leased in his name, and he told Mr Newton:

8. [69]

   After the liquidation, in response to an enquiry from the liquidator, Mr Francis made clear that the stock was his, saying:

9. [70]

   Mr Newton agreed that SCSQ would pay Mr Francis’s reasonable lease fees for the use of the equipment. There is an invoice from Mr Francis to SCSQ on 22 June 2019 for $16,096.42 for leasing fees. Mr Newton said that this invoice was paid, as did Natalie Newton, and that was not disputed by Mr Francis.

10. [71]

    It was put to Mr Newton in cross-examination that instalment payments were made by SCSQ, but Mr Newton said they were lease payments. What they were called is not to the point. SCSQ used the equipment in the quarry and made some payments, effectively, to Mr Francis to reimburse him for the liability he had undertaken in relation to the equipment.

11. [72]

    It is apparent from that evidence that the liability for the equipment leasing was that of Mr Francis and not SCSQ, nor was it part of the arrangement reflected in the spreadsheets. Any adjustments because of what Mr Francis had incurred in leasing it were to come out of the earnings of SCSQ. It was SCSQ that paid the instalment or lease payments. JNN did not have the responsibility for paying half of them.

12. [73]

    Much was made in the cross-examination of Mr Newton about the need SCSQ had for the equipment so that it could carry out its quarrying work. So much may be accepted. However, the issue is whether JNN had any liability for reimbursing Mr Francis for his entry into the leasing arrangements. There is no evidence, including from Mr Francis, that it did.

13. [74]

    It is scarcely surprising that the matter worked out in that way, with Mr Francis entering into the lease arrangements but SCSQ paying or contributing to Mr Francis’s obligations for the lease of the equipment. By the time the equipment was obtained, JNN had paid out some hundreds of thousands of dollars towards the joint venture, and Mr Francis had not repaid any of it. Indeed, Mr Francis said in his evidence:

14. [75]

    I therefore accept Mr Newton’s evidence that JNN did not want to take on further liabilities at that time. It was reasonable, however, and in accordance with what Mr Francis had said, that SCSQ should contribute to the lease instalments when it was using the equipment.

15. [76]

    The Referee found as a matter of accounting that the equipment leasing costs were not an expense of SCSQ or the partnership. As a matter of the contractual arrangements between JNN and Mr Francis, the position is the same. JNN had no liability for the equipment or for the use of the equipment. Mr Francis is not entitled to have those taken into account either in relation to any set-off with what is owed to JNN, nor on his cross-claim.

(3) Enforcement of the mortgage where no tax demand made

1. [77]

   Mr Newton’s account of the circumstances leading to the mortgage was this. In November 2016, Mr Francis was working as a sub-contractor to Mr Newton or JNN. Mr Francis said that he had a problem coming up with the funds for settlement of the purchase of Lot 2 of the land. Mr Francis said he was waiting for a payment of about $300,000.00 for two jobs he had done. He asked Mr Newton if he could cover the settlement, and he said that he would pay Mr Newton back as soon as he got the funds in. Mr Newton said that if he was going to be lending Mr Francis money, he wanted some sort of documentation and security.

2. [78]

   Shortly after that conversation, the parties signed the partnership agreement.

3. [79]

   On 31 January 2018, shortly after the DA had been approved, a meeting was arranged with Mr Newton’s accountant, Paul Volpe, to discuss the partnership, the business structure, and setting up a company to run the quarry business. Just before the meeting, Mr Francis said words to the effect:

4. [80]

   At the meeting with Mr Volpe they discussed the ATO issue. Mr Volpe said that if Mr Newton was going to secure the money he had advanced to Mr Francis, it should be done sooner rather than later, and that it should be done by a mortgage. Mr Francis agreed to a mortgage, and Mr Volpe suggested that Mr Francis’s brother Joseph (Mr Francis’s solicitor in the present proceedings) could draw up the mortgage documents.

5. [81]

   However, probably because of a conflict of interest, Joseph Francis declined. The mortgage was prepared by the plaintiff’s solicitors, Rickard Lawyers. The mortgage documents were then forwarded to Joseph Francis around mid-April 2018 for execution by Mr George Francis. The executed mortgage documents were returned by Mr Joseph Francis on 25 May 2018. The covering letter from Joseph Francis said this:

6. [82]

   Mr Francis agreed that a meeting was held on about 31 January 2018 with Mr Newton and Mr Volpe. He said he did not acknowledge at any stage that Mr Newton had loaned him money, and when the tax issue was discussed he recalled Mr Volpe saying words to the effect:

7. [83]

   Mr Francis said that both he and Mr Newton agreed that that would be a good idea.

8. [84]

   Mr Francis went on to say:

9. [85]

   Mr Francis said that on about 21 March 2018 both John and Natalie Newton rang him. In the course of the conversation Mr Newton said that he had received a letter from the tax office, and the tax office wanted to garnishee any moneys the plaintiff was paying the defendant by sending the tax office 15% of the moneys. Mr Francis replied that they did not have to worry about that because he was not working for Mr Newton. The conversation then continued:

10. [86]

    Mr Francis agreed to that and said he would ask his brother, Joseph, to prepare the documents. Mr Francis said he rang his brother but his brother said he was not able to act on the transaction. Mr Francis rang Mr Newton and said:

11. [87]

    Mr Francis said in his affidavit:

12. [88]

    Mr Cassimatis submitted that it would appear to be common ground that the mortgage was procured to protect Mr Francis’s share in the property from the ATO. He accepted that it was not common ground that JNN would only take enforcement steps under the mortgage if the ATO took enforcement steps.

13. [89]

    Nevertheless, Mr Cassimatis submitted that Mr Francis’s evidence of what was said ought to be preferred to the account given by Mr Newton for the following reasons:

14. [90]

    In my opinion, Mr Newton’s evidence should be accepted in preference to that of Mr Francis for reasons I gave earlier.

15. [91]

    Secondly, I consider that Mr Francis’s recollection about a caveat is not reliable. A caveat would need to be based on some underlying arrangement, most likely an unregistered mortgage. Both Mr Newton and Mr Volpe (whose evidence was unchallenged) say that Mr Volpe recommended a mortgage, and Mr Volpe’s evidence was that he recommended a registered mortgage. In those circumstances, no caveat would be necessary.

16. [92]

    Thirdly, there is no term in the mortgage which limits enforcement of it to the circumstances asserted by Mr Francis, namely, that the ATO was endeavouring to enforce payment from him.

17. [93]

    Fourthly, given that Mr Joseph Francis was acting for Mr George Francis in relation to the execution of the mortgage, if there had been some term limiting the circumstances for enforcement of the mortgage, I would have expected something to have been said in the letter written by Mr Joseph Francis on 25 May 2018 (above at [81]). Further, although Mr Francis asserted that he rang his brother and explained the position about the ATO to him and his brother declined to act on the basis that it would be a “false mortgage” there was no evidence from Mr Joseph Francis about the matter, despite his presence in Court, and despite his acting for Mr George Francis in the proceedings.

18. [94]

    There was a faint suggestion that evidence from Joseph Francis would infringe Mr George Francis’s client legal privilege. It is difficult to see how that would be. The issue concerning any advice from Joseph Francis was disclosed by Mr Francis in his affidavit as set out at [86] above. Any privilege was waived by that evidence. I consider that I am entitled to draw a Jones v Dunkel inference from Mr Joseph Francis’s failure to give evidence about the matter, that his evidence would not have assisted Mr George Francis in that regard.

19. [95]

    During the cross-examination of Mr Newton, Mr Cassimatis sought to tender a letter from Mr Joseph Francis dated 4 June 2020 concerning this issue. Although the letter did not arise out of any particular answers Mr Newton gave in cross-examination and although the letter ought to have been put into evidence at a much earlier time, I permitted it to be tendered. It was wrongly marked “without prejudice save as to costs” and I held that it was not to be rejected because of the inclusion of those words on it. The relevant part of the letter said this:

20. [96]

    No evidence was led about the previous advice referred to. I note in passing that the phrase “As previously advised” would also amount to a waiver of the privilege discussed above.

21. [97]

    I do not consider that the letter provides support for the evidence of Mr George Francis. The letter was not written until well after the break down in relations between Mr Newton and Mr George Francis, and in circumstances where notification had been given to Mr Joseph Francis that documents were to be served in relation to the plaintiff’s claim.

22. [98]

    The evidence suggests that the issue of a potential liability of Mr Francis to the ATO may have been the trigger for the execution of the mortgage. However, I accept the evidence of Mr Newton that it was not only for that reason that the mortgage was entered into. It was also because, by that stage, Mr Newton had lent a considerable amount of money to Mr Francis by effectively paying for his share of the costs of the enterprise.

23. [99]

    In any event, I do not consider that the timing of the execution of the mortgage says anything about the circumstances in which the mortgage would be enforced. The absence of any term in the mortgage or any other contemporaneous evidence to suggest a limitation on enforcement in that way is a strong basis for concluding that there was no limitation on the enforcement of the mortgage. The only basis for the limitation is Mr Francis’s uncorroborated evidence. His evidence concerning the advance of funds from JNN was so unreliable that I do not accept his evidence about the limitation on enforcement of the mortgage. In many respects, it is simply a further attempt on his part to avoid the clear terms of the partnership agreement and the mortgage, that he owes JNN the money it advanced on his behalf.

24. [100]

    It is not apparent, in any event, how the execution of the mortgage was to provide any protection to JNN against any tax liability that Mr Francis might have. Mr Cassimatis submitted that the decision in Federal Commissioner of Taxation v Park demonstrates how that protection might have been provided to JNN.

25. [101]

    In that case, a second mortgage had been granted to the mortgagee in 2007. In 2009, the ATO commenced proceedings against the mortgagor. The mortgagor entered into a contract to sell the mortgaged property. Thereafter, the ATO served a notice under s 260-5 of Sch 1 to the Taxation Administration Act 1953 (Cth) on the purchasers. The mortgagor became bankrupt and the mortgagee assigned its rights in the amount claimed by the ATO to the trustee in bankruptcy. The ultimate contest was between the ATO and the trustee. The Full Court of the Federal Court overturned the decision of the Federal Circuit Court and held that the ATO was entitled to the money as against the trustee.

26. [102]

    The effect of the judgment was that the second mortgagee was not protected by its mortgage from the claim by the ATO. The decision provides no support for the notion that execution of the mortgage in the present case was any basis for providing protection against a claim by the ATO against Mr Francis. That is an additional reason for rejecting Mr Francis’s account in relation to any limitation on enforcement of the mortgage.

(4) Demanding payment prior to 31 March 2023

1. [103]

   For ease of reference, I will set out again cl 5 of the mortgage. It provides:

2. [104]

   Mr Cassimatis submitted that when cl 5 of the mortgage was considered objectively, when read in light of the document as a whole and the surrounding circumstances known to the parties at the time the mortgage was entered into, cl 5 should be construed to mean that no demand or enforcement by the plaintiff pursuant to the mortgage was permitted until 31 March 2023. He submitted that if the plaintiff was able to take all remedies for recovery before 31 March 2023 there would then be no security for any future business indebtedness, even although cl 2 envisages that future business expenses paid for by the mortgagee would be made.

3. [105]

   The mortgage is not an example of fine draughtsmanship. It seems likely the opening words of cl 5 should be, “The Mortgagor acknowledges…”, since the sentence goes on to impose a liability on the mortgagor (and not the mortgagee) in the circumstances set out. “Principal Sum” is defined in two different ways, once in cl 1 and once in cl 2, although the intention is probably clear. There is some tension between cll 1 and 5.

4. [106]

   Nevertheless, despite what are submitted to be the inconsistencies between the wording of cll 1, 2 and 5, they can sit together. In the first place, the Principal Sum is repayable on demand. The Principal Sum is the amount in cl 1 ($102,617.43) together with further amounts that JNN pays for and on behalf of Mr Francis, and those amounts are to be found in the first instance in the spreadsheet attached to the mortgage, together with further moneys which are paid for by JNN being business expenses for which the parties are equally liable. Those further moneys are posted in a spreadsheet from time to time. Those further moneys constitute part of the “Principal Sum”, and in that way are repayable on demand.

5. [107]

   As I earlier indicated, the starting point of cl 5 is that the Principal Sum may well have been repaid, with or without a demand, before there is a need to resort to cl 5. However, cl 5 also allows for the fact that, if Mr Francis has not repaid all of the Principal Sum by the time the business commences production, his share of the profits of the business will be repaid to JNN until all moneys have been repaid. Finally, cl 5 allows for the fact that by 31 March 2023 Mr Francis may not have repaid all that he owes to JNN either from his share of the profits of the business or from other sources. In such a case, and in the absence of any demand from JNN, he is obliged to repay all his indebtedness as at 31 March 2023 by that date.

6. [108]

   What cl 5 does not contemplate or allow is the right of Mr Francis not to repay the Principal Sum if it is demanded of him, in accordance with cl 1, at any time prior to 31 March 2023. Such a demand could be made before the business commences production, and in that way cl 5 would have no operation unless the mortgage were kept on foot following repayment of the demand, if further expenses were incurred by JNN for which Mr Francis was equally liable.

7. [109]

   A demand might be made and responded to by Mr Francis without the need to enforce the mortgage. However, if it was not paid when demanded, JNN would need to elect whether to enforce the mortgage at that point and bring its security to an end, or to wait perhaps to be paid out of the profits, and leave the mortgage on foot.

8. [110]

   It is noteworthy in that regard, that the last sentence of cl 5 commences, “Notwithstanding the terms of this clause” and not, “Notwithstanding the terms of this mortgage”. Acceptance of Mr Francis’s argument about the proper construction of cl 5 would mean that the words “repayable on demand” in cl 1 would have no work to do, because the repayment spoken of in cl 5 does not require a demand.

9. [111]

   There is no evidence pointing to any significance of 31 March 2023 which might explain the choice of that date, or which might suggest a reason that repayment of the loan from JNN to Mr Francis would not be settled until that date. Nor is there any evidence that the date was ever discussed prior to execution of the mortgage.

10. [112]

    When cll 1,2 and 5 are construed together, JNN is entitled to make demand of Mr Francis at any time before 31 March 2023.

(5) Amount owing to each of the parties

1. [113]

   Although challenges were initially made to the report of the Referee, the parties now accept the determination of the Referee that the amount owing by Mr Francis to JNN is $182,674.03, and the amount of business expenses incurred by Mr Francis was $96,101.91.

2. [114]

   At a hearing after receipt of the Referee’s report, the plaintiff handed up a further affidavit of Natalie Newton. The affidavit was not formally read. It concerned what was said to be a further invoice from Mr Volpe addressed to JNN and Mr Francis for accountancy work. After an enquiry by my associate about the status of this affidavit after I had reserved my decision, objection was taken by Mr Francis’s solicitors for the reasons set out in written submissions of the defendant dated 19 April 2022.

3. [115]

   Those submissions relevantly said:

4. [116]

   I consider that the objection is a highly technical one. The invoice was annexed to the affidavit. Mrs Newton said that she had paid it. JNN and Mr Francis were clearly liable to a professional third party for it. I intend to receive the evidence. Half of the amount of $2,706 will be added to what was otherwise the Principal Sum, that is, $182,674.03, bringing the new total to $184,027.03. From that amount $48,050.96 will be deducted. The amount owing under the mortgage, exclusive of interest, is $135,976.07.

5. [117]

   The other issue in relation to what money is owing to JNN concerns the evidence that some of the amounts of money were paid, not by JNN, but by other companies associated with JNN and Mr Newton. In re-examination Mr Newton gave this evidence:

6. [118]

   This issue was included in the Referee’s determination of what was owed to JNN. I am satisfied that JNN was liable for these amounts, that other entities associated with JNN and Mr Newton paid them, and they amounts constitute loans to JNN. In my opinion, no distinction should be made between these amounts and amounts paid directly from JNN’s resources.

(6) Amount of the demand

1. [119]

   On 24 June 2020 the solicitors for JNN wrote a letter which included a demand which relevantly said:

2. [120]

   On 10 July 2020 solicitors for JNN forwarded a notice pursuant to s 57(2)(b) of the Real Property Act 1900 (NSW). The notice noted that the borrowings secured by the mortgage were payable on demand, and that a demand had been served on 24 June 2020. The amounts outstanding were said to be:

3. [121]

   The notice required payment of that sum within 30 days. A copy of the spreadsheet was again attached to the notice.

4. [122]

   The defendant submitted that the amount claimed in the s 57(2)(b) Notice overstated the amount that was due, particularly because it did not take account of amounts that had been paid by the defendant on behalf of the business. The submission made on behalf of the defendant was that the defendant was not obliged to repay the principal sum demanded unless the plaintiff had correctly calculated the sum owing. It was submitted that the defendant could not be in default if the sum claimed was not due.

5. [123]

   There are a number of answers to this submission. First, the principal remedy being sought by the plaintiff is possession of the defendant’s interest in the land. A notice under s 57(2)(b) is not a precondition to the bringing of proceedings seeking possession for mortgage default because the notice relates to the power of sale: Suncorp-Metway Limited v Nam Property Holdings Pty Limited [2010] NSWSC 1078; (2010) 16 BPR 30,859 at [41]; Commonwealth Bank of Australia v ACES Sogutlu Holdings Pty Ltd & Ors [2013] NSWSC 1184 at [37].

6. [124]

   Secondly, there is abundant authority that such a notice is not necessarily bad if it overstates the amount due: Bunbury Foods Pty Ltd v National Bank of Australasia Ltd (1984) 153 CLR 491 at 504; Clare Morris Ltd v Hunter BNZ Finance Ltd (1988) 4 BPR 9609; AGC (Advances) Ltd v Tweed Canal Estates Pty Ltd (1988) 4 BPR 9404 at 9406.

7. [125]

   Thirdly, the defendant is not precluded from contesting the precise amount that is due and payable. That may well be ascertained in an accounting exercise or by the Court’s determination when the sum demanded is sued for, as in the present case. The present case is not one where nothing is owed by the defendant. He owes $87,925.12 together with interest. He has a liability under the mortgage even despite success on particular issues.

8. [126]

   The demand is not invalid.

(7) Is JNN entitled to an order for possession against a co-owner?

1. [127]

   Clause 6 of the Memorandum incorporated into the mortgage relevantly provides:

2. [128]

   One of the powers under s 60 of the Real Property Act 1900 (NSW) is the power to bring proceedings for possession of the land.

3. [129]

   The land is owned by the parties as tenants in common. The mortgage must be taken to be over that part of the land owned by Mr Francis. The defendant does not submit that there is any limitation on the right of a co-owner to obtain possession of the other share of the land. The mortgagee is under an obligation with respect to the land over which the mortgage was given, once the land is in its possession (the land would need to be sold rather than there being an effective foreclosure by the mortgagee simply retaining the land), but that does not seem to me to prevent an order for possession being made.

(8) Should time to pay be given?

1. [130]

   Mr Francis submitted that any judgment for an amount owing to JNN would be akin to a demand for payment of that amount as the Principal Sum. He submitted, in reliance on Bunbury Foods at 502 that a reasonable time should be given, and that reasonable time would be 28 days.

2. [131]

   JNN submitted that there is no reason why any time should be given, and that it should not be denied its right to possession without good cause, and none has been shown.

3. [132]

   Clause 6 of the Memorandum appears to require a demand for the payment of the Principal Sum after the power of sale becomes exercisable. Section 58(1) of the Real Property Act only gives the right to the mortgagee to sell when the provisions of s 57 have been complied with.

4. [133]

   In Bunbury Foods, the High Court held (at 502) that it is now well established that a debtor required to pay a debt payable on demand must be allowed a reasonable time to meet the demand. The Court allowed (at 503) that sometimes accounts may be so complex that it is difficult to ascertain the precise amount due and payable.

5. [134]

   The amount said to be owing to JNN was at the centre of the dispute in these proceedings. A finding will be made that a sum of money, different from that which was previously demanded, is owing to JNN. I consider that Mr Francis should be given a reasonable time to pay the amount due. I do not consider that there is any serious prejudice to JNN in not obtaining an order for possession for the relatively short time that will be given to Mr Francis, particularly given the delays to date. I consider that 28 days is a reasonable period.

Conclusion

1. [135]

   The judgment has determined that the defendant owes the sum of $135,976.07 to JNN. That amount does not include interest up to judgment.

2. [136]

   The parties should bring in short minutes to reflect these reasons. The short minutes should provide for acceptance of the Referee’s report, judgment for the amount owing including interest, and an order that if the amount due is not paid within 28 days from the date of the judgment there will be judgment for the plaintiff for possession of the defendant’s interest in the land. The cross-claim needs to be dealt with. The parties should give consideration also to providing for the issue of a writ of possession.

3. [137]

   I will hear the parties on costs unless agreement is reached and contained in the short minutes.