NPV WA Securities v Interactive Network Services [2006] VSC 284
In the Commercial and Equity Division of the Supreme Court of Victoria, Whelan J held, following Equuscorp, that a related financier which settled a film investment loan with a counter cheque endorsed back to it the same day had still made the loan, and was unable to conclude that the loan agreements were a sham, so the borrower's and guarantor's defences failed [66], [79], [80], [81].
What the court decided
NPV WA, a financier, sued INS for unpaid interest and enforcement costs under a written loan agreement dated 27 February 2001 (the second agreement), and sued Mr Atherton as guarantor [1]. NPV WA alleged that it made that loan of $2,500,000 by applying it in discharge of an obligation INS owed to a related company, NPV Finance, under a loan agreement dated 30 June 2000 [2]. Mr Jarrouge was a director of both NPV Finance and NPV WA [6]. The transactions were principally, if not exclusively, directed towards generating tax deductions for INS and fees and profits for other participants [4]. INS acquired film rights from one Village group company and licensed them to another [7], [21], [22].
At settlement NPV Finance drew a counter cheque dated 30 June 2000 for $6,260,000 in favour of the vendor, TAJ Walker, without funds to meet it; TAJ Walker endorsed it back to NPV Finance [26]. The judgment records that the cheque has never been presented [27]. The defendants contended that no loan was made, that the second agreement was unenforceable and that the scheme was a sham [5].
His Honour said that, absent a finding of sham, an exchange of cheques intended to cancel each other out, which could not be met if presented, is not for those reasons a pretended payment [58]. The critical question on sham is whether the parties commonly intended the transaction to be merely a disguise [60].
His Honour held that Equuscorp Pty Ltd v Glengallan Investments Pty Ltd was on point and must be followed [66]. Although the settlement was cash neutral for NPV Finance, it applied the money lent as INS required in paying the purchase price to the extent of $2,500,000 [66]. The return of that sum by the Village group the same day did not alter that position [66]. The transactions might mean that the tax consequences sought were not achieved, but not that no loan was made unless they were a sham [66]. NPV Finance or NPV WA later paid substantial sums to TAJ Walker or at its direction [67].
The defence that the second agreement misdescribed its purpose failed because Mr Atherton was advised in writing that it was a refinancing and agreed to it [68], [69]. Whether NPV Finance could require the refinancing under clause 48 was irrelevant, since INS and Mr Atherton agreed to it [70].
On sham, the defendants set out 24 factors said to show that the scheme was a sham [71]. His Honour found that a number were not individually significant, including the round robin; he said the distinction between "real" money and other money is misconceived [73]. The vendor finance for the half of the investment not financed by NPV Finance appeared "very close to a mere façade" [75]. His Honour could not accept that the parties intended the loan agreements to be no more than a disguise [77], [78]. Mr Jarrouge, who was not the architect of the troubling aspects, intended the agreements to have legal effect and NPV Finance to lend $2.5m [79]. The parties' conduct concerning interest, and Mr Atherton's affidavit, also supported that conclusion [79]. His Honour was unable to conclude that Mr Jarrouge for NPV WA and Mr Atherton intended the second loan agreement not to have its legal consequences [80].
The plaintiff was entitled to judgment for the amount owing, agreed at $614,910.18 as at 15 July 2006, subject to a possible further credit of $25,000 [81]. The amount of judgment and costs were reserved for further hearing [82].
Why it matters
The decision applies Equuscorp to a tax-driven film scheme: unless the transactions are a sham, a loan settled by a cheque that is endorsed straight back is still a loan, particularly where real payments follow. Disturbing features did not establish a sham where neither Mr Jarrouge nor Mr Atherton was shown to intend that the agreements lack legal effect. The Court of Appeal dismissed an appeal, Kellam JA and Dodds-Streeton JA agreeing with Ashley JA (Interactive Network Services Pty Ltd v NPV WA Securities Pty Ltd (2007) VSCA 282). The no loan and sham arguments were not pursued; the Court construed the second agreement objectively as an internal refinancing of the existing loan, and inferred that NPV WA gave consideration by discharging INS's liability to NPV Finance, a point the trial judge had not addressed.
Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.