Case: ASIC v GDK Financial Solutions Pty Ltd (in liq) (No 3) [2008] FCA 448
Outcome: followed
Finkelstein J considered and rejected the AVS profit share claim in his reasons for judgment in ASIC v GDK Financial Solutions Pty Ltd (in liq) (No 3) [2008] FCA 448 at [27] - [31] . Although the claim at that time was merely foreshadowed rather than actual, it turns out the actual claim is on precisely the same basis and in precisely the same terms as the foreshadowed claim rejected by Finkelstein J. While it is true that his Honour's comments on the profit share issue are non-binding dicta, I nevertheless consider them to be clearly correct and adopt them. Although I do not propose to repeat all of his Honour's reasons here, a simple restatement of the fundamental premise is that, in the absence of any definition of "profit" in the agreement, there is no reasonable, or even rational, implied definition or formula for profit under which it could be said that a profit was made. 108 Again, any implied definition must be reasonable and equitable. The definition must be in keeping with the purpose and other provisions of the agreement. Here, the purpose of the Development Agreement was the development of the Land. Again, cl 2 states that AVS is entitled to 50% of the profits from the "development of the land." On that basis, I consider that a reasonable and equitable definition of profit could only be one involving profit resulting from improvements made to the land (whether by construction of a housing development or otherwise). Because no development was undertaken, there can be no profit. 109 I should emphasise one other point made by Finkelstein J, which goes to answer a claim that profit that should be defined more broadly (a claim which I reject) to include profit derived from appreciation of the Land's value over the years due to a general rise in the real estate market. As noted by his Honour, the problem with this argument is that because WRVM was only the bare legal owner of the Land, and not the beneficial owner, it is not entitled to any proceeds from the sale. It goes without saying that AVS, apart from its mortgage interest (which as a secured legal interest superseded the equitable interests of the Mews investors), was neither a beneficial nor a legal owner of the Land. Neither WRVM nor AVS is entitled to the sale proceeds as an item of profit to which the joint venture agreement could attach. 110 With respect to the remaining items claimed by AVS (development costs incurred before 18 May 2005 of approximately $40,000 or $50,000, development costs incurred after 18 May 2005 of $1.4 million, and a management fee of $660,000), the fact that some amounts may be owing follows from the conclusion that the Development Agreements are valid and enforceable. Whether the particular amounts claimed are supportable is another story. For example, although a project management fee of approximately $660,000 is claimed, it cannot stand. Clause 3 of the Development Agreement states that AVS is entitled to a project management fee "equal to 5% of the before tax profits of the Joint Venture, with a minimum of $500,000 plus GST." Given that I have already concluded that there was no profit, it follows that the maximum amount that could be claimed is only $500,000 ex GST. Clause 3 further provides that any $10,000 monthly retainer fee charged is to be offset against the management fee, which might further diminish the amount allowable as a management fee. 111 I need not consider the accuracy of the fees and costs claims any further, however, because I conclude that those amounts are not secured by the AVS mortgage or charge. As noted earlier (at [77]-[78]) the all-moneys clause in the mortgage will not be held to secure debts of a fundamentally different character from those contemplated at the time at which the contract was entered into. Here, I consider that while the mortgage explicitly considered the two tranches of loans (the $1 million and $3 million advances) at the time of contracting in May 2005, the mortgage did not consider the development costs and management fees. As noted earlier, cl 3 of the AVS Facility Agreement states that the purpose of the mortgage loan agreement was to discharge encumbrances on the Land. In effect, it was a refinancing agreement of the distressed Westpac loan. I consider that the amounts now claimed to be secured as development costs and management fees are costs related to development, not costs relating to encumbrances, and are thus of a fundamentally different character from the debts contemplated at the time of the mortgage's execution. Further, I consider that this analysis applies equally to the all-moneys clause in the AVS charge.