Paterson v Pongrass Group Operations Pty Ltd [2011] NSWSC 1588 (20 December 2011)

Last Updated: 11 January 2012

Supreme Court New South Wales

Case Title:	Paterson v Pongrass Group Operations Pty Ltd
Medium Neutral Citation:	[2011] NSWSC 1588
Hearing Date(s):	7 and 8 April 2011
Decision Date:	20 December 2011
Jurisdiction:	Equity Division
Before:	White J
Decision:	Refer to para [97] of judgment.
Catchwords:	GUARANTEE AND INDEMNITY - enforcement of indemnity - whether court should refuse to enforce indemnity on grounds of public policy - where parties conspired to attempt to obtain financial advantage by deception - cause of action grounded on deed of indemnity and deed not itself part of intended deception - not in public interest to refuse to enforce indemnity GUARANTEE AND INDEMNITY - enforcement of indemnity - liability of indemnifier before payment - whether indemnity merely requires indemnifier to compensate indemnified party for what he has paid towards liability or requires indemnifier to relieve indemnified party of burden of liability - obligation of indemnifier depends on terms of contract between indemnifier and indemnified - Wren v Mahoney [1972] HCA 47; (1972) 126 CLR 212 distinguished - indemnity not limited to compensate indemnified for amounts paid - indemnity required indemnifier to relieve indemnified party of burden of liability GUARANTEE AND INDEMNITY - enforcement of indemnity - whether plaintiff's action at law for damages or in equity for specific performance - assessment of damage for breach of contract for indemnity where promise is to relieve indemnified party of burden of liability uncertain - damages not adequate remedy - damages fall for assessment only if specific performance not available EQUITY - equitable remedies - specific performance - whether sufficient consideration - where consideration provided for in deed incorrect - party estopped by recitals to deed from denying that consideration provided - consideration provided by implied promise GUARANTEE AND INDEMNITY - enforcement of indemnity - where indemnity requires indemnifier to relieve indemnified party from burden of liability - appropriate remedy - where creditor not a party - order payment to person entitled to indemnity even though have not yet paid creditor on undertaking to apply payment forthwith to discharge liability
Legislation Cited:	Crimes Act 1900
Cases Cited:	Codelfa Constructions v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 Nelson v Nelson [1995] HCA 25; (1995) 184 CLR 538 Beresford v Royal Insurance Co Limited [1938] AC 586 Carantinos v Magafas [2008] NSWCA 304 Ranelaugh v Hayes [1680] EngR 235; (1683) 1 Vern 189 Nisbet v Smith (1789) 2 Bro. C.C. 579 Ascherson v Tredegar Dry Dock & Wharf Co Limited [1909] 2 Ch 401 Watt v Mortlock [1964] Ch 84 Thomas v Nottingham Incorporated Football Club Limited [1972] Ch 596 Woolmington v Bronze Lamp Restaurant Pty Ltd [1984] 2 NSWLR 242 Abigroup Limited v Abignano [1992] FCA 567; (1992) 39 FCR 74 McIntosh v Dalwood (No. 4) (1930) 30 SR (NSW) 415 Wren v Mahoney [1972] HCA 47; (1972) 126 CLR 212 BNP Paribas v Pacific Carriers Limited [2005] NSWCA 72 In re Richardson; ex parte Governors of St Thomas's Hospital [1911] 2 KB 705 Loosemore v Radford [1842] EngR 427; (1842) 9 M&W 657; 152 ER 277 Jefferys v Jefferys [1841] EngR 337; (1841) CR & PH 139; 41 ER 443 Carpenter v Buller [1841] EngR 552; (1841) 8 M & W 209 at 212; [1841] EngR 552; (1841) 151 ER 1013 Clifford v Turrell [1841] EngR 1212; (1841) 1 Y & C Ch Cas 138; (1841) 62 ER 826 Frith v Frith [1906] AC 254 Yaroomba Beach Development Co Pty Ltd v Coeur de Lion Investments Pty Ltd (1989) 18 NSWLR 398 BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977] UKPC 13; (1977) 180 CLR 266 McIntosh v Dalwood (No. 3) (1930) 30 SR NSW 332 Lacey v Hill (1874) LR 18 Eq 182 Rankin v Palmer [1912] HCA 95; (1912) 16 CLR 285
Texts Cited:	Young, Croft and Smith, On Equity (2009) Thomson Reuters Lawbook Co Spry, The Principles of Equitable Remedies, 7 ed (2007) Lawbook Co
Category:	Principal judgment
Parties:	John Trevett Paterson (Plaintiff) Pongrass Group Operations Pty Ltd (Defendant)
Representation
- Counsel:	I Pike (Plaintiff) J Smith (Defendant)
- Solicitors:	Judd Commercial Lawyers (Plaintiff) C. G. Gillis & Co (Defendant)
File number(s):	2010/357144
Publication Restriction:

JUDGMENT

1. HIS HONOUR : This is a claim to enforce an indemnity given by the defendant, Pongrass Group Operations Pty Ltd ("PGO"), to the plaintiff, Mr Paterson, against his liability to penalties he incurred as a director of four subsidiaries of PGO. The indemnity was given by deed. PGO denies that it is presently liable to pay any moneys under the indemnity because Mr Paterson has not paid any part of the penalties incurred. It also says there was no consideration (apart from its seal to the deed) for its promise of indemnity. Mr Paterson contends that PGO is liable either to pay the Commissioner of Taxation or him the amount of the penalties, so that he is not exposed to the threat of suit.

2. On 11 October 2010 the Deputy Commissioner of Taxation served a payment demand on Mr Paterson for an amount of $2,008,574.46 and advised that legal action for the recovery of that amount was an option open to the Australian Taxation Office ("the ATO"). PGO admits for the purposes of these proceedings that Mr Paterson owes the amount demanded. No proceedings have been instituted against Mr Paterson for recovery of the debt.

3. The issues are:

(a) whether the court should refuse its aid to the enforcement of the indemnity because the indemnity is an outcome of an agreement between Mr Paterson and the sole director of PGO, Mr Robert Pongrass, to attempt to obtain financial advantage by deception;

(b) if the indemnity is enforceable, whether it merely requires PGO to pay Mr Paterson amounts for which he is liable after he has paid the ATO, or whether it requires PGO to relieve Mr Paterson by preventing his having to pay the penalties for which he is liable;

(c) if the latter, whether the plaintiff's action is an action at law for damages or in equity for specific performance or other equitable relief;

(d) if the indemnity is only to compensate Mr Paterson against penalties paid by him, whether he is nonetheless entitled to quia timet relief in equity;

(e) in so far as Mr Paterson seeks equitable relief, whether valuable consideration was provided for the indemnity; and

(f) to what relief is Mr Paterson entitled.

4. I have concluded:

(a) that the court should not refuse to enforce the indemnity on the grounds of public policy;

(b) the indemnity requires PGO to relieve Mr Paterson of the burden of his liability, not merely to compensate him for any amounts he pays towards his liability;

(c) Mr Paterson is seeking quia timet equitable relief, but would be entitled to more than nominal damages if equitable relief were unavailable;

(d) if the indemnity was only to compensate Mr Paterson for amounts paid by him, he would not be entitled to equitable quia timet relief, but the indemnity is not so limited;

(e) PGO is estopped by the recitals to the deed from denying that consideration was provided for the indemnity, but in any event, consideration was provided by Mr Paterson's implied promise to co-operate in negotiations with the ATO; and

(f) PGO should be ordered to pay $2,008,574.46 to Mr Paterson on his undertaking forthwith after receiving the payment to pay the Commissioner of Taxation.

The plaintiff's appointment as director

5. PGO is the holding company of two groups of subsidiaries referred to as the Wilcom Group and the Arcade Group. Mr Paterson deposed that the Wilcom Group of companies developed and licensed software for the use in the manufacture of textiles and embroidery and the Arcade Group of companies operated as an importer and manufacturer in the textile, clothing and embroidery industries. Mr Pongrass is the sole director of PGO.

6. On or about 17 January 2003 Mr Paterson was appointed as the sole director of 17 of the subsidiary companies in the PGO group. These included seven companies then known as Albion Hat & Cap Co Pty Ltd ("Albion"), Arcade Badge Embroidery Co Pty Ltd ("Arcade Embroidery"), Arcade Value Added Technologies Pty Ltd ("Arcade Technologies"), Embroidery Machinery Sales & Services Pty Ltd ("Embroidery Machinery"), Wilcom International Pty Ltd ("Wilcom International"), Wilcom Pty Limited ("Wilcom"), and Initial Pty Limited ("Initial").

7. Mr Paterson deposed that he took the position as sole director of those companies following a conversation with Mr Pongrass to the following effect:

" Mr Pongrass : 'We have just about sorted out my father's estate between my brother and me. I will be taking over all of the companies as subsidiaries of PGO. Some of these subsidiaries have big tax debts. They may have to be put into administration.'

[Mr Paterson]: 'Which of the subsidiary companies need to go into administration?'

Mr Pongrass: 'I have inherited a mess. I'm still working out which companies should be put into administration.'

[Mr Paterson]: 'If I am the director of the subsidiaries the process of administration may be easier to manage as I have no significant assets.'

Mr Pongrass: 'Yes, that would make it easier. As the sole director with no assets, it will be easier for us to negotiate a deed of company arrangement with the administrator and avoid the alternative of liquidation.'"

8. Mr Pongrass did not dispute that a conversation to the effect of that set out above took place. His actions and subsequent correspondence confirm it.

9. Mr Pongrass told Mr Paterson that he did not expect Mr Paterson to become involved in operational matters. Mr Pongrass told Mr Paterson that he did not want him interacting with any of the staff. Mr Paterson confirmed he had no desire to get involved in the management of the businesses. Mr Paterson signed undated resignations and gave them to Mr Pongrass. The existing directors of the subsidiaries, including Mr Pongrass, resigned as directors. Mr Paterson became the sole director of the subsidiaries, although it is clear that Mr Pongrass remained a de facto director and became a shadow director.

Events up to May 2005

10. Mr Paterson deposed that it was his role to place PGO's subsidiaries selected by Messrs Pongrass and Crouch into voluntary administration and then manage the process of administration. Wilcom was placed into voluntary administration on 18 August 2003. On or about 10 December 2003 a company called PGO Management Pty Limited that was trustee for what was known as the Pongrass Employment Unit Trust ("PEUT") and Initial were placed into voluntary administration. The PEUT was the predecessor of the Pongrass Group Employment Trust ("PGET").

11. On or about 18 February 2003 Mr Pongrass received director penalty notices from the ATO in respect of unpaid taxes of Wilcom International, Arcade Embroidery and Embroidery Machinery. Mr Adrian Crouch, the chief financial officer of PGO, also received director penalty notices in respect of unpaid taxes of Wilcom International and Arcade Embroidery. He had also been a director of those companies until he resigned on 17 January 2003.

12. On or about 16 September 2003 Mr Crouch received two further director penalty notices in respect of Arcade Embroidery and Wilcom International. At about the same time Mr Pongrass received three director penalty notices in respect of taxes owed by Embroidery Machinery, Wilcom International and Arcade Embroidery.

13. On 29 September 2003 the ATO withdrew the notices of 16 September 2003. But on about 26 and 27 November 2003 Mr Crouch and Mr Pongrass received further director penalty notices in respect of taxes owed by Arcade Embroidery and Wilcom International. Mr Crouch arranged for a Canberra lawyer, Mr Allan Powrie, to act on behalf of PGO and its subsidiaries, Mr Pongrass and himself to negotiate with the ATO.

14. Except for notices of 16 September 2003, the director penalty notices to Mr Crouch and Mr Pongrass have not been withdrawn. The notices have not been paid and no repayment schedule has been submitted by Mr Crouch or Mr Pongrass. Nonetheless, the ATO has taken no steps to seek to collect the moneys stated in the notices.

15. Director penalty notices were also issued to Mr Paterson dated 18 and 19 February 2003 in respect of Initial, Arcade Embroidery and Embroidery Machinery.

16. A further director penalty notice was issued to Mr Paterson on 26 November 2003 in respect of Arcade Embroidery.

17. In April 2004 Mr Paterson was served with director penalty notices in relation to Wilcom International and Arcade Embroidery.

18. The notices stated that Mr Paterson was liable to pay a penalty in an amount equal to the unpaid amount of each liability of those companies in respect of PAYG Withholding Amounts that had not been remitted. Each notice stated that the penalty would be remitted if at the end of 14 days after the notice was given to Mr Paterson, either the company's liability in respect of the unpaid amounts were discharged or an agreement relating to the liability was in force with the ATO, or the company was under administration, or was being wound up.

19. Mr Paterson discussed the notices with Mr Crouch who asked him to send the penalty notices to him. Mr Crouch said that Mr Powrie was negotiating payment arrangements with the tax office. Mr Paterson sent the notices to Mr Crouch for them to be dealt with by him and Mr Powrie.

20. As a result of conversations with Mr Crouch in August 2004, Mr Paterson learnt that companies in the PGO Group had not been paying employees' superannuation.

21. Mr Paterson received further director penalty notices from the ATO in December 2004 and January 2005. He gave the notices to Mr Crouch expecting them to be taken care of as part of the negotiations that Mr Crouch and Mr Powrie were having with the ATO. Mr Paterson asked Mr Pongrass to be kept informed about how the tax debts were being handled, but Mr Pongrass told him it was none of his concern.

22. On 10 April 2005 Mr Paterson was served with a statement of claim in which he was named as defendant. He deposed that in that proceeding the ATO sought to recover $650,874.38 against him personally. He came to learn that the proceedings concerned PAYG tax obligations of the PGET. Mr Powrie advised that Mr Paterson should have independent representation and recommended that he engage a Mr Joe Weller. At about this time Mr Crouch wrote that:

" Although there is no mention of the company involved, I believe it is in respect of Pongrass Group Employment Trust which also fell into arrears last year.

We have since made a payment of about $100,000 off this debt, so the amount claimed is incorrect.

We intend to make payment of the debt over a period of 6-12 months whilst maintaining current liabilities and have commenced this process.

The Trust is not a trading entity, trustee company is Venturecorp Pty Ltd and Director is John Paterson ... "

23. Mr Paterson was satisfied that the claim could be satisfactorily defended because the ATO had made the incorrect assumption that he was the trustee of the PGET, whereas he was a director of the company that was trustee. Nonetheless, he was concerned about events. Mr Pongrass told him that " the Company will pay whatever legal fees are involved in defending your position and ensuring that you are not subject to a summary judgment ". PGO or Mr Pongrass, or one of the other companies in the group, engaged Mr Weller to provide legal assistance to Mr Paterson. PGO paid Mr Weller's legal bills and those of a barrister he retained.

24. On 4 May 2005 Mr Crouch wrote to Mr Powrie, with a copy to Mr Paterson, stating:

" This current matter is in regard to Pongrass Group Employment Trust which has not been included in past negotiations with the tax office in 2003-2004 as part of the Wilcom and Arcade groups of companies.

It has to date been separately handled by myself in negotiation and correspondence with a Trish Cary of the Brisbane Tax Office.

While we have retained two [sic] now act in this matter, which should not at any stage link the two debts, as I think that would be a disaster for current negotiations in respect of the Wilcom/Arcade debt compromise proposal. "

25. These were the circumstances in which Mr Paterson requested an indemnity against liabilities he had incurred as a result of taking office as a director of the PGO subsidiaries. There had been negotiations on foot since 2003 with the ATO in respect of the tax liabilities of the Wilcom and Arcade groups of companies that had not been resolved. A new issue had arisen in respect of liabilities of the trustee of the PGET which had led to his being sued. It was clear that Mr Pongrass and Mr Crouch intended to defend the claim made against Mr Paterson in respect of liabilities of the PGET. Mr Pongrass and Mr Crouch wanted control of the negotiations Mr Powrie was conducting on their behalf and on behalf of PGO's subsidiaries.

26. On 4 May 2005 Mr Paterson wrote to Mr Pongrass as follows:

" Dear Robert

[T] he Statement of Claim with regard to the PGET tax debt came as a surprise, as I was not aware that this debt was being accrued.

I was vaguely aware of the other tax debts being negotiated with ATO by a lawyer in Canberra, as I had received a number of director penalty notices in regard to these. As requested by Adrian, I have handed these notices over to him as they arrived, being assured that these matters were being effectively negotiated, as a whole, by your counsel in Canberra.

While the SOC relating to the PGET debt is readily defended in the very first instance, the on-going process of your negotiations with ATO concerning BAS (PAYG and GST) debts of various members of the Group is going forward without my knowledge, involvement, participation, or acquiescence. I do not quibble with that, as that is entirely your decision. However, you should not then leave me to hang me out to dry in regard to matters over which I have no influence, let alone any control.

I therefore request that you and PGO execute a deed of indemnity in my favour, such that I am relieved of the prospect of bankruptcy by a decision of the ATO's or of yours, in relation to companies or trusts in the PGO group over which I have no influence or control.

The proposed deed is attached. "

27. Mr Pongrass replied on 16 May 2005. He said:

" Background

At the time that PGO was embroiled in financial concerns due to separation from my brother you became actively involved as an adviser on Asset Protection. You made a proposal to be the Sole Director of the PGO subsidiary companies with the Resignation on Shareholder demand and a scale of fees to compensate you for your work. We accepted your offer and in the capacity of Director you were able to be of beneficial assistance in a number of areas.

At the time when you proposed the Sole Directorship you indicated that you were an ideal candidate since you had no assets in your own name. Since that time your personal situation has changed, in particular the fact that you now have approved Broking credential that would be at risk. Since you now have personal assets at risk you have asked for an indemnity to protect those assets. It has been agreed that you will be indemnified and a lawyer has been provided at PGO's costs to protect your interests. With the change in your personal circumstances and the initial reason for having you as a Sole Director (ie no assets) is no longer valid, and indemnifying you transfers the responsibilities back to PGO and myself.

These matters have caused friction between us and threatens a friendship of long standing and in retrospect it may have been advisable not to get you involved in PGO matters.

Proposed Action

1. Future Exposure

In order to eliminate your exposure to future issues stemming from the ATO we will accept your resignations from all PGO companies and I will assume the position of Director in your place. This will take place immediately and will eliminate your personal exposure going forward.

2. Indemnification of Previous Events

The form of indemnity that you have sent is for every company in PGO even those that have not had notices from ATO. Since you will no longer be a Director of PGO entities that form of indemnity can be restricted to those companies which have received ATO Notices during your Directorship and would relate to PGET, PEUT, Arcade, EMSS, Initial, Wilcom Precise and Wilcom International. The indemnity is thus limited to where you are exposed and will address your concern about being hung out in the breeze. To ensure that you are not exposed to claims of Trading Insolvent we will also document PGO's support for its subsidiaries during your Directorship. "

28. Whilst Mr Pongrass asserted in his email of 16 May 2005 that Mr Paterson's personal situation had changed, Mr Paterson did not think that it had. He had held a financial services licence since 1984 and would have lost that had he been bankrupted in 2003. According to Mr Paterson the only relevant change to his personal situation was that he had joined a larger dealer group, whereas prior to that he had been a sole operator.

29. Mr Pongrass' email of 16 May 2005 confirms that it had been his intention that Mr Paterson be appointed as sole director of PGO's subsidiaries as a straw man to provide " asset protection ". It corroborates Mr Paterson's evidence that it was never intended that Mr Paterson should perform the functions of a director. The inference is irresistible that Mr Paterson was appointed as director to deceive those who would be appointed as voluntary administrators of the subsidiaries that would be put into voluntary administration about who truly were the directors of the companies.

30. For the reasons below the deed of indemnity is ambiguous. The matters set out above including the email correspondence between Mr Paterson and Mr Pongrass can be used to assist resolving the ambiguities in so far as they provide the objective matrix of facts known to both parties in which the deed was entered into. However, the email correspondence cannot be used to construe the deed in so far as it sets out Mr Paterson's and Mr Pongrass' subjective intentions as to the scope or nature of the indemnity ( Codelfa Constructions v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 352).

The Deed of Indemnity

31. Mr Pongrass declined to give a personal indemnity. The deed of indemnity was signed on 17 May 2005. It was made between Mr Paterson (called " the Indemnified ") and PGO (called " the Indemnifiers "). (The reason for the use of the plural was that as originally drawn, Mr Pongrass was also referred to as an Indemnifier. At the meeting on 17 May 2005 he was struck out as a party.) The relevant provisions of the deed were as follows:

" WHEREAS:

1. The Indemnifiers wish for the Indemnified to be a director of the following corporations,

Albion Hat & Cap Co Pty Ltd ACN 001 496 224

Arcade Badge Embroidery Co Pty Ltd

ACN 000 501 762

Arcade Value Added Technologies Pty Ltd ACN 104 648 071

Embroidery Machinery Sales & Services Pty Ltd

ACN 065 343 964

Wilcom International Pty Ltd ACN 062 621 943

Wilcom Pty Ltd ACN 001 971 919

Initial Pty Ltd ACN 060 724 398

Venture Corporation Pty Ltd (as trustee for PGET)

ACN 002 627 527

2. The Indemnified is prepared to be a director of such corporations providing only, that an indemnity is provided to him in the terms of this deed.

OPERATIVE PROVISIONS:

3. INDEMNITY

The Indemnifiers will indemnify, and pay to the Indemnified monies to compensate for, and be in respect of, any loss suffered by the Indemnified arising out of any claim connected to, or directly or indirectly related to, any act committed or omitted to be done by the Indemnified in his capacity as such a director, including such acts or omissions that are offences against any laws, including but limited to taxation laws.

For the purposes of this clause 'loss' includes, any amount payable in respect of a claim against the Indemnified, and includes but is not limited to damages, judgments, settlements, interest, costs and defence costs, and includes any fines or penalties imposed by law, punitive, exemplary or aggravated or multiple damages, income tax, customs duties, excise duty, transaction duty, Goods and Services Tax, or any other State or Federal tax or duty.

For the purposes of this clause, defence costs shall include all reasonable costs, charges and expenses incurred with the prior written consent of the Indemnifier, such consent not to be unreasonably withheld, in defending, investigating, attending or monitoring any Claim or proceedings, including but not limited to official investigations, examinations, inquiries and the like, or appeals therefrom, together with all reasonable costs of bringing any appeal.

For the purposes of this clause claim shall mean, any writ, summons, application or other originating legal (criminal, civil or otherwise) or arbitral proceedings, cross claim or counter-claim issued against or served upon the Indemnified, or any written demand communicated to the Indemnified under any circumstances and by whatever means.

The Indemnifiers will also pay costs incurred with its prior written consent, such consent not to be unreasonably withheld, by or on behalf of the Indemnified in attending any official investigation, examination, inquiry or other proceedings ordered or commissioned by any official body or institution, where the Indemnified is legally compelled by such body or institution to attend such investigation, examination, inquiry or proceeding and which involves an allegation against the Indemnified.

4. INDEMNIFIERS' OBLIGATIONS

a) The Indemnifiers' obligations:

i) are principal obligations and not ancillary or collateral to any other obligation;

ii) may be enforced against the Indemnifiers without the Indemnified being required to exhaust any remedy it may have against the Indemnifiers.

5. OBLIGATIONS ABSOLUTE AND UNCONDITIONAL

The liability of the Indemnifiers is absolute and unconditional and is not affected by any act, omission, matter or thing which, but for this provision might operate to release or otherwise exonerate it from any of their obligations ... "

32. There is no dispute that a cause of action at common law is maintainable on the deed whether or not there would be sufficient consideration to support a simple contract. But PGO submitted that equity would not lend its aid to the enforcement of voluntary promises and submitted that there was no consideration for its promises. Mr Paterson submitted that:

(a) PGO was estopped from denying the truth of Recital 2 and it provided sufficient consideration;

(b) alternatively (and contrary to Recital 2) he agreed to resign as a director of all the PGO subsidiaries, except Venture Corporation Pty Ltd ("Venture Corporation") and agreed to resign as a director of that company provided he received the indemnity; and

(c) he agreed to co-operate with PGO and Mr Powrie in their negotiations with the ATO provided he received the indemnity.

Consideration for the deed of indemnity

33. Mr Paterson deposed that during the course of the meeting on 17 May 2005 he had a conversation with Mr Pongrass to the following effect:

" Mr Pongrass: 'John I want you to resign as the sole director of all of the PGO companies. You should remain as a director of Venture Corp.'

[Mr Paterson]: 'Provided I get the indemnity, I will remain as a director of Venture Corp and resign from the `others.'"

34. Mr Paterson also deposed that at the meeting he promised and undertook to Mr Pongrass that provided he got the Deed of Indemnity he would co-operate with PGO and Mr Powrie in its negotiations with the ATO. He said he continued to provide co-operation as he had promised.

35. Mr Paterson also said that once he had signed the Deed of Indemnity he regarded himself as bound to continue as the sole director of Venture Corporation that was the trustee of the PGET. He continued as the sole director of that company until it was wound up in March 2010.

36. In cross-examination Mr Paterson acknowledged that there was no reason for his not remaining as a director of Venture Corporation after 17 May 2005 if he did not get the indemnity in the terms that he had asked. He agreed that he then intended to remain a director of Venture Corporation regardless of whether an indemnity was provided by Mr Pongrass or PGO.

37. Mr Paterson resigned as a director of the PGO subsidiaries, but remained as a director of Venture Corporation. Mr Pongrass formally reassumed office of director.

38. Mr Crouch attended the meeting on 17 May 2005. He had no recollection of a conversation to the effect of that deposed to by Mr Pongrass set out at para [33] above. He did not believe that Venture Corporation was discussed in any particular detail at that time, other than that it should be replaced as trustee. He did not recall that there was an arrangement that the Deed of Indemnity was being given in respect of continued co-operation from Mr Paterson in relation to negotiations with the ATO. He confirmed that after May 2005 Mr Paterson and he did have discussions in regard to the tax affairs of companies in the group. Although he did not recall there being any discussion about PGO needing Mr Paterson's co-operation in future negotiations with the ATO, he conceded that he was not in a position to deny that such discussions occurred.

39. Mr Crouch kept a note of the meeting. But it was not a detailed or verbatim note. It contained no reference to the matters Mr Paterson raised, namely that he would remain as a director of Venture Corporation but resign as a director of the other PGO companies if he got an indemnity and that provided he got an indemnity he undertook to co-operate with PGO and its lawyers in negotiations with the ATO. But the note is so brief that the absence of such notation does not indicate that there were not such discussions.

40. Mr Pongrass denied that at the meeting of 17 May 2005 there was a conversation between him and Mr Paterson to the effect of that set out at para [33] above. He also denied that at the meeting Mr Paterson promised to Mr Pongrass that he would co-operate with PGO and Mr Powrie if he were provided with a deed of indemnity. Mr Pongrass acknowledged that he wanted to keep control over the negotiations with the ATO and ensure that they occurred through Mr Powrie. He did not want Mr Paterson to be talking directly with the ATO. But he denied that any promise was made by Mr Paterson to provide such co-operation in return for a deed of indemnity.

41. Mr Pongrass accepted that there was a mutual agreement that Mr Paterson would resign as a director of all of the PGO subsidiaries, other than Venture Corporation, but denied that that agreement was linked with the provision of the indemnity. He said it was a condition of Mr Paterson's employment that he could be removed as a director of the PGO subsidiaries at any time. I take this to be a reference to the fact that Mr Paterson had given Mr Pongrass signed, but undated, notices of resignation as a director of the PGO subsidiaries at the time he took up his appointment. Mr Paterson agreed that his arrangement with Mr Paterson was that negotiations with the ATO would be conducted through Mr Powrie, but denied that this was a quid pro quo for the giving of the indemnity.

42. Mr Pongrass said that PGO exposed itself to the liability under the indemnity without getting anything in return. He said the reason PGO provided the indemnity was because he felt honour-bound to protect Mr Paterson.

43. Given Mr Paterson's concession that he would have remained as a director of Venture Corporation whether or not he received the indemnity, I do not think it likely that at the meeting of 17 May 2005 he would have said to Mr Pongrass words to the effect that " provided I get the indemnity, I will remain as a director of Venture Corp and resign from the others ".

44. It is clear that Mr Paterson and Mr Pongrass agreed that Mr Paterson would resign as director of the PGO subsidiaries, other than Venture Corporation, from 17 May 2005. The Deed of Indemnity was given as part of a transaction under which Mr Paterson resigned as director of those companies, and Mr Pongrass formally reassumed office as director.

45. I am not satisfied that Mr Paterson stated expressly that he would resign as a director of the PGO subsidiaries provided he got the indemnity. I am not satisfied that he said expressly that he would co-operate with PGO and its lawyers in negotiations with the ATO provided he got the indemnity. Nonetheless, it was understood and agreed between he, Mr Pongrass and Mr Crouch that he would resign as a director of the PGO subsidiaries other than Venture Corporation without Mr Pongrass' having to use the undated resignations he had given when he took his appointment. It was understood that Mr Paterson would continue to provide his co-operation in negotiations with the ATO and allow the negotiations to be conducted as Mr Crouch and Mr Pongrass determined. I also find that whilst Mr Pongrass was motivated to give the indemnity as a matter of honour having accepted Mr Paterson's proposal to be appointed as a director to assist Mr Pongrass, he, Mr Pongrass, considered that the deed of indemnity would be useful in providing further assurance that Mr Paterson's continued co-operation would be forthcoming.

46. In summary, I find that the indemnity was not a quid pro quo for Mr Paterson's remaining as a director of Venture Corporation. Mr Paterson conceded that his continued directorship of Venture Corporation was not linked to the provision of the indemnity. There was no express agreement that the indemnity was a quid pro quo for Mr Paterson's resigning as director of the PGO companies. It was not expressly a quid pro quo for his giving continued co-operation in negotiations with the ATO. Mr Pongrass, who was the governing mind of PGO, did not consider that the indemnity was useful for PGO to ensure Mr Paterson's resignation of PGO's subsidiaries because he already held undated resignations. Nonetheless, I find that Mr Pongrass considered that the indemnity would be of benefit in obtaining Mr Paterson's continued co-operation in the negotiations with the ATO, although there was no express agreement that one was consideration for the other.

47. I deal below with the question whether there was sufficient consideration for the specific enforcement of PGO's promises in the deed of indemnity.

First issue: public policy

48. Neither party contended that the deed of indemnity should not be enforced on grounds of public policy, namely, that it arose from an illegal scheme. But the court has an obligation itself to consider whether enforcement of an agreement should be refused on the grounds of illegality.

49. It is, and was in 2003, an offence for a person by any deception to obtain dishonestly for himself, herself or another person any financial advantage of any kind ( Crimes Act 1900, s 178BA(1)). " Deception " means deception (whether deliberate or reckless) by words or conduct as to a fact or as to law (s 178BA(2); see now Crimes Act 1900, ss 1912B and 192E).

50. On the evidence before me, Mr Pongrass and Mr Paterson conspired to attempt to obtain a financial advantage for Mr Pongrass and other directors of the PGO subsidiaries that would be placed into voluntary administration, by deceiving those who would be appointed as voluntary administrators as to who the true directors of the companies were. The deed of indemnity was an outcome of that agreement. As Mr Pongrass said, he had a moral obligation to Mr Paterson to cause PGO to give the indemnity. That arose from his acceptance of Mr Paterson's proposal and implementation of it.

51. The court will not lend its aid to a plaintiff who founds a cause of action upon an illegal act, particularly where both parties are equally in fault ( Nelson v Nelson [1995] HCA 25; (1995) 184 CLR 538 at 554). In Beresford v Royal Insurance Co Limited [1938] AC 586 Lord Atkin said (at 598) that " ... a man is not entitled to have recourse to a Court of Justice to claim a benefit from his crime whether under a contract or a gift ." A court would not enforce an agreement for the division of the spoils of a robbery.

52. In this case Mr Paterson's cause of action is grounded upon the deed of indemnity. The deed of indemnity was not itself part of the intended deception. It was not an element of the illegal conduct. Any benefits that may have been obtained from the agreement to attempt to deceive voluntary administrators as to who were the true directors were obtained by Mr Pongrass or other directors of the companies. Any victims of the agreement were the creditors of the companies. The principal creditor was the Commissioner of Taxation. The Commissioner of Taxation would be the beneficiary of enforcement of the deed of indemnity. It would not be in the public interest to refuse to enforce it.

53. The public interest will be served by directing that a copy of these reasons be provided to the Commissioner of Taxation and to the Australian Securities and Investments Commission so that they can consider whether any action should be taken as a result of the matters disclosed in this case ( Carantinos v Magafas [2008] NSWCA 304 at [61]- [63], [116]).

Second issue: nature of the indemnity

54. An obligation to indemnify can arise in a variety of circumstances. The obligation might arise under an express contract, as in this case. It may be implied as in the case of a guarantor and principal debtor. Without any express contract, it is implied that the principal debtor will indemnify the guarantor against the guarantor's liability to the creditor. In such cases equity may grant quia timet relief requiring the principal debtor to satisfy the debt where there is an accrued and fixed liability so as to relieve the guarantor from that liability, it being unreasonable that the guarantor should always have such a cloud hanging over him ( Ranelaugh v Hayes [1680] EngR 235; (1683) 1 Vern 189; Nisbet v Smith (1789) 2 Bro. C.C. 579; Ascherson v Tredegar Dry Dock & Wharf Co Limited [1909] 2 Ch 401; Watt v Mortlock [1964] Ch 84; Thomas v Nottingham Incorporated Football Club Limited [1972] Ch 596; Woolmington v Bronze Lamp Restaurant Pty Ltd [1984] 2 NSWLR 242; Abigroup Limited v Abignano [1992] FCA 567; (1992) 39 FCR 74 at 81-82).

55. The present case is not one of principal debtor and surety, both liable to the creditor. Even in such a case, the obligation of the surety will depend on the terms of any express contract that there may be between the surety and principal debtor.

56. In McIntosh v Dalwood (No. 4) (1930) 30 SR (NSW) 415, Street CJ (with whom Owen and Long Innes JJ agreed) said in relation to a contract for indemnity (at 418):

" The suggested distinction between contracts of simple indemnity and other classes of contract has in my opinion no basis either of authority or of principle. The test is always the same. In every case the contractual obligation must first be ascertained in order that it may be seen whether an adequate remedy exists at law in the event of a breach. If the obligation is merely an obligation to indemnify a person, in the sense of repaying to him a sum of money after he has paid it, no equitable relief is needed. Damages will provide an adequate remedy. If, however, the obligation on its true construction is an obligation to relieve a debtor by preventing him from having to pay his debt, equity will in such a case give relief in the nature of quia timet relief, and, instead of compelling the party indemnified first to pay the debt, and perhaps to ruin himself in doing so, will specifically enforce the obligation by ordering the indemnifying party to pay the debt. "

57. The proper construction of any contract of indemnity must depend upon the terms of the individual contract, considered, where appropriate, in the objective matrix of facts in which the contract was entered into. There can be no rule of law that a particular form of words is necessary in order to conclude that the indemnity is to prevent the indemnified party from suffering loss rather than to compensate the indemnified party for loss he or she has suffered. In every case the proper meaning of a contract of indemnity must be taken from the words the parties have used and the context in which the agreement is made in order to ascertain objectively their intention.

58. In Wren v Mahoney [1972] HCA 47; (1972) 126 CLR 212 Barwick CJ (with whom Windeyer and Owen JJ agreed) said of the contract of indemnity in that case that without an express promise by the indemnifier in terms to pay the amount of tax payable by the indemnified party to the Commissioner of Taxation, no cause of action would arise against the indemnifier until the indemnified party had paid the tax payable (at 225). Later his Honour said (at 227) that:

" ... the distinction in my opinion is not between an indemnity against payment and an indemnity against a liability to pay. The distinction is between a promise to indemnify the promisee and a promise given to the promisee for the payment by the promisor of the debt in question. "

59. In my view, those statements were directed to the particular contract there in question. They are not to be understood as laying down a principle of law applicable to the construction of any contract of indemnity. In each case what is promised must depend upon the terms of the contract. An indemnifying party may promise to relieve an indemnified party from the burden of having to pay a debt without necessarily expressly promising to pay the creditor. A promise to pay the creditor might be implied from other express terms of the agreement. A promise to prevent the indemnified party from having to pay his debt might be capable of being achieved by means other than paying the debt owed by the indemnified party to the creditor. The indemnifying party might have any number of lawful means of persuading the creditor not to press its claim.

60. In the present case the indemnity does not include an express promise by PGO to pay the debt owed by Mr Paterson to the Commissioner of Taxation. For the reasons above I do not consider that the absence of such an express provision is necessarily decisive.

61. Mr Pike, who appeared for Mr Paterson, emphasised the definition of " loss " as including any amount payable in respect of a claim against Mr Paterson. He submitted that this showed that the indemnity was to relieve Mr Paterson from his liability without Mr Paterson first having to pay his debt. Mr Smith, who appeared for PGO, emphasised the words that PGO would pay Mr Paterson moneys to compensate for any loss suffered by him arising out of a claim referred to in the first paragraph of the indemnity. The ordinary meaning of compensate is to " make up for ", and this, it was submitted, required that the loss first be paid out.

62. PGO did not dispute that the claim made by the ATO was connected to or related to an act committed or omitted to be done by Mr Paterson in his capacity as a director of the companies referred to in Recital 1.

63. The punctuation of the first paragraph of the indemnity is important. PGO's promise was not merely to pay to Mr Paterson moneys to compensate for any loss suffered by him arising out of such a claim. If that were the extent of the indemnity then even given the extended meaning of " loss " as including amounts payable in respect of a claim (and not merely amounts paid in respect of a claim), there would be force in the submission that to require PGO to pay the Commissioner of Taxation or Mr Paterson the amount of the penalties for which Mr Paterson is admittedly liable would go beyond compensating him, where no step has been taken to require him to pay those moneys beyond the service of a demand.

64. But the opening paragraph of the indemnity is wider. PGO's promise to pay Mr Paterson moneys to compensate for any loss suffered by him arising out of a claim as described is additional to its promise to indemnify Mr Paterson in respect of any loss suffered by him arising out of any such claim. When the word " loss " is read in its defined sense as including an amount payable in respect of the claim and not merely an amount paid in respect of a claim, that indemnity, being additional to the promise to pay moneys as compensation, amounts to a promise to relieve Mr Paterson by preventing his having to pay his debt.

65. In my view, the draftsman of the indemnity took a belts and braces approach by providing both a promise to prevent Mr Paterson from suffering loss arising out of a described claim and a promise to compensate him in respect of any such loss. It is true that the promise to compensate for such loss should be unnecessary if PGO fulfilled its promise to prevent the loss from being suffered. But the draftsman dealt with both contingencies. The promise of PGO was not only to indemnify Mr Paterson by paying money to compensate him for loss suffered.

66. In these respects the contract of indemnity in this case differs from that considered by the High Court in Wren v Mahoney . There, the deed of indemnity was to keep Mr Mahoney indemnified against all proceedings, actions, claims and demands made by the Commissioner of Taxation in connection with any income tax payable, or which might become payable, by Mr Mahoney (at 216). The majority of the High Court construed that promise as giving rise to a cause of action only after Mr Mahoney had paid an amount of tax (at 225). But in this case, the indemnity covers both a promise to compensate for loss actually suffered, and a promise to indemnify in the sense of preventing a loss from being suffered.

67. The context supports this construction. If the indemnity only required PGO to compensate Mr Paterson for amounts he paid to the Commissioner, it would not achieve its intended purpose. The parties' mutual concern, a matter of objective fact, was that Mr Paterson might be bankrupted by his exposure to the penalties. That concern would not be addressed if the indemnity applied only in respect of amounts Mr Paterson paid in respect of the penalties. To the knowledge of both parties he could not pay the amounts for which he was liable. His impecuniosity was the reason for his appointment as a director.

68. If the indemnity was only in respect of amounts paid, the deed would not have a sensible operation. If proceedings were brought against Mr Paterson and judgment was obtained against him, execution might be levied for a small sum. Only then, on PGO's submission, would the indemnity come into play. PGO would be required to pay Mr Pongrass that small sum. If he then remitted that sum received from PGO to the Commissioner in further reduction of the debt, the indemnity would again be triggered in respect of the further sum paid. To the extent Mr Pongrass made further payments the indemnity would operate until eventually after repeated payments the debt was discharged. At any time the process could be stopped by Mr Paterson not paying an amount received from PGO under the indemnity to the Commissioner. But in that event, the Commissioner could levy execution and upon doing so successfully, further moneys would become payable under the indemnity. That is not a sensible construction.

69. When the deed was entered into Mr Paterson was a defendant in proceedings instituted against him for moneys alleged to be payable by him as a trustee of the PGET. I think it is clear that none of the parties expected that those proceedings need not be defended, or expected that PGO would pay the Commissioner of Taxation the amounts demanded in that suit. But that is because it was understood that Mr Paterson was not liable for the amounts which were being claimed because he was not the trustee of that trust. In the terms of the indemnity, he had not then suffered a loss in respect of that claim because the amount claimed was not an amount payable by him.

70. The indemnity contemplated that a claim against Mr Paterson could be defended and provided that defence costs would be included in the indemnity only to the extent they were reasonable and were incurred with the prior written consent of PGO, such consent not to be unreasonably withheld.

71. This provision shows that the parties contemplated that a claim might be defended. Defence costs are included in the definition of loss as an addition to the scope of the indemnity beyond amounts payable in respect of a claim. Defence costs might be recoverable under the indemnity because a claim was made in respect of an amount that was not payable by Mr Paterson that had to be defended, or because the parties might choose to defend a claim for an amount that was payable. The latter possibility does not mean that Mr Paterson was not entitled to be relieved against having to pay an admitted debt that was subject to the indemnity.

72. I conclude that the indemnity requires PGO to relieve Mr Paterson by preventing his having to pay the penalties for which he is admittedly liable. It is not merely an indemnity to compensate him for any amounts of penalties that he pays to the Commissioner of Taxation.

Third issue: damages or equitable relief?

73. Mr Paterson contended that he was entitled to damages for breach of the indemnity for the full amount he was liable to pay the Commissioner of Taxation. If that were so, no question of equitable relief would arise. PGO did not dispute that Mr Paterson's entitlement to common law damages for breach of the deed did not depend on whether there was sufficient consideration to support a simple contract.

74. It has been said that a contract of indemnity is only enforceable at common law after the indemnified party has paid his creditor (e.g. In re Richardson; ex parte Governors of St Thomas's Hospital [1911] 2 KB 705 at 712). If the claim at law was on the common money count for money paid, (as in the case of contribution at common law between co-sureties) that was certainly so. There is no reason in principle why it should be so on a claim for damages for breach of a contract of indemnity. A contract has the same meaning at law as in equity. If the contract was an indemnity to prevent the plaintiff suffering loss, as distinct from indemnifying the plaintiff against a loss paid, there is no reason in principle why substantial damages should not be payable in the event of a breach to put the plaintiff in the same position as if the contract had been performed. In BNP Paribas v Pacific Carriers Limited [2005] NSWCA 72 at [112], Giles JA said:

" [112] If BNP did not provide indemnity in accordance with its obligations, PCL could claim as damages the amount of the relevant loss. BNP was in breach of contract, and PCL was ' so far as money can do it, to be placed in the same situation with respect to damages, as if the contract had been performed' ( Robinson v Harman [1848] EngR 135; (1848) 1 Ex 850 at 855 per Parke B; [1848] EngR 135; 154 ER 363 at 365). If PCL was yet to pay a claimant against it, and BNP's obligation was to relieve it from having to pay, it could obtain an order that BNP pay ( McIntosh v Dalwood (No 4) (1930) 30 SR 415 at 418-9); and it could obtain a declaration of entitlement to indemnity ( Post Office v Norwich Union Fire Insurance Society Ltd (1967) 2 QB 363 at 374) ."

75. In Loosemore v Radford [1842] EngR 427; (1842) 9 M&W 657; 152 ER 277, the defendant was liable in damages for breach of a covenant with the plaintiff to pay the payee of a promissory note given by the plaintiff and the defendant jointly. It was held that the amount of damages for which the defendant was liable was the amount of the money that he ought to have paid according to his covenant. In Wren v Mahoney (at 226-227), Barwick CJ observed of this decision that whilst an award of damages for breach of a promise by the defendant to pay a debt due to the plaintiff's creditor may include the amount of the debt, it will not necessarily do so and the damages for the breach might not include the full amount of the debt in the award of damages.

76. In McIntosh v Dalwood (No. 4) , Street CJ held that the reason equity will specifically enforce an agreement to relieve a debtor by preventing his having to pay his debt is that damages do not provide an adequate remedy.

77. Damages for breach of a contract of indemnity, where the promise is to relieve the plaintiff from the burden of the liability, rather than merely to compensate the plaintiff for moneys paid by him, could be less than the quantum of the liability if, for example, it was proved that the creditor could be satisfied at a smaller expense than payment of the full amount of the debt. But in the absence of such evidence, the amount of money to compensate the plaintiff for not having been relieved of his liability would prima facie be the amount of that liability. But this would provide over-compensation to the plaintiff if the creditor did not ever seek to enforce the liability. I take it that it was to this that Barwick CJ referred in Wren v Mahoney . In the present case, the ATO has taken no step for over eight years to enforce the liability. An assessment of damages would have to take into account the contingency that it may never do so. But such an assessment would be uncertain. Hence, damages are not an adequate remedy. They will fall for assessment only if equitable relief by way of specific enforcement is not available.

Fourth issue: quia timet relief if only promise was to indemnify against amounts paid

78. For the reasons I have given this issue does not arise. In Abigroup Limited v Abignano the Full Court of the Federal Court observed (at 83) that:

" It is well and long established in equity that a person entitled to an indemnity may obtain relief from the indemnifying party as soon as the person's liability to the third person arises and before he has made payment himself, except where the contract otherwise provides or certain exceptional circumstances exist: see National Financial Co; Ex parte Oriental Commercial Bank (1868) LR 3 Ch App 791; Wooldridge v Norris (1868) LR 6 Eq 410 Wolmershausen v Gullick [1893] 2 Ch 514 and other cases conveniently collected in Halsbury's Laws of England , 4th ed, vol 20, para 315. The person may therefore, where appropriate, obtain an order to compel the person who has given the indemnity to set aside a fund from which liability may be met ( Re Richardson; Ex parte Governors of St Thomas's Hospital [1911] 2 KB 705 per Cozens-Hardy MR at 709) or to pay the amount due directly to the third person ( Ascherson v Tredegar Dry Dock and Wharf Co Ltd [1909] 2 Ch 401) or where the giver of the indemnity is under no liability to the third person, in some circumstances even to pay the amount to himself (ie the person entitled to the indemnity: Lacey v Hill, Crowley's Claim (1874) LR 18 Eq 182 per Jessel MR at 191). But, as is noted correctly, in the passage mentioned above from Halsbury , the equitable right to enforce an indemnity does not constitute a debt (see the cases cited in Note 12 to para 315 of Halsbury which support the proposition for which they are cited). "

See also Young, Croft and Smith, On Equity (2009) Thomson Reuters Lawbook Co at [4.760].

79. As noted above, the right of a surety or other indemnified party to obtain quia timet relief in equity is subject to any express contractual term. Where, as in this case, there is an express contract of indemnity, Mr Paterson would not be entitled to equitable quia timet relief to require PGO to pay the debt to the Commissioner of Taxation, or to him, if PGO's only obligation was to indemnify against amounts already paid. For the reasons I have given, the indemnity was not so confined.

Fifth issue: consideration for the promise of indemnity

80. PGO submitted that its promise of indemnity was purely voluntary and that equity would not assist Mr Paterson as a volunteer ( Jefferys v Jefferys [1841] EngR 337; (1841) CR & PH 139; 41 ER 443). In Young, Croft and Smith, On Equity the learned authors summarised the position as being that " equity generally accepted that what was consideration at law was consideration in equity and, in addition, blood, marriage and natural love and affection could also be classed as consideration " (at [11.150]). In Spry, The Principles of Equitable Remedies , 7 ed (2007) Lawbook Co at 56-57. Dr Spry said:

" It may now be taken to be established that an applicant for the specific performance of a contract must be able to show that he has provided valuable consideration. It is by no means sufficient to establish that the agreement to be enforced has been made under seal. The fundamental principle that underlies this restriction is that courts of equity have not regarded the mere giving of a promise by the defendant as itself creating a situation where it would be unconscionable that the promise should not be performed. It is the provision of something of value that renders a failure to perform so unconscionable that enforcement may be obtained in specie if it is otherwise appropriate. "

81. For the reasons which follow, there was sufficient consideration to support PGO's promise of indemnity as a simple contract. But even if that were not so, I would not necessarily accept that specific enforcement should be refused. Whether or not there was sufficient consideration to support a simple contract, there is no doubt that at least Mr Pongrass was morally bound to provide the indemnity. He recognised that obligation. It may be a different question as to whether PGO was under any such moral obligation, but given that the companies to whom Mr Paterson was appointed as a director were its subsidiaries, and given that Mr Pongrass was its director, and (it can be inferred) controlled its shareholder, it could readily be concluded that PGO, as well as Mr Pongrass, had such a moral obligation. I would reserve my position as to whether such a moral obligation, even if not sufficient consideration to support a simple contract, was sufficient to bind PGO's conscience to perform the promise it gave in the deed.

82. Recital 2 to the deed states a sufficient consideration for the promise of indemnity, namely, Mr Paterson's agreement to continue as a director of the subsidiaries. Contrary to the submission made on behalf of PGO, there is nothing ambiguous about the recital. This is an action by Mr Paterson on the deed. As between Mr Paterson and PGO it is not competent for PGO to deny the recital, even though the recital is incorrect ( Carpenter v Buller [1841] EngR 552; (1841) 8 M & W 209 at 212; [1841] EngR 552; (1841) 151 ER 1013 at 1014). Evidence may be admitted to prove that a consideration additional to that stated in the deed was given because to prove an additional consideration is not a contradiction of the deed ( Clifford v Turrell [1841] EngR 1212; (1841) 1 Y & C Ch Cas 138; (1841) 62 ER 826; Frith v Frith [1906] AC 254 at 258-259; Yaroomba Beach Development Co Pty Ltd v Coeur de Lion Investments Pty Ltd (1989) 18 NSWLR 398 at 407-408). The fact that additional consideration can be proved because such proof is taken not to contradict the statement of consideration provided in the deed, indicates that a party cannot deny that it provided consideration for its promise in a deed, where the deed states that consideration was given and where the question arises in an action brought on the deed.

83. Even if PGO were not bound by the recital, consideration was provided by an implied promise on the part of Mr Paterson to continue to provide his co-operation in negotiations with the ATO and to allow such negotiations to be conducted through Mr Powrie in accordance with instructions from Mr Crouch and Mr Pongrass. There was no express agreement to that effect. But the promise would be implied. It satisfies each of the requirements for the implication of a term stated in BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977] UKPC 13; (1977) 180 CLR 266 at 283. It was so obvious as to go without saying. As a matter of business efficacy, PGO would not have given its promise of indemnity and Mr Paterson would not expect to have received it, except on the basis that he would agree to the continuation of the existing arrangement under which those negotiations were being carried on. The term was reasonable and equitable and did not contradict any express term of the deed. The fact that there was no express promise does not mean that there was no consideration for the indemnity.

84. Accordingly, Mr Paterson is entitled to remedies in equity as well as at law on the action to enforce the deed.

Appropriate remedy

85. In In re Richardson; ex parte Governors of St Thomas's Hospital, Fletcher Moulton LJ said (at 712-713):

" If you seek guidance in the matter from common law, there is no doubt whatever that it went on this principle: It would not help a man to make a profit out of what was merely an indemnity. If, for instance, B. was bound to pay a sum to A. and C. was bound to indemnify B., which is the case before us, then B. could not sue C. unless he could aver payment to A. It was the same thing whether it was a case of suretyship, indemnity, or contribution. In all cases before you could make a guarantor pay you must prove that you had actually paid the money.

...

As the Master of the Rolls has said, the rule in Chancery was somewhat different, and yet, to my mind, it emphasizes the fundamental principle that you must have paid before you have a right to indemnity, because the remedy which equity gave was a declaration of a right. You could file a bill against the principal debtor to make him pay the debt so that you would not be called upon to pay it, and then you obtained a declaration that you were entitled to an indemnity. You could in certain cases have a fund set aside in order that you might be indemnified, to avoid the necessity of your having to pay and then to sue for the money you had paid, which perhaps would not repair your loss and credit even if it discharged the debt. But I do not think that equity ever compelled a surety to pay money to the person to whom he was surety before the latter had actually paid. He might be ordered to set a fund aside, but I do not think that he could be ordered to pay. I do not know what were the cases to which Sir George Jessel vaguely referred in Lacey v. Hill"

86. Notwithstanding what was said in the passage quoted above, equity does more than make a declaration of right and order a fund to be set aside to enforce an indemnity. Equity may order the principal debtor to pay the creditor before the surety had been compelled to pay (see cases cited at para [54]). Ascherson v Tredegar Dry Dock & Wharf Co Limited (decided two years previously to In re Richardson; ex parte Governors of St Thomas's Hospital ) was such a case. Those were cases of principal debtor and surety, unlike the present case. A case of indemnity analogous to the present is McIntosh v Dalwood (No. 3) (1930) 30 SR NSW 332 and on appeal, McIntosh v Dalwood (No. 4) . There, as a term of an agreement to buy shares, the defendant promised the vendor to indemnify him against his liability to a third party. The plaintiff vendor sought to enforce the indemnity before he had paid his creditor.

87. In McIntosh v Dalwood (No. 3) Harvey CJ in Eq said (at 334-335):

" Equity can, by ordering the indemnifying party to pay the money direct to the creditor relieve the other party from sustaining those damages. It is a more satisfactory and proper remedy to make available to the plaintiff than requiring him to sustain the loss and then seek such damages at law as he is entitled to under his contract with the defendant. In other words, the Court of Equity can give him what a court of law cannot give and that may be the reason which has induced the court to interfere by way of specific relief in these contracts of indemnity. ... It is true that most of the cases arise on a contract of suretyship, but in my view that is only one instance of the contract of indemnity applying, the intention being to give a remedy of which suretyships form one only of many examples. There is no reason why the same principle should not apply to indemnity. The cases show that a plaintiff can call upon the debtor to pay the debt under his contract of indemnity from the principal debtor before he is has actually paid the liability. In my opinion the same principle exactly applied to a contract of indemnity against the payment of the liability. "

88. The decision was upheld on appeal ( McIntosh v Dalwood (No 4) ). The demurrer to the plaintiff's statement of claim was dismissed. It can be inferred that the relief sought and granted was an order that the defendant pay the plaintiff's creditor.

89. In Lacey v Hill (1874) LR 18 Eq 182 Jessel MR said of an agent entitled to be indemnified by his principal (at 191-192):

" ... it is quite plain then in this Court any one having a right to be indemnified has a right to have a sufficient sum set apart for that indemnity. It is not very material to consider whether he is entitled to have that sum paid to him, or whether it must be paid direct over to the creditor. If the creditor is not a party, I believe that it has been decided that the party seeking indemnity may be entitled to have the money paid over to him. As to the observation that he may compromise for less, the answer is, that the person liable to indemnify can go to the creditor and set him right. It is his own fault that the liability remains. "

90. In In re Richardson; ex parte Governors of St Thomas's Hospital Fletcher Moulton LJ in the passage quoted above said that he could find no such case and any such decision would not be in accordance with the spirit of the law. As can be seen from the passage in Abigroup Limited v Abignano quoted at para [78] above, the Full Court of the Federal Court considered that Lacey v Hill was authority for making orders for payment to the person entitled to the indemnity, even though he had not yet paid the creditor.

91. In Rankin v Palmer [1912] HCA 95; (1912) 16 CLR 285, Griffith CJ (with whom Barton and Isaacs JJ agreed) said (at 289-290):

" It is clear, however, that the plaintiff's only right is to indemnity, and the Court is bound to see that it does not prejudice the defendant by giving the plaintiff anything more. If the judgment stood in its present form, and the defendant paid the whole sum to the plaintiff, the plaintiff might not pay it to the creditors, in which event the defendant as principal might have to pay the money over again. Such a result would be manifestly unfair. An undertaking by the plaintiff would not obviate this difficulty. "

92. That was said where the defendant was both liable to the plaintiff's creditors and liable to indemnify the plaintiff. That is not the present case. PGO would not be placed in double jeopardy if required to pay Mr Paterson.

93. An order for payment to the indemnified party would not be contrary to the " spirit of the law ", if the court could ensure that a payment made to the indemnified party was no more than was required to discharge his liability to his creditor and was applied for that purpose. The difficulty that an undertaking might not be honoured would preclude that course in a case where the defendant was exposed to the risk of having to pay twice, but if that is not the case, an order could be made for payment to the indemnified party. Just as the indemnifier could meet his obligation to prevent the indemnified party suffering loss either by dealing with the indemnified party's creditor or by paying the indemnified party, so the court could specifically enforce the indemnifier's obligations in either way.

94. In Ascherson v Tredegar Dry Dock & Wharf Co Limited the order was that the defendant pay the amount to the bank so as to satisfy the plaintiffs' liability, with liberty to apply in the event of non-payment (at 409). It is not clear what further order Swinfen Eady J contemplated might be made in the event of non-payment.

95. Abigroup Limited v Abignano shows the difficulties that can attend enforcement of a judgment that the indemnifier pay the indemnified party's creditor where the creditor is not a party to the proceeding. The indemnified party would not be a judgment creditor entitled to enforce the judgment by execution or by winding-up proceedings. The debt would not be payable to it. Where the indemnifier is a company and refused to pay, though having the means to do so, it could be punished for contempt by fine or sequestration of property, but this might not ensure that the order is complied with.

96. As PGO is not at risk of having to pay twice, the preferable course is to order payment to Mr Paterson on his undertaking to the court to apply the payment forthwith in discharge of his liability. Such a course reduces potential problems of enforcement.

Orders

97. For these reasons I make the following declarations and orders:

1. Declare that pursuant to clause 3 of the Deed of Indemnity dated 17 May 2005 between the plaintiff and the defendant, the defendant is obliged to indemnify the plaintiff in respect of the amount of $2,008,574.46 referred to in the Payment Demand dated 11 October 2010 served on the plaintiff by the Deputy Commissioner of Taxation in respect of amounts of penalties incurred by the plaintiff as a director of subsidiaries of the defendant.

2. Upon the plaintiff by his counsel giving the undertaking referred to in order 3, order that within 28 days the defendant pay the sum of $2,008,574.46 to the plaintiff or as he might direct.

3. Note the undertaking of the plaintiff by his counsel to the Court and to the defendant forthwith after receiving payment from the defendant pursuant to order 2, he will pay or cause to be paid the whole of the sum received from the defendant to the Commissioner of Taxation in discharge of the amount the subject of the Payment Demand of 11 October 2010 referred to in the declaration in order 1.

4. Order that within seven days of receiving the sum paid by the defendant in accordance with order 2, the plaintiff file and serve on the defendant an affidavit showing his compliance with the undertaking noted in order 3.

5. Direct that the Registrar provide a copy of these reasons to the Australian Securities and Investments Commission and the Commissioner of Taxation.

6. The exhibits may be returned, but are to be retained by the parties' solicitors for at least 28 days or, if an appeal is filed, until the determination of the appeal. Any subpoenaed material may be returned forthwith.

98. Prima facie the plaintiff is entitled to his costs. I will hear the parties on costs.