FEDERAL COURT OF AUSTRALIA

FEDERAL COURT OF AUSTRALIA MCG Group Pty Ltd v Ftrus Pty Ltd (Formerly Fortrus Pty Ltd) [2016] FCA 697 File number: QUD 107 of 2015 Judge: GREENWOOD J Date of judgment: 10 June 2016 Catchwords: CONTRACTS consideration of whether a contract was entered into between two individuals and entities under their control in relation to reimbursement payments to be made by the respondents to the applicant in respect of payments made by the applicant to the Commissioner of Taxation in respect of a tax liability of an entity called Fortrus Resources Pty Ltd Date of hearing: 1-3 December 2015 Date of last submissions: 3 December 2015 Registry: Division: National Practice Area: Sub-area: Category: Queensland General Division Commercial and Corporations Commercial Contracts, Banking, Finance and Insurance Catchwords Number of paragraphs: 133 Counsel for the Applicant: Solicitor for the Applicant: Counsel for the Respondents: Solicitor for the Respondents: Mr M Martin QC Mills Oakley Mr Conrick Ellem Warren Lawyers

ORDERS QUD 107 of 2015 BETWEEN: MCG GROUP PTY LTD ACN 124 699 823 Applicant AND: FTRUS PTY LTD ACN 101 141 851 (FORMERLY FORTRUS PTY LTD) First Respondent JUDGE: PAUL GERARD MCDONALD Second Respondent GREENWOOD J DATE OF ORDER: 10 JUNE 2016 THE COURT ORDERS THAT: 1. Judgment is given for the applicant against the respondents in an amount of $673,210.38. 2. The parties file within 7 days short submissions in relation to the question of the disposition of the costs of and incidental to the proceeding including reserved costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT GREENWOOD J: 1 Although these proceedings formerly also incorporated a claim for relief based upon contended contraventions of provisions of The Australian Consumer Law, the proceedings at trial were confined to a claim for moneys due and owing under an oral agreement said to have been made between the applicant ( MCG Group ) and the first respondent ( Ftrus ), formerly known as Fortrus Pty Ltd, in or about June 2013. 2 The agreement is denied by Ftrus. 3 The questions in issue in these proceedings regrettably engage a controversy between Mr Bill McDonald, the sole director and controlling mind of MCG Group and his brother, Mr Paul McDonald, the sole director and controlling mind of Ftrus. For ease of reference, I will refer to these men as Bill McDonald and Paul McDonald. 4 Both Bill McDonald and Paul McDonald at all material times were and remain directors of a company called Fortrus Resources Pty Ltd ( Fortrus Resources ). A company controlled by Bill McDonald, B. McDonald (No 2) Pty Ltd, owns 125 issued shares in Fortrus Resources. Ftrus, Paul McDonald s company, owns 75 issued shares. Thus, their respective interests in Fortrus Resources were and are 62.5% and 37.5%. The parties accept that Bill and Paul s entities held those respective interests in those proportions notwithstanding that either the accountants or the solicitors for Fortrus Resources recorded, incorrectly, with the Australian Securities and Investments Commission ( ASIC ) an apportionment of the issued shares in the ratio 50%/50% rather than 62.5%/37.5%. 5 In or about June 2013, Fortrus Resources was indebted to the Commissioner of Taxation (the Commissioner ) in an amount of $6,053,081.43 although Ftrus says that the amount was $6,053,081.49 inclusive of interest (the tax debt ). 6 It is common ground that the tax debt arose out of a transaction about 12 months earlier by which Fortrus Resources sold either a coal lease or the shares in a controlled entity holding that lease, for $20 million generating a substantial gain of approximately $15 million to $16 million. $15 million of that gain was distributed to each shareholder entity equally ($7.5 million each rather than in the ration 62.5%/37.5%) not as a dividend but as a term unsecured loan for seven years in conformity with the Income Tax Assessment Act 1936 (Cth), the Income Tax Assessment Act 1997 (Cth) and the Taxation Administration Act 1953 (Cth). The

- 2 - Division 7A Loan Facility Agreement between Fortrus Resources and B. McDonald (No 2) Pty Ltd and Fortrus Resources and Ftrus as Trustee for Paul McDonald Family Trust are both in evidence: Exhibit 1, pp 1-12. 7 The distribution of the cash balance remaining on sale of the asset (by means of the two term loans), meant that Fortrus Resources did not have sufficient assets or any ability to pay the tax debt when it fell due for payment. 8 On 24 June 2013 Fortrus Resources entered into a payment arrangement with the Commissioner which involved the payment of 12 instalments in satisfaction of the tax debt. The payment schedule extending from 5 July 2013 to 5 June 2014, contained in the Commissioner s letter of 24 June 2013, provided for three monthly payments of $100,000.00 commencing on 5 July 2013; eight monthly payments of $639,231.27; and one final monthly payment on 5 June 2014 of $639,231.33 representing an amount, in all, of $6,053,081.49. 9 The matter critical to the litigation arises out of para 11 of the second further amended statement of claim. MCG Group says that on a specific date which it cannot particularise but which occurred in or about June 2013, Bill McDonald on behalf of MCG Group and Paul McDonald on his own behalf and on behalf of Ftrus, entered into an oral agreement containing these elements: MCG Group would pay 62.5% of the tax debt of Fortrus Resources; Ftrus and/or Paul McDonald would pay 37.5% of that debt; in order to facilitate payment to the Australian Taxation Office ( ATO ), MCG Group would make all payments to the ATO, in full, following which Paul McDonald and Ftrus would pay to MCG Group 37.5% of the amount paid to the ATO in reduction of the tax debt, resulting in contributions representing their respective beneficial shareholding in Fortrus Resources. 10 The matters at para 11 are denied by Paul McDonald and Ftrus. 11 MCG Group contends that a course of conduct then occurred in part performance of the agreement commencing on 8 July 2013. 12 On 5 July 2013 an instalment of $100,000.00 was due for payment to the ATO. On that day MCG Plant Pty Ltd ( Plant ) paid the ATO the instalment. On 8 July 2013 MCG Group reimbursed Plant for the payment. On 22 July 2013 Ftrus paid MCG Group $37,500.00 representing 37.5% of the payment to the ATO. 13 On 5 August 2013, MCG Group paid the next instalment of $100,000.00 and on 5 August 2013 Ftrus paid MCG Group $37,500.00.

- 3-14 On 6 September 2013, MCG Group paid the next instalment of $100,000.00 and on 6 September 2013 Ftrus paid MCG Group $37,500.00. 15 Although I will return to the evidence of each brother later in these reasons, Bill McDonald in response to the proposition put to him a number of times in cross-examination that there was no oral reimbursement agreement as alleged, observed that if no such arrangement had been made, why were payments equivalent to 37.5% of the paid instalment being made to MCG Group each month in apparent conformity with such an arrangement, by Ftrus? The alternative explanation put to Bill McDonald was that each brother was simply making contributions to the payment of the tax debt (in the period 5 July 2013 to 6 September 2013) through entities under their respective control consistent with their respective interests in Fortrus Resources. 16 The three payments of $37,500.00 were not made to Fortrus Resources for payment to the ATO. Nor were they paid directly to the ATO. They were proportionate contributions paid to MCG Group which had paid the entire monthly instalment to the ATO. 17 On 7 October 2013 an instalment of $639,231.27 fell due for payment. An extension had been obtained until 14 October 2013. On 14 October 2013, MCG Group paid that instalment to the ATO. On 25 October 2013, Fortrus Pty Ltd ACN 150 945 350 ( Fortrus 350 ; formerly Mac Anchor Pty Ltd), on behalf of Ftrus paid MCG Group $239,711.00. MCG Group says that in conformity with the agreement, $239,711.72 represents a reimbursement of 37.5% of the payment made by MCG Group to the ATO. Ftrus and Paul McDonald admit the payment and plead the role played by Fortrus 350 but deny that the payment was made pursuant to any oral agreement. 18 Mac Anchor Pty Ltd assumed the title Fortrus Pty Ltd on 16 August 2013. Paul McDonald is the sole director of that company. The shares are held equally by him and his wife Kaye McDonald. On the same day, Fortrus Pty Ltd (the first respondent) changed its name to Ftrus Pty Ltd (leaving the name Fortrus available for Mac Anchor Pty Ltd). 19 The fundamental assertion by Ftrus and, more particularly, Paul McDonald, is that he made no such agreement with his brother; there simply was no reimbursement agreement as pleaded; and the point of the payments was to reduce the Division 7A unsecured term loan each shareholder had with Fortrus Resources and enable that company to pay the tax instalments. If the payments were, or were intended to be, reductions by or on behalf of the shareholders of each of their Division 7A term loans of $7.5 million each, presumably the

- 4 - repayments would have been equal as between each shareholder (brother) since the loans were distributed equally. The payments, however, were in the ratio 62.5% and 37.5% after taking account of the Ftrus reimbursement payments to MCG Group. 20 MCG Group says that since 14 October 2013 it has made two payments of $135,000.00 to the ATO. The first was on 13 November 2013 and the second on 6 December 2013. On 13 November 2013 Ftrus paid MCG Group $50,625.00. On 9 December 2013 MCG Group was paid $50,625.00 although as to that payment, Ftrus and Paul McDonald say that the payment was made by Fortrus 350 for and on the direction of Ftrus. 21 The November and December payments of $50,625.00 to MCG Group by Ftrus and Fortrus 350 (for Ftrus) are amounts that represent 37.5% of $135,000.00. 22 Apart from the two payments of $135,000.00, MCG Group asserts that it paid 9 instalments of $164,189.00 between 4 March 2014 and 28 November 2014 amounting to $1,477,701.00. It made a further payment on 9 March 2015 of $656,756.00 amounting in all (including the two instalments of $135,000.00) to $2,404,457.00. 23 MCG Group has paid the ATO $3,343,688.00 in all made up of three payments of $100,000.00, one payment of $639,231.00, two payments of $135,000.00, nine payments of $164,189.00 and one payment of $656,756.00. Ftrus either by itself or by Fortrus 350 has paid MCG Group three payments of $37,500.00, one payment of $239,711.00 and two payments of $50,625.00.00 constituting, in all $453,461.00. Assuming Ftrus has an obligation to pay MCG Group 37.5% of the payments it made to the ATO, the amount owing to MCG Group would be $1,253,883.00 less $453,461.00 amounting to $800,422.00. If the calculation takes account of only the pleaded para 20 additional payments, the amount paid by MCG Group to the ATO is $2,404,457.00, 37.5% of which is $901,671.37. The payments to the MCG Group by Ftrus (apart from the earlier three payments of $37,500.00 and the amount of $239,711.00) amount to $101,250.00. The unpaid reimbursement would be $800,421.37. However, the claim made by MCG Group by paras 37 and 38 of the second further amended statement of claim is an amount of $673,210.38 either as a sum said to be due and owing or alternatively as the measure of the damage MCG Group says it has suffered by reason of the contended breach. 24 In summary, the respondents say that no oral agreement was made in or about June 2013 as pleaded or at all. Moreover, the changes to the statement of claim (the first filed 23 March 2015; the second filed on 22 May 2015; the third filed on 9 November 2015; and the fourth

- 5 - filed on 1 December 2015) demonstrate the changes to the contended agreement. Further, the letter from the solicitors for Bill McDonald and MCG Group to the solicitors for Paul McDonald and Ftrus dated 16 March 2015 asserts an agreement made on 14 October 2013 not June 2013. The respondents say that Bill McDonald is confused about when meetings occurred and who was present at them. Finally, they say that the payments made by or on behalf of the respondents were simply reductions in the loan balances to enable the tax instalments to be paid according to shareholder interests and, far from striking an agreement by which MCG Group would pay tax instalments with reimbursement by Ftrus of 37.5% of those payments, Bill McDonald and Paul McDonald were both investigating the possibility of winding-up Fortrus Resources and possibly entering into a Deed of Company Arrangement with the ATO. 25 It is now necessary to examine the evidence of the witnesses and particularly the evidence of Bill and Paul McDonald on these various matters. Before doing so, the principal actors in the events should be noted. 26 Mr William (Bill) Yates is an accountant. At all relevant times he was employed as the Chief Financial Officer of the MCG group of companies. Exhibit 4, pp 28-58 comprises the financial statements for the year ended 30 June 2012 for MCG Corporation Pty Ltd ( MCG Corp ) and its controlled entities. MCG Group is a controlled entity of MCG Corp. So too is Plant. Mr Dale Cliff is Bill McDonald s solicitor. 27 Ms Elisha Williams is Paul McDonald s personal secretary. Ms Michelle Civitarese is an accountant who practises under the name Smart Steps Accounting. At all relevant times she was the accountant for Fortrus Resources. Paul McDonald gave evidence that Ms Civitarese was also the accountant for entities controlled by him: T p 100, ln 20. Paul McDonald also gave evidence that he did not deal with Ms Civitarese one on one. Ms Williams dealt with Michelle : T p 100, lns 22-23. Mr Martin (Marty) Bristow was an advisor to Paul McDonald. He also had a small partnership interest in Paul McDonald s American business. Mr Richard Ellem was Paul McDonald s solicitor. 28 On 16 May 2013, Ms Civitarese advised Mr Yates, Ms Williams and Mr Bristow that the tax return for Fortrus Resources had been lodged with the ATO the day before and once the debt was posted to the ATO portal (just a matter of days), it would be necessary to enter into a payment arrangement with the ATO asap : Exhibit 4, p 1. Ms Civitarese also advised them that generally the ATO accepts payment over 12 months and she would try for smaller

- 6 - payments over the first three months starting late June and then renegotiate the payments after three months. 29 On 24 May 2013 Ms Civitarese sent to Mr Bristow, Ms Williams and Mr Yates, a draft of an email to the ATO (High Value Tax Debt Department ( HVD group )) saying that Fortrus Resources currently had insufficient assets to pay the tax debt. The draft outlined a proposal to pay $100,000.00 for the first three months to enable the directors to raise funds with a view to reviewing the tax debt after three months. Ms Civitarese sought the comments of the three addressees on the draft. Mr Yates suggested a minor change to the draft. The proposal was put to the ATO. 30 On 28 May 2013 Ms Civitarese advised Mr Yates, Mr Bristow and Ms Williams that the ATO wanted to know the entities that would be making the repayments. The ATO also wanted financial statements for those entities for the last two financial years; a statement of loan facilities; cash flow statements for them; current aged debtors; and current aged creditors. Mr Yates responded that day advising that MCG Group would be paying the Bill McDonald liability and the relevant information would be available within three days: Exhibit 4, p 7. That information was provided to Ms Civitarese on 30 May 2013. 31 On 5 June 2013 Ms Civitarese sent an email to the ATO HVD group advising that MCG Group (although she mistakenly referred to MCG Resources ) would be paying $3,524,908.00 of the tax debt and Fortrus Charters would be paying $2,114,945.00 of the tax debt. Fortrus Charters was nominated as a Paul McDonald entity. Paul McDonald gave evidence that he did not know until the day before he gave evidence that Fortrus Charters had been nominated as his relevant paying entity. MCG Group s proportion of the tax debt ($5,639,853.00) was 62.49% and the Fortrus Charters proportion was 37.51% (on those figures). 32 Ms Civitarese nominated Fortrus Charters on instructions from Mr Bristow for Paul McDonald: T p 128, lns 24-25. Paul McDonald gave evidence that Fortrus Charters owned a large catamaran (purchased for between $8M and $9M) and sought, unsuccessfully, to charter it out. Only two charters had ever occurred. It was sold in 2013 for a similar amount : T p 102, lns 24-32. In support of Ms Civitarese s email to the ATO HVD group nominating Fortrus Charters, a document described as Fortrus Charters Actuals v Budget 2013-2014 was submitted to the ATO: Exhibit 4, 104. Ms Civitarese understood and believed that the numbers on the spreadsheet were entirely budgeted figures. The document suggests budget

- 7 - revenue of $110,000.00 each month for July, August and September 2013 and other revenue in October 2013 of $2,500,000.00 from the sale of the catamaran. Gross proceeds were budgeted at $2,473,000.00 (after expenses). The budget revenue for January 2014 ($110,000.00) and Mach and May 2014 ($55,000.00 each month) assumed that the boat had not been sold. In fact, it was sold for USD 8,400,000.00 (with a deposit of $840,000.00) by Fortrus Charters Ltd of the Cayman Islands with a closing date of 9 July 2013. 33 In relation to the payment arrangement with the ATO, Ms Civitarese gave evidence that the first three payments were sought at $100,000.00 each due to cash flow restrictions within [b]oth Bill and Paul trusts : T p 126, lns 25-30. Mr Yates, Ms Williams and Mr Bristow instructed Ms Civitarese to negotiate a payment plan because the tax debt could not be repaid in full: T p 126, lns 39-40. Ms Civitarese gave evidence that after the first three months, negotiations would continue during which investigations would be undertaken into the question of whether liquidation of Fortrus Resources ought to occur and whether a Deed of Company Arrangement was an option : T p 127, lns 1-3; lns 36-37. Examination of that issue arose in late May or early June as a result of a request made by Mr Bristow to seek advice from an insolvency firm, Worrells : T p 127, lns 42-43. 34 On 24 June 2013 the ATO, by letter, agreed to a payment arrangement in the terms described at [8] of these reasons. 35 The purchase and sale agreement for the sale of the boat by Fortrus Charters Ltd was signed by the Swiss buyer, Melih Keyman on 25 June 2013. The purchase and sale agreement was sent by email by the Newport (USA) yacht broker, Mr LeBuhn to Mr Bristow and Ms Williams on 26 June 2013. Ms Williams sent it by email to Mr Bristow (again) and to Paul McDonald at 9.09am that day. That evening at 10.20pm Paul McDonald sent an email to Bill McDonald attaching the purchase and sale agreement and other material. In his email, Paul McDonald simply said: Please call xo. Plainly enough, Paul McDonald wanted Bill McDonald to call him to discuss something. It may have concerned the attachments per se although Bill McDonald had no interest in Fortrus Charters Ltd. It may have been about the tax debt the subject of the 24 June 2013 ATO HVD group letter in the light of the impending closing of the sale of the boat on 9 July 2013. In any event, whatever the subject matter of the proposed conversation, it was sufficiently important to Paul McDonald that he sent Bill McDonald an email asking him to call. Paul McDonald at the time was in the United States.

36 The evidence-in-chief given by Bill McDonald is very brief. Bill McDonald was taken to the - 8 - ATO letter of 24 June 2013 setting out the payment schedule and gave evidence that he had a conversation with Paul McDonald at about that time as to how the amount of the tax debt would be paid. It was a telephone conversation. He then gave this evidence at T p 20, lns 5-10; lns 14-18: [to the] best of my recollection, I rang Paul. Paul was working in America at the time so he was in and out of Australia. I rang Paul. Smart Steps had done the tax returns up and we had to start paying the tax from the windfall we had had with the business deal we did and I rang Paul and we discussed and agreed to split the tax in the proportion of the shareholdings and start paying the tax.... To the best of my recollection, we agreed that we had to start paying the tax. Michelle [Civitarese] had, through Smart Steps, had done the tax returns. That was the agreement arrangement we had put in place with the ATO and then when I discussed with Paul we had to start paying and I would, to make it easily [easy], I would pay and Paul would reimburse me at the time. 37 Bill McDonald could not remember the date of the conversation although it was said to be around that time which I assume is a reference, like the earlier reference, to the 24 June 2013 ATO letter. That assumption is made clearer by his further observation in these terms at T p 20, lns 23-25: Once the ATO payment had been put in place and we knew all the documents had come back, that the tax was due, and we had to start paying it. 38 Bill McDonald says that he made the call from MCG Corp s office in Brisbane and his best recollection is that Paul McDonald was overseas at that time. McDonald had a business overseas. He added that Paul 39 In cross-examination Bill McDonald was taken to the statement of claim filed on 23 March 2015 at para 11 which recites that the applicant cannot currently particularise the date of contended oral agreement. The statement of claim filed on 22 May 2015 added but in or about June 2013. In response to the proposition that he could not originally say when he entered into the oral agreement, Bill McDonald said that it was around this time [the time of the 24 June 2013 payment arrangement] : T p 41, lns 28-29; lns 34-35. He added, at T p 41, lns 37-44: It would be around that time. That s where we started paying it and that s where the split started happening, and we started whether before the first payment would have went through. Otherwise, why would the payment have gone through and those if we didn t have the agreement or the conversation, why would they have gone through with those figures? - the figures that went through that were exactly those percentages. If the conversation never took place, why would the numbers be that

- 9-40 Bill McDonald was also taken to the additional matter introduced into the amended statement of claim filed 22 May 2015 that an element of the oral agreement was a facilitation arrangement whereby MCG Group would pay the instalments agreed to be paid and Paul, by Ftrus, would reimburse MCG Group for 37.5% of any amount paid to the ATO. It was put to Bill McDonald that the first time such a contention had been made was in the amended statement of claim. Bill McDonald reasserted his evidence that he and Paul had had a conversation and otherwise why would his people pay the money : T p 42, lns 31-34. 41 Bill McDonald accepts that the ATO was owed about $5.5M after adjustments and if the tax debt was not paid, Fortrus Resources would likely be wound up and the trustee entities for each of Paul and Bill McDonald would be pursued for recovery of the Division 7A loans. Thus the payment of the instalments by MCG Group and a contribution by Ftrus to MCG Group of 37.5% of each payment was said to be simply a co-operative way of paying down the loan accounts to enable the tax to be paid according to a contribution arrangement reflecting a 62.5% and 37.5% split. Bill McDonald maintained his position that the tax had to be paid because neither Bill nor Paul McDonald could expect to derive a windfall gain of between $15M and $16M on a sale at $20M and not pay the tax debt. Although Bill McDonald made this remark a number of times, one example is at T p 47, ln 8. The reality of the tax debt, the inevitability of the ATO pursuing recovery of it and the instalment arrangement of 24 June 2013 with the ATO, made it essential, in Bill McDonald s view, for an arrangement to be made with his brother for paying each monthly instalment as it fell due. 42 Bill McDonald also accepted that when he and Paul McDonald spoke about the need we had to pay the tax debt in proportion to our respective shareholdings, references by the brothers to our companies or my companies or us or we were not intended to be references to any particular entity but rather a reflection of an interest held by one or other of them through whatever selected vehicle happened to hold the relevant interest: T p 44, lns 4-24. 43 Bill McDonald also accepted that given their split in the interests in Fortrus Resources at 62.5% and 37.5% it was not remotely surprising that [Bill] and Paul talked or understood that you would have to pay the tax or fund the tax in proportion to your shareholdings : T p 44, lns 45-57. The respondents say that the need to make contributions to the tax debt instalments according to the differential shareholding interests is the explanation for the sequence of payments made by MCG Group and Ftrus in the respective amounts rather than a separate contended agreement in the terms asserted by Bill McDonald or at all.

- 10-44 Plainly enough, Bill McDonald took the view that if Fortrus Resources did not have the assets or the capacity to pay the tax debt, it was up to Bill and Paul to see it paid and they would do that by or through whatever vehicle they respectively controlled (reflecting their respective asset position in the overall broad sense) and in the proportion of their respective shareholding in Fortrus Resources of 62.5% and 37.5%: T p 45, lns 41-47; T p 46, lns 1-13. Equally plainly, Bill McDonald considered that he had made an agreement with his brother directly: T p 45, lns 41-43; T p 46, lns 3-9. 45 Bill McDonald agreed that in the June 2013 discussion with Paul McDonald he would have talked about my share and your share of the Fortrus Resources tax debt and although he thought that there would have been discussion of the specific percentages he ultimately put it this way at T p 47, lns 41-44: I don t recall whether we would [have] discuss[ed] percentages. We would have discussed whose share, what share, and when so that s what we would have discussed. Now, whether its percentage or share, it s the same thing. 46 In the context of a discussion about what may have occurred at a meeting in September 2013 (to which I will return) Bill McDonald made further reference to the June 2013 agreement and the anomaly of the 50/50 apportionment of the issued shares in Fortrus Resources in the records of ASIC. He said this at T p 54, lns 30-41:.. When we first got the first ATO agreement in place Paul and I had a discussion and we split it, because you will see in September the ASIC, by the looks of that, was still fifty-fifty. That s why that joke on the second-last page is there [this is a reference to a remark, described by Bill McDonald as a joking or facetious remark in the transcript of a meeting in which Bill McDonald makes a reference to Paul McDonald paying 50% of the tax debt], so back in when we first got the payment plan and we started paying it, we were paying at the correct split [62.5/37.5] and then you will see part of this I m positive. Before this meeting actually took place [the September meeting], Michelle [Civitarese] and don t quote me on this was already negotiating to redo the payment plan with the ATO before this meeting, so that was going on as well before that. So there would have been no discussion at this meeting about the split of the tax because we had already decided that and we were already paying that. Now if I was going to be silly I would have said to Paul back in June/July you ve got to pay fifty per cent because that s what ASIC says. Well, it s not. ASIC was wrong. 47 This topic of the June 2013 discussion was revisited in the context of the statement made in the letter of 16 March 2015 written by Mr Cliff (Bill McDonald s solicitor) to Mr Richard Ellen (Paul McDonald s solicitor) that an agreement had been reached between the brothers on 14 October 2013 that Paul McDonald would meet his share (37.5%) of the outstanding [tax debt] with Bill agreeing to meet the full instalment each month and Paul agreeing to pay Bill the 37.5% share within seven days. The proposition was put to Bill McDonald that no

- 11 - agreement was reached on 14 October as asserted by Mr Cliff on behalf of Bill McDonald (and, as later put, that an agreement of 14 October 2013 was inconsistent with an assertion that an agreement was made in June 2013). Bill McDonald responded in this way at T p 55, lns 22-27: No. It was actually back in. there was there were numerous discussions. The first discussion we held was back in June and that s why those payments were paid in that split, and that would line up with the second line of ATO payment plans too, the exact same split and then the payments were made. So if there wasn t an agreement the payments wouldn t have been made that way, would they. It s a very big coincidence if the payments were made exactly that way when there was no agreement. 48 Bill McDonald was asked the following question and gave the following answer at T p 55, lns 29 42: Q. Now, when you say you reached an agreement in June, was that before or after the payment agreement was reached with the ATO and you knew what was required to be paid each month? A. I don t recall the specific dates when Michelle would have finalised with the ATO, when that actual it will be in the documentation when she had that final thing. As you said earlier, we would have known since February/March there was a tax bill coming and it would have had to have been sorted out, and Michelle would come back from the ATO with a date. We would have known since the money came in [the windfall profit]. You can t get 20 million and not pay tax and not have a tax bill, can you. 49 At T p 56, lns 4-11, Bill McDonald added this: When Michelle started finalising the tax returns of last year [which is a reference to the tax returns for the financial year ending 30 June 2012 which were lodged by Ms Civitarese on 15 May 2013], that s when I had the conversation with Paul. Because the ASIC registry was fifty-fifty, which was incorrect, it was actually more of a liability to me [62.5%] than it was to Paul [37.5%], that s when we had the conversation. Michelle cut the deal with the ATO and did a good job, and that s when we started paying and that s when Paul we would pay we paid it and Paul paid us. Now, if we hadn t had the deal why we would have paid that sum of money to that specific percentage if there was no deal. 50 In answer to Bill McDonald s question at the end of the last quote, counsel for the respondents observed that the respective percentages simply represented the proportion of the shareholdings and as businessmen, you would have assumed you were going to meet the liability of the company in proportion to your ownership of it. Counsel asked wasn t that the case? Bill McDonald agreed: T p 56 lns 13-16. 51 These topics were further addressed in response to a proposition put to Bill McDonald by counsel for the respondents that there were five business occasions at which representatives of Paul McDonald were present and during which the question of an agreement having been

- 12 - made in June 2013 as alleged could have been asserted by or on behalf of Bill McDonald. The first was a meeting of 5 July 2013. The second was a meeting at Noosa in August 2013. The third was a meeting on 13 September 2013. The fourth was a meeting on 14 October 2013 and the fifth was a meeting on 3 December 2013. Bill McDonald responded in this way at T p 60, lns 40-47; T p 61, lns 1-4: Those meetings, if you look at all the correspondence, were to do with Fortrus [Resources]. Predominantly those meetings to do with Fortrus Resources [were addressing the question] was [it] in a position legally to avoid the tax. While we discussed the split 67/32, whatever it is [62.5/37.5], when it was already agreed to back in June, it was already being paid. If it wasn t agreed to, it wouldn t have been paid up to that point and it wouldn t have been kept being paid at that split after that point. So those meetings were in place to work out whether Fortrus could legally avoid paying tax, like we all do, as taxpayers. So there s you can say that and if there was never an agreement or never a discussion, it s a two billion chance to one that Fortrus would all of a sudden pay the tax on that split if we didn t have the conversation. Why would it when ASIC says fifty-fifty. So if the conversation never existed, why do those figures stack up from the first payment? 52 Bill McDonald was asked why he considered the share ownership was in the ratio 62.5/37.5 when ASIC had recorded the holding of the issued shares in the ratio 50/50. Bill McDonald explained that an error had been made by the accountants on the assumption that when the company was set up, the two shareholders would be required to agree about relevant matters and thus the shareholding would be held 50/50. However the correct ratio was 62.5/37.5. Even though the records with ASIC had not been changed, the payment of the tax debt of the company would be met in the correct ratio. Bill McDonald put it this way at T p 61, lns 16-19: Even though ASIC hadn t been changed we were paying the tax at 60/32 whatever the give or take a percentage point, otherwise [but for] the conversation we would have had, why would that have been paid, why would Paul s people have paid that money according to that percentage if it hadn t been instructed by Paul. 53 As to the contended failure to mention the matter of the June 2013 agreement at the Noosa meeting in August 2013, Bill McDonald said this at T p 61, lns 39-42: There was no need to say it, because the meeting was in regard to investigating legally whether Fortrus [Resources] could be wound up, and that was on Paul s suggestion. We had already I had already had tax advice myself that it wasn t right. 54 As to the 3 December meeting at which Bill McDonald and Mr Cliff were present together with Mr Yates, Mr Bristow, Ms Civitarese and Mr Ellen, with Paul McDonald on the telephone relaying responses through Mr Bristow, Paul McDonald made it plain through Mr Bristow that he could not find more than $50,000.00 a month to contribute. Bill McDonald

- 13 - refused to accept that position and put his refusal to do so in writing. Bill McDonald accepted that neither he nor Mr Cliff asserted in the meeting that Paul McDonald was breaking an agreement made in June 2013 by now offering only $50,000.00 each month. Bill McDonald accepted that the written material exchanged between the parties over time does not express any reference to an agreement made in June 2013. Bill McDonald then added this observation at T p 62, lns 35-37: All I can see is a bank statement [as] to when it actually took place. And Paul, in December, said he could only paid 50,000, [if] there was no agreement, why would he even offer to pay 50,000 if there s no agreement in place. 55 Bill McDonald added this at T p 62, lns 42-46; T p 63, lns 1-2: If there s no agreement in place, why would he say I can t pay the 62 which was the split [the amount Paul McDonald by his relevant entity is said to have agreed to pay]. When you look through the documentation you will see on the new tax payment payment plan, Paul actually with the split, as you say, didn t exist, but if it did the split was 62,000 and you will see in his cash flows he had that there and then he said I can only afford 50,000. Well, if there was no agreement [by] those conversations.. why would he pay those sums if there s no agreement. If there s no agreement, don t pay anything. 56 Bill McDonald accepted that the figures line up with the shareholdings : T p 63, ln 7. 57 Counsel for the respondents returned to the topic of the June 2013 agreement again and Bill McDonald reasserted this position at T p 66, lns 16-19: There was an agreement to pay the ATO debt when Michelle lodged it. Paul and I had an agreement to pay our portions. It was a verbal agreement and that s why those portions were paid that way, and it continued to be that way until the payments stopped. 58 The payment arrangement of 24 June 2013 with the ATO provided for a payment of $639,231.27 on 7 October 2013. An extension was arranged until 14 October 2013. On 14 October 2013 at 1.08pm Bill McDonald sent an email to Ms Williams and Mr Bristow in which he said: Elisha/Marty, do you want us to pay the $639,231.27 today in full? then you pay us the Fortrus [Ftrus] share? Or how do you want to handle it? : Exhibit 1, p 100. At this time the question of a renegotiation of the payment schedule had been raised with the ATO. On 14 October 2013 at 3.51pm Mr Bristow sent an email to Bill McDonald, Ms Williams, Paul McDonald and Ms Civitarese in which he said this (Exhibit 1, p 103): I just spoke to Narelle at the ATO for the last 30 minutes. I advised them the payment was being processed today and they were happy with that [$639,231.27]. There were notes on file saying we would call today, which we did. They did advise that the payment plan still show as current and had not defaulted due to late payment. With regards potential renegotiation, I advised the ATO that in my professional

- 14 - opinion, the shareholders would struggle to meet the existing payment arrangement. I advised that I would be suggesting a three year strategy that would be viable for the shareholders. The matter needs to be escalated to a person in the Townsville office. We tried several times to connect with them but the lines have been busy. Narelle from the ATO did make several file notes to explain my thoughts and that we have tried unsuccessfully to reach the right person by phone today. I will call back again this afternoon and in the morning to get this moving. Any questions, give me a shout. 59 The proposition was put to Bill McDonald that his email of 14 October 2013 asking Ms Williams and Mr Bristow (for Paul McDonald) whether they wanted Bill McDonald s interests to pay the instalment that day in full with Fortrus (now Ftrus) paying MCG Group Ftrus s share of the instalment, coupled with the question of how do you want to handle it, suggested that there seemed to be no agreement about the payment according to the method suggested by Bill McDonald. Bill McDonald gave evidence that when that instalment was due Ms Williams and Mr Bristow were trying to strike a new deal with the ATO. Mr Bristow described it as a renegotiation of the existing arrangement over a three year period. Bill McDonald gave evidence that he asked Mr Bristow, by his email, whether he had done it yet : T p 67, ln 3. Bill McDonald put it this way at T p 67, lns 5-10: They, at that time, were dealing with a second round [renegotiation] with the ATO Have you sorted it? And if so, I will pay it. Do you want me to pay it in full? And you pay Paul [s] share. Now, Paul s share was at that percentage. 60 Finally on this topic of the June 2013 Agreement the proposition was put to Bill McDonald at the end of his cross-examination that no such agreement had been reached with Paul McDonald. He gave the following answer at T p 76, lns 26-38: Paul and I had a conversation with Michelle. I will repeat it again for the third time today. Michelle put the BAS Statements and all those things in. When the ATO came back, the tax debt was there. Paul and I had a conversation and we would then start when the first payment was due that Michelle organised, we would pay that according to our shareholding, and we did. And we did so for the first six months. That s what happened. So [if] if there was no agreement.. [it] was very ironic that we actually paid the 37-62 split or whatever it was. I ve said for the third time today, if there was none of that in place, why would anyone have ever done anything in the first place to line it up? It actually happened with bank statements and the ATO. And Paul s accountant, Michelle, actually did the work. So I don t know why we re around to this point again. Because if there was none of that in place, none of that would have happened. 61 As to background matters, Paul McDonald gave evidence that he invested the funds received from Fortus Resources in the 2012 financial year in a business in America that failed entirely to live up to expectations. As he said, it could not be made to perform. As to the tax position, Paul McDonald understood that in approximately 12 months time we had to pay

- 15 - the tax (T p 99, ln 24) according to our shareholding and my obligation was 37.5%: T p 99, ln 26-27. Paul McDonald was aware when he received the funds that by about June 2013, we had to pay tax on the money we [had] received : T p 99, lns 35-41. Paul McDonald gave evidence that at that time, however, the financial position of his entities was very, very poor : T p 99, ln 43. In January Paul McDonald began discussing the position with his advisors, Mr Bristow, Ms Williams and Ms Civitarese. As to discussions with Bill McDonald, Paul McDonald said: I can t recall any personal discussions with Bill. I m sorry (T p 100, ln 15). Paul McDonald added that [Bill] would have been aware which seems to be a reference to Paul McDonald s contended financial position: T p 100, lns 10-11. 62 Paul McDonald gave evidence that during the second half of June 2013 he was in America. He left Australia on 17 June 2013 and returned on 1 July 2013. 63 As to whether Paul McDonald had any discussions with Bill McDonald in June 2013 about the tax, Paul McDonald told his counsel that [i]t would have been highly unlikely that I did and the reason for that, he said, was [b]ecause for half that month I was in America and when there, Paul McDonald used different cell phones, so I don t know whether [Bill] had that number : T p 100, lns 28-32. Moreover: Bill and I spoke fairly rarely very rarely on the phone together : T p 100, ln 33. 64 As to personal meetings, Paul McDonald recalled meeting with Bill McDonald in August 2013 (at Noosa), September and October 2013 but not otherwise. 65 Thus, as to a telephone conversation with Bill McDonald in June 2013 (in or about 24 June 2013), Paul McDonald s evidence-in-chief is that he could not recall such a conversation; it would have been highly unlikely ; and he and Bill very rarely spoke on the phone together anyway. 66 In cross-examination, Paul McDonald said that he could not recall when he first saw the ATO s letter of 24 June 2013 sent to Ms Civitarese setting out the payment arrangement. Paul McDonald said that he saw the ATO letter after it was completed and after it was agreed to. However, he accepted that his staff had been working towards entering into a payment arrangement with the ATO for some time: T p 110, lns 16-21. Paul McDonald denied that at about the time the ATO letter arrived [with Ms Civitarese] he had a conversation with Bill McDonald about how the agreed monthly payments would be made: T p 109, lns 40-45. Paul McDonald said that Ms Williams was discussing it with [Ms Civitarese] : T p 110, lns 2-3. As to whether he had any input into it, Paul McDonald said:

- 16 - it would be highly highly unlikely because Elisha [Williams] would have handled the payments through Michelle [Civitarese]. Paul McDonald accepted that the money required to make the payments would need to come from Bill or Paul or their entities: T p 110, lns 11-14. Paul McDonald said that he knew that some arrangement had to be reached to pay the tax debt over time because it could not be paid in one lump sum : T p 110, lns 26-27. 67 In that context, the proposition was put to Paul McDonald in cross-examination that he spoke with Bill McDonald over the telephone in about June 2013 and discussed how the payments would be made. He responded: No. I can t categorically say that I did and I would say it was highly unlikely that I would have. 68 The next proposition put to Paul McDonald was that he discussed with Bill McDonald paying the ATO debt over a period of time. He agreed and added: We wanted to try and stretch the payments out and pay it over a period of time because we short I was short on cash : T p 110, lns 39-41. Paul McDonald corrected the impression that that matter was discussed with Bill McDonald and said: no, I didn t. What as my group, my my advisors were advised to say and they knew right back as early as probably January that we re short on cash and we had to extend it as far as we could. 69 Paul McDonald denied that any conversation with Bill McDonald took place in about June 2013 in which an agreement was reached for payment of the tax debt by Bill McDonald (either by him or his entities) and payment by Paul McDonald (either by him or his entities) of his 37.5% share of the tax debt. 70 Paul McDonald accepted that between July and December 2013 six reimbursement payments were in fact made to MCG Group by Ftrus. Paul McDonald s understanding was that yes, that s what the girls did : T p 111, ln 40. No payments were made by Ftrus to Fortrus Resources and no payments were made by Ftrus to the ATO. 71 Paul McDonald gave evidence that he was present at the 14 October 2013 meeting, the due date for the payment of the $639,231.27 instalment. Shortly later on 25 October 2013, Ftrus paid a reimbursement contribution to MCG Group of $239,711.00. 72 Against the background of the six payments, Paul McDonald was again pressed with the correctness of his evidence that no agreement was made with Bill McDonald for you or your family trust to pay its share [of the ATO payments], calculated by reference to the percentage

- 17 - shareholding, of the Fortrus Resources tax debt. 113, lns1-7: Paul McDonald gave this answer at T p I was fully aware that we had an obligation to pay the tax through the division 7A loan of around thirty-seven and a half per cent. I never gave anybody a guarantee that no matter what the amount of money it was we would pay thirty-seven and a half per cent because, for example, if it was a million dollars that was $375,000. I didn t have the money. I was aware of our obligation to pay it and I was trying to minimise that as much as possible to try to turn America around and get it going again. [Emphasis added] 73 However, on 5 June 2013 Ms Civitarese, acting for Paul McDonald (T p 113, lns 16-20), told the ATO that Fortrus Charters will be paying $2,114,945.00 of the tax debt (ie, 37.5% of $5,639,853.00). Paul McDonald gave evidence that the whole purpose of this was to try to minimise the tax and stretch it out to turn the and hopefully turn the business around in America, and so they were negotiating : T p 113, lns 41-45. 74 The concession at T p 113, lns 6-20 that Paul McDonald had agreed that either he or some entities that he controlled were going to pay about $2M of the tax debt, and that, through Ms Civitarese, we had told them [the ATO] that was, in effect, withdrawn when Paul McDonald said that Ms Civitarese was not acting on his behalf or on his instructions in writing the 5 June 2013 email to the ATO. That followed because Paul McDonald first became aware of it, he said, the day before giving evidence and accountants, that they don t ring you on every second email : T p 114, ln 12. 75 Paul McDonald accepted that the request from the ATO (about which entities would be paying the tax debt and whether the nominated companies had the ability to do so), was an important matter. Paul McDonald says he has no knowledge of the matter of the response because his engagement with Ms Civitarese was, it seems, like his engagement with his brother Bill McDonald, one in which he actually hardly ever spoke or corresponded with Michelle : T p 114, ln 35. 76 Although Paul McDonald may not have appreciated that Mr Bristow had nominated the Cayman Island entity, Fortrus Charters, as the paying entity, I have no doubt that Paul McDonald through Mr Bristow, Ms Williams and Ms Civitarese knew and understood that a proposition was to be put to the ATO in June 2013 that he or an entity controlled by him would be paying about $2M of the tax debt based on a 37.5% share of it. 77 Although Paul McDonald says that he and Bill McDonald very rarely spoke on the phone together, and a conversation in the second half of June 2013 would have been highly

- 18 - unlikely as Paul McDonald was in America and used different cell phones, something of some substance plainly arose on 26 June 2013 which caused Paul McDonald to send an email to Bill McDonald at 10.20pm that night asking Bill McDonald to please call. The inference on the face of the email is that it was not necessary for Paul McDonald to recite any particular differentiated United States cell phone number. It was enough to simply say please call xo. The email attached material concerning the sale by Fortrus Charters (the nominated paying entity) of the boat for USD8,840,000. 78 From 14 October 2013 negotiations were conducted to try and establish a new payment plan. On 11 November 2013 Ms Civitarese sent an email to Mr Yates (copied to Ms Williams) advising that she had applied to the ATO for a three year loan at $135,000.00 per month starting now. The old payment plan had been cancelled to avoid default. The ATO would take 28 days to consider the plan. Ms Civitarese said that if we could pay the $135,000.00 now it may help with the request : Exhibit 1, p 117. Bill McDonald responded that day agreeing with the suggestion and asked how do you want to do it : Exhibit 1, p 117. Ms Williams responded on 12 November 2013 to Mr Yates and Bill and Paul McDonald saying that Mr Bristow had been conducting the discussions with the ATO and that he had submitted a new agreement. Ms Williams said that a payment would need to be made but the ATO had not responded by indicating how much and when : Exhibit 1, p119. Mr Yates responded by saying that the $135,000.00 should be paid as it had been raised in the discussions between the ATO and Ms Civitarese. Mr Yates believed that it would add strength to our argument for a revised plan if we can show we have continued to make monthly payments albeit this month is less than as per the original plan at least something is paid : Exhibit 1, p 123. On 13 November 2013 Ms Williams sent an email to Mr Yates and Paul and Bill McDonald confirming that we do agree that the $135,000.00 should be paid by the end of the week : Exhibit 1, p 123. 79 MCG Group paid $135,000.00 on 13 November 2013 and Fortrus paid MCG Group $50,625.00. 80 On 26 November 2013 Ms Civitarese advised Mr Yates, Ms Williams, Mr Bristow, Paul and Bill McDonald and Mr Cliff by email that the ATO had refused the proposed new payment plan of $135,000.00 per month. By letter dated 27 November 2013 the ATO advised Fortrus Resources that the tax debt of $4,674,028.47 was required to be paid within seven days: Exhibit 1, p 133.