Edgar & Ors v Farrow Mortgage Services Pty Ltd (In Liquidation)

[1993] HCATrans 275

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S88 of 1993

B e t w e e n -

JONATHAN SCOTT EDGAR, TALEDI
PTY LTD, EASTSIDE INVESTMENTS
PTY LIMITED and TEKIKO PTY

LIMITED

Applicants

and

FARROW MORTGAGE SERVICES PTY

LTD (In Liquidation)

Respondent

Application for special leave

to appeal

Edgar 1 17/9/93

BRENNAN J

DAWSON J

TOOHEY J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 17 SEPTEMBER 1993, AT 11.22 AM

Copyright in the High Court of Australia

MR D.F. JACKSON, QC:  May it please the Court, I appear with

my learned friend, MR C.C. WATERSTREET, for the

applicants. (instructed by Gadens Ridgeway)

MR A.C. ARCHIBALD, QC:  May it please the Court, I appear

with my learned friend, MR J.B.R. BEACH, for the

respondent. (instructed by Bruce & Stewart Turton)

BRENNAN J: Yes, Mr Jackson.

MR JACKSON:  May I hand to Your Honours two things: the

first consists of the relevant legislation and the

second document consists of some pages of

transcript which relate to a question relating to
the propriety of the Full Court setting aside a

finding by the primary judge. I will take

Your Honours to the relevant passages in each at the appropriate time.

BRENNAN J: Yes.

MR JACKSON: There are two issues which it is submitted

merit the grant of special leave: firstly, the

illegality question, if I can put it shortly; and

secondly, the question of the approach taken by the

Full Court to findings of fact made by the primary

judge. May I deal with them in that order.

Your Honours, as to the first matter,

illegality, may I seek to identify first the issue

which arises in relation to it and then seek to

indicate its relative importance and its

appropriateness for the grant of special leave. In

that regard, the issue concerns ultimately

section 133(3) of the Building Societies Act 1986
of Victoria. However, I should say, Your Honours,
that the particular provisions have been repealed
and there are not now cognate provisions or like

provisions in place, however, as appears from the

affidavit in support of the application, the

determination of the particular issue in relation

to the Building Societies Act is one which has

ramifications for a large number of other cases.

The second thing about it is that the issue

which we seek to raise is one which arises in

relation to many other enactments in broadly

similar terms. What I mean by that - if I could

take Your Honours to section 133(3) of the Building

Societies Act what Your Honours will see is that it

provides that:

Any person who aids, abets, counsels or

procures or by act or omission is in any way

directly or indirectly concerned in or a party

to the commission of an offence against this

Edgar 2 17/9/93

Act is deemed to have committed that offence

and is liable to the penalty for that offence.

The position in relation to principal offenders is

dealt with by the earlier subsection, 133(l)(a) and

(l)(b), of course, and (l)(c).

If I could say something for the moment about

the particular case, the case was one where the
breach of the Building Societies Act by, in effect,

the principal offender, Pyramid Building Society,

was brought about by its providing funds to, by way

of purchase of mortgages from Farrow Mortgage

Services obtained from us. We are borrowers, money

lent to us, the money given to Farrow by the

building society. One may assume - and I will take

Your Honours to the provisions in just a moment -

but in the circumstances of that occurring, that
was a breach on the part of the building society of

the Act.

BRENNAN J:	What was, Mr Jackson?
MR JACKSON:	For the building society to acquire a mortgage

in circumstances where it could not itself have

advanced the money consistently with the Act.

BRENNAN J: That is to have acquired it from Farrow?

MR JACKSON:	Yes.
BRENNAN J:	What is the section which prohibited that?

MR JACKSON: Section 57(4), I think, Your Honour, the top of

page 38. Then Your Honours will see section 57(1) which is the provision picked up referentially by

it, in effect.

DAWSON J: It is common ground that that particular

provision was breached, is it?

MR JACKSON: That was the finding. Could I just say one

other thing about it, Your Honours.	Much of the
public policy involved, but the way in which the	reasoning of the Full Court is devoted to the loss distribution in cases of illegality was really
based on the facts of the particular case as
distinct from the policy revealed by the Act. What
I mean by that is that Your Honours will see that section 133(3) applies to "Any person" and it might
just as well have been a company absolutely unrelated to the Pyramid Building Societies that
was a company which was in breach of it.

But the view taken by the Full Court seems to

say, if one looks at the particular case, where the

Edgar 17/9/93

money was in fact provided by the building society

to a body which was in fact its subsidiary, as

distinct from, for example, a trustee company, some

other company absolutely unrelated to it, that in
those circumstances one has to see what the effect

of the Act is in terms of who should suffer the

loss.

The reality of the matter, of course, is that

the loss which is sustained by the building society

is caused not by the fact that - I am sorry, may I

start that again. What I am seeking to say is that

the reason why the building society would lose

money on the transaction is because the body with

whom it dealt happens to be a body which itself is

unable to pay. The true situation which had to be

considered by the court was the position as between
ourselves and Farrow, not as between ourselves and Pyramid Building Society. As between Pyramid and

Farrow, the position was that it only is the case

in fact that the building society loses money

because it happens to be dealing with a third

party which is a body which has no money.

BRENNAN J: Is that the reason? It is not because of the

illegality affecting the relationship between them?

MR JACKSON:  No, Your Honour. I am sorry, I answer yes and

no. What I am seeking to say is that if one looks

at - the situation is Farrow Building Societies was

a body which was entirely, in effect, funded by

Pyramid and by another building society. It had,

for practical purposes, very small funds, as events

turned out, apart from moneys which might be

provided by the building societies. And in fact in the particular case, every advance that was made to

us was an advance made with money provided

immediately by the building society to Farrow and

then to us.

So that the result is, of course, that it is

right to say, if we are correct in the proceedings,

then the probability is that the building society
will lose money but the reason why the building

society will lose money is because the third party

in breach of the Act is a party which happens to

have no money. That is putting it, in a sense,

simplisticly but what I mean to convey by that is

that what the court did not look at was the
situation deriving from the Act, the consideration

deriving from the terms of the Act, whether as

between us and the lender to us the effect of

illegality should be what we would submit is the

normal result, and that is the transaction is

unenforceable or whether there was a higher public

policy that required the transactions to be given

effect to.

Edgar	17/9/93
BRENNAN J:	What was the illegality which affected the

transactions between you and Farrow?

MR JACKSON: 

The illegality, Your Honour, between us and

Farrow was that at the moment of lending to us
Farrow was participating in a breach by the

building society of section 57(4).

BRENNAN J: Just mere contemporaneity?

MR JACKSON:	More than that, Your Honour.
BRENNAN J:	What more?
MR JACKSON:	More than that, Your Honour, in that Farrow was a body which was established, in effect, for
purposes including purposes of that kind and it was
a body which - I am sorry, I am putting it badly.
What I am seeking to say is this: in relation to
section 57(4) what Farrow was doing was to lend to
us and, as the evidence was, lend to many other
people in breach of section 57(4).  The building
society used it as a vehicle to get around the Act.

BRENNAN J: But the building society could purchase the

mortgage from Farrow, could it not?

MR JACKSON:  The terms of the arrangement between the

building society and Farrow were that the building

society was entitled to purchase any mortgage from

Farrow. The purchase took place and, Your Honour,

the documents are in the book.	The purchase took
place by paying the purchase price.	The purchase

price was the amount owing under the transaction at

any time. In the particular case, although the

transaction was one which, in form, is a

transaction between us and Farrow, it was a

transaction in which immediately all the money was

provided by the building society.

BRENNAN J:  Your argument would come to this, would it not:

let us assume Farrow is a third party, completely	independent, a financier, finance company, and it
was lending to you but it was acquiring the money
in breach of section 57 from the building society.
You knew nothing about that, let us assume. So
there is a straightforward transaction of lending
with securities and so forth, and there is a sale
of the mortgage back to Pyramid by Farrow, where would there be any illegality affecting the
transaction between you and Farrow in that
hypothetical situation?

MR JACKSON:	In that case, Your Honour, there might not be. That assumes a sequence of events which was (a),
not the particular case, and (b), not the typical case.
Edgar	17/9/93

BRENNAN J: Let us assume, to make it closer and make the

analogy closer, that the finance company in the

hypothetical case acquired the funds by arrangement

with Pyramid and directed Pyramid to draw their

cheque in favour of you as the borrower.

MR JACKSON: In that case the foundation, I suppose, of the

illegality would not exist because there would not

be a contravention of the substantive provision,

section 57(4).

BRENNAN J: There would, would there not, because they are

buying your mortgage from Farrow?

MR JACKSON:  If they buy it after the mortgage is entered

into, in effect, then perhaps the foundation for it

would go. If what happens, however, is that the

transactions occur at the same moment, because the

payment of the loan is the purchase of the mortgage

and the payment comes to us immediately, then what

one has is participation by Farrow in the

transaction which is in breach of section 57(4)

itself, and it is a complete and immediate

participation in it. That is very commonly the

case, of course, if one goes away from particular

facts such as this, is very commonly the case where

a body which, by statute, has some limitation upon

its powers uses a company, maybe one it creates,

maybe one it does not, to do that which it cannot.

And, ordinarily speaking, the statute which limited

the powers would be one which provided that the

secondary party, if I can call it that, would be

liable for an offence of the same nature.

So what we would submit, Your Honour, is that

the court was in error, if I can put it that way,

in looking at the issue as being one saying, look

at the facts; it would be a bad thing, and it would

not be public policy if, by reason of the

particular transaction, the building society was to

lose money. What it should have done, with

respect, was to look at the circumstances and say,

is this a case where, looking at the parties

affected by the relevant illegality, Farrow and

ourselves, the loss should in effect lie where it

falls or, that illegality should be treated as

absolutely irrelevant.

Now, Your Honours, in relation to that, the

point we would seek to make is that provisions of
the kind of section 133 represent a legislative
expression of the degree of seriousness of them

and, Your Honours, whilst the provision is one

which one frequently 3ees, and no doubt sees as an

element of convenience, what one does see is that a

provision such as section 133(3) is one which

indicates that the seriousness in the legislative

Edgar 6 17/9/93

view of the participation may be as great as that

of the person actually involved in the transaction

in the first place.

The second thing we would seek to say about it

is this, that the view taken by the Full Court also

involved - and Your Honours, I do not mean to say

this in any adversely critical way - a division of

illegality into really, in effect, three classes.

Your Honours will see at pages 153 and 154 three

categories are provided for, in effect, by the
court. What is said is that the distinction

between the first, second and the third categories

is essentially this, that one may see in the first

category "An express statutory prohibition against
the making of a contract", in the second category

an "express prohibition on ..... the doing of a

particular act", and the third one is something

that is "not itself directly contrary to the

provisions of the statute". The way in which the

court approached it seemed to be to treat the third
class as being one which was somewhat lesser in

seriousness than the first two.

Broadly speaking that may be correct, but if

one takes the whole range of cases that fall within provisions such as section 133(3) in this and other

statutes, what one has to look at is to see, where

a phrase like those used in section 133(3) is

involved, what is the principal provision to which

it relevantly relates. If one goes back to a

provision such as section 57(4) one sees a

prohibition on the conduct and by the application
of 133(3) to it one would infer, in our submission,

an equally strong prohibition against participation

in the conduct. So it becomes really a case of

going to a first or second class, rather than a

third.

Your Honours, the final thing I would wish to

say about the topic of illegality and the

correctness of the views in the court below is that	Your Honours will see that there was a reference at
page 171 in the reasons of the court at about
lines 20 to 25 that:

the terms of the statute itself support the

proposition that where the legislature

intended a transaction to be void it so

stated.

Your Honours, that seems to be a reference back to

the provisions referred to at page 165 and at the
bottom of the page provisions referred to are

section 58(2) and the top of the next page, 71(3)

and 71 ( 5).

Edgar 17/9/93

If I could take Your Honours to those

provisions for just a moment, what we would submit

about them is that they seem to be provisions

concerned with very particular aspects of the

management of building societies. Section 58(2) is

at page 38 and sections 71(3) and 71(5) are at

pages 43 and 44. Your Honours will see section 71

refers to particular types of management contracts.

As to the importance of the matter, could we

say two things: the first is that its importance appears, we would submit, from what is set out in

paragraph 20 of the affidavit in support at
page 189. That is in relation to the particular

decision. Your Honours will see there is a

reference there to Mr Hodgson's affidavit. The relevant paragraphs of that are at pages 214 to

216, commencing at the bottom of page 214 and, in

particular, paragraph 25:

Many of these loans and mortgages may be said

to be in the same category as the loans and

mortgages made and given in the transactions

which are the subject of this appeal.

One accepts, of course, that mere money is not a

sufficient criterion for special leave but, in a

sense, if the case otherwise is of some importance,

it does not hurt. Your Honours, could we just say

that the question of the application of the

doctrines of illegality to provisions like

section 133(3) is a question of importance.

Could I move, Your Honours, then to the second

aspect of the case and that concerns the course taken by the Full Court. It will take me, I am

afraid, just a moment or two to take Your Honours to the particular considerations but they are set

out in the affidavit in support of the application,

commencing in paragraph 14(b) at about line 18.

May I say we accept immediately this goes to the

particular case, rather than to the law as a

whole. If one goes from that then to paragraph 22 Your Honours will see that in paragraph 22 on

page 190, five matters are set out as being matters

in which the Full Court did not relevantly agree

with the reasons of the primary judge.

The representations that are referred to in

paragraph 22)(a) may be seen at page 53 of the

record and between lines 10 and 15, in the primary

judge's reasons, Your Honours will see that he sets

out the representations which he found to be

established, and those are the two representations

to which reference is made. If I could go then to

paragraph 23, the view taken by the Full Court,

which appears at page 10 of its reasons and

Edgar 17/9/93

page 144 of the application book, about line 20,

Their Honours say at the bottom of the page:

there was ..... no adequate foundation for the
finding by the primary Judge that either of
the two representations in question was

made .... before the entry into the first

agreement.

They also say further up the page, between lines 5 and 10:

A consideration of the evidence of Mr Edgar

supports the conclusion ..... that he understood

that Farrow only agreed to provide the

$16.615m. facility on the terms of the first

agreement -

Your Honours will see a reference there to what was

said to be an "open ended" commitment but,

Your Honours, what Your Honours will also see,

however, is that the finding of the primary judge,

as we submit at the bottom of page 190, was related

not to any open ended commitment but to the

agreement which had, in fact, been entered into at

that stage. In that regard, Your Honours, may I go

to page 35 and, in particular, between lines 20 to

25 and then going over to the remainder of that

paragraph at the top of page 36.

Your Honours, more importantly, in a sense, is

what is set out in paragraph 24 where Your Honours

will see the finding to which I referred a moment

ago, at page 144 line 20, by the Full Court that

"there was no adequate foundation" for the primary

Judge's finding of the existence of the two

representations. The two representations,

Your Honours, if I could pause for a moment again,

are at page 53 and Your Honours will see, if I

could take Your Honours to the small booklet of

evidence, that there was evidence in our submission

which entitled the judge to make findings of that

kind.

At a page which is the first page of text in that booklet Your Honours will see various parts of

the evidence of Mr Edgar. Mr Edgar's evidence was

relevantly accepted by the primary judge. You will

see at the page numbered in the bottom right corner

451, half-way down the page, he was asked:

What was the discussion between you and

Mr Poustie -

who was the officer of Farrow -

Edgar 9 17/9/93

as to the allocation of the working capital in

the original facility -

Now, Your Honours, this is by way of introductory

matter, I should say, and I would refer

Your Honours to that question and answer and the one immediately following it. Then, on the next

page, page numbered 453, one comes to matters

which, in our submission, would support the

findings made by the primary judge. Could I invite

Your Honours to look at about point 4 on the page where the answer is:

I advised Mr Poustie that we had a very

critical time path agreed to by the council

and other authorities and that it was

absolutely imperative -

Your Honours, I will not read it out.	I invite
Your Honours to read that.	And the next question
and answer.

That was the format from which the discussion

originated and Mr Poustie agreed with it.

Then, Your Honours, one goes through the remainder

of that page and to about point 3 on the next page,

page 454:

Mr Poustie said he understood exactly the time

frames and the constraints we were working

under and that Farrow would comply with those

time constraints because it was in everybody's

interests to do so.

From there, there are some other documents to which I shall not refer, but if I could take Your Honours

to the next passage of transcript which is about

six pages from the back of the book. It is a page

which has the number on it 456 at the bottom of the

page. Your Honours will see, about point 7 on the

page:	I know you had a number of discussions but
doing the best you can, tell us about those
discussions?---! said to Mr Poustie -

et cetera. Once again I shall not read it out but

what we would submit is that in the circumstances

of oral evidence like that, with the evidence of

Mr Edgar having been generally accepted, there was

no particular reason why the judge could not form

the view which he did in relation to the findings

which appear at page 53, paragraphs (a) and (b)

between lines 10 and 15. Your Honours, in

particular, it is very difficult, we would submit

with respect, to say that there was no adequate

Edgar 10 17/9/93

foundation for it. The views expressed by

His Honour were views based on an interpretation of

the evidence of Mr Edgar. No one called on the

other side, and there was no reason why the judge

should not - - -

DAWSON J: Is there some particular evidence of some answer

given by Mr Poustie that you rely on? Most of

these are statements by Mr Edgar to Mr Poustie.

MR JACKSON:  But he said that in a context where Mr Poustie

was agreeing to the propositions and he was

referring to the events which had occurred.

DAWSON J:  To agree to the proposition that someone has a

critical time path does not really amount to a

representation, does it?

MR JACKSON:  Your Honour, could I just say two things about

it: the first is that Your Honour will see, for

example, at page 453 that the time table had been

given - this is half-way down the page - Mr Poustie

agreed to it. But His Honour was perfectly

entitled, if I could just say this, to say, hearing

what Mr Edgar has said about it, and the

conversation that he had with Mr Poustie, it is

obvious these representations must have been. And

Your Honour will see - I should have said page 454,

it is the page numbered 79 also - a quarter of the

way down the page:

Mr Poustie said he understood exactly the time

frames and the constraints we were working

under and that Farrow would comply with those

time constraints because it was in everybody's

interests to do so.

Your Honours, could I just turn then to

paragraph 25 at page 191. Your Honours will see

that the Full Court's view was:

that there was insufficient evidence to found

any finding as to changed circumstances -

that is in the circumstances of Farrow -

to ground misleading and deceptive conduct.

The Full Court's view is at page 145. It is the

commencement of the first new paragraph on that

page. At page 70 the primary judge says, about

line 19:

On the evidence, Farrow must have known that

it was financially insolvent in May.

Then page 71, line 18:

Edgar 11 17/9/93

I believe that the directors and officers knew

enough about their financial difficulties to

realise that there was a considerable risk

that Farrow would not be willing or able to

make drawdowns -

Your Honours, this was a case where no one was

called on the other side and what one had was the

company going into receivership shortly after the

events in question.

If I could move then to paragraph 27,

Your Honours will see that - - -

BRENNAN J:  Just take us to the special leave points. We do

not need to go through the affidavit as such, so

we?

MR JACKSON: No, I am sorry, Your Honour. All I was going

to say was that the next point is in paragraph 27

and there are two others, that is all. The first

is paragraph 27, there is the finding at the page

which is there numbered 148 that if there had been

a significant risk - Your Honours will see it set

out there that its failure to inform us was not a

real inducement, but what the primary judge had

found, as Your Honours will see at page 85, between

lines 16 and 20:

For the reasons I have earlier given, I find

that in entering the second agreement, the applicants did rely on the representations

concerning drawdowns I have accepted.

And, Your Honours, in the light of the passages of

the evidence to which I referred a moment ago, it

would hardly be very surprising if the judge

arrived at that conclusion. There is evidence of a

discussion about the need for timely drawdowns when

you have got a fast track arrangement with the

council - I am sorry to use the jargon of it - it

would hardly be surprising if the judge formed the

view that they relied upon those representations.

But the Full Court - - -

BRENNAN J: What were the damages which flowed from entry

into the second agreement?

MR JACKSON:	The result was, in effect, what appears in the next paragraph, paragraph 28, and that is that
because we got, in effect, caught and went further
in with Farrow, we were not able to do anything
else, to adopt any other course, and Your Honour
will see at pages 84 to 85, at the last paragraph
on 84 and going on to 85 that the judge was of the
view that another course might have been taken if
we had not gone further into what became the mire.

Edgar 12 17/9/93

BRENNAN J:	What was the damages at the end?
MR JACKSON:	The damage at the end, Your Honour, was that we

were in a situation where the project was delayed

and delayed; we needed, in effect, more and more

money to go ahead with it and the market was going

down at the time.	We lost opportunities and we
were really stuck with it.	We could not do

anything with it to put it to profit and, of
course, the value of the project itself kept going

down as the economy went down.

BRENNAN J:	So the loss assessed was what?
MR JACKSON:	His Honour did not go on to find any loss

because the view which he took was the appropriate

remedy was to set aside the transactions - the

mortgage documents - mortgage and guarantees. I

should also say, for reasons which I do not, I must

say, quite follow, no attempt was made at the trial

on behalf of the respondent to seek, as a

condition, say, of setting aside the documents,

that there be some repayment by the borrower.

BRENNAN J:  Then if you were to fail on the first point and

succeed on your second, what would be the order

that you would be seeking?

MR JACKSON:  The order we would be seeking is simply to

leave the trial judge's order where it was. With

perhaps a degree more of slightly greater realism

in that regard, the result which might well occur

would be that the matter be referred back to the

trial judge for assessment of damages or perhaps

for the imposition of conditions. What we would

really seek, as a second best, would be that if we

were to success - perhaps I will start again. If
we were to succeed, we would say the trial judge's

order should be left where it was.	No one has
sought anything more at the trial, there we are.	I
can understand, however, a situation which might
obtain if an order was sought by way of, in effect,

a cross appeal, that there be some conditions

attached to the rescission. That would have to

come from the other side, Your Honour.

BRENNAN J:  We need not trouble you, Mr Archibald.

This application raises two issues: first,

the illegality of the lending transaction between

Farrow and the applicant, disentitling Farrow from

recovering the money lent; and second, the reversal

by the Full Court of findings of fact made by the

trial judge.

On the first issue, the conclusion of the Full

Court is, in our view, correct. On the second

Edgar 13 17/9/93

depends, of course, on the state of the evidence in the particular case. There is nothing on the face of the reasons for judgment of the Full Court which

issue, the correctness of the reversal by the Full

reveals any error of approach or principle. The

question of the sufficiency of particular evidence to support a particular finding is not, in itself,

a ground which ordinarily attracts the grant of

special leave.

For that reason, special leave is refused.

MR ARCHIBALD:  I ask for an order for costs, Your Honour.

BRENNAN J: It will be refused with costs.

AT 12.03 PM THE MATTER WAS ADJOURNED SINE DIE

Edgar 14 17/9/93