Equuscorp & Anor v Glengallan Investments

[2004] HCATrans 167

[2004] HCATrans 167

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Brisbane  No B93 of 2003

B e t w e e n -

EQUUSCORP PTY LTD

First Appellant

RURAL FINANCE PTY LTD (Receivers and Managers Appointed) (In Liquidation)

Second Appellant

and

GLENGALLAN INVESTMENTS PTY LTD

Respondent

Office of the Registry
  Brisbane  No B94 of 2003

B e t w e e n -

EQUUSCORP PTY LTD

First Appellant

RURAL FINANCE PTY LTD (Receivers and Managers Appointed) (In Liquidation)

Second Appellant

and

EDWIN THOMAS CODD

Respondent

Office of the Registry
  Brisbane  No B95 of 2003

B e t w e e n -

EQUUSCORP PTY LTD

First Appellant

RURAL FINANCE PTY LTD (Receivers and Managers Appointed) (In Liquidation)

Second Appellant

and

CYRIL WILLIAM ANDERSON

Respondent

Office of the Registry
  Brisbane  No B96 of 2003

B e t w e e n -

EQUUSCORP PTY LTD

First Appellant

RURAL FINANCE PTY LTD (Receivers and Managers Appointed) (In Liquidation)

Second Appellant

and

BRIAN JAMES PRENDERGAST

Respondent

Office of the Registry
  Brisbane  No B97 of 2003

B e t w e e n -

EQUUSCORP PTY LTD

First Appellant

RURAL FINANCE PTY LTD (Receivers and Managers Appointed) (In Liquidation)

Second Appellant

and

BARRY THORNTON

Respondent

Office of the Registry
  Brisbane  No B98 of 2003

B e t w e e n -

EQUUSCORP PTY LTD

First Appellant

RURAL FINANCE PTY LTD (Receivers and Managers Appointed) (In Liquidation)

Second Appellant

and

HGT INVESTMENTS PTY LTD

Respondent

GLEESON CJ
McHUGH J
KIRBY J
HAYNE J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 26 MAY 2004, AT 10.19 AM

(Continued from 25/5/04)

Copyright in the High Court of Australia

GLEESON CJ:   Yes, Mr Cooper.

MR COOPER:   Thank you, your Honours.  Your Honours, between approximately 1991 and during 1993 this project was audited by the ATO and it made some findings and recommendations which are significant to a number of issues that were raised by the Court yesterday, and I would like to take the Court to that report, if I may.  It is in volume 5 and starts at page 1420.  If I can go through the report in reverse order so that your Honours understand what was decided.  If your Honours go to page 1426 at clause 5.1, a decision was reached that:

The net losses claimed in the income tax returns of Partnerships No 1 and No 2 for the year ended 30 June 1989 and Partnership No 3 for the year ended 30 June 1990 will be disallowed for the reasons given in paras 4.1 to 4.3 above.

If your Honours go back to page 1424, your Honours find 4.1 to 4.3 and these are significant conclusions, in my submission.

CALLINAN J:   What is this document exactly?

MR COOPER:   It was an ATO position paper.  They investigated the audit.  They made certain findings and they recommended that they were going to disallow the objections, impose additional tax on the investors and do other things under the tax law.

CALLINAN J:   How was it admissible then?  Was it not objected to, or what happened?

MR COOPER:   It was put in by the appellant, your Honour – I am not sure why, but it was put in by them – and the trial judge relied upon it, which is apparent from some of the findings he made.  Clause 4.1 was the finding that:

The partnerships are not carrying on a business of aquaculture but are merely passive investors in a business being carried on by others.  The funds ostensibly outlaid for management fees, pond lease rental and facilities fees are outgoings of capital or of a capital nature.

CALLINAN J:   What does it actually prove?  I do not understand its probative purpose.

MR COOPER:   It made findings, which I will come to in a minute, that there was no business being carried on at 30 June 1989.

CALLINAN J:   The Income Tax Commissioner said there was no business being carried on.  How does that bind anybody else?

MR COOPER:   But this was put in by the appellants as part of their case, your Honour.

CALLINAN J:   It does not matter, Mr Cooper.  It does not bind anybody else.  It does not bind the trial judge.  Simply, it is somebody else’s opinion about what was happening.

MR COOPER:   But it seems to be opinions of fact accepted by the other side as being correct.

CALLINAN J:   Well, you are saying it is some kind of an admission against interest?

MR COOPER:   Yes.

CALLINAN J:   I do not quite see how.  It may be that tender by somebody can necessarily give rise to an admission against interest.  Perhaps it can.  I do not know. 

MR COOPER:   Your Honour, if I could just go to page 1422 to see the sort of findings that were made.  These do not seem to be controversial, I might say.  In paragraph 2.4:

The purchase of the main project property at Innisfail was not completed until after 30 June 1989.

. . . 

2.7      FJA undertook to complete the establishment of all grow out ponds and other specified works within six months of entering into the Grow Out Pond Lease . . . 

2.9      At 30 June 1989 no ponds had been established.  The present situation –

in 1993 –

is that a total of 70 ponds have been established.

But by that stage they needed 116 ponds.

There are no plans for the establishment of any further grow out ponds.

Over the page at 2.11, it is recorded:

Extensive delays were encountered in the development of the project due to unforeseen problems, including pond leakage and significant stock losses.  The project is still largely in the research stage.

Then at paragraph 2.19:

The acquisition of the Innisfail property and other capital costs of the project were, in essence, financed by the moneys paid out by the partnerships as fees in Year 1.

CALLINAN J:   Where do I find the tender of this document?

MR COOPER:   I will have to get my junior to have a look at that, your Honour.   In my submission, it is significant, because this document demonstrates that in practical terms this venture was in the same state of parlousness as was the venture considered in Jekos.  It was not started at the relevant time, it was chronically under‑funded and it failed fairly soon after inception. 

CALLINAN J:   How can the conclusion in 4.1 be reached, anyway, when 70 ponds were established?

MR COOPER:   That is 1993 it is talking about, your Honour.  Paragraph 2.9 says:

At 30 June 1989 no ponds had been established.

GLEESON CJ:   It may be this document was just used as a convenient source of non‑controversial factual information.  As to 4.1, I cannot understand what the first sentence in it means.

MR COOPER:   Your Honour, I am not so concerned, with respect, about the conclusions there – it is more the factual narrative that goes before, because these are statements of what happened in fact, which were put in by the other side.  They were not controversial.  No one spoke to disavow anything said in this document.  It is significant, because it allows me to submit to your Honour that this case is in practical terms no different from Jekos.  It did not start when it was supposed to start, it was chronically under‑funded and it failed almost from inception.

There was also a finding made that the general partner withdrew from this project in 1990 and for over two years no one fulfilled the role of general partner.  Now, that made this partnership unworkable because under the deed the primary obligations are on the general partner to ensure that everything is done to carry on the business of the partnerships.  Your Honour, this ATO position paper led to a dispute between my clients and the tax office.

GLEESON CJ:   I bet it did.

MR COOPER:   They lodged objections and after quite some period of negotiation they were able to reach a settlement with the ATO which required them to pay in part additional tax, and they lost deductions that they had had and they got limited deductions in respect of one year.  So they certainly came out of this experience much the worse for it.

GLEESON CJ:   Limited deductions on the basis that they were partners?

MR COOPER:   It is not really clear, your Honour.  It just seems that they were given some concession for prepayments they had made in one year, but they were not allowed deductions for losses as though they were partners.  It seems some sort of arbitrary determination made by the ATO.

GLEESON CJ:   It is a settlement.

MR COOPER:   It is a settlement, and I cannot really give you the ins and outs.  All I can say is that my clients were certainly worse for wear from the experience of being involved in this venture.

CALLINAN J:   The Commissioner’s acceptance of a compromise might tend to contradict his unequivocal conclusions in this document.

MR COOPER:   No.  It surely means he is prepared not to have a fight.  He is prepared to take a settlement and run rather than have people with a long purse take him to the High Court.

CALLINAN J:   I find it difficult to read this document, I have to tell you, Mr Cooper, other than as a set of assertions by the Income Tax Commissioner.  They may be right, they may be wrong, but I do not think that the fact of the document and what is contained in it mean that we are obliged or that, indeed, any court is even entitled to act upon it as a statement of the true facts.  It is an assertion of factual matters by some person; that is all.

MR COOPER:   Yes, put in by the appellant, who did not seek to in any way controvert any of these findings of fact.

CALLINAN J:   In part, upon the purpose for which it was tendered, I would have thought, which I am trying to find out.

MR COOPER:   It was a dispute, apparently between my friend and I, which is not recorded in the transcript, and his Honour obviously disallowed my objection and the document went into evidence.

CALLINAN J:   You objected to it?

MR COOPER:   Well, I must have, because I was not trying to put it in and it got in, so I assume that ‑ ‑ ‑

CALLINAN J:   I find it hard to believe you would object to a document, Mr Cooper?

MR COOPER:   Only infrequently and in desperation, your Honour.  In this case, there were many and varied objections about documents because they were being put forward on so many uncertain bases that his Honour was asked to make rulings about limited admissibility because some documents were being put in apparently as truth of the content and they clearly were just hearsay documents and ‑ ‑ ‑

CALLINAN J:   It often happens in a documentary case that a lot of documents go in without anybody identifying the purpose for which they are tendered and, indeed, whether they are even admissible.

MR COOPER:   That is half the problem in this case.  We called oral evidence.  The trial judge accepted that and he was, with respect, castigated by the Court of Appeal for putting so much weight on the oral evidence when there was this documentary evidence going the other way, but it was documentary evidence which went in for limited purposes.  Most of it was not admitted testimonially, it was only admitted as to credit or for other tangential issues such as that, and that is a matter I will come to later, but that is why in this case, much more weight has to be given to the oral testimony rather than the documents.  Your Honours, I was asked a question yesterday about ‑ ‑ ‑

HAYNE J:   Just before you pass from the position paper, is it relevant to take account in examining that document what appears at 1458 which is a letter from Mr Thornton of June 1994, well after, I think, the position paper which is June 1993, which seems to be putting forward a proposal for settlement on the basis that certain amounts would be claimed as each partner’s individual interest in the net loss of the respective partnerships?

MR COOPER:   Your Honour, he put forward a proposition - a resolution was made that included my clients not having all their deductions allowed and having to pay additional tax.  The mental process by which the Tax Department reached its decision was never disclosed.  Obviously this was an opening shot, whether it carried any weight is a matter which is a complete mystery to us all.

I was asked yesterday if the first year prepayments to FJI and JFM were paid in an ungoverned way so they could be deposited with Rural Finance.  The answer to that question is no.  The money was paid to each of them, was committed to a specific function.  If I could ask the Court to go to volume 3 please, page 847, this is the management agreement with JFM.  Relevantly, if the Court would please go to page 851, 4.2 says:

The General Partner may in respect of the management fees for the First year of the Term pay such fees to the Farm Manager within 30 days of the Commencement Date, in which event the management fees payable to the Farm Manager shall be the amount specified in Schedule “A” hereto as the amount payable to the Farm Manager on prepayment of the management fees for the First year of the Term.

If your Honours go to Schedule A which is page 855, your Honours see the amount payable to the farm manager on prepayment of management fees for the first year is $833 per unit issued in the partnership.  Now, if you go back to clause 3.5 at page 850, your Honours read:

For the purposes of sub-clause 3.4 hereof the parties hereto acknowledge that the fee payable to the Farm Manager pursuant to sub-clause 4.1 hereof for the First year of the Term incorporates a sum sufficient to meet the costs, expenses and outgoings to be incurred in respect of each Unit in the Partnership for the Partnership Project in that year.

And clause 8.2 at page 853 says:

In the event of the termination of this Agreement prior to the end of the First year of the Term the Farm Manager shall pay to the General Partner that amount which bears to the management fee paid pursuant to Clause 4 the same proportion as the period from the date of termination to the end of the First year of the Term bears to the whole of the first Year of the Term.

So the money was being paid on account of a specific purpose.

HAYNE J:   Did the contingency referred to in 8.2 occur?

MR COOPER:   About the termination?

HAYNE J:   Yes.

MR COOPER:   There is no evidence of that, your Honour.  The point I am making is that it was not free to deal with the money that it received.  It received it for a purpose that it had to honour.  Your Honour Justice Callinan asked me yesterday if it was possible to factor debts to raise capital for this venture.  The answer is no.  If I could ask you yet again to go to the prospectus, which is in volume 4, your Honour, at page 908 under the heading “Minimum Subscription” it is recorded:

Subject to reaching this minimum subscription level, subscription to the first limited partnerships will close on 26 June 1989 and those partnerships will commence business on 30 June 1989.

Now, if you go to the expert’s report at page 929, your Honour – this is the expert accountant’s report ‑ ‑ ‑

CALLINAN J:   I do not think I made myself clear.  I meant under the loan agreement, Mr ‑ ‑ ‑

MR COOPER:   No, not under the loan agreement.  But my friend was putting forward this as a general proposition, that they could raise finance for factoring.  In my submission, there is just nothing to that point and I am trying, if I can, to demonstrate why.

CALLINAN J:   Well, you took us to the passages yesterday.  I noted them where ‑ ‑ ‑

MR COOPER:   The point I am simply making ‑ ‑ ‑

CALLINAN J:   Which related to the application of money, I think.

MR COOPER:   Yes.  The point I am simply making is that the prospectus required that there be working capital of $3.472 million available for the business to start by 30 June 1989.  So if they factored on 1 July or any date after that, axiomatically a factoring could not create capital required on or before 30 June 1989.

CALLINAN J:   What about raising money by borrowing elsewhere?

MR COOPER:   The general partner was entitled to borrow.

CALLINAN J:   What about the farm manager?

MR COOPER:   No, your Honour.  As I recall the agreements, he is not entitled to borrow any money.  A farm manager has responsibilities to build ponds and things like that, but neither he nor the owner are given powers to borrow or to invest or anything like that.  They just have burdens; what they have to do to achieve the reward they are getting for these licence and management fees.

Justice Hayne asked me yesterday whether the relevant provisions of the legislation were sections 98 and 170.3 of the Corporations Code.  As I can research it, it seems that they are the relevant provisions.  The prospectus complies with section 98, and clause 40, which I took you to yesterday, is in terms compliance with section 98(1)(d), which talks about – if I could remind your Honour – that the working capital of $3.472 million is to be paid only “out of the proceeds of the issue of prescribed interests hereunder.”  Your Honour the Chief Justice asked me yesterday ‑ ‑ ‑

HAYNE J:   That expression owing its origin, I suspect, to section 98(1)(d)(ii), where it is said that the prospectus shall “set out particulars” as to:

the amounts to be provided in respect of [various matters] otherwise than out of the proceeds of the issue –

So you have to disclose, in effect, other sources of funds.

MR COOPER:   I have checked it, and it in terms complies with every aspect of (1)(d), or whatever the provision is.  Your Honour the Chief Justice put to me yesterday that there was an incongruity about the security provision in the loan agreement being secured over working capital, but in fact under this arrangement there were two partner’s accounts.  One was a capital account and one was a current account, and the profit from the venture was paid into the partner’s current account.  So one would expect the security would be over the income which was paid into the current account, your Honour.

Your Honour, my friend relied on Lau’s Case yesterday.  In my submission, that case is clearly distinguishable on the facts.  In that case, as Justice Connolly found, all parties, including the borrowers, such as Dr Lau, were parties to the round robin transaction and intended there to be performance of the loan obligations undertaken by Dr Lau.  In this case, the borrowers were not parties to whatever happened at the bank, but, more fundamentally, there is absolutely no evidence from any of the parties who were notionally involved in this transaction as to what their intentions were with the passing of the cheques and the making of the entries in the bank statements.  It is a matter of complete conjecture. 

The case, with respect, is even more limited than that.  At the risk of being tedious, if I could go back to a submission I made yesterday, the case which we had to meet, and which we did meet, was that the appellants said they had made the loan by two purported transfers of money on 30 June from the Rural Finance account to the Eagle Star account.  That was all they relied upon; they did not rely upon the wider impact of the transaction.  In my submission, his Honour correctly found that, having regard to the interplay of all the documents that we have discussed, that transaction did not in fact or law create a loan of money.

GLEESON CJ:   Is it the corollary of your proposition, which may be right or wrong, that your clients never became partners?

MR COOPER:   That would be so, your Honour.  A lot is said about their having attended meetings, and I agree that they did attend meetings, but the evidence was that they did so in the belief that they had these fully paid units and they were entitled to exercise these rights.  The trial judge found that we never knew until just before the trial started exactly what had happened, and, had anyone taken the point, we could have been refused any right of participation because we had not been given units lawfully under the investment deed. 

Your Honour, could I move onto the case of affirmation.  I do not propose to stay long on this point.  The pivotal allegation made against my clients on this affirmation, however it might be understood – and I am still having some difficulty with that – is based upon an allegation that my clients on 30 June 1989 had knowledge of how in fact Rural Finance purported to perform its obligations under the agreement.  Now, they lost on that fact.  The trial judge made a finding that they had no knowledge at 30 June, and he made a finding that they acquired knowledge incrementally over many years, which concluded when they received a receiver’s report shortly before the trial started.  There is just no basis, with respect, to overturn that finding of fact.

Your Honour, if I could then turn to the notice of contention.  The genesis of the negotiations between Mr Hasell and Mr Thornton was a blueprint prospectus which offered to investors in the Blueberry Project limited recourse finance on the terms which we contend were negotiated in this contract.  If I could ask your Honours to go to volume 3, please, the prospectus starts at page 712 but the relevant parts are at 719, question 4 “How does the Loan Agreement work?” and it explains about the prepayments. 

At 720, question 16, “What happens if the blueberry farm fails . . . ?”, it deals with the limited recourse there.  At 723, under the heading “LOAN SERVICING” “Personal Liability” it sets out the prepayments and the two repayments of capital.  Then over on page 724 under the heading “Limiting Liability” it talks about – it is called in this agreement a “non-recourse”, but it is the same as limited recourse.  The terminology seems to be interchangeable.  Then if your Honours go to clause 7 on that page, “THE ENTIRE REMAINING LIABILITY”.  Then on page 725, under the heading “IN THE EVENT OF FARM FAILURE” it says:

the Investor apart from the moneys personally paid by him during the first six months cannot be made to pay any further money other than $1 each year for years 1-6 for Farm Fees, in the 12 year period, otherwise than from income of his Blueberry farm business.

So it is not as though this arrangement came out of the ether.  Also can I take your Honours to page 730,please,which is the loan agreement itself.  The relevant provisions of the loan agreement are 3C(i) and (ii) and 4(iii)(c) on page 731.  The document in terms sets out that the arrangement is exactly as we were contending was the deal done here.

Now, Mr Hasell testified that the Blueberry Project was virtually fully subscribed, so he directed Mr Thornton to the Red Claw Project which he said offered similar finance opportunities.  Thornton said he was only interested in investing in the Red Claw on the same basis, and his Honour has made findings to this effect.  Hasell subsequently told Thornton that Rural was prepared to provide finance to his group of investors on the limited recourse basis.  If I could take your Honours to volume 3 at page 600, starting at about line 20, I asked him:

Did you have any discussions with Mr Johnson on the question of providing funding to investors?--  Yes, I did.

In what context did those – what provoked those discussions?--  As we got closer to June 30th we were unsuccessful – appeared to be unsuccessful – they appeared to be unsuccessful with, I think it was, Barclays and Westpac as financiers . . . 

What was the relevance of Rural becoming the financier?--  Well, Rural had been the financier of the Blueberry projects, as I recall, and I was actually surprised that it wasn’t financier straight away for this one and that it would be on the basis of non-recourse loans.

Did you discuss with Mr Thornton that Rural was to become the financier?--  Yes, I did.

What did you tell him about that?--  I made him aware that Rural Finance would be prepared to finance the investment.

Did you tell him on what terms it would be prepared to finance?--  It was on a schedule that was produced which was an upfront pre‑paid interest and two subsequent payments of principal.

Over the page:

Any further payments by the investor?-- The rest was to be paid out of the project and there was a complex financial analysis of how the project would deliver the returns which would satisfy the borrowings.

To whom were you reporting at this time?-- In the Johnson group?

Yes?-- Tony, Tony Johnson.

On whose authority or with whose authority did you have the discussion with Thornton about the terms of the Rural loan?‑‑ With Tony Johnson’s authority –

and the evidence was Johnson was the controller of Rural Finance in these companies at the time.

CALLINAN J:   Mr Cooper, that document you referred us to at page 719 is the Blueberry Hill prospectus, it is not this project.

MR COOPER:   No, but this is how all the negotiations came ‑ ‑ ‑

CALLINAN J:   I understand that, but I mean it is an entirely different prospectus relating to a different time.  It is a year earlier, different project.

MR COOPER:   Yes, but ‑ ‑ ‑

CALLINAN J:   Is there a set of questions and answers in the relevant prospectus, of the same kind as you directed us to at page 719?  You drew attention particularly to question and answer 16.  I understand your point, Mr Cooper, but I would be interested to know whether there was such a document forming part of the relevant prospectus.

MR COOPER:   If we understand your Honour’s question correctly, at page 724 under the heading of “Limiting Liability” it says:

Because of the non-recourse nature of the Loan, the Investor who complies with all his other obligations cannot be called upon to pay any more than $2,001 ‑ ‑ ‑

CALLINAN J:   I understand that, but that is all part of the Blueberry Hill Development prospectus, is it not?

MR COOPER:   Yes.

CALLINAN J:   Which begins at 712.  Was there such a document forming part of the prospectus with which we are directing ‑ ‑ ‑

MR COOPER:   I am sorry, no.  That is what caused Mr Thornton to become so concerned about the documents that were given to him, because he read through the prospectus and he realised that the prospectus that he was being given did not align with what he was being told the arrangement was, and so it was for that reason that he had Hasell go away and speak to Johnson and come back and confirm, notwithstanding what the prospectus said, Rural would give him this arrangement. 

Hasell said, “Yes, I have done that”, and then what happened is on 30 June, Hasell came to his office for he and Prendergast to sign the documents and said, “Yes here they are”, and he read through them again and said, “These are hopeless.  They do not talk at all about the limited recourse and they do not talk about the non-assignability, and you should have come to me earlier”, and there was then a telephone conversation between firstly, Hasell and Johnson, in Ian Thornton’s presence where Hasell confirmed again that the arrangement would be on limited recourse and there would be non-assignability.  Then Thornton took the phone and spoke to Johnson directly and Johnson confirmed to him in terms, that what Hasell had told him would be the arrangement.

CALLINAN J:   Why did he not write on the loan agreement then, before he signed it, notwithstanding anything else herein contained this is a non‑recourse loan ‑ ‑ ‑

MR COOPER:   Because he was promised by Mr Hasell that he would get a document almost straightaway confirming the arrangement, and what they did was, they only partially completed the document, I can take you to the evidence, because they agreed it was not relevant.  His evidence was that they filled in the numbers and he picked up his pen, he was about to sign and he said to Mr Hasell, “I am only signing this document on the basis that you have promised me the terms are so‑and‑so, and you will give me a document confirming what our arrangement is, and that is the only basis I am signing”.  Prendergast, who was also present, said the same thing.

CALLINAN J:   He never wrote that down anywhere at the time.  He never wrote that on any document at the time.

MR COOPER:   No, but as his Honour said, you had to understand the relationship between Hasell and Thornton.  Hasell had been his stockbroker for many, many years and he trusted him.  As his Honour said, perhaps he was very unwise to be so trusting of the gentleman, but he had dealt with him on a face‑to‑face basis for many years, and he had no reason to assume that he would not act as he said he would act.

CALLINAN J:   It was not because he was anxious to seal it all before 30 June?

MR COOPER:   That is obviously part of the reason, because the view was taken there had to be something in evidence to satisfy the Tax Department there was an obligation in respect of borrowing.  This really was not a document that could be just quickly scratched out and rewritten.  It was a document that required substantial redrafting.

CALLINAN J:   It could have been qualified in the sort of way that I was suggesting, Mr Cooper, a couple of sentences.

MR COOPER:   Or it could have been qualified in the way that his Honour accepted, that he said to the gentleman, “I am only signing this because you promised to give me a document”, and the evidence shows that after that he pursued Mr Hasell vigorously to get the document.  What happened was that a letter came, which I will take the Court to now, because it is very important.  They received a letter on 29 November – it is exhibit 29.  If I could ask the Court to go to that document, it is at volume 4, page 1136. 

Now, this was a document in which the trial judge placed great weight, in my submission correctly, and the Court of Appeal deminimised, in my submission quite wrongly, for reasons I will come to in a moment.  This is a letter from Rural Finance, 29 November, which says:

We wish to remind you that your second (and final) loan repayment in relation to your investment in The Red Claw Project falls due in December 1989.

To alleviate any concern over the Christmas period we suggest early payment and in this regard we offer you a rebate on your repayment.  The rebate will be calculated –

at so and so.  The evidence was that when Thornton and Prendergast got this letter, Thornton got onto Hasell again and said “Look, we are happy to make the second and final payment, but we want that document that you promised us recorded the true terms”.  That led to them being given the document which was called the guarantee.  If I could ask the Court to go to that document which is in volume 5, page 1282.

CALLINAN J:   I see that is where the 18.5 per cent is mentioned and not 18 per cent too, Mr Cooper.

MR COOPER:   The evidence is that when the document was received, my clients were not over the moon by its phraseology, but in my submission, given the fact it was prepared by a layman, its intent is clear:

In consideration of Glengallan Investments Pty Ltd entering into the acquisition of 500 units . . . and applying for a loan from RURAL FINANCE PTY LIMITED for $434,000 we the undersigned hereby guarantee and indemnify Glengallan Investments Pty Ltd as follows:

1.        That the only payments to be made by Glengallan Investments Pty Ltd will be as follows:

Prepaid Interest  –     Due 30/06/89 of $70,000

that had been paid at this stage –

Prepaid Repayment  –     Due 30/09/89 of $35,500 –

that had been paid at this stage, and the principal payment of 31 December which was to be paid but would discounted if paid earlier.  It then says:

2.        That no further payment will be made by Glengallan Investments Pty Ltd beyond the above to –

amongst others, Rural Finance, and it is signed by Rural Finance.

GLEESON CJ:   Just pausing there.  That is a very different thing from the Blueberry arrangement, is it not?  As I recollect it, and my recollection may be wrong, the Blueberry arrangement was that there would be limited recourse except out of profits of the business venture.

MR COOPER:   Yes.

GLEESON CJ:   This does not say that if the crayfish venture made profits the obligation to repay the rest of the loan would subsist.

MR COOPER:   I agree with that, your Honour, but ‑ ‑ ‑

GLEESON CJ:   That is a very large difference.

MR COOPER:   It is but, in my submission, what my clients were more concerned about was the recognition of their obligation to pay these three sums of money.

GLEESON CJ:   But what was their obligation?  Did they think their obligation was the same as the Blueberry deal, or did they think their obligation was as recorded in this document?

MR COOPER:   No, the same as the Blueberry.

GLEESON CJ:   Then this document was wrong.

MR COOPER:   Yes it was, and Mr Thornton said – and he was believed – that it was not really what he was expecting to get but ‑ ‑ ‑

GLEESON CJ:   Well, he must have been delighted by this, because this fixed a limitation on his liability that was much more stringent than the limitation fixed by the Blueberry deal.

MR COOPER:   Well, he did not say he was elated, and he has always maintained that his liability was two‑tiered to pay the sum specified here, and that the ongoing part of the debt would be repaid out of the profit.  He has never said anything to the contrary to that effect.

HAYNE J:   In particular he has not said there has been a forgiveness of the debt.

MR COOPER:   No, he has never said that.  Well, he could not say that.

CALLINAN J:   Well, is that not in substance what this guarantee is?

MR COOPER:   Well, I do not know if I can take it much further than this.  It is a very ineloquent document drawn by a layman which, to the mind of the two people, recorded the critical part of the deal, namely that there were to be three payments only by my clients.  It recorded that.  Now, it is true it does not go on and record that the balance of the loan would come out of the proceeds, but that was something everyone knew.  At this stage Equus had not come onto the scene, Rural knew that was the position, the Johnson group knew that was the position, and my clients knew it was the position.

CALLINAN J:   Is this document referred to by the – in that audit paper produced by the Commissioner?

MR COOPER:   Yes, it is.

CALLINAN J:   At some stage I will get you to give me the reference to that.

MR COOPER:   I can do that now, your Honour.  It certainly was not – that is why I said to you that the findings in it seem to be totally uncontentious because this was one of the things that was referred to.  It is in volume 5, your Honour, at page 1423, clause 2.18.

CALLINAN J:   Mr Cooper, did the Court of Appeal – did Justice Williams say anything about this, about these two documents?

MR COOPER:   Yes, he did.

CALLINAN J:   What did he ‑ ‑ ‑

MR COOPER:   If I could go back to the first document, exhibit 29, to say that the – yes, the Court of Appeal dealt with that, your Honour.  Bear with me, I am out of sequence a bit – in volume 6, at page 1651 his Honour dealt with it in paragraphs [65] and [66].  His Honour said correctly:

The learned trial judge gave significant weight to the letter of 29 November 1989, and in particular the inference contained therein that only two repayments of principal had to be made by the defendants.  On the appeal counsel for the plaintiffs contended that it was significant that in his reasons the learned trial judge did not refer to another letter from the second plaintiff dated 6 November 1990.  That letter was sent to each of the defendants, and was signed by Kathy O’Leary –

If I can just pause there, that is wrong.  The evidence was that that second letter was sent to Mr Codd and Mr Prendergast, only two of the respondents.  It was not sent to all the respondents at all.

His Honour said that it was submitted that this second letter was of such a nature it amounted to an admission and negatived the effect of the letter of 29 November.  Your Honour, that, with respect, is completely incorrect.  If I could take you to that letter, which is in exhibit 4 at page 1161, your Honours see that the letter says:

Messrs Cross & McInnes have been engaged by Rural Finance Pty Limited to conduct a routine independent audit of the company’s receivables.

Company records show the existence of a loan to you in accord with the enclosed copy of your loan contract.

Should your records agree, could you kindly assist us by signing and returning the enclosed form of acknowledgement to Messrs Cross & McInnes.

Now, the letter was saying, “If you agree that you have a full recourse loan, then sign the acknowledgment and send it back”.  My clients got the letter.  They did not agree that it recorded the true situation, so they did not send back the acknowledgment.  So the Court of Appeal has completely misconceived what this letter said and what its effect was all about.  It cannot constitute an admission on the part of my clients, they owed a full recourse loan, and most significantly, it does not in any way attenuate the effect of the letter of 29 November, which was written by Ms O’Leary.  There is one significant forensic matter here.  Ms O’Leary wrote both these letters, 29 November and 6 November.  Ms O’Leary was subpoenaed by the appellants, was at court for two days but was never called by them, to in any way distance or countenance any incorrectness in the letter of 29 November.

Now, that, with respect, must be an important factor.  If they had the author at court and they contended the letter was wrong and they did not call her, that, with respect, is an admission on their part that they agreed the letter was correct.  What happened after these letters ‑ ‑ ‑

CALLINAN J:   Before you leave 1136, was 18.5 per cent per annum a mistake, because the loan agreement refers to 18 per cent per annum?

MR COOPER:   Eighteen per cent, yes, it was a mistake.

CALLINAN J:   So the 18.5 is wrong?

MR COOPER:   It was a mistake.

GLEESON CJ:   Could you just remind us what exactly is your contention in relation to this subject matter?

MR COOPER:   Your Honour, my submission is that the agreement that was made was an oral agreement made on 30 June 1989 between Rural and Mr Thornton on behalf of my clients, that the investors would borrow finance to an amount of several millions of dollars.  They would each make a repayment of the loan 60 days after that date and a repayment of the loan 90 days after that date, and that they would have no further obligation to repay the loan and that the financier would look to the income flowing from the venture to satisfy ‑ ‑ ‑

GLEESON CJ:   This is an oral agreement, to use the language of the parol evidence rule, adding to, varying or contradicting the written agreement?

MR COOPER:   That really, I say, with respect, begs the question, your Honour.  The Court of Appeal took the view that because the loan agreement was signed, that must have been intended to be their agreement, but as your Honour has said and Justice McHugh has said in other cases, the parol evidence rule is just a forensic position from one starts.  Generally, if there is a document signed, one assumes that is the four corners of the contract.

GLEESON CJ:   That is why I want to understand precisely what your contention is.  Your contention is, is it, that the written loan agreement does not contain the whole of the agreement between the parties?

MR COOPER:   It does not contain the agreement for sale because ‑ ‑ ‑

GLEESON CJ:   I am still not sure I am understanding what exactly is your argument.  Is it that the written agreement had no legal effect?

MR COOPER:   Yes, it was just signed simply because if the Tax Department asked for some evidence of there being an arrangement on 30 June a piece of paper could be given to them.

GLEESON CJ:   So the true agreement was the oral agreement.

MR COOPER:   Yes, and it did not merge in the writing.

GLEESON CJ:   Well, the writing was a sham.  Was that your argument?

MR COOPER:   Well, I would not say sham.  It ‑ ‑ ‑

GLEESON CJ:   We need to know what you would say because ultimately we have to put a point on this.

MR COOPER:   Yes, all right.  Well, in legal parlance it would be a sham because it would not be reflected ‑ ‑ ‑

GLEESON CJ:   That is the parlance we usually speak in.

MR COOPER:   I had initially pleaded in this case the document was a sham and ‑ ‑ ‑

GLEESON CJ:   Is that what you are submitting to us?

MR COOPER:   Yes, your Honour, because it does not reflect the true agreement.  The parties intended their true agreement to be something different from the writing which they deliberately left incomplete and signed only for a limited purpose.

CALLINAN J:   Was it intended to be a fraud upon the Income Tax Commissioner?

MR COOPER:   No, just to be ‑ ‑ ‑

CALLINAN J:   How could it be otherwise if it were a sham?

HAYNE J:   It is a very bold submission.

MR COOPER:   Well, your Honour, rightly or wrongly, the view was taken by them that it was necessary to have some evidence in some form ‑ ‑ ‑

CALLINAN J:   Which misrepresented the position.  If it is a sham it misrepresented the true position.

MR COOPER:   But your Honour has to remember that the contemplation was that this document would be overtaken very soon thereafter by the true agreement because Hasell was going to produce the writing which truthfully recorded the agreement and he was pursued for that for months.  Although he promised to give the true writing to my clients he never did it.  It was only when they got the letter on 29 November at the second last payment that they use that as a lever to get some sort of document from Hasell to confirm that the arrangement was not as the loan agreement would suggest it is.

GLEESON CJ:   The word “arrangement” can be a little dangerous.  What was the contract that was entered into between your clients and Rural Finance, was it oral or in writing?

MR COOPER:   No, I have to submit that it was oral, your Honour.

CALLINAN J:   Why did your client sign the document?  If it was entirely oral why did he sign any document at all - a loan agreement?

MR COOPER:   Well, your Honour, I can only assume out of cautiousness and fear of the ATO wanting to have some sort of evidence available.

CALLINAN J:   In order to commit a fraud on the Commissioner.

MR COOPER:   It cannot have committed a fraud because you see in the finding the Commissioner found out about all this.

GLEESON CJ:   You had better think about the consequences of what you are saying here.

CALLINAN J:   I think you will find it is a very serious offence under the Act.  I cannot tell you the section offhand, but ‑ ‑ ‑

MR COOPER:   Well, your Honour, that is the way the evidence has come out.

GLEESON CJ:   In all events, you are inviting us to write a judgment saying that your client submitted to us, and we accept their submission, that the written loan agreement was a sham.

MR COOPER:   Your Honour, that is the way the case has been run.

CALLINAN J:   Mr Cooper, with all due respect, I think you ought to take instructions on that having regard your client is an experienced businessman.  Is he not an accountant?

MR COOPER:   Yes, he is.

CALLINAN J:   It is a matter for you, of course, but ‑ ‑ ‑

MR COOPER:   I will, your Honour, if I can come back to you on that.  On 27 March the respondents received a notice of assignment of their loan agreements and the evidence is that Mr Thornton rang Johnson straightaway after this and asked him why they have received this notice when the agreement between them was that there was to be no assignability of the loan and he was assured that the Equus Corporation understood what the true arrangement was.  On 25 June 1991 the respondents commenced proceedings in the ACT Supreme Court seeking a declaration that the agreement which they had entered into was, in fact, the agreement which was, in fact, the agreement which had been performed by them.  It is my submission, your Honour, that on the evidence, as his Honour found, the true agreement between the parties was the ‑ ‑ ‑

GLEESON CJ:   Where can we see his Honour’s actual finding?

MR COOPER:   Page 1575, your Honour, paragraph [15].

GLEESON CJ:   I am not sure I understand that the “operative agreements” – that is in plural ‑ ‑ ‑

MR COOPER:   That was a descriptive term that was used in the defence to say it was a limited recourse loan requiring the three payments we have discussed and the balance of the loan being repaid out of ‑ ‑ ‑

GLEESON CJ:   Where do we see the defence?

MR COOPER:   It is in volume 1 at page 116, your Honour, paragraph 6.

CALLINAN J:   Mr Cooper, is there one comprehensive final defence?  I think some of the further amended defences built upon the others and incorporated by reference.  It would be very useful to know whether there is a comprehensive final version.

MR COOPER:   It starts at page 111.  It is this one, your Honour.  Can I just explain to you why the other defences were put in ‑ ‑ ‑

CALLINAN J:   I think I can understand it.

MR COOPER:   It is because of the argument that the Trade Practices point was raised out of time and it is to demonstrate that that is just bogus.

CALLINAN J:   That is a complete defence at the beginning of 111.

MR COOPER:   Yes, your Honour.

McHUGH J:   Is not a better way of putting your case not that the document was a sham, but that it did have legal effect, but it was subject to a condition subsequent that had to be fulfilled, namely, the execution of this other document? 

MR COOPER:   Yes, which qualified it in the sense of making it ‑ ‑ ‑

McHUGH J:   Well, which would, but until that other document was executed, it did not have effect.  Once it was executed, it took effect.

MR COOPER:   As varied by the other document.  Yes, that is probably a more correct legal analysis of what happened.  There was certainly no intent to deceive anyone here.  It really was just a question of wanting to have ‑ because everything happened so late and Mr Hasell had not done what he said he would do, but he promised he would, as soon as possible after 30 June, give them the document that recorded what they had agreed, with respect, your Honour is correct that that would have then had the effect of taking out the assignability provision and incorporating something like the terms of the loan agreement in the Blueberry.

GLEESON CJ:   What did the trial judge find about the legal effect, if any, of the written loan agreement?

MR COOPER:   He has implicitly found it did not have any effect, because he has found the agreement to be the oral agreement, because he relied upon the letter of 29 November talking about the second and last payment as being wholly probative of the agreement that we contended for.  I might, with the greatest of respect, adopt what Justice McHugh has said about my inadequacy in pleading really not being a relevant reason not to look at this matter objectively, on all the evidence, and seeing clearly what was intended. 

GLEESON CJ:   Which was that the oral agreement varied the written agreement?

MR COOPER:   That there was to come into place a further written agreement which was to be read in conjunction with the loan agreement and vary it to coincide with the terms of the oral agreement.

CALLINAN J:   What would be the tax implications of the varied agreement?

MR COOPER:   None on the evidence.  Mr Thornton, who is a chartered accountant, said nothing.  We called an expert from Ernst & Whinney and she said that it had no effect.

CALLINAN J:   You can give us that reference later, please Mr Cooper.  There is no need to worry about it now.  Give it to me at some stage.

MR COOPER:   Thank you, your Honour.  Your Honour, my junior has really reminded me of what the points your Honour Justice McHugh was making.  The trial judge said at page 1574 in paragraph [13], at the bottom of the page:

There was no provision in the loan agreement documents for limited‑recourse of the kind agreed to orally, but the documents were executed by or on behalf of the defendants on the understanding that the further documents promised by Mr Anthony Johnson would be provided –

So that is really the way the evidence fell out.  Your Honour Justice Callinan, I think we can give you the references that you want now.  Your Honour, can I just conveniently refer you to paragraph 39 of our notice of contention submissions – paragraph 39 on page 9.  Your Honour, they are my submissions, if the Court please.

GLEESON CJ:   Yes, thank you Mr Cooper.  Yes, Mr Keane.

MR KEANE:   Your Honours, in relation to the questions your Honour Justice Callinan asked earlier in relation to the document which is at volume 5, page 1420, the situation is that that document was tendered by us as part of exhibit 169.  Your Honours will see that begins at 1417.  The significance of it is that it was discovered by the other side after an application for it succeeded.  Your Honours will see that recorded in volume 6 at 1560 and, in particular, I think, 1560A.  The point is that it was disclosed as an Arthur Andersen document with a “with compliments” slip.  The Brian to whom the note at 169 at 1417 being directed is Mr Prendergast.  He attaches:

2 copies of the ATO Position Paper on Red Claw, plus a copy of the letter we propose to send the ATO regarding an extension of time in which to respond to the Position Paper.

Your Honours, the significance of the document, being a document discovered by them, is that, if your Honours look at 2.18 on page 1423 and then see, at 1430, the draft response for discussion purposes, at the bottom of the page in relation to paragraph 2.18 it is said:

Our clients, generally described as the Anderson Family investors (the borrowers), entered a loan agreement with Rural Finance Pty Ltd (RF) which was in the first instance a full recourse loan i.e. in the event of default, the lenders would have recourse to all assets of the borrowers ‑ ‑ ‑

CALLINAN J:   So you really need the audit report to make intelligible that response, or that proposed response.

MR KEANE:   That is the point of it, your Honours.  The point of it was that it was put in to make intelligible this response which, being the document that was sent to Mr Prendergast as the proposed response to the ATO which says “The agreement we negotiated was for recourse.  Then over the page that is explained a little further.

CALLINAN J:   And the draft purports in other respects to contradict the assertions made in the audit report.

MR KEANE:   It does, and it does that in relation to paragraph 4.4 as well as your Honours will see on page 1431, but before going to that, can we invite your Honours to read the two paragraphs on page 1431.

HAYNE J:   Understanding that this is not your side’s document, Mr Keane, can you explain to me how what seems to me to be an irreducible tension between the first proposition in the second paragraph and the second proposition is to be resolved?

MR KEANE:   No, your Honour, save that what seems to be being said in terms is that prior to the second loan repayment being made there was a renegotiation.  What we use it for is to say that it is entirely inconsistent with the notion that there was this oral agreement negotiated on 30 June.

HAYNE J:   And expressions like “non‑recourse”, “limited recourse” were frequently used in this field of discourse of so‑called tax effective agricultural arrangements.

MR KEANE:   Yes.

HAYNE J:   But the exact content of them, at least to me, is not instantly apparent.

MR KEANE:   No, it definitely depends, it distinctly depends on what you actually agree you mean by it.

HAYNE J:   Well, “non-recourse loan” seems to me to be a gift, but there we are, that is an unduly hard approach to these concepts perhaps.

MR KEANE:   The question is whether limited recourse was agreed to be, in effect, a release or whether it was a full recourse with a promise from Mr Johnson and possibly from Johnson Farm Management that the project would perform so that there would be assets.  In the evidence, and this is an aspect of the Court of Appeal’s criticism of the learned primary judge, when one goes to the evidence with the learned primary judge the oral evidence that he says he believes, what you get is a number of candidates emerging which, simply believing Messrs Prendergast, Hasell and Thornton, does not resolve the tension between the candidates and ‑ ‑ ‑

HAYNE J:   They also reflect on the significance, if any, to be attached to the course of the trial and the particular fashion in which the case has been pleaded because if - and I just do not know where this chain of inquiry may lead, but if there is some uncertainly or some room for move about what is meant by “limited recourse”, if there is some doubt about whether it was the blueberry terms or some other terms that were to be the subject of agreement or were agreed orally - I just do not know yet, I have not done enough work - much may turn on the way in which the case was pleaded and run at trial.

MR KEANE:   Yes, your Honour.  We would say one thing is clear, with respect, that they were not the Blueberry terms because ‑ ‑ ‑

HAYNE J:   What, were not said to be the Blueberry terms or ‑ ‑ ‑

MR KEANE:   They were not agreed to be such.

HAYNE J:   Yes.

MR KEANE:   We need to take your Honours to the evidence about that.  But one starts with the point alluded to by Justice Callinan earlier, which is that the Blueberry terms came with a form of loan agreement which was distinctly not the loan agreement that these gentlemen signed.  Can we just, with this letter at 1431, draw your Honours’ attention to the second paragraph on the page and to the second‑last paragraph, where it is being said very firmly that there was a subsequent variation.

GLEESON CJ:   Mr Keane, before you leave this position paper on page 1420, it appears from paragraph 1.12, does it not, that the tax returns were prepared on the basis that partnership losses of almost $9 million were incurred during the year ended 30 June 1989.

MR KEANE:   Yes.

GLEESON CJ:   That is to say incurred on 30 June 1989.

MR KEANE:   Yes.

GLEESON CJ:   Bearing in mind the distinction that is drawn in paragraph 4.2, which I think is a fairly respectable distinction, between preparing the carry on of business and carrying on a business, the proposition that these partnerships were carrying on a business on 30 June 1989 and lost $9 million on 30 June 1989 was hopeless, was it not?

MR KEANE:   Your Honour, it certainly could not be maintained unless the taxpayers fully understood that, as indeed the partnership deed provided for, the moneys raised went immediately to FJA and the farm owner, because unless they went to them immediately you were not at square one for the contention that there was such a loss. 

We should say as well in relation to these letters that we are looking at, that if you go to 1439 your Honours will see exhibit 170, which is Arthur Andersen, the borrowers’ accountants, sending off a letter in effectively the same terms as the draft that had been sent to Mr Prendergast for his comment.  This document was referred to in the Court of Appeal at page 1655, paragraph [82], and the observation is made by Justice Williams that in evidence Mr Thornton gave evidence that he was very unhappy about this document because it did not reflect the true position, and dismissed his accountants in consequence of it.

Mr Prendergast did not give any evidence.  That was said to be our problem because we tendered this document – after it had been disclosed to us – as a document that had been to Mr Prendergast and then had been sent by the other side’s accountants.  So that on the face of things it looks like an admission against them.  Mr Prendergast was said to have been available at trial when we tendered it and it was said that in some way the document did not have the effect for which we contend because we did not call Mr Prendergast and cross‑examine him about it.  It seems to us, with respect, the situation is that the document speaks for itself and, in the absence of an explanation, is entirely destructive of the other side’s case.

CALLINAN J:   Well, there was an explanation – Mr Thornton’s, for what it was worth. 

MR KEANE:   Mr Thornton said it was wrong.  Mr Thornton – yes, that is true, your Honour, and in that regard he said that.  On the other hand ‑ ‑ ‑

CALLINAN J:   You could have called the author.

MR KEANE:   Mr Stanfield?  I suppose we could, but then again, on the other hand, if it is said that their agent got it wrong, we would only be calling him to say, “Is that the document you wrote?  Did you write it on instructions?”, to displace the proposition that on the face of things is correct, that it was written on instructions.  We would have thought that at least the failure to call the author was a deficit in the other side’s case.

CALLINAN J:   The real problem, Mr Keane, in tendering – I am not reproaching anybody – in tendering documents, a large number of documents, and authors not being called, is that often the result is equivocal.  You can choose whichever attitude you want to adopt to them.  It can be very unsatisfactory.

MR KEANE:   We certainly want to have a bit of that in our favour in respect of ‑ ‑ ‑

CALLINAN J:   I understand your submission. 

MR KEANE:   Your Honour, as to that, we say the documents speak for themselves, they are written by people who were in a position to know and they are, in terms, very strong.

GLEESON CJ:   What was the basis on which the Court of Appeal decided this issue?

MR KEANE:   The Court of Appeal dealt with it basically at paragraphs [88] – perhaps a little before then, but certainly at [88] to [95].  They took the view that even accepting that the learned trial judge regarded Hasell, Thornton and Prendergast as honest, the evidence they gave was not such that it could establish this – and we say it with respect – rather shifting oral agreement.

GLEESON CJ:   Do you mean they decided on the basis of uncertainty?

MR KEANE:   No, they held that there were sufficient ambiguities and uncertainties and inconsistencies in the oral evidence that, the oral evidence considered in the totality of the evidence, together with all the documents, the best you could find in favour of the respondents was an assurance by Tony Johnson that he would procure or guarantee that the project would provide the funds from which the repayments were to be made.

GLEESON CJ:   What effect, if any, did they give to the document called a guarantee?

MR KEANE:   That is dealt with by them at page 1659, paragraphs [91] and [92], your Honours.

GLEESON CJ:   They conclude [92] by saying, “Whatever the legal effect of the documents of 19 December 1989”, they did not evidence something, but what was their legal effect?

HAYNE J:   Paragraph [96] says:

It is not necessary for present purposes to consider further the possible legal ramifications of ‑ ‑ ‑

MR KEANE:   Yes, it was never contended that that agreement took effect as an operative agreement in the proceedings.  The learned primary judge expressly said, as he was invited to do by the respondents, they were not taking their stand on it as an agreement that operated as an agreement but, rather, its evidentiary effect was to support the existence of the earlier agreement.  The point has been made it does not in a very serious respect and, further, it introduces into the picture Tony Johnson and Johnson Farm Management, which to the extent that there are suggestions in the oral evidence to which the trial judge referred, tends to support the suggestion that what was promised was a guarantee from them that the liability would be met by the project, or by them.

GLEESON CJ:   Rural Finance was a party to the document of 19 December 1989.

MR KEANE:   Well, in an interesting way.  Your Honours will have seen that while the seal of JFM is affixed and it appears to be signed regularly, it is not the case with Rural.

GLEESON CJ:   But do we understand that it was never pleaded or argued that the document of 19 December 1989 had any legal operation which qualified the rights of Rural Finance?

MR KEANE:   That is correct.  Your Honours will recall we showed your Honours exhibit 15 which was the Morris Fletcher & Cross letter of April 1991, which said there are these two agreements, the loan is not non‑recourse, but there is this other agreement, the guarantee, and we take our stand under both.  Mr Thornton’s evidence was that that was another mistake by his lawyers and that was wrong.  In the case it was never suggested that that agreement took effect as an agreement, rather, its effect was evidentiary only.  I should tell your Honours where the learned primary judge records that. 

Certainly, it is at paragraph [17], which is a long paragraph.  It begins at 1575 and concludes relevantly at 1577, particularly lines 9 to 11.  The comments in relation to the inaccurate documents that emanate from the other side’s lawyers all those years ago are at paragraphs [20] and [21] at page 1577 and 1578. 

CALLINAN J:   Mr Keane, going back to that document at 1430, that is the letter that was sent to the Commissioner and disavowed by Mr Thornton in evidence.  If you go back earlier to 1417, you will see that it was sent, presumably to Mr Prendergast, on 15 June.  Then if you go to 1441, the slightly amended draft was actually sent to the Commissioner on 9 July 1993 and actually discussed with a representative of the Commissioner on 15 July.  That appears from the handwritten notation.

MR KEANE:   Yes.

CALLINAN J:   It would be a large thing to swallow that in that almost a month which elapsed between the dispatch of the draft and the dispatch of the letter itself to the Commissioner there were no discussions and no instructions and that the accountant took it upon himself just to send off the letter.

MR KEANE:   That is right, your Honour.

CALLINAN J:   With some amendments.  What are the amendments?  I do not want the detail.  Are they just verbal sorts of changes or ‑ ‑ ‑

MR KEANE:   Certainly, I do not think there are any amendments to the substance of the draft so far as 2.18 and 4.4 were concerned.  We can check that though, your Honour.

GLEESON CJ:   Has there ever been an issue in this case involving a claim for damages on the basis that there was some kind of misapplication of the partnership funds, in particular, any misapplication of them by lending them to Rural Finance?

MR KEANE:   No, your Honour, and as to that we should draw your Honour’s attention to some aspects of the evidence very briefly.  Firstly, in relation to page 924 in volume 4, your Honour Justice Hayne yesterday identified three of the elements of the $868.  The other element, the $12, is also referred to at that page.

HAYNE J:   Line 10.

MR KEANE:   Yes, that is right.  In volume 3 in the partnership deed we should draw your Honour’s attention to page 876 which is provision for the remuneration of the general farm manager.  Your Honours were taken to 4.2.  We would refer your Honours to 4.1 and then invite your Honours to note that the amount specified in schedule A thereto is the $833 being the amount payable to the farm manager on prepayment for the first year of the term.  So that what there is was a specific provision for the prepayment of the 833 to Johnson Farm Management.

GLEESON CJ:   Of course, that is the basis on which they claim to have lost $9 million on the very day on which they commenced business.

MR KEANE:   Your Honour, we were about to say it was on the basis that that money immediately be paid, or at least subject to a binding obligation to pay it, that was the whole driving intent, the whole purpose of the arrangement.  We should draw your Honour’s attention as well to paragraph 6.3.14 of the deed at 781 because paragraph 6.3.14 authorised the general partner to retain JFM under the management agreement.  So that the deed authorised the retention of the general partner under the management agreement, the management agreement authorised the incurring of the obligation to pay those fees immediately.

In relation to the leases of the ponds, if your Honours go to 856 your Honours will find an agreement between Forestell, being the general partner, JFM and Farmer Johnson Aquaculture.  At 861 there is in paragraphs 3.1 and 3.2 the provision for – particularly 3.2 - the engagement of Farmer Johnson.  You will find the annexures B and C at 81 and 894.  We took your Honours yesterday to 885 in relation to the rent provision at 5.1.

This document, that is to say, the document, schedule 5, that begins at 856, is authorised by clause 12.3 at page 823 of the volume.  So that we then come to make the point that as of course was the purpose of the transaction, if the tax deduction, on the basis of the partnership loss to it, was to be sustainable, then the amount raised as working capital had to be spent immediately in accordance with the terms of these agreements.

GLEESON CJ:   Mr Keane, are there any financial statements of Rural Finance in evidence?

MR KEANE:   We do not think so, your Honour.

GLEESON CJ:   How do we know that Rural Finance did not have substantial funds available?  How do we know that Rural Finance needed to rely on the deposits it was going to receive from the manager in order to raise the funds it was going to lend to the investors to subscribe to the partnership?

MR KEANE:   Well, as to that, there is the evidence of what occurred in the conversations of May 1991, but that apart, I think – I am not sure whether there is any direct evidence – one piece of evidence there is is in one of the documents that came from the other side ‑ ‑ ‑

McHUGH J:   Well, there is the finding by the trial judge, is there not, in paragraph [28]:

On 30 June 1989 the second plaintiff had no funds – by way of overdraft or otherwise ‑ ‑ ‑

MR KEANE:   That is true, your Honour.  There is some evidence that the holding company of the Johnson Farm Management group had shareholders’ funds of $6 million‑odd.  We will turn that up for your Honours.

CALLINAN J:   Mr Keane, do you agree with Mr Cooper’s submission that the tax implications would be no different under the agreement that he alleges from ‑ ‑ ‑

MR KEANE:   No, I do not, your Honour.  We say two things about that.  Firstly, as to Ms Armstrong’s evidence – and we will show you some ‑ ‑ ‑

CALLINAN J:   Perhaps before you answer that question, there seems to have been a real concern on the part of the respondents, or at least their accountants, to refute an assertion by the Commissioner that this may have been a scheme under Part IVA.  That appears at page 1443 and onwards.

MR KEANE:   That is right.

CALLINAN J:   It does have an entirely different complexion, does it not, if the agreement is as alleged by the respondents, rather than as appears in the loan agreement? 

MR KEANE:   Yes, your Honour.  Really, what people might think about it later on – I mean, certainly what your Honour says is correct, and there is no doubt that there is an attempt to say that it was full recourse, full liability, it was a liability that was what it seemed to be.  But the most important point of all this is that in terms of the parties’ understanding at the time, the prospectus and the Ernst & Whinney report in the prospectus made it clear that unless the borrowers’ obligation was to repay the loan, one risked drawing the thunder of section 82KL.  Mr Thornton said that he only wanted to make these claims for deductions if they could have been done lawfully, and he had no view different from the Ernst & Whinney view.

So the common understanding of the parties at the time the transaction was done was that you needed to have a full liability, and a promise of a release, on the basis of the information that everybody had, would have been destructive of the objective which Mr Thornton swore he pursued, which was to have a lawful basis for claiming these deductions.  Now, that is the first and most important thing we say about that.

We say that that view of things is supported by the letter of 9 July 1993.  The last thing we say about that is that at the technical level, the retrospective view of how the Tax Act might work, about which Ms Armstrong gave evidence, really is distinctly less than compelling.  I will just turn that up for your Honours.

CALLINAN J:   The tax position would have been different, would it not?  If, as Mr Thornton asserts, he intended to invest in a genuine profit‑generating project and that project was to generate sufficient money to discharge his liabilities, then it would have been a tax‑neutral transaction, whereas if there was not the money available, then the losses would be generated.

MR KEANE:   That is right.  In relation to Ms Armstrong’s evidence, can we invite your Honours to look at – and we should say about Ms Armstrong’s evidence that your Honours will appreciate the learned primary judge did not rely upon it.  He does not refer to it at all.  Can we just take your Honours to it?  We will not take your Honours to it at length, but if we can invite your Honours to read what appears in volume 3, commencing at 693, line 35 to 696, line 22.  In our respectful submission, the difficulties in Ms Armstrong’s position are made very clear. 

In essence, it seems to have been that her view was that section 82KL was not attracted because there was a contingent obligation to pay that arose only on the fund coming into existence, but notwithstanding that that obligation only arose when the fund came into existence, it was nevertheless correct to say that there was a full liability to repay the loan.  It is just too tangled ‑ ‑ ‑

CALLINAN J:   It is a qualified opinion, anyway.  It does not necessarily breach the section.  It does not sound very confident.

MR KEANE:   No.  As we say, his Honour did not act upon it.  Your Honours, our learned friends were asked ‑ your Honour Justice Callinan asked, was there a document akin to the blueberry document presented to the ‑ ‑ ‑

CALLINAN J:   I need the question and answer document, Mr Keane.

MR KEANE:   Yes, your Honour.  Something along those lines, not quite a question and answer, but something along those lines was discussed by Mr Hasell with Mr Thornton.  It is exhibit 14.  It is in volume 4 at page 1024.  If your Honours go to that, your Honours will see that it sets out in the left‑hand column, at the dot points, the terms on which “Rural Finance Pty Ltd will advance 6 year loans”.  The interest is 18 per cent.  The principal is up to 100 per cent of the investment.

CALLINAN J:  

The loan is not non‑recourse and the Project profits are not guaranteed.

MR KEANE:   And then your Honours see the example with the deductions that is given.  Your Honours, that is significant in terms of Mr Hasell’s evidence, because he actually says that he presented this to Mr Thornton and it was on the basis of what he was presenting that they reached their agreements.  Now, that is not non‑recourse.  The example that is shown there is not intended to be an exhaustive statement of your liabilities. 

To make it very clear, can we take your Honours to 1025, the right‑hand column, the second‑last dot point.  We mentioned earlier that there was some evidence that JFM or Farmer Johnson Aquaculture’s holding company had shareholders’ funds of $9.4 million.  Your Honours will see that at 1026.  That is another document that was given to Mr Thornton before 30 June.  And at 1027, in the right‑hand column, the second‑last paragraph on the page, your Honours will see the point made that:

The farm owner’s holding company, Farmer Johnson Ltd, has shareholders’ funds of $9.4 million and Johnson Farm Management Pty Ltd has over 500 clients for whom it manages farm businesses.

GLEESON CJ:   Have you mentioned what is on page 1025 in the right‑hand column, the second‑last and third‑last dot points?

MR KEANE:   Yes, your Honour. 

GLEESON CJ:   That seems to indicate a change in policy away from guaranteed farm income.

MR KEANE:   Yes.

CALLINAN J:   “Full investor risk” is the expression used, Mr Keane.

MR KEANE:   Yes, your Honour.

CALLINAN J:   The profit forecasts were not conservative enough.

MR KEANE:   Then some people did not pay their loans either.  So that when the learned trial judge found the existence of the operative agreement – and we should also draw your Honours’ attention, in addition to the paragraphs my learned friends took you to, to paragraph [9], which is at 1572 in volume 6, and paragraph [25], which is at 1580.  He did so on the footing explained in paragraph [15] that he found:

The oral evidence of Messrs Hasell, Prendergast, and Thornton, which I accept as true, leads to that conclusion.  Furthermore, important documents support it.

One of the problems with his Honour’s judgment, in our respectful submission, is that there was simply no recognition of the ambiguities, uncertainties and inconsistencies in that evidence, which cannot be resolved by a selective finding of reliability or truthfulness.  It is on the basis of a view of that evidence and seeing it in the context of the documents, and bearing in mind that the most important document, being the document that they signed on 30 June 1989, is not mentioned really as a subject of concern by his Honour. 

The Court of Appeal concluded that it is just not possible to resolve these ambiguities and uncertainties in favour of the oral version that is most favourable to the respondents.  By way of example, before we go to the evidence itself, the evidence‑in‑chief of Mr Thornton was that his first meeting, the actual face‑to‑face meeting with Hasell in June 1989 – Hasell identified that the loan was non-recourse and that he, Hasell, would speak to Tony Johnson, and that he, Hasell, was sure he could get Thornton loans on a similar basis to the Blueberry venture. 

In cross‑examination, Mr Thornton accepted that paragraph 24 of his statement, which became exhibit 107 which your Honours will find in volume 6, relevantly at page 1501, accurately recorded what he was told by Hasell at the first meeting which was somewhat different.  It was as you will see from about the third line down:

“I think I can get you a guarantee from Johnson Farm Management that the project will be self funding and that there will be no recourse by the lender after the initial payments and that all that would be required to be paid would the first payment of interest and two payments of principal like the Blueberry project.  I’ll talk to Tony Johnson about this and I’ll let you know”.  The meeting then concluded and he left my office.  The meeting lasted for approximately 1 hour.  I cannot now recall whether he specifically referred to Rural Finance by name during the meeting.

GLEESON CJ:   But as appears from page 1025 on the top of the right‑hand column, the Tax Office was taken the view, rightly or wrongly, that a guarantee of income produced the consequence that this was an affair of capital, not on revenue account from the point of view of the investors.  The Tax Office policy was that if you have a guaranteed forward income then the business was the business of the promoter, not the business of the investor.

MR KEANE:   Yes, that if you have a guaranteed forward income ‑ ‑ ‑

GLEESON CJ:   So this entire subject of limited recourse loans or guaranteed income was regarded as extremely sensitive in relation to the tax effectiveness of this scheme.

MR KEANE:   Yes, especially if the arrangement was that there not be a liability at all or there not be a liability to some extent.

HAYNE J:   Is there a difference between guaranteeing the profits or income stream that will be obtained from the venture and limiting the obligation to repay to specified amounts or instalments?

MR KEANE:   Certainly so far as the Ernst & Whinney advice is concerned, they focused specifically on the problem of no liability.

HAYNE J:   Well, there may be different tax consequences, but looking for the moment only at the relations between the parties concerned, are the agreements different or the same?

MR KEANE:   To the extent that Mr Johnson personally promises to stand behind the project, we would submit that it is at least arguable by reference to what was in play at the time between the parties that it might have been done lawfully on the footing that the promoters of the scheme are the general partner and JFM and FJA.

HAYNE J:   Done lawfully in the sense of tax effectively.  Leave aside tax effects for the moment, I just want to understand whether there is a difference between an arrangement of guarantee of the kind referred to at 1501, paragraph 24 and what is pleaded at page 116, paragraph 6, which seems to be a plea that the only obligations of the borrower would be to make three payments identified.

MR KEANE:   We submit there is, your Honour.  We submit there is a real difference between saying, “In consideration of my agreeing to repay $1,000, you agree that I will discharge that obligation by paying you $10”, which is the no recourse or limited recourse theory, and, on the other hand, “In consideration of my agreeing to repay to B $10,000, C agrees that he will ensure that in the event that I am called on, he will provide 500 of those dollars”. 

HAYNE J:   Because it seems to me that something may turn on how this expression “limited recourse”, how this expression “guarantee”, was being understood at various steps in the evidence and in the events revealed in the evidence.  And when, so it seems, after there is said to have been an oral agreement reached, the parties then execute written documents, if there is to be understood from the evidence to have been some condition subsequent, it may be of no little importance to understand precisely what the content of that condition subsequent was.

MR KEANE:   Your Honour, we agree with that, with respect, and one sees that what the Court of Appeal did was to conclude that one could not, on the evidence, taking into account all the documents and objective facts and the plain purpose of the transaction, including Mr Thornton’s evidence that he wanted to do this properly and he had no different view of things than the Ernst and Whinney view, you cannot fit it all in unless “limited recourse” means something other than no liability.  What it can mean is that there might be a guarantee from Tony Johnson, and what one sees in the evidence is that there is a lot of reference to that.  There is a lot of reference to getting Tony Johnson to guarantee the position. 

In cross‑examination, again, Mr Thornton accepted the accuracy of what is said at paragraph 50 of his statement at 1508, where he accepts the accuracy of what is in paragraph 50:

There was some conversation from Johnson for a while and then Alastair turned to me and said “Barry, Tony (Johnson) has said that he will provide you with a written document guaranteeing that the loans are limited recourse and because they are limited recourse loans, there is nothing to assign and you shouldn’t be concerned about an assignment to a third party”.  I concluded he was speaking on behalf of Rural Finance. 

Then it goes on, but your Honours will see the last sentence: 

I can’t recall the exact words, but it would have been to the effect that he was prepared to confirm what Alastair had said. 

The question really is, was Alastair saying that Tony Johnson will guarantee that the project will succeed?  In that regard, at 1515 in paragraph 75, in relation to the documents entitled “Guarantees”, far from the dismay that our learned friends suggested Mr Thornton suffered, in paragraph 75, it records that Mr Thornton thought the title “Guarantees” of the document reflected what Hasell had told him.  At the bottom of the page:

because I recalled that Alastair had turned to me and said that Tony Johnson would “guarantee” the limited recourse nature of the loan. 

And the complaint about the learned trial judge’s approach that the Court of Appeal accepted is that the learned primary judge simply did not deal with these matters.  In the Court of Appeal at 1648 in volume 6, paragraph [49], Justice Williams refers to the evidence of Mr Hasell in a statement which was consistent with the idea that the agreement was for the Johnson group to “stand behind the loan” and that “Johnson Farm Management would guarantee to the defendants that the deal was a ‘non‑recourse’ loan”.

Now, in his cross‑examination, Mr Hasell accepted that that statement reflected his recollection of events, qualified as he said, because he said that the statement was written in words used by our instructing solicitors, but he accepted its essential accuracy.  Your Honours, exhibit 130, which is his statement, has been omitted from the record.  Can we hand it ‑ can we make them available to the Court ‑ ‑ ‑

MR COOPER:   Well, I object to this, I am sorry to interrupt.

GLEESON CJ:   This is just an exhibit, is it not?

MR KEANE:   It is.  It is an exhibit.

CALLINAN J:   It was already in evidence.

GLEESON CJ:   Just a minute, excuse me.  These are a number of copies of it.

MR COOPER:   It went into evidence, your Honour, but on the basis that Mr Hasell did not accept it as being an accurate statement on his behalf.

GLEESON CJ:   But this is part of the evidence before the judge?

MR COOPER:   It is, but subject to what I have just said, that Mr Hasell did not accept it as being his ‑ ‑ ‑

GLEESON CJ:   All right, but we can look at it, can we not?

MR COOPER:   Yes, your Honour.

MR KEANE:   And we will take your Honours to what Mr Hasell said about it in the record.  It is referred to by the Court of Appeal in paragraph [49] at 1648, bearing in mind that Mr Hasell is one of the gentlemen whose evidence the learned trial judge thought was true and that led to a finding about this operative agreement, and can we draw your Honours’ attention to what is said in paragraphs 12 and 13 on page 2 - perhaps 11 to 13 on page 2, and make the point that the handwriting your Honours see there, the evidence shows is Mr Hasell’s own.  Mr Hasell’s evidence‑in-chief – and in this regard in volume 3 at page 600, commencing at about line 35:

Did you discuss with Mr Thornton that Rural was to become the financier?-- Yes, I did.

What did you tell him about that?-- I made him aware that Rural Finance would be prepared to finance the investment.

Did you tell him on what terms it would be prepared to finance?‑‑ It was on a schedule that was produced which was an upfront pre‑paid interest and two subsequent payments of principal.

Any further payments by the investor?-- The rest was to be paid out of the project and there was a complex financial analysis of how the project would deliver the returns which would satisfy the borrowings.

The first thing we would say is that is obviously not a non‑recourse loan.  The second thing we would say is that the document that was being discussed is the document of 26 June, to which we have taken your Honours, which says it is not non‑recourse.  The third thing is that in Mr Thornton’s statement in volume 6 at page 1507 at paragraph 47 it does seem to be clear that they are speaking of Johnson giving a warranty that – I mean, one sees from the fourth‑last line:

Surely Johnson in those circumstances will be willing to warrant that the loans are limited recourse.

GLEESON CJ:   Mr Keane, can I ask you a question about this statement of Mr Hasell’s, paragraph 32?  Are you appearing for both appellants?

MR KEANE:   Yes.

GLEESON CJ:   Is Equuscorp a member of the Johnson group of companies?

MR KEANE:   No, your Honour.

McHUGH J:   It was Equus who appointed the receiver and manager ‑ ‑ ‑

MR KEANE:   That is right, your Honour.

GLEESON CJ:   What was the consideration for the factoring of the loan agreements?

MR KEANE:   It is the subject of a rather lengthy and complex agreement.  Equus took an assignment of many loans that Rural are given, including some that were not about Red Claw.  There were a couple of classes of agreement.  There were the class A that had people who could pay and would pay.  There were others who looked like they might not pay – might not be able to – and there were others who were either unwilling or perhaps unable to pay.

GLEESON CJ:   Did the evidence show ‑ ‑ ‑

MR KEANE:   Sorry, your Honour, just to say that the agreement is in volume 5.  It begins at page 1179 and the particular passages that are relevant to your Honour the Chief Justice’s question are 1185 to 1186.

GLEESON CJ:   Did the evidence disclose whether or not the loans were factored on the basis that they were worth full‑face value or were they factored on the basis that they were limited recourse?

MR KEANE:   Your Honour, the evidence shows they were factored on the basis that they were at dollar per loan plus what could be recovered, so that the existence of the guarantee documents was known.

McHUGH J:   The obligation of collecting the debts remained with Rural, did it not, and Equus had a right of recourse?  So that on one view the substance of the transaction was that it was a security.

MR KEANE:   There was an assignment and Equus had certain rights in relation to what it could recover and had certain obligations in relation to what it had to reimburse Rural.

GLEESON CJ:   So the terms of the factoring arrangement do not throw any light on the issue the subject of the notice of contention?

MR KEANE:   That is our submission – certainly so.

GLEESON CJ:   They are neutral or ‑ ‑ ‑

MR KEANE:   They throw no light on it at all, your Honour.  Mr Hasell, at 602 in volume 3, beginning at about line 26 – this is the 30 June conversation.  Your Honours will see at about line 40 he says that he wanted Tony Johnson to tell Barry directly what the deal was, and then in that regard, Mr Thornton’s evidence‑in‑chief, which your Honours will find in volume 2 ‑ ‑ ‑

HAYNE J:   Just before we leave Hasell, all of this against a background revealed at 601, line 12 and following of Hasell telling Johnson that he, Hasell, needed non-recourse loans to make the Rural Finance package work because the competition out in the market is non-recourse.

MR KEANE:   Yes, then your Honours go to 603 and if your Honours read down from the top of the page you get to line 20:

Was there a discussion about recording in written form the arrangement or the terms that you’d discussed?-- Yes.

What was the discussion?-- I said that I would arrange for Tony Johnson to sign the appropriate letter that would be to their satisfaction documenting the non-recourse loan.

Mr Thornton’s evidence‑in‑chief, which was in volume 2 at page 421, commencing at line 25 and relevantly concluding at 422 at the bottom of the page - your Honours really need to read it all to put it into context - including at the top of 422, Mr Thornton read through the prospectus and the loan documents:

And was there anything there about a limited recourse loan . . . 

Did you say anything to Mr Hasell . . . 

I told him that under no circumstances would I sign the loan agreements or enter into the agreements because it did not reflect what the – we had understood to be the arrangement . . . 

He said that it must be a mistake . . . 

He said:

“I would not agree to sign anything unless I had an assurance that these loans were limited recourse and that there was no assignability.”  To that he said that, “I will ring Tony Johnson . . . 

Alistair said, “Tony Johnson has agreed to your request yet again and that your loans are limited to recourse.”  I picked up – took the phone from Alistair Hasell and I confirmed with Tony Johnson that what Alistair had told me was correct.  He also said to me that, “He did not believe that it was necessary to have non assignability because there was – being limited recourse loans there was really nothing to assign ‑ ‑ ‑

and we have seen yesterday that there were some difficulties with that.

Yes, go on?-- He also promised to provide me with written documentation confirming the fact that there was a limited recourse loan so that in effect on the day we would have a written agreement, a verbal agreement and the verbal agreement would be confirmed in writing thereafter.

Certainly so far as Mr Thornton’s evidence is concerned he thought he had a verbal agreement and a written one, not an oral one.  If we can then invite the Court to go very briefly to some of the cross-examination, first of all, Mr Prendergast.  Mr Prendergast is one of the three whose oral evidence was relied upon by the primary judge.  We can take your Honours to volume 2, page 588, lines 10 to 30, this is his evidence‑in‑chief, and then in his cross‑examination at 596, last lines of the page:

Mr Prendergast, do you really have a recollection of the meeting – of meeting with Mr Hasell on 30 June 1989?--Yes. 

Then, on the next page, at about line 12:

Is the position that Mr Hasell told you that Johnson guaranteed that the liability would be met from the project profits?--What liability?

The loan liability?--The balance of the loan liability? 

Yes?--Yes. 

Then he is asked in re‑examination:

Just in relation to that topic about Johnson telling you on 30 June about the balance of the loan liability being repaid from the profit, did anyone else tell you that on 30 June?--Thornton and Hasell.

Thank you. 

The other thing we should mention about Mr Prendergast – the reason why he was asked whether he had any recollection at all appears at 593, from the top of the page to about line 20, in relation to an answer to an interrogatory which Mr Prendergast swore, which, as his Honour observed at line 15, does not suggest that he was actually at the conversation.  Mr Prendergast was unable to answer or unable to explain why that was so.

Then, in relation to Mr Hasell, if we can take your Honours to his cross‑examination at 609, lines 25 to 40, in particular, under line 30.  First of all, there is the reference to meeting the payments out of the income stream, then over the page, at 610, from about line 7 to the bottom, we are cross‑examining him about the important late news document, which was the document which the parties had in front of them when this conversation was going on.  That important late news document is the one of 26 June which we showed your Honours earlier.  In cross‑examination, it does appear that Mr Hasell is accepting that what he was doing was elaborating upon what that document said, which is distinctly not non‑recourse.

CALLINAN J:   Mr Keane, I notice at page 621 Mr Hasell was not too confident about the project, line 32.  You were cross‑examining him and he said the sea hatcheries and barramundi failed.  He said:

I was never under the –

obviously he was going to say “illusion”, and then he said –

I was never so confident that I didn’t face the reality ‑ ‑ ‑

MR KEANE:   Your Honour, one of the things that all the documents are upfront about is that it is highly speculative and high risk.

CALLINAN J:   What exactly was Mr Prendergast’s position again?  Just remind me.

MR KEANE:   Mr Prendergast was an accountant.  He is an executive of GWA, the company in which he is a subordinate of Mr Thornton’s. 
And, your Honour, in relation to Mr Hasell’s evidence, we also draw your Honour’s attention to page 623, line 45, and his evidence about Mr Thornton’s conversation with Mr Johnson, 624, and 627, the first 10 lines.

By way of interest, at 618, lines 10 to 25 Mr Hasell was asked whether he had had a conversation with Mr Prendergast and Mr Thornton about the evidence in the case, whether they had exchanged recollections.  In effect he said they had not but, interestingly, Mr Thornton gave evidence that he had forgotten about the discussions of 30 June with Mr Johnson until reminded by Mr Hasell that that had occurred.  That appears at page 483 in volume 2, about lines 45 to 50, and over the page, the first couple of lines, and then at 484, lines 35 to 37.  In relation to Mr Thornton’s cross‑examination on the issue, we take your Honours to 454 and we draw your Honours’ attention to the evidence at lines about 17 to 30 and then 456, or the bottom of 455, line 45:

It was really quite important for your purposes in getting a lawful tax deduction that the anti-avoidance provisions of the Income Tax Assessment Act didn’t apply, wasn’t it?--  Yes, that’s true.

The obvious anti-avoidance provision that Ernst & Whinney referred to was section 82KL.  See that?--  Yes.

You didn’t have a view different to that, did you?--  I didn’t have a view on it at all.  It’s as simple as that.  I am not familiar with those provisions.

So you certainly didn’t have a view different to that being put by Ernst & Whinney?--  That’s right.  They’re a respected firm.

You are not suggesting that you had any view different from them?‑‑  No.

And then we see Mr Thornton’s view that is then put about the importance of limited recourse and the possibility of reconciling it with the advice of the tax accountants.

HAYNE J:   At the end of all that, what do you say we get out of that collection of evidence?

MR KEANE:   We have not quite finished ‑ ‑ ‑

HAYNE J:   Sorry.

MR KEANE:   But what we get, your Honour, is support for the view taken by the Court of Appeal that the quality of the evidence in terms of its recollection and in terms of its precision, in terms of its ambiguity, that it was somewhat shifting, was not such as to justify the court in concluding that those ambiguous, at best, and indeed on occasion inconsistent, contentions seen against the background of the documents that were being discussed and the documents that were later signed and the documents that later came in, did not justify the trial judge in concluding that the agreement had been made.  Indeed, one sees even in the exercise that occurred this morning, it is very difficult to articulate this agreement.

GLEESON CJ:   Is that a point of uncertainty?

MR KEANE:   Well, ambiguity, inconsistency.  Perhaps one might test it this way.  If it is said that there was an agreement, would that evidence justify rectification?  Our respectful submission is that the answer is no.  It certainly would not be the convincing proof that is required, and it certainly would not be the clear evidence, the unequivocal evidence of a representation that would be required to engage section 52 and section 87 – which is another reason why we say that if our appeal succeeds there is no reason to send this back for a retrial on the late point in relation to misleading and deceptive conduct.

HAYNE J:   Leave aside the section 52 aspect of it for the moment – is it your submission that the case made about oral agreement reached before execution of the written instrument would be of legal significance only if the case were made for rectification of the written instrument to accord with the prior agreement reached?

MR KEANE:   Your Honour, it is difficult to see how it can be said that it can proceed otherwise, because otherwise one has a signed agreement that is effective on its face and is clear and has been relied on.  Ordinarily, the position is that absent convincing proof, written agreements are taken to be the agreements of the parties.

HAYNE J:   But there is no defence of non est factum.

MR KEANE:   No.

HAYNE J:   It is not said “I did not sign it” or “didn’t sign it believing it to be an agreement”.  It is said that, “This is not the repository of the terms between us”.

MR KEANE:   Well, it seems to be put even further today, which is that it is nothing at all.

CALLINAN J:   Mr Keane, can you summarise again for me your submission why, if you were to succeed, the section 52 point would not have to go back.

MR KEANE:   Well, so far as misleading and deceptive conduct, inducing people to sign the document on the basis of a representation that some other document would be provided, as to that we submit that the evidence does not show an unequivocal representation the document to be provided will be a release by Rural.

GLEESON CJ:   Is that the only form of misleading and deceptive conduct relied on?

MR KEANE:   The other form is the late claim, the claim that was made I think in September 1999, three years after the letter of August 1996 from the other side’s solicitors, asserting their intent to rely on the round robin.  That is the claim that there was no real money.

GLEESON CJ:   Yes.  Why would that not have to go back?

MR KEANE:   In our respectful submission, firstly, because no representation that there was real money can be extracted from the material that has been put before the Court.

HAYNE J:   The proposition “absence of real money” may depend upon demonstration that Rural Finance was not creditworthy.  The trial judge finds, does he not, that Rural Finance could not meet the loans from its own moneys or from facilities it then had in place?

MR KEANE:   He makes the finding that has been referred to that it did not have funds, other than the funds that came to it by the round robin.

CALLINAN J:   Mr Keane, if it were to go back, there would not be any point in sending it back to the Court of Appeal because the Court of Appeal ‑ ‑ ‑

MR KEANE:   That is right.

CALLINAN J:   The failure to decide, if that is what it be, was the failure of the primary judge ‑ ‑ ‑

MR KEANE:   If it is a failure to decide, that comes from the trial.

CALLINAN J:   What is your attitude as to whom the matter should go back?

MR KEANE:   If it had to go back, obviously, with great respect to his Honour the trial judge, it should go back to a different judge, but your Honours appreciate our primary submission is that, on the evidence and the material that is before the Court, there just simply is not a basis for such a case and, in any event, it was too late.  It was statute barred.

CALLINAN J:   In any event, I understand what you say about that, but you would want the matter to go back to a different judge?

MR KEANE:   We would ask for a different judge, your Honour, having regard to the circumstances of the favourable findings ‑ ‑ ‑

KIRBY J: I do not remember any case where the court has done that, unless there has been an issue of due process or procedural unfairness. The court does not normally – and I am not sure the Constitution contemplates that the court will interfere in the way in which the Supreme Courts will determine the disposition of cases that are sent back to them.

MR KEANE:   I understand that, your Honour.

KIRBY J:   Maybe you should wear another hat now.

MR KEANE:   I am trying to avoid that, the possibility of having to have them both on at the same time.

CALLINAN J:   Well, why can we not make any order that the Court of Appeal ‑ ‑ ‑

MR KEANE:   I was simply going to respond to Justice Kirby by saying that if your Honours sent it back to the Court of Appeal one would think that that might be an order they would make, and they would certainly not have any – there would not be any impediment to them doing it, and one would think that they would be on sound ground in doing so simply because of the findings that have been made which, by hypothesis, have been upset.  But as we say, our primary submission is that there is not a viable case to go back.

There is one further thing we wanted to say to your Honours, and that relates to the approach our learned friends urged on the Court in respect of the reading of the loan agreement with the deed.  Obviously, there is a measure of cross‑information or cross‑pollination between the two, but can we say this.  Clause 8 and clause 9 of the loan agreement mean that if the application for units was not accepted there would be no loan, and clause 9 contained a direction to the lender to pay.  It plainly contemplated the lender doing that in a way which did not involve the would‑be subscriber, the applicant, complying with the terms of the deed relating to applications, clause 3.1 and 3.2, for example, which oblige an applicant to tender his or her cheque with the application.  Clause 9 of the loan agreement involves a direction by the borrower to the lender to make the loan by applying for the subscription.

The further point we make about that is the provision such as clauses 3.5 and 3.6 and other provisions that contemplate the possibility of a hiatus between the application and the fulfilment of the subscription, those provisions might or might not operate to protect an individual who tenders a cheque, the proceeds of which are collected and held.

But in this case the loan agreement itself plainly contemplated that that was not going to happen.  While no doubt one reads the two documents together, what one cannot do, in our respectful submission, is treat the provisions of the deed, which are apt to deal with the situation of individual applicants, as if they dictate the mode of performance of the lender’s obligation under the loan agreements in circumstances where that agreement expressly contemplates that it will be the lender that makes the application. 

In our respectful submission, it is not going to far to say that it contemplates that the application might be made in relation to more than one applicant.  The question is, did Rural pay the application money?  Was there a payment by Rural?  The question is not, in my respectful submission, assisted by reference to provisions which might or might not be invoked to protect the position of individuals who do tender a cheque.

We should also mention clause 5.4.3, which is in volume 3 at 767, which suggests that 5.3.1, which is the earlier provision in that bunch of provisions, is simply not a provision mandating a payment of cash, because 5.4.3 is the provision that contemplates applicants becoming partners after the partnerships have been created, but subject to the limitation on the number of partners not being exceeded.

Your Honour, I am reminded that in relation to your Honour Justice Callinan’s question as to the draft letter of response to the position paper in July 1993 and the final letter, there are no changes of substance.

There are a couple of matters of housekeeping we should have attended to as well.  The first is that we mentioned yesterday there were a couple of documents that were missing from the record relating to the 1991 Canberra proceedings and in relation to the letter of demand that Equus had served.  We have those documents.  We can make them available to the Court.  These are documents that were in evidence but were not in the record.  We are handing your Honours copies of exhibits 102 and 93.

GLEESON CJ:   Thank you.

MR KEANE:   Your Honours, finally, might we say that in the event that the appeals are allowed, we would ask the Court to note our request for an opportunity to make a further written submission in relation to any costs orders that are made.  We do not wish to elaborate on that.  Those are our submissions, if it please the Court.

GLEESON CJ:   Thank you, Mr Keane.  Mr Cooper, do you want to say anything about the notice of contention?

MR COOPER:   Your Honour the Chief Justice asked whether the factoring agreement was relevant to any of this and you were told “no”.  With respect, that is incorrect.  If I can give you a reference at volume 5, at page 1185, your Honour will see that under the factoring agreement, the loans held by my clients were categorised as B Class loans and they were treated, in a way, quite differently from the A Class loans which was the general body of loans.  The significance of all of this is that these loans were taken up in the books of Equus as having a value of one dollar each.  Mr Stewart-Hesketh who was a former employee and a principal of the company gave evidence about this ‑ ‑ ‑

HAYNE J:   Principal of which company?

MR COOPER:   Equus.  He worked hand in glove with Mr Russo, the controller and owner of the company.  He said at volume 2, at page 387, at about line 35, I asked him:

Mr Stewart-Hesketh, could you have a look at this document for me, please?  Can you identify that as a document produced in the offices of Equus and given to you with the documents you received?-- Yes, that’s correct.

What function does the document serve?-- It’s basically a record of each loan, a hard copy record of each loan held on the computer.

Now, the document I have given you just relates to Mr Thornton, but was it the case that there was a similar entry for each GWA investor?-- Yes, that’s correct.

Now, do you see about four lines down there’s a heading or an entry “Recourse type three”?-- Yes.

Do you know what that refers to?—Yes, I do.

What does it refer to?-- It first of all refers to the so‑called 79 dollar receivables loans which were purchased for $1.  The type three loans were the ones which were never to be enforced because they were subject to a guarantee.

And then at the bottom of the page:

Thank you, your Honour.  Now, I was asking you whether you had discussed with Mr Russo the existence of these guarantee arrangements?—Yes, I had, yes.

Over the page at line 10:

Just constrain yourself to Mr Russo, please?-- I was informed by Mr Russo that these were subject to a guarantee which meant that no repayments were ever to be made or even expected.

So these loans were factored, bought by Equus for a dollar each, and treated by Equus as being worth nothing more than that.

GLEESON CJ:   Mr Cooper, was there any evidence as to the way these loans were treated in the books of account or financial statements of Rural Finance?

MR COOPER:   Your Honour, the only records of Rural Finance that went in, to my recollection, are a cash receipts and a cash payments book, the cash receipts showing moneys coming in from clients for prepayments and the cash payment book showing two notional loans to Equus.  That is all, I recall, the evidence of Rural’s records.  Your Honour the Chief Justice also asked if there was any evidence that Rural had no money.  His Honour made findings about that at paragraphs 26 to 28 of his reasons, but at exhibit 119, which is in volume 5, specifically at page 1396, there is a report of the receivers and managers who took over the affairs of Equus, and they explain in detail that Equus at no time ever had any money.

GLEESON CJ:   Rural Finance, you mean. 

MR COOPER:   Rural never had any money at all, and they set out in some detail the artificial way in which this company purported to operate.  Your Honours were referred to a letter written to the ATO, which my friend continues to take out of context, with respect to him, because there is an earlier letter which the trial judge relied upon as having significance and confirming the evidence of the respondents.  Your Honour, that letter starts at page 1405, it is exhibit 172, but, relevantly, at page 1409 it sets out in detail – this is a letter of 27 November 1992, some many months before the court was referred to it: 

The participants were able to negotiate a limited recourse financing arrangement.  This has been documented by the investment promoter.

Then it sets out that page and over the page that the arrangement was to the effect as his Honour found.

GLEESON CJ:   How long do you think you will need?

MR COOPER:   I will be very short, your Honour, if you will just indulge me a few minutes more.  Mr Hasell’s evidence was referred to about some confusion on his part about what the non‑recourse transaction meant.  But there was no confusion in his mind, in my submission.  If one goes to volume 3, page 599, I asked him about discussions he had with the finance from the blueberries and he used the expression “non-recourse”, and at line 25 I said:

What do you mean by non‑recourse loan?--  That they had to make, I think it was, two payments, plus probably an initial payment, I think it was, and thereafter the loan was – would be – the loan would be supplied by the project itself, so that the proceeds of the project would satisfy the loan.  If not, there was no recourse to the borrower.

So when he used the parlance “non-recourse”, he meant limited recourse in the sense that Mr Thornton understood it.  Mr Thornton also said that he well and truly understood that concept because of his background as an accountant he had seen a lot of literature dealing with these sorts of tax‑driven agricultural investments offering this sort of deal and, as Mr Hasell said, at this time if you were not marketing on this basis you were not in the race because everyone was offering the same sort of deal.

Finally, my friend misrepresents my submission about the section 52 case on no money.  He says we do not plead that there was a positive misrepresentation.  That is correct.  Our case is of a misrepresentation by omission, but there was an obligation to tell us the true state of Rural’s finances but they did not tell us that.  Had they told us the true state of Rural

finances at the time, we would not have gone into this transaction.  So, in my submission, there is a ‑ ‑ ‑

GLEESON CJ:   And that issue has never been litigated?

MR COOPER:   No, but it is a very live and a real issue because it only arose late in the period when we started to get knowledge of what had happened.  In my submission, the matter is not statute barred at all.

HAYNE J:   Well, the precise pleading is, is it not, at page 120 plus 121, in particular at paragraph 19(b)(ii), plus paragraph 20A?

MR COOPER:   My junior tells me 145, your Honour, so just bear with me.  Sorry, what was the page your Honour referred me to?

HAYNE J:   Pages 120 and 121, paragraph 19(b)(ii) and paragraph 20A.  Is that the last version of the plea of misleading and deceptive conduct?

MR COOPER:   Yes, I think it is, your Honour, with respect.  We were asked for particulars about this and we gave particulars at 150, and your Honour will see that the representation at i(iv):

the silence of the Second Plaintiff in not advising the Defendant that it did not have sufficient funds to lend –

the money.  So that is the case we are running, one of misrepresentation by omission to make known to us material facts that should have been known.  They are my submissions.  Thank you, your Honours.

GLEESON CJ:   Thank you Mr Cooper, we will reserve our decision in this matter.  We will adjourn until 10.00 am tomorrow morning.

AT 12.49 PM THE MATTERS WERE ADJOURNED