Equuscorp & Anor v Glengallan Investments & Ors

[2004] HCATrans 166

[2004] HCATrans 166

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 TUESDAY, 25 MAY 2004, AT 10.17 AM

Copyright in the High Court of Australia

MR P.A. KEANE, QC:   If the Court pleases, I appear with my learned friend, MR S.S.W. COUPER, QC, for the appellants in each appeal.  (instructed by Gadens Lawyers)

MR D.R. COOPER, SC:   If the Court pleases, I appear with MR C.L. FRANCIS for the respondent in each appeal.  (instructed by Lees Marshall Warnick)

GLEESON CJ:   Yes, Mr Keane.

MR KEANE:   Your Honours, the first issue in each of our appeals is whether the second appellant’s obligation to lend the subscription moneys to the respondent in each case was discharged by the debiting of the second appellant’s account with Westpac Bank and the crediting of the respondent’s representative’s account with that amount in the course of the round robin transaction that occurred on 30 June 1989.

The second issue in each appeal arises for decision if that issue was resolved against the appellants.  That second issue was whether the respondents, by exercising rights as partners after being informed of the round robin, accepted that the second defendant’s obligation to advance the subscription moneys, the units in the partnership, had been discharged by the round robin. 

Your Honours, I will mention for the sake of completeness the third issue which arises which is one that arises on our learned friend’s notice of contention, that is, whether the terms of the loan agreement were contained, as the Court of Appeal held, in the written loan agreement signed by each of the respondents on 30 June 1989, or whether the agreement was in somewhat different terms.  Your Honours, as to the first issue which arises in our appeal, may we take the Court to our written submissions and proceed by reference to an elaboration of them.

CALLINAN J:   Mr Keane, could I just ask you a couple of questions on the facts, I may have missed them reading through, but all of the negotiations really took place within a month, is that correct?

MR KEANE:   Yes.

CALLINAN J:   Both oral and any documents that were compiled were made available during that month.  As at 30 June 1989, had there been any infrastructure constructed – were there ponds in existence?  Had any capital been expended?

MR KEANE:   The land had been acquired.  I think the evidence is that $2.8 million was spent on that.  There was a budget under which, I think it was Farmer Johnson Aquaculture, the farm owner, was obliged to do capital works worth about $7 million by either mid‑1990 or the end of 1989.  As to the extent to which those works had been carried out at that stage, as opposed to budgeted, and budgeted for in a way which did not involve the use of moneys from this prospectus, to go the step further, I would need to get back to your Honour on that.

CALLINAN J:   All right.  That brings me to the next question.  Did the prospectus say how the money was going to be applied, the subscription money was going to be applied? 

MR KEANE:   In the sense that the large part of the subscription money, $833 of $868 was going to go by way of management fee to Johnson Farm Management and $23 was to go to Farmer Johnson Aquaculture which was charged with the obligation of the capital works.

CALLINAN J:   That is in your submissions, I think, those two numbers.  How much in subscriptions was raised, about $7 million, was it not?

MR KEANE:   Thirteen million.  The evidence is that 13 million was raised of which approximately two million was subscribed directly by investors.

CALLINAN J:   And seven million were discounted, is that right?

MR KEANE:   Approximately seven million was ‑ ‑ ‑

CALLINAN J:   For six million.

MR KEANE:   Yes.

CALLINAN J:   So that was about 14 per cent discount rate.

MR KEANE:   Yes.

CALLINAN J:   And when did that 6 million come to hand, do you know?  Was it the year it was subscribed?

MR KEANE:   Your Honour, the evidence does not show with any precision as to when it came to hand.  What we do know though, is that it was raised in the period between 1 July 1989 and May 1991 when the discussions about that occurred and when, at that stage, it was said by Mr Johnson in a conference of 15 May, which is of some significance as your Honour knows, that that is what had happened, that the $2 million subscribed by cash investors, the balance by way of loans funded by Rural and of those, I think your Honour is right, $7 million I think had been discounted for five.

CALLINAN J:   Only two other questions.  Is there any evidence about the application of that $6 million?

MR KEANE:   No, there is not.  When I say that, there is no detailed evidence as to how it was applied.  In the context of the discussions that occurred, it seems to have been accepted that it was applied to the project in the sense that they were short on money, but there was no suggestion that that money had not been applied to the project.

CALLINAN J:   All right.  The last question, were the actual crayfish installed and was some business activity conducted?  Was any aquaculture undertaken? 

MR KEANE:   That question, that is to say, the question whether there was actual production in the sense of carrying on the business of the partnership, was something which the Tax Office looked at and investigated.  Your Honour, I would have to say that I do not know there is any clear evidence that crayfish were being grown.  Certainly, the evidence was from Mr Humphrys that by late 1991 the evidence was that a number of ponds had been established and we mention his evidence – dykes, pumps, water storage and ponds – that is referred to in paragraph 11 of our submissions, and we have given your Honour the reference to Mr Humphrys’ evidence.

CALLINAN J:   Well, he told me there is a problem with crayfish, they go walkabout.  I do not know whether that is right or not. 

MR KEANE:   And sometimes they eat each other, but according to prospectus these were not cannibals.

GLEESON CJ:   Mr Keane, at some time before you finish your argument and at any time convenient to yourself I would like to understand the revenue implications of the aspects of this transaction with which we are concerned from the point of view of the taxpayers.

MR KEANE:   Yes, your Honour.  We can do that by reference to a couple of documents:  the prospectus and a couple of documents they received.

GLEESON CJ:   Whenever it is convenient.

MR KEANE:   It would be convenient to do it quite soon, your Honour.  Indeed, we might take your Honours first to the prospectus which your Honours will find in volume 4 of the record at page 905.  If we take your Honours first to page 908, which summarises the legal structure in the left‑hand column, what is to be established is:

a limited partnership . . . two categories of partners, the General partner and the Limited Partners . . . the General Partner’s role is to manage all business affairs of each partnership, unless removed by 75% of persons holding units . . . 

Each limited partnership will lease from the Farm Owner –

which was Farmer Johnson Aquaculture, FJA –

grow out ponds, which are the ponds in which the Red Claw crayfish are farmed, and will be granted the right to utilise certain breeding facilities and other operational facilities by the Farm Owner.  Each limited partnership by contract through the General Partner will engage the Farm Manager –

that is Johnson Farm management, JFM –

to manage its Red Claw farm interests . . . 

Additionally, the General Partner and the Investors’ Representative are authorised to invest the assets of each limited partnership in authorised investments.

The financial structure is set out under the next heading.  The subscription moneys for a unit is $868.00.  The minimum is ‑ ‑ ‑

GLEESON CJ:   Just pausing there, you are not going to get a tax deduction for that subscription, are you?

MR KEANE:   It is explained directly, your Honour, in volume 3 at page 736, “Precisely What is the Best Farming Investment This Year?”  This is one of the documents that, as your Honours will see from 735, Mr Hasell sent to Mr Thornton at the end of May.  If your Honours go to 737, the revenue aspects are discussed.  In particular, your Honours will see at the left‑hand column:

The Return now Approximates 13.8 Times the Cash Outlaid. 
If the $4,340 investment is fully borrowed and one year’s interest is prepaid on that borrowing, then both the $4,280 referred to above plus the $781 prepaid interest are deductible.  In this instance an investor would have an initial cash outlay of $781 and a deduction of $5,061 ‑ ‑ ‑

GLEESON CJ:   What is it that makes the $4,280 deductible?

MR KEANE:   Your Honour, it is the share of the partnership loss that arises by reason of the payment by the partnership to the farm manager, JFM, by way of a prepayment of the manager’s fees.

GLEESON CJ:   So the allowable deduction is the manager’s fees?

MR KEANE:   Yes, and the prepaid interest.

GLEESON CJ:   Not the contribution to the partnership. 

MR KEANE:   No.

GLEESON CJ:   And the manager’s fees are payable in advance, is that right?

MR KEANE:   That is right.

GLEESON CJ:   Front‑end loading.

MR KEANE:   Yes.  Going back to page 908 in volume 4:

Each partnership will lease 100m² of grow out pond . . . to produce the project’s production target of 250 kg Red Claw per 500 m² per year (5 partnership units) after year 3 –

and your Honours see the “Minimum Subscription”, the next matter dealt with.  Then there is something about the “Management Experience” of the general partner and the investors’ representative, and over the page the topic of “Management and Representative Fees” is discussed.

Returning to your Honour the Chief Justice’s question as to the farm manager, that is dealt with in the left‑hand column, halfway down.  It gets the upfront fee and then it gets thereafter:

a fee equal to 13% of any net operating profit –

and the farm owner receives: 

in consideration of granting the lease of the grow‑out pond and the right to use the breeding and other facilities to a limited partnership, in each of the first five years . . . a rental calculated on the basis of $23.00 per year ‑ ‑ ‑

GLEESON CJ:   Well, their rental is also an allowable deduction.

MR KEANE:   To the partnerships?

GLEESON CJ:   To the partnership.

MR KEANE:   Yes.  Then taxation considerations are discussed at the top of the right‑hand column:

an Investing Partner may be able to claim his pro rata share of initial partnership losses incurred (principally through partnership farm expense payments to the Farm Manager) as deductions for personal income tax purposes in the year in which his investment in the limited partnership is made.  In addition interest paid on any funds borrowed and used to subscribe under this Prospectus may also be deductible.  For details in relation to this investors should refer to the Expert’s Report on Taxation –

and we will take your Honours to that.

GLEESON CJ:   Now, pausing there.  In practical terms to secure the allowability of those deductions somebody is going to have to persuade the Australian Tax Office that this partnership is carrying on a business.

MR KEANE:   That is right, and it will also have to persuade them of something else, which is dealt with in the tax adviser’s report.  We will take your Honours to that.

CALLINAN J:   The position of each appellant is identical.  Is that right?

MR KEANE:   Yes, it is.  Well, the position of each of the respondents is relevantly identical.

CALLINAN J:   Sorry?

MR KEANE:   The position is that it was proved and accepted that Mr Thornton acted in negotiating for them and to the extent that Mr Prendergast was involved in negotiations with lenders or the Tax Office, he acted for the others as well.  Your Honours, at 910 the parties involved are identified.  The investors’ representative is Eagle Star Trustees.  The general partner is Forestell Securities.  The farm manager is Johnson Farm Management and the farm owner is Farmer Johnson Aquaculture. 

At 911 your Honours will see summarised, in brief, the roles that each of those parties played.  We do not mean to skip unnecessarily, but without becoming unduly bogged down in the detail, can we take your Honours to 918 where there is reference to the site development plan.  We do this in part in response to your Honour Justice Callinan’s question earlier.  You will see there that it speaks of a site development program which is evidently in existence:

is timed to have the nursery/hatchery completed and 80 ha of ponds operative before 30 June 1989 –

so that obviously none of that has anything to do with the funds being raised by this prospectus –

to enable the first of the limited partnerships to be in business by that date.  The balance of these ponds are to be completed by 31 October 1989.

So it was the end of 1989 that I was referring to earlier.

Remaining ancillary facilities are to be completed by 31 December 1989 with ongoing additions constructed as are commercially necessary.

To return to your Honour the Chief Justice, the idea is that these preliminaries to business will be completed.  We mention the budget of the farm owner:

The Farm Owner’s capital budget excluding packing and processing facilities to 31 December 1989 is $7 million for the first 400 ha of grow out pond areas.  Upon subscription exceeding 40,000 partnership units the Farm Owner will purchase additional suitable land in the general vicinity and construct more grow out ponds.

GLEESON CJ:   At the time this prospectus was issued, was it still in contemplation that working capital would come from loan finance provided by outside bankers?

MR KEANE:   When the prospectus was prepared it was contemplated that it would.

GLEESON CJ:   If you withdraw that aspect of the transaction contemplated by the prospectus, where does the working capital come from?

MR KEANE:   The working capital comes from the subscriptions which are intended to raise it.  The very purpose of the prospectus is to raise the working capital.  When Rural comes in as the in‑house lender providing these moneys the situation is that, as was said later on, the intent was to sell off the debts that Rural had from its various borrowers to fund the drawdown from deposits with Rural by Farmer Johnson Aquaculture and Johnson Farm Management to run the thing, and to the extent of $5 million, that happened.  But it would not be a complete answer to your Honour’s question if we did not draw attention to the circumstance as well, that so far as the capital works are concerned, the capital works that are referred to here are not works for which these funds are earmarked.  The funds are earmarked for the carrying on of the business of growing the crayfish, not establishing the business or establishing the infrastructure for the business.

CALLINAN J:   At page 908 there is a reference to the power of the partnership to borrow and the liability that is put at page 908 in the ‑ ‑ ‑

MR KEANE:   Yes, quite, your Honour, under the heading there.  I am also reminded that, on any view of the question raised by the notice of contention, there were two instalments of principal that were due by the end of 1989, and, of course, there was the prepayment of the interest.

GLEESON CJ:   But the tax deduction depends on the application of this money on revenue account, not on capital account.

MR KEANE:   That is right.  We will take your Honours a little later, very briefly, to the provisions of the agreements between the partnerships and the farm manager and the farm owner, but can we take your Honours, for the moment briefly, to page 923 “The Investor’s Contribution to a Red Claw Limited Partnership”, the second line:

each investor’s contribution to a Limited Partnership is to be measured in terms of the number of units -

Each unit is $868, the minimum is five, total number available is 80,000 in all the limited partnerships.  At the bottom of the page we should draw your Honour’s attention to:

Minimum Subscription

All moneys subscribed by applicants will be refunded if the minimum subscription of 4,000 partnership units is not received within 4 months of the date of this prospectus.  No allotment of partnership units will be made pursuant to this prospectus until the whole amount of the minimum subscription is received in cash.

The reference to “in cash” looms large in the reasons of the Court of Appeal that were against us on the first issue.  Then there is a summary of the contract ‑ ‑ ‑

HAYNE J:   That is an expression, is it not, that finds it origins in the relevant company’s legislation of the time?

MR KEANE:   I think it probably does, your Honour, and, indeed, with a long history, a long ‑ ‑ ‑

HAYNE J:   Through the prescribed interest provisions in the various forms from, I think, the amendments to the 61 so‑called uniform Acts.

MR KEANE:   Well, your Honour, and possibly even earlier going back to Spargo’s Case.  Spargo’s Case was a case about the meaning of the word – it was either money or cash in English companies legislation, dealing with subscription moneys and we will take your Honour to that.  There is a summary of the contracts on page 924, and your Honours see:

each partnership provides the Farm Manager with $12 worth of breeding stock and juvenile crayfish, and access to 100m² of the grow out ponds –

and there is then reference to the grow out pond lease and the facilities licence which are agreements made with the farm owner.

We have mentioned the expert’s report on taxation considerations.  Can we take your Honours to page 928 where it begins.  We invite your Honours to read what is said by way of introduction and then take your Honours particularly, apropos of your Honour the Chief Justice’s questions, to 929.  Under the heading “Income Tax Implications in Participating in a Red Claw Limited Partnership”, the second paragraph says:

Based on our review of the agreements referred to above, the explanations given to use by the staff of the Farm Manager and the expected scale of operations, it is our opinion that each partnership will be carrying on the business of primary production so long as it is managed and continues to be managed in a business-like manner with a view to deriving commercial profit.  Investors should take a regular interest in the progress of their investment and make appropriate enquiries regarding matters of interest to them.

Section 92(1) of the Income Tax Assessment Act (ITAA) requires a partner in a partnership to include in his assessable income his individual interest in the net income . . . Section 92(2) of the ITAA allows a partner in a partnership a deduction for his individual interest in a partnership loss.

I would invite your Honours to read down to the last paragraph on the page:

The assessable income of a year of income, in the absence of the partnership making an election for a differing basis of valuation of stock on hand, will also include the increase in the fully absorbed cost of purchases and natural increase of crayfish on hand . . . at one balance date over –

another, and then over the page:

Each partnership should be entitled to deductions in terms of Section 51of the ITAA for the following expenses –

(i)       Licence fee . . . under the Facilities Licence Agreement;

(ii)      Lease rental . . . under the Grow Out Pond Lease;

(iii)     Management fees pad to the Farm Manager . . . 

(iv)     Annual fees payable to the Investors’ Representative;

(v)       Purchase of crayfish.

Where such fees are payable in advance, it is necessary to consider –

those various provisions that are identified there, because they may have an effect on deductibility and, in particular, we can ask your Honours to look at the bottom of the page:

We have considered the specific anti-avoidance provisions, namely Sections 82KJ, 82KK and 82KL –

and then going over the page, if we can invite your Honours to read what is said about KJ and KK without reading them out, but then particularly, may we draw your Honours’ attention at line 19:

Section 82KL deals with transactions where deductions are claimed and expenditure is ‘recouped’ (i.e. the taxpayer obtains benefits additional to those intended to be received in respect of the expenditure incurred).  So long as there is no recoupment of expenses (e.g. no intention that borrowings made by each partnership or borrowing made by the Investing Partners to take up their partnership units shall not be repaid, and the loans are in fact repaid), it is our opinion that this Section will not have application.

In summary, it is our opinion that each Investing Partner will be required to include in his assessable income his individual interest in the net income of the partnership or will be entitled to an allowable deduction for his individual interest in the partnership loss, as applicable.

In due course, I will be taking your Honours to Mr Thornton’s evidence, where he said he had no view of the operation of 82KL different from that expressed by Ernst & Whinney, where he said that it was of critical importance to him that he be able to lawfully obtain the tax deductions that he had claimed.

HAYNE J:   The parenthetical reference at about line 22 is a reference, is it, to the so‑called non‑recourse loan that in connection with other transactions was sometimes seen? 

MR KEANE:   Yes, and specifically so in the second parentheses, your Honour, where it refers to the danger that arises of the application of the provision where there is an intention that borrowings made by the investing partners shall not be repaid.  That is a matter of some significance in relation to the issue that arises on the matters of contention.

GLEESON CJ:   Well, now, is this simply a deferral scheme?  I understand the benefits in the form of allowable deductions that are obtained at the front end of the transaction, but what are the commercial benefits that flow to the investors?  Is it the profits made by the partnership?

MR KEANE:   Ultimately, yes.

GLEESON CJ:   So what is the attraction in incurring allowable deductions soon, other than that the assessable income is going to be deferred for some years?  Is that the attraction?

MR KEANE:   The attraction, your Honour, is in obtaining an allowable deduction in the year ending 30 June 1989 by reason of the investment in the partnership on that date and the partnership’s discharge of its obligation to the farm manager on that date so as to create a loss on that date, that is, in the year ending 30 June 1989, so as to create an allowable deduction of $5,000‑odd for your $800 investment.  You can offset that against your income from other services, obviously, for the year ending 30 June 1989.

GLEESON CJ:   I understand that, but unless you are an aficionado of deductibility, you want to get something back in due course, so the benefit of a scheme like this is that you get early on, now, allowable deductions that you can set off against your assessable income this year, but, in due course, over time – deferred, as it were – you will get assessable income.

MR KEANE:   Yes, and, your Honour, that is dealt with, insofar as it was part of the matrix of what was in the minds of the parties, in the document we took your Honours to before in volume 3, the one that begins at 735.

GLEESON CJ:   Indeed, if you did not have the prospect of getting assessable income in the long run, you would not get your deduction now.

MR KEANE:   You would not get your deduction under 51, that is right.  In relation to that return, the document begins at 735.  If we take your Honours to 737, at the top of the page, in the left‑hand column:

WHAT IS THE RETURN?
The Return Approximates 3.5 Times the Investment.
The minimum investment is $4,340 (5 units) which can be increased in 1 unit multiples.  Based on very conservative assumptions the net minimum return before tax over the next twelve years –

that is the life of the partnerships –

is calculated at $15,375 (5 units).  This return is not guaranteed.

McHUGH J:   Is that 15,375 a gross figure, or is that a discounted cash flow figure as at the date?  I mean if it is not, there is not much gain in it, is there, over 12 years?

MR KEANE:   I cannot answer that at the moment.  The schedule which appears at 738 does rather tend – this is 738 at the bottom that one looks across, it looks like it is a figure that is derived progressively over time, over the 12 years.

HAYNE J:   That is reinforced at 740 where you seem to have a summary table.

MR KEANE:   Yes.

HAYNE J:   Generating an internal rate of return, so it is said, at 29 per cent.

MR KEANE:   Yes.  29 per cent is a very handsome internal rate of return.

GLEESON CJ:   Hang on, the rate of interest was 18 per cent, was it not, at this time?

MR KEANE:   That is right.  So that has an impact on what the ultimate return would be.  Your Honours, that is all I think we wish to take you to in respect of the prospectus.

HAYNE J:   In the prospectus then is there anything said about the destination of the funds that are to be raised under it?

MR KEANE:   Not beyond the payment of the $833 to the farm manager, which obviously contains an element of profit for the farm manager.  That is the only - apart from the $23 – to go to the farm owner.  That is the only dedication of the subscription moneys that is apparent.

HAYNE J:   And no description of the purpose of the raising as being to generate working capital to generate funds ‑ ‑ ‑

MR KEANE:   It is to carry on the operation of growing and selling and packaging Red Claw crayfish, but it is not more specific than that, your Honour.  There are no targets that are identified to which specific funds are to be dedicated within a particular time frame, other than the time frames we have taken your Honour to in relation to the farm owner’s obligations in respect of the grow out ponds.  In relation to that we make the point that the timing of that obviously has nothing to do with this subscription.  As we say in paragraph 33 of our submissions in the last sentence, there is no suggestion that the first year’s lease payments to the farm owner were either necessary or sufficient for the costs that it was incurring.

HAYNE J:   I am sorry to harp on this point, but is there anything in any of the other documents, either referred to or contemplated by the prospectus, that would identify what is to happen to the moneys ‑ ‑ ‑

MR KEANE:   An earmarking of funds?

HAYNE J:   Well, earmarking or general indication of what is to happen to the money that is to be raised by this capital raising.

MR KEANE:   Your Honour, the answer is no.  If Johnson Farm Management decided to go to the Riviera with the moneys, that would not be a problem in terms of those responsible for the prospectus.

GLEESON CJ:   That assumes there would be money to travel with.

MR KEANE:   Yes, that is right.

GLEESON CJ:   The concept of this as a capital raising assumes, does it not, that this exercise will produce working capital for the business venture?

MR KEANE:   Yes.

GLEESON CJ:   Now, if what is going to happen in practice is that the subscriptions for the partnership units are going to be funded by loans from the second appellant, but the second appellant has no capital available to make those loans so that the second appellant depends on getting back, virtually instantaneously, the moneys that it loans by way of subscription, then there is not any infusion of capital, is there? 

MR KEANE:   Your Honour, there are a couple of things we say about that.  The first is that your Honour says “virtually instantaneously” ‑ ‑ ‑

GLEESON CJ:   I should have actually said “before”.

MR KEANE:   In terms of the notion of urgency, that is to say, a timeframe which is inconsistent with factoring the debts owed to Rural by the borrowers, there is not a basis for concluding that there is an inconsistency in that regard.  In other words, it is, in our respectful submission, wrong to begin with a presumption, not justified by any of the background matrix materials, that the assurance of the funds to the project by a lender for some unspecified period is fundamental to understanding the obligations of the second appellant to the borrower.  One might test it this way.  If there were facilities that were available from outside lenders to Rural, in this case the facility that was granted was instantaneous in support of the round robin, but if there had been a facility to terminate it on 1 July, would things be different? 

The question really is whether the debts, the choses in action, that Rural obtains can be factored in a timeframe consistent with the pursuit of the project.  It is wrong, in our respectful submission, to assume or presume that what was intended to be done here with factoring the debts was inconsistent with raising the capital.

McHUGH J:   Did I understand you to say that property, plant and equipment was not a matter of interest, in effect, of the partnership?  They were not contributing to property, plant and equipment?

MR KEANE:   According to the prospectus, this was all being done under the $7 million farm budget of the farm owner and we should ‑ ‑ ‑

McHUGH J:   So their working capital was directed to farming, harvesting and marketing?

MR KEANE:   As it had to be to be carrying on the business of growing and selling crayfish.  We should also, in response to both your Honour Justice McHugh and to come back to your Honour Justice Hayne in relation to what is apparent in the material, take your Honours to the management agreement which is in volume 3.  It is an annexure to the partnership fees.  At 848 your Honours will find it.  If your Honours go to 849 ‑ ‑ ‑

HAYNE J:   Just before we do, at some point can you take me – I know it is laborious – through the way in which all these documents interconnect one with another.  I know they are all there, but for my part I want to understand how they connect.  Sorry, 849 you said.

MR KEANE:   Page 849.  Clause 2 states the term.  Clause 3.1 states the duties of the farm manager.  They are stated in the most general terms:

The Farm Manager shall properly and diligently supervise and maintain the Partnership Project.

3.2      In particular and without limiting the generality of sub‑clause 3.1, the functions of the Farm Manager shall include:

(a)      providing sufficient staff, labour, machinery, installations and equipment for the proper management and maintenance of the Partnership Project;

and then we invite your Honours to read the balance.  Then if you go over the page, 3.3 says:

The Farm Manger shall be responsible for payment of all the costs, expenses and outgoings of the Partnership incurred in the conduct of the Partnership Project, and shall be entitled to be reimbursed by the Partnership within 30 days of the date of production to the General Partner of the relevant invoice or other document substantiating such cost, expense or outgoing as the case may be, provided that such cost, outgoing or expense is in the circumstances reasonable, for all such costs, expenses and outgoings but only to the extent that the General Partner shall be entitled under the terms of the Deed to claim reimbursement from the Partnership in respect thereof.

3.4      Notwithstanding sub-clause 3.3 hereof the Farm Manager shall meet all the costs, expenses and outgoings of the Partnership Project in the first year of the Term hereof and shall not be entitled to be reimbursed therefore by the Partnership.

So for the first year the farm manager has to perform the obligations under 3.1 and 3.2 and is not entitled to reimbursement.  Clause 3.5 we should also invite your Honours to 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.

Then in relation to the grow‑out pond lease, if your Honours go to 883, Farmer Johnson Aquaculture, your Honours will see at the top of 883, is the lessor and the general partner is the lessee.  Under clause 1 the lessor grants to the lessee a lease, and then, if one goes to page 885, the “Lessors Works”: 

The Lessor shall at its own cost in all respects without seeking any payment or reimbursement from the Lessee carry out upon the Land the works specified in part 9 of the Schedule at the times specified in part 9 of the Schedule. 

If one goes to page 893, one sees in Part 5 the annual rent of $20 for each partnership unit, and then, at page 894, we see the “LESSOR’S WORKS”.  They are, in greater detail, the works that have been referred to earlier.

HAYNE J:   At some point, I take it, the dates specified at about line 22 or 23 on 894 were completed before execution of the relevant instruments?

MR KEANE:   There is no evidence about that. 

HAYNE J:   No evidence. 

McHUGH J:   It seems unlikely, does it not?  Was not the principal sum not even put in the agreement as at that time?  Put in later?

MR KEANE:   Different agreement, your Honour.

McHUGH J:   I know. 

MR KEANE:   So far as the loan agreements are concerned, the principal sums were put in.  The repayment schedules were not filled out, but, as is apparent, that is just a matter of calculation, once you know what the principal sum is.  In relation to your Honour Justice Hayne’s query as to how these documents fit in, if one goes back to page 744 in volume 3, your Honour will see that this is the deed dated 14 June 1989.  If you go to 746 in the recitals, you will see that: 

B.  Interests in each of the said partnerships are to be offered to members of the public by way of Prospectus.

C.  The Representative has agreed to act as the Representative of each of the partners in the said partnerships.

The general partner is to be the partner.  The documents we have just been looking at are schedules to the partnership agreement, as, indeed, is the application form, which your Honours will find at 843.  Your Honours will see at 842 and earlier, there are the signature provisions or the attestation provisions of the deed, and then the application form is at 843 and 844.  It is the first of these schedules which, as we say, include those management and lease agreements that we just took your Honours to.  The application form says: 

I/We have read the Prospectus and wish to subscribe . . . 

I/We have read the provisions of the Partnership Deed dated 14 June 1989 between Forestell Securities (Australia) Ltd and Eagle Star Trustees Ltd and others and I/we agree to be bound by its provisions.  I/we acknowledge that pursuant to clause 15.2 of the Deed I/we Irrevocably appoint Forestell Securities (Australia) Ltd and any agent, attorney or substitute nominated by It for the purpose to be my/our attorney, inter alia, to execute and deliver on my/our behalf any certificate, notice, election, document or form in relation to the registration of the partnership of which I/we are to become a member.

Now, if we can pursue that, just for a moment, further.  If you go to the terms of the loan agreement, which your Honours will find in volume 4 at page 1043, your Honours will see it is an answer to interrogatory which is replicated in the case of the other borrowers.  Page 1043 contains the admission that it was signed.  If you go to 1044 you see it is the application form by Glengallan Investments, where it is recited they:

have read the Prospectus and wish to subscribe for 500 Partnership units . . . and enclose my/our payment for $434,0000 –

and it is signed by Glengallan Investments.  Then if one goes over to 1046 one sees the terms and if we can take your Honours to the recitals, recital A, which refers to the “limited partnership” more specifically identified in schedule 2 and that, your Honours, says at page 1053:

LIMITED PARTNERSHIP
Forestell Securities (Australia) Limited and Others
Red Claw Partnership No. 2 (a limited partnership) ‑ ‑ ‑

HAYNE J:   Sorry, where is that?  What page?

MR KEANE:   Page 1053, your Honour.

HAYNE J:   Thank you.

MR KEANE:   Schedule 2.  Your Honours will understand that I think there were two partnerships granted in the end of June.  There was a further one created in December.  The respondents in this case are members of 1 or 2.  I think mostly they are members of 1.  I think Mr Codd is a member of No 2.  Going back to the loan agreement while we have it, recital B:

The Lender has agreed to lend to the Borrower and the Borrower has agreed to borrow from the Lender the principal sum as specified in this Agreement, for the purpose of allowing the Borrower to acquire the said units.

Then your Honour will see – going back to your Honour Justice Hayne – in terms of the interlinking of these, “Deed” is referred to in the definition in 1 as the deed of 14 June.  Then we draw your Honours’ attention to clause 7 which says:

Any term which is defined in the Deed, and which is not separately defined in this Agreement, shall have in this Agreement, the meaning given to it in the Deed.

LOAN

8.        Subject to the acceptance of the Application of the Borrower pursuant to the provisions of the Deed, the Lender hereby agrees to lend to the Borrower the Principal Sum.

The “Principal Sum” is defined in clause 1 to mean:

the sum described as the principal sum in Schedule 1 hereto –

If your Honours go to schedule 1 you will see $434,000, and apropos of the question your Honour Justice McHugh raised with us, if we can draw your Honours’ attention to the notes underneath the boxes at the left‑hand side of the page your Honour will see where there is “Note (1) $71.00 per partnership unit financed”.  It is the principal payment amount set opposite “PRINCIPAL REPAYMENT DATES” “Sep 1989, Dec 1989” and so forth.

Similarly, there is a provision which says what the interest repayment obligations are.  They are boxes (c) and (d), and you will note that at the agreement date there is an obligation to pay interest of “$140.00 per partnership unit financed”.  So there is this interlinking ‑ ‑ ‑

HAYNE J:   Account must also, I think, be taken, must it not, of page 937, clause 43 in the additional statutory information in the prospectus, which pushes you back to page 18 of the prospectus, page 924 which in turn pushes you to copies of agreements which are available for inspection ‑ ‑ ‑

MR KEANE:   Yes, that is right.

HAYNE J:   All that to be read in light of the fact that the applicable companies legislation at the time, required I think, that applications could go forward only on an application form attached to a prospectus, was it not?

MR KEANE:   I think that is right, your Honour.

HAYNE J:   And that if one started from the statute, one would go from the companies statute to the prospectus, to the application form, from the application form back into the prospectus, which would take you to these documents available for inspection, which in turn are linked in the fashion you have described.

MR KEANE:   And to which one then adheres by the application to subscribe for units.

HAYNE J:   And relevantly that the loan agreement, I think you took us to a number of provisions in the loan agreement of 1046, clause 9 of the loan agreement at 1047 obliged the application of:

The Principal Sum . . . in payment of Application Moneys –

application moneys relevantly being ‑ ‑ ‑

MR KEANE:   Defined in the deed.

HAYNE J:   The deed equals prospectus, et cetera –

and otherwise in accordance with the Borrower’s obligations under the Deed.

MR KEANE:   And we should mention as well, your Honour, clause 8 at the bottom of 1046:

Subject to the acceptance of the Application of the Borrower pursuant to the provisions of the Deed, the Lender hereby agrees to lend to the Borrower the Principal Sum –

the point being that if they were not accepted, there was never going to be a loan.  Under clause 9, there is a direction as to the payment of the application moneys so that ‑ ‑ ‑

HAYNE J:   But all of that also, for example, governed by minimum subscription requirements found in the prospectus that derived ultimately from the relevant, I assume, Code at the time.

MR KEANE:   Yes, your Honour.  And the term of the loan is dealt with in clause 10.  It is 6 years.  Clause 11 is an express obligation on the borrower to:

pay to the Lender on each of the dates specified in paragraph (a) of Schedule 4 hereto the sum specified in paragraph (b) –

I have shown your Honours the boxes where that is dealt with –

which payments shall be on account and in reduction of the Principal Sum.

Clause 12 authorises:

the Representative and General Partner to pay any part of the Partnership income to which the Borrower becomes entitled to the Lender, firstly in reduction of any interest accrued or due but unpaid in respect thereof and secondly in reduction of the Principal Sum.

The question of interest is dealt with in clause 14.  Clause 15:

The Borrower hereby charges his interest in the Partnership . . . with repayment of the Principal sum and interest –

Clause 18 deals with default.  Clause 29 -obviously should be 19, deals with the consequences of default in terms of the balance of the loan becoming due and over the page, we should draw your Honours’ attention to clause 24 under which:

The Lender retains the right to assign its rights and obligations pursuant to this agreement to another party, in which case that party assumes the rights and obligations of this agreement as though it is a signatory.

Your Honours, the deed, we should just take your Honours briefly to this now, apropos of the observations of your Honour Justice Hayne, in volume 3, the definition of application moneys, first of all, to page 747 where “Applicant” is defined to mean:

any person who has completed and caused to be delivered to the General Partner an application for Units in accordance with clause 3.3 –

GLEESON CJ:   Did some of the applicants for partnership units subscribe cash rather than borrowing?

MR KEANE:   Yes, they did.  That appears from the bank accounts and also from what was later said about $2 million being subscribed in cash.  At the top of 748:

“Application” means an application in the form of Schedule 1 . . . 

“Application Funds” means the Application Moneys paid and accepted pursuant to Clause 3;

“Application Moneys” means all moneys paid by Applicants for Units in conjunction with their Applications pursuant to clause 3.3;

Then if one goes over to page 756, clause 2.1:

Each Partnership shall comprise no more than such number of Partners as the General Partner and the Representative shall determine.

2.2      If Minimum Subscription is achieved no later than the Last Date then as at the date on which Minimum Subscription is achieved, the General Partner will effect or cause to be effected a distribution of the Initial Fund, by the Representative into separate Partnership Funds for each Partnership, the funds so distributed to constitute the subscriptions and capital funds to the respective Partnerships required to be contributed by each Partner thereto.

2.3      If Minimum Subscription is not achieved by the Last Date the Initial Fund will be terminated and wound up –

Clause 3.1 deals with applications.  Clause 3.2 says:

The full application price for each Unit shall be $868.00 which shall be paid as herein set out.

Clause 3.3 deals with the procedure for an application:

Every person who wishes to apply for a Unit must complete and deliver to the General Partner:-

3.3.1   an Application for Units signed by or on behalf of the Applicant; and

3.3.2   a cheque made payable to the Representative for payment of the application price for each Unit applied for. 

And then 3.5 and 3.6, I draw your Honour’s attention to those because they deal with what is to happen to the funds before minimum subscription is declared.  They are matters that were influential in the reasoning of the Court of Appeal.

GLEESON CJ:   I notice that in volume 4 of the appeal book on page 1111 you will find the standard form of document for inclusion in an income tax return that went to the partners.

HAYNE J:   For service operation, Mr Keane.

GLEESON CJ:   These partners were provided very soon after 30 June 1989, as I understand it, with information about the project in a standard form for them to provide to the Tax Commissioner. 

MR KEANE:   And that begins at 1108, your Honour.

GLEESON CJ:   What I wanted to ask you was this:  in the information that the partners received to pass on to the Tax Commissioner, was there anything said about the loan being either non‑recourse or limited recourse?

MR KEANE:   There was certainly material provided to them where emphasis was placed on the need for it to be full recourse. 

GLEESON CJ:   I mean in the material that they were to pass on to the Tax Commissioner, of which what appears at 1111 is an example.  This is a document to be included in your income tax return.

MR KEANE:   Yes.  As to that, your Honour ‑ ‑ ‑

GLEESON CJ:   And you will find a reference to the loan on the bottom of 1112.

MR KEANE:   Yes.

GLEESON CJ:   In any of that material was there any reference made to the loan being either non‑recourse or limited recourse?

MR KEANE:   No, none at all.

GLEESON CJ:   Which presumably would explain why it was dealt with in the way it was by that guarantee, if I can use that expression, in December. 

MR KEANE:   Yes, that is right, because if it were otherwise, then the deductions could not be claimed on the footing that there was a loan that was really a loan.

GLEESON CJ:   But it would have jeopardised the allowability of the deductions if it had been a term of the loan that it was either non‑recourse or limited recourse.

MR KEANE:   Yes, your Honour.

HAYNE J:   You have taken us to a number of the provisions of the applicable instruments.  If the transactions that occurred on 30 June amounted to the provision of the application moneys, is it said against you that those moneys were not applied in accordance with the applicable provisions of the relevant instruments you have been taking us to?

MR KEANE:   There was a complaint that there had not been provided to, I think the gentlemen from the general partnership - it might be to the representative of the authorised representative - at the round robin, a declaration of compliance, but as his Honour held, there was no need for such provision.  That apart, there are the certificates of partnership which issued and which, under the Act, declare or deem the partnerships to have been established, so, with those qualifications and in that way, the answer to your Honour’s question is no.

That brings us, your Honours, to paragraph 16 of our submissions which is to the nub of the first issue which is the circumstances of the round robin.  Apropos of our submissions, can we take your Honours to, firstly, the finding of the learned trial judge which your Honours will find in volume 6, at page 1581, in paragraph [28]:

On 30 June 1989 the second plaintiff had no funds – by way of overdraft or otherwise – on which to draw to make the loans it had agreed to make to the defendants.  On that day book entries were made to create an ‘audit trial’.  An audit of particular concern to the promoters of the scheme was one that could be carried out by the Australian Taxation Office.  The audit trial was created at the offices of the Westpac Bank at 360 Collins Street, Melbourne.  Debit notes to the second plaintiff’s account at that bank showed sums of $7,910,084 and $3,634,316 leaving the second plaintiff’s account, and credit notes to the Eagle Star Trustees’-

that is the partner’s representative-

account showed those sums moving into its account:  exhibits 34 and 35.  By cheques drawn on Eagle Star Trustees’ account those sums then appeared to pass to the Forestell Securities (Australia) account, and from there to Johnson Farm Management and Farmer Jones -

it should be Farmer Johnson -

Aquaculture, and then back to the second plaintiff by way of ‘deposit’ of the non-existent funds.  Exhibit 141 shows the details of the audit trial.  An officer of the Westpac Bank made the debit and credit entries in the second plaintiff’s and Eagle Star Trustees’ accounts respectively acting on the authority of letters dated 30 June 1989 signed by Mr Anthony Johnson as managing director of the second plaintiff:  exhibit 43.  Forestell Securities (Australia) had no funds from which to meet the cheques it used to pay Johnson Farm Management and Farmer Jones Aquaculture, apart from those notionally deposited to its credit by Eagle Star Trustees.

[29]     Each loan agreement required, counsel for the defendants submitted, ‘a real loan of real moneys’, and did not contemplate transactions of the kind shown by the audit trial, each of which was ‘a complete artifice or facade’ and a ‘charade’.  I accept those submissions as correct.

GLEESON CJ:   Where do we see exhibit 141?

MR KEANE:   Volume 4, your Honour, at page 1054.  While your Honours have the volume there, I will not delay, but exhibit 43 to which his Honour refers is at 1055, and page 1056 relates to the authorisation in respect of partnership No 2.  The next two documents at 1057 and 1058 are the debit and credit notes in respect of the $7.9‑odd million.  The evidence is they are signed by Mr Pietrzykowski for the bank, and that evidence is – we will not take your Honours to it, but it is at page 246, lines 15 to 40, in volume 1.

Then exhibit 35 is the debit and credit notes, also signed by Mr Pietrzykowski, in respect of the $3.6‑odd million.  Exhibit 36 is the cheques drawn by Eagle Star Trustees in favour of Forestell Securities.  Then exhibit 39 is the Forestell Securities bank statement showing debits and credits.  Exhibit 40 is the Rural Finance bank statements; that goes to 1068.  Page 1069 is the Johnson Farm Management, and then, 1070, the Farmer Johnson Aquaculture account.  The partnership certificates that issued are at 1072.

If your Honours go from 1072 to 1103, your Honours will see at 1103 the various respondents identified there.  At the top of the page, Mr Anderson; down a few entries, Glengallan Investments; down another five or six, HGT Investments; about halfway down the page, under line 25, Mr Prendergast; and, at line 31, Mr Thornton.  Mr Codd’s name is not there.  I think the evidence was that Mr Lynch, who was one of the promoters, held units on trust for him.

GLEESON CJ:   Is the finding on page 1581 in paragraph 29 a finding of sham?

MR KEANE:   Our submission is that it is not and nor could it be, but it is unintelligible if it is not.  We say it is not and could not be because there had been allegations of sham in relation to the loan agreement and they were withdrawn.  In relation to the round robin, what there was was an allegation that it did not serve to provide a loan of money because no payment was, in fact, made.  Your Honours will see the way in which that is said to be so is particularised in volume 1 at page 202 of the record where the allegation in paragraph 17(b) which your Honours will find at page 177 is particularised.  It is said that:

The payment was only purportedly made because in fact no payment was made.

If one goes back to 177, it says:

the Defendant says that it is not indebted to either Plaintiff by reason of the fact that the Second Plaintiff did not make the alleged loan to the Defendant by reason of the following facts:-

(a)      by a transaction which purportedly occurred . . . the Second Plaintiff purported to act on behalf of the Defendant and to pay the Representative the sum of $217,000.00 to acquire the units in the limited partnership;

(b)      the purported payment was effected by a series of debit and credit bookkeeping entries performed contemporaneously by the Manager of the Bank in the accounts by of the Second Plaintiff, Forestell, the Representative, Johnson and Farmer Johnson Aquaculture Limited (a company associated with Johnson) held at the Bank;

(c)      the purported payment was effected without the knowledge and consent of the Defendant;

(d)      the Second Plaintiff did not have sufficient funds to make the said payment on behalf of the Defendant;

(e)      in the premises no payment was made –

In our respectful submission, that is distinctly not an allegation of sham and to the bank officers who were called – Mrs Coulthard and Pietrzykowski – it was never suggested to them that they were engaged in creating a blind.

GLEESON CJ:   But an allegation that a payment was only a purported payment is an allegation of sham, is it not?  What else might it be?

MR KEANE:   It is affecting to make a payment which is not one because there are no funds, that being what they allege.

GLEESON CJ:   But affecting to make a payment that is not one, whatever the reason, is presumably a sham.

MR KEANE:   In our submission, not, your Honour, if one has a case like Lau’s Case where everyone intends the documents to take effect according to their tenor but in relation to which there are no funds, on the view taken by the courts below in this case, you would say that even though there is no suggestion that the people who were there doing this did not really intend things to happen as they appeared to happen ‑ ‑ ‑

GLEESON CJ:   But I can agree to lend you $100 on condition that you immediately lend it back to me, can I not?

MR KEANE:   Yes, absolutely ‑ ‑ ‑

GLEESON CJ:   There does not have to be a bag with $100 coins in it for that to have legal effect.

MR KEANE:   No, quite not.  But the view that has been taken both in the courts below and in an earlier decision in Queensland called Jekos on which the courts relied that such an arrangement as your Honour has just put may be effective where all the parties to it are bound by the convention that it would be treated as if it is real, but unless you are a party to it, because there is no money going round, as the trial judge ‑ ‑ ‑

HAYNE J:   What does that mean, Mr Keane?  This notion of no money going round, this notion “don’t have funds” has no meaning unless there is a temporal element.  Does not have funds “when”?

MR KEANE:   That is right, your Honour.

HAYNE J:   It is all very well to point out that at birth one has no funds and at death one has no funds, but there is a bit in between.

MR KEANE:   Yes, that is true, your Honour.  We will take that up in a moment, but to return to your Honour the Chief Justice, to make it clear what his Honour was actually saying, he then goes on in paragraph [30] to explain why he says he accepts the submissions that this was a facade, bearing in mind that at the beginning of [28] he said the second plaintiff had no funds by way of ‑ ‑ ‑

GLEESON CJ:   Just a minute, a facade is something that is intended to hide something else so we had better get our metaphors straight.  Was his Honour saying these dealings were intended to mask some other dealings that were really taking place, or was he intending to say these dealings were a mere pretence, they were never intended to have legal effect according to their tenor?

MR KEANE:   He has not gone on to say that last, your Honour.  What he says – and he does not say it was intended to mask someone else – what he says at [28] in the third line is, the “book entries were made to create an ‘audit trail’”.  We would say, well yes, that is true, just as in Lau’s Case the Full Court of the Federal Court held they were intended to create an audit trail because the transaction that they represented was the real transaction.  It is not a false trail, in other words, your Honour, but there does seem to be almost a suggestion that there is some false trail about this.

CALLINAN J:   The Income Tax Commissioner would have access to all of this information, so there would be no deception of him.  He could follow the so-called “audit trail” so it, in fact, was concealing nothing from him.  Is that right?

MR KEANE:   It is, and your Honour, the other thing is, if you are doing it so as to present the picture to the Commissioner, it has to be real.  That is the whole purpose of it.

CALLINAN J:   He can go to all of these bank accounts and have ample power to do so, so would not a more accurate description be that this was created to ensure that all of the obligations were properly documented?

MR KEANE:   Quite.  Properly documented ‑ ‑ ‑

CALLINAN J:   And factually, however, what his Honour found, leaving aside any pejorative metaphors, factually what his Honour found in paragraph [28] is uncontroversial is it not?  It is an accurate summary of what happened?

MR KEANE:   Yes, it is.

CALLINAN J:   But as an audit trail, it was merely an assurance of proper documentation of precisely what happened so that obligations could be clearly ascertained.

MR KEANE:   Quite, your Honour, and then to come back to the way his Honour was reasoning by reference to the absence of real money, if you go to page 1581, paragraph [30]:

The recitals of each loan agreement document refer to an application, or intention to apply, for the issue of units in a limited partnership pursuant to the Partnership (Limited Liability) Act and to the second plaintiff’s agreeing to lend a specified sum for the purpose of allowing the defendant to acquire the units.  Section 11(1) of the Act provides that any contribution made by a limited partner in a limited partnership towards the discharge of liabilities of the firm ‘shall be in the form of money only’.  Whatever it was the second plaintiff provided to the defendants on 30 June 1989 it was not money.

And he goes on then to elaborate on that in paragraph [31] by reference to the text of the loan agreement and of the partnership agreement. Your Honours will see that in 1582, paragraph [32] and then at [33] on 1582, he says:

In accordance with the loan agreements, then, the second plaintiff’s obligation to each defendant was to pay real money as application moneys for units in a Red Claw partnership.  It did not.  Therefore it did not lend the promised money.

GLEESON CJ:   Underlying that, is there an idea that by sending the money around in a circle in this way, the partnership was deprived of working capital that would otherwise have been available to it if there had been what is being referred to as “real money”, which I presume means money from some outside source? 

MR KEANE:   The continued availability of which is assured.

GLEESON CJ:   Yes.  As you point out, it might have been overnight accommodation by a bank.

MR KEANE:   Yes, but that would be all right, apparently.

GLEESON CJ:   They did not turn their minds to that. 

MR KEANE:   No.  Well, to answer your Honour’s question, his Honour does not say that.  The point your Honour has just raised is a point which comes up in the Court of Appeal, and we can take your Honour to that now.

McHUGH J:   Before you do, did Mr Johnson make available to Eagle Star the deeds to the land as security instead of the payment of the money to Eagle Star?

MR KEANE:   Your Honour, there is no evidence about that either way.

McHUGH J:   Exhibit 1054 suggests that – there is a note there on the right‑hand side of the page:

Tony to put [to] Eagle to have the deed of the land as security instead of the money ‑ ‑ ‑

MR KEANE:   Your Honour, I am told, and I am sure reliably, that that is a reference to Eagle Star’s security for its fees.  Eagle Star got an entitlement to be paid fees in the transaction.  I think that reference is to the provision of the security to Eagle Star for its fees rather than something to do with the round robin itself. 

McHUGH J:   Right. 

HAYNE J:   Mr Keane, could you at some point let me have a note of where in the appeal book the evidence is to be found that describes what this document is, how it was created and what was to be understood about it?  Do not delay now.

MR KEANE:   We will do that, your Honour. 

CALLINAN J:   Mr Keane, a possible source of funds might follow from the assignment of the debts, pursuant to clause 24 of the loan agreement at 1048.

MR KEANE:   That is right, your Honour.

CALLINAN J:   And that in fact happened, did it not? 

MR KEANE:   It did happen, and that ‑ ‑ ‑

CALLINAN J:   We do not know about the application of the proceeds ‑ ‑ ‑

MR KEANE:   No, and the significance of that clause is that it makes it plain, we would submit, that the chose in action created was assignable, for the obvious reason that you can then factor it.

CALLINAN J:   That clause also contradicts, I think, an assertion by Mr Thornton in evidence that he was told orally that the debts would not be assignable.

MR KEANE:   Yes, that is the other aspect of its significance, your Honour.

HAYNE J:   But, more than showing them to be assignable, the critical fact is perhaps that it shows there was a chose in action.  There is no chose in action if there is no debt, if there is no loan.

MR KEANE:   That is right.

GLEESON CJ:   That might be a reason why I would lend you $100 on the basis that you immediately lend it back to me, and we would do that by an exchange of cheques.  Your credit is so obviously superior to mine that I could then factor the debt to a moneylender.

CALLINAN J:   Mr Keane, the loan was at 18 per cent interest, was it?

MR KEANE:   That was the interest obligation undertaken by the borrowers to Rural.

CALLINAN J:   And at that time, a time of high interest, I think ‑ ‑ ‑

MR KEANE:   It was 1989. 

CALLINAN J:    ‑ ‑ ‑ what was the bank rate?  Was there evidence of that?  I tell you why I ask that.  If in fact the interest rate was a very high rate, then perhaps an experienced businessman might contemplate the possibility of a discounting which would enable an assignee still to collect, still to receive, a reasonable return. 

MR KEANE:   And do very well.  Your Honour, we will have to look at that.  I have to say, my immediate reaction is that I do not recall there being any evidence of the bank rates.

CALLINAN J:   October 1989 was the approach, was it not? 

MR KEANE:   October 1987.

CALLINAN J:   1987.  I am two years out, you are right.

MR KEANE:   We were taking your Honours to the Court of Appeal apropos of the notion that a decisive consideration in relation to the round robin was the funding of the partnership works.  At page 1663 in paragraph [109], Justice Williams, with whom relevantly on this point the other members of the court agreed, said at line 25 – well, your Honours will see that he has adopted what the learned primary judge said, and at the bottom of the page, deleting the reference to section 11 of the Limited Partnership Act, has concluded with the flourish that:

Whatever it was the second plaintiff provided to the defendants on 30 June 1989 it was not money.

In accordance with the loan agreements . . . the second plaintiff’s obligation to each defendant was to pay real money . . . It did not.  Therefore it did not lend the promised money.”

So that notwithstanding a reference to charades, it seems that the basis on which the finding was made was that there was not a lending of money because there were not funds available.

GLEESON CJ:   But this is all explicable, is it not, by that earlier decision of the Court of Appeal of Queensland in Jekos?

MR KEANE:   Well, we come to that in a moment, your Honour.  When one looks ‑ ‑ ‑

GLEESON CJ:   In fact, that is where the very idea for this argument came from, as I understand it, because one of the characters involved in this case was a witness in Jekos.

MR KEANE:   Certainly one, perhaps more.  We will need to look at Jekos.  Jekos is distinguishable in a sense in that there there was a passing around of cheques.  I think the bank entries showed the beginning and the end without all the steps in between.  Here we have the actual debiting of Rural and the crediting of the borrower’s representative in the accounts of the bank.

GLEESON CJ:   Was there an application for special leave in Jekos?

MR KEANE:   I am told not.  I am indebted to my learned friend.  But before we come to that, your Honour, before we come to the question – the Jekos approach is really to blend two thoughts.  One is the thought about the need for real money to capitalise the partnership and the other is to look at aspects of the text and to say that because the text of the partnership deed speaks of the payment that it must mean payment of real money.

GLEESON CJ:   In Jekos, as I understand the facts, the whole project came to grief.  It failed because there was no outside capital, which, of course, would raise the question that you raised earlier:  what kind of outside capital and on what terms?

MR KEANE:   Yes.

HAYNE J:   And would suggest that if these ventures are to be structured in ways that permit the application of application moneys in this way, such events can occur.  It is only if there is some earmarking of funds that one avoids the money going around in a circle.

MR KEANE:   Then, your Honour, it becomes a question of the limits of regulatory control and issues for others, perhaps.

HAYNE J:   Well, limits on what investors see and think.

MR KEANE:   Your Honour, the question or the relevance of capitalisation is dealt with by the Court of Appeal at paragraph [111].  Your Honours will see that it is said:

In other words real money was to be borrowed and advanced to Johnson Farm Management Pty Ltd and Farmer Johnson Aquaculture Limited to enable those companies to conduct the venture and generate profits for the defendants –

In a general sense that is true, but as we have shown, so far as the capital establishment was concerned, it does not appear to be correct and there was no other earmarking other than the payments to Johnson Farm Management that were to be made to it and thereafter the partnership’s entitlement rested in personam against it.

In (i), (ii) and (iii), your Honours will see the reference to the prospectus and the need for capital funds being required “to make the venture operational”.  Over the page there is reference in (iv) to:

The Deed restated all those provisions of the Prospectus –

and the reference to payment, possibly being by cheque –

made payable to the Representative” and to the fact the Representative had to hold such funds in trust until a minimum subscription was received;

(v)      The report from Ernst & Whinney in the Prospectus referred to the fact that it was necessary that the partnership be carried out on a commercial basis for taxation benefits to accrue.  That was an indication that the investment had to be genuine, and that the venture had to have sufficient capital to operate reasonably on a commercial basis;

(vi)     The document headed “Precisely What is the Best Farming Investment This Year?” contained by way of illustration of return of profit a calculation based upon an investor having “an initial cash outlay of $781.00”.  Again that was an indication that investment had to be by cash – real money.

HAYNE J:   Now, is that series of propositions a series of propositions about the construction of the relevant instruments, or is it a series of propositions about the implication of some term?

MR KEANE:   Your Honour, in our submission they are propositions concerned to assist the construction of clause 9 of the loan agreement.  Your Honour sees that if your Honour goes to page 1664, paragraph [111], second sentence and then:

There are a number of considerations which clearly establish that it was fundamental to the performance . . . that real money flow from the defendants to those entities responsible for conducting the enterprise.

HAYNE J:   It was the reference his Honour makes to the performance of the various agreements which was part of the provocation of my question.

MR KEANE:   Yes.  And then, your Honour, in further answer to it, page 1665, paragraph [112], commencing at about line 33, after referring to Mona Homes and the availability of “mutually known facts” to assist in the construction of terms:

Applying that principle to this case, one is entitled to have regard both to the nature of the investment, and the mutual understanding that the capital necessary to make the venture profitable would come from money provided by investors, in construing the terms of the Loan Agreement and determining the obligations of the Lender thereunder and what constituted “payment” for units.  Looked at in that light, when the Loan Agreement states that “the Borrower has agreed to borrow from the Lender the principal sum as specified in this Agreement for the purpose of allowing the Borrower to acquire the said units” and that “Subject to the acceptance of the Application of the Borrower pursuant to the provisions of the Deed, the Lender hereby agrees to lend to the Borrower the Principal Sum” it must be taken as meaning that real money would find its way pursuant to Clause 9 of the Loan Agreement into the venture by way of capital.

HAYNE J:   That seems to be a proposition about the destination of application moneys, not a proposition about the nature or content of the loan agreement.

MR KEANE:   Your Honour, in our submission, his Honour is using the former to assist in the construction of the latter and to do it in a way which we submit ‑ ‑ ‑

HAYNE J:   What is wrong with his Honour doing that?  These are obviously interrelated agreements.  Why should his Honour not do that?

MR KEANE:   They are, your Honour, but it is the use of the prospectus which speaks of payment as a control over what “payment” means in circumstances where the creation and discharge of obligations by round robin, but particularly by the creation of credits and bank accounts is an established mode of payment.  To deny the effect as such, one would need something specific in the language rather than general indications that what is intended is to capitalise the project when the project can be capitalised in the way in which we have indicated, and, indeed, the way in which the agreements on their face contemplate it by the sale of choses in action, subsequent to a funding arrangement in respect of which Rural may or may not have had an outside facility, which may or may not have lasted beyond 30 June 1989, and in relation to which there is absolutely no evidence that there was some critical time frame within which this capital had to be raised.

Your Honours, we should then take your Honours to the reference to Jekos.  At page 1666, your Honours will see that in paragraph [113] his Honour says:

It is true that, consequent upon what happened, the second plaintiff showed the loan accounts in its books as an asset, and it may be that at all times the second plaintiff had a belief that it could sell those assets (choses in action) and thereby generate funds for use in the venture.  But there is no evidence to suggest that any of the defendants had any knowledge of that as at 30 June 1989.

With respect, it seems a hard thing to say, “Well, they had no knowledge about any of that”, but nevertheless to construe the provisions in relation to payment as meaning payment in real money, something as difficult as that, because these debts themselves that could be sold to fund the partnership cannot be regarded as a mode of capitalising the partnership, and that the parties to the agreement are presumed to have had that knowledge and that fact as a part of the background.  Then there is reference in [114] to Jekos:

Interestingly Hasell was a marketer of that scheme, and the investors, who are plaintiffs in the action, were companies in the GWA group.

At paragraph [115], there is reference to Justice Dowsett’s judgment in Jekos.  If I can take your Honours particularly in relation to that passage to the bit that begins at about line 41:

“The defendant claims that it had discharged these obligations by engaging in the ‘round-robin’ transactions, but I do not agree.  There is no sensible way in which it can be said that the ‘round-robin’ transactions amounted to payment of the principal sum to the Representatives . . . In those circumstances, if there were enforceable agreements for loan, whether pursuant to the Deeds of Loan or otherwise, the defendant failed to advance the funds as required by those agreements.  The plaintiffs were therefore entitled to terminate the agreements as they have done.”

Then there is reference to the judgment of Justice McPherson on appeal.  We will need to take your Honours to Jekos in a little more detail in a moment, but can we conclude with this aspect of the Court of Appeal’s judgment by taking your Honours to paragraphs [117] and [118], particularly the last five lines of [118] on page 1667 and over the page on 1668. 

Can we say, compendiously, but accurately, we hope, that what seems to be being said here is that when you have a round robin it is only effective, it can only be effective, against those who are actually parties to it.  In other words, it cannot affect those who are not parties to the convention, that is, that the round robin operates only by way of convention between the parties to it and is not apt actually to discharge obligations for all purposes, or to create obligations for all purposes. 

Now, that seems to be a gloss which is being put on Lau’s Case, and, indeed, Momm v Barclays Bank, in circumstances where, in our respectful submission, it simply fails to appreciate that where the round robin occurs because banks give credit and take credit away, by those means there really are payments.  That that is so is a proposition with which the law is very familiar and has been for some time.

GLEESON CJ:   Mr Keane, is there anything in the Queensland Limited Partnerships Act that prohibits partnerships from giving financial assistance in connection with the acquisition of interests in partnerships?

MR KEANE:   In giving financial assistance?  I think the answer is no.  Can we take your Honours to it.  It is appended, usefully, to our learned friend’s submissions in response on the appeal.  It does not seem to involve the level of regulation of an order that your Honour has in mind.  In a sense, it is a rather slim volume.  Section 6 says what a limited partnership is, and:

A corporate person may be a general partner or a limited partner ‑ ‑ ‑

GLEESON CJ:   Where does it deal with capital – raising and maintenance of capital, if anything?

MR KEANE:   At section 10, that is, in relation to the liability of limited partners, and specifically in section 11:

Any contribution made by a limited partner in a limited partnership towards the discharge of liabilities of the firm shall be in the form of money only.

GLEESON CJ:   Let us just pause there for a moment.  So that would exclude money’s worth?

MR KEANE:   It excludes kind.  Your Honours will recall that provision was specifically referred to by his Honour the primary judge.

GLEESON CJ:   That is referred to as a contribution towards the discharge – do these partnerships have capital? 

MR KEANE:   They do, and that is the limit of the limited partner’s obligation.  The limited partner’s obligation to pay the debts ‑ ‑ ‑

GLEESON CJ:   To the paid up capital?

MR KEANE:   ‑ ‑ ‑ is in respect of the contribution they make.

GLEESON CJ:   So what corresponds to the paid up capital of a company is the contribution made by a limited partner to the limited partnership.  Is that right?

MR KEANE:   By all limited partners.

HAYNE J:   Contribution made or obligation to contribute?  It is section 10.

MR KEANE:   It is the latter.  It is the amount which the:

limited partner is liable to contribute or such part of that amount as remains unpaid.

So that the amount of your contribution can be $50,000 and if you have only actually paid $25,000 you can be liable for the balance.

GLEESON CJ:   If what was going on here was, not the acquisition of units in a limited partnership, but the acquisition of shares in a company, it would be prohibited, would it not, by whatever is the current provision of the Corporations Law that says a company cannot give financial assistance in connection with the acquisition of shares in the company?

MR KEANE:   Yes, it may.

GLEESON CJ:   Which would be the classic way of producing an illegal reduction of the company’s capital.  The real complaint underlying the approach taken in the Queensland cases here is very much like a complaint, is it not, that this involves something like an unlawful reduction of capital?  What has gone on here is that the contributions to the limited partnership have gone in and come out again immediately by way of assistance given by the partnership to the financing of the contributions.

MR KEANE:   Your Honour, Rural, while a member of a group of companies of which the contractors are also parties, Rural is not a member of the partnership, nor are the contractors so that they are not providing assistance.  So far as the general partner is concerned, it receives the cheques from the limited partners’ representative and banks them.

GLEESON CJ:   It just occurs to me that this may be what is behind this idea of real money.  There seems to be, perhaps, what is thought to be a gap in the law relating to the raising and maintenance of the capital of a limited partnership of a kind that does not exist in relation to the raising and maintenance of capital of a company.

MR KEANE:   And, your Honour, they are two separate regimes but, to the extent that section 11 does say that a contribution “shall be in the form of money only” and that is money paid or to be paid, as we say, that has respectable pedigree, in particular, the decision of the Court of Appeal as long ago as 1873 in Spargo’s Case (1873) LR 8 Ch App 407, which we have given your Honours in Re Harmony and Montague Tin & Copper Mining Co.

Your Honours will recall that under section 25 of the Companies Act shares were required to be paid for in cash.  Mr Spargo took shares in a company formed for working a mine which he sold to the company.  The whole nominal amount of the shares was immediately payable as was the purchase money of the property.  It was agreed between Mr Spargo and the company he should be credited in account with the price of the property and debited with the amount payable on his shares and the balance of account thus made out was shortly balance by cash payments by Mr Spargo.  It was held that he must be considered as having paid up the calls on his shares in cash and, in particular, can I take your Honours to the judgment of Sir William James commencing at 411 at about eight lines from the bottom where his Lordship said, speaking of an earlier case with which the court had dealt:

In that case no doubt it was not necessary for us to lay down what would amount to “payment in cash,” since we were clearly of opinion that there had not been any payment of cash or anything that could be called a payment of cash in that particular case, but it was said by the Lord Chancellor, and we entirely concurred with him, that it could not be right to put any construction upon that section which would lead to such an absurd and unjustifiable result as this, that an exchange of cheques would not be payment in cash, or that an order upon a banker to transfer money from the account of a man to the account of a company would not be a payment in cash.  In truth, it appeared to me that anything which amounted to what would be in law sufficient evidence to support a plea of payment, would be a payment in cash within the meaning of this provision.  The object of the section was, I apprehend, to prevent such contracts as had been before the Court in Pellatt’s Case, and Elkington’s Case, in which a man was to take shares, and to pay for them by supplying goods when wanted.  It was considered that there was mischief in collateral contracts of that kind, which deprived creditors of the remedies which they would expect to have against persons whose names they saw registered on the list of shareholders.  In Fothergill’s Case, the bargain in effect was to give paid up shares in satisfaction of the money which was to be paid for other shares.  But if a transaction resulted in this, that there was on the one side bona fide debt payable in money at once for the purchase of property, and on the other side a bona fide liability to pay money at once on shares, so that if bank notes had been handed from one side of the table to the other in payment of calls, they might legitimately have been handed back in payment for the property, it did appear to me in Fothergill’s Case, and does appear to me now, that this Act of Parliament did not make it necessary that the formality should be gone through of the money being handed over and taken back again; but that if the two demands are set off against each other the shares have been paid for in cash. 

Then at the bottom of the page, last sentence:

Supposing the transaction to be an honest transaction, it would in a court of law be sufficient evidence in support of a plea of payment in cash, and it appears to me that it is sufficient for this Court sitting in a winding‑up matter.

Now, the relevance of that is twofold, in our respectful submission. Firstly, it identifies, in a statute which, one might say, is not necessarily in pari materia, but concerned with the same sort of vice as section 25 of the Companies Act 1867 was concerned with, and it construes the requirement for payment in cash in a way which would make these payments unexceptional.

HAYNE J:   The problem underpinning this case was, I think – I may be wrong – later dealt with by other provisions dealing with promoters’ contracts, but perhaps I am mistaken about that recollection.

MR KEANE:   Collateral agreements where you are not able to apply the nominal theory of money, because it is money that measures the exchange.

CALLINAN J:   Mr Keane, a prospectus was issued here.  Was there some statutory regime governing that?  I have an impression that the Corporations Law or the companies law or one of those ancillary pieces of legislation was enacted in order to require a prospectus to be issued.  I notice here it was suggested that it was intended to try to develop a secondary market in the units, because obviously they could not be listed on the exchange as partnership units.  I just have an impression that there may have been some statutory regime which required a prospectus to be issued in these circumstances, and that may say something about the matter, about the obligations.  It may also be that the prospectus needed to be approved by the NCSC or whatever it was at the time.

MR KEANE:   It did, by the NCSC, under the then code.  That, of course, is concerned with the issue of units ‑ ‑ ‑

McHUGH J:   Prescribed interests.

CALLINAN J:   Not the making of the loan.

MR KEANE:   Not the making of the loan.

McHUGH J:   But may it not be a mistake to concentrate on this question of money?  Let me put this to you, which, I think, is against you.  The purpose of this loan was to provide capital to the partnership to enable it to finance a business.  Under this round robin, not a razoo went to the partnership, nor, as far as I can see, ever would.  At most, Rural Finance could sell off its debt.  Now, why do you not construe with a loan agreement a saying purposively and a saying that this was not a lending to the borrower of the principal sum, having regard to the purpose of the loan agreement?

MR KEANE:   Well, your Honour, there are a number of propositions in that.  The first is identification of the purpose of the loan agreement.  The obvious purpose of the loan agreement was the issue of units, and that happened.  They got them.  The question then is, should they have got units in a much shinier partnership than they bargained for?  As to that, the question is, how shiny was the partnership to be?  As to that, the general partners accepted the promise of JFM – Johnson Farm Management, the farm manager – to perform its obligations in circumstances where there was no provision made to secure or assure that in any way. 

In circumstances in which insofar as that obligation rested in personam and insofar as funds might be required to meet its obligations under the agreement, then the situation is that so far as Johnson Farm Management was concerned, it had a chose in action, being its deposit with Rural, which Rural could sell to turn into cash, the exigencies of that factoring operation being, on the evidence, neither difficult nor prolonged nor uncertain.  When your Honour says not a brass razoo went to the partnership, well, what happened is that millions of dollars of the chose in action were factored, which turned into money which Rural was then able to use to pay real cash to Johnson Farm Management.

Your Honour, that is one of the complaints we have about the other aspect of this issue, the second issue which relates to this question of assent, which is that that what was happening was that the contractor to the partnership was being funded by the lender to the borrowers, turning into cash moneys which were on deposit with the lender as a chose in action, that was itself a consequence of the round robin.

McHUGH J:   I appreciate that.  The way the scheme worked out in the end was that by Rural selling off the book debts it was in a position to repay the deposit of funds which had been made by JFM and FJA.  Is that right?

MR KEANE:   That is right.

McHUGH J:   But the way it worked out was very different from what the prospectus contemplated ‑ ‑ ‑

MR KEANE:   Your Honour, could we say, with the greatest respect, to get that from the factual matrix, in our respectful submission, is to strain very hard because there is not the ghost of a suggestion that there was an assurance to these borrowers that there were in place secure established long‑term facilities in favour of Rural.  Indeed, the circumstances in which they came to take their units, to apply for their units, were that they were told that the banks had previously been engaged to provide funding for the borrowing – that is funding to the borrowers to subscribe – but that they had withdrawn.

Now, in that context, your Honour, it is a strong thing, in our respectful submission, to say that there is in this factual matrix some assurance that there is some secure long‑term funding in place from someone other than the in‑house financier, which is how Rural was described.

GLEESON CJ:   Mr Keane, a number of people subscribed cash; they did not borrow anything.  What happened to their money, their capital that they subscribed?

MR KEANE:   Well, as best one can tell, it was used.

GLEESON CJ:   What I want to know is whether the borrowers participated in that in any way.  Capital was subscribed to these partnerships.  Some of it came in the form of borrowings from the second respondent and some of it came in cash from subscribers.  When it came to working out the accounts of the partnership, was any differentiation made between the capital that came through borrowings from the second respondent and the capital that came through cash?

MR KEANE:   No evidence that there was, your Honour.

GLEESON CJ:   Does it follow that to the extent to which liabilities of all the partners were met, they were met from capital subscribed by people who paid cash and from capital subscribed by people who borrowed?

MR KEANE:   Yes.

GLEESON CJ:   And insofar as there might ever have been any distribution of profits of the partnership, would there have been any differentiation between the profits that were distributed to those who subscribed cash and the profits distributed to those who borrowed?

MR KEANE:   No.

GLEESON CJ:   What actually happened about it?  The partnership folded, did it?

MR KEANE:   I think there was a finding that the farm manager was dismissed by the partnerships in September 1992 and I think the authorised representative was dismissed as well.

GLEESON CJ:   When a partnership comes to an end, somebody has to take partnership accounts, right?

MR KEANE:   There is no evidence about that.  There is the finding at 1573 in paragraph [10] of the learned primary judge’s judgment at line 27:

The crayfish project suffered severe cash‑flow problems which led to its ‘reconstruction’ in September 1992.  The three partnerships were dissolved and a new limited partnership, ‘Red Claw (1992)’ was formed with a view to engaging in barramundi aquaculture and growing sugar cane.

GLEESON CJ:   When you dissolve a partnership, you have to have some accounts.  What I am interested in is knowing what rights were asserted by the present respondents when it came to the taking of partnership accounts.  Did they say, we are not members of the partnership because we never subscribed anything to the capital of the partnership, or when partnership accounts came to be taken, did the respondents make claims and were they treated on the basis that they had subscribed “real capital” to the partnership?

MR KEANE:   Your Honour, there is no evidence about that.  What evidence there is is that on a number of occasions they voted at meetings of the partnership.  They exercised their rights to vote.

GLEESON CJ:   Would that not be a factual matter that would need to be investigated to deal with the second of the issues that you want to raise on your appeal, that is, what you called affirmation?

MR KEANE:   The question of how the accounts ‑ ‑ ‑

GLEESON CJ:   The question of how they asserted their rights when it came to the winding up of the partnership.

MR KEANE:   It would, your Honour, but it is a matter that was not investigated.  The focus was on the exercise of their rights as limited partners to assert rights to vote, which they did on a number of occasions.

GLEESON CJ:   Presumably the corollary of ‑ ‑ ‑

MR KEANE:   Including in September 1992.  Sorry, your Honour.

GLEESON CJ:   Presumably the corollary of the proposition that they never borrowed any real money from the second appellant is that they never subscribed any real money to the capital of the partnerships. 

MR KEANE:   That seems to us to be so, and it seems to us to be a proposition that cannot stand with the way they conducted themselves.

GLEESON CJ:   Or their tax returns.

MR KEANE:   Or their tax returns, or indeed, in the case of Glengallan, its own books where it included in its books, a piece of evidence not as compelling perhaps, as the tax returns, but nevertheless.

HAYNE J:   Just to return a moment to matters Justice McHugh was taking up with you, is the position then that JFM and FJA deposited some of the application moneys that were received with the lender, but deposited other sums equivalent to the amount subscribed in cash with its bank or with some other institution?

MR KEANE:   I am not sure the evidence goes quite precisely to that.  The evidence does suggest that Rural was the in-house banker as against Farmer Johnson and Johnson Farm Management.  No doubt, Rural itself had bank accounts.

HAYNE J:   But Rural was treated as the in-house banker to whom or with whom moneys were deposited.

MR KEANE:   By members of the group. 

HAYNE J:   And does the evidence reveal the terms on which those deposits were made?

MR KEANE:   Only this, that there is reference to the moneys put with Rural by Johnson Farm Management and Farmer Johnson Aquaculture as being on interest‑bearing deposits.  As to what the weight of that interest was, I think the evidence is silent. 

GLEESON CJ:   The business of these partnerships had come to an end years before the litigation was conducted before Justice Helman.  He was dealing with the case more than 10 years after the partnerships were ended, was he not?

MR KEANE:   That is right.

GLEESON CJ:   So that there would be no difficulties – and there are some outstanding issues to be resolved, are there not, in the event that you were to succeed in this appeal.

MR KEANE:   Our learned friends contend that that is so.  We contend that the conclusions in our favour on the notice of contention as to the true terms of the agreement, resolve those other matters as well and insofar as there is a contention that the borrowers were misled and deceived into believing that there was real money, we submit that they were not misled and deceived because no such representation was made to them.  In any event, the attempt to litigate that assertion was first made by an amendment to their pleadings in 1999, years after the limitation period expired.

GLEESON CJ:   But I thought the evidence was that they only found out about the matters on which they relied very late in the piece.  Indeed, I have in my mind that somebody said he found out about it during the course of the Jekos litigation.

MR KEANE:   Well, there is a difficulty about that in the sense that – that is true, but that was in 1996.

CALLINAN J:   There is a finding about that, is there not?

MR KEANE:   There was.

CALLINAN J:   When they first found out about it – adverse to you I think.

MR KEANE:   Yes, there is, and Justice Chesterman on appeal made the point that that seemed unlikely to be right, bearing in mind the evidence of Mr Marshall that in 1995 he had become aware of the round robin and accepted that he almost certainly informed Mr Thornton and Mr Prendergast of it.  Justice Chesterman makes the point that it is unlikely that Mr Thornton and Mr Prendergast were accurate in their recollection that they did not know about it until 1995 or 1996.

The other point about it is that an aspect of our second contention is that they were, indeed, informed of the round robin in May 1991, and their liability, so far as the question of the non‑recourse aspect of the loan is concerned, or the likelihood they would suffer loss, arose in early 1991 when we made demand, when Equus made demand.

GLEESON CJ:   As between those partners who subscribed cash and those partners who borrowed from the second respondent, their respective rights have never been worked out on the basis that there is some difference between them, have they?

MR KEANE:   No, no suggestion of that.

CALLINAN J:   Mr Keane, the application to amend the defence to set up section 52, was it ruled on?  It was no doubt opposed by your side.

MR KEANE:   Your Honour, these days under our rules, you amend and then wait to objection.  We pleaded back to it.

CALLINAN J:   Expiration of the limitation period.

MR KEANE:   We did.

CALLINAN J:   Could you not have opposed the making of the amendment, even under the uniform rules?

MR KEANE:   We could have but, your Honour, Wardley’s Case instructs that summary applications to strike people out on the basis of limitation ‑ ‑ ‑

CALLINAN J:   There is an underlying factual issue in relation to the availability of the plea ‑ ‑ ‑

MR KEANE:   That is right.  My learned friend reminds me that I should conclude my response to your Honour Justice McHugh’s observations about falsifying the expectations of parties, or that what happened falsified someone’s expectation.  At page 495 in volume 2, Mr Thornton was being cross‑examined at the top of the page to the effect that the whole purpose of the prospectus was to raise capital, and he said:

I don’t know the state of Rural Finance’s finances.  If someone offers you a loan you assume they’ve got the cash to do it.  Otherwise why would they offer you the loan?

It was a loan, the purpose of which was to enable you to attain units in the partnership?--  Yes, that’s right.

And the very nature of the invitation to invest made it clear to you that what they were trying to do was to raise capital?--  Yes.

And I’m asking you if it ever occurred to you to wonder why if Rural had the cash itself, had the capital itself, why they were going to the market, why they were going to investors to raise money?--  I never thought about it to be honest with you.  As I said to you before, I was a passive investor.  I was happy with our deal and that’s where I left it.

You hadn’t provided any financial information in relation to the loan?--  No.

The only security that you gave were the units in the partnership?‑‑  Yes.  That was all that was asked for.

You were aware, weren’t you, that one way of raising money, so far as Rural was concerned, would be by factoring the loans?--  I was aware that they could do that, they could factor the loans that were not limited recourse.

of course, the point being, as Justice Callinan said earlier, the limited recourse is said to have precluded the loans from being assignable, whereas, of course, one sees that no one ever suggested that a line be drawn through clause 24 when the document was signed.

McHUGH J:   Mr Keane, 15 million was raised, apparently of which two million was kept by JFM and paid for the purpose of the business.

MR KEANE:   Yes.

McHUGH J:   Was there any evidence as to how much was received in respect of the 13 thirteen million which was on deposit and which was ‑ ‑ ‑

MR KEANE:   There is, and we will be taking your Honours to it, but for present purposes it can be shortly put at 1674 in volume 6 in the judgment of Justice Chesterman at the top of the page what is being recorded is Mr Tony Johnson at a meeting where Mr Thornton is present with others.  Tony Johnson said:

“$15M comprised $13M which partners individually borrowed plus $2M in cash.  Partnership received $15M and paid it to JFM as prepayment.  JFM put $2M to project and $13M on IBD in RF.  So $13M went around in circle.  The intent was to sell off non‑guaranteed RF loans.”

The other passage which I think is probably more of assistance to your Honour Justice McHugh is at 1669, paragraph 124 which is Justice Williams dealing with the meeting in May 1991:

Hesketh opened by saying “Red Claw is cash poor and only has funds for two weeks”.  There is then a note that “Equus is trying to upgrade 79 accounts worth $5.9M.

These were accounts that had guarantees relating to them. 

Hesketh wanted to keep the project alive, but needed “$800K to complete construction of 138 ponds”.  Johnson is recorded as saying:  $5.8M in loans outstanding part of which carries guarantees.  In budget the deficit needed to build 24 more ponds out of 47 required and bring new ponds and existing into profit you think is $1.5M to 30/6/92.”  Thornton queried the “value of loans”.  Hesketh is recorded as replying:  “$2.5-$2.6 M in addition to the loans subject to the guarantees.  Equus will continue to disburse against loans which you upgrade.”  Johnson is then recorded as providing the following information:
           “Gross subscription $15M.
           Cash investors 2M
           RF Loans 13M
           $7M of loans sold and yielded $6M cash.
           Balance of $8M.  (This is the $5.8M mentioned above.)”

So the evidence is – and then your Honours see the balance of what is said to have happened to the $13 million that was loan money.

McHUGH J:   Do we assume from that that the $6 million went into the business? 

MR KEANE:   There is certainly no suggestion it did not.  No one ever suggested that there was in any way that sort of wickedness going on.

CALLINAN J:   The suggestion is that 23 ponds had been built.

MR KEANE:   Yes.

McHUGH J:   One of the circulars that was sent around said that there were almost 700,000 advanced juveniles in one of the ponds and 500,000 hatchling crayfish were being grown, so there seems to have been a fair size operation going on.

MR KEANE:   Yes, and there was also the evidence of Mr Humphrys that we referred to as well.  Your Honours, if we might say, to come back to the first issue, we say this, we deal with we say here in paragraph 24 and following of our submissions, but can we say by way of elaboration of what we say there, is that so far as bank accounts are concerned, the balance actually posted in the bank’s ledgers is given a weight and effect of its own.  We have circulated to your Honours copies of the decision of our Court of Appeal in R v Capewell [1995] 2 Qd R 64 at 67 in the judgment of Chief Justice Macrossan ‑ ‑ ‑

McHUGH J:   Did the evidence establish that cheques were actually drawn and deposited?

MR KEANE:   Yes.

McHUGH J:   It was.  It just was not some mere case of book entries as such.

MR KEANE:   No, the cheques were drawn and they passed around and they were then recorded.  Sorry, there were cheques drawn by Eagle Star in favour of Forestell.  There were bank credits and debits between Rural and Eagle Star and there were bank debits and credits between Forestell and JFM and FJA and then bank debits and credits in favour of Rural.

The passage in the judgment of Chief Justice Macrossan to which we take your Honours is at 67, commencing at line 3 and really down to line 40, and the point we wish to make by reference to Capewell apart from the point that:

the balance as actually posted in the bank’s ledgers, at least in the case when it is notified to the customer, is given a weight and effect of its own.  No doubt this has come about because of the demands of commerce and the need not to impede it.  The principle which relates the rights of the customer to the form of the entry which appears in the bank’s records finds expression in the cases from time to time –

and there is reference to Capital and Counties Bank Ltd v Gordon and we have given your Honours the excerpt where Lord Lindley said:

It must never be forgotten that the moment a bank places money to its customer’s credit the customer is entitled to draw upon it, unless something occurs to deprive him of that right.

So that while some instructions for payment are regarded in law as no more than that, for example, handing a cheque to someone, other matters of instruction are more than that, and a bank entry into a customer’s account is more than simply an instruction to pay.  It is treated as actual value, the mere receipt of which is sufficient to settle the payment obligation.  The correctness of that proposition does not depend upon other persons being parties to a convention that it will so operate.  The law gives it that effect.

Capewell’s Case was a case where the third party was relevantly affected by the entry in the credit account of her child.  Spargo’s Case itself was a case in liquidation; third parties were affected.  Momm’s Case is a case where the Herstatt Bank went into liquidation; third parties were affected by the transaction.  They were not parties to a convention about it having effect, but they were affected by it because it has effect in law as a payment.

May we take your Honours to Fletcher’s Case first.  Fletcher’s Case is of general relevance in relation to round robins.  Momm’s Case is of more specific relevance in relation to bank entries and bank records.  In Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1, your Honours will find the relevant round robin bills of exchange set out at page 12. The course of events is explained in the first full paragraph on page 12 and the effect of all that activity is summarised in the second full paragraph on page 12.6:

The effect of all this activity was that all three bills ended up in the hands of the original drawee so that nothing actually passed under them. 

Then if we go to page 13, the bottom of the page:

Was there any relevant outgoing of interest?

Their Honours record:

once the questions of sham and fiscal nullity were resolved against the Commissioner, the amounts payable under the loan agreements in respect of the tax years were properly seen as having been paid by the “round robins” of bills of exchange and as therefore being outgoings “incurred” –

Then if we can ask your Honours to note that about point 3 on the page:

In this Court, the Commissioner sought to move from that common ground and to maintain that there were, in fact, no outgoings of interest incurred by the partnership in any of the tax years.  The so‑called “loans” by Doowarf and Eromdim to the partnership were, so it was argued, “effected by ‘payments’ which were not supported by cash” with the consequence that “[n]o advance of money was made upon which interest could accrue”.  There is a short answer to that argument.

The fact that the relevant “payments” were purportedly made by “round robins” of bills of exchange which were not supported by equivalent amounts of cash and which all ended up in the hands of the original drawees does not, once arguments of sham and fiscal nullity are rejected, necessarily preclude those “payments” from being effective and legally binding.  Depending upon the circumstances, they could constitute counterbalancing set‑offs of credit and debit amounts.  Prima facie, it would seem that they so operated in the circumstances of the present case.  Whether they did is, however, a mixed question of law and fact.

If we can ask your Honours to then go, with specific reference to bank accounts, to Momm’s Case [1977] QB 790, which is the second item in our list. The facts are set out in the headnote at the bottom of page 790. There was an instruction given to a London branch of the defendants by a German bank:

to transfer that sum from their account to that of the plaintiffs “value June 26, 1974.”  On that day, after the amount had been credited to the plaintiffs’ account and debited from H’s account by the defendants, it was announced that H had ceased trading and were going into liquidation.

There is reference to punched cards not having been processed until the evening, but the actual processing does not seem to have mattered, and nor did the fact that the dispatched advice notes or other communications of the entries had not occurred, and the relevant reasoning of Sir Michael Kerr begins at 799, just below the letter F, and I invite your Honours to read that.  We rely upon what his Lordship says for the balance of that page, over the page in relation to Eyles v Ellis, particularly between B and D and G to the end of that paragraph, and over the page at 801, between F and G.

GLEESON CJ:   Is that a convenient time?

MR KEANE:   Yes, your Honour, just subject to one final thing.  In relation to the irrelevance of the bank’s internal processing operations at 802, lines G to H.

GLEESON CJ:   We will adjourn until 2.15 pm.

AT 12.44 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.18 PM:

GLEESON CJ:   Yes, Mr Keane.

MR KEANE:   Thank you, your Honours.  Your Honours, can we tidy up a few things from before lunch.  Firstly, there is some, albeit very general, evidence that the interest rates of 18.5 per cent and the penalty of 20 per cent were higher than prevailing rates.  It is in Mr Thornton’s statement in volume 6, page 1502, lines 10 and 11.

As to the evidence in relation to what was done with the funds that were raised, in volume 5, exhibit 56 at page 1285, there is, if your Honours would go to that, a description of the state of play with the project as at that date and perhaps as of March 1991, in fact.  As one sees under the heading “Pond Construction”:

Grow-out pond water surface area is 106.5 ha (68 ponds) at photo date.

Then there is some discussion of the dry ponds:

The Construction Manager advises, subject to satisfactory weather conditions, that the resealing programme will be completed by mid June 1991.

And there is a problem with pond leakage.  The other aspect which is relevant here is at 1287 – and this deals with your Honours’ questions as to what was done with the funds – about point 3:

Finally, a word about loans to Investors and project funds.  In June and December 1989 Rural Finance Pty Limited (RF) loaned most of the $15 million subscribed to the Prospectus, to investors/borrowers.  Our Group received these funds by way of pre-payment from the Partnerships.  We put most of the funds back on interest‑bearing‑deposit (I.B.D.) with RF and now draw against that I.B.D. as funds are expended on site.

For completeness, we would read on:

RF relies on progressively selling the loan portfolio as its source of funds to repay the I.B.D. as funds are needed. 

That would seem to be a communication that there are not otherwise funds.

Equus Financial Services Limited (Equus) is the purchaser of RF’s receivables.  Equus additionally acts as stakeholder of the proceeds of the receivables sale.  Although the proceeds belong to us and the project sub-contractors, we allow Equus to control disbursement.  Through this mechanism, Equus ensure that funds are properly disbursed. 

GLEESON CJ:   Just before you go on, this was a communication to all the partners, was it?

MR KEANE:   Yes.

CALLINAN J:   By the farm manager.

MR KEANE:   Yes, and then on the point as to what happened to the moneys, in exhibit 53, which is in the same volume at 1301, and we will take your Honours later to some cross-examination of Mr Thornton about this document, but you will see it is a letter addressed to Mr Hasell from Woods & Johnson, which was the holding company of Rural Finance, it was another member of the group.  It was a letter of offer –

GLEESON CJ:   What page?

MR KEANE:   Page 1301, your Honour, volume 5:

Enclosed is letter of offer for your clients.

The letter has been drawn under the eye of professional advice to ensure that all benefits flow if the offer is accepted.

I trust you will appreciate that the offer has to have solid commercial justification and this is why the background has not been toned down.

Then if we go to the letter - I invite your Honours to read paragraphs 1 and 2.  You will see that Woods & Johnson are there as subcontractors to JFM.  In 2 they say:

Funds were received by us by way of pre-payment to carry out the above works.  We, as a depositer, lodged substantial funds on interest bearing deposit on quarterly call, with Rural Finance Pty Limited, with the intent to drawdown as Red Claw works progressed.

It is a wholly owned subsidiary.  It has advanced substantial funds to the majority of investors who subscribed.  Paragraph 4 is important in relation to the questions your Honours raised:

Rural Finance Pty Limited agreed to progressively sell its loan receivables portfolio to fund progressive return of our interest bearing deposit as and when we required funds for the Red Claw works.  Rural Finance Pty Limited has been selling its receivables for the past year to the extent of approximately $6 million (although our drawdown requests have been of less amounts and at later times than originally planned because construction has been seriously delayed through pond leakage problems which are now rectified as to both previously completed ponds and effective construction technique for future ponds).

Then to complete the reference to the document, if we go over the page to paragraph 6, and your Honours will note:

Rural Finance Pty Limited’s remaining loan portfolio . . . consists of approximately a further $6 million in outstanding loan principal, of which most is due to be repaid by borrowers in the period June 1992 to June 1994 . . . 

8.        The total cash requirement of our company to complete and to bring the Red Claw project into profitability is $1.5 million.  We understand the Farmer Johnson Group require approximately the same level of funding to complete their blueberry and citrus projects.

9.        Rural Finance Pty Limited has been called on by us and also separately by the Farmer Johnson Group to forthwith return a further $1.5 million to each of us from our respective interest bearing deposits, to enable completion of our respective Red Claw, blueberry and citrus projects.

Then there is the reference to the January 1991 assignment of the 79 separate loan contracts, being the remaining $6 million, which Equus was to seek to upgrade.  Then over the page, paragraph 11 explains that that financial plan has failed, and 13, and then 14, your Honours:

The basic position with the Red Claw project is that an otherwise sound operation is in imminent danger of collapse because loans made by Rural Finance Pty Limited to Red Claw investors, cannot be converted to cash, mainly due to the economic recession in this country today.

Your Honour Justice Hayne asked about exhibit 141, that is, the flow chart, and how it got into evidence.  That appears from volume 3, page 671, lines 10 to 20.  It was a document that was discovered by us and tendered by our learned friends through Mr Marshall, who gave evidence about obtaining it on discovery.  Further, in relation to the respondent’s knowledge of the round robin and in relation to your Honour Justice Callinan’s observation as to the finding against us in that regard by the learned primary judge, can we draw attention first to Justice Chesterman’s judgment that we mentioned earlier.  It is at 1674 in volume 6 and at paragraph [152] is the passage we are referring the Court to.

In that regard, if we can take your Honours to a letter from Mr Marshall which is in volume 5.  It is exhibit 147.  It is at page 1471.  It is a letter dated 20 August 1996 from the respondents’ solicitors to the appellants’ solicitors.  On the second page, at paragraph 5(c) Mr Marshall says:

Recent enquiries have revealed that in fact no monies were ever advanced by Rural Finance Pty Ltd as the loans were effected by “round robin” style transactions performed with the Representative Eagle Start Nominees Limited on or about 30 June, 1989 which were shams.

Then what is meant by that is then elaborated by the reference to the judgment of Justice Dowsett in Jekos and then it said: 

The fact that the loan transaction was a sham has not been pleaded by our clients because the true facts were unknown to them until recently.  However it will be pleaded if the actions are to proceed.

In fact, it was not pleaded as a sham.  The point we take your Honours to that for though is that on 20 August 1996 it is as clear as it could be that they were aware of the round-robin transaction and the absence of “real money” and the amendment to raise a complaint about that by reference to section 52 was made in December 1999.

GLEESON CJ:   Mr Keane, you referred us to the letter of 27 May 1991 which appears on page 1302.

MR KEANE:   Yes, your Honour.

GLEESON CJ:   The next document in the appeal book is an originating summons which appears at 1307, dated 25 July 1991 seeking a declaration that an investor is not in indebted on the loan account.  Where do we find the particulars of the grounds on which it was claimed, in July 1991, that there was no indebtedness under the loan agreement?

MR KEANE:   We will turn that up for your Honour.  Your Honour appreciates this is one of the matters on which we relied to contend that by asserting that the loan agreement had been performed by them, they were accepting that it had been performed by us as well.  We will seek to answer your Honour’s question.  Subject to that, I think that is what we wanted to say in relation to the matters that were raised with us before lunch.

CALLINAN J:   Mr Keane, that is not right, is it, at page 1502, that the rates were 18.5 and penalty of over 20 per cent?  It was 18 per cent and 20 per cent, was it not?  Was there something I have missed? 

MR KEANE:   18 and 20 were the ‑ ‑ ‑

CALLINAN J:   Yes.  It is just Mr Thornton in his statement ‑ ‑ ‑

MR KEANE:   I think he might have the precise figures wrong, your Honour, but the point about them being higher than prevailing rates does at least seem to be made.  Your Honours, going back to where we were before lunch, we have taken your Honours to Momm’s Case, and in our submissions in support of the argument that a credit entry in an account effects payment we have given your Honours reference to Mann, The Legal Aspect of Money, 5^th edition, page 84, where the learned author says at the top of the page:

When payment is made to the creditor’s bank, i.e. his agent, whether by electronic transfer or otherwise, a credit entry on his account is sufficient and probably necessary to effect payment. 

It is sufficient if the amount was credited ‘intentionally and in good faith and not by error or fraud’, and in such circumstances the credit cannot be reversed, notification to the creditor not being required to render the payment effective.

The next case we wanted to take your Honours to in this context is Lau.  We have given your Honours a reference to the decision of the Full Court of the Federal Court, Commissioner of Taxation v Lau (1984) 6 FCR 202. In that report, the relevant passage is at 207, in the judgment of Justice Fox. It is useful because it summarises the nature of the transaction. In the first full paragraph of the page on 207, it makes the point that the lender was at arm’s length from the taxpayer, and it deals with the contention by the Commissioner that there was not a loan to the taxpayer or a payment by him to the manager of the venture. His Honour says:

The cheque from NQ (for $2,656.120) was in fact cleared through Liberton’s bank –

Liberton was the lender –

and the corresponding debit was made when Liberton’s cheque was cleared.  As the learned judge has observed, NQ’s bank presumably gave NQ credit for “virtually an instant of time”.  The net result of the dealings so far as concerned the taxpayer was to make meaningful the loan to him, as well as to provide a record.  The latter had performed his obligation to pay NQ the balance of the management fee, albeit he had incurred a liability to Liberton for the same amount.  Liberton had also incurred a liability to NQ.

The point being that making a meaningful loan is not inconsistent with providing a record. As to the reference to the trial judge, we have circulated to your Honours the judgment at first instance, the judgment of Justice Connolly, in (1984) 54 ALR 171. The passage that elaborates and stands behind the observations made by Justice Fox is at 171, lines 25 to 50. Then at 172 at the bottom of the page his Honour says:

The creation of these huge debts without any real movement of money encouraged the respondent to stigmatise the transactions as shams.  However, if it be remembered that NQ proposed to charge the participants in the scheme a heavy management fee, and that the effect of the exchange of cheques in late June was to convert that obligation into corresponding obligations for the repayment of money lent, it is seen that while the transaction may be unusual, it cannot be stigmatised as non‑existent.  If it be right to say that all the parties to this transaction or series of transactions intended that the instruments in question should take effect and operate according to their tenor and that they should respectively have the rights and be bound by the obligations thereby created, then, whatever else may be said about the transaction it is not a sham –

and we rely upon the balance of that passage to about line 20.  Now, with those observations in mind, one may then move to Jekos, with which your Honours have been provided.  It is an unreported decision.  If we can take your Honours to the page numbered 13 at the top, your Honours will see there under the heading “LOAN” the terms of the loan, and clause 4 in relation to the “APPLICATION OF LOAN FUNDS”.  Over the page at page 14 your Honours will see the summary of the evidence of the round robin.  At about point 6:

what is described as a “round-robin” of cheques was arranged.  It took place in Normand’s office at the Bank –

that is the manager of the ANZ Bank –

at a meeting attended by representatives of the defendant and other companies involved in the project, together with Permanent Trustee Australia, which was the Representative under the venture.

What happened on that occasion was that the defendant gave a cheque to Permanent Trustee Australia for the amount of the loan.  The cheque was attached to a deposit slip and handed to the bank manager for crediting to the account of Permanent Trustee Australia.  Those representing Permanent Trustee Australia in turn delivered a cheque in favour of Zamane Securities, which was the Manager, which, along with a prepared deposit slip, was handed to the bank manager for crediting to the account of Zamane Securities.  Cheques drawn by Zamane Securities in favour of Okari Management for its management fee and to Okari Plantations for its licence fee, accompanied by appropriate deposit slips, were then handed to the bank manager for the credit of the accounts of those companies.  They in turn delivered cheques in favour of the defendant, which were handed to the bank manager for depositing to the credit of the account of the defendant.  In this way the amounts supposedly credited by depositing the cheques delivered in each instance were returned to the source from which they had originally come, which was the defendant.

On the bank statement (ex. 39) issued in respect of the defendant’s account with the Bank, these transactions are represented by a credit entry on 29 June 1990 of $836,562 followed by a debit entry of the same amount, which is said to constitute the loan by the defendant to the investors pursuant to the deeds of loan.

I invite your Honours to read the balance of that.  Over the page, numbered 16 at the top, the first full sentence – I perhaps should start with the last sentence on the preceding paragraph, page 15:

It was by this means that the defendant claimed to have lent to the plaintiffs the principal sums.  The precise chronological order in which it was carried out may now not matter much; but from the standpoint of the Bank, its object, according to Mr Normand, was to ensure that the cheques being drawn on each account were in every instance matched by corresponding deposits for the credit of those accounts.  It comes as something of a surprise to discover that the Bank was prepared to actively assist in enabling its facilities to be used in that artificial manner.  In the end, however, the question is whether the defendant as Lender did, in terms of cl.3 of the Deeds of Loan, “lend” the Principal Sums to each investor or Borrower and “pay” those sums to Permanent Trustee Australia as Representative in terms of cl.4(a) of those Deeds.  Unless there was in fact a payment to the Representative, there was no loan capable of satisfying cl.3 of the Deed. 

Then his Honour refers to the term “lend” and various references to the idea of lending money, that would be a payment of money to someone on condition it be repaid.  The dangers of reading words out of context are then mentioned.  Then over the page, his Honour gives the example of:

the unpaid price of goods sold and delivered would ordinarily not be considered a loan; but the parties may by their agreement or conduct treat it as such, either immediately or at some time after the sale has taken place.  That is what serves to distinguish cases like Lau . . . on which the defendant relied in these appeals.  In the first of those decisions, Connolly J. declined to treat an arrangement or transaction, which involved a financing by an exchange of cheques similar to this, as a nullity or “sham” for the purpose of the Income Tax Assessment Act 1936.

Then he cites what his Honour says.  Justice McPherson then says:

What distinguishes those decisions, and makes them irrelevant for present purposes, is that in each of them the parties to the transactions in question agreed to be, and so were, bound by the course adopted. 

In our respectful submission, Justice Connolly and the decisions to which he referred were not saying that what would otherwise be a sham is not a sham if the third party affected by it acquiesces.  Even in Lau’s Case, for example, the question was:  were the transactions good against the Commissioner?  They either were or they were not just as in Fletcher’s Case the transaction ‑ ‑ ‑

HAYNE J:   The base question is:  was there a transaction?

MR KEANE:   That is right, your Honour.

HAYNE J:   That depends on the relations between the parties to the transactions and no one else, I would have thought.

MR KEANE:   Yes.  In our respectful submission, to seek to quarantine that line of authority on the footing that it is really about convention and only the parties to the convention are affected by it, in our respectful submission, is in error.  One can see the basis on which Jekos was then decided when one looks at the passage cited from Justice Dowsett which goes over the page and concludes, “No funds were advanced”.

GLEESON CJ:   It is the paragraph on page 18 that is the key to the reasoning, is it not?  Right or wrong, that is the basis on which they decided the case.

MR KEANE:   Yes, it is, your Honour. 

GLEESON CJ:   Which seems to get back to this idea of raising and maintaining capital for a partnership venture.

MR KEANE:   Yes.  Your Honours, our submission is that the approach that is reflected there is wrong, with respect.  It is also the case that it is distinguishable, in that there does not seem to have been the relevant bank entries as between all the parties, as there has been here. 

Manzi v Smith (1975) 132 CLR 671 is a decision on which our learned friends rely. We should take your Honours to that; it seems to us that it is distinguishable. That was an application to recover a preference under section 293 of the old Companies Act 1961: 

a payment made to a shareholder shortly before the liquidation was void as against them as a preference, and that certain other shareholders were indebted to the company in specified amounts, the only material produced by the liquidators consisted of entries in the company’s books of account which, if correct, showed the payment and indebtedness in question.  There was no evidence that the shareholders were aware of the entries, and there was some evidence that the entries were incorrect. 

The Chief Justice dealt with the issue at 673.7, in the third last paragraph on the page.   We invite your Honours to read that, and particularly what follows then.  At the bottom of the page, his Honour’s finding:

“the entries were the equivalent of payment of the accounts referred to; their effect was accordingly to extinguish the obligations to which they referred”. 

And his Honour then goes on, over the page, to say that this case is distinguishable from cases such as Eyles v Ellis and Spargo’s Case.  His Honour says:

These decisions, quite clearly, are not authority for the proposition for which they were advanced, namely, that a payment of money was made by the making by the company of a journal entry in the books of account without reference to, or without the agreement of, the persons said to be the recipients of the money.  The company’s assertions in its books of account did not establish the indebtedness of the appellants or any payment of money in discharge of that indebtedness. 

With respect, it is the notion of having to look at the transaction between the parties and see if there has been a transaction between them.  In this case, the court plainly decided the case on the footing that the evidence did not establish that there had relevantly been a transaction.

GLEESON CJ:   Could I take you back to page 18 of Jekos, please?

MR KEANE:   Yes, your Honour.

GLEESON CJ:   In the middle of page 18 it said:

Contrary to the expectations of the promoters, the venture turned out not to be funded by the contributions of the investors, but required the infusion of capital from sources of their own.  They –

that is the promoters –

could not, and in fact did not, obtain money by adopting the expedient of writing cheques which they knew would not produce the funds needed to finance the project.  They ought at that stage to have confessed the failure of the project through inability to obtain the means needed to carry it out.

That appears to be a finding of fact that in the circumstances of that case the substratum of the venture had disappeared.

MR KEANE:   Your Honour, that it was a finding of fact – well, the court approached it as such on the basis that your Honour suggests - does appear to be confirmed by the first sentence after the quotation at the top of page 18 and, indeed, the next two sentences as well.  In this case, the situation is, according to the evidence, that it was the intent of the promoters that the choses in action be sold off to raise funds.

Your Honours, if we might locate ourselves in terms of our submissions by saying that we now propose to move on to paragraph 42 of our written submissions in the appeal which deals with the second issue we mentioned earlier.  Now, in that regard, as to paragraph 43(a) of our submissions, we refer to exhibit 49 which your Honours will find in volume 5, at page 1288.  If your Honours look at it you will see that it is the document to the summary of which we have already taken your Honours and in relation to it, Mr Thornton’s evidence is in volume 2 at page 513, line 25.  He was being asked in relation to this conference:

The position is, is it not, Mr Thornton, that in the course of the conference Mr Johnson said that the subscriptions to the partnership were $15 million.  They comprised 13 million which the partners borrowed and 2 million in cash.  The partnerships received 15 million, paid it to JFM, that is Johnson Farm Management, the operator, as a pre-payment.  JFM put 2 million in the project and 13 million on IBD in Rural Finance so 13 million went round in a circle.  The intent was to sell off the non-guaranteed Rural Finance loans.  See that?-- Yep.

Now, you recall that was said?-- I don’t recall but I trust this to be, you know, a statement of the truth.

You didn’t have any reason at the time when you first saw it ‑‑‑‑‑?‑‑ No.

----- to think it wasn’t accurate? -- I definitely didn’t.

I should mention that the learned primary judge declined to act on the evidence of the note on the footing that it might have represented comment or conclusion by Mr Thompson, the solicitor who made it, but Mr Thornton did not seem to share that difficulty.

GLEESON CJ:   What was the date of the conference referred to in that question?

MR KEANE:   It was 15 May 1991, your Honour.

GLEESON CJ:   Thank you.

HAYNE J:   So what is the legal rubric under which this branch of the argument is being fitted?

MR KEANE:   We would now call it acceptance.  We called it affirmation.  We actually called it acceptance as well, but it was dealt with as a question of affirmation.

HAYNE J:   Acceptance in what sense?

MR KEANE:   Assent to the deal, assent to the agreement as performed.

GLEESON CJ:   You only get to this argument on the assumption that there had not been a lending of money. 

MR KEANE:   Yes, that is right.  If there had not been a lending because it was a round robin, which did not pass funds, then we say that was communicated to them by exhibits 53 and 56 and in this conversation, it was communicated to them that that was the case, that thereafter, they exercise rights as partners, vis-à-vis – and as partners – vis-à-vis, or in a relationship with members of the group, rights they only have if they have subscribed, we submit that that is assenting.

HAYNE J:   Is that a species of estoppel, because if it is not, I am still wondering what the legal category of reference is?

MR KEANE:   We submit it is assent by conduct.

HAYNE J:   Forgive me, it simply does not convey enough to me yet.

MR KEANE:   In an agreed variation.

GLEESON CJ:   Accord and satisfaction?

MR KEANE:   Possibly, your Honour, yes. 

HAYNE J:   But there is no loan on this hypothesis?  What is now happening?

MR KEANE:   On this hypothesis there was no loan, because there was a round robin.  If you know about the round robin and, thereafter, exercise rights that you can only have if the round robin was effective, then you are adopting.

GLEESON CJ:   Is this some kind of election?

MR KEANE:   We think it is better put as adoption, your Honour.

HAYNE J:   I do not for the moment see how you go from there is no loan to what conclusion?  There is a loan, you cannot be heard to deny that there was a loan?

MR KEANE:   You have accepted that what transpired with the round robin was effective to make you a partner in the project with rights as such which you exercise, which you may choose to exercise, and which they did ‑ ‑ ‑

HAYNE J:   How does that affect the debt claim?  The claim is a claim in debt, is it not?

MR KEANE:   Yes it is, but the claim for the debt is resisted on the footing that the lender did not perform its obligation to lend.  If the borrowers accept the performance that did occur, and then exercise rights referable only to that, then we submit, with respect, that they have adopted the benefit of it, the benefit of the performance that has produced their units.

CALLINAN J:   Is that a kind of a benefit/burden argument, that if you take the benefit of something, then you have to assume the burdens.

MR KEANE:   Yes, and in that regard we pray in aid some observations of the New South Wales Court of Appeal in Empirnall.

GLEESON CJ:   Within two months these investors are saying, “We don’t owe you the money”, are they not?  There is an originating summons filed within about two months of this ‑ ‑ ‑

MR KEANE:   In 1991?

GLEESON CJ:   Yes.

MR KEANE:   That originating summons says they performed.

GLEESON CJ:   Well, it says, “We’re not indebted”.

MR KEANE:   That is true, albeit ‑ ‑ ‑

GLEESON CJ:   That is why I inquired actually as to what was the basis on which they were saying that.

MR KEANE:   Albeit on the footing, it appears, that they contended that they had discharged the obligations of making the prepayment of interest and the two part payments of repayments of principal.  It was referred to in Justice Chesterman’s judgment at 1676, in volume 6, paragraph [159](a).

GLEESON CJ:   Do you mean at that stage they were on the partial recourse argument?

MR KEANE:   Yes, that there was an agreement which they had performed.  The point being, for our purposes here, that notwithstanding what they had been told in May, they were not saying, “The agreement has not been performed and we’re no longer partners.  We never became partners”.  They are saying that they are partners, and, indeed, they continued to attend and vote at meetings as such.

HAYNE J:   Do I understand from what appears at 1308, paragraph 2, that the originating summons was intended to propound a case “not indebted because performed”?

MR KEANE:   Yes.

GLEESON CJ:   By the borrower.

MR KEANE:   By the borrower.

CALLINAN J:   Were any particulars of the performance provided?

MR KEANE:   Your Honour, we will try to find the letter which was exhibit 102, on which Justice Chesterman’s observations at 1676, paragraph (a), are based.  It is exhibit 102.  If it is not there, we will try and get it overnight.

GLEESON CJ:   Can you just remind me of these two payments of principal?  There was a prepayment of interest ‑ ‑ ‑

MR KEANE:   June.

GLEESON CJ:   In June 1989.

MR KEANE:   And then in September and December.

GLEESON CJ:   1989.

MR KEANE:   Yes.

GLEESON CJ:   So that if in mid‑1991 the parties had all come before the commercial judge who said, “What’s the real issue in this case?”, the investors would have said, “We borrowed money on a limited recourse basis and we have discharged the whole of our obligations under the limited recourse arrangement, so we don’t owe them any more money”.

MR KEANE:   That is right.

GLEESON CJ:   “But we are partners”.

MR KEANE:   Yes.

GLEESON CJ:   “We’re entitled to tax deductions for our share of the partnership losses”.

MR KEANE:   Yes.

GLEESON CJ:   “And we’re entitled to any partnership profits that ultimately eventuate”.

MR KEANE:   And those claims – claims for tax deductions on that footing were made in this period.

GLEESON CJ:   “But our liability under the loans that were made to us is limited by this non‑recourse arrangement, and we have no further liability”.

MR KEANE:   Yes.

GLEESON CJ:   That is the stand they were taking for several years, is that right?

MR KEANE:   Well, insofar as your Honour says that it was a stand they were taking, for example, as against the Commissioner, it is true to say they took it for several years, but then in 1993 they told the Commissioner in the letter exhibit 170 – which Mr Thornton said was a mistake – that they originally agreed to full recourse and subsequently negotiated the guarantee arrangement. 

GLEESON CJ:   They never asserted to the Commissioner they were not partners.

MR KEANE:   No, your Honour.

GLEESON CJ:   Have they ever asserted that to anybody?

MR KEANE:   No.

McHUGH J:   But how does that help you?  The matters that you point to do not concern Rural Finance.  Rural Finance was not a partner.  Its only relationship with your clients is one of debtor/creditor.

MR KEANE:   Your Honour, that is one of the consequences that we brought on ourselves perhaps by talking about affirmation too much because affirmation focuses attention on the exercise of rights as against the other party to the contract.  Rather, here, what happened is that the other party to our contract, the borrowers, were in circumstances where we submit they were clearly told by the group, which includes Rural, how Rural had performed its obligations or not, but how it had performed them, and knowing that they then continued to exercise rights as partners which in the nature of things were rights vis‑a‑vis the contractors who were also members of the group.  The question is whether that ‑ ‑ ‑

McHUGH J:   Now, you bring in this legal entity which does not exist, the group.

MR KEANE:   Quite, your Honour, but ‑ ‑ ‑

McHUGH J:   I mean, you have a direct relationship with Rural Finance.

MR KEANE:   Yes.

McHUGH J:   Now, what you do in relation to the Commissioner of Taxation in respect to the partnership, what you do in relation to the other partners, what you do in relation to the management has nothing whatever to do with a debtor/creditor relationship.

MR KEANE:   But, your Honour, in terms of what is communicated one to the other, because we are a member of the group, if the members of the group communicate to them – whether it comes from Rural itself or not, but it came from Mr Johnson at a meeting concerning Rural’s loans – what goes to them is information as to how Rural says it performed its obligations to them.

GLEESON CJ:   I do not pretend to fully understand these terms, but has this got something to do with approbating and reprobating?

MR KEANE:   In the broadest sense, yes.

McHUGH J:   But how can it?  At one stage I thought the only way you could put up this argument was to claim that it was some sort of an account stated between Rural Finance and the respondents in that there was an admission of a debt which at common law you could sue on on an account stated, but I cannot see any evidence of an admission of the debt.

MR KEANE:   No.

McHUGH J:   That is your problem, is it not?  Money was not paid, on the hypothesis, and you have to say that nevertheless the respondents have admitted the obligation or ‑ ‑ ‑

MR KEANE:   On our side, your Honour, assuming the first issue against us, what we did by the round robin was effective to procure the issue of the units and that they had rights as partners only on the footing that they had paid for them and the only basis on which they could be said to have paid is by reason of the round robin.  On that ‑ ‑ ‑

HAYNE J:   Which is to say the hypothesis is no loan made but somehow the conclusion is loan to be treated as having been made by reason of their conduct.  I just do not follow it.

MR KEANE:   Your Honour, I suppose we could go back to Justice McPherson’s observations here, where his Honour accepts the idea that you can have a convention.  Here, if we are right about their knowledge, then we have the problem that we did not get a finding to this effect, but we submit that, if we are correct that we informed them, and they accepted the performance that occurred, that is to say, the round robin which produced the units that made them partners, if they accept that, then there is a convention.

GLEESON CJ:   The word “accepted” is ambiguous, I think, Mr Keane.  It might just mean a kind of resignation.  They might have said “Good on you” or something like that.

MR KEANE:   It probably has three meanings that might be relevant here.  Your Honour has identified one.  The other is that there is an acceptance of what has occurred that gives them their rights.  The acceptance of that and the exercise of those rights also involves an acceptance of the burdens.

GLEESON CJ:   But they were not being presented with any choice at this stage, were they?

MR KEANE:   No.  Well, they were not being presented with a choice, but just as it was said in Empirnall that if you have a choice as to whether you take the benefit of a transaction or not and you take it, then you can be taken to have taken it on the basis on which it was proffered.

HAYNE J:   And much turns on what you mean by “the transaction”.

MR KEANE:   Yes, your Honour.

McHUGH J:   In this case, if you were trying to raise an estoppel by convention, it would have to be in respect of the agreement between Rural and the subscribers.  Where is there in the evidence, that suggests that Rural and your clients each treated the agreement as having been performed?

MR KEANE:   Your Honour, I suppose it is the conclusion for which we contend, rather than evidence to which we point, and the reason we contend for the conclusion is that unless they paid for their units, they were not partners.  The only candidate for payment is the borrowing from us.  As partners, they were in a contractual relationship with JFM and FJA who had moneys on deposit with us, in consequence of that.

GLEESON CJ:   I think I can understand how you might be able to rely on this as a factual matter in answer to the kind of reasoning that we see at page 18 of Jekos, that is, that there has been some failure of the substratum of this transaction.  You could perhaps point to what happened here to say ‑ ‑ ‑

MR KEANE:   That is plainly not so.

GLEESON CJ:    ‑ ‑ ‑ that is not the way people behaved when they found out about it, but as a separate argument that you only get to on the hypothesis that there has never been a loan, it is a little more difficult to come to grips with.

MR KEANE:   Your Honours, for the moment, and we will take your Honours to Empirnall in a moment, although I must say with two of the authors of the judgments in that case on the Court, there does not seem to be a great deal of encouragement.  We will take your Honours to it very briefly, but on the footing that your Honour the Chief Justice has put to us, that this evidence is relevant at least in that regard, even if we do not get over the legal theoretical hump.  Can we take your Honours very, very briefly, and we will be as quick as we can about this.

McHUGH J:   Is Empirnall the case where Eric does not sign contracts?

MR KEANE:   That is right, but then took the benefit of it.  Your Honours, as to exhibit 53, that is the document which is in page 1301 and following, that is the letter of 27 May.  Mr Thornton’s evidence about that is in volume 2 at page 501.  At line 15 Mr Thornton is asked to look at the document.  He is reminded it was discovered.  At 27:

But you accept it was sent to you?--  Yes, I would say it was.

Sent to Mr Hasell and then distributed to yourself and the other members of the GWA investors?--  Yes.

He was taken to paragraph 4, and it is set out, and he is asked:

Did that suggest to you that Rural Finance was dependent upon selling the loans in order to raise actual cash to fund the return of the interest-bearing deposit with Rural?--  It really didn’t suggest anything to me.  I just read it for what it was and just accepted that.

You read it?--  Well, just skimmed over it.

Then he is taken to the paragraph numbered 6 which he would just have skimmed over.  Then over the page, the next paragraph: 

do you recall reading that?--  No.

You definitely didn’t read that?--  No.  As far as I was concerned, all these parties were related under the Farmer Johnson banner.

And the last sentence in that paragraph, which is then set out:

I didn’t read that. 

You didn’t read that?--  No.

Reading it now, do you agree that it suggests that to actually realise cash – to create cash, the loans to Rural had to be assigned?--  It is very easily in hindsight to say that, but I didn’t consider that at the time because they raised, according to the original records, $15 million, 2 million in cash and 13 million was put on fixed deposit which was paid, in our view, in cash.  IBD means cash.

Reading that now, quite apart from whether you read it at the time, reading that now, you do understand that what it is saying is that in order to produce cash, it is necessary to sell loans?--  Well, it is suggesting that but that didn’t raise any thoughts in my mind about whether there was cash or not originally.

He says again he did not read it.  At the bottom of the page, lines 40 to 45, he said:

I think this document was received principally for Mr  Prendergast who was doing a due diligence ‑ ‑ ‑

GLEESON CJ:   But the concept of raising the cash by selling a loan was fundamentally and radically inconsistent with the limited recourse arrangement, was it not?  The loans that were to be factored were loans to the investors.

MR KEANE:   That is right. 

GLEESON CJ:   But if those investors’ liability was limited in some fashion, then the loans were not worth their face value.  Somebody was going to be defrauded if the cash was raised by selling the loans and the loans were only on limited recourse.

MR KEANE:   That is right. 

CALLINAN J:   Mr Keane, I think Mr Thornton was cross-examined about that obvious inconsistency, his claim that he thought they were non‑recourse, and he attempted some explanation of it.  Can you remind me what that was?  He attempted to say, I think, “Well, it didn’t matter now that I have thought about.  The fact that they were non-recourse did not mean that they could not have had value to an assignee.”

MR KEANE:   Yes.

CALLINAN J:   I do not know how satisfactory the explanation was, but he attempted it.

MR KEANE:   Yes, we will try and turn that up.

CALLINAN J:   Perhaps Mr Couper might be able to find it.

MR KEANE:   We will turn that up, your Honour.  We will try and turn it up.

GLEESON CJ:   But if, as I understand was the case, in mid-1991 at least the primary stance that was being taken by these investors was that their liabilities were subject to limited recourse and they had discharged their liabilities by that stage, one would have expected that when they learnt that debts said to be owned by them had been sold, or were going to be sold, to third parties, they would have been crying blue murder.

MR KEANE:   They were aware of the assignment to Equus, as appears from ‑ ‑ ‑

GLEESON CJ:   Assigned at face value?

MR KEANE:   No.  Assigned on the footing that what was paid was a dollar for each on the basis that under the agreement Equus had, it would then seek to recover the loans and, to the extent that they were recovered, that Equus would account for the proceeds under the terms of the agreement which is in the evidence and would retain a fee for collection.  If they were recovered after a particular timeframe, then Equus would probably retain what it recovered.  This assignment had occurred before – this is the 1991 assignment – these discussions were occurring.

GLEESON CJ:   But by this time the debtors had discharged their indebtedness because of the limited recourse arrangements. 

MR KEANE:   Yes.  Well, they were being asked ‑ ‑ ‑

GLEESON CJ:   How could you raise money by assigning debts that had been fully discharged?

MR KEANE:   In that letter of 27 May 1991, they were being asked to upgrade their loans, that is to say, not take their stand on that – not to take their stand on the guarantee.  It is possible, of course, that in any event the guarantee would not have mattered, in the sense ‑ ‑ ‑

GLEESON CJ:   You mean they were being asked to waive their rights?

MR KEANE:   In the sense that the guarantee was only actually executed by Johnson himself and Johnson Farm Management, it is possible, I suppose, that the view might be taken that if it only operated as a guarantee the loans could be sold.  That the parties rights did operate in that way was asserted by the borrowers’ solicitors, Morris Fletcher & Cross, in exhibit 15, which your Honours will find at 1280 in volume 5.  If your Honours go to it, you will see that they refer to the notice of assignment by Rural to Equus:

Our clients acknowledge that they have received a notice of assignment of loan agreement.  The notice provides that the loans entered into by them with Rural Finance Pty Limited on 30 June 1989 have been assigned to Equus Financial Services Limited.

We draw your attention to the amended terms of the Loan Agreement as indicated in a Deed dated 19 December 1989 (“the Variation”).  Copies are attached for your records.  Our clients obligations with respect to the loans are therefore set out in the Loan Agreement of 30 June 1989 and the Variation of 19 December 1989. 

Our client’s obligation under the loan documents are separate obligations governed by the terms of those documents.

The Variation is headed “Guarantee” and records the terms of the Loan Agreement as varied.

Our clients confirm that they entered into the Loan Agreement and Variation in order to borrow funds to assist them in purchasing the partnership units.  The obligations are those which exist under those two documents and are not of a non recourse nature.

So that it was being said at that stage, although Mr Thornton says in error, by his solicitors, that the guarantee took effect as an instrument of variation.  Your Honours will appreciate that the learned trial judge did not regard it as having any operative effect itself, but rather as indicating support for the view that the agreement that there would be no further recourse after the prepayment of interest and the two payments of principal, that that agreement had been made in June 1989.

GLEESON CJ:   What was the purpose for which that letter was written?

MR KEANE:   I think it was a response to a request from Equus that they acknowledge their obligations, but I am not sure that that letter is in the record, your Honour.

GLEESON CJ:   Thank you.

MR KEANE:   The other evidence we wished to take your Honours to in Mr Thornton’s evidence is in relation to exhibit 56.  That is the May 1991 circular which explained how the money had gone around in the circle and that had been used, as it had been realised – or the chose had been realised.  The relevant evidence is in Mr Thornton’s evidence at volume 2, page 515, commencing at line 30.  He is taken to the document.  It was discovered by Glengallan Investments, which is the company of which Mr Thornton was a director:

Do you recall receiving it in about May 1991?-- No, I don’t –

and he accepts that it could have been one of the newsletters he received –

Can I invite you to look at the paragraphs that start with the word “Finally” and “RF relies” . . . 

Did you receive the document?-- Yes.

And you are in the habit of reading documents about the project?‑‑ No.  As I said to you, with these newsletters, they were the – the procedure was they were copied and put on the litigation file and one was put on – the original was put on the original file.  I may or I may not have read it.  I don’t recall receiving it but I possibly have read through it.

He would have had to have read it to send it to his lawyers.  He is then asked at 15 about whether he would have given it to Mr Prendergast and Mr Thornton said:

He would have got one also so he would have drawn it to my attention if he thought there was something we needed to worry about.

Can I ask you to look at those last three paragraphs on the last page?‑‑ Yes.

Reading those, can I suggest to you it would suggest that to get real cash to repay the IBD that with the agreement Johnson Farm Management had with Rural, it was necessary to sell the loans?‑‑ Well, you could get that impression.

Then he says that is not the impression he got when reading it, because of the reference to “interest bearing deposit”.  He is asked at line 36 whether he sees that refers to, “interest bearing deposit with Rural Finance”:

That shouldn’t matter.  It’s a financial institution, well, of a type.

Quite.  As you say.  And it says it’s an interest bearing deposit with it?‑‑ Yes, but as we now know, it wasn’t cash at all.

Quite.  That letter is telling you that in order to raise funds to repay the IBD it has to sell the loans so it’s actually telling you----?-- That didn’t ring any alarm bells with me –

He goes on to complete his answer.  So what is said is, well, it certainly gives you the impression that there was no money, that there was a chose in action that was being realised to raise it.  What put him off is the suggestion that it was because it was on an IBD with Rural.  That just means that it was deposited with Rural, who, as is explained in the documents that he has been shown, did not actually have the cash.  That is the evidence on which we rely on in support of the proposition that Mr Thornton – and through him, the respondents – was informed of the round robin nature of the transaction.  It was the very reason why the 27 May letter was written to him and explained to him why there was not any money.

In relation to the Empirnall point, we will just refer your Honours to the decision briefly.  It is Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523. The passages on which we will be relying are in the judgment of your Honour Justice Kirby at 528B to C:

Accordingly, courts have come to conclude that sometimes, out of some circumstances, an acceptance can be inferred, notwithstanding the absence of specific assent.

Then at the bottom of the page, taking up the point further, F to G:

The circumstances in which assent may be inferred, although never specifically stated, vary with the infinite variety of facts which come before the courts in disputed contractual cases.  From the facts, looked at objectively, a court may be willing to infer a party’s acceptance. 

Your Honour mentions the various types of conduct in that regard.  Then, at 529, the question that your Honour addresses is:

Can it be said that, objectively examined, the facts give rise to the inference that Empirnall assented to the written agreement?

For our part, we submit that the question here is, can it be inferred from the facts, objectively examined, that the borrowers assented to the performance by the round robin in June 1989 as the basis on which they became partners? 

The other passage in the case which we rely upon is in the judgment of your Honour Justice McHugh, commencing at 535C:

A more accurate statement is that where an offeree with a reasonable opportunity to reject the offer of goods or services takes the benefit of them under circumstances which indicate that they were to be paid for in accordance with the offer, it is open to the tribunal of fact to hold that the offer was accepted according to its terms.

And then at E:

The ultimate issue is whether a reasonable bystander would regard the conduct of the offeree, including his silence, as signalling to the offeror that his offer has been accepted.

We submit, then, that the question is, would the bystander, seeing the dealings that are occurring between Rural in its meetings with Mr Thornton and Mr Prendergast, explaining to him the basis on which these events have occurred, then seeing Mr Thornton and Mr Prendergast continuing to exercise their rights as partners – would that send the signal that they accept that the loan has been effected? 

GLEESON CJ:   Their choice presumably, their alternative course of action being to give a lot of money back to the Commissioner of Taxation.

MR KEANE:   Quite.  That is right, your Honour. 

HAYNE J:   That journey into the discourse of offer and acceptance may originate in the way in which the defence was ultimately framed at 117, where the pleas are made that the defendant’s offer to apply for units lapsed.  It is apparently for want of acceptance.  At the moment, the relevance of the argument to the agreement for loan upon which you depend is not apparent to me.

MR KEANE:   Well, your Honour ‑ ‑ ‑

HAYNE J:   It comes to this notion of assent to a particular form of performance.

MR KEANE:   And your Honour, we put it as succinctly as we can in paragraph 49 of our submissions.  Your Honours, that is what we wish to say about the second issue.  As to the issue raised by the notice of contention we are in the Court’s hands, but we would propose to ‑ ‑ ‑

GLEESON CJ:   You can deal with that in reply.

MR KEANE:   We would propose to.

GLEESON CJ:   Thank you.

MR KEANE:   I am sorry, your Honour.  Your Honours, we think the passage that your Honour Justice Callinan had in mind is in volume 2, at page 495, the passage which begins at about line 22:

You were aware, weren’t you, that one way of raising money, so far as Rural was concerned, would be by factoring the loans?-- I was

aware that they could do that, they could factor the loans that were not limited recourse.

You were aware that if the loans were of limited recourse they couldn’t be factored honestly?-- Well, having thought about that subsequently I’m not quite sure about that because it seems to me that there was value in the limited recourse loans, in the belief that if they were assigned then the assignee would receive any income that was derived from the project.  So to that extent my thinking at the time was incorrect.

I think that is the passage your Honour had in mind.  And it goes on over the page to 497 of the letter to about line 12.  If it please the Court.

GLEESON CJ:   Thank you.  Yes, Mr Cooper.

MR COOPER:   If your Honours please, it is clear from the terms of the prospectus and the deed, money subscribed for units was to constitute the working capital of the partnerships provided minimum subscription was achieved.  If I could take you firstly to the prospectus in volume 4, page 937.  This is in the important statutory information, and if your Honours go to clause 40 please, your Honours read this:

The minimum amount that in the opinion of the directors of Forestell –

who was the general partner –

must be raised by the issue of partnership units in order to provide the sums, or if any part of the sums is to be defrayed in any other manner, the balance of the sums required to be provided in respect of each of the following is set out hereunder:

(a)      The purchase price . . . nil.
(b)      Any preliminary expenses . . . nil . . . 
(c)      The repayment of any moneys borrowed by the General Partner . . . nil.
(d)      The working capital required is $3,472,000.00.

If I just interpolate, that figure is arrived at by multiplying 4,000 units by $868 which is the minimum subscription as defined in the documentation, and relevantly, it moves on -

No amounts are to be provided in respect of the matters referred to in paragraphs (a) to (d) of this clause otherwise than out of the proceeds of the issue of prescribed interests hereunder.

Now, if you go back two pages to page 934, it becomes crystal clear how this fits together.  Clause 13 says that:

The interests offered pursuant to this Prospectus are units in a number of limited partnerships to be formed pursuant to the Act, and the units are a measure of the capital contribution of an Investing Partner to a partnership –

Clause 16:

The capital contribution of an Investing Partner to a partnership shall be $868.00 per unit multiplied by the number of units in respect of which an application by an Applicant has been accepted by the General Partner and the Investors’ Representative.

Clause 17 says:

The principal duties and obligations imposed on the Investors’ Representative by the Deed are to act as Investors’ Representative for the Investing Partners, to hold the partnership funds in trust –

GLEESON CJ:   Is there anything in that legislation dealing with limited partnerships dealing with the raising and maintenance of capital, apart from section 11? 

MR COOPER:   No, the Act says – it is a bit ambiguous as to how it is to operate.  It says that a capital can contribute money, by way of capital contribution, and can draw it back.  What seems to be contemplated is that there will be a register, which is an ambulatory document, that will show that at a time so much has been paid in, either being full subscription or part subscription, or money has been drawn back, so that a creditor at any time could look at the document and see Mr X nominally owed 500,000 capital contribution, he has only paid 250,000 contribution, so he is still ‑ ‑ ‑

GLEESON CJ:   So you do not need any court approval of a reduction of capital, but there are publicity requirements associated with it.

MR COOPER:   Yes.  It is for the protection of third parties dealing with the partnership, so that they can see, by looking at the public records – if this works according to the way it should work – exactly how much capital is there to be recouped in the event of the partnership being wound up.

HAYNE J:   Is there any restriction on the way in which that capital may be invested? 

MR COOPER:   That would be governed by the partnership deed.

HAYNE J:   In particular, is there any restriction, whether under the Limited Partnerships Act or under the provisions of Division 6 of Part 4 of the Companies Code, that would preclude the deposit of moneys on interest bearing deposit with Rural Finance? 

MR COOPER:   I cannot answer that, your Honour.  The Act does not deal with how the money will be used.  It just says that a capital contribution shall be paid in money and not in kind. 

HAYNE J:   But it does not preclude, as I understand your answer – I mean, to me this is quite important. 

MR COOPER:   That is why one then goes to these documents, to see how this concept of limited partnership is to be, in effect, applied.  One gleans that from looking at the prospectus and the partnership deed. 

GLEESON CJ:   Are you heading for a submission that the loan agreement, read in the light of the prospectus, on its true construction, does not permit the performance by the lender of its obligation in the manner that happened here?

MR COOPER:   Exactly, and if I can continue on through my traverse of the documents, I hope to make that good.

CALLINAN J:   Mr Cooper, could you just tell me, the document at page 937 – it seems to start at 932 and it is titled “Additional Statutory Information”.

MR COOPER:   Yes.

CALLINAN J:   Now, pursuant to what?  What provision?

MR COOPER:   Looking at the investment deed, it talks about the relevant legislation – it is in the definition.  “Code” is defined to mean: 

the Companies (Victoria) Code and the corresponding Code or Act as the case may be, of any State or any Territory of the Commonwealth as the case may require –

because, as your Honours will have observed, reading this, the prospectus was approved by the Victorian Corporate Affairs Commission as delegate of the NCSC, and recognised ‑ ‑ ‑

HAYNE J:   That was done under, I think, section 170, which is part of Division 6 of Part 4.

MR COOPER:   And the deed was then to be issued in every other State and Territory of the country.  So this deed is ‑ ‑ ‑

HAYNE J:   And if I am wrong about that statutory source, I want it corrected.  Do not ‑ ‑ ‑

CALLINAN J:   I would like to know that too.  Was there anything that required, in fact, or is there any provision that we can look at and can see that what clause 40 states is required specifically by any provision?

MR COOPER:   I will have to look at that, your Honour, and get back to you, I am sorry.

CALLINAN J:   I must confess I did not fully understand your submission about clause 40.

MR COOPER:   The submission is that the directors of the general partner had formed the view that the only money necessary to be raised was the sum for working capital of $3,472,000, and that equates to 4,000 units at $868, which is minimum subscription as defined.  Then it says:

No amounts are to be provided in respect of the matters referred to in paragraphs (a) to (d) of this clause otherwise than out of the proceeds of the issue of prescribed interests hereunder.

The prescribed interests are issued by people paying $868 for each unit for which they subscribe.

CALLINAN J:   Why is not a discounting of the money owed also “the proceeds of the issue of prescribed interests”?

MR COOPER:   Your Honour, because the documents say nothing about there being capital raised by discounting.

CALLINAN J:   Why could it not be?

MR COOPER:   Perhaps it could, but the investors were not told that that was to be proposed.  You must remember that when this was approved it was contemplated that the money would come from conventional banks.  It is only when they withdrew from this at the eleventh hour that this decision to raise internal finance came to the fore, rather than these promoters saying to the investors, “We can’t go forward pursuant to the proposal as approved”.

CALLINAN J:   I understand that, but you do not dispute that the proceeds of a discounting could literally be “proceeds of the issue of prescribed interests hereunder”.

MR COOPER:   Your Honour, not in the context in which I am trying to develop at the moment because ‑ ‑ ‑

CALLINAN J:   Do you have to look outside the prospectus?

MR COOPER:   Yes – well, no ‑ ‑ ‑

CALLINAN J:   Or is there somewhere else in the ‑ ‑ ‑

MR COOPER:   If you look to other parts of the prospectus, which I am trying to do.

CALLINAN J:   All right.  Well, to which other parts do I have to look to see that?

MR COOPER:   Well, I would ask you to go to page 934.

CALLINAN J:   Yes.

MR COOPER:   And I would refer to paragraphs 13 and 16 and 17, and paragraph 19 says:

(a)      Pending the expenditure of moneys on a partnership project, application moneys –

which is defined –

and income are to be held in trust . . . 

(b)      Save insofar as the Investing Partner’s funds are invested in the partnership project, the balance thereof is held in authorised investments.  As these investments essentially form cash deposits, there are no valuation provisions –

again, confirming that the contribution ‑ ‑ ‑

CALLINAN J:   That seems to me to be the strongest clause of all in support of what you say.

MR COOPER:   Well, it gets stronger, with respect.

HAYNE J:   But did you ever sue saying there was a breach of that?  Did you ever say in your case that clause 19 was contravened?

MR COOPER:   No.  Our case was ‑ ‑ ‑

HAYNE J:   It seems to me that if you have a complaint about destination of funds ‑ ‑ ‑

MR COOPER:   I am not complaining about destination ‑ ‑ ‑

HAYNE J:   Let me finish.  Clause 19 regulates the destination of funds.  Is that right?

MR COOPER:   Yes.

HAYNE J:   And you did not complain about it.  Is that right?

MR COOPER:   No.

HAYNE J:   And the fact that they were deposited with Rural Finance is not said in the action to have been a contravention of the agreement constituted by the various instruments to which we have been taken.

MR COOPER:   No, because my fundamental point was that by doing what happened at the bank did not create an advance of money within the contemplation of the prospectus and the deed, and, therefore, there was no money to be misapplied.

GLEESON CJ:   Mr Cooper, in clause 19(a), “Authorised Investments” is with a capital A and a capital I.  It is in the lower case in (b).  Is this a defined term?

MR COOPER:   It is, your Honour, in the deed.

GLEESON CJ:   Where is the definition?

MR COOPER:   Can I come to that in a moment, your Honour?  I was going to just go through this document first then come to the deed to explain how they all work together.  Your Honour, the next page is page 923 and there are two relevant things in this page.  The first is at about line 15 under the heading “Why a Limited Partnership?”  Investors are told:

The infrastructure necessary to carry out the Red Claw Project, and in the initial stages the running costs, are such that the most economic and attractive structure is one which allows individual investor’s funds to be pooled to create a larger business unit capable of bearing the infrastructure and running costs.

Again, that reinforces my submission that the money coming from application is to be used for working capital.  Then one goes to the foot of the page under the heading “Minimum Subscription” and one sees that:

All moneys subscribed by applicants will be refunded if the minimum subscription of 4,000 partnership units is not received within 4 months of the date of this prospectus.  No allotment of partnership units will be made pursuant to this prospectus until the whole amount of the minimum subscription is received in cash.

again, reinforcing the need for money to be paid in for working capital.  Then if your Honours go to page 908 there are two relevant provisions here.  The first is at the bottom of the right‑hand column under the heading “Borrowing by a Limited Partnership”.  It is recorded:

The Partnership Deed, which governs the formation and conduct of each limited partnership, permits borrowing by the General Partner on behalf of a limited partnership limited to four times the initial capital of the partnership.  The Investing Partner is not responsible for any such borrowing beyond the amount he contributes on application.

At the top of that page, under the heading “Minimum Subscription” your Honours see this:

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, that could only have happened, with respect, if the working capital necessary was available by 30 June 1989.  All these units were being applied for on 30 June 1989 and the only way that the working capital could be obtained in my submission is if on that day a fund of $3,247,000, the working capital I referred to earlier, was made available to the representative and subsequent upon the deed of compliance being issued by the general partner the money is being gradually released to run the partnership and I will come to that in a minute.

HAYNE J:   Released from where?

MR COOPER:   From the trust account held by the representative.

HAYNE J:   Under clause 19 of the additional statutory information?

MR COOPER:   Yes, it probably is, your Honour.  Mr Thornton was asked a question by my friend about how he interpreted this document.  It was put to him that he understood that what this document was speaking to was the fact that it was about raising capital.  This is in volume 2, page 582, about line 8, he was asked this question:

And the very nature of the invitation to invest made it clear to you that what they were trying to do was to raise capital?‑‑ Yes.

So, in my submission, the document says in terms it was designed to raise working capital and was understood by Mr Thornton to that effect.  But it is also clear, with respect, when one goes to the deed, if I could ask your Honours to go to that ‑ ‑ ‑

HAYNE J:   Just before you do, the relevant provisions of the Code that govern minimum subscriptions, again subject to anything that counsel may later say, seem to me to be section 98 as applied by section 170(3) of the code. 

MR COOPER:  The first page I would ask your Honours to go to in the deed is page 750.  I think your Honour the Chief Justice asked me about a definition of “initial fund”.

GLEESON CJ:   “Authorised investments”.

MR COOPER:  I am sorry, “authorised investments”.  That is on page 748, your Honour.

GLEESON CJ:   What appeal book?

MR COOPER:  Appeal book 3.  Your Honour will see that none of the investments described there answers what happened with Rural Finance.  Yet again it contemplated the involvement of a traditional bank in this venture and that money would be secured – protected for the investors.

McHUGH J:   Paragraph 19(c) on 934 enable the general partner to vary the investments, did it not?

MR COOPER:  Yes, in certain circumstances, with certain consents and things of that nature. 

HAYNE J:   You say, “with various consents”.  If you are going to say that, I would like a little reference to it, please.

MR COOPER:  Clause 15 of this document, which I will come to in a minute, deals with amendment of its terms.  If the Court would go to page 754, the definition of “Unit”, in my submission, is relevant:

“Unit” means that interest in a Partnership, that would be constituted by a capital contribution of an amount equal to the amount specified in an Application as the application price for a Unit –

Then, in my submission, if the Court goes to 756, at clause 3 the document sets out the procedure by which units are to be applied for.  It says:

Every person who wishes to apply for a Unit must complete and deliver to the General Partner:-

3.3.1   an Application for Units signed by or on behalf of the Applicant; and

3.3.2   a cheque made payable to the Representative for payment of the application price for each Unit applied for.

The scheme that follows after that is relevant, in my submission, to show that what is contemplated is that the representative will receive money.

GLEESON CJ:   Just remind us, who was the depositor with Rural Finance?

MR COOPER:  It was the management company and the farm owner, JFM and FJA.

GLEESON CJ:   Then your argument must be, right or wrong, that the word “lend” in the loan agreement does not embrace a transaction under which Rural Finance borrows from the farm companies the money that it will lend to the investors to subscribe as capital for the partnership being managed by the farm companies.  So it is an argument about the meaning of the word “lend” in the context.

MR COOPER:  In part, your Honour.  It is lending for the purposes of the borrower’s obligations under this deed.  What I am trying to explain to your Honour is the borrower’s obligation, in applying for units under this deed, was to pay in cash or its equivalent the full face value of the number of units for which he was applying on 30 June 1989, because only by doing that could working capital be achieved if minimum subscription is satisfied. 

I was about to demonstrate, your Honour, why that is so.  If one looks at the procedure at 757, clause 3.5 says:

Upon receipt by the Representative of any amount representing Application Moneys for Units or part thereof –

the respondent –

HEREBY DECLARES that until Minimum Subscription it shall hold the amount and any income thereon as trustee for each Applicant in respect of which the amount was paid and that prior to Minimum Subscription the Application Moneys and any income therefrom, shall be invested only in the accounts referred to in Clause 3.6.

CALLINAN J:   Mr Cooper, what is the argument?  The argument is that the parties to the loan agreement understood and could only understand “loan” as used in the partnership agreement, against the known background facts known to both of them, that “loan” was actual money as contributed by way of working capital under the prospectus and the investment agreement.  Is that the argument?

MR COOPER:   Yes, it cannot mean anything else because of the reference to the working capital.  But clause 3.6 is fundamental to all of this.

CALLINAN J:   But you have to take that step that I have said, that this was background information common to both parties ‑ ‑ ‑

MR COOPER:   But your Honour would have read on the application form, each applicant says, “I have read the terms of the prospectus and I have read the terms of the deed, and I agree to be bound by it”.  There is a clause in here which I can take you to, I think it is clause 5.4.1 that says that each investor agrees inter se “to be bound by the terms of” this document.  The prospectus and the deed do not allow for people to be treated differently if one person is paying cash for units and someone else is paying in some other way.

McHUGH J:   But is that not against you, because what has happened here is, if these agreements are not shams, then funds went to JFM and FJA, they both put those funds on deposit with Rural Finance and they had rights against Rural Finance.  Strictly speaking, they are entitled to call on Rural Finance to hand over the money.  Now, it is difficult for you to contend, is it not, that working capital was not supplied, given the nature of the agreements entered into between the parties. 

MR COOPER:   Your Honour, what I am submitting ‑ ‑ ‑

HAYNE J:   It seems to depend upon some unstated premise about the credit worthiness of Rural Finance.

MR COOPER:   It was common ground, Rural Finance had no money in the bank.

McHUGH J:   That may be, but it had a legal obligation and the $2 million in cash and the $13 million in loan money had been deposited with them, with Rural Finance.  How can you distinguish between the $2 million in cash and the $13 million in loan funds?  That was working capital in the hands of JFM.

MR COOPER:   But there were no funds to the extent of $11.5 million ‑ ‑ ‑

McHUGH J:   Well there would have been.  What if on 1 July Rural Finance was able to factor the choses and obtain the funds and repay JFM?

MR COOPER:   Because it would not have been able to do that.

McHUGH J:   Well, it may not have been as a matter of practice.  We are talking about legal obligations here.

MR COOPER:   But what I am trying to explain to your Honour is that the real money had to come in because the money that was being contributed had to be paid into a special trust account and held there for the benefit of the applicant/investor until his application was either accepted or rejected, and if it was rejected, then the money had to be repaid back to him with interest.  Now what has happened here could not allow any money to be isolated into a trust account, let alone paid back with interest.

GLEESON CJ:   Would your argument, as a matter of law, be any different if for Rural Finance you substituted Westpac? 

MR COOPER:   I would have to think about that, your Honour. 

GLEESON CJ:   Well, the question is intended to raise the point that Justice Hayne raised, that is to say, the argument seems to proceed upon the basis that we all know that Rural Finance is not worth powder and shot.  But would the outcome of the case be different if you substituted for Rural Finance a corporation of undoubted financial capacity? 

MR COOPER:   Yes, your Honour, because that company would have contributed the face value of the units on 30 June. It would have lent money to the borrower, who could have paid the face value of the units on 30 June.

McHUGH J:   You mean Westpac would have given a cheque nominally to your clients, who would have passed it on Eagle Star, who would have passed it on to Forestell, who would have passed it on to ‑ ‑ ‑

MR COOPER:   No, that would never have happened.  They would have passed the cheque on to Eagle Star, who would have put it into its special trust account.  The only reason the money went in the way it did was because there were no actual funds being contributed. 

CALLINAN J:   Westpac would have wanted a lot more security than just the units. 

MR COOPER:   That is probably why the banks all pulled out of this.  They realised it was too risky.

McHUGH J:   Yes, but it does not answer the point concerning the loan relationship between your clients and Rural Finance.  What you are saying indicates a breach of the agreement on the part of those connected with JFM, FJA – maybe Eagle Star.  But how does that affect the validity of the loan agreement between you and Rural?

MR COOPER:   It is a question of whether that loan agreement was performed, in my submission.  What I am saying is that the loan agreement was not performed because they did not lend money, which is what they were required to do.

HAYNE J:   If, in the Westpac example, Westpac had said, “Yes, we’ll enter this arrangement, but JFM and FJA must on the same day put at interest bearing deposit with us the entirety of the proceeds thus raised”, then we are closely analogous to the present position, but for the credit worth of Rural Finance.

MR COOPER:   The problem with that, though, is that the evidence of the bank managers who gave evidence was that they had no control over this.  They were not providing any financial accommodation.  They were not in any way giving it their imprimatur.  They were not really sure what they were doing, they said. 

GLEESON CJ:   I think you have to face up to this.  To what extent does your argument depend upon the circumstance that Rural Finance had no funds available to it apart from the moneys that were put on deposit? 

MR COOPER:   Your Honours will have seen from the pleading that what is pleaded against us as being the act of payment is a transfer of a global sum from the account of Rural Finance into Eagle Star.  That is all that is pleaded as being the basis of the making of the loan.  We plead that in fact that was part of a greater transaction that was of no legal effect.  It was purported.  We said it was of no legal effect.  The other side replied by saying that they do not rely upon the whole transaction; they are only relying upon the trench of the deposit between Rural and Eagle Star.

GLEESON CJ:   Maybe you can and should face up to that.  Maybe you could answer the Westpac example by saying Westpac would have been an authorised investment.  Putting money on interest-bearing deposit with Westpac would have been an authorised investment.

MR COOPER:   Yes, it would have been as defined in the deed.

HAYNE J:   What control was exercised under the deed?  That is what legal obligations were imposed by the deed on the way in which JFM and FJA deployed the funds raised?

MR COOPER:   They could not do anything without the – the power of disposition was given to the general partner.  JFA and the other company would come to the general partner and ask to be reimbursed for their expenses.  The general partner would then come to the representative and say, “Please provide me with funds out of the partnership funds to pay this account”.  He could draw down the capital contributed until there was $10 left in paying these fees, but there was no direct payment of the capital to them other than by the general partner being satisfied that the claims being made were reasonable and should be paid.

Just moving back to the point I was making before, clause 3.6 says that:

Any money paid by any Applicant shall be placed by the Representative in any one of one or more special trust accounts each being an interest bearing bank account established in the name of the Representative and kept solely for the purpose of depositing Application Moneys.

Which is defined as meaning:

all moneys paid by Applicants for Units in conjunction with their Applications –

My submission is that the reference to money means money.  Clause 3.8 on page 758 says:

Subject to the provisions of clause 3.7 and to any reasonable directions of the General Partner as set out hereunder any amount paid by any Applicant may be pooled with amounts paid by any other Applicants.

3.9      The General Partner may make such requests in writing, as are reasonable, to the Representative to the effect that the amount paid by any one or more Applicants or group of Applicants be separated from amounts paid by other Applicants by being placed in a separate special trust account and the Representative shall comply with those requests.

Again, contemplating that money would come in and be put in special trust account to be held there, to gain interest pending compliance.  Your Honour, page 759 talks about the creation of the partnership funds.  In clause 4.3 it says:

After Minimum Subscription and pending Declaration of Compliance relating to the establishment of a Partnership of which any Applicant becomes a Partner, any amount received from that Applicant and interest thereon shall be held by the Representative upon trust for the Applicant to be applied towards the Partnership Fund of that Partnership of which that Applicant is to become a Partner.

Page 760, clause 4.5 is a “Declaration of Trust”:

The Representative hereby declares that upon Declaration of Compliance in respect of a Partnership, it shall thenceforth hold the Partnership Fund in respect thereof, and all income therefrom and assets thereof, in trust for the Partnership concerned subject to and in accordance with the provisions of this Deed.

CALLINAN J:   Mr Cooper, I have to say that the argument sounds to me rather like an argument that you can look at the surrounding circumstances, all of these other arrangements and agreements being surrounding circumstances, because they are not agreements between the parties here, in order to give colour and meaning to the expression “lend” or “loan”?  I just want to know whether that is the argument.  It seems to me to be the argument.  It has to be, does it not?

MR COOPER:   It is part of the argument, yes.

CALLINAN J:   You really have to import into the contract for loan a particular meaning to be given to “loan” and “lend”, and you say you import that from the known surrounding circumstances.  It is a little like what was discussed in Codelfa, at page 348, is it not?

MR COOPER:   Yes.

McHUGH J:   You have an additional problem though, do you not, that you have to overcome the problem as to whether Hasell, as representative of Rural, and Johnson as representative of Rural, can have attributed to them the knowledge that they have in other capacities, that is to say, what is learnt as a director or a representative of JPM or FGA or the general partner, you have to allege that that can nevertheless be attributed to them in their capacity as representatives of Rural.  Now, are not the authorities against that?

MR COOPER:   I cannot answer that at the moment, your Honour, sorry.

McHUGH J:   Well, you might have a look at it overnight, Mr Cooper.

MR COOPER:   The next paragraph I wanted to go to was page 764 which deals with capital and interest and says that:

5.3.1   Application Funds shall be subscribed to a Partnership in the amount paid or to be paid by each Applicant who is to be a Partner in that Partnership as specified in the Applicant’s Application.

5.3.2   The relevant Application Funds required to be subscribed shall be payable in accordance with the procedure set out in Clause 7.3.

And 7.3 appears at page 785, which says:

Upon the Declaration of Compliance being made in respect of any Partnership, the General Partner is thereafter entitled from time to time to request the Representative as the agent for the Partners concerned . . . to contribute moneys to the General Partner until all of the moneys comprising the Partnership fund of the Partnership concerned save the sum of $10.00 have been so contributed -

and so on.  Back at page 776, in clause 6.2 it is said:

The General Partner shall, as soon as reasonably practicable after Declaration of Compliance purchase the Crayfish and select and arrange suitable ponds and tanks for their storage and enter into and execute all those transactions and documents as may be required or appropriate for any sub-lease, lease, licence, use or otherwise, of lands, ponds, tanks and cages, as may be necessary for the conduct of the Partnership Project.

So it is quite clear that the running of the partnership is in the hands of the general partner, and, while there is some sub‑contract relationship with the owner of the ponds and the manager, it is really the general partner who has to ensure that the working capital is obtained and then defray the working capital, pursuant to the deed, in terms of the agreements that were made with the owner and the farm manager. 

Page 786 deals with the expenditure on crayfish farming.  At clause 8.1, it says:

Following Declaration of Compliance in respect of a Partnership, the General Partner may thereafter pay (or transfer) the following from the relevant bank account or accounts of the Partnership as and when moneys are available in that account:

8.1.1  from time to time all reasonable relevant expenses and outgoings –

and other sums of money.  Your Honour will have recalled that $12 of each sum that was paid for a unit was money that was earmarked for providing crayfish stock to the venture.  Another relevant provision, in my submission, is at page 788 ‑ ‑ ‑

McHUGH J:   Of the $868, $833 went to the management fee, $23 went for the lease and licence and $12 went for crayfish. 

MR COOPER:  In clause 9.1.2, the deed says, talking about the accounts of the partnership:

Those accounts shall contain, inter alia, an Application Funds account and a current account for each Partner concerned in a Partnership –

And “application funds”, of course, is defined at page 748:

means the Application Moneys paid and accepted pursuant to Clause 3 –

so it was contemplated there would be both a capital account for a partner and an operating or current account for the partners. 

His Honour made a finding that this venture failed very soon after inception in 1990.  The general partner withdrew.  There was no general partner running it for over two years.  It was inactive virtually after the second lot of partnership money was invested.  So it is very much like the Jekos Case that it failed almost from inception because of a chronic lack of working capital.  For that reason, in my submission, the rationale of the Court of Appeal in Jekos is directly relevant to deciding whether, in fact, there was a loan made here or not.

Of course, in Jekos, there was the more conventional round robin transaction which the bank manager supervised.  Here, as I have made the submission, what is being relied upon is simply a global deposit from the account of Rural to the account of Eagle Star on 30 June, in the context where the bank was not providing any daylight accommodation or any financial support to that transaction.  So the money that was paid into Eagle Star’s account on that day was incapable of being withdrawn by Eagle Star and put into the special trust account which it was required to maintain pursuant to this arrangement.

It was only by the parties breaching the agreement between the investors that this notional transaction of money going around was able to occur, because if Eagle Star had taken the money into the special trust account, as it was required, it could not have then paid the money out to Johnson Farm Management or Johnson Aquaculture because the money was held there pending a declaration of compliance that minimum subscription had been reached.

GLEESON CJ:   Do you have an argument based on the terms of the loan agreement?  I am looking at page 1046 and 1047 in volume 4.

McHUGH J:   Yes, I was looking at the same documents.  I thought you might get some assistance from the recitals, which refer to the ‑ ‑ ‑

MR COOPER:   I am sorry.  I thought your Honours had realised that I was referring very much to the recitals, because that gives the context of all of this.

GLEESON CJ:   I would have thought you would also be relying on clause 15 and 16.  The investors gave a charge over their interest in the partnership to secure their indebtedness to the lender.

MR COOPER:   Yes.

GLEESON CJ:   Now, I wondered whether you were arguing that it would be inconsistent with the concept of the lending and the purpose of the lending and the loan agreement ‑ ‑ ‑

MR COOPER:   And to give a charge in the same breath.

GLEESON CJ:   ‑ ‑ ‑ to give a charge where the source of funds for the loan was the working capital of the partnership.

MR COOPER:   Yes.

GLEESON CJ:   There does seem to be an element of incongruity between the concept – let me go back a step.  On the face of it there is nothing in the loan agreement to indicate that it matters where the lender gets the money to lend, subject to this possible qualification that if the source of the funds for the lending is the working capital of the partnership which is being raised by the lending that may involve an incongruity.

MR COOPER:   Yes, that is, in fact, the only source that could have been used.

HAYNE J:   How does that sit with the known intention that the unit amount of 868 should be disbursed as to 833 in management fees, 23 in lease and 12 in stock?  Firstly, is the payment of 833 to either JFM or to FJA?

MR COOPER:   I think it is to the manager, your Honour.  I will just have to check that.

HAYNE J:   And is the 23 to the other one of the entities?

MR COOPER:   To the owner – yes, your Honour.

HAYNE J:   And is the 12 to whom?

MR COOPER:   All of this should go to the general partner, under the way this deed works. 

HAYNE J:   I understand that you say it goes immediately to the general partner, and from the general partner then in accordance with the deed.

MR COOPER:   It is the general partner’s obligation to procure the crayfish, and the prospectus talks about the crayfish being purchased from an external source.  That is in the prospectus.

HAYNE J:   Apart from the $12 sum, however, is the payment of the 856, being the 833 plus 23 to the combination of JFM and FJA – let us leave aside which it is – that which was contemplated by all subscribers to the venture?

MR COOPER:   It is referred to in the prospectus in a worked example, your Honour.  I am sorry, I beg your pardon – it is not referred to in the prospectus.  It is referred to in a letter which was written to investors after the banks had determined they would not be involved and it was decided that Rural Finance would provide the money.  It was in one of those letters that this worked example appeared.  There is nothing in the prospectus about it that I can recall.

HAYNE J:   I have in mind what appears at page 924.  At about line 25, we find the reference to the 833.  At about line 38, we find 20, and at line 43, we find 3, being payments contemplated explicitly as occurring in year 1. 

GLEESON CJ:   I might have misunderstood something we were told this morning, but I had a recollection that we were told that this advance payment to the manager for the first year was made in circumstances under which the manager undertook the liability to pay for a substantial part of the operating expenses during the first year.  Am I right about that?

MR COOPER:   I am not sure whether there is evidence where the prepayment went, other than they had to make a prepayment of a sum of ‑ ‑ ‑

GLEESON CJ:   Well, you better have a look at this overnight.

HAYNE J:   Because it seems to me at the moment that perhaps a view open of the documents is that the parties to the documents contemplated that the whole of the subscription sum would go by way of prepayment in the year ended 30 June in which the investment was being made out into the hands of JFM and FJA.  What JFM and FJA then did with the money they were to receive in the financial year ended 30 June was a matter ungoverned by the deed or other instruments to which we have been taken and that, indeed, prepayment of those sums to those entities was essential to the taxation consequences which were touted to the investors as being available under the arrangement. 

Now, if that be so – and there are several steps in it to which I invite your very close attention – if that be so, on its face it seems to be that JFM and FJA, not constrained by any express obligation to the contrary under any of these instruments, choose for whatever reason to deposit their funds on interest bearing deposit with the lender.  The lender is thereby in funds.  That may make good commercial sense, it may make poor commercial sense, but it seems to me to be an important step in understanding the transactions that have occurred.  But perhaps those are things to which you might give some attention overnight.

GLEESON CJ:   Mr Cooper, while you are doing that, and giving attention to it, you might look at page 850, paragraph 3.4?

McHUGH J:   That requires “the Farm Manager” to “meet all the costs” of the first year.

CALLINAN J:   Mr Cooper, on the meaning of “loan” and surrounding circumstances, you may get some assistance from Royal Botanic Gardens

and Domain Trust v South Sydney City Council (2002) 186 ALR 289 paragraphs [30], [70], [98] to [105] and [154].

MR COOPER:   Thank you, your Honour.

GLEESON CJ:   Is that a convenient time, Mr Cooper?

MR COOPER:   Yes, thank you, your Honour.

GLEESON CJ:   We will adjourn until 10.15 am tomorrow morning.

AT 4.16 PM THE MATTERS WERE ADJOURNED
UNTIL WEDNESDAY, 26 MAY 2004