Equuscorp Pty Ltd & Anor v Glengallan Investments Pty Ltd

[2003] HCATrans 472

[2003] HCATrans 472

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Brisbane  No B78 of 2002

B e t w e e n -

EQUUSCORP PTY LTD

First Applicant

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

Second Applicant

and

GLENGALLAN INVESTMENTS PTY LTD

Respondent

Office of the Registry
  Brisbane  No B79 of 2002

B e t w e e n -

EQUUSCORP PTY LTD

First Applicant

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

Second Applicant

and

EDWIN THOMAS CODD

Respondent

Office of the Registry
  Brisbane  No B80 of 2002

B e t w e e n -

EQUUSCORP PTY LTD

First Applicant

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

Second Applicant

and

CYRIL WILLIAM ANDERSON

Respondent

Office of the Registry
  Brisbane  No B81 of 2002

B e t w e e n -

EQUUSCORP PTY LTD

First Applicant

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

Second Applicant

and

BRIAN JAMES PRENDERGAST

Respondent

Office of the Registry
  Brisbane  No B82 of 2002

B e t w e e n -

EQUUSCORP PTY LTD

First Applicant

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

Second Applicant

and

BARRY THORNTON

Respondent

Office of the Registry
  Brisbane  No B83 of 2002

B e t w e e n -

EQUUSCORP PTY LTD

First Applicant

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

Second Applicant

and

HGT INVESTMENTS PTY LTD

Respondent

Applications for special leave to appeal

GUMMOW J
HAYNE J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

FROM BRISBANE BY VIDEO LINK TO CANBERRA

ON FRIDAY, 14 NOVEMBER 2003, AT 10.05 AM

Copyright in the High Court of Australia

__________________

MR P.A. KEANE, QC:   May it please the Court, I appear for the applicants in each application.  (instructed by Gadens Lawyers)

MR D.R. COOPER, SC:   May it please the Court, I appear with my learned friend, MR C.L. FRANCIS, for the respondents in each matter.  (instructed by Lees Marshall Warnick)

GUMMOW J:   Yes, Mr Keane.

MR KEANE:   May we take your Honours to volume 2 of the joint application book, page 355.  The first question arises from the conclusion of the learned primary judge at paragraph [29] on that page; that the process of debiting the applicants’ account with the Westpac Bank and a crediting of the bank account of the borrower’s representative, and then the debiting of that account and the crediting of the account of the general partner with the amount of each respondent’s application moneys, described in paragraph [28], immediately preceding it, was not payment of those moneys for the purposes of the loan agreement between the lender, that is, the second applicant, and the borrower, that is, the respondents.

The conclusion at paragraph [29] that what was required was “a real loan of real moneys” and that the transaction reflected in the round robin and the debits and credits in the bank accounts of the various parties was “a complete artifice or façade” or a “charade”, was affirmed on appeal at page 444 in the same volume in the judgment of Justice Williams, with whom relevantly the other members of the Court of Appeal agree.  Your Honours will see in paragraph [109] where his Honour excerpts and affirms the finding we have already looked at.

GUMMOW J:   Yes, line 40.

MR KEANE:   Yes, and goes on to affirm:

Whatever it was the second plaintiff provided to the defendants . . . it was not money.

The basis of the conclusion then is that the process of debits and credits in the account of the parties with the Bank was what is said to be a “charade” or an “artifice or façade”.

HAYNE J:   What does that mean?

MR KEANE:   Your Honour, it is not said to have been a sham and it is not said to have involved a fraud.  In that regard, as to what was the case, can we ask your Honours to go to the first volume of the application book to see what the pleaded case was.  There are number of additions of the defence, but relevantly, if your Honours would go to page 62, the last version, and if your Honours would look at paragraph 17 ‑ ‑ ‑

GUMMOW J:   The action at page 1 was a debt, was it not?

MR KEANE:   Yes, it was.  Your Honours, seeing what is alleged in paragraph 17, and your Honours will see that what is not said is that the round robin was a sham or a fraud.  It is our submission, that absent sham or fraud, the debiting and the crediting of a customer’s account is regarded as payment in that a payment has been made if the payee’s account is credited with the payment intentionally and in good faith and not by error or fraud.

For that proposition we rely on the observations of Sir Michael Kerr in Momm v Barclays Bank.  Your Honours have a bundle of our authorities I believe, it is item 3 in that bundle, if we could ask your Honours to go to that.

GUMMOW J:   I think Sir Garfield Barwick said something much the same too, I just cannot think of the case at the moment.

MR KEANE:   Your Honour, I am not aware of that case but certainly in Fletcher’s Case, to which we will take your Honours in a moment, similar views are expressed.  In Momm’s Case at page 799 of the report, which is page 49 of our bundle, if your Honours read from G to the bottom of the page where his Lordship said:

If there were no authorities on this point, I think that the reaction, both of a lawyer and a banker, would be to answer this question in the affirmative.  I think that both would say two things.  First, that in such circumstances a payment has been made if the payee’s account is credited with the payment at the close of business on the value date, at any rate if it was credited intentionally and in good faith and not by error or fraud.

In which event, of course, it could be reversed.  And:

Secondly, I think that they would say that if a payment requires to be made on a certain day by debiting a payor customer’s account and crediting a payee customer’s account, then the position at the end of that day in fact and in law must be that this has either happened or not happened, but that the position cannot be left in the air.  In my view both these propositions are correct in law.

If we can invite your Honours to read down the next paragraph to the citation from Eyles v Ellis and, in particular, in the citation from Eyles v Ellis, the passage from E to F.

GUMMOW J:   It is really a question of what is thrown up by a plea of not indebted, is it not?  I am not saying that against you, but that is what it is.

MR KEANE:   Yes, and I was going to respond to your Honour, and also the allegations that were made in the defence that there was this round robin that occurred but did not affect payments.

HAYNE J:   The significance to be attached to that, if any, is to be judged, is it not, in light of the loan agreement and of the partnership deed that is referred to in the loan agreement.  I have in mind page 68 of volume 1, clause 8 and clause 9 on the next page, which conveniently set out the relevant provisions of the loan agreement, and the deed which is referred to is found at pages 92 and following and several other places, but page 104 through to 106, which provide for what is to happen.  The fact that there is a round robin may be a fact, but the significance of it, the legal significance of it, for the moment is not clear to me.

MR KEANE:   Your Honours, the transaction, so far as the material terms of the loan are concerned, was this relevantly, that the obligation to lend was conditional upon acceptance of the application for units in the partnership - see clause 8 of the loan agreement at page 68 - and the principal sum was, so far as the lender was concerned entitled to be and insofar as the borrower was concerned only entitled to be, paid in payment of the application money – the application money being defined at page 96 in the deed to which your Honour Justice Hayne has referred, as meaning:

all moneys paid by Applicants for Units in conjunction with their Applications pursuant to clause 3.3 ‑ ‑ ‑

HAYNE J:   Whether the recipient of the application money then at once paid it out, may, it may not, raise some question of its obligations, but payment has occurred or has not occurred.

MR KEANE:   In our submission, your Honour, payment has occurred.  We were going to take your Honours as well to, having mentioned Fletcher’s Case ‑ ‑ ‑

GUMMOW J:   Yes, if I can just interrupt.  Eyles v Ellis was referred to by Sir Michael Kerr, was it not?

MR KEANE:   Yes.

GUMMOW J:   And Eyles v Ellis is referred to by Sir Garfield Barwick in Manzi v Smith 132 CLR 671 at 674.

MR KEANE:   Thank you, your Honour.  The passage we were going to take your Honours to from Fletcher’s Case, being item 2 in our bundle, is at page 12 of the report, which is page 24 of the bundle.  Your Honours will see that in the last paragraph on that page, referring to the activity, which in that case was effectively a round robin of bills of exchange, said:

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

Then one goes to page 14, commencing at about point 4, one sees the court saying:

The so‑called “loans” . . . 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 –

which is, of course, irrelevant here:

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.

It is our submission, to come back to your Honour Justice Hayne’s point or question of us, when the borrower’s representative received the payment and paid it to the creditor for credit to the general partner’s account the investors were then in the same position, so far as the provision of an advance for the acquisition of the units was concerned, as if they had been able to draw on the lent funds.  The moneys were credited to the account of the very person obliged to, and entitled in turn, to pay out those moneys by way the borrower’s application moneys.

As we have said, the loan under clause 8 was only to be lent on acceptance of the application and under clause 9 was directed to be applied in payment of the moneys, and otherwise in accordance with the borrower’s applications under the deed, which were discharged thereby, the units being accepted on the footing that the application moneys were paid so that the borrowers were in the same position, so far as the loan agreement and the deed partnership were concerned, as if “real money”, whatever that might be, had been paid to the representative or the general partner.

To put it another way, we would submit, with respect, that the introduction of the term “real money” is a false inquiry, at least where there is no suggestion of sham or fraud.  It is an approach not warranted by any decision of this Court and indeed, we would submit, with respect, not warranted by any decision save the decision in this case and the earlier case, concerning similar but somewhat different arrangements in Jekos Holdings, which your Honours will see…..in the written submissions.

GUMMOW J:   You were counsel at trial, were you not?

MR KEANE:   Yes, your Honour.

GUMMOW J:   These arguments were all put at trial, were they, that you are now putting to us?

MR KEANE:   Yes, that is right.

GUMMOW J:   Where were they dealt with, if at all?

MR KEANE:   In the passage to which we took your Honour.

GUMMOW J:   Is that all?

MR KEANE:   Yes.  So far as the question of the proper construction of the agreement which your Honour Justice Hayne raised with us, the question of construction was dealt with in the paragraphs that followed paragraph [29].  If your Honours go back to page 355 to paragraph [30], your Honours will see his Honour there referring to the terms of the loan agreement and the deed and his Honour concludes at [33]:

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.  Therefore it did not lend the promised money.

HAYNE J:   Is there any explanation of what is meant by this idea of “real money”?  Are we literally concerned with notes?  What content, if any, is given to this expression?

MR KEANE:   One could understand if it was said the question is whether there was a real transaction of loan.  When one says, “Is what is the subject of the transaction real or not?”, in our submission, it is impossible to answer that unless one asks whether there is a real transaction or not.  If parties agree that what is advanced has effect as money, then it is money, in our

submission, especially if it is supported by debits and credits in a bank account.

HAYNE J:   There are a lot of unreal transactions occurring everyday on the Internet at this rate, Mr Keane.

MR KEANE:   Quite, your Honour, and not only on the Internet but in banks because this case is a case about the transactions occurring within a bank, and no doubt, with respect, it would come as a surprise to the officers of the bank to know that they were engaged in a charade, though not a sham, and certainly not a fraud, and if that description denies what they did of any effect so that ‑ ‑ ‑

GUMMOW J:   Yes, thank you, Mr Keane.  We will hear from your opponent.

MR COOPER:   If the Court pleases.  My submission that what this transaction contemplated was that there would be a payment of cash before there could be an acquisition of units.  What happened at the Westpac Bank, what was found by the trial judge to be an “audit trail” designed to discourage the tax department from looking closer, it was never intended by the parties who took part in it to confer rights and obligations upon them inter se.  That, with respect, is ‑ ‑ ‑

GUMMOW J:   That would be a sham, that would be a classic definition of a sham.

MR COOPER:   Your Honour, it may be, but the fact of the matter is ‑ ‑ ‑

GUMMOW J:   Namely, that what apparently was done in law was intended by the parties not to be done in law, but that is not this case, is it?

MR COOPER:   Your Honour, the way the case was run was that my clients asserted, not being parties to what happened at the Bank, that they were not bound by what happened at the Bank.  The court has found that what happened was not an effective transaction because it happened not contemporaneously, it happened at different times on different floors between different people, who were not acting to assist each other to promote the transaction.  My clients, the finding is, had no idea what happened at the Bank and believed, erroneously, that in fact cash had been paid in respect of the units for which they applied because that is what the partnership deed requires.  If your Honour goes to clause 3 of the partnership deed, it requires that there be a payment in cash which will be paid into a trust account ‑ ‑ ‑

GUMMOW J:   Just a minute, what page?  You know all this off by heart, we do not.

MR COOPER:   Page 104 it starts, your Honour.

GUMMOW J:   Yes.

MR COOPER:   What is contemplated is that there will be a payment of $868.00 per unit applied for.  If your Honours go to 3.3.2:

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

That never happened here.  If your Honour goes to page 106, 3.5 says:

Upon receipt by the Representative of any amount representing Application Moneys for Units . . . it shall hold the amount and any income thereon as trustee for each Applicant in respect of which the amount was paid –

until the minimum subscription is reached, and 3.6 says:

Any amount 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.

And there is a provision that says if subscription is not reached then the money, with accretions, will be returned to the people who paid it.  All of that, in my submission, can only have one natural meaning and that is that cash would be paid at the time the units were applied for.

HAYNE J:   Why?  Why does it require the handing over of notes?  Why?

MR COOPER:   It does not, with respect, contemplate that there will be at the Bank a transaction which the court has held to be not effected between the parties who took an involvement in it.  One of the problems was at the trial, I think from memory there were five parties involved in this transaction at the Bank, two of them did not give any evidence at all at the trial, so we have absolutely no idea what intentions they had at the time that the transactions at the Bank occurred.  For there to be an effective round robin, in my submission, it would be necessary for there to be evidence that each party to it intended to undertake an obligation or responsibility in terms of what he or it was doing at the time.

The other reason why the court decided, with respect, that the money should be paid by something other than a movement of paper is because the money that was coming in was, of the terms of this deed, to be applied in specific ways:  for example; to pay the income of the manager, to acquire land, to acquire stock for the Red Claw.  It is also significant, in my submission, that this whole transaction was subject to the terms of the Partnership (Limited Liability) Act, which required that any contribution by a limited partner shall be in the form of money.  Whatever happened at the Bank was not a contribution on behalf of a partner in the form of money.  It is also significant, in my submission, that the prospectus which was issued in support of this transaction said at page 17 ‑ ‑ ‑

GUMMOW J:   Where do we find that?  What page of the application book?

HEYDON J:   Is it 287?

MR COOPER:   No, your Honour, it is page 305 in volume 2.  If your Honours go to the foot of the page, under the heading “Minimum Subscription” it says:

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.

It could not be clearer, with respect, that what was contemplated was that there would be cash.

So, in my submission, the first two special leave questions, which contemplate that there was an effective round robin transaction, fail at the threshold level because the court has found that there has not been an effective round robin transaction.  Even if there had been, it is not sufficient to satisfy the requirements of this arrangement, which clearly contemplated the payment of cash.  I do not think I can assist your Honours any further than that.

GUMMOW J:   Thank you.  Yes, Mr Keane.

MR KEANE:   Your Honours, just a couple of points.

GUMMOW J:   What is the significance of this Partnership Act requirement of cash?

MR KEANE:   Your Honour, that is referring to cash as opposed to kind.  It is speaking of money, in our submission, as opposed to contributions, contributions that are measurable in terms of dollars rather than assets that are then measured in dollars.  It is our submission that is the distinction that is being drawn.

GUMMOW J:   Yes.

MR KEANE:   As to the first point your Honours raised with our learned friends as to where is the finding that the round robin was not intended to take effect according to its tenor, the short answer is, of course, there is not one.  As to the suggestion that the provision of money requires the provision of notes, references to cash are to be understood as provision of notes, in our respectful submission, that is most unlikely to be the case in the present day.

HAYNE J:   Mr Keane, at the core of what seems to be the complaint seems to be the suggestion that it is legally significant to your claim that the money or the credit or the value that was given was at once paid on, and it seems to be put against you that it was paid on contrary to obligations that can be deduced from perhaps the prospectus, perhaps the partnership deed, perhaps the Act.  What do you say to that?

MR KEANE:   Your Honour, as to the Partnership Act, in our respectful submission, it has nothing to say to this if the distinction, which we submit is a clear one as to the meaning of money in that Act, is accepted.  As to the deed, the provisions of clause 3 to which our learned friends took your Honour operate on a footing that they provide the regime which is to be in place until the subscription is reached.  They have no operation if the subscription is reached, and here the subscription was reached.

GUMMOW J:   Thank you.  How long did this trial go, some days by the look of the record?

MR KEANE:   Your Honour, the trial went for eight days, I am told by our learned friends, and adding a couple of extra days, it may have been 10 all up.

GUMMOW J:   Yes, but what extent of record are we looking at?

MR KEANE:   Your Honours, the record would be quite significant, I am afraid.

HAYNE J:   It would be amplified by the duplication of the various instruments which each of the defendants executed.  If we cut it down to one copy loan agreement, one copy prospectus, et cetera, how extensive?

MR KEANE:   Making a guess, I would suspect probably something of the order of five or six.

GUMMOW J:   Take a minute to ask your instructing solicitors how extensive it was in the Court of Appeal, as a starting point.

MR KEANE:   Your Honours, in the Court of Appeal it was 14 volumes.

GUMMOW J:   Yes.  There were other issues, were there, in the Court of Appeal, that will not be arising here?  Maybe not.

MR KEANE:   A principal issue in the Court of Appeal was our attack on the primary judge’s finding that the original loan agreement was not contained in the written loan agreement but was actually comprised of that loan agreement and the side agreement which modified it.  On that issue we succeeded in the Court of Appeal.  A large amount of the evidence and the argument was directed to that.  That would not arise on our appeal, but being frank with your Honours, I suspect it would arise on a contention that our learned friends would seek to raise.

GUMMOW J:   Yes, that is what worries me too.  Let us ask Mr Cooper, would there be a notice of contention?

MR COOPER:   There will, your Honour, because our fundamental case is that there was this agreement which antedated the formal loan agreement whereby my clients’ liability was limited to a repayment of interest and two other payments of interest and then the repayment of the debt would be self‑funded from the profits of the project.  There is a lot of evidence on that.  That aspect of the case went for many days in its own right and we would certainly wish to urge upon the Court that his Honour was correct to come to the factual conclusion he did in that regard.

Might I also say that there are some other issues which arose in this case, such as claims under the Trade Practices Act, which his Honour did not decide.  So if, for example, this matter was to go forward and the Court was to find there was a debt, it would have to be remitted to the trial judge to find whether ‑ in light of this limited arrangement that we say existed and which he found to exist, if it did not give rise to the contract between the parties it is still nevertheless relevant to see whether it is the basis of relief under the Trade Practices Act because it could still be a complete answer to the debt claim.

GUMMOW J:   Yes, I can understand that.

MR COOPER:   So, there are a lot of other issues which will necessarily have to be considered.

GUMMOW J:   Yes, but not necessarily by us.  Thank you, Mr Cooper.  We will take a short adjournment.

AT 10.35 AM SHORT ADJOURNMENT

UPON RESUMING AT 10.37 AM:

GUMMOW J:   There will be a grant of leave in this matter accompanied by a direction to the Registrar that if, upon perusal of the draft index, it appears that the appeal record would involve more than six appeal books, the matter will be listed for consideration before a Justice.  Will this be a two‑day case, Mr Keane, Mr Cooper?

MR KEANE:   Yes, your Honour.

GUMMOW J:   I think it would.  Very well, we will allow two days.  We will adjourn to reconstitute.

AT 10.38 AM THE MATTERS WERE CONCLUDED