Equuscorp Pty Ltd (formerly Equus Financial Services Ltd) v Haxton & Ors [2011] HCATrans 50

[2011] HCATrans 50

[2011] HCATrans 050

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M128 of 2010

B e t w e e n -

EQUUSCORP PTY LTD (FORMERLY EQUUS FINANCIAL SERVICES LTD) (ACN 006 012 344)

Appellant

and

IAN ALEXANDER HAXTON

Respondent

Office of the Registry
  Melbourne  No M129 of 2010

B e t w e e n -

EQUUSCORP PTY LTD (FORMERLY EQUUS FINANCIAL SERVICES LTD) (ACN 006 012 344)

Appellant

and

ROBERT SAMUEL BASSAT

Respondent

Office of the Registry
  Melbourne  No M130 of 2010
  No M131 of 2010
  No M132 of 2010

B e t w e e n -

EQUUSCORP PTY LTD (FORMERLY EQUUS FINANCIAL SERVICES LTD) (ACN 006 012 344)

Appellant

and

CUNNINGHAM’S WAREHOUSE SALES PTY LTD

Respondent

FRENCH CJ
GUMMOW J
HEYDON J
CRENNAN J
KIEFEL J
BELL J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 9 MARCH 2011, AT 10.16 AM

Copyright in the High Court of Australia

MR B.W. WALKER, SC:   May it please the Court, I appear with my learned friend, MR R.M. PETERS, for the appellant in each case.  (instructed by Lander & Rogers Lawyers)

MR J.D. MERRALLS, QC:   May it please the Court, I appear with my learned friend, MR M.D. RUSH, for the respondents in appeals M129, M131 and M132 of 2010.  (instructed by Shand Taylor Lawyers)

MR M.R. PEARCE, SC:   If the Court pleases, I appear with my learned friend, MR M.J. CAMPBELL, for the respondents in the remaining matters, matters M128 and M130 of 2010.  (instructed by Shand Taylor Lawyers)

FRENCH CJ:   Yes, Mr Merralls.

MR MERRALLS:   There is a brief matter of the notices of contention, your Honours.  I understand that our learned friends have no objection to our relying upon the notices of contention that are annexed to our original written submissions.

FRENCH CJ:   Yes, you want leave to file?

MR MERRALLS:   We seek leave to rely upon them.

FRENCH CJ:   Yes, you have leave to file the notice of contention.

MR PEARCE:   I seek that same leave, if the Court pleases.

FRENCH CJ:   Yes, Mr Pearce.  Yes, Mr Walker.

MR WALKER:   May it please the Court, the statutory provision at the heart of the dispute, section 170 of the Companies Code, proscribed conduct in these terms, namely that a company, or in section 171:

A person shall not issue to the public, offer to the public for subscription or purchase, or invite the public to subscribe for or purchase, any prescribed interest –

I will be coming back to the statute soon but not straight away in my address.  But the beginning, and we submit, pervading the argument and governing at the end is the fact that the statutorily proscribed conduct had to do with the offering, issuing, inviting the public to subscribe for prescribed interests, a defined term in a fashion which is not in controversy and does not involve any consideration of particular facts in this case. 

One way of understanding the nature of the common money count, the claim for money had and received, which is the subject matter of these appeals, is to examine what it was that the respondents or investors saw to their advantage or benefit in the conduct which was, as it happens, proscribed for lack of any prospectus or lack of a proper prospectus. 

Could I take your Honours in volume 1 of the appeal book, please, to page 432 which is picking the matter up with Mr Haxton’s brother who was, more significantly, his accountant and adviser.  At the top of page 432 in paragraph 20 of his affidavit, the reasons why that which was offered or the subject of the invitation to subscribe was considered attractive by his brother and him, as well as his two partners, that is accounting partners, Mr Glover and Mr McEwan, for the reasons there set out:

the initial tax relief was generous -

Now, that is a reference to a familiar feature of such schemes, namely, what is sometimes called upfront payments for the meeting of expenditure in such a way as to be deductible against income.  That is what (b) referred to:

there was an upfront payment of one years’ interest –

So if there were a borrowing, I stress if there were a borrowing, the interest would be paid at the beginning so that when you went into the exercise you would have not only the initial payment for management, but also interest on a borrowing which could be claimed as a deduction. 

In (c) there is a reference to “loan repayments”.  As you will see, they can be called initial payments, relatively modest, comparing it to the borrowing, if there were a borrowing and then, (d), otherwise what is sometimes called in this trade limited recourse, namely, that it was net revenue from the business endeavour, in this case growing and marketing blueberries, which would be the sole source to which the lender would look after the initial payments were made for repayments of capital and interest.

Importantly, and one is entitled to point out, absolutely essentially in order to get any of the so‑called tax relief, importantly, this was a business venture.  There was potentially significant income to be gained from the investment for the balance of the lease or licence term.  If one then goes to ‑ ‑ ‑

CRENNAN J:   In all these types of schemes, which have been seen commonly enough, investors do not – it is not contemplated, is it ever, that the investors would get the full value of the loan?  The arrangements are upfront payments coupled with a mechanism for subsequent repayments.

MR WALKER:  Your Honour, they get full value but do they ever, as it were, for more than an instant have the money that they borrow?  Not usually because if they choose to borrow this, like most of these schemes, does not compel borrowing, but if they choose to borrow it is for a purpose which tailors the amount borrowed to the upfront payment practically always in order to be attractive of a fully deductible kind though one sees variants where the deduction is not as to 100 per cent of the upfront payment and in that sense, of course they immediately get and always retain – that is the history is never expunged of full value for the borrowing.  They borrow the money which becomes theirs and with it they pay an obligation which they had contracted for upfront payments or an option which they had to pay upfront, as in this case, to get a discount. 

It is in that sense that indeed they do get full value.  There is no doubting in this case, so far as the parties are concerned and the way in which they have fought these issues out that there was payment made by the investors of a kind which could be, and was, the subject of claims for deduction from their income in relation to the Income Tax Assessment Act – real payments, real deductions because defraying real obligations to pay for the upkeep, et cetera, of the blueberries which were theirs.  It is for those reasons, no, they do get full value.

But in the sense that the money is borrowed for a purpose which requires expenditure immediately, then they do not get to keep the money.  The same is true for those of us who need to borrow to buy residential real estate, we never actually see the money.  It goes immediately from the bank to the vendor of the property leaving us with the obligation on the mortgage.  We get full value, of course, for the borrowing, we never see the money.  It does not mean we were not paid the money.  It does not mean we have not paid in due course the money to the vendor we have.

Could I note what follows in terms of decision making on page 432.  This, I stress, is the accountant brother advising the investor, Mr Haxton.  In paragraph 25 at the foot of 432 to the top of page 433 one has here the hearsay evidence received in the proceedings:

that he would only go into the project because of my assurances of these features of the investment of firstly significant tax relief –

That can only come, of course, with actually making real payments of truly deductible amounts –

secondly, good long term returns –

In other words, the possibility of profit in the future –

and thirdly, low risk through the limited recourse funding.

Now, that does not mean no risk.  This is not the purchase of an annuity from an entity of undoubted solvency.  This is the borrowing of money from my client’s point of view, of course, the borrowing, the lending of money so that somebody may go into a business venture which had the features that one sees at the foot of paragraph 25.  If we then go over to page 445 in the book to Mr Bassat’s affidavit, one sees in his paragraph 10:

It was obvious that the fruit sales –

and that is, of course, towards the end of the continuing farming exercise, the land has to be prepared, looked after, farmed, the fruit has to be grown, harvested and sold.  That is how it generates the revenue –

the loan payments were interlocking arrangements.  This was an extremely attractive element of the investment.  The fruit sale payments were structured in such a way that they underpinned the payments to be made under the Loan Agreement. 

This figurative language, we would invite your Honours to read it as obviously a reference to the so‑called limited recourse whereby the cash flow from the sales was earmarked for, but also provided the limit of obligation under the loan agreement.

FRENCH CJ:   That was subject to initial repayments being made on time.

MR WALKER:   Subject to those initial repayments which - I need not dwell on it, we have set it out in the table - also were significant for a different point, the so‑called acceleration point which applies in some, but not all, of the cases.  As Mr Bassat ended up – other than that, the tax benefits were significant, as was the longer term investment potential once the loans had been repaid.  The loan terms were five or six years, the lease or licence terms were 10 or 12, so that the future to be looked forward to was of no – that is the full capital acquisition price having been paid, and the project being self‑funding with a profit possible.  We can then go to page 460 in volume 1.  Mr Cunningham, for the eponymous company, at the foot of that page, paragraph 17, he caused his companies –

to invest not only because of the tax benefits aspect, but also because I believed the venture was a good investment in the longer term.

So what they obtained by taking up the offer to the public, or the invitation to the public to subscribe, going back to the promoter’s proscribed conduct, what they obtained was an investment which they had evaluated on its business merits, together with, and I stress “together with”, the so‑called tax benefits, and it remains the case that they, having obtained those benefits either more or less immediately in terms of deduction, or in prospect and subject to ordinary commercial risk as to profit, they were never deprived of that.  Nothing deprived them of that, least of all, the lack of a prospectus or the lack of a proper prospectus. 

This is not a case where there is anything induced by either the lack of a prospectus or by the shortcoming that prevented a purported prospectus from answering the statutory description was said to have caused in any way, for example, the failure of the venture.  It was observed in the Court of Appeal, indeed, that it was a remarkable feature of the litigation how little, bordering on nil, there was in evidence concerning the reason for the commercial collapse of the scheme.  We know the scheme went until 1991 producing revenue, at an apparently satisfactory rate.

This is not a case where anything in the proscribed conduct caused it and it is all the more obviously not a case where anything in the conduct of the lender in lending the money or administering or enforcing the loan contracts was said to have produced that failure commercial and ultimately being – fruit was not being sold so as to produce revenue, which caused the schemes to collapse, as it has sometimes been put.

Now, the loan agreements which I stress were not a mandatory part of the arrangement and would be taken up at the option of a so‑called investor if that happened to suit his, her or its tax position, no doubt, can be seen in volume 1, page 260 - I am using Haxton documents, may it please the Court.  Could I draw to attention a number of features that may be relevant for different matters that follow. 

Rural Finance is a company incorporated in the ACT.  The borrower you will find over the page on page 262, schedule 1, Mr Haxton who has a post office box address at Maitland in New South Wales.  The evident relation to the blueberry scheme can be seen in the commonality of interest provision which is A of the introduction and the references in both B and C that I need not dwell on.

The term of the loan is seen in clause 3A, particularly at the top of the right‑hand column - five years.  Interest is provided for in clause 3B but you will see that is subject to the discount in clause 6 on the next page, left‑hand column and then there is also a discounting in 3B(ii).  That which has been called “limited recourse” appears in 3C.  There was security provided for under 4(i).

GUMMOW J:   How does 3C work?

MR WALKER:   I am sorry, this is only the first part of a limited recourse mechanism, your Honour.  Mr Haxton is not limited recourse, I am sorry.  He is one of those who enjoy or have the mechanism of the revenue first being applied, insofar as the loan agreement is concerned, to meet obligations under the loan agreement before going to Mr Haxton.  I will show you the variant later which adds to that mechanism a cap so as to restrict payments under the loan agreement to what may be produced from that revenue.  Mr Haxton was not limited recourse.  Mr Haxton was the mechanism of revenue being first applied to meet loan agreement.

Under clause 4 something which produces some internal contradictions in the Court of Appeal reasons to which we have referred in our written submissions is noted.  There are two forms of security there.  There is the charge in 4(i) and the possibility of a mortgage charge or assignment in clause 4(ii).  There was no such request or execution under 4(ii).  However, of course, there is the charge in 4(i), and I simply note that is the matter which seems, on one reading of the Court of Appeal reasons, to have mistakenly been regarded at least at one point as having been enforced.  There was never any enforcement of that security.

CRENNAN J:   What happens when there is the assignment from Rural to Equuscorp in relation to that security?

MR WALKER:   There was not, in fact – but your Honour is asking me if there had been such a request, what would have happened?  Presumably, that assignment which is governed by the phrase at the end “in order to secure the Loan” comes with an equity of redemption, as it were.  That is, it would not be an assignment once and for all, unless by some further agreement between the parties.  It would be an assignment in the sense of a legal mortgage.

CRENNAN J:   And in relation to (i), what happens with the disposition of interest from Rural to Equuscorp?

MR WALKER:   We have the net proceeds in 4(i), which picks up or parallels the mechanism in 3C in the sense that the charge would still be there even if the mechanism had somehow failed, and as to the interest in the farm, which of course is defined ultimately by lease licence rights and management, that is charged.  For that charge to be enforced, obviously, would involve the usual processes and apparatus of exercising, ultimately, some kind of a sale.  Some capital return was seen by Justice Byrne – some capital value was seen as possible during the term of this arrangement.  I stress, there was no enforcement of any element of the charge in 4(i) and there was no execution of any instrument of any kind under 4(ii).

CRENNAN J:   Was that related to a priorities issue, or is there some other ‑ ‑ ‑

MR WALKER:   It would be, yes, absolutely, that is, it would affect priorities in the event of insolvency of the investor.

CRENNAN J:   I am just asking you if that is a matter of fact.  There was no action for that reason.

MR WALKER:   That is right.  The priority in question was what I will call the mortgagees of the scheme promoters, the Johnson company’s land, and indeed, as we have set out in our written submissions, ultimately we, Equuscorp, obtained the bank mortgages and Rural Finance’s claims, so we say.  Could I give you an example of the non‑recourse version?  This is in volume 1, 334, one of the Cunningham’s Warehouse cases, and you will find its corresponding provisions in the right‑hand column on that page, about line 30 in B(iii).

CRENNAN J:   Sorry, what page are you at?

MR WALKER:   Page 334.

GUMMOW J:   Whereabouts?

MR WALKER:   Right‑hand column, about line 30 in clause B(iii), and you will see halfway down:

the Lender shall have no right of recourse against the Joint Venturer and . . . shall have no other personal liability for payment of balance -

et cetera, and that comes about because there has been the mechanism under B(ii) of the repayment of the lender by direct deduction from proceeds, if any, of sale.

FRENCH CJ:   Does this have an acceleration provision in it?

MR WALKER:   Your Honour, I will need to turn up my table for fear otherwise - no, your Honour, that one does not have an acceleration provision.

GUMMOW J:   Is there any choice of law provision in these later ‑ ‑ ‑

MR WALKER:   No, there are not. 

GUMMOW J:   So how was it, if you can just tell me now, the Property Law Act (Qld) got engaged?

MR WALKER:   There is a choice of law in the assets sales agreement.

GUMMOW J:   I see.

MR WALKER:   So, in what I might call the debacle phase, refinancing and security being taken, there was an assets sale agreement pursuant to which the deed of assignment was executed.

GUMMOW J:   Now, you will be taking us to that?

MR WALKER:   I will, indeed.  Let me anticipate in relation to choice of law, because it is not as cut and dried as one might in retrospect like, the agreement has a choice of law provision.  The deed does not.  Now, we say that presents no difficulty whatever in terms of choice of law but I draw it to your attention.  That is the answer to Justice Gummow’s question.  That is why we say ‑ ‑ ‑

KIEFEL J:   But you say the proper law of the deed in any event is Queensland.

MR WALKER:   We do, as you have seen from our written argument.  Now, because I have been asked about proper law, the loan agreements, I stress, do not have a choice of law provision.  The borrowers are not all in the same jurisdiction.  There would be no fun if there were no doubts.  We have the lender, an ACT registered company, the endeavour for which there is an expressed link and the borrowing is an endeavour in New South Wales.  Mr Haxton was in New South Wales but not all the borrowers were in New South Wales. 

Now, that, one would have thought, would be relevant at least as a matter of argument to questions of limitation but it does not seem to have been the subject of any contention in the courts below.  But it is a matter that does present itself.  We think not so as to cause any difficulty, but I accept that it is not something that can simply be ignored. 

Your Honours, I have already referred to the Code.  Could I take you back there in more detail, but, before I do so – I am obliged to Mr Peters - an example of an acceleration provision may be found in volume 1 at 302 in another of the Cunningham’s cases.  It is about line 40 in the left‑hand column under the expression “default”.  You will see the expression:

should the Borrower make default hereunder as to payment of interest or the Principal Sum . . . thereupon immediately become due and payable by the Borrower to the Lender and may be sued for and recovered -

I apologise for not having that at my fingertips earlier.  Now, the Code - your Honours are familiar with - it is not a matter of controversy – the notion of prescribed interest but you will find the definition in subsection 5(1) and without being exhaustive, it includes, as your Honours will recall, a so‑called “participation interest”, subject to exceptions and the like. 

That also is a defined term under subsection 5(1) and stripping to essentials means a right to participate in the profits of a business undertaking.  I have left out important aspects but they are not controversial in this case.  In a form of verbal tease you will find the word “enforceable” in that definition.  I do not think it will cast any light on the matter which is at the heart of the argument but I draw it to attention.  Participation interest is such a thing, whether or not the right or interest is enforceable. 

We then come to section 170 itself and it can be paralleled with section 171 which I otherwise will not dwell on.  The prohibition is expressed in terms:

shall not issue to the public, offer to the public for subscription or purchase, or invite the public to subscribe for or purchase, any prescribed interest –

As I have already pointed out, it cannot be said that the offer of money by way of the loan fell foul of any of that proscription.  That has never been said.  There was, as your Honours have seen, a very lively dispute at first instance whereby my client disputed the proposition that this prohibition had any effect of rendering the loan agreements unenforceable.  We lost that and it is not persisted in.  That is the first of the two propositions for which the so‑called prescribed interested authorities, culminating in Amadio in the Full Court of the Federal Court ‑ ‑ ‑

GUMMOW J:   When you say “unenforceable” - by either party?

MR WALKER:   No.  Perhaps I can sketch it and conclude this part of the argument in answer to that question.  The so‑called prescribed interest cases showed in ABCOS a failure to distinguish between unenforceable and void.  That is not the law.

GUMMOW J:   Is there a criminal penalty attached to 170?

MR WALKER:   There is, under section 174 and it is a swingeing one.  May I flag that my argument very much involves a reading of section 174(2) but may I come back to that rather than deal with that at the moment.  To answer the first of Justice Gummow’s questions, we mean enforceable and the parties have been in common ground as to what enforceable means following and in light of Amadio in the Full Court as follows - Amadio is Amadio Pty Ltd v Henderson (1998) 81 FCR 149 and what I call ABCOS is Australian Breeders Co‑Operative Society Ltd v Jones (1997) 150 ALR 488 and one cannot leave out two others which I should note now when I talk about prescribed interest cases. There is, of course, Hurst v Vestcorp Ltd [1988] 12 NSWLR 394 and O’Brien v Melbank Corporation Ltd (1991) 7 ACSR 19.

The point about Amadio is that – or the first of the points which was common ground as to principle and contested as to fact only at first instance was that a loan contract as closely connected to an investment scheme, such as the blueberry schemes here, would be rendered unenforceable by the contravention of section 170 in relation to the lease licence, the farm management agreement, et cetera, for the purposes of which the moneys were lent.  That is the first of the two propositions and in Amadio it was explained, as must be correct not least for reasons of the statute to which I will come in a moment, that by unenforceable is meant and meant only that if the investor so chooses they may on that ground resist enforcement of liabilities, obligations against them.  I stress, it is only at the election of the investor, and I am going to come back to that.

It has never been suggested and is not suggested in the exchanged written submissions in this Court that unenforceable has a different meaning in relation to the loan contract from what it has in relation to the transactions which constitute the contravention of section 170. In other words, if the investors had so chosen, they could have stayed with all of the transactions. There was no avoidance by them, willy‑nilly, the commercial, financial preferences of the investors. The investors had the whip hand. They had the election, they could choose. That is what is meant by the reference at page 192 in 81 FCR 149 by the reference to being “unenforceable except by the holder of the prescribed interest”.

GUMMOW J:   Page 192?

MR WALKER:   Yes, your Honour.  Page 192, between letter A and B, towards B.

GUMMOW J:   I see.

MR WALKER:   That was the basis upon which the parties joined issue below and join issue here.  It is, as observed in the Court of Appeal, common ground as to the doctrine on both those elements laid down by the prescribed interest cases.  I do not wish to suggest they are a block or that they are holy writ.  It is just that they were not in contest in this case as to either of those propositions and they do need to be understood as Amadio having corrected what, with respect, was an error or slip in ABCOS by using the word “void”.

May I now come, in particular, to the importance of section 174(2).  We know that the prescribed interest which may be a prescribed interest notwithstanding it is unenforceable and we know that enforceable is something that can occur on account of illegality, that is, contravention of statutory prohibition.  We know in section174(2) that it is not dead for all purposes.  It is not avoided or a nullity, nor, for that matter, is it rescinded leaving only accrued rights and obligations to be enforced.

Rather, though not in terms and without using the word “enforceable”, it is clear that a person who is not the holder of the prescribed interest, of whom it might be considered there could be liability to the holder of the prescribed interest, is not relieved of that liability.  So, in a very compressed fashion, a number of steps of reasoning are contained by the negative form “not relieved from any liability”.  The first thing of course is that it contemplates their may be liability, a second thing is that it discriminates, obviously, between the holder of the prescribed interest and anybody else.  It is only the holder of a prescribed interest whose right, the corollary of the liability of another person, is preserved by subsection (2).  No one to our knowledge or research has ever suggested that 174(2) is not exhaustive of the class of person with rights to enforce liabilities, notwithstanding contravention of section 170.

GUMMOW J:   Is the person referred to in the first words of 174(2) the contravener?

MR WALKER:   It will certainly be a contravener, if a contravener is, for example, the person who becomes a party to, or chargeable with liabilities under any of the transactional instruments resulting from that contravention.  That need not happen, but bearing in mind the ‑ ‑ ‑

FRENCH CJ:   But is that only class of person referred to 174(2)?

MR WALKER:   Probably not, not least because of privity of contract or privity of the State, there is going to be a limited class, pretty much tied to those who issued or offered these interests.

GUMMOW J:   What about liability in tort?

MR WALKER:   Yes, your Honour, negligent misstatement, misleading and deceptive conduct, none of that is affected so as to reduce the rights of an injured party, no.  So in terms of the contract claim or a claim to do with covenants pertinent to an estate, it is likely – the words do not require it, but in the nature of things it is likely that it will be only those who are parties to the contract, or privies in the estate.  That is because the phrase “issue to the public, offer to the public”, but perhaps not the phrase “invite the public to subscribe for or purchase” will not normally capture, as the contravener the person who becomes the party to the interest, usually in the form of a contract.

FRENCH CJ:   Who is the contravener in this case?

MR WALKER:   Certainly, your Honours, it would be, I think correct to say, if one looks at the relevant players, that it would be Mr Johnson.  Section 171 - not section 170 - as we understand it, it would certainly include Corindi Blueberry Growers, Johnson Farm Management, at the least.  So there would be those three, one natural person and two corporations.  There is no suggestion anywhere and absolutely no evidence or factual finding that Rural was in any way a contravener of section 170.

FRENCH CJ:   Strictly speaking, CBG was offering the interest, was it not?

MR WALKER:   I think so.

FRENCH CJ:   It was the owner.

MR WALKER:   Yes, and Mr Johnson would be caught presumably under section 170.  I do not think ‑ ‑ ‑

FRENCH CJ:   JFM was offering management services which ‑ ‑ ‑

MR WALKER:   The business venture integrally includes the management.

FRENCH CJ:   I understand that.

MR WALKER:   So, I think the farm manager probably would be implicated as well, your Honour.  It was not of any moment in this sense, that we did not resist the proposition that there was the illegality and that it pervaded all the instruments except the loan agreement, which we did resist.  We have lost that argument, not on the basis that it was itself illegal in inception, that is, no one has suggested that loan agreement was a kind of agreement which neither could be entered into or could be performed lawfully.  Rather, it was its connection with the proscribed issued interests, proscribed because they were unaccompanied by a prospectus or a proper prospectus.  It was that which rendered them unenforceable on a general law notion of illegality.

GUMMOW J:   Is there any notion of aiding and abetting attached to 174(1) offences?  Is there any other provision somewhere else in the statute?

FRENCH CJ:   Or knowingly concerned?

MR WALKER:   Your Honour, could we check that.  There is a general offence provision which, I think, throws no more light than 174 does.  So may I take that on notice?

GUMMOW J:   Yes.

MR WALKER:   I am bound to say that the lack of any reference in the statute to such forms of criminal responsibility does not mean, of course, that it could not, nonetheless, be charged and made out.

GUMMOW J:   One of the troubles with this statute is we do not know which statute, do we?  Which State in fact?

MR WALKER:   Yes, is the answer to your Honour’s question.  That is one of the troubles.

FRENCH CJ:   If it is Queensland it would pick up general accessorial provisions under the Criminal Code.

MR WALKER:   That is what I am proposing but as Justice Gummow points out, what general accessorial provisions, which States?  That would then raise questions, not only not explored, but not raised in the proceedings below such as, where were the offences committed?

GUMMOW J:   Yes, the NCSC legislation tried to sweep these questions under the carpet which was a foolish thing to have done.

MR WALKER:   As soon as one has, for example, section 68 of the Judiciary Act one has to know what one may be picking up.  Your Honours, subsection 174(2) is therefore a critical explicit statutory indication of the intended effect on the very transactions – that is, the very choses in action or other forms of property such as lease – entered into because of contravention, not incidentally because of contravention, but their very entry constituting the offence.

GUMMOW J:   Yes, that is right.

MR WALKER:   The explicit statutory effect laid down by section 174(2) is to permit the holder of the proscribed interest, regardless of it being unenforceable, in the sense that I have explained in answer to Justice Gummow and picking up the word of the definition to which I had referred earlier – regardless of that, it preserves to that person the right to continue to participate in the venture, to use the language of the definition. 

In a sense, when one considers the evident protective purpose of these statutory provisions, whether or not one agrees with it as a matter of policy, it is readily apparent why that choice may have been made.  If a person aware of the position – and I will come back to why that is important – aware of the position of the illegality surrounding his, her or its entry into such a venture, nonetheless decides that it would be silly to cut off your nose to spite your face, it is doing well, the lack of a prospectus has not prevented blueberries from coming the fruit of fashion, and the loans have been repaid – look as if they are going to be repaid – the commercial risk is well contained, the manager seems to be competent, I will stay in the scheme, thank you very much – and holding the owner of the land, the farm manager, buyers, et cetera, and lenders to their promises – that is, enforcing their liability – is what section 174(2) explicitly stipulates.

I stress, that is for the transactions or relations, the existence of which signifies the contravention.  In the case of the undoubtedly related but distinct loan agreement, a number of things can be said in light of that plain statement of legislative intent concerning the constitutive transactions or relations which signify the contravention.  First of all, though they are clearly related, not necessarily so.  One did not have to borrow to enjoy either the tax benefits or the commercial prospect and they are, the loan agreements accordingly, that much removed from the centre of the scheme. 

I cannot possibly say they are not part of the scheme, not least in terms of the very obvious evidence to which I took you in opening, but they are not an essential part of the scheme.  They are an optional extra for people who see their tax affairs in such a light that they will borrow in order to assume obligations, the payment of which will give them a deduction – the payment of interest of which, I should say, will give them a deduction.

In our submission, in the face of section 174(2), it is not possible to descry an intention in section 170 in the context of the whole of the provisions by which it is surrounded.  It is not possible to descry an intention that a loan agreement rendered unenforceable at the election of the borrower – which is this case – may not produce a situation where a common money account for money had and received for the money the benefit of which has been enjoyed by the borrower should not be allowed or, to put it as it has been put in some of the writings, no preclusive effect against money had and received can be seen in the words of the statute, starting with and centred on section 170, but including very tellingly that which is provided concerning the legislative intention concerning the transactions in question in section 174(2).  We have already taken your Honours to that passage in Amadio.  May we also in the same context ‑ ‑ ‑

GUMMOW J:   In Amadio there was a trade practices claim as well, was there not?

MR WALKER:   Yes.

GUMMOW J:   That is why it was in the Federal Court.

MR WALKER:   Yes, your Honour, that is right.

FRENCH CJ:   Incidentally, just to go back a moment so it does not slip past the keeper.  We are dealing here, subject to it being the State of Queensland for the moment, with legislation adopted by the State, that is, the ACT Code is adopted by the State and becomes State law.

MR WALKER:   Yes, but I am not sure whether that is Queensland – with what I am talking about at the moment.

FRENCH CJ:   It does not matter which State at the moment.  Just assume it is one the States.  No question of 68 of the Judiciary Act arises.  You mentioned that.  It either picks up State law governing accesorial liabilities to offences generally or that may depend upon which State it is in.

MR WALKER:   Quite.  My reference to section 68 was under a different regime ‑ ‑ ‑

FRENCH CJ:   I am sorry, I misunderstood you perhaps.

GUMMOW J:   Justice Crennan reminds me that you have to look at section 568.

MR WALKER:   I am sorry.  I cannot answer that at the moment, your Honour.  May I answer that afterwards?  Your Honours, in relation to the election or the choice to which I have referred, could we take you as well also to the approach of Justices Dixon and Evatt respectively – that is separately – in Commonwealth Homes and Investment Company Limited v Smith (1937) 59 CLR 443, picking the matter up at page 461 in the reasons of Justice Dixon.

Here, the question arose concerning what would happen to an allotment of shares in light of the provision section 226 of the South Australian Act which provided for what would happen if there was a shortfall in subscription, namely the allotment should not be binding on the applicant.  You will pick up those provisions at page 460 point 7.  Page 461, at the foot of the page, his Honour then refers to what the section does:

is to deny to allotment part only of these characteristics, namely, the quality of binding the allottee.  It is express in its reference to the applicant, and he it is who is not to be bound.  

One may adapt the same language and idea to what is said in 174(2).  It applies equally to debentures, et cetera, contract -

In these circumstances I think that sec. 226 should not be construed as depriving the allotment of shares or debentures of all legal effect whatsoever.  It cannot be the source of any obligation upon the allottee or applicant.  But he may take advantage of it and by his assent given with knowledge bind himself to the obligations incident to the status of membership in respect of the shares allotted.

That, of course, is radically different from the notion of an infirm transaction by reason of some public policy or policy of the law upon which it would be offensive in the administration of justice for any rights to be founded.  That is a world away.

Could I now take your Honours to page 463 in Mr Justice Dixon’s reasons?  In applying that principle to these facts it became, about three‑quarters of an inch down, second line of the first full paragraph, it was significant:

that the respondent was unaware of the facts upon which his right to avoid the allotment depends –

That is how his Honour saw the matter arising -

No ratification or acquiescence can be imputed to him in the absence of knowledge of or a belief in the existence of his right of avoiding the allotment or the facts on which that right depends . . . It is not enough to say that means of knowledge were available.

So there is nothing constructive involved, and then further down, in relation to a statute of limitations, about an inch into that paragraph:

He could not have sued for money had and received while the allotment stood.

That is the significance in this case, given the way in which the respondent’s investors ran their cases.  That is the significance of the election or choice ‑ ‑ ‑

GUMMOW J:   Sorry, where are you reading from, Mr Walker?

MR WALKER:   I am looking at page 463.  It is about an inch down in the paragraph commending “The appellant also relied upon the Statute of Limitations”, so about point 7 on the page:

He could not have sued for money had and received while the allotment stood.

Then the word “rescission” is used:

I am inclined to think that without rescission or rectification –

that is, rectification of the register; getting rid of the shares as it were –

he could not obtain the return or repayment of such moneys.

So the accrual of the cause of action for limitations purposes does not occur until the election.

GUMMOW J:   The complaint was, was it not, there was a call made?

MR WALKER:   Yes, so there had been lots of water under the bridge, hence the importance of examining whether or not he had lost his right ‑ ‑ ‑

GUMMOW J:   There was a resistance to the call by the shareholders, was there not?  Is that right?

MR WALKER:   Yes, that is how the matter arises, and that is what rendered significant the notion of, in effect, was it too late for him to rely upon the protective provisions, going right back to the very beginning of section 226.  After all, he had had the allotment, and a question arose, obviously, as to whether that could be undone on the basis that the statutory provision was that the allotment was not binding.

GUMMOW J:   So what remedy was he after…..page 446.

MR WALKER:   He wants to have his name removed from the company’s register of shareholders.

GUMMOW J:   An injunction to restrain the call.

MR WALKER:   Yes, to be removed as one of those subject to the call, in the course of compulsory winding-up.

GUMMOW J:   What he was got was at 447.

MR WALKER:   I am so sorry, I did not hear your Honour’s last ‑ ‑ ‑

GUMMOW J:   The remedy he actually got appears at 447 which seemed to be just rectification and repayment of what he had paid so far.

MR WALKER:   Yes.

GUMMOW J:   I guess if he was off the register, he could not be subject to a call.

MR WALKER:   That is right.  One of the issues in the case, as you see from counsel’s argument at 447, point 4, was in effect that other people’s rights were in question, and you have to take steps to get yourself off the register, and that is what Mr Justice Dixon was dealing with on page 463, and it has the familiar lineaments of an election, a choice, namely it is something which can be done only by a person aware of relevant facts.

GUMMOW J:   That is the significance of what Sir Owen Dixon says at 463, point 8:

Without recission or rectification he could not obtain the return or repayment of such moneys.

MR WALKER:   Yes.  Those moneys, of course, are the subscription moneys.

GUMMOW J:   Yes, and he could not have sued for money he had not received other than by first getting rectification.

MR WALKER:   Yes.  You see the word “recission”, one of those words that has not quite chameleon shades of meaning, but used in distinctly different senses in different areas.  Here, in our submission, it means – albeit after a fully executed agreement there has been an allotment – it means undoing, not just bringing to an end, there are no executory obligations on the allotment agreement, but undoing it.  Mr Justice Evatt, to somewhat similar effect, picking it up at page 465, bearing in mind the statutory language here was not binding – that is, in this case, of Smith – his Honour says in the second full paragraph, the section:

was not intended to operate so as to annihilate the transaction between the subscriber and the company –

Then there is a reference to why someone may choose to stay:

Despite non‑compliance by the promoters with the conditions of sec. 226, membership of the company may turn out to be profitable.  Why should the neglect of duty on the part of the promoters enable the directors to announce to a member after the enterprise has succeeded: “You are not, and never were, a member, because we took good care not to comply with sec. 226.”  The wording of sec. 226 is not apt to suggest an allotment which must for all purposes be treated as a nullity.  The section merely declares that the allotment is not “binding on the applicant,” it says nothing about whether the company may still come to be bound.

That is this non‑mutual effect of enforceability, obviously turning, though not only turning, on the difference between a contravener and a member of a class among those classes to be protected by the statute.  Then his Honour expresses it in familiar language:

I am satisfied that the language used shows that the object of the section is to confer upon an applicant a right to treat an allotment as not binding upon him, a right which he may exercise or not at his choice.  In one sense the conditions set out in sec. 226 may be regarded as analogous to conditions which an applicant is at liberty to treat as going to the root of the contract, and as entitling him to rescind the contract -

one can hear the notion of a waiver in the background there -

In my view, wherever sec. 226 applies, it gives an applicant a right to avoid the contract by which he has agreed to take shares, but does not compel him to do so -

et cetera.  Yet other language of a kind that bears multiple meanings in different circumstances can be seen in Mr Justice Evatt’s reasons at 466.5, a bit like the passage to which Justice Gummow most recently drew attention in Mr Justice Dixon’s reasons:

the plaintiff did not become entitled to demand repayment of his subscription moneys until he repudiated the contract of membership, shortly before the issue of the writ in the action.

And “repudiated” there means “with the requisite knowledge making the choice or election to say I will not be bound by that contract”.

HEYDON J:   Is the next sentence relevant:

It follows that the contention based on the Statute of Limitations must fail.

Is it relevant to this case?

MR WALKER:   Yes on a contention, we think.  Yes.  As we understand it, this is common ground.  I stress, namely, the effect of the prescribed interest authorities given a loan contract associated with a scheme, the entry into which was a contravention, and one sees that in our learned friend’s written submissions, we think, if we are reading them correctly, in paragraph 29.  There is also a reference which we think shows the continued common ground explicit in the Court of Appeal and we think continued in this Court in our learned friend’s paragraph 32, particularly given the authorities in and the content of, their footnote 71.  It means that, if we are correct in understanding the position, it is accepted there was an election to bring the matter to an end and it is further accepted that in those circumstances it depends upon the statute here, section 170, in its context, whether or not there can be a common money account for money had and received for the loan moneys not repaid.

In our submission, that is on all fours with the approach taken to the effect of illegality – true in this case with respect to a claim in trust following upon purchase in another’s name with moneys fraudulently borrowed at a lower rate of interest – in Nelson v Nelson (1995) 184 CLR 538 and picking it up in particular at the passage in the reasons of Justices Deane and Gummow at page 552. So there is the taxonomy that authorities such as Yango Pastoral (1978) 139 CLR 410 might suggest in relation to the effect in the nature of illegality by a statute and then halfway down 552 in a category of case which we would submit is one of these, there is nothing in itself wrong about entering into a loan agreement:

the courts act not in response to a direct legislative prohibition but, as it is said, from the “policy of the law”.

That is why, with respect, we do not challenge the first of the two matters seen in the prescribed interest cases.  We accept that though loan agreements are not within offer, issue, invitation to subscribe prohibited by section 170, nonetheless the association of these loan agreements brings them within this ambit of illegality –

The finding of such policy involves consideration of the scope and purpose of a particular statute.

Hence the significance of subsection 174(2), your Honours –

The formulation of the appropriate public policy in this class of case may more readily accommodate equitable doctrines and remedies and restitutionary money claims than is possible where the making of the contract offends an express or implied statutory prohibition.

We will be continuing to develop that argument.

FRENCH CJ:   I suppose if the making of the loan were conduct involving the lender in accessorial liability ‑ ‑ ‑

MR WALKER:   Different considerations may arise.

FRENCH CJ:   Then it would be a different consideration, yes.  That was not run in this case.

MR WALKER:   Thank you.  There are two points; (a) it most definitely was not run and, bearing in mind that there was common directorships, or at least control, it was an obvious point to be run with evidence and appropriate findings if it could be run.  So there is more than usual significance in the fact that the point was not run.  If there was anything in it, there was at least the favourable substrate of the same human minds directing the various corporations at that time, of course.

The second point is, though different considerations would be involved, there would not necessarily be different outcome.  The question would still be whether the effect of the statute required that there could be no recovery of the lent principal making just allowance, as doctrine requires, sometimes called counter-restitution, for that which had been paid.  That question would still arise and would not be foreclosed even if it had been a case of accessorial liability of the vendor in the contravention of section 170. 

Now, if one can go forward then in Nelson to page 559, still in the reasons of Justices Deane and Gummow, the two full paragraphs on the top of that page above the subheading I will not read.  In our submission, they are, with great respect, an appropriate guide to the application – or, first of all, the identification and application of principle.  In particular, the reference to equity invokes either resemblance to rootedness in or similarity with equity of the common money count for money had and received, to which reference has been made in both written submissions and in the reasons in the Court of Appeal, and, in particular, the last sentence in the middle of that page 559:

In various instances equity has taken the view that it may intervene, albeit with the attachment of conditions, lest there be “no redress at all against the fraud nor any body to ask it”.

It is to be recalled that in this case, that is Nelson v Nelson, the Bench divided on the question whether the advantage fraudulently obtained from the Commonwealth of the reduced interest should be the subject of the imposition of a condition.  This was, of course, equity in an unproblematic way, that is, equity in an overt way because a trust obligation was the subject of the claimed relief.  Our submission is that these are principles which, as will be seen in the next authority to which we come, may be and have been and in this case should be applied to the money had and received count.

Finally, could I take your Honours in Nelson at this point to, again in Justices Deane and Gummow, page 563.  Having referred to equity’s approach, and I draw to attention in particular apropros the Chief Justice’s inquiry to me, the reference to “particeps criminis” at about point 3 on that page, dropping down after the quote we, with respect, place emphasis on what is now a repeated proposition in these reasons, namely:

in these cases, no doubt the operation of the particular statute will be critical -

a reference to the money‑lending legislation in particular.  Could I take your Honours then to 593 in the reasons of Justice Toohey?  Just to draw to attention without reading, the passage at the foot of page where his Honour is considering the position of the Commonwealth, which of course had been imposed upon contrary to the legislative permission for the particular form of borrowing at the favourable rate, and 597 in the same judge’s reasons, the second full paragraph:

Although the public policy in discouraging unlawful acts and refusing them judicial approval is important –

We interpolate at least one aspect of our learned friend’s written submissions would suggest that is not merely important, but it is decisive and to be answered without any balancing involved.  We submit, this is one of the passages that stands against that approach.  Continuing the passage:

it is not the only relevant policy consideration.  There is also the consideration of preventing injustice and the enrichment of one party at the expense of the other.  In the present case there was an arrangement, to which the members of the family were party –

because remember Mrs Nelson knew about all of this –

that Bent Street be acquired in the names of Peter and Elizabeth Nelson.  Their purpose was to enable Mrs Nelson to obtain a Defence Service Home loan if the occasion arose.  Such a loan involved favourable terms to the borrower; the loan itself of course was in any event repayable.  To that limited extent there would be a benefit –

et cetera, “[T]here is no rule of public policy”, his Honour said for circumstances where there had been benefits of various kinds to the different players –

there is no rule of public policy that demands that relief to Mrs Nelson must be refused.  In particular there is no such rule that precludes giving effect to a resulting trust in her favour.

His Honour, with respect, distinguishes between what might be called a general consideration, relief must be refused, and then the particular way in which it was framed in that case, which was with respect to a trust obligation, does not preclude giving effect to a resulting trust.  There are two passages in Justice McHugh’s reasons that are important for (a) later reference in this Court and, (b) the way in which they have been treated in our learned friend’s written submissions.

The two passages, the first is 604 to 605, and the second is 612 to 613.  The first is the passage which is highlighted and placed at the centre of this aspect of our friend’s argument by paragraphs 20 and 21 of their written submissions.  At page 604 Lord Mansfield is invoked, that is Holman v Johnson:

[n]o Court will lend its aid to a man who founds his cause of action upon an immoral or illegal act -

usually in Latin tagged “ex turpi causa” –

The principle contained in this dictum applies in both law and equity.  But it is subject to exceptions –

It is the exceptions which drive the argument of our learned friends –

which allow relief to be granted despite the presence of illegality.

Then, I will not read them, first, second, third, fourth, and in particular one sees that the first of them involves the claimant being “ignorant or mistaken as to” what makes it illegal, to which I – it is obviously important bearing in mind the way in which the investor’s respondents chose to run their case.

At page 612, his Honour returns to – and I do not mean that he has been absent from – but after development of consideration, comes back to how, in his Honour’s opinion then in this resulting trust case, these principles should be approached, and halfway down 612, one finds the following, apropos Lord Justice Nicholls’ comments upon ex turpi causa quoted above, Justice McHugh says:

This approach confers a broad judicial discretion upon the judge to determine whether the grant of relief would affront “the public conscience”.  While it provides a ready means for a judge to do what he or she thinks is just in the circumstances of the particular case, it does so by means of an unstructured discretion.  The so called “public conscience” test, although providing a flexible approach, leaves the matter at large.

This is criticism of an approach discerned by his Honour in his Lordship’s suggestions –

Greater certainty in the application of the illegality doctrine will be achieved if the courts apply principles instead of a vague standard such as the “public conscience”.  But what principles, consistent with the public policy underpinnings of the doctrine of illegality, should the courts apply -

A question which, in our submission, invites an answer and his Honour gives it.  This is where, as it were, his Honour lands.  He continues in the critical passage – I cannot read all of it to your Honours, it is too long.  It starts “If courts withhold relief” at the foot of page 612, and it goes over to the foot of page 613 just before the important link:

The adoption of these principles accords with the approach of this Court in the leading case of Yango.

Summarised, and using some of his Honour’s words, what Justice McHugh said in this answer to the search for the question about “what are the principles?”, first one notes that a particular kind of case has to be put to one side, a kind of case which is truly governed, controlled, foreclosed by the statute.  One sees that just above the paragraph commencing “First”.  His Honour says:

Leaving aside cases where the statute makes rights arising out of the transaction unenforceable in all circumstances –

That is an expression, of course, which cannot possibly apply to the loan contract in this case.  It does not even apply to the position of the transactions constituting the breach, the contravention.  After all, the investor can decide this is too good to lose.  It can be enforced by the investor.  His Honour then talks about the conditions necessary to visit this extra sanction of preclusion of remedy upon a situation affected by illegality.  There should be a proportionality judged by reference to the terms or policy of the statute – in this case, it is section 170.  I interpolate, we have the explicit guide from 174(2) as to the disproportionality of wiping out the loan agreement completely with nothing arising from what did actually happen under it, namely the provision of money which actually did purchase rights and obtain deductions.  His Honour notes:

The statute must always be the reference point for determining the seriousness of the illegality –

The second one is that there must be a furthering of the purpose of the statute.  Some writers have talked in terms of the law not being self‑frustrating, so it should be a concordance, not a discordance:

not impose a further sanction for the unlawful conduct if Parliament has indicated that the sanctions imposed by the statute are sufficient to deal with conduct –

In this case one has seen the seriousness of the sanctions provided by section 174(1).  It would be, in our submission, going far too far beyond limits referred to by Justice McHugh in this passage to add to that the visiting upon a lender, not a contravener, of an incapacity to get back the principal which has been enjoyed, spent, and the subject in at least two ways of financial benefit by an investor.  Then a critical passage, bearing in mind the way in which our learned friends have focussed on 604, 605 in Justice McHugh’s reasons.  A critical passage - the next paragraph:

Accordingly, in my opinion, even if a case does not come within one of the four exceptions to the Holman dictum -

that is 604, 605

to which I have referred, courts should not refuse to enforce legal or equitable rights simply because they arose out of or were associated with an unlawful purpose unless:  (a) the statute discloses an intention that those rights should be unenforceable in all circumstances -

that goes back to the case that his Honour had put to one side -

or (b)(i) the sanction of refusing to enforce those rights is not disproportionate to the seriousness of the unlawful conduct;  (ii) the imposition of the sanction is necessary, having regard to the terms of the statute, to protect its objects or policies;  and (iii) the statute does not disclose an intention that the sanctions and remedies contained in the statute are to be the only legal consequences of a breach of the statute or the frustration of its policies.

Now, our learned friends do recognise this passage 612, 613 in their footnote 36 which commences by providing the citation to 604, 605 which is the centrepiece of their argument.  Then in a sentence commencing “Although” which I will not go on to read, there is recognition of a way in which the exceptions are to be confined.  One does not find any other reference except by incorporating Leonhardt, to which I am about to come, to the critical passage 612, 613 where Justice McHugh, having considered the four exceptions, plainly rejected them as definitive, categorical, or exhaustive of the matter and in terms which are unmistakably so.  That is why the reasoning in paragraph 21 of our learned friend’s written submissions must be rejected.  None of the exceptions applies, say our friends, therefore, restitution should be denied.  That is not what the judge who had referred to those exceptions thought would be the case.

GUMMOW J:   Where do you say Justice McHugh indicates non‑exhaustive statement?

MR WALKER:   It is that passage at 613, your Honour.  Just down below halfway:

Accordingly, in my opinion, even if a case does not come within one of the four exceptions -

The whole of that paragraph attends to a case outside the exceptions, meaning the exceptions are not exhaustive of the possibility.  That does not mean that there is not a great deal of overlap between aspects of some or all of those exceptions and what his Honour then promulgates in that paragraph.  There is in the nature of things but quite plainly those exceptions were not being treated by his Honour as exhaustive.  To the contrary.

The prescribed interest cases uniformly recognised that, in principle, restitution of funds advanced under the illegal loan contract was not precluded.  In each case, however, the determination of the restitutionary claim was either unnecessary or remitted to the trial judge.  The courts did not identify the applicable category of restitutionary relief or address the question whether the lender’s receipt of some payments precluded relief.  There is no basis on which to infer that the restitutionary relief recognised in the prescribed interest cases as available ‘in principle’ was implicitly based on a total failure of consideration.  Indeed, as Mason and Carter state, there is ‘a problem with [the] analysis’ in Hurst v Vestcorp Ltd because there was ‘no explanation of how the prima facie claim was established’ and no reliance on ‘any recognised unjust factor’.  Further, as ‘the suggestion appears to be that unjust enrichment may operate on the basic claim, unmerited benefit’ the analysis (which was adopted in the subsequent prescribed interest cases) may not accord with the requirements of a prima facie claim elaborated by the High Court in the significant decisions following Pavey.

The point has never really been determined by an intermediate appellate court.  The closest that they have ever got was, I think, in ABCOS at page 541 where Justices Wilcox and Lindgren appeared to state that the test was whether the relevant section of the Code suggested an intention to exclude the remedy of restitution, and that seems to be the basis of the appellant’s case here. 

We say that that is the wrong approach; the illegality of the contract is determined by inference from the Code on public policy grounds and the consequences of illegality must be determined in a similar way.  If the Code referred to particular forms of legal rights or remedies that would provide the answer, but it cannot be inferred from the absence of specific reference that a party in breach has any particular rights or remedies, though a right to recover moneys had and received is of course distinct from a contractual right to sue for a contractual debt.

In our submission, here it was a concomitant right which was affected by the same considerations of policy.  So we say that we have now reached our first row of trenches.  We say that there is no indication on inferential or public policy grounds that where a contract is unenforceable there should be a parallel restitutionary right under one of the common law rubrics.

FRENCH CJ:   What sort of indications would one look for?

MR MERRALLS:   If there were to be an indication in the statute – well, it would be the basis of the illegality, the severity of the illegality, the way Parliament has treated it, the relationship of the illegality to the conduct upon which the claim is based.  Leonhardt’s Case is perhaps a good example of that where you have a degree of removal from the illegal act to the claim for work performed because an additional factor in that case – it was the defendant who was seeking to resist payment who was in default in not obtaining a licence to drill.

FRENCH CJ:   Does it depend partly on the factual circumstances?  Would you, for example, equate this case to the case of a single multi‑party contract in which Rural and CBG and JFM and the investor are all parties, including provisions for loans to be advanced under that contract?

MR MERRALLS:   Would I distinguish it from it?

FRENCH CJ:   Would you distinguish it?  Would you say this is really like that case?

MR MERRALLS:   Yes.  I would not distinguish it from it at all, no, because of the relationship of the loan to the scheme as a whole.  It is all very well for my learned friend to say that it was open to participants in the scheme to go to Westpac and obtain a loan privately.  Of course they could, and if they did then the Westpac loan would not be tainted in any way at all because it would not be part of the scheme.  It is because it is part of the scheme and in this case the controlling minds of all the companies that participated in the schemes – all four companies – were the same, common boards. 

FRENCH CJ:   Was that an element upon which Justice Byrne found the loan contract unenforceable because he was doing so from the investors’ perspective, was he not?

MR MERRALLS:   Yes.

FRENCH CJ:   He found it severable from the lender’s perspective.

MR MERRALLS:   Yes.

FRENCH CJ:   But not severable from the investors’ perspective because they never intended that they, on his finding, would go into the loan arrangement if the scheme or the loan arrangement should stand if the scheme should fall away.

MR MERRALLS:   Yes.  It is a pity you used that expression “fall away” because it is ambiguous.

FRENCH CJ:   Yes.

MR MERRALLS:   We accept the explanation that was given.

FRENCH CJ:   It was not focusing so much on what one might call an accessorial involvement of Rural as distinct from the imputed intentions in relation to the investors and their attitude to the loan.

MR MERRALLS:   I think it was both.

FRENCH CJ:   Yes.

MR MERRALLS:   Yes. 

FRENCH CJ:   Is that reflected in a finding?

MR MERRALLS:   You have to get from the loan from Westpac to the loan from Rural and that did not involve entirely matters from the perspective of the investor.  Of course, I mentioned the community of interest provisions in some of the loan agreements.  If, contrary to our submission, our first line of trenches were to be overrun, we come to our second line which is that if contrary to our primary submission, a right to plain recovery and restitution - I use that in the loose descriptive sense in which the word is often applied – is not necessarily precluded, there must be what has been described as a qualifying or vitiating factor falling into some particular category entitling the plaintiff to recover. 

We refer to cases in which statements to that effect are found in paragraph 18 of our written submissions, and those cases are referred to in footnotes 27 to 29.  It has also been stated on several occasions in this Court, perhaps most recently in Farah Constructions v Say-Dee (2007) 230 CLR 86 at 156 in paragraph 150. The appellant has pinned its claim on what was originally expressed as “total failure” or “failure of consideration” and I do not wish to address the Court on any possible distinction between failure and total failure of consideration. What we are really concerned with is the nature of the consideration that is alleged. It was not quite clear from my learned friend’s submissions how he describes or identifies that consideration. He says at one stage that the failure was the removal of the right to repayment, which he seemed to assume was removed at some time after the loan was made, and in another place, he said that the contemplated state of affairs – presumably the contemplated state of affairs being that there were four agreements that were all valid and enforceable – disappeared when the transaction was called off.

In our submission, it boils down to an assertion that there was a failure of consideration which was constituted by the unenforceability of the loan contract, because that removed or destroyed any right to repayment that ever existed and, in fact, none existed.  That was caused by the conduct of the promoters of the scheme with whom, for this purpose, Rural Finance was identified, if it was not one of them itself.  The proximity of Rural Finance to the other participants in the scheme on the promoter’s side is described by Mr Justice Byrne in paragraphs 112 and 113 of his judgment.

In its reply to our written submissions, the appellant says that this part of our submissions suffers from what is called a conflation of parties and transactions.  If it does, we confess and avoid because for this purpose, in our submission, the parties are conflated or fused.  Members of the Johnson group of four companies played interlocking roles in the investment scheme and the appellant cannot set up a sort of Salomon fence to separate them.  The Court has required the, what is called, removal of a substratum of a joint relationship or endeavour to be without attributable blame before relief by restitution or constructive trust is allowed.  I refer to Roxborough v Rothmans of Pall Mall 208 CLR, first of all at page 525 in paragraph 16. I am sorry I have an unmarked copy:

The authorities referred to by Deane J, in his discussion of the common law count for money had and received in Muschinski v Dodds, show that the concept embraces payment for a purpose which has failed as, for example, where a condition has not been fulfilled, or a contemplated state of affairs has disappeared.  Deane J, referring to “the general equitable notions which find expression in the common law count”, gave as an example “a case where the substratum of a joint relationship or endeavour is removed without attributable blame and where the benefit of money or other property contributed by one party on the basis and for the purposes of the relationship or endeavour would otherwise be enjoyed by the other party in circumstances in which it was not specifically intended or specially provided that that other party should so enjoy it”.  In the case of money paid pursuant to a contact, it would involve too narrow a view of those “general equitable notions” to limit failure of consideration to failure of contractual performance.

We emphasise the reference to ‑ ‑ ‑

GUMMOW J:   If one looks at the open sentence of paragraph 16 on 525, which you have been taking us to, involved in that, and I am not saying it is in any way wrong, but involved in that is some notion of consideration which predates or is broader than 19th century ideas of contractual formation.

MR MERRALLS:   I am not sure about that, your Honour, I wondered whether it was not a reference back to something - was it Lord Wright in Fibrosa v Fairbairn?

GUMMOW J:   You may be right, but he may in turn have been ‑ ‑ ‑

MR MERRALLS:   Yes, well he may have been, yes.  This is pre‑Slade’s Case, or immediately following Slade’s Case.

GUMMOW J:   He talks about a purpose which has failed” and then about 10 lines from the bottom ‑ ‑ ‑

MR MERRALLS:   Yes, well that may be simply a reference to the type of arrangement that Muschinsky v Dodds was.  That was a de facto relationship.

GUMMOW J:   Yes.  About 10 lines from the bottom of the page “to limit” would be wrong, he is saying:

to limit failure of consideration to failure of contractual performance.

MR MERRALLS:   Yes, but performance, not promise.

GUMMOW J:   It is usually the promise of the contractual performance which is the consideration.  That is what I am ‑ ‑ ‑

MR MERRALLS:   Yes, that is the distinction that I was attempting to draw.

Of course, it is now generally recognised that the claim for money had and received, though the claim is brought at law, notions – to use your Honour’s language in Roxborough v Rothmans, your Honour Justice Gummow:

notions derived from equity have worked into and in that sense have become part of the fabric of the common law.

That, of course, goes back to a series of cases in the mid-18th century, mainly decisions of Lord Mansfield.  You find in those cases that idea expressed over and over again in a very direct and simple language.  Those passages and, in particular, his Lordship’s judgment in Moses v Macferlan, require the circumstances and substance of the transaction to be examined and the competing claims of the parties to be evaluated. 

In our submission, considerations of equity and good conscience apply acutely when a party’s own act or omission, or the act or omission of a party with whom a claimant is closely connected, as Rural was to the other participants in the scheme here, where that act or omission has produced the unenforceability of a contract or where, in turn, that conduct is relied on as the foundation for the claim in restitution, as it appears to be here ‑ ‑ ‑

GUMMOW J:   If one is looking at Roxborough, perhaps at paragraph 101, there is a long extract from Professor Stoljar’s writing.

MR MERRALLS:   What is the page reference?

GUMMOW J:   Page 555 of Roxborough.

MR MERRALLS:   Page 555?

GUMMOW J:   Yes, paragraph 101.  He says:

thirdly, failure of consideration has also a much older and specialised sense, one that describes a specific remedy when, upon the collapse of a bargain, the promisee seeks to recover money had and received by the promisor.  Thus failure of consideration specifies not only a claim, but also the particular basis –

That may be linked to what Justice Deane was saying, I think.

MR MERRALLS:   Yes.

KIEFEL J:   I think in that article Professor Stoljar explains or expresses the opinion that the notion of failure of consideration was derived from 19th century pleading requirements and his thesis is that since those pleading requirements have gone so should failure of consideration as the requirement of it to be total.

MR MERRALLS:   I must confess that I have not read Professor Stoljar’s article, your Honour.  I am indebted to your Honour for the information.

KIEFEL J:   If it be right, if it be correct.

MR MERRALLS:   I am afraid I cannot comment on it.  Now, a number of matters are relevant to the claim.  Rural Finance’s loan agreements were, in our submission, nothing more than a mechanism by which the respondents entered into investments in the blueberry farm project.  They did not obtain an asset of equivalent value to that of the loan, hence their enrichment, if that term can be used, was not the face value of the loan but the right to participate in the scheme, and participation then required the actual payment of two amounts and the assignment of any income derived from the activities.  Now, my learned friend referred your Honours this afternoon to the pleading at paragraph 35 of our defence:

The Defendant acquired his prescribed interest in the Blueberry Hill Joint Venture with funds provided to him under the Loan Agreement.

It is not alleged that it was acquired in a particular way or what the significance of the acquisition or the use of the funds was.

In fact, that paragraph is one of a series of paragraphs which lead to the allegation in paragraph 37 that the contract was illegal.  It has got nothing to do with the claim against which a pleading was made in paragraph 20A for restitution.  It is simply the pleader’s attempt to link Rural Finance with the other participants in the scheme in order to get to the conclusion that the loan agreement, in addition to the other agreements, was rendered unenforceable by section 171.  That appears abundantly from paragraphs 33 and 34.  Paragraph 20A was inserted much later by amendment in response to the plea claim in restitution.  It is unfortunate that because the restitutionary claim was initially made as a sort of afterthought at the end of a statement of claim ‑ ‑ ‑

GUMMOW J:   It was a counterclaim, was it not?  Was it not a counterclaim?

MR MERRALLS:   No.

GUMMOW J:   How did it come into the litigation?

MR MERRALLS:   It was the last paragraph of the statement of claim.  It is on page 13.  It was just made baldly as a claim “for money had and received to the use of the Plaintiff”, referring to the particulars which are, in fact, particulars to the claims in contract.

GUMMOW J:   But that is a claim against you.

MR MERRALLS:   Yes, that is right.  That was the way the claim was made, but, as I say, it was made as a sort of afterthought, as it appears in the pleading.  It is not elaborated in any way by reference to the conventional rubrics of moneys had and received and the pleadings are really back to front and a lot of the material ‑ ‑ ‑

GUMMOW J:   But then at page 22 there is a counterclaim in paragraph 43, a counterclaim by your side for restitution of amounts paid and repaid.

MR MERRALLS:   Yes.  The pleadings are topsy-turvy inasmuch as much of the material that one would normally expect to find in a statement of claim is, in fact, pleaded in the reply and some of the matters that are effectively pleaded in answer to matters that are in the reply are pleaded in our defence.  That occurred because of the way the amendments were made at the hearing and some pages have been – if your Honours would look at pages 35 and 36 of the appeal book, which is in a document headed “Second Further Amended Reply and Defence to Counterclaim”, one finds in paragraph 4A(d) on page 36 the claim that I said one would normally expect to find in the statements of claim rather than the reply:

the Defendant was unjustly enriched as amongst other things:

(i)the Defendant entered into the Loan Agreement dated 31 May 1989 with Rural pursuant to which Rural lent the Defendant $44,506.00;

(ii)the Defendant received the benefit of the payments by the sale of fruit proceeds pursuant to the Sale of Fruit Agreement; and

(iii)the Defendant derived a tax benefit to the extent of amongst other things the interest prepaid pursuant to clause 6(i) of the Loan Agreement, the payments made pursuant to clause 3C(i) of the Loan Agreement and the payment of interest and management fees.

FRENCH CJ:   That is pleaded in answer to a paragraph 21A.  Is there such a paragraph in the ‑ ‑ ‑

MR MERRALLS:   Paragraph?

FRENCH CJ:   That is pleaded in answer to paragraph 21A.

MR MERRALLS:   Yes.

FRENCH CJ:   Where is that?

MR MERRALLS:   All of which were ‑ ‑ ‑

FRENCH CJ:   Is that a mistake for 20A?

MR MERRALLS:   Yes, 21A, I notice I have got a query, 20A, on my copy.

FRENCH CJ:   Yes, okay.

GUMMOW J:   What happened at trial on the counterclaim that you were making?

MR MERRALLS:   Nothing happened at trial because an order was made before the trial by Mr Justice Harper deferring consideration of the counterclaim.  That was the order that my learned friend referred to in which it was ordered that the quantum of any restitutionary benefits would also be deferred for further consideration.  Well, that is what happened, your Honour.

FRENCH CJ:   All right, Mr Merralls, we will adjourn until 10 o’clock tomorrow morning.

MR MERRALLS:   If your Honours please.

AT 4.17 PM THE MATTER WAS ADJOURNED
UNTIL THURSDAY, 10 MARCH 2011