Patrick v Capital Finance Corporation (Australasia) Pty Ltd

[2004] FCA 120

FEDERAL COURT OF AUSTRALIA

Patrick v Capital Finance Corporation (Australasia) Pty Ltd [2004] FCA 120

TRADE PRACTICES - misleading and deceptive conduct - representative proceedings - prospectus issued for stage production “Crazy For You” - participants borrowed money to invest in "Crazy For You Fund" - tax-driven investment scheme - loans made to investors - assignment of loans - representations made in prospectus - allegation that representations as to use of investors’ funds were misleading - allegation that 68% of investors funds used to purchase term bonds as security rather than production costs - knowledge of respondents - claim of aiding and abetting misleading conduct - onus on applicant to establish that investors’ funds were misapplied in manner alleged - alleged misapplication of funds not established - causation and reliance - applicant did not rely on representations contained in the prospectus - held - applicant's case against all respondents must fail.

CONTRACT - agreements underpinning investment scheme - Crazy For You Fund - Deed of Investment - Co-Producers Equity Agreement - Co-Producers Agreement - Production Services Agreement - Production Management Agreement - obligations of various respondents - allegations of breach of contractual obligations - co-producers obligations under various agreements not restricted to pre-production expenses but include production running costs.

EQUITY - investment scheme - Crazy For You Fund - investors’ representative - trustee - fiduciary duties - trust property - allegations of breach of fiduciary duties - claim of accessorial or recipient liability in relation to trust funds - Barnes v Addy claim - test for accessorial or recipient liability - precise principle not critical - whether a reasonable person would be put on inquiry of a breach of trust or fiduciary duty - sufficient case not established - issue of funds being knowingly received - claim to set loans aside - applicant not permitted to 'approbate and reprobate - no offer of restitution by applicant - constructive trust.

PRACTICE AND PROCEDURE - representative proceedings brought under Part IVA of the Federal Court of Australia Act 1976 (Cth) - persons who borrowed money to invest in the Crazy For You Fund said to constitute a class - no challenge to proceedings being brought as a representative action.

Income Tax Assessment Act 1936 (Cth)

Trade Practices Act 1974 (Cth)
Fair Trading Act 1999 (Vic)
Fair Trading Act 1987 (NSW)

Patrick v Capital Finance Pty Ltd (No1) [2002] FCA 1566 cited

Jones v Dunkel (1959) 101 CLR 298 cited
Consul Development Pty Ltd v D.P.C Estates Pty Limited (1975) 132 CLR 373 referred to
Koorootang Nominees Pty Ltd v ANZ Banking Group [1998] 3 VR 16 referred to
Barnes v Addy [1874] 9 Ch App 244 referred to
Commonwealth v Verwayen (1991) 170 CLR 394 at 421 cited
Verschures Creameries Limited v Hull and Netherlands Steamship Company Limited [1921] 2 KB 608 referred to
Maguire v Makaronis (1997) 188 CLR 449 cited

WILLIAM GEORGE DOUGHTY PATRICK (for himself and as representing the persons referred to in paragraph 1 of the Statement of Claim) v
CAPITAL FINANCE CORPORATION (AUSTRALASIA) PTY LTD (ACN 074 692 443) CAPITAL FINANCE CORPORATION (AUSTRALIA) PTY LTD (ACN 074 352 194), CAPITAL FINANCE CORPORATION PTY LTD (ACN 064 512 385), KERROD GRANT PARK, OVERSEA-CHINESE BANKING CORPORATION LIMITED (ABN 073 598 035), CHRISTOPHER COOTE AND PHILLIP EMANUEL PRODUCTIONS LIMITED (ACN 002 693 512)

V 637 OF 2001

TAMBERLIN J
ADELAIDE (HEARD IN MELBOURNE)

26 FEBRUARY 2004

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIAN DISTRICT REGISTRY	V637 OF 2001

BETWEEN:

WILLIAM GEORGE DOUGHTY PATRICK (for himself and as representing the persons referred to in paragraph 1 of the Statement of Claim)
APPLICANT

AND:

CAPITAL FINANCE CORPORATION (AUSTRALASIA) PTY LTD (ACN 074 692 443)
FIRST RESPONDENT

CAPITAL FINANCE CORPORATION (AUSTRALIA) PTY LTD (ACN 074 352 104)
SECOND RESPONDENT

CAPITAL FINANCE CORPORATION PTY LTD
(ACN 064 512 385)
THIRD RESPONDENT

KERROD GRANT PARK
FOURTH RESPONDENT

OVERSEA-CHINESE BANKING CORPORATION LIMITED
(ABN 073 598 035)
FIFTH RESPONDENT

CHRISTOPHER COOTE
SIXTH RESPONDENT

PHILLIP EMANUEL PRODUCTIONS LIMITED
(ACN 002 693 512)
SEVENTH RESPONDENT

JUDGE:

TAMBERLIN J

DATE OF ORDER:

26 FEBRUARY 2004

WHERE MADE:

ADELAIDE (HEARD IN MELBOURNE)

THE COURT DIRECTS THAT:

The parties bring in Draft Short Minutes of Order to give effect to these reasons for judgment within twenty-one days.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIAN DISTRICT REGISTRY	V637 OF 2001

BETWEEN:

WILLIAM GEORGE DOUGHTY PATRICK (for himself and as representing the persons referred to in paragraph 1 of the Statement of Claim)
APPLICANT

AND:

CAPITAL FINANCE CORPORATION (AUSTRALASIA) PTY LTD (ACN 074 692 443)
FIRST RESPONDENT

CAPITAL FINANCE CORPORATION (AUSTRALIA) PTY LTD (ACN 074 352 104))
SECOND RESPONDENT

CAPITAL FINANCE CORPORATION PTY LTD
(ACN 064 512 385)
THIRD RESPONDENT

KERROD GRANT PARK
FOURTH RESPONDENT

OVERSEA-CHINESE BANKING CORPORATION LIMITED
(ABN 073 598 035)
FIFTH RESPONDENT

CHRISTOPHER COOTE
SIXTH RESPONDENT

PHILLIP EMANUEL PRODUCTIONS LIMITED
(ACN 002 693 512)
SEVENTH RESPONDENT

JUDGE:	TAMBERLIN J
DATE:	26 FEBRUARY 2004
PLACE:	ADELAIDE (HEARD IN MELBOURNE)

REASONS FOR JUDGMENT

1. The applicant (“Dr Patrick”) is a medical practitioner who sues the respondents for himself, and on behalf of the fifty-eight persons named in the Schedule to the Fourth Further Amended Statement of Claim (“Fourth FASC”).  Dr Patrick and the represented persons will be referred to collectively as “the participants”.  They are persons who had borrowed money in order to purchase or acquire an interest in an investment known as the Crazy For You Fund, which was a tax driven investment scheme designed to defer income tax for the financial year ended 30 June 1996 over a six year period.  The participants allegedly made their investments in reliance upon information contained in a prospectus issued on 22 April 1996 (“the Prospectus”).  The Prospectus was issued to offer interests for purchase to persons who had executed an “Offer to Borrow” document in which either the first respondent, Capital Finance Corporation (Australasia) Pty Ltd (“Capital Australasia”) or the second respondent, Capital Finance Corporation (Australia) Pty Ltd (“Capital Australia”) were described as “lenders”.  “Crazy For You” is the title of a musical production which was to be financed, in part, by investment from the participants.  The participants claim to have suffered loss and damage as a consequence of their investments.

2. At the close of the applicant’s case, a no case submission was made by the first to sixth respondents.  I refused to grant this application and my reasons are set out in a judgment delivered on 18 December 2002: see Patrick v Capital Finance Pty Ltd (No 1) [2002] FCA 1566. In the course of the hearing, I delivered judgments on matters raised by the parties on several interlocutory matters.

3. My reasons for judgment refusing the no case submission provide a brief background to the proceedings and indicate the substantial issues raised in the course of the proceeding having regard to the evidence addressed at that stage.  Subsequent to dismissal of that application, substantial additional oral and written evidence was adduced by Dr Patrick and the respondents.

   PARTIES

4. Dr Patrick is a surgeon who lives in Sydney.  He invested $100,000 in the Crazy For You Fund and sues on behalf of persons who borrowed money to invest in the fund, who are said to constitute a class for the purpose of representative proceedings, brought under the Federal Court of Australia Act 1976 (Cth) (“Federal Court Act”).

5. The first, second and third respondents (Capital Australasia, Capital Australia and Capital Finance Corporation Pty Ltd (“Capital Finance”), collectively “Capital”) are members of a group of finance companies that are effectively under the control of the fourth respondent (“Mr Park”).  Mr Park is a director of the first two respondents, and the Managing Director of Capital Finance.

6. The fifth respondent, Oversea-Chinese Banking Corporation (“OCBC”), is a bank carrying on business as a finance provider.  The Bank of Singapore (Australia) Limited (“BOSA”) is an Australian subsidiary of OCBC, and it entered into a number of transactions relating to the Crazy for You Fund prior to 1 July 1996.  On that date, BOSA assigned all its rights, title and interest in those transactions to OCBC.

7. The sixth respondent (“Mr Coote”) is a qualified chartered accountant who operates his own chartered accountancy firm.  According to the Crazy For You Fund documents, which refer to him as “the Representative”, Mr Coote’s role in the Crazy For You Fund was to represent the interests of the participants.

8. The seventh respondent, Phillip Emanuel Productions Limited (“Phillip Emanuel Productions”), is a management company which at all material times carried on business with respect to films and theatrical stage presentations.  This company did not participate in the hearing and no evidence was adduced, nor submissions made, on its behalf.  The controlling mind of entities in the Phillip Emanuel group of companies is Mr Phillip Emanuel (“Mr Emanuel”).  He was not called to give evidence, and the Court was informed that he was out of Australia.  Although not a party, another corporation in that group, Phillip Emanuel International Pty Ltd (“Phillip Emanuel International”), played an important role in the events that gave rise to the present dispute.

   ISSUES

9. The following issues have been canvassed in the pleadings and over the course of the hearing in this matter: whether the respondents engaged in misleading and deceptive conduct; whether the Offers to Borrow should be set aside; whether funds were knowingly received; whether trust property was received in the knowledge that it belonged to the participants with awareness of their misapplication, whether there had been breaches of fiduciary or trustee duties; whether the respondents were aware of, or accessories to, breaches of trust, contract, or fiduciary duties, and whether there should be compensation. 

10. During the hearing, many of the pleaded allegations raised by the applicant were abandoned or substantially modified in the light of the evidence.  This was a helpful and realistic approach, as it significantly reduced the number of issues requiring determination.

11. The pleadings in this matter were substantially amended prior to, and during the course of, the hearing.  The final statement of claim on which the matter proceeded to hearing was the Fourth FASC.  An application was made to file a Fifth Further Amended Statement of Claim (“Fifth FASC”) but amendments sought in that document were not allowed.  The applicant’s final submissions were based on a Third Further Amended Application filed in Court on 2 May 2003 (“the Third Amended Application”), which refers to a document described as “the Fifth FASC”.  As the respondents pointed out in final address, the latter document was in the nature of a convenient aide memoire.  It recorded numerous deletions to the Fourth FASC.  This judgment will refer to the “Fifth FASC” as a convenient reference point because it is referred to in the Third Amended Application and in the applicant’s submissions.  As recorded later, a number of arguments that the applicant made in final address were not the subject of the pleadings, and for that reason, among others, they were opposed by the respondents.

12. At the conclusion of the hearing, counsel for the applicant stated in written submissions that the “live” causes of action against the various respondents by reference to the “Fifth FASC” were as follows:

    (a)As Against Capital/Mr Park

    (I)Misleading and deceptive conduct and aiding and abetting such conduct.

    (II)Recipient and accessorial liability in relation to trust property.

    (III)Fraud resulting in the avoidance of the loan agreements.

    (IV)     Constructive trust.

    (b) As Against OCBC

    (I)Recipient and accessorial liability in relation to trust property.

    (II)      Setting aside the loan agreements.

    (c) As Against Mr Coote

    (I)       Breaches of the Investment Deed.

    (II)      Breaches of fiduciary duty.

13. The common questions of law and fact raised by the applicant in the Third Amended Application are as follows (shown here without indicating where the amendments have been made):

    “(a)Whether as a matter of fact the Fourth Respondent on behalf of the Capital Group established and implemented the Crazy For You Investment Scheme as alleged in paragraphs 13 and 16 of the Fifth Further Amended Statement of Claim for the purposes alleged in paragraph 14 of the Fifth Further Amended Statement of Claim;

    (b)Whether as a matter of fact the Fifth Respondent had the knowledge of the Crazy For You Investment Scheme, and agreed to implement it, as alleged in paragraph 15 of the Fifth Further Amended Statement of Claim;

    (c)Whether, as a matter of law and fact, the Offers to Borrow contained the express and implied terms alleged in paragraphs 27, 28 and 28A of the Fifth Further Amended Statement of Claim.

    (d)Whether, as a matter of law and fact, the First Respondent and/or the Second Respondent accepted the Offers to Borrow in accordance with the terms alleged in paragraph 27(g) of the Fifth Further Amended Statement of Claim.

    (f)Whether, as a matter of fact, advances were made by the First Respondent pursuant to the Offers to Borrow referred to in paragraph 26A of the Fifth Further Amended Statement of Claim, and

    (i)what the source of the money used to make those advances was;

    (ii)       to who or whom those advances were made;

    (iii)      to what use those advances were put.

    (k)Whether as a matter of law and fact the prospectus representations referred to in paragraph 41 of the Fifth Further Amended Statement of Claim were misleading or deceptive or likely to mislead or deceive, or contained the material omissions alleged in paragraph 51A of the Fifth Further Amended Statement of Claim;

    (l)Whether as a matter of law and fact the Sixth and Seventh Respondents breached the terms of the Investment Deed as referred to in paragraph 37 of the Fifth Further Amended Statement of Claim;

    (m)Whether as a matter of law the First and/or Second Respondents breached the terms of the Offers to Borrow as referred to in paragraph 40 of the Fifth Further Amended Statement of Claim;

    (n)Whether as a matter of fact the First, Second, Third and Seventh Respondents had the knowledge and intention alleged in paragraph 47 of the Fifth Further Amended Statement of Claim;

    (p)Whether as a matter of law and fact the First and/or Second, Third, Fourth and Seventh Respondents engaged in conduct that was misleading and deceptive as alleged in paragraphs 49, 56 and 57 of the Fifth Further Amended Statement of Claim;

    (r)Whether as a matter of law and fact the First and/or Second, Third, Fourth and Seventh Respondents did:

    (i)aid, abet, counsel or procure a contravention of ss. 51A and 52 of the Trade Practices Act (Cth) and/or ss. 10A and 11 of the Fair Trading Act (Vic) and ss. 41 and 42 of the Fair Trading Act (NSW).

    (ii)induce a contravention of ss. 51A and 52 of the Trade Practices Act (Cth) and/or ss. 10A and 11 of the Fair Trading Act (Vic) and ss. 41 and 42 of the Fair Trading Act (NSW);

    (iii)were, directly or indirectly, knowingly, concerned in or a party to a contravention of ss. 51A and 52 of the Trade Practices Act (Cth) and/or ss. 10A and 11 of the Fair Trading Act (Vic) and ss. 41 and 42 of the Fair Trading Act (NSW);

    as alleged in paragraphs 51, 58, 68G and 73 of the Fifth Further Amended Statement of Claim.

    (s)Whether, as a matter of fact, the First, Second, Third [and] Fourth Respondents had the knowledge and intention alleged in paragraphs 53, 61 and 66 of the Fifth Further Amended Statement of Claim;

    (t)Whether as a matter of law and fact, the fifth respondent disregarded or had wilfully and recklessly failed to make enquiries of the fact that the payments which were made out of the Crazy For You Fund referred to in the particulars to paragraph 37(a) of the Fifth Further Amended Statement of Claim were made in breach of the representative’s fiduciary and trustee duties.

    (u)Whether the Sixth Respondent owed any and if so which of the fiduciary duties alleged in paragraph 59 of the Fifth Further Amended Statement of Claim;

    (v)Whether as a matter of law the Sixth Respondent breached his fiduciary duties to the Participants as referred to in paragraphs 59 and 60 of the Fifth Further Amended Statement of Claim;

    (w)Whether as a matter of law and fact, the First and/or Second and/or Third and/or Fourth and/or Fifth Respondents were guilty of the conduct referred to in paragraph (a) and/or (b) of paragraph 63 of the Fifth Further Amended Statement of Claim

    (z)Whether as a matter of fact it was the intention of the First and/or Second Respondents that monies to be raised from the Participants under the Offers to Borrow would not be used for the purposes of the Production, but were to be used for the purpose of purchasing term bonds, as alleged in paragraph 67 of the Fifth Further Amended Statement of Claim

    (aa)As a matter of law, whether and to what extent the Fifth Respondent’s interest as assignee of the Offers to Borrow (if any) is subject to the claims of the Participants.

    (ab)Whether as a matter of fact the First and/or Second and/or Third and/or Fourth and/or Fifth and/or Sixth respondents had the knowledge referred to in paragraph 13 C of the Fifth Further Amended Statement of Claim.”

14. Many of these questions are not required to be answered in the light of final submissions, but the list provides a useful overview of the matters raised during the hearing.

15. A central factual question is that adverted to in paragraph (f), regarding the use that was made of the moneys that the participants advanced pursuant to the Offers to Borrow.  This is an issue on which other claims depend.  The gravamen of the applicant’s case is that 68% of the loan funds that the participants invested was used to purchase term bonds from OCBC, rather than being applied towards the cost of the “Crazy For You” production, and that Capital, Mr Park, Mr Coote and OCBC were aware, or ought to have been aware, that the participants’ funds had been misapplied.  These funds were said to have been misapplied because they were not used for the pre-production, production and running costs of the “Crazy For You” musical production, as required by the Crazy For You Fund documents.  A primary question, therefore, is whether the evidence establishes the misapplication or diversion of the participants’ funds to purchase term bonds from OCBC.  If the alleged misapplication is not established, then, because the other allegations made against the respondents are dependent on this allegation being made out, the applicant’s case must fail.

    THE APPLICANT’S CASE

16. The applicant’s case is to the following effect. The proceeding is brought as a representative proceeding under Part IVA of the Federal Court Act. It concerns the marketing of an investment scheme proposal for the stage production “Crazy For You”, which scheme was represented to have certain tax advantages for investors in the deferral of income tax payments over a six year period.

17. The budget for the staging of the production, according to the Prospectus, was $5.5 million.

18. Dr Patrick invested $100,000 in the Crazy For You Fund. There were in total one hundred and fifteen investors in the Crazy for You Fund. Of these, sixty-two were borrowers, in that they obtained loan funds arranged by Capital to finance their investments. Dr Patrick sues on behalf of himself and the other participants who borrowed for the purpose of investing in the Crazy For You Fund. No challenge was made to the matter proceeding as a class action under Part IVA of the Federal Court Act.

1. The Crazy For You Fund was promoted as an investment which had good prospects of providing a 100% deduction of the cash value of the initial investment, in relation to contributions made in the taxation year ended 30 June 1996.  It was marketed during the months of May and June 1996, with a view to investors obtaining a tax advantage for the tax year ended 30 June 1996.

2. A total of about $5.45 million was subscribed by investors.  Of that amount, $4.743 million was borrowed from Capital Australasia, and $707,000 was contributed in cash.  The three settlements, whereby the investments using the borrowed funds were made, and the loans from Capital Australasia to the participants were assigned to OCBC, took place on 19 July 1996, 6 August 1996 and 21 August 1996.  There were other settlements in relation to the cash investments, but they are not material for present purposes.

3. Dr Patrick borrowed from Capital Australasia, made his investment in the Crazy For You Fund, and, on this basis, claimed a tax deduction for the year ended 30 June 1996.  The scheme involved the payment of interest on the borrowed funds on a monthly basis.  These interest payments were deducted from Dr Patrick’s account, and totalled in the order of $51,000. 

4. Of the total amount borrowed, a sum of $3,235,550.00 is alleged to have been used to purchase a series of term bonds from OCBC.  These bonds matured over six monthly periods from 1 July 1997 to 1 July 2002 in amounts precisely calculated.  In the first six month period of each of the years, 2% of the amount invested had to be paid. In the second six month period, 3% of the amount invested had to be paid, together with a balloon investment at the end of the period, which amounted to 75% of the principal invested.  The applicant’s case is that $3.235 million of investors’ funds was diverted to purchase the term bonds, which secured the repayment to OCBC of the amount of the principal of the loans.  Allegedly, this proportion of the funds was not used in relation to the production, but rather as a guarantee to OCBC that the loan principal would be repaid.  The term bonds were used to match the repayment obligations under the terms of the loan.

5. In July 1999, the Australian Taxation Office (“ATO”), having investigated the claims for tax deductions, produced a report of its findings in relation to the Crazy For You Fund (the “ATO Report”) and denied tax deductibility for reasons that will be explained in more detail later in these reasons, but which included the use that was made of the participants’ funds.

6. Dr Patrick says that if he had been aware of the proposed diversion of the funds then he would not have invested.  He says that he was induced to enter the Crazy For You Fund without being told that 68% of his investment was going to be used to fund the repayment of the capital invested by him, and that only 32%, at most, was to be used in relation to the production. 

   THE CRAZY FOR YOU FUND DOCUMENTS

7. The Crazy for You Fund was one of a number of tax driven investment schemes in entertainment productions that were made between BOSA, OCBC, Capital and other parties in the period 1995-1997.

8. The first relevant document in evidence is a letter of 20 June 1995, in which a framework was proposed between Capital and the “Bank” (at that time BOSA) in relation the assignment of loans made by Capital to investors in various stage productions, including “Crazy For You.”.  That proposal was accepted on 30 June 1995, and established an arrangement which relevantly provided:

   “1.      Nature of Proposal

   The Bank will, at its discretion, take assignments from Capital of Qualifying Loans (as defined below).

   The Bank will pay Capital for each Qualifying Loan an amount equal to the principal amount of the loan as at the date of assignment.

   The Bank will also engage Capital to manage all Qualifying Loans which the Bank buys from Capital.

   2.        Qualifying Loans

   The Bank will buy a loan from Capital only if it satisfies the following criteria relevant to each facility, those criteria being set out in the schedules annexed hereto.

   The following criteria will also apply, to all facilities:

   (i)The Bank’s solicitors must have certified that the underlying transaction and documentation in each case is legally satisfactory.

   (ii)The borrower must satisfy the Credit Approval Guidelines specified in the Bank’s letter dated 24 March 1995.

   (iii)The loan must not have been in default at any time.

   (iv)The loan must have been made on the terms of the Loan Agreement approved by the Bank; those terms must include:

   (a)an acceptable interest rate of not less than 1.75% per annum over and above the Bank’s cost of funds as determined by the Bank for each of the terms, the penalty rate to be 3.75% per annum above the Bank’s costs of funds;

   (b)interest payable monthly in arrears;

   (v)The Bank’s solicitors must certify that all the Bank’s security requirements in respect of the loan have been satisfied. 

   …  (Emphasis added)

9. On 8 March 1996, a key document in relation to the Crazy for You Fund, the Deed of Investment, was prepared.  The parties to the Deed of Investment were Mr Coote (as the “Representative”), Phillip Emanuel Productions, (as the “Management Company”), and those persons who would subsequently execute investment applications (the “Investors”).  That document recited that:

   “A.The Management Company proposes to co-produce a live stage presentation entitled ‘Crazy For You’ (the ‘Stage Presentation’) based upon the songs of George Gershwin.

   B.The Management Company proposes to commence rehearsals for the Stage Presentation in August 1996.

   C.The total Budget Cost being a maximum of $5,500,000, will be met from Investments and as such is the amount proposed to be raised pursuant to this Deed.

   D.The terms and conditions of this Deed shall be binding on the Representative and Management Company and each Investor as if each Investor were a signatory to this Deed …”  (Emphasis added)

10. Clause 2 defined “Budget Cost” to mean the amount that Phillip Emanuel Productions must contribute to the total budget cost for the stage presentation, plus other costs of Phillip Emanuel Productions, to a maximum of $5.5 million.

11. The “Pre-Production Budget” is defined as that part of the total budget cost attributable to the costs incurred prior to the first public presentation of the stage presentation.

12. The “Running Budget” is defined as that part of the total budget cost attributable to costs incurred by the ongoing public presentation of the stage presentation. 

13. Clause 23.1 provided that:

    “The Management Company will with all due diligence proceed to expend the Investments in the making of the Stage Presentation pursuant to this Deed within 13 months from the end of the Financial Year in which the Investments are received.”

14. The Second Schedule to the Deed of Investment set out a budget, which totalled $5,500,000, in respect of pre-production costs, general overheads, production costs and running costs.

15. In addition to the Deed of Investment there were other constituent documents of the Crazy For You Fund.  The first was the Co-Producers Equity Agreement of 29 March 1996 between Gordon Frost Attractions Pty Limited (“Gordon Frost”) and the Adelaide Festival Centre Trust (“the Trust”), referred to as “the Producers”, and Phillip Emanuel Productions, referred to as “the Co-Producer” (the “Co-Producers Equity Agreement”).  In this agreement, Phillip Emanuel Productions agreed to procure investment in the capitalisation of the production by contributing $1,000,000 to the pre-production costs.  Recital C provided:

    “The Co-Producer has agreed to pay or procure investment in the capitalisation of the Production by contributing or procure (sic) contributions to the funding of Pre-Production Costs on the terms and conditions set out in this Agreement; (see attachment B)”

16. A copy of attachment B was not included in the Court Book.

17. Clause 7 of the Co-Producers Equity Agreement provided:

    “(a)The capital required to provide the initial funding of the Pre-Production Costs for the Season is $3,000,000 (‘the Capitalisation’) which is represented in the Pre-Production Costs budget as in Attachment B.

    (b)Provided the Producers are fully complying with all its [sic] obligations under the Agreement and the Co-Producer’s Agreement, the Co-Producer shall contribute the sum stated in the Schedule hereto [$1,000,000] towards the Capitalisation on the date or dates and in the proportion referred to in the Schedule; and the Producers shall (whether by itself or from its own resources or by obtaining investments from third party Co-Producers) use reasonable endeavours to procure contributions for the balance of the Capitalisation provided that the Co-Producer may withdraw its contribution by notice in writing if the Producers does [sic] not match the Co-Producer’s contribution to the balance of capitalisation pro rata by July 15, 1996.  Any sums contributed by the Producers to the Pre-Production Costs in excess of the Capitalisation shall be treated as a loan by the Producers to the Production which shall be repayable in priority to any repayment to the Co-Producer and any other Co-Producer or Co-Producers …” (Emphasis added)

18. The same parties also executed another agreement, known as the “Co-Producers Agreement”.

19. Under this agreement, Phillip Emanuel Productions as “Co-Producer” agreed to provide to the Trust and Gordon Frost, as “the Producers”, services in connection with the production.  Clause 6, which related to the budget, provided:

    “The budgets for Pre-Production Costs and Weekly Running Costs for the Production, which have been drawn up by the AFC [the Trust] in consultation with GFA [Gordon Frost] shall be considered final and may only be varied by mutual consent.  These budgets are attached and marked as Attachment B and C, respectively.”

20. Clause 8(a), entitled “Production Services”, provided that:

    “The Co-Producer agrees on the reasonable request of the Producers to provide services where applicable in relation to the following:

    i.         all stage facilities and services;

    ii.        writing and directing services;

    iii.       pre-production and production supervision services;

    iv.       services of actors and actresses;

    iv.       all musical facilities and services” (Emphasis added)

21. This makes it clear that Phillip Emanuel Productions was bound to provide services and facilities for the running of the production.  It appears that these documents were not executed until the first settlement on 19 July 1996, but this is of no significance for present purposes.

22. The next document is the “Production Services Agreement” made between Phillip Emanuel Productions and Mr Coote, as representative of the participants.  It contains an agreement by each of the participants to provide services to Phillip Emanuel Productions to assist it in producing the stage production.  Clause 2 related to the obligations as to production of the musical and provided:

    “The Participant severally agrees to provide such necessary Production Services, facilities and personnel required to co-produce and present the Stage Presentation in accordance with the items and amounts set out in the Stage Presentation Budget.” (Emphasis added)

23. Clause 19.1 provided for payment of “fees” for “services” to be made to participants:

    “In consideration for provision of Production Services, the Co-Producer shall pay to the Participant, or as it may direct, the fees to be calculated in accordance with Item 11.”  (Emphasis added)

24. Item 11 of the Schedule to the Production Services Agreement set out the fees to be paid to the participants.  These fees, over a period of six years, total 100% of the “Production Contribution Moneys”, which is the money invested by each participant.  It is apparent from this that the participants’ capital was not at risk.  The fees were in an amount equal to the total capital investment.

25. The “Production Management Agreement” dealt with the participants’ appointment of Phillip Emanuel International, as the production management company, to carry out and perform the participants’ obligations to Phillip Emanuel Productions.  The parties to the Production Management Agreement were Phillip Emanuel Productions (as “Co-Producer”), Phillip Emanuel International (as “Production Management Company”), Mr Coote (as “Representative”) and persons who subsequently became a party to the agreement by virtue of the Deed of Investment (as “Participants”).  The relevant provisions of this were as follows:

    “3.1The Participant appoints the Production Management Company and the Production Management Company accepts such appointment, for the duration of the Rehearsal Time and the Season, to supervise and administer the performance of the Participant’s obligations to the Co-Producer in accordance with the Production Services Agreement and the Participant’s participation in the production of the Stage Presentation upon the terms and conditions of this Agreement.

    …

    4.1The Production Management Company covenants with the Participant that it shall require the Production Contribution Moneys to be spent only for the purposes referred to in clause 3.1 of this Agreement or for such additional purposes as required or authorised under the Trust Deed or in respect of which notice is given in the Prospectus and not otherwise.

    4.2The Production Management Company is irrevocably authorised by the Participant to call upon the Representative to make payments to the Production Management Company out of the Production Contribution Moneys Account to enable the Production Management Company to perform its functions under this Agreement.”  (Emphasis added)

26. Clause 10 of the Production Management Agreement provided:

    “10.1All Pre-Production Expenses and Running Expenses for the Stage Presentation which are to be contributed by a Participant will be contributed by that Participant pursuant to the Prospectus in one lump sum payment of Production Contribution Moneys to the Representative.  The Representative will then immediately settle those moneys on the Co-Producer and Production Management Company, who will then expend those funds to meet Pre-Production Expenses for the Stage Presentation, and then Running Expenses for the Stage Presentation as detailed in the Stage Presentation Budget.

    10.2For the avoidance of doubt, on 12 July 1996, all production Contribution Moneys contributed by a Participant will be paid to the Production Management Company by the Representative to enable it to fulfil its obligations under this Agreement.  The Production Management Company must then provide the Co-Producer with such funds as are necessary to enable the Co-Producer to fulfil its functions under the Production Services Agreement, the Co-Producer’s Agreement and the Co-Producer Equity Agreement.” (Emphasis added)

27. On 22 April 1996, Phillip Emanuel Productions published the Prospectus. This Prospectus was for the subscription of $5.5 million to be used to finance the production of the musical “Crazy For You”.  It stated that the stage presentation was a co-production between Phillip Emanuel Productions, Gordon Frost and the Trust.  It also stated that participants must play an active role in the production of the stage presentation (this is directed to tax deductibility considerations) and that participants would contract with the Production Management Company [Phillip Emanuel International] to assist them in fulfilling this role. There was a reference to “Participants Entitlements” where it was stated that participants would be entitled to fees which, over the relevant period of six years, would total 100% of the cash value of their initial investment.  In relation to income tax concessions, the Prospectus stated:

    “The Investment of a Participant could potentially be characterised under section 51(1) of the Tax Act as money which has been expended in the course of an income producing activity, that is, the production of the Stage Presentation.  A tax concession may therefore be available to all Participants in the 1995/96 financial year in relation to the full amount of the Investment.  However, neither the Management Company nor the Representative guarantees the availability of any tax concession and Investors should refer to the independent taxation opinion on pages 15-18 and to their own financial and legal advisers with respect to the availability of any concessions.”  (Emphasis added)

28. In relation to “The Producers’ Contribution”, the Prospectus stated that the Management Company [Phillip Emanuel Productions] would contribute one million dollars to the pre-production costs for the stage presentation.  It stated that the running costs for the production were $296,000 per week and that Gordon Frost, the Trust and the Management Company were responsible for any shortfall in the running costs and any losses.

29. Importantly, in relation to security for the payment of fees to participants, the Prospectus stated:

    “In respect of the abovementioned fees payable to Participants (up to a maximum of $5,500,000, depending upon total subscriptions under this Prospectus) the Management Company [Phillip Emanuel Productions] will provide or procure the Security (refer definition in Glossary) to secure the fees.  As at the date of this Prospectus the Security has not yet been issued. If the Management Company is unable to provide or procure the Security any Investments received will be returned in full to the respective Participants.  The Management Company does not anticipate that it will be unable to provide the Security.” (Original emphasis)

30. The term “Security” was defined in the glossary to the Prospectus as meaning one or more of the following, as approved by the Representative [Mr Coote]:

    “(a)any security, letter of credit, guarantee or bill of exchange issued, guaranteed or endorsed by an Australian bank;

    (b)bonds issued by any State Government or the Commonwealth Government or any government or semi-government instrumentality or statutory corporation which is rated at least A- by Australian Ratings, Moody’s Investors Services or Standard Poors Index; or

    (c)a managed fund comprising of the above securities referred to in paragraphs (a) and (b).

    (d)In the event that Participants are borrowing funds from a lender, any security approved by the Investors’ Representative and the lender and which may be issued by a corporation or financial institution other than those stated in (a), (b) and (c) above.”   (Emphasis added)

31. It is apparent that a central feature of the investment in the Crazy for You Fund was that the payment of fees equal to 100% of the amount of the initial investment would be secured by “Security” as defined.  This security was important to the investors.

32. The Prospectus included a taxation advice in the form of a letter from Gadens Ridgeway Lawyers (“Gadens Ridgeway”), dated 19 April 1996, addressed to the directors of Phillip Emanuel Productions.  The advice listed and described the constituent documents of the Crazy for You Fund.  It stated that the budget cost of the production was $5.5 million.  In relation to income tax concessions, the advice stated that participants were required to expend funds to facilitate the production of “Crazy For You” under the Production Services Agreement.  It continued:

    “Subject to the comments in this letter these funds should be deductible pursuant to s.51(1) of the Income Tax Assessment Act on the basis that the expenditure is incurred in gaining or producing assessable income, or alternatively, incurred in carrying on the business for that purpose.

    Subject to our comments below, it is our opinion that:

    (a)the expenditure of production moneys by participants in relation to the provision of the theatrical production services for ‘Crazy For You’ is deductible under section 51(1) by reason of these being characterised as outgoings necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income;

    (b)the expenditure is available as a deduction at the time, and to the extent to which, the Production Management Company requires the Representative to pay to it the production management fee in conformity with the express contractual stipulation pursuant to the terms of the Production Management Agreement;

    (c)provided the participants entered into the contemplated transactions with the dominant purpose of making a profit from the project itself, Part IVA, the general anti avoidance provision should not apply. Further, it is our view that there are no other provisions of the Act that would have a justified application to the transactions contemplated.”  (Emphasis added)

1. It is not in dispute that the clear inference to be drawn from the tax advice and the Prospectus was that the moneys raised pursuant to the Prospectus would all be applied towards the stage production.

2. Under the heading “Explanation of Budget” the Prospectus stated:

   “The Management Company [Phillip Emanuel Productions] is obliged, under the Production Management Agreement, to contribute up to $1,000,000 of the total Pre-Production Costs for the Stage Presentation.  In addition to raising the $1,000,000 of the Pre-Production Costs, the Management Company is raising funds from Participants to contribute to the Running Costs of the Stage Presentation. Set out below is the full budget for the Stage Presentation.  Section 1 shows the Pre-Production Costs in total, being $3,000,000 and the Management Company’s share of those Pre-Production Costs as being $1,000,000.  Section 2 of the Budget shows the general overheads payable by the Management Company only with respect to the issue of this Prospectus, and section 3 shows  fees payable to the Management Company out of funds raised under this Prospectus. Finally, section 4 of the Budget shows the projected weekly Running Budget, which, if the full amount is raised under this Prospectus, will be paid for a total of 12 weeks (plus part week 13) by the funds invested by the Participants.”  (Emphasis added)

3. This statement indicates that money was being raised from participants for Phillip Emanuel Productions to contribute both to the pre-production costs and the running costs of the stage presentation.

4. The Prospectus summarised the contractual arrangements concerning the stage presentation as follows:

   “In summary, the effect of the Production Services Agreement and Production Management Agreement is that the Investments which are subscribed under this Prospectus are paid to the Representative by the Participants, and that money is then paid to the Production Management Company [Phillip Emanuel International] for its services under the Production Management Agreement.  In turn, the Production Management Company must then provide the Management Company [Phillip Emanuel Productions] with funds to enable it to perform its obligations to its partners with respect to the payment of Pre-Production Costs, and to satisfy the other costs to the Management Company detailed in the Budget.  The balance of funds will be used to offset Running Costs of the Stage Presentation.”  (Emphasis added)

5. The Prospectus also contained warnings for potential investors.  For example, it stated:

   “Investment in stage presentations is subject to a high degree of risk and the investment being the subject of this Prospectus should be considered speculative.”

6. There were also warnings as to the uncertainty of the taxation consequences of the participants’ investments. 

7. The evidence indicates that OCBC did not receive a copy of the Prospectus until some time in June 1996.

8. On 30 May 1996, Mr Park wrote to Mr Lawrence of BOSA (later OCBC) outlining a number of proposed transactions and schemes for the forthcoming tax period.  These schemes included the Crazy For You Fund.  On 31 May 1996, Cornwall Stodart Lawyers (“Cornwall Stodart”) confirmed to its client, BOSA, that it would act on its behalf in the proposed transactions, whereby Capital would lend money to selected participants, and BOSA would take assignments of those loans on certain terms. 

9. On 13 June 1996, Mr Lawrence wrote an internal memorandum which listed a number of tax deferment projects that BOSA had been asked to fund for the year ending 30 June 1996.  It included the Crazy for You Fund.

10. Mr Lawrence confirmed:

    “We will continue to have mortgaged to us our own Term Bonds being the security for our principal.”

11. It was a requirement of BOSA, before it was prepared to purchase loans made to investors in stage productions, that the investor be entitled to 100% return of capital invested, which was fully secured.  The security was provided by BOSA itself rather than another financial institution.  In so doing, BOSA reduced the credit risk of the capital invested in the transaction, but remained exposed to the credit risk of the borrower in respect of interest payments and accordingly, conducted credit checks before it would approve the assignment of a loan.

12. In June 1996, Mr Patterson, a former partner at Cornwall Stodart, was provided with, and reviewed, a number of documents in relation to the Crazy For You Fund on behalf of BOSA/OCBC.  On 17 June 1996, Mr Patterson sent a fax to Mr Hutchings of Cornwall Stodart, enclosing a draft of a letter to be provided, by Cornwall Stodart, to Mr Lawrence (as the Manager of Corporate Banking for “OCBC Australia”) in relation to the project.  Mr Patterson raised some concerns about the transaction.  One of these was expressed as follows:

    “5.Copy of executed Co-Producers Equity Agreement between Gordon Frost Attractions Pty Ltd and the Adelaide Festival Trust as ‘Producers’ and Phillip Emanuel Productions Ltd as ‘the Co-Producer’ dated 29 March 1996. NOTE – we have not been provided with copies of any of the various attachments referred to in this agreement.  This is significant, since as we understand this agreement, the Co-Producer is bound only to provide $1 million towards the ‘Pre-production costs (clause 7(b)); the Producer is obliged to meet all other expenses of mounting the production – see Recital C and clause 3.  If this be correct, we cannot understand why the promoter needs to raise so much money.”  (Emphasis added)

13. This expression of concern was relied on by the applicant, as a circumstance which should have triggered enquiries, by the respondents, as to how the invested funds were to be used.

14. Dr Patrick completed an investment application and wrote out a cheque for $4,683.00, dated 25 June 1996, to Capital Finance Corporation.  This committed him to making the investment, and on this basis he claimed a deduction for the year ended 30 June 1996.  The investment application and cheque were given to Mr Ahearn, Dr Patrick’s financial adviser, who forwarded them to Pacvest Securities Limited (“Pacvest”), which was the sponsoring broker identified in the Prospectus.  On 28 June, Dr Patrick completed a loan application made to Capital Finance, which was received by Capital on 1 July 1996. 

15. On 1 July 1996, Mr Coote sent a fax to Phillip Emanuel Productions with a list of the investment applications that had been made to the Crazy For You Fund, including that of Dr Patrick.

16. On 9 July 1996, Mr Park wrote to OCBC to confirm that a new entity, Capital Australasia, had been incorporated to serve as the financing vehicle for the Crazy For You Fund.

17. In early July 1996, credit inquiries were made, at Capital’s request, with respect to Dr Patrick’s loan application.  The results were provided to OCBC to enable it to consider whether to agree to purchase Capital’s loan to Dr Patrick.  Cornwall Stodart also carried out a due diligence exercise in relation to the proposed loans, including the loan to Dr Patrick.  On 8 July 1996, OCBC sent a memorandum to Capital, conditionally approving the assignment to OCBC of the proposed loan to Dr Patrick.  On 16 July 1996, Capital Australasia wrote to Dr Patrick, conditionally approving a loan to him.

18. On 17 July 1996, Cornwall Stodart wrote to OCBC setting out the matters that it would certify in relation to each of the loans proposed to be assigned to OCBC by Capital.

19. On 18 July 1996, Cornwall Stodart sent Mr Park a letter, setting out the outstanding matters in relation to the Crazy for You Fund, including the concern expressed by Mr Patterson in relation to the need for funds.

20. Mr Hutchings of Cornwall Stodart then spoke with Mr Olivestone of Pacvest, and the reservation that Mr Patterson had expressed in June was resolved by Mr Olivestone, to the satisfaction of Mr Hutchings.  Mr Hutchings then completed the solicitor’s certificate, which was signed and issued without this reservation. 

21. The first settlement of the investments involving the Capital loans and the assignments to OCBC occurred on 19 July 1996.

    SETTLEMENT OF 19 JULY 1996.

22. This settlement was held at the branch of the ANZ Bank in Sydney, since this was Mr Coote’s bank, and he was the receiver of the funds.  Cornwall Stodart provided a settlement schedule to OCBC, and Mr Lawrence provided a set of instructions for Mr Ho, who attended the settlement on behalf of OCBC.

23. The following transactions took place at this settlement.  OCBC entered into a Deed of Assignment and Management with Capital Australasia and Capital Finance to affect the assignment of the first tranche of the loans from Capital to OCBC and paid Capital Australasia $2.698 million for the purchase of those loans.  OCBC had issued a bank warrant in that amount on behalf of Capital Australasia, in favour of Mr Coote, which it handed over on settlement.  It had also issued term bonds with a total future value of $2.698 million, for which it charged Capital Australasia $1.576 million, which were deposited into Capital Australasia’s account with OCBC.  OCBC collected an ANZ bank cheque on behalf of Capital Australasia for $1,808,030.00, which it paid into Capital Australasia’s account with OCBC.  Of this amount, $1.576 million was shown as a debit in favour of OCBC to pay for the term bonds.  This amount was to secure the repayment of the loan made by Capital Australasia.  OCBC retained the term bonds and collected the unit certificates, the manager’s declaration executed by Phillip Emanuel Productions, and a declaration from Mr Coote, as part of the security.  Mr Ho ensured that the Production Services Agreement and Production Management Agreement had been duly executed.

24. Similar procedures were followed in relation to the two other settlements involving OCBC that took place on 6 and 21 August 1996.  At these settlements, bank warrants issued by the Commonwealth Bank of Australia were collected by OCBC for payment into Capital Australasia’s OCBC account.  The settlement in relation to Dr Patrick was 6 August, but nothing turns on this.  The evidence includes instructions from OCBC to Mr Ho who attended the settlement, in similar terms to those in respect of the settlement of 19 July 1996.  For the purposes of these proceedings, it is not necessary to set out in detail what occurred in the later transactions. 

25. I now turn to consider the evidence of the principal witnesses.  These were Dr Patrick; Mr Park; Mr Lawrence; Ms Enconniere and Mr Ho of OCBC; Mr van Nieuwkuyk and Mr Frost from Gordon Frost; Mr Patterson and Mr Hutchings of Cornwall Stodart, and Mr Coote.

    EVIDENCE OF DR PATRICK

26. Dr Patrick gave evidence that in June 1996 he wanted to make investments that would be profitable and have the effect of deferring his payment of income tax from the financial year ending 30 June 1996 until a later year. 

27. Dr Patrick said that he attended the office of his accountant, Mr Spitzer, on about 25 June 1996, for a meeting that was also attended by his financial adviser, Mr Ahearn.  Mr Ahearn controlled an entity called the Locums Group, that provided financial, accounting, and other services to the medical profession.  A few weeks before 25 June 1996, Mr Ahearn telephoned Dr Patrick and suggested some investment proposals, one of which was the Crazy For You Fund.  He then sent Dr Patrick a copy of the Prospectus.  Dr Patrick produced a brochure concerning “Crazy for You”, which he said was given to him at the meetingwith Messrs Spitzer and Ahearn  He said he decided, at that meeting, to make an investment of $100,000, and to borrow this from Capital.  He signed a cheque for $4,683.00 payable to Capital Finance.  That cheque was drawn on Dr Patrick’s company account, which was operated by the company that Dr Patrick had incorporated to manage his medical practice.  Dr Patrick also signed an application for units in the Crazy For You Fund totalling $100,000.  The application was taken from the Prospectus. 

28. Dr Patrick said that he was given a copy of the Prospectus some time prior to the meeting on 25 June 1996, but does not specifically recall when he received it.  He said he had seen some advertising with respect to the musical “Crazy For You” on the back of taxi cabs.  He said he had a “good read” of the Prospectus.  He admitted that he did not study it, but says that he read it sufficiently to attempt to make an informed decision as to whether to invest in the Crazy For You Fund.  He said that he thought that the stage production had an excellent chance of commercial success as he had read reviews about it.

29. Dr Patrick also received a prospectus for another production known as “Peter Pan”, but he preferred the “Crazy for You” production.

30. Dr Patrick understood from the Prospectus that the whole of the invested funds would be spent in accordance with the budget contained in it, noting that the $5.5 million to be raised from investors was the same figure contained in the Prospectus budget.  He understood that the Management Company [Phillip Emanuel Productions] agreed to make progressive payments to him of his investment, and that these payments would be secured by security obtained from the Management Company.  He believed the investment proposal would be effective to provide a “reasonable chance” of an income tax deduction in the 1996 tax year.

31. On 28 June 1996, Dr Patrick signed an application to Capital Finance and BOSA for loans of $200,000 for which $100,000 was for the Crazy For You Fund.  He gave the application to Mr Ahearn to send to Capital Finance.  Towards mid-1996, Dr Patrick received copies of an Offer to Borrow, and a direct debit authority, which documents he executed and sent to Capital.

32. Dr Patrick said that he was not aware of any assignment of the loan until about November 1996, but knew that a loan had been made.  He claimed a tax deduction for the $100,000 for the investment for the year ended 30 June 1996, and he paid interest on the loan until August 2000.  In October 2000, Dr Patrick received a letter from the Deputy Commissioner of Taxation, disallowing the deduction.  He said he only became aware that some of the funds for the investment had not been used for the purpose of the production as a consequence of the ATO investigation, and that this use of the funds made him angry.  He said that if he had been aware that less than one third of his loan would be available for the production, he would not have entered into the transaction.  He claimed that the effect of the transaction on him was that he was bound to pay interest on the whole of the $100,000 and that he did not get his tax deduction for the 1996 year.  On 25 April 2002, Dr Patrick entered into a settlement with the Deputy Commissioner of Taxation.  Dr Patrick says that around the time of his investment in the Crazy For You Fund, he had been looking at other investments, such as purchasing rental property for negative gearing. 

33. On cross-examination Dr Patrick said that he decided to make an investment in the production at the meeting with Messrs Spitzer and Ahearn of 15 June 1996, but that this was a confirmation of the decision he had already made prior to the meeting.  He said that if he were to put funds into a theatre investment he would prefer it to go into “Crazy For You”.  It was as a result of what was said at the meeting that he made his decision to invest and signed a cheque to Capital Finance.  He understood that by signing the investment application he was legally committed to purchasing 100 units in the investment.  He was cross-examined as to differences between his earlier affidavits and his “consolidated affidavit” sworn on 25 November 2002, concerning the matters that he took into account when making the decision to invest. It is evident from the cross-examination that Dr Patrick’s answers in relation to these matters were in the nature of reconstruction, rather than recollection. 

34. Dr Patrick knew that the Management Company [Phillip Emanuel Productions] had to purchase a security that would return 100% of the investment by 1 July 2002.  He said that he did not direct his attention to the way in which the security would be paid for.  He said that he believed that the security would be furnished from receipts derived from the production.  His evidence regarding his understanding of the way that the tern bonds would be financed was unsatisfactory.

35. Dr Patrick said that he went into the investment on the basis that it would be profitable, because otherwise he would have been going into it for the dominant purpose of getting a tax concession.  This answer has the flavour of reconstruction.  He says he did not see the Crazy For You Fund as tax avoidance, but that it suited him because it deferred payment of his tax. 

36. Dr Patrick claims that he would have been concerned if a substantial amount of investors funds did not go into the show as this could affect its success.  However, he agreed that if the Prospectus said that running costs for the production were $296,000 per week, and if Gordon Frost and the Trust were responsible for any shortfall in running costs, and for losses, it would have been very unlikely that he would have been concerned about under funding.  He said that his major concern was that the investment would be a genuine tax effective investment.  He agreed that he would have had minimal concerns in relation to under funding, given the producers who were standing behind the production.

37. Dr Patrick was cross-examined in some detail about the allegations of fraud raised by him in the pleadings, which were subsequently withdrawn, against Mr Park, Capital and OCBC. 

38. Dr Patrick said that he would not have invested in the Crazy For You Fund except for the tax deduction.  In so doing, he relied on the advice of Mr Ahearn in relation to an earlier decision by him to invest in a production known as “The Ugly Dumpling”.  This also involved a tax driven investment scheme.

39. Dr Patrick’s position was that he had a good income and had to get some legitimate tax relief, and that he was very keen to do something to reduce his taxable income for the year ended 30 June 1996.  He said that he was certainly very enthusiastic about getting the largest tax advantage legitimately available to him, but only if his financial adviser advised that it (which I take to mean the tax benefit) was likely to be effective.  He said that he relied on the advice given to him.  He agreed that he was not going to trust his own reading of the Prospectus or the brochure, which is why he sought advice.

40. After making the investment, Dr Patrick showed virtually no interest in following through the affairs and progress of the musical production. 

41. Having regard to the cross-examination of Dr Patrick, I am not satisfied that his evidence is reliable or accurate in relation to his reasons for investing and his likely alternative investment options to the Crazy For You Fund.  I have no doubt that this is due to the considerable lapse of time between the events in question and the swearing of Dr Patrick’s affidavits and the hearing.  I do not consider there was any indication of dishonesty in Dr Patrick’s evidence, but I am not persuaded that he relied on any representations in relation to term bonds.

42. I am satisfied that the only material and operative purpose in investing in the Crazy for You Fund, as evidenced by Dr Patrick’s later inaction, and the strength of his desire to obtain tax relief, was to obtain a tax deduction.  I am also satisfied that he would have invested in the Crazy for You Fund in any event, having regard to his discussions with his consultant and accountant.  I find that he did not direct his attention, or attach any importance, to the question as to how the term bonds were to be financed.  This is particularly so given the time at which he decided to invest and his urgent desire to minimise his income tax.  I consider that if he had not invested in the Crazy For You Fund he would have most likely, in his eagerness to secure a taxation benefit, have entered into a similar fund. 

1. For reasons given earlier, there is no substance in any allegation that Mr Coote knew or ought to have known that the true extent of the investment obligation of Phillip Emanuel Productions was limited to one million dollars.

2. In relation to the claims based on the misapplication of the participants’ funds, for reasons given previously, this central fact has not been made good and therefore the claim must fail.

3. The claims for tax deductions by participants were disallowed by the ATO for four principal reasons, as indicated earlier in this judgment. The ATO formed the view that the dominant purpose of the participants in making the investment must have been to obtain a tax deduction. This view enlivened the operation of Part IVA of the Income Tax Assessment Act.  I am not persuaded on the evidence that it was ever Mr Coote’s intention, or that he was aware in any way of any intention that the term bonds should be purchased from the participants’ funds.  I accept Mr Coote’s evidence, and I accept that he did not have reason to believe that any party had breached any agreement.  The circumstances were not such as to put him on inquiry. 

4. Having regard to the documents comprising the Crazy For You Fund, Mr Coote was, in my view, entitled to proceed, in the absence of any indication to the contrary, on the basis that funds would be spent on pre-production expenses and on running costs for the production in compliance with the documentation.

5. The other claims against Mr Coote depend on his knowledge that participants’ funds would be diverted and that the assignments to OCBC had the effect of repaying OCBC 68% of the amount borrowed.  These matters have not been made out.

6. The applicant also submits that for Mr Coote to discharge many of his obligations under the Deed of Investment, he needed to act in a way which was independent of the interests of the producers, and to make active inquiries of them as to the use to which they intended to put the participants’ funds that he handed to Phillip Emanuel International.  It is said that he should have inquired as to the source of each payment for the term bonds and considered whether the funds might not be available to those parties, having regard to their resources, which he should have investigated and did not do so.  More particularly, it is said that he did nothing other than carry out certain mechanical tasks, for which he received substantial remuneration.  The “general law” is invoked to support a proposition that, by failing to make inquiries, including a demand that the appropriate documents, such as bank statements, be produced to him before and after each of the settlements, Mr Coote preferred the interests of the producers to the interests of the investors.  Similarly, it is alleged, in the alternative, that by his inaction, Mr Coote preferred his own interests to the interest of the investors.  Essentially, the submission is that Mr Coote should have taken steps to satisfy himself that participants’ funds would be used solely in connection with the stage production, and not for purchase of term bonds, and this would have involved making an inquiry of Mr Emanuel and his companies.

7. In my view, it was not necessary or appropriate, in the circumstances of this case, for Mr Coote to conduct the investigations suggested.  I am not persuaded that they would have achieved any result, so far as approaching Mr Emanuel was concerned.  Furthermore, having regard to the reputation of the Emanuel group, the Trust and Gordon Frost, considered in conjunction with the Crazy For You Fund documentation and the obligations imposed on Mr Coote, I do not consider it was incumbent upon him to make inquiries.

8. Much was sought to be made out of the fact that the tasks performed by Mr Coote were “mechanical” and that he appeared uncertain as to what he might have done had he been hypothetically informed that the monies were to be diverted to purchase term bonds.  In my view, nothing flows from these matters.  Given that I have concluded that the monies were not in fact misapplied, and that in any event, Mr Coote was not in a position where he was aware, or ought to have been aware, of circumstances which required further investigation, and which might have led to discovery of the misapplication of funds, I do not consider that any of the claims of breach of the Deed of Investment have been made out.

   FIDUCIARY AND TRUSTEE DUTIES OF MR COOTE

9. So far as the duties imposed on Mr Coote are concerned, Counsel for Mr Coote pointed out that the money was applied by him as required by the Prospectus, the Deed of Investment and the Production Management Agreement.  It was central to the Crazy For You Fund that the participants’ money was paid to Phillip Emanuel International as required by the Production Management Agreement, on the provision of security for payment of fees payable under the Production Services Agreement, which ensured return of the participants’ capital by way of fees.  Mr Coote gave evidence that, on all of the settlements that he attended, the securities were “on the table” and available on his arrival, and that he received them in exchange for money paid to Phillip Emanuel International.  In my view, it has not been established that Mr Coote failed to act in the best interests of the participants, or to safeguard the participants’ interests in the production, or their claim for a tax deduction.

10. For the above reasons, the causes of action alleged against Mr Coote must fail.

    CAUSATION AND RELIANCE

11. As noted above, I do not accept Dr Patrick’s evidence that he relied in any way on representations that the investors’ funds would not be used to purchase the term bonds in order to secure repayment of principal when he invested in the Crazy For You Fund.  He agreed in evidence that he had to get some taxation relief for the financial year ended 30 June 1996.  The timing of his investment, and the rush with which it was effected, are important to bear in mind when considering his likely reasons for the investment.  In my view, the only significant operative reason for Dr Patrick’s investment was his keen desire to get the immediate tax benefit.  He entered into this scheme with a sense of imperative urgency, without giving the matter any real thought, except with respect to obtaining the tax advantage.  He made the final decision to invest after speaking with his accountant and adviser.  It is probable, in my view, given the history of his previous tax driven investment, that he would have invested in another scheme of a similar type in great haste if he had not invested in the Crazy For You Fund.  It would not have been of any concern to him, in my view, if he were told (contrary to the fact) that the funds were to be used for the purchase of the term bonds.  He simply gave the matter no thought.  Given his strong belief in the attractiveness of the production and its likely success, it is possible that he believed there would be ample funding from the takings of the production and that it would not therefore be under-funded.

12. Dr Patrick did not show any interest in, or follow up, the progress of the production.  He did not check the extent of any pre-sales.  He did not attend any meetings of investors or vote or otherwise communicate about and participate in the progress of the production.

13. As pointed out in cross-examination, the possible rate of return on the “investment” was extremely low in commercial terms, and was clearly not the operative incentive for entering into the scheme.  A sensitivity analysis of the 149 week season, assuming a 95% audience capacity, would have been barely sufficient to allow Dr Patrick to recover the amount paid in interest.  In fact, the audience capacity went down to 40% during the period in Brisbane, and down to 66% in the Sydney season, which lasted for 31 weeks.

14. Dr Patrick admitted that the way that the “the security” was to have been paid for did not cross his mind.  He relied on his accountant and adviser.  He had a strong belief that the production would do well.  His understanding was that the investors’ funds would be used until the revenue from sales was sufficient to meet the ongoing expenses.  He was referred to the Prospectus and said that he would have been reassured if he had known that the producers were obliged to meet any shortfalls in running costs.  He agreed that if he had read the Prospectus, it was very unlikely that he would have been concerned about any under-funding, or at least, that this would have been of minimal concern.

15. The evidence of Dr Patrick was largely based on reconstruction as he had no clear recollection.  This is understandable, having regard to the fact that the events in question occurred over five years prior to his giving evidence.  He did not answer questions directly.  In many instances, his evidence was not given in a careful or responsive manner, and he frequently delayed answering questions in order to reconstruct what would have happened.  He conveyed the distinct impression that he adapted his answers in order to be consistent with the case he wished to press on the Court.

16. Dr Patrick omitted to raise a number of matters in his earlier affidavit evidence to those raised in later evidence.  His initial extensive sweeping claims of fraud were substantially withdrawn and found no support in the evidence.

17. The evidence indicates that the project did not fail because it was under-funded during the initial period contemplated in the budget to the Prospectus, but rather because it was not a box office success.  The tax scheme failed for a number of reasons quite independent of funding considerations and this is made clear in the ATO Report.  That the production did not achieve the targeted audience capacity is evident from the occupancy rates referred to earlier.

18. I find that Dr Patrick did not rely on any representations as to the use of the investors’ funds in relation to the source of payment for the term bonds, and that any loss which Dr Patrick claims to have suffered was not caused by or did not flow from the conduct of any of the respondents.  The production failed for reasons other than under-funding, and the tax deductions were disallowed for reasons independent of the alleged application of the participants’ funds to the funding of term bonds. 

    LOSS AND DAMAGE

19. It is not necessary for me to make a finding as to whether Dr Patrick suffered any loss as a consequence of the conduct of the respondents, and I do not do so.  I am not satisfied that the applicant has made out its case.  However, even if any claim succeeded against any of  the respondents, I find that Dr Patrick has not suffered any loss as claimed or indeed any loss at all, having regard to the settlement and the allowances made by the ATO and the benefits obtained by Dr Patrick referred to in the evidence.

    COMMON QUESTIONS

20. In response to those questions set out in the Third Amended Application which are common to the claims of the group members, and give rise to ‘live” issues between the parties, my answers, indicated in bold, are as follows:

    “(a)Whether as a matter of fact the Fourth Respondent on behalf of the Capital Group established and implemented the Crazy For You Investment Scheme as alleged in paragraphs 13 and 16 of the Fifth Further Amended Statement of Claim for the purposes alleged in paragraph 14 of the Fifth Further Amended Statement of Claim.”

    No

    “(b)Whether as a matter of fact the Fifth respondent had the knowledge of the Crazy For You Investment Scheme, and agreed to implement it, as alleged in paragraph 15 of the Fifth further Amended Statement of Claim.”

    No

    “(c)Whether, as a matter of law and fact, the Offers to Borrow contained the express and implied terms alleged in paragraphs 27, 28, and 28A of the Fifth Further Amended Statement of Claim.”

    Not necessary to answer

    “(d)Whether, as a matter of law and fact, the First Respondent and/or the Second Respondent accepted the Offers to Borrow in accordance with the terms alleged in paragraph 27(g) of the Fifth Further Amended Statement of Claim.”

    Yes, by the first respondent

    “(f) Whether, as a matter of fact, advances were made by the First Respondent pursuant to the Offers to Borrow referred to in paragraph 26A of the Fifth Further Amended Statement of Claim, and:

    (i) what the source of the money used to make those advances was;
               (ii) to who or whom, those advances were made;
               (iii) to what use those advances were put.”

    Yes – advances were made by Capital Australasia pursuant to Offers to Borrow

    (i)the source of money for the loans was the purchase price paid by OCBC to the first respondent for the loans.

    (ii)the loans were made to participants and paid to Mr Coote, in exchange for units in the production.

    (iii)Mr Coote paid the monies to Philip Emanuel International.  The participants’ money was not used to pay for the term bonds.

    “(k)Whether as a matter of law and fact the prospectus representations referred to in paragraph 41 of the Fifth Further Amended Statement of Claim were misleading or deceptive or likely to mislead or deceive, or contained the material omissions alleged in paragraph 51A of the Fifth Further Amended Statement of Claim.”

    No

    “(l) Whether as matter of fact of law and fact the Sixth and Seventh Respondents breached the terms of the Investment Deed as referred to in paragraph 37 of the Fifth Further Amended Statement of Claim.”

    As regards the sixth respondent - no
    As regard the seventh respondent - not known

    “(m) Whether as a matter of law the First and/or Second Respondent breached the terms of the Offers to Borrow as referred to in paragraphs 40 of the Fifth Further Amended Statement of Claim.”

    No

    “(n)Whether as a matter of fact the First, Second, Third, and Seventh Respondents had the knowledge and intention alleged in paragraph 47 of the Fifth Further Amended Statement of Claim.”

    No

    “(p) Whether as a matter of law and fact the First and/or Second, Third, Fourth and Seventh Respondents engaged in conduct that was misleading and deceptive as alleged in paragraphs 49, 56 and 57 of the Fifth Further Amended Statement of Claim.”

    No

    “(r)Whether as a matter of law and fact the First and/or Second, Third, Fourth and Seventh Respondents did:

    (i)aid, abet, counsel or procure a contravention of ss. 51A and 52 of the Trade Practices Act (Cth) and/or ss. 10A and 11 of the Fair Trading Act (Vic) and ss.41 and 42 of the Fair Trading Act (NSW);

    (ii)induce a contravention of ss. 51A and 52 of the Trade Practices Act (Cth) and/or ss.10A and 11 of the Fair Trading Act (Vic) and ss. 41 and 42 of the Fair Trading Act (NSW);

    (iv)were, directly or indirectly, knowingly, concerned in or a party to a contravention of ss 51A and 52 of the Trade Practices Act (Cth) and/or ss.10A and 11 of the Fair Trading Act (Vic) and ss. 41 and 42 of the Fair Trading Act (NSW).”

    (i)No

    (ii)No

    (iii)No

    “(s)Whether, as a matter of fact, the First, Second, Third [and] Fourth Respondents had the knowledge and intention alleged in paragraph 53, 61 and 66 of the Fifth Further Amended Statement of Claim.”

    No

    “(t)Whether, as a matter of law and fact, the fifth respondent disregarded or had wilfully and recklessly failed to make enquiries of the fact that the payments which were made out of the Crazy For You Fund referred to in the particulars to paragraph 37(a) of the Fifth Further Amended Statement of Claim were made in breach of the Representative’s fiduciary and trustee duties.”

    No

    “(u)Whether the Sixth Respondent owed any and if so which of the fiduciary duties alleged in paragraph 59 of the Fifth Further Amended Statement of Claim.”

    No

    “(v)Whether as a matter of law the Sixth Respondent breached his fiduciary duties to the Participants as referred to in paragraphs 59 and 60 of the Fifth Further Amended Statement of Claim.”

    No

    “(w)Whether as a matter of law and fact, the First and/or Second and/or Third and/or Fourth and/or Fifth Respondents were guilty of the conduct referred to in paragraph (a) and/or (b) of paragraph 63 of the Fifth Further Amended Statement of Claim.”

    No

    “(z)Whether as a matter of fact it was the intention of the First and/or Second Respondents that monies to be raised from the Participants under the Offers to Borrow would not be used for the purposes of the Production, but were to be used for the purpose of purchasing term bonds, as alleged in paragraph 67 of the Fifth Further Amended Statement of Claim.”

    No

    “(aa)As a matter of law, whether and to what extent the Fifth Respondent’s interest as assignee of the Offers to Borrow (if any) is subject to the claims of the Participants.”

    No

    “(ab)Whether as a matter of fact the First and/or Second and/or Third and/or Fourth and/or Fifth and/or Sixth respondents had the knowledge referred to in paragraph 13C of the Fifth Further Amended Statement of Claim.”

    No

    CROSS-CLAIM

21. Dr Patrick has not made out any cause of action raised against any of the respondents.  It is therefore appropriate that the cross-claim be allowed and that a declaration be made on the basis that the loan agreements are valid, and that, in the case of Dr Patrick, he is liable to pay outstanding sums under those agreements.  I am not presently persuaded that I ought to make a general declaration as to other participants represented by Dr Patrick.  I will hear further argument on the appropriate form of any declaration bearing in mind that there may be relevant circumstances in respect of members of the group whereby defences may be established to the cross-claim.  I am not suggesting that there are any such defences, but I require further submissions from Counsel in relation to this matter in the event that the parties cannot agree.

    COSTS

22. I have been asked to reserve the questions of costs for further argument after the parties have had an opportunity to consider these reasons for judgment.  I will do so in view of the history of this matter.

    CONCLUSION

23. The application is dismissed as against each of the respondents.  I direct the parties to bring in draft Short Minutes of Order to give effect to these reasons within twenty-one (21) days.

I certify that the preceding two hundred and seventy (270) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin.

Associate:

Dated:             26 February 2004

Counsel for the Applicant:

Dr C L Pannam QC

T J McClean

Solicitor for the Applicant:

Corrs Chambers Westgarth

Counsel for the First, Second, Third and Fourth Respondents:

E N Magee QC

D M Austin

Solicitor for the First, Second, Third and Fourth Respondents:

Voitin Walker Davis

Counsel for the Fifth Respondent:

R M Garratt QC

M Moshinsky

Solicitor for the Fifth Respondent:

Cornwall Stoddart

Counsel for the Sixth Respondent:

P M Bornstein

Solicitor for the Sixth Respondent:

Phillips Fox

No appearance by the Seventh Respondent.

Dates of Hearing:

20, 21, 25, 26, 27, 28, 29 November 2002

10, 11, 12, 13, 14 February 2003

28, 29, 30 April 2003

1, 2 May 2003

30 June 2003, 1 July 2003

Date of Last Written Submissions:

1 July 2003

Date of Judgment:

26 February 2004