Rocky Castle Finance Pty Ltd v Taylor; Rocky Castle Finance Pty Ltd v Gillen

[2014] HCATrans 128

[2014] HCATrans 128

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Adelaide  No A4 of 2014

B e t w e e n -

ROCKY CASTLE FINANCE PTY LTD

Applicant

and

MARK TAYLOR

Respondent

Office of the Registry
  Adelaide  No A5 of 2014

B e t w e e n -

ROCKY CASTLE FINANCE PTY LTD

Applicant

and

ROBERT GILLEN

Respondent

Applications for special leave to appeal

FRENCH CJ
GAGELER J
KEANE J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 20 JUNE 2014, AT 9.31 AM

Copyright in the High Court of Australia

____________________

MR N.J. YOUNG, QC:   In each matter I appear with MS C.G. BUTTON for the applicant.  (instructed by Piper Alderman Lawyers)

MR W.J.N. WELLS, QC:   May it please the Court, I appear with my learned friend MR M.R. BURNETT for the respondent.  (instructed by Iles Selley Lawyers)

FRENCH CJ:   Thank you.  Yes, Mr Young.

MR YOUNG:   If the Court pleases, the question of principle that we contend arises is articulated in paragraph 2 of our summary of argument at page 118 of the application book.  The question is whether the delivery of a promissory note by a lender to a creditor of the borrower accepted by that creditor in discharge of the obligation of the borrower is as between the lender and the borrower a payment or an advance, without the need for the borrower’s authority as to the particular manner of the payment. 

FRENCH CJ:   This is on the basis that the terms advance – the words “advance in payment” in a deed of loan have a meaning of general application not limited in any way by the context.

MR YOUNG:   Those words have that general application, yes, but it is a basic principle of commercial law that a negotiable instrument can be tended by way of payment or in satisfaction of an obligation to advance moneys.  That, after all, is the whole purpose of a negotiable instrument.  What occurred in this case was that the Full Court rejected that proposition, framed in that question, in two respects.  Their Honours held that there was no payment or advance and secondly they held that there was no discharge of the obligation of the borrower to the creditor, notwithstanding that the creditor received the promissory note, elected to endorse it in discharge of its own obligations, and subsequently the promissory note was discharged by merger when it was negotiated back to the issuer.

So in those circumstances it is our respectful submission that there is a fundamental and well‑established principle of law that the delivery of a promissory note in those circumstances does amount to an unconditional payment, and if it was not unconditional on acceptance by virtue of the immediate election to negotiate it, it became an unconditional payment when the promissory note was discharged by merger.  Those principles are denied, or eroded, by the decision of the Full Court, and the decision is based upon a fundamental misconception of the law concerning negotiable instruments and promissory notes, and that is what I will endeavour to demonstrate in a moment.  The governing principle, in our submission, is that articulated by Sir Owen Dixon in Mackenzie v Rees.  The Court, I believe, has been referred to that authority.  It is in 65 CLR.

FRENCH CJ:   Yes, thank you.

MR YOUNG:   Page 1.  The judgment of Sir Owen Dixon, relevantly, is at pages 14 and 15.  Can I direct the Court to the principle we say applies?  At page 14 at about point 3 on the page:

The presumption is that a bill or note given in respect of a debt operates as payment subject to a condition subsequent or qualification by way of defeasance.

His Honour went on at about 14, point 8, to say that it is not correct to speak of the bill or note suspending the remedy pending presentation, and his Honour restates the governing principle at the top of page 15 from the second line onwards.  There is “a discharge by payment subject to a condition subsequent”, and if, on the due date, the bill is not honoured the original debt is capable of reviving under this principle.  But if the note or the bill is accepted unconditionally and negotiated on, that is an unconditional payment.

GAGELER J:   That is a discharge of the obligation as between the debtor and the creditor.

MR YOUNG:   Yes, but further in this case, the issue was one that concerned a promissory note with a due date into the future, between the acceptance of the promissory note and the due date for payment, bankruptcy effectively intervened.  There was a deed of arrangement with creditors.  That deed of arrangement discharged the promissory note, and as his Honour Sir Owen Dixon said at 15, point 3:

By the deed it was released and discharged.  The original debt, therefore, never revived and must be considered paid and satisfied ‑

Likewise, when the promissory note is discharged by merger, as occurred here, as found by the courts, and really as follows from the provisions of the Bills of Exchange Act, there is a discharge.

GAGELER J:   But is it different where you have a third party – the third party paying a debt?  That is ‑ ‑ ‑

MR YOUNG:   Well, that is the point I want to come to.  That is the issue that this case raises, and that is the basis upon which Justice Blue decided the matter.  We submit that that is an error.  His Honour cited no authority for that proposition, that it is different when there is a tripartite arrangement, rather than a bipartite arrangement.  Can I go immediately to Justice Blue’s judgment?  The critical passage discussing the law concerning promissory notes is at page 88 to 89 of the application book.

After stating some basic propositions at the bottom of the previous page and the top of page 88, his Honour came to the tripartite issue at paragraphs 94 to 96.  The launching pad for those statements in those paragraphs is completely incorrect.  In paragraph 94, his Honour attributes to the Court of Exchequer in Currie v Misa, a view based on implied agreement that where:

the bill of exchange was accepted in conditional payment of the debt, the condition being that the debt revives if the security is not realised.

Currie v Misa, in fact, says exactly the opposite at the pages his Honour cites.  I have given your Honours’ associates copies of those pages this morning.  In Currie v Misa in the Court of Exchequer at page 163, point 9, Justice Lush said that the title to a bill:

and payable at a future day, does not rest upon the implied agreement to suspend his remedies ‑

and his Honour goes on to state the true reason ‑

that a negotiable security given for such a purpose is a conditional payment of the debt, the condition being that the debt revives if the security is not realized.

That is the principle articulated by Justice Dixon.  It does not depend upon implied agreement and it does not depend upon any view about whether there was consideration by way of an antecedent debt for the giving of the promissory note.  So, Justice Blue’s views about those matters are completely misguided in paragraph 94.  But then his Honour says in paragraph 95:

Where a creditor takes from a debtor a bill of exchange in respect of an antecedent debt, general contractual principles applying to implied contracts and implied terms dictate whether in all the circumstances it should be implied that the underlying debt is to be regarded as discharged absolutely, discharged conditionally upon payment being made, suspended or unaffected.

Now, that proposition has four alternatives.  The proposition that they rest upon an implied agreement is wrong.  It is a fundamental principle of the law of negotiable instruments and that is the foundation for his Honour to say in paragraph 96, that a tripartite situation is different.  Now, that is a departure ‑ ‑ ‑

KEANE J:   His Honour also says in the last sentence in 96:

It also depends fundamentally on the agreement between the creditor and debtor as the parties to the loan or other transaction giving rise to the debt.

The proposition you cited to us from Sir Owen Dixon begins with the statement that it is a matter of presumption. 

MR YOUNG:   Yes.

KEANE J:   The real question here is, is it not, what affect the agreement that Justice Blue then goes on to summarise – the real question is what affect ‑ ‑ ‑

MR YOUNG:   No.

KEANE J:   ‑ ‑ ‑ the agreement has, what the parties have bargained for.

MR YOUNG:   No, your Honour, I am sorry to interrupt.  We say it is a more basic principle.  When a negotiable instrument, such as a cheque, or a bank cheque, or a promissory note is tendered in payment, and a party accepts it and negotiates it on, there is a fundamental principle of law that that effects payment.  The payment is either a conditional payment, or an unconditional payment.  It is not something else.  It was treated as another thing, effectively, by the judges in the Full Court.  They said that there was no discharge at all of the debtor’s obligations to the creditor.  Now, that is an erosion or denial or a fundamental principle concerning negotiable instruments.  Let me just assume in this case ‑ ‑ ‑

KEANE J:   Before you go on ‑ ‑ ‑

MR YOUNG:   Yes.

KEANE J:   Are you – do you see a difference between performance and discharge?

MR YOUNG:   No, for this reason.  This was a promissory note payable on demand.  There was no deferred date for presentation.  The recipient had a choice to make.  That party could have immediately demanded payment on the promissory note, or they could treat the promissory note as a negotiable instrument, accept it unconditionally, and negotiate it on in discharge of the recipient’s own legal obligations.  That is what occurred.  Now, in those circumstances, the negotiable instrument itself is a payment.  There is only two options considered by the principle, addressed by Sir Owen Dixon.  It is either a conditional payment, accepted subject to performance, because the time for performance is deferred, or it is an unconditional payment, accepted unconditionally and negotiated on, but none of that really matters in a sense, because if the promissory note is discharged, then it becomes an unconditional payment.  That really is the law concerning negotiable instruments.

GAGELER J:   Is not the difficulty that you need to grapple with the tripartite nature of this arrangement?  What you say is perfectly acceptable as between debtor and creditor.  Here you have the debt, or at least a sum in a particular form, perhaps being tendered by a third party; to discharge the debt requires the arrangement of the debtor.

MR YOUNG:   Yes.  But when the promissory note is delivered and accepted, either immediately on negotiation or ultimately by force of the discharge of the promissory note, that is an unconditional payment, and it does not alter simply because as between the original debtor and the creditor there is said to be some stipulation that the promissory note should have been banked ‑ the proceeds of the promissory note should have been banked, rather than by being used by the creditor through negotiation to discharge its own obligations.  There is no reason to overlay on the law of negotiable instruments this tripartite implied contractual limitation because that would defeat the purpose of negotiable instruments.

Can I give an example in this case?  Let us assume, instead of a promissory note it was a cheque.  The creditor took the cheque, but instead of presenting the cheque to the bank and cashing it, endorsed it on, and that is one of the capabilities of a cheque, it can be negotiated on in discharge of liabilities.  Now, the reasoning of the Full Court would say the negotiation onwards of a cheque in these circumstances is neither a discharge of the debt, nor a payment, nor an advance, and the reasoning would extend, likewise, to a bank cheque; the bank cheque is still a promissory note.  The only difference is the credit of the person that issues it.  So if a bank cheque were to be tendered it does not have to be cashed, it can be negotiated on by the recipient in discharge of its obligations.

KEANE J:   The credit of the person issuing the instrument matters, does it not, in a context where this scheme is supposed to actually be funded, if there is not somewhere someone who is creditworthy ‑ ‑ ‑

MR YOUNG:   Two answers to that.  The first is that that line of reasoning was rejected by this Court in Equuscorp.  In that situation the Court said, it is irrelevant that no real money was involved and that there was simply offsetting debit and credit entries in the bank account.

FRENCH CJ:   Well, it was looking to legal rather than economic effect, was it not?

MR YOUNG:   Yes, your Honour.

FRENCH CJ:   There were cheques though and there was a real bank account.

MR YOUNG:   No, there were no cheques, there were debit ‑ ‑ ‑

FRENCH CJ:   I am sorry.

MR YOUNG:   ‑ ‑ ‑ notes and credit notes incapable of being negotiated, but they were reflected in bank entries.

FRENCH CJ:   Yes.

MR YOUNG:   But immediately offset instantaneously by – debit was offset by credit all the way down the line.

KEANE J:   But in legal terms, for the purposes of the agreement between the parties, all the parties, there was performance of the obligation to advance.

MR YOUNG:   Well, likewise, we say here, your Honour, through the use of negotiable instruments and in accordance with fundamental principles that have been long established concerning negotiable instruments there was performance.

FRENCH CJ:   Well, at the risk of trampling over the fundamental principle, it looks like somebody who has no money sending a piece of paper in a circle.

MR YOUNG:   Well, there were issues below about that your Honour.  Ultimately, the evidence was not admitted but leave was sought to introduce evidence to the effect that the promissory note found its way back to the issuer but, effectively, it was a deposit of that note and thereafter funds were provided for the venture, so it is not as if no moneys emerged.

FRENCH CJ:   There was one promissory note which was for a large of money, was it not?  It was $730,000, or something ‑ ‑ ‑

MR YOUNG:   Yes.

FRENCH CJ:   ‑ ‑ ‑and it embodied both the financer’s direct obligations in terms of providing funds to the manager, plus the purported advances on behalf of the investors.  They were all incorporated in the one – I mean nothing turns on it though.

MR YOUNG:   Your Honour is right, they are all incorporated into one but that was multiple sets of application fees from multiple investors.

FRENCH CJ:   Yes, yes, I understand that.

MR YOUNG:   Yes.  But there were no other moneys other than participation fees covered by the promissory note.  Can I go to Justice Blue’s reasoning again to show the Court where it leads?  Just reflecting back on paragraph 89 for the moment, his Honour refers to no authority justifying the proposition that a tripartite situation makes a difference to the application of the principle.  Then, his Honour turns to the conclusions of that approach at page 95, paragraph 121. 

It also follows that the indebtedness of Mr Taylor and Mr Gillen to the Manager was not affected by the making or the indorsement of the Promissory Notes ‑

and at the last line ‑

their indebtedness to the Manager remained the same –

That is a rather extraordinary conclusion.  They participated in the venture.  They claimed tax deductions.  They derived benefits as participants in the venture even if it ultimately was not successful financially.  The promissory note was accepted.  It was endorsed on as discharging obligations.  It was ultimately discharged, and to say that it affected nothing is a rather extraordinary conclusion.

That all emerges from the proposition that in a tripartite situation, ordinary principles concerning negotiable instruments do not apply but

rather you look to inferences to be drawn from the agreement between the investor and the manager.  It really is a fairly extraordinary consequence.  It would be at odds with Equuscorp – that conclusion – because quite obviously the negotiable instruments here had legal effects all the way down the line.  This indicates that something has gone fundamentally wrong.

Can I turn to Justice Vanstone, just on the promissory note point?  Her Honour’s approach was somewhat different.  It is at pages 72 and 73.  Her Honour felt that the promissory note fell within the ordinary words of the documents.  That is paragraph 15 of page 72.  It is just that her Honour construed the words “advance” or “payment” as requiring actual money.  There is a long line of authorities to the contrary of that.

Her Honour then refers to the principle articulated in Mackenzie at paragraph 17.  Her Honour refers only to the statement by Acting Chief Justice Rich.  Sir Owen Dixon was in the minority but – because the case turned on the bankruptcy point.  Justice Rich had expressed very much a minority view about the effect of the negotiable instrument where he said that the effect until the note was honoured was that it was “not a payment at all” – this is page 6 of Mackenzie:

unless the condition of fulfilling the obligations . . . is complied with.

Now, that is not the prevailing view about negotiable instruments.  The prevailing view is that tender is either an unconditional payment or a conditional payment and nothing else.  So, her Honour has formed the view that based on Justice Rich that this suspension meant at the end of the day that there was no discharge of the debt – that appears from paragraph 18 and at the end of paragraph 19.  Then her Honour develops a distinction between the case in Equuscorp, saying in Equuscorp there were legally effective transactions.  Here there were none, below the quote in paragraph 20 because:

the promissory note was not called upon.

The fact that the note was discharged by merger after being negotiated on does not have the consequence that there were no legally effective transactions.  If your Honour pleases.

FRENCH CJ:   Right.  Thank you, Mr Young.  Yes, Mr Wells.

MR WELLS:   May it please the Court.

FRENCH CJ:   The real question for you is whether you can contain this to a debate about the construction of the particular terms in context or whether it inescapably involves some question of principle.

MR WELLS:   Our answer is it does not.  Can I start just by making three corrections with respect to what my learned friend has proffered.  First of all, it needs to be borne in mind, we submit, that the respondents, my clients, had no knowledge of the delivery of the promissory note.  Until they heard about it they proceeded on the basis that payment had been made in the sense that moneys had ended up to the credit of the scheme bank account.

FRENCH CJ:   What difference does that make to the outcome?

MR WELLS:   It means that what happened, bearing in mind that critically, and this is why matters of principle do not arise here, critically we are talking about not a transaction between debtor and creditor but a transaction – relevantly, the transaction between a lender and the manager of the scheme in relation to the tendering of a promissory note to secure, so it is said, although the evidence is sparse about this, to secure a discharge. 

FRENCH CJ:   If the lender had delivered a cheque or a truckload of money to the manager and your clients did not know about it, would that make a difference?

MR WELLS:   No, provided that what was done was in accordance with the mandate that was provided in the terms of the loan deed.

FRENCH CJ:   Well, the question reduces then to the terms of the deed of loan.  It is not dependent in any way upon the state of knowledge of the respondents, is it?

MR WELLS:   It should not be ignored, however, because my learned friend made the point, or seemed to be suggesting the point, that here were respondents taking the benefit of this arrangement by claiming tax deductions in circumstances where, as we say, they believed that a proper payment had been made to the creditor for the scheme bank account, and when they learned that it was a promissory note only, they ceased to claim their deductions.  They stepped into the witness box and gave evidence; Mr Reschke, the controller and promoter, did not.  The three propositions that we would want to put to the Court are these.

First, that because Mr Reschke chose not to step into the witness box, or indeed, proffer any witness, the evidence is lacking to enable an authoritative analysis to be undertaken even of what is put forward as the issues under the Bills of Exchange Act.  First proposition.  Second proposition, the applicant’s case, that is, that by accepting the promissory note delivered by the lender, RCF, and the investor borrower’s obligation under the joint venture agreement to pay the balance of the management fees, thereby being discharged, flounders on one fundamental proposition apart from a lack of evidence, and that is that AHM was not authorised to effect a discharge of the joint venture agreement – joint venture obligation – on an unfulfilled promissory note.

We are required – and rightly, we submit – by authority in this Court to analyse the transaction which constitutes or purports to constitute the performance by the lender of the loan deed obligation for the purpose of discharging or performing the joint venturer’s obligation to pay the balance of the management fee.  In that transaction, AHM, the manager, on the case that is put forward about which we say there is little or no evidence, in fact, AHM is said to have accepted the promissory note unfulfilled – that is, unperformed – and, on the acceptance of that promissory note, to have discharged the borrower, the joint venturer, from his joint venture debt, in circumstances where, as a result, if this is right, AHM, the manager, accepts a risk that the promissory note will not be on it, or will not be discharged by payment, and thereby, the scheme bank account is the less.

To accept an unfulfilled promissory note in return for the discharge of one joint venturer’s obligation would require the consent of all the joint venturers because they are affected by that transaction and the consequences of it, and one need only look at both the joint venture agreement and the constitution, not all of which is set out in the judgment, to see that in this joint venture which incorporated the terms of the constitution, each joint‑venturer contracted which with every other joint‑venturer in the pursuit of the common purpose.  So that for AHM to discharge one joint‑venturer from his joint venture debt, upon an unfulfilled promissory note, in our respectful submission, is an act for which there is no authority, actual or ostensible, I might add, again the debtor ‑ ‑ ‑

FRENCH CJ:   Not all investors signed up to the deed of loan arrangement, is that right?

MR WELLS:   Not all did, your Honour, but those who did not, paid their full amount themselves ‑ ‑ ‑

FRENCH CJ:   Yes.

MR WELLS:   ‑ ‑ ‑ and they are entitled to expect that from everybody else.  Now, there is a third proposition, your Honours, and that is if we assume for the moment against us that AHM, the manager, did have authority to give a discharge, then, nevertheless, any discharge, if there was one because the evidence is sparse about it, was not bought with the borrowers’ borrowed money.  It was bought by a separate consideration flowing from the lender, RCF, and this brings into play the three sets of parties, not just the debtor and the creditor but one relationship being the investor joint‑venturer and the scheme manager, joint venture debt; another relationship being the investor borrower and the lender, under the loan deed, and the third relationship which is, as we would contend, what his Honour Justice Blue was addressing in paragraph 96 of his judgment, the separate transaction undertaken by the lender in dealing with the scheme manager under the promissory note. 

Now, your Honours, much may be said of the lack of evidence but can I say this much.  Although there is lack of evidence as to every step in this round robin, we can at least identify this:  there is no evidence of any arrangement between RCF, the lender, and AHM, the manager, for the proffering of the promissory note and why, for that matter, AHM would accept it.  There is no evidence of what AHM, the manager, and RCF intended to happen to the underlying debt.

There is one item of documentary evidence about that and that is a tax invoice but apart from that, there is no evidence as to whether the promissory note was delivered as security in order to suspend the underlying joint venture debt or in order to discharge it by the equivalent of an accord or satisfaction.  There is no evidence of debiting and crediting of accounts of AHM or RCF, let alone of any bank accounts and there is no evidence of RCF’s capacity to pay.

FRENCH CJ:   You use that as a point of distinction with Equuscorp, do you?

MR WELLS:   Well, in Equuscorp there was only one issue and that was whether there was an effective payment at that critical first stage, and the debiting and crediting of bank accounts on the spot, not even as my friend points out, not even by the exchange of cheques, but in the bank manager’s office, constituted, relevantly, the payment, and the equivalent here is RCF’s promise to pay on a promissory note.  That is the correct contrast.

Can I likewise suggest to the Court that similarly there is no evidence as to the circumstances in which the promissory note was negotiated to Koonara?  It is assumed by the applicant that in some way that was to discharge an obligation of AHM, but there is no evidence to say what obligation it was that was to be discharged and whether it had anything to do with the scheme or not, that is, with the project or not.  No evidence about it.

FRENCH CJ:   Koonara – just so I understand, AHM is said to have been an independent company.

MR WELLS:   Said to be.

FRENCH CJ:   Koonara had the same director as Rocky Castle Finance.

MR WELLS:   Correct.

FRENCH CJ:   Yes, and Coonawarra the owner, or the same ‑ ‑ ‑

MR WELLS:   Well, they actually did not end up owning it, there was a contract to become owner, but that did not get completed.  They are the players ‑ ‑ ‑

FRENCH CJ:   I think Koonara ‑ there had been a subcontract of management obligations from AHM to Koonara.

MR WELLS:   There had been, but no evidence as to what the negotiated promissory note was negotiated for.  Similarly, no evidence as to why it came about that Koonara then negotiated the promissory note back to the maker of the bill.  Obviously, if one stands back and looks at it, the result of all of this is – so it is said – that for no outlay by the purported lender the debt is said to – that is, the joint venture debt – is said to have been discharged so that the joint venture debtor and borrower then comes under an obligation to make full payment to the lender who has lent nothing on that basis.

As we would put it, in terms of legal effect, that scenario can be exploded by, as I say, first of all, lack of evidence, secondly, the discharge was not authorised, and thirdly, if the lack of authority can be overcome in any way at all we are then still left with this, that an assumed discharge, assumed because as the two judges who ultimately constituted the majority in Mackenzie’s Case pointed out, that is, the acting Chief Justice and Justice Williams, in the absence of evidence it is taken to be a suspension of the underlying debt only, and that is as between creditor and debtor, and we are not talking about that here.  Any assumed discharge was bought not with, as I have called it, borrowed money, in which RCF would be acting as agent for the borrower under the mandate in the loan deed, but with a separate consideration flowing from RCF.

One can test it this way, of course.  First of all, if what RCF did was to comply with the mandate and, let us say, to produce a barrow load of cash to the requisite amount, the specified amount, in delivering that cash to AHM it would be the borrower’s cash that is being delivered.  Under the mandate, the lender, by undertaking that act, is acting on behalf of the borrower in order to make that payment, but it is a payment of the borrower’s money.

GAGELER J:   When you refer to the mandate, are you referring to clause 2.1 of the deed?

MR WELLS:   I am, your Honour, and in particular, the alternative, because this could have been performed in two ways, this loan deed – one is by the lender providing the money to the borrower, and the borrower then making the payment, or, on the authority given under clause 2.1, the lender could make that payment direct to the manager, but it is not any payment.  It was the payment, as Justice Blue made clear, it was the payment which was required to perform the joint venturer’s obligation under the joint venture.  It was, in fact, defined exactly in that way.  The question that may be asked is this:  in what way, instead of delivering, let us say, cash, in what way, by delivering the promissory note, does the lender act on behalf of the borrower – I might add, unknown to the borrower – act on behalf of the borrower by tendering a chose in action created by the lender as a consideration for the discharge of the joint venture debt.

The equivalent in the three options that Justice Dixon offered in Mackenzie’s Case, which is security – which has no effect on the underlying debt – payment according to the tenor which, at best, effects a suspension, or an accord and satisfaction which discharges the debt.  This here, coming however not from the debtor but from a separate source, is the equivalent of an accord and satisfaction.  One thing is clear from Mackenzie’s Case, and that is accord and satisfaction is contrasted with payment.  This is not a payment.  This is the equivalent of accord and satisfaction, but it is not the debtor’s accord and satisfaction, it is the separate contract which is entered into by RCF, giving its own consideration from its own source for the purpose of – if we are to make the assumption that that was the purpose of discharging the joint venture debt.

GAGELER J:   Can I just put that in really simple terms?  Is it your submission that whatever meaning the word “payment” might have as a matter of general law, read in the loan deed, against the background of the joint venture agreement, it must be a narrower meaning?

MR WELLS:   The answer, your Honour, is yes.  It necessarily incorporates that proposition, I do not found only on that proposition, but it may, in the end, from the slightly more elaborate analysis, come down in the end to that, which is a question of interpreting the loan deed against the particular circumstances that arose here.

FRENCH CJ:   You do not deny the legal effect of the promissory note?

MR WELLS:   Well, we are prepared to assume that for the purposes of the argument the delivery of the promissory note creates a conditional

obligation, but the point is that from the point of view of the scheme, that does not perform the obligation, and the loan deed requires the performance of the joint venture obligation, nothing less.  May it please the Court.

FRENCH CJ:   Thank you, Mr Wells.  Yes, Mr Young.

MR YOUNG:   A few brief points.  My learned friend started with some propositions that involved some assumptions about the effect of a promissory note.  One of the propositions was that the manager was not authorised to effect discharge on an unfulfilled promissory note and the other was that the manager accepted a risk that ‑ on that promissory note and at the end of the day the scheme bank account would be less because of that risk.  Now, the fact is here under the agreements the manager had an immediate obligation to transfer the whole of the participation fees to the entity charged with the conduct of the venture, Koonara. 

So, as soon as the participation fees came in they had to be paid out.  So what occurred, and this was the findings below, was that the negotiable instrument was taken and negotiated in discharge of that obligation.  Moneys were never going to stay into the scheme bank account because they were obliged to be paid to the person, Koonara, establishing the venture.  As to the proposition that there was no evidence, the findings below were complete that there were these deliveries and endorsements of the promissory note and that they had the effect of discharging the debt. 

The Magistrate so found at 33 to 38, pages 8 to 9 of the book, as did the trial judge at paragraphs 38 and 77 to 78.  It was only the Full Court that said that there was no discharge of the debt and the proposition that there was no evidence of why it would be accepted and endorsed is quite incorrect.  One only has to look at the sequential obligations of the parties to make it very clear why the promissory note was endorsed on in discharge of the obligations that immediately fell on the recipient. 

FRENCH CJ:   That is endorsed on to Koonara?

MR YOUNG:   Yes.

FRENCH CJ:   What about the endorsement back to Rocky Castle?

MR YOUNG:   I do not think there was any evidence as to that being in discharge of an obligation.  The submission that was put, and I emphasise it was only a submission because there was no evidence in the way in which it arose at the Magistrate’s Court, was that that was put back on deposit with Rocky Mountain which was the financier to be drawn upon as and when funds were required to establish the venture.  But those assumptions concerning the unfulfilled nature of the promissory note build in assumptions about the effect of the promissory note.  A promissory note is not unfulfilled simply because it is not presented for payment.  It has value as a negotiable instrument to discharge other obligations.  So, immediately rights and obligations were affected by the acceptance and negotiation of the promissory note. 

Can I turn to the mandate?  I will be quite brief about it.  Justice Blue sets out the salient provisions of the only two relevant documents at 97 and 98 of the application book.  There are two relevant documents that affected the lender.  One was the application – I am sorry, I have given the wrong – I gave the paragraph number.  It is page 89.  Firstly, the application form was a document passing between the lender and the borrower.  It is at page 89.  Two‑thirds of the way down the page:

1.Apply for a loan . . . to fund the payment of your Management Fees . . . 

2.Irrevocably Authorise and Direct the Lender to apply the proceeds of the loan . . . to payment of the Management Fees –

Then the loan agreement, the Court will have seen.  The next page, page 22, clause 2.1 and at least its opening subparagraph is set out.  That was an authorisation and direction to the lender to “advance the Principal . . . to the Manager the sum of $8,000” in part‑payment of the management fees.  So the obligation was to make a payment in satisfaction of the obligation to pay the management fees.  There is nothing about the documents passing between the lender and the borrower that foreclosed the use of a cheque, a bank cheque or a promissory note to effect that discharge.

The source of Justice Blue’s finding that there was some restricted mandate comes from the constitution and the passages that his Honour sets out at page 93.  The constitution was not a document to which the lender was a party.  It simply provided, at the top of page 93, for the establishment of a scheme bank account:

into which all monies received by the Manager . . . are to be paid.

But under clause 15.9 that follows, it is clear that a broader concept was envisaged:

The monies or payments received from or on behalf of Members must be applied . . . to the Manager.

That is the obligation to on‑fund the manager for the establishment of the vineyard and this was subcontracted to Koonara.  So it is only in the internal

document between the venturers, the constitution, that you find provisions about the establishment of a bank account and they do not restrict the mandate or foreclose the possibility of using a method of payment well known to the law – that is to say, a promissory note.

FRENCH CJ:   Thank you, Mr Young.

MR YOUNG:  If your Honour please.

FRENCH CJ:   The Court will adjourn briefly to consider what course it should take.

AT 10.15 AM SHORT ADJOURNMENT

UPON RESUMING AT 10.19 AM:

FRENCH CJ:   In our opinion, the decision of the Full Court, which is the subject of these applications for special leave, turned necessarily upon the proper construction of the Deed of Loan and its application to the particular transactions under which promissory notes were issued by the applicant to the management company, endorsed by it to a subcontracting company related to the applicant and then endorsed by that company back to the applicant.  The case is not a suitable vehicle for the exploration of any question of general principle which would warrant the grant of special leave.  The cases are distinguishable on their facts from those in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471. In each case special leave will be refused with costs. The Court will now adjourn to reconstitute.

AT 10.20 AM THE MATTER WAS CONCLUDED