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

[2013] SASC 27

SUPREME COURT OF SOUTH AUSTRALIA

(Magistrates Appeals: Civil)

TAYLOR v ROCKY CASTLE FINANCE PTY LTD;  GILLEN v ROCKY CASTLE FINANCE PTY LTD

[2013] SASC 27

Reasons for Decision of The Honourable Justice Nicholson

4 March 2013

MAGISTRATES - APPEAL AND REVIEW - SOUTH AUSTRALIA - APPEAL TO SUPREME COURT - POWERS OF COURT - OTHER MATTERS

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS - INTERPRETATION OF MISCELLANEOUS CONTRACTS AND OTHER MATTERS

BANKING AND FINANCE - INSTRUMENTS - PROMISSORY NOTES - OTHER MATTERS

BANKING AND FINANCE - INSTRUMENTS - PROMISSORY NOTES - RIGHTS AND DUTIES OF HOLDER

BANKING AND FINANCE - INSTRUMENTS - BILLS OF EXCHANGE - DISCHARGE - PAYMENT

MONEY - PAYMENT - PAYMENT BY BILL, NOTE OR CHEQUE

Appeal from the decision of a Magistrate who found each of the two appellants to be liable, pursuant to the terms of a deed of loan, to repay to the respondent loan principal said to have been advanced, together with interest.  Each appellant entered into a separate “Loan Deed” with the respondent.  The deeds were in materially identical terms and arose within the same factual matrix.

The appellants participated, as investors, in a managed investment scheme.  Each accepted the optional financial assistance offered by the respondent with a view to partially discharging a financial obligation under the scheme.  The respondent purported to pay the sums promised to be advanced under the Loan Deeds by providing a promissory note, payable on demand, to the Manager of the scheme.  The Manager accepted the promissory note by way of part discharge of the relevant obligation owed to it by each appellant.  However, the Manager did not present the promissory note to the respondent for payment.  Rather, it indorsed it in favour of another participating party on the management side of the scheme.  This party also did not present the promissory note for payment but indorsed it in favour of the respondent.  In these circumstances, each appellant maintains that the respondent never, itself, incurred a liability sufficient to satisfy its obligation to have “advanced [to the appellant] the Principal” as required by the Loan Deed. 

Held:  Both appeals allowed.  At no time did the respondent make a payment or advance the principal, as required by the terms of the Loan Deeds.

Magistrates Court Act 1991 s40; Bills of Exchange Act 1909 (Cth) s66, s89, s95, referred to.
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337; Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989; Western Export Services Inc. v Jireh International Pty Ltd [2011] HCA 45; Royal Botanic Gardens & Domain Trust v South Sydney City Council [2002] HCA 5, (2002) 240 CLR 45; Pacific Carriers Ltd v BNP Paribas [2004] HCA 35, (2004) 218 CLR 451; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52, (2004) 219 CLR 165; Wilkie v Gordian Runoff Ltd [2005] HCA 17, (2005) 221 CLR 522; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3, (2008) 234 CLR 151; Re York Street Mezzanine Pty Ltd (in liq) (2007) 162 FCR 358; Rowe v Young (1820) 2 Bligh HL 391, 4 ER 381; Re: Boyse (1886) 33 ChD 612; Arnold & Anor v State Bank of South Australia & Ors (1992) 38 FCR 484; Australian Horticultural Finance Pty Ltd v Jekos Holdings Pty Ltd [1997] QCA 440; Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2001] QSC 464, [2002] QCA 380, (2005) 218 CLR 471; Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449; Raftland Pty Ltd v Federal Commissioner of Taxation (2008) 238 CLR 516; Quainoo v NZ Breweries Ltd [1991] 1 NZLR 161; Reid Murray Holdings Ltd (in liq) v David Murray Holdings Pty Ltd (1972) 5 SASR 386, considered.

TAYLOR v ROCKY CASTLE FINANCE PTY LTD;  GILLEN v ROCKY CASTLE FINANCE PTY LTD
[2013] SASC 27

Magistrates Appeal

NICHOLSON J.

Introduction

1. These are appeals from the decision of a Magistrate who found each of the two appellants to be liable, pursuant to the terms of a deed of loan, to repay to the respondent loan principal said to have been advanced, together with interest.[1]  Each appellant entered into a separate “Loan Deed” with the respondent.  The deeds were in materially identical terms and arose within the same factual matrix.  There are no material differences, either factual or legal, between the positions of the two appellants vis a vis the respondent.  The two trials were heard by the Magistrate concurrently as were the appeals before me.  Nevertheless, I am dealing with two separate appeals and separate orders with respect to each will need to be entered.   

   [1]    The appellant Taylor was held liable to repay $29,972.62 inclusive of interest and the appellant Gillen was held liable to pay $36,573.10 inclusive of interest.

2. The appeal is brought pursuant to s40 of the Magistrates Court Act 1991 and is by way of re-hearing.  An appeal court is obliged to reach its own view of the case by making an independent assessment of the evidence after giving due weight to the advantage of the Magistrate in having heard the witnesses. 

3. The appellants participated, as investors, in a managed investment scheme.  Each accepted the optional financial assistance offered by the respondent with a view to partially discharging a financial obligation under the scheme.  The respondent purported to pay the sums promised to be advanced under the Loan Deeds by providing a promissory note, payable on demand, to the Manager of the scheme.  The Manager accepted the promissory note by way of part discharge of the relevant obligation owed to it by each appellant.  However, the Manager did not present the promissory note to the respondent for payment.  Rather, it indorsed it in favour of another participating party on the management side of the scheme.  This party also did not present the promissory note for payment but indorsed it in favour of the respondent.  This served[2] to discharge the respondent’s liability on the promissory note.[3]  In these circumstances, each appellant maintains that the respondent never, itself, incurred a liability sufficient to satisfy its obligation to have “advanced [to the appellant] the Principal” as required by the Loan Deed.  I have concluded that the appellants are correct and that the appeals should be allowed. 

   [2]    For an effective discharge, delivery is also necessary.  That delivery took place has not been challenged by any party.  

   [3]    Bills of Exchange Act 1909 (Cth) ss66, 95.

   The nature of the scheme

4. The managed investment scheme was known as the “Coonawarra Wine Grape Project”.  The relevant prospectus[4] provided that investors (described as “farmers”) would collectively own all of the scheme production (grapes and wine) and would share in the nett revenue in proportion to their respective holdings.  An investor would be obliged to pay, in advance of the first year, a Management Fee, an Establishment Fee and a Lease Rent Contribution Fee in the total amount of $17,300 for each unit (“Participation”) it acquired.  Thereafter, each investor would pay Annual Management Fees and Lease Rent Contribution Fees. 

   [4]    Exhibit D1.

5. Coonawarra Property Holdings Ltd (“CHP”) owned the land upon which the joint venture was to operate and Australian Hardwood Management Ltd (“AHM”) was established as the Responsible Entity and Manager of the scheme.  However, AHM entered into a sub-contract with Koonara Management Pty Ltd (“Koonara”) pursuant to which it sub-contracted its management obligations with respect to the scheme to Koonara.  The respondent, Rocky Castle Finance Pty Ltd (“RCF”) was a financier of the scheme.  RCF was to provide financial assistance, in relation to the payment of the Management Fees, to those investors who chose to take up this loan option. 

6. Each appellant, as investor, was party to three separate written agreements:

   (i)a Constitution,[5] the parties to which were AHM (as Manager), CHP (as land owner) and the relevant appellant (as farmer);

   (ii)a Joint Venture Agreement[6] the parties to which were the same as for the Constitution; and

   (iii)a Loan Deed[7] the parties to which were RCF (as lender) and the relevant appellant (as borrower).

   Both of the Joint Venture Agreements and both of the Loan Deeds were executed on 30 June 2000.

   [5]    Exhibit P1.

   [6]    Exhibit P11 (the appellant, Mark Taylor) and exhibit P10 (the appellant, Robert Gillen).

   [7]    Exhibit P9 (Taylor) and exhibit P10 (Gillen).

7. The Constitution required an investor to pay a number of fees, including an Annual Management Fee, to AHM as the Manager.[8]  The primary object of the scheme was identified as a joint venture, for the benefit of investors, to conduct the business of planting, growing and cultivating of grape vines, the production of wine grapes and the harvesting, marketing and sale of the wines, grapes and bulk wine produced therefrom.[9] 

   [8]    Exhibit P1, sub-clauses 4.2, 4.3 and 8.1.

   [9]    Exhibit P1, sub-clause 14.1.

8. The Constitution imposed a number of obligations on the parties. By sub-clause 15.1 a prospective member became obliged, after acceptance by AHM (as Manager) to execute the Joint Venture Agreement and to deliver it together with “all monies payable at that time…”. By sub-clause 15.2 the Manager (AHM) became obliged, on receipt of “application monies” and a completed and signed application form (if accepted) to pay those monies “as soon as practicable after their receipt but not later than the close of business on the next working day after the day of receipt” into the Applications Bank Account. By sub-clause 15.8 the Manager or the Custodian, as the case may be, became obliged to transfer the relevant application monies from the Applications Bank Account to the Scheme Bank Account.

9. The term “Applications Bank Account” is defined to mean the bank account into which the application monies are to be banked pending acceptance by the Manager of an application by a prospective member. The term “Scheme Bank Account” is defined to mean the bank account maintained by the Manager or the Custodian as the agent of the Manager, as the case may be, into which all monies received by the Manager for and on behalf of members were to be paid other than any monies required to be banked into the Applications Bank Account. The term “application monies” does not appear to be defined either in the Constitution or the Joint Venture Agreement; nevertheless, it can only be a reference to the obligatory payments by a member as provided for in clause 4.

10. Sub-clause 15.9 provided that “monies or payments received from or on behalf of members must be applied in the case of the Annual Management Fees, the Vineyard Establishment Fees and the Lease Rent Contribution Fees to the Manager”.  Clause 18.3 comprised a direction that certain expenses of the scheme “shall be borne and paid by the Manager out of the Annual Management Fees and the Vineyard Establishment Fees”. 

11. The Joint Venture Agreement contained cognate provisions, including to the effect that AHM, as the Manager, was to perform the Management Services; as defined;[10] that the Manager was to collect, accept, receive, apply and disperse any monies that it is required to do so under this Agreement…;[11] that in consideration of the Manager carrying out the Management Services the Manager was to be paid the specified Annual Management Fees;[12] and that the expenses of the Joint Venture relating to the Management Services were to be borne by the Manager out of the Annual Management Fees paid by the investors/farmers.[13]

    [10]   Exhibit P11 and P12, cl 3.3 and definition of Management Services in cl 1.1.

    [11]   Clause 4.5.

    [12]   Clause 5.1.

    [13]   Clause 5.3.

12. The term “Manager” is defined in both the Constitution and the Joint Venture Agreement in terms sufficiently broad enough to embrace Koonara in its role of performing the management operations pursuant to its sub-contract with AHM.

13. It is common ground that these two scheme documents, the Constitution and the Joint Venture Agreement, form part of the “factual matrix” within which the appellants’ and the respondent’s obligations pursuant to each Loan Deed are to be construed.

14. In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales[14] Mason J set out without any apparent animadversion the following statement by Lord Willberforce in Reardon Smith Line Ltd v Hansen-Tangen.[15] 

    In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.

    Neverthless, the “true rule”[16] as to the admission of evidence of surrounding circumstances remains that as set out by Mason J, with the concurrence of Stephen and Wilson JJ, in Codelfa.[17]

    The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning.  But it is not admissible to contradict the language of the contract when it has a plain meaning.  Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed. 

    [14] [1982] HCA 24; (1982) 149 CLR 337 at [350].

    [15] [1976] 1 WLR 989 at 995-996.

    [16]   See Western Export Services Inc. v Jireh International Pty Ltd [2011] HCA 45, a determination of a special leave application by Gummow, Heydon and Bell JJ where their Honours also observed that the position of Codelfa, in this respect, as a binding authority, was made clear in the joint reasons of five Justices in Royal Botanic Gardens & Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45 at 62-63, [39]. In addition, their Honours in Western Export Services observed that they did not read anything said in the High Court in Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at 461-462, [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at 179, [40]; Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522 at 528-529, [15]; and International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3, (2008) 234 CLR 151 at 160, [8] as operating inconsistently with what was said by Mason J, as set out in the text to the next footnote.

    [17]   At 352.

15. In the present case each of the Loan Deeds[18] expressly referred to the Joint Venture Agreement and the Constitution. The evident common intention of the parties to each Loan Deed at the time of its execution was that it is to be construed against the background of the obligations and entitlements as provided for in those two agreements and notwithstanding that RCF is not a party to them.

    [18]   Exhibits P9 (Taylor) and P10 (Gillen).

16. Under the Loan Deeds RCF agreed, in substance, to lend to each appellant specified sums in order that each appellant could satisfy his obligations with respect to part payment of the Annual Management Fees payable under the Joint Venture Agreement.  The proper construction of the terms of the obligation to lend money assumed by RCF, and as set out in the Loan Deed, is fundamental to the disposition of these appeals.  I will return to the terms of the Loan Deed a little later in these reasons.

17. In June 2000 both appellants applied for and received two “Participations” in the scheme.[19]  When taking up the Participations each appellant also decided to take up the “loan option” whereby RCF was to fund part payment of the Annual Management Fees payable to AHM.[20]  Clause 5.1 of the Joint Venture Agreement provided:

    5.1     In consideration of the Manager carrying out the Management Services the    Manager must be paid the following Annual Management Fees by the Farmer as follows [sic]:

    (a)     for the Initial Period the sum of $13,430 per Participation in advance on the Settlement Date;

    (b)     for the 12 month period commencing on the first anniversary of the Settlement Date, the sum of $5,000 per Participation in advance on that date;

    (c)     for the 12 month period commencing on the second anniversary of the Settlement Date, the sum of $5,000 per Participation in advance on that date;

    (d)     for the 12 month period commencing on the third anniversary of the Settlement Date, the sum of $1,300 per Participation in advance on that date;

    (e)     for each 12 month period thereafter an amount per Participation being the greater of [two alternative formulas, the reproduction of which here is unnecessary].

    [19]   In clause 1.1 of the Joint Venture Agreement, “Participation” is defined to mean a single undivided interest in the Joint Venture that a farmer acquires by entering into the Joint Venture Agreement.

    [20]   Exhibits P5-P8.

18. As a consequence of each appellant and the respondent (RCF) entering into the Loan Deeds, RCF became liable to pay a proportion of these various Annual Management Fees directly to AHM as and when due such that the appellants were to be invoiced only for any balance due. Clause 2.1 of each Loan Deed, provided as follows.

    2.1     The Lender hereby agrees to advance the Principal to the Borrower or as he may    direct, and the Borrower hereby authorises and directs the Lender to so advance the       Principal as follows:

    (a)     no later than the Settlement Date to the Manager the sum of $8,000.00 per Participation in part payment of the first year’s Annual Management Fee payable by the Borrower as a Farmer under the terms of the Joint Venture Agreement;

    (b)     provided that the Borrower is not in default under this Loan Deed, no later than the first anniversary of the Settlement Date to the Manager the sum of $2,500.00 per Participation in part payment of the second year’s Annual Management Fee payable by the Borrower as a Farmer under the terms of the Joint Venture Agreement;

    (c)     provided that the Borrower is not in default under this Loan Deed, no later than the second anniversary of the Settlement Date to the Manager the sum of $2,500.00 per Participation in payment of the third year’s Annual Management Fee payable by the Borrower as a Farmer under the terms of the Joint Venture Agreement;

    (d)     provided that the Borrower is not in default under this Loan Deed, no later than the third anniversary of the Settlement Date to the Manager the sum of $1,500.00 per Participation in payment of the fourth year’s Annual Management Fee payable by the Borrower as a Farmer under the terms of the Joint Venture Agreement; and,

    (e)     provided that the Borrower is not in default under this Loan Deed, no later than the fourth anniversary of the Settlement Date to the Manager the sum of $1.100.00 per Participation in payment of the fifth year’s Annual Management Fee payable by the Borrower as a Farmer under the terms of the Joint Venture Agreement.

19. It was the appellants’ understanding that,  for the duration of the scheme, their obligations to pay Annual Management Fees were met, in part, from their own funds and, in part, by RCF as recorded in tax invoices received from AHM.[21]

    [21]   Exhibits P13-P33.

20. By way of example, the tax invoice issued on 28 November 2000 by AHM to the appellant Taylor[22] sets out the various fees payable by Mr Taylor with respect to his two Participations as at that date, including the Annual Management Fee for the Initial Period[23] in the amount of $13,430 plus GST per Participation.  The invoice also records and deducts from the amount due and payable an “amount financed” of $16,000.  This “amount financed” corresponds with the RCF obligation[24] to pay to the Manager on behalf of Mr Taylor the sum of $8,000 per Participation, in part payment of the first year’s Annual Management Fee.  As far as the appellants were concerned, each such invoice received indicated that the finance arrangement entered into with RCF was being observed and that, following payment of any balance due, the obligation of each appellant to pay to the Manager the Annual Management Fee and other amounts payable under the Joint Venture Agreement would be discharged. 

    [22]   Exhibit P13.

    [23]   Clause 5.1(a) of the Joint Venture Agreement.

    [24]   Clause 2.1(a) of the Loan Deed.

    The means by which RCF purported to discharge its obligations under the Loan Deeds

1. A substantial number of investors in the scheme, but not all, accepted the finance option offered by the scheme promoters through RCF.  However, RCF did not remit to AHM on an annual basis separate individual amounts referrable to each such investor’s borrowing.  Rather, RCF, on an annual basis, purported to remit one global amount representing all of the funds it had agreed to advance on behalf of all such investors for that annual period.  Furthermore, RCF did not do this by providing a cheque or cash to AHM or an electronic transfer of funds to a bank account of AHM.  RCF purported to discharge its obligations in this respect by providing promissory notes payable to AHM.  For example, a promissory note issued on 30 June 2000 represented payment (in advance) of part of the first year Annual Management Fee for all of the relevant investors.[25]  I set out the promissory note provided on 30 June 2000, together with subsequent indorsements, in full.

   [25]   Exhibit P40, which is illustrative of the process adopted for subsequent years.

   PROMISERY [sic] NOTE

   (Coonawarra Wine-Grape Project Investment)
   (Prospectus 1)

   30^th June 2000

   Rocky Castle Finance Pty Ltd (ABN 44 758 401 975) hereby unconditionally promises to pay Australian Hardwood Management Limited (ABN 35 079 695 051) on demand the sum of:

   Amount:  $736,000

   Amount in words:         Seven hundred and thirty six thousand dollars.

   Date:                 30/6/00 [handwritten]

   Executed by BURKE RESCHKE [handwritten] of Rocky Castle Finance Pty Ltd by its duly authorised signatory.

[signed]

(Signature)

ENDORSEMENT

Please pay to the order of Koonara Management Pty Ltd (ABN 54 411 757 190) the sum of: $736,000

Amount in words:   Seven hundred and thirty six thousand dollars.

Date:                 30/6/00 [handwritten]

Executed by F McLACHLAN [handwritten] of Australian Hardwood Management by its duly authorised signatory.

[signed]

(Signature)

ENDORSEMENT

Please pay to the order of Rocky Castle Finance Pty Ltd the sum of:  $736,000.

Amount in words:         Seven hundred and thirty six thousand dollars.

Date:                 30/6/00 [handwritten]

Executed by BURKE RESCHKE [handwritten] of Koonara Management Pty Ltd by its duly authorised signatory.

[signed]

(Signature)

1. It can be seen that the parties on the management side of the scheme engaged in a round-robin series of transactions.  The promissory note drawn by RCF in favour of AHM (as Manager) was on the very same day indorsed by AHM in favour of Koonara (to whom AHM had sub-contracted its management obligations) and on that same day Koonara further indorsed the promissory note in favour of RCF. 

2. The note, as drawn by RCF, comprised an unconditional promise in writing by RCF to pay AHM the sum of $736,000 on demand. The note complied with the requirements of ss89(1) of the Bills of Exchange Act 1909 (Cth) and is properly to be characterised as a promissory note for the purposes of that legislation.

3. All Bills of Exchange, including promissory notes, are prima facie deemed to have been made for valuable consideration although this presumption is rebuttable, at least in an action between the immediate parties to the Bill.[26]  As such, the unconditional promise contained in such a note is enforceable according to its terms.  That the promissory notes provided by RCF to AHM were enforceable, according to their terms, has not been challenged by the appellants.  In any event, AHM accepted these promissory notes from RCF in part discharge of each investor’s (including each appellant’s) obligation to pay Annual Management Fees.  If it were to be necessary to do so, I would infer that, as between RCF and AHM, AHM effected this partial discharge at the request, implied or express, of RCF and thus provided consideration to RCF for RCF’s unconditional promise to pay money. 

   [26]   Re York Street Mezzanine Pty Ltd (in liq) (2007) 162 FCR 358 at [37] and authorities there cited.

4. By indorsing the promissory note in favour of (to the order of) Koonara, AHM became contingently liable to Koonara to satisfy the terms of the note, although RCF remained primarily liable to Koonara.  In the event that Koonara had presented the note to RCF for payment in accordance with its tenor and had RCF defaulted, Koonara could have called on AHM for payment.[27]  AHM’s potential liability, as indorser of the promissory note, was conditional and would not have arisen unless and until the promissory note were to be dishonoured by RCF.[28]  Presentation for payment is necessary in order to render an indorser liable.[29]The effect of the final indorsement by Koonara to RCF was to discharge the promissory note,[30] that is, to discharge AHM’s contingent liability to Koonara and RCF’s primary liability to Koonara.   From this point on no further action could have been brought by any of the parties upon the promissory note. 

   [27] Sections 95(2), 59 and 60.

   [28]   Rowe v Young (1820) 2 Bligh HL 391, 4 ER 381; Re: Boyse (1886) 33 ChD 612 at 623.

   [29]   Sub-section 93(2).

   [30] Sections 95 and 66.

   The appellants’ complaint

5. At no time was the promissory note presented to RCF for payment either by AHM or Koonara.  The appellants maintain that, in these circumstances, the mere provision by RCF to AHM of an unconditional promise to pay money did not satisfy RCF’s obligation under the Loan Deed to effect a “payment” to AHM so as to “advance the Principal to [the appellants] or as [they] may direct”.   The “Principal” is defined in clause 1.1 of the Loan Deed as “the sum of $15,600 per Participation advanced by the Lender [RCF] to the Borrower [the appellants] as provided in clause 2 herein”.  In effect, the appellants contend that a mere promise to pay money which promise was never executed did not amount to a payment by RCF (to AHM) of money nor an advance or lending by RCF (to the appellants) of the “Principal”. 

6. The appellants rely upon the language adopted by the parties in the Loan Deed, as properly construed, against the background of the transactions entered into by the appellants and AHM.  The situation was one where no “real money” found its way into the possession or control of AHM as contemplated by the terms of the Loan Deed. 

7. During argument, some reliance was placed by the appellants on the contention that there needed to have been a transfer of “real money” and there was much criticism of this term advanced by the respondent.  The respondent maintained that the ultimate effect of the appellants’ argument was that the obligation of RCF to advance the Principal could only really have been satisfied by the handing over of cash and that to interpret the Loan Deed as requiring this would lead to an absurdity – “no one borrowing thousands of dollars expects, in Australia, to receive this sum in a wheelbarrow”.[31] 

   [31]   Arnold & Anor v State Bank of South Australia & Ors (1992) 38 FCR 484 at 486 (Burchatt, Hill and Drummond JJ).

8. I have simplified the position of the appellants.  As the argument developed it became apparent (and I dare say it always was the case) that the appellants accepted that there might have been a number of means by which RCF’s obligation to advance the Principal would have been satisfied by the transfer of “real money”.  These would include, for example, payment by way of cheque drawn on RCF’s bank account which when presented by AHM was met, payment by way of bank cheque (which, ordinarily, would only issue following RCF’s bank account being debited with the amount) or payment by way of electronic funds transfer whereby an account held by RCF with its bank (whether in credit or in overdraft) was debited and a corresponding amount transferred to and credited to an account of AHM with its bank.  There can be little doubt that these rather more common forms of paying money to another person or entity would have served to satisfy RCF’s obligation under the Loan Deed to “advance the Principal” to the appellants or as they may direct.[32] 

   [32]   There being a standing authorisation and direction in clause 2.1 of the Loan Deed for RCF to pay the advanced Principal to AHM.

9. The appellants maintain that there is a critical difference between making a payment of funds in one of these ways as compared with a mere (executory) promise to pay, albeit on demand, which promise was never executed in favour of AHM or, as in the present case, at all.  The appellants maintain that the terms of the Loan Deed required something in the nature of the former but did not embrace the latter.  At first blush, the distinction is an attractive one.  From a commercial perspective, there is a significant difference between a promise to pay money (particularly where it is unsecured) and the actual payment of money; just ask the butcher. 

10. The appellants maintain that their argument is fortified by the consideration that if there were to be no payment of “real money” to AHM for its management services, the funds available for the establishment, maintenance and operation of the vineyard, as intended by the parties, would be reduced.  The Annual Management Fees were to be paid to AHM in accordance with the terms of the Joint Venture Agreement for this purpose.  According to the appellants, this is an important aspect of the factual matrix.  It supports a finding that the construction of RCF’s obligation under clause 2.1 of the Loan Deed to the effect that “real money”, in one of the forms of or analogous with those identified above, is contemplated, was the parties’ common expectation and intention.  The language of clause 2.1, to the extent it is ambiguous in this respect, should be construed accordingly. 

11. A potential difficulty with this subsidiary argument arises from whether or not it ought to be assumed that AHM or, more pertinently, Koonara, was without access to funds represented by the amounts the subject of the promissory note. 

12. For the purpose of assessing the weight to be given to the argument that the parties always intended AHM to have access to the funds represented by the Annual Management Fees in order to develop the joint venture, Koonara can be treated as standing in the shoes of AHM.  Koonara was to perform the relevant management tasks pursuant to its sub-contract with AHM.  As such, it was not of practical importance to the appellants that AHM had access to the funds; what would satisfy the appellants’ concern (implicit in this subsidiary argument) was that Koonara had access to the funds.[33] 

    [33] By cl 13.1 of the Constitution, the Manager reserved to itself the power “to appoint an agent, or otherwise engage a person, to do anything that it is authorised to do in connection with this Scheme”. The appellants must be taken to have understood and agreed that AHM might (as it did) sub-contract the management operations to another entity and that it would be this entity which would require access to the funds represented by the Annual Management Fees (in addition to other funds) so as to manage the Scheme. Furthermore, as earlier observed, the team “Manager” in the Joint Venture Agreement and the Constitution is defined in terms broad enough to embrace Koonara in its performance of the role.

13. During argument the submission was put on behalf of the respondent that the Court was not entitled to assume that Koonara received nothing in return for its indorsement of the note in favour of RCF or, at least, that it did not have access to funds on deposit with RCF as a consequence thereof.  Indeed, the Court was told that the respondent was prevented at the trial from adducing evidence that might be seen to bear on this issue.  A finding that, for example, Koonara did end up with access to funds on deposit with RCF would serve to limit any weight that might otherwise be given to this subsidiary argument of the appellants.  I will return to this issue later in these reasons.

    The argument of the respondent (RCF)

14. The respondent provided lengthy and elaborately argued written submissions in support of the decision appealed from supplemented with oral argument.  In what follows I have attempted only to distil essential aspects.

15. The proposition central to the respondent’s argument is that there are many ways by which an advance or payment can be made to discharge a legal obligation which do not involve the advance or payment of money or other forms of legal tender.  In the present case and given the “specific context” in which the Loan Deed came about, the term “advance” where used in clause 2.1 of the Loan Deed is to be construed as meaning any form of financial accommodation giving rise to a financial benefit to the Borrower and a financial obligation of the borrower to the Lender.[34]  The respondent maintains that there was an advance to the appellants in the form of a (partial) discharge of the appellants’ obligations to pay Annual Management Fees to AHM.  The respondent relies on the credits for amounts advanced (by RCF) allowed in each of AHM’s invoices as having the legal effect of discharging the appellants’ cognate obligations owed to AHM.

    [34]   Paragraphs [1] and [27] of the Summary of Argument of the Respondent.

16. There is no express requirement within the terms of the Loan Deed that any advance or payment had to be by way of actual cash funds or any particular form of legal tender be it cash, cheque or EFT.  The language of clause 2.1 leaves it open for any such advance to occur by the provision of a benefit to the borrower (the appellants) which was achieved by RCF satisfying, on behalf of the appellants, their obligations owed to AHM.  Each appellant received valuable consideration and benefit, namely, their obligation to pay Annual Management Fees was (in part) satisfied and, “as the learned Magistrate correctly found,[35] each of the [appellants]… received everything he contracted to receive under the Loan Deed”.[36]  Accordingly, so the respondent argued, the appellants (as borrowers) were liable to repay RCF in accordance with the terms of the Loan Deed. 

    [35]   Rocky Castle Finance Pty Ltd v Mr Mark Taylor; Rocky Castle Finance Pty Ltd v Mr Robert Gillen, reasons for judgment dated Friday 20 July 2012 at [38].

    [36] Summary of Argument of the Respondent at [28].

17. I interpolate here that the notion that the appellants received everything they contracted to receive under the Loan Deed does no more than beg the essential question in dispute.  It would appear to be the case, as the matter presently stands,[37] that the appellants have had part of an obligation owed to AHM discharged, that this has been achieved by the actions of RCF undertaken on their behalf and that both the appellants and RCF intended this result.  However, it is a separate or different issue whether or not this was something that the appellants agreed to receive under the Loan Deed as the sum total of RCF’s contractual obligation. 

    [37]   As the matter presently stands, AHM has issued invoices acknowledging a discharge of the appellants’ obligations to pay the Annual Management Fees.  If the appeals were to be allowed and the appellants were found not liable to repay principal and interest pursuant to the Loan Deeds with RCF, the question might arise as to whether or not AHM remains bound by its apparent discharge of the appellants’ obligations owed to it.  There might be an argument that the appellants, upon succeeding with their appeals, would be seen as enriched at the expense not of RCF but of AHM.  Whether or not as a matter of fact this would be so and, if so, whether or not that enrichment could be characterised as “unjust” or would be such as to give rise to a cause of action in AHM are not matters that either can be or need to be determined in these proceedings.

18. According to the terms of the Loan Deed, RCF contractually promised no more than to advance the Principal (as defined) and in the manner stated.  Whilst there was an expectation that this would lead to a certain contractual position as between the appellants and AHM, RCF did not directly undertake to achieve that result. 

19. It is conceivable that, after having engaged in the promissory note round-robin exercise, AHM might have received advice that this exercise did not suit its purposes either commercially or legally.  If, in such circumstances, AHM refused to effect a (partial) discharge of the appellants’ obligations, the question would arise as to whether or not RCF had, in any event, discharged its obligations owed to the appellants under the Loan Deeds.  Presumably the answer of the respondent (RCF) would have to be “no”, given its reliance, throughout its argument, on the assertion that the appellants obtained all they “contracted” to receive, namely the (partial) discharge. 

20. This highlights a concern with the logic of relying on the acknowledgment by AHM that the promissory note from RCF operated to discharge (in part) the appellants’ liability to AHM.  This discharge occurred only because AHM agreed (expressly or impliedly) with RCF that the receipt of a promissory note, whether or not presented by AHM, would have this effect.  Without AHM’s agreement, neither RCF nor the appellants could have insisted on this.  RCF was contractually obliged to the appellants to make the advance in the particular way directed in the Loan Deed.  Whilst, as between the appellants and RCF, the purpose of the advance was clearly identified, RCF and the appellants, by their agreement, could not bind AHM to accept any RCF “payments” as impressed with that purpose or character. 

21. As between AHM and the appellants, whether or not anything received by AHM from RCF constituted a part payment of the Annual Management Fees was to be determined by the terms of the Joint Venture Agreement, absent any concession by AHM. 

22. I return to my review of the respondent’s submissions.  The respondent submits that when read in context, the words “advanced” and “part payment” in clause 2 of the Loan Deed “mean the (partial) discharge of the borrower’s obligation to pay his management fees to AHM – the (partial) satisfaction of a sum owed by the borrower to AHM”.[38]  According to the respondent, “it does not matter that no actual cash or other monies or legal tender passed from Rocky Castle Finance to the borrowers and, in turn, from the borrowers to AHM”.[39] 

    [38] Summary of Argument of the Respondent at [34].

    [39] At [35].

23. In paragraphs [36] to [38] of its Summary of Argument the respondent refers to a number of cases dealing with the meaning of the word “advance” and the meaning of the word “payment”, presumably by way of support for the propositions just summarised.  However, I do not find these authorities to offer anymore than general assistance.  None of them deal with nor can be said to embrace the notion of payment by way of provision of a promissory note that is never presented. 

24. The respondent relies upon the analysis by Finkelstein J in Re: York Street Mezzanine Pty Ltd (in liq)[40] in support of the proposition that a legal obligation to make a payment (or an advance) may be satisfied otherwise than by the transfer of legal tender (money).

    [40] (2007) 162 FCR 358 at [24]-[26].

25. In York Street Mezzanine, an investor lent money to York Street Mezzanine Pty Ltd (in liquidation at the time of the proceedings).  By way of “security”, the investor was issued with a promissory note in the amount of $100,000.  The note had a maturity date of 30 November 2005.  It was expressed to be payable on that day or earlier at York Street Mezzanine’s discretion.  In mid-July 2005, York Street Mezzanine invited the investor to “roll over” his investment into a development conducted by a related company.  The investor elected to roll over the investment.  The related company (Anne Street Mezzanine) issued the investor with a promissory note for $100,000, this time with a maturity date of 1 August 2008.  On the same day, by book entry, York Street Mezzanine “paid” the investor the face value of the York Street Mezzanine note by making that payment to Anne Street Mezzanine.  One of the questions before the court was whether York Street Mezzanine had discharged its obligation to the investor under the York Street Mezzanine promissory note.  If it had not done so the investor would have remained a creditor of York Street Mezzanine.  Finkelstein J said this.[41]

    This brings me to another aspect of the law relating to promissory notes. The ordinary rule is that to discharge a bill of exchange, and so to discharge a promissory note, the issuer is required to make a payment in money to the payee or bearer… . In other words the payment must be in legal tender (money) or by the transfer of a money fund.

    This method of payment is highly inconvenient, especially where large sums are involved. It is not uncommon, therefore, to find that parties to a bill of exchange agree that payment can be made by some other means which is commercially acceptable, such as by the delivery of a bankers cheque. Not surprisingly, it has been held that parties to a note may agree that the note can be satisfied otherwise than by the transfer of legal tender (money). In that way (that is by the agreement of the parties) the law relating to bills of exchange (including promissory notes) is brought in line with the law relating to contracts generally… . The result is that, by agreement, payment of money due under a bill of exchange can be made by set off, by the delivery of goods, by a bond, by cheque or bankers draft or even by book entry… .

    There is every reason to permit a payment to be made by a book entry. Often it is simply a short-hand for money or a cheque being handed across the table and money or a cheque being handed back. It would be entirely inconsistent with modern commercial life if a payment due by one person to another could not be effected in this manner. At any rate, that is how the law has progressed… .  All that is required is an actual agreement by the relevant parties that payment be made by means of entries in books of account… . The agreement may be express or it may be inferred. In the case of a bill of exchange, however, in the absence of an express agreement the court will not readily infer an agreement that the payment, which must otherwise be in money, may be made by some other means.

    I propose now to consider whether York Street Mezzanine discharged its obligation to Mr Dunphy under the York Street promissory note. If it did not Mr Dunphy remains a creditor of York Street Mezzanine. Here it is necessary to resolve several issues. The first is whether Mr Dunphy agreed to accept the discharge of the York Street promissory note by a payment by York Street Mezzanine to Ann Street Mezzanine of an amount equal to the face value of the note. The second issue is whether Mr Dunphy agreed that the payment to Ann Street mezzanine could be effected by book entry. These issues are interrelated. The final issue is whether these arrangements, if they are found to exist, can be set aside ab initio and so be treated as never having been made.

    There is no difficulty with the first issue. The answer is to be found in the rollover application form. By his acceptance of the rollover offer Mr Dunphy “direct[ed] York Street Mezzanine Pty Ltd to … rollover and pay the face value of the [York Street] promissory note … to the Ann Street Development”. This was an unmistakable direction to pay the sum due to Mr Dunphy to Ann Street Mezzanine. If the payment was made it is in law equivalent to a payment direct to the creditor and is a good discharge of the debt…

    As to the second issue (could the promissory note be discharged by book entry), the rollover acceptance form is silent.  That is, there is no express agreement that payment of the amount necessary to discharge the York Street promissory note need not be in legal tender.  There may, however, be an implicit agreement to that effect.  To analyse whether that is what the parties intended regard should be had to the following matters.  First, Mr Dunphy’s purpose in accepting the rollover offer was to purchase a promissory note from Ann Street Mezzanine.  Second, to achieve that purpose he had to pay $100,000 to Ann Street Mezzanine.  Third, it would have been obvious to Mr Dunphy that each of York Street Mezzanine and Ann Street Mezzanine were companies in the Westpoint group.  Fourth, there was no instruction to pay Ann Street Mezzanine in cash.  Lastly, there was no obvious reason for the money to be paid in cash.  In my opinion (albeit after a good deal of hesitation) payment to Ann Street Mezzanine by book entry was both anticipated by the parties and, by implication, agreed to by them.

    [41]   At [24]-[29] citations omitted and emphasis supplied.

1. I do not see how the decision in Re: York Street Mezzanine including the reasoning of Finkelstein J, as set out above, is of more than general assistance.  The issues in that case and the discussion of Finkelstein J centred on the rights and obligations of the parties to a promissory note.  It is not surprising, with respect, that his Honour recognised that the parties to the York Street Mezzanine promissory note might reach an agreement that its discharge upon presentation could be effected by way of book entry.  In the present case we are not directly concerned with the rights and obligations of RCF and AHM vis a vis each other, as parties to the promissory note.  We are concerned with the rights and obligations of the appellants and RCF vis a vis each other pursuant to the terms of the Loan Deeds.

2. The respondent in its Summary of Argument[42] seems to place some significance on these observations of Finkelstein J and, in particular, his finding that parties to a note may agree that the note can be satisfied otherwise than by the transfer of legal tender (money) and that “by agreement, payment of money due under a Bill of Exchange can be made by set off, by the delivery of goods, by a bond, by cheque or bankers draft or even by book entry”.  I am not persuaded of the significance.  It is entirely a matter for the parties to the promissory note in this case, RCF and AHM, as to the arrangement, as to the method of payment or satisfaction, they might have agreed to (had the note been presented) but this cannot be binding on the appellants. 

   [42] At [40].

3. Indeed, RCF and AHM came to no arrangement for its payment or satisfaction other than, no doubt, the mutual understanding that, in due course, Koonara would indorse it to RCF and thereby effect its discharge. 

4. The respondent also relied (as did the Magistrate) on the decision in Arnold & Anor v State Bank of South Australia.[43]  Again, the decision in Arnold can only be of limited, if any, assistance to the respondent.  Arnold concerned quite different facts.  The Arnolds had borrowed money from the respondent bank secured by way of mortgage over real property.  They argued that no money was due and payable by them under the mortgage.  According to the Full Court:[44]

   [43] (1992) 38 FCR 484.

   [44]   Burchett, Hill and Drummond JJ at 484.

   The attacks made in the statement of claim on the mortgage are, with one exception, all based on the notion that the debt secured by the mortgage involved the creation by the State Bank of a book-entry credited at no cost to itself.

   In dealing with this argument the court said, inter alia, this.[45]

   [45]   At 485-486.

   Notwithstanding the fact, deposed to on behalf of the State Bank and acknowledged in the course of the hearing by Mrs Arnold, that the appellants received the benefit of the original advance (which in fact totalled $200,000), their core argument was that, because the Bank is said to have made this advance available to the appellants by creating credit at no cost to itself out of nothing, that is not proper consideration for the appellants' obligation to repay. This challenge to the enforceability of the mortgage is identical to that which has been made to bank mortgages, but rejected, in two other actions that have recently come before single judges of this Court: Napier v National Australia Bank Ltd (unreported, Federal Court, Spender J, No 304/92, 16 April 1992) and Fisher v Westpac Banking Corporation (unreported, Federal Court, French J No 624/92, 18 August 1992). In Fisher's case, French J (at p 13) said:

   There is nothing to prevent a bank evidencing a loan by a credit entry. Its obligation under the loan agreement is nevertheless a real one. If the money is advanced by way of electronic transfer or appropriate bookentries there can none the less be real rights and real obligations created which are enforceable at law. Contract documents and securities recording a loan in such cases do not mislead or deceive for want of hard currency backing for it.

   This is a correct statement of the position. In A L Tyree's book on Banking Law in Australia (1990), Ch 1, upon which the appellants rely, the following appears:

   [1.3] The characteristic feature of modern banking is that it is 'fractional reserve' banking. In simple terms, the bank 'lends' its credit, not its money. The banking system as a whole is capable of creating money.
   …
   In a system where bank liabilities are used as 'money', it is clear that the financial stability of the entire community is closely related to the stability of the banking system.
   …

   [1.9] One of the characteristics of banking business is that the ratio of debt to equity is extremely high. Since most of the debt is owed to relatively small depositors, it is essential that these depositors be protected from mismanagement and that there is a general level of confidence in the bank. This confidence is for the benefit of the bank and the banking system as much as for the depositors.

   The [Banking Act 1959 (Cth)] Act gives the Reserve Bank certain powers which are intended to provide this protection and so to maintain the [sic] confidence.

   That there is statutory recognition in the Banking Act, in particular in Divs 1A, 2 and 3 of Pt II of that Act, of that characteristic of Australian banking operations which Tyree refers to as "fractional reserve banking" is one answer to the appellants' contentions that what they refer to as "cost free book-entry credit creation" by the respondent Bank is an illegal and misleading activity which results in the loan being worthless, and renders the security documents void. Another is that the appellants actually received value - even if, according to their argument, it was not money - under the contractual arrangements with the Bank. Prior obligations were paid off; they were enabled to meet fresh ones. This was exactly what they contracted to obtain (no one borrowing thousands of dollars expects, in Australia, to receive the sum in a wheelbarrow) and they must carry out their part of the bargain.

5. The respondent submits and the Magistrate held, that the present appellants, like the Arnolds, “actually received value (even if not by cash monies)” and that “prior obligations were paid off”, that is, rights were created and in due course obligations were “satisfied”.[46]  This may be accepted, subject to the potential qualification raised above.[47]  However, again, I do not see how the reasoning or decision in Arnold advances the respondent’s position given the facts of the present case.  In Arnold the borrowers received and used the purchasing power that the bank promised to and did provide.  In the event that the monies advanced, albeit by way of “book entry” in the bank’s accounts, were not repaid the bank would suffer a loss which would need to be reflected in the bank’s accounts.  Ultimately, the bank’s assets would be reduced to that extent.  In this sense the bank’s money was lent.  The same cannot be said with respect to RCF following the provision of the promissory note to AHM and in circumstances where neither AHM nor Koonara presented it for payment. 

   [46]   See the Magistrate’s reasons at [40] and the Summary of Argument of the Respondent at [41]-[45].

   [47]   At fn 37.

6. Arguably, of most assistance to an understanding of the arrangements reached in the present case is the High Court decision in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd.[48]  Whilst this case did not involve the use of a series of promissory note round-robin transactions, it did involve the use of a series of round-robin transactions involving cheques.  The respondent relies on this case, as ultimately determined in the High Court, as being materially indistinguishable from the present case and as involving reasoning which is determinative of the present case.  However, before giving consideration to the analysis provided by the High Court in Equuscorp it would be helpful first to look at the earlier decision of the Queensland Court of Appeal, on similar facts, in Australian Horticultural Finance Pty Ltd v Jekos Holdings Pty Ltd.[49] 

   [48] (2005) 218 CLR 471.

   [49] [1997] QCA 440.

7. Australian Horticultural Finance involved a scheme structured similarly to that now before the Court.  Investors, by subscribing for “participation interests”, provided capital to enable plantations to be established and developed which when cultivated and managed would produce crops to be sold to satisfy expenses and to return an income to the investors.  Various written agreements were entered into by the participants.  The scheme also involved the offering of loan finance to investors to assist with the acquisition of their interests in the scheme.  The appellant, Australian Horticultural Finance Pty Ltd, was the financier and the various respondents to the appeal were a number of plaintiff investors who had sought to recover monies they had paid to the appellant purportedly in repayment of loans. 

8. The relevant provisions in the Deed of Loan included cl 3 which provided “the Lender shall at the request of the Guarantor lend the Principal Sum to the Borrower on the date hereof” and cl 4(a), “the Borrower and the Guarantor direct the Lender to pay the Principal Sum to the representative within 7 days after the date of this Deed…”.

9. The “Lender” as referred to in these provisions effectively assumed the position of the respondent (RCF) in the present proceedings.  The “Borrower” effectively assumed the position of the appellants and the “Representative” effectively assumed the position of AHM.  The essential question, on appeal, concerned whether loans had, in fact been made at all; the same question that arises in the present proceedings. 

10. On 29 June 1990 a series of round-robin transactions was undertaken but this time involving cheques.  The Lender gave a cheque to the Representative for the amount of the loan.  The cheque was attached to a deposit slip and handed to a branch manager of the ANZ bank for crediting to the account of the Representative at the bank.  The Representative, in turn, delivered a cheque drawn on its bank account in favour of another party (the Manager of the scheme) which along with a prepared deposit slip was handed to the same bank manager for crediting to the account of the Manager.  Cheques were then drawn on the account of the Manager in favour of other participating entities purportedly to pay management fees and license fees.  Again, these cheques were accompanied by appropriate deposit slips and were handed to the ANZ bank manager to be credited to the accounts of these other entities.  Finally, those entities delivered cheques in favour of the appellant Lender (Australian Horticultural Finance Pty Ltd) for deposit to the credit of that company’s bank account.  “In this way the amounts supposedly credited by depositing the cheques delivered in each instance were returned to the source from which they had originally come which was the [Lender]”.[50] 

    [50]   McPherson JA, Butterworths Cases, BC 9706880 print at p10.

11. The bank statements issued for the various participants in this series of round-robin transactions reflected, in each case, a credit entry and a debit entry in the same amount of money.  Thus, on the bank statement issued in respect of the Lender’s account with the ANZ, a credit entry for 29 June 1990 of $836,562 appeared together with a debit entry of the same amount which latter entry was said, by the lender, to have constituted the loan by it to the various investors concerned pursuant to their Deeds of Loan.[51]  McPherson JA (with whose reasons Thomas and de Jersey JJ agreed) said this.

    It was by this means that the [Lender] claimed to have lent to the [investors] the principal sums. … From the stand point of the bank, its object, according to [the branch manager] was to ensure that the cheques being drawn on each account were in every instance matched by corresponding deposits for the credit of those accounts.  It comes as something of a surprise to discover that the bank was prepared to actively assist in enabling its facilities to be used in that artificial manner.  In the end, however, the question is whether the [Lender] did, in terms of clause 3 of the Deeds of Loan, “lend” the Principal Sums to each investor or Borrower and “pay” those sums to [the Representative] in terms of clause 4(a) of those deeds.  Unless there was in fact a payment to the Representative, there was no loan capable of satisfying clause 3 of the deed. 

    [51]   The ‘credit’ entry resulted from the receipt and depositing to the Lender’s account of the last cheque in the round-robin series.

12. McPherson JA referred with approval to observations of the trial Judge (Dowsett J) to the following effect.

    [Where] the parties to a transaction agree that the mutual discharge of obligation should be effected in a particular way, it may be very difficult for an outsider to assert that the purported discharge was of no effect.  That is not the present case.  The [Lender] had an obligation to each [Borrower] which obligation could only have been discharged in accordance with the terms of the agreements, unless the parties agree to vary those terms.  As a matter of common understanding, what each [Borrower] had contracted for was the advance of funds to the Representative.  No funds were advanced, and in those circumstances, it is clear to me that the [Lender] did not discharge its obligations pursuant to the various agreements… .

13. McPherson JA observed that the Deed of Loan did not define the term “lend” and that therefore it must receive its ordinary meaning considered in the context of the transaction it was designed to serve. However, in the circumstances, it was impossible to ignore the fact that each Deed of Loan was one of a complex series of instruments by which the venture was intended to be carried into effect.  Further, the Deed of Loan contained its own internal cross-references to the venture itself and the other instruments executed by the Borrowers for the purpose of acquiring interests in the venture. 

14. McPherson JA then devoted close attention to the terminology used in various clauses of the Deed of Loan, including, for example, the definition of “application money” in cl 12.1(d) namely, “cash provided by an applicant for the purchase of the participation interest…” and a further definition in cl 12.1(i) that “cash” included cheques, bank cheques and deposits in any trading or savings bank accounts. 

    The effect of these provisions is that an intending investor was, by clause 16.1 of the investment deed, required to execute and deliver an application together with all monies payable.  The application money was to be in cash which by the definition in clause 12.1(i) might include cheques; but any monies paid by a prospective grower had to be capable under clause 15.1(a) of being held by [the Representative] in trust in a bank account established and kept solely for the purpose of depositing monies paid by the [investors].

    .  .  .  .

    It would have been difficult, if not impossible, to satisfy the requirements of these provisions if the loan referred to it in clause 3 in the Deed of Loan was in the form to which it was sought to reduce it by the “round-robin” cheque transactions.  That series of debit and credit entries created no “monies” capable of being held by the representative in trust for each [investor] or of any interest that, in the event of his application to participate in the venture being declined, was capable of being returned to the intending [investor]...  From the provisions considered, it is evident that in referring as the parties did in clause 3 of the Deed of Loan to the obligation of the [Lender] to “lend” the Principal Sum, what they had in contemplation was a loan of something more tangible than a mere entry in a bank statement that was never intended by anyone to be a deposit of money to be held in trust so as to be capable of earning interest before being repaid. 

    What was done in [the bank manager’s] office… was nothing more than an exchange of pieces of paper that the Bank required as its authority for making entries in the statements of account which it issued to its customers including the [lender].  As against the Bank, those entries no doubt amounted to evidence in favour of its customer of the balance, if any, due, even if momentarily, from the Bank to the particular customer in question. … But, as against the plaintiffs, the entries in the statements of account fail to establish that the Principal Sum, or any other money amount had in accordance with clause 3 of the Deed of Loan, in fact been lent by the [Lender] to the [Borrowers].  Far less did it show that it had been paid by the [Lender] to [the Representative].  A debit entry in the bank account entry of one customer, and a corresponding credit entry in the account of another, may be evidence in favour of or against the bank or those customers that a payment in that amount has taken place… but it has that effect because the parties by their banking arrangements have agreed or are conventionally bound in a certain circumstance to treat it as such.  It has no such consequence as against a person who is not a party to those arrangements or who has not accepted it as having that effect… .[52]

    [52]   BC 9706880 at pp15-16, citations omitted.

15. McPherson JA stated the Court of Appeal’s conclusion in rather more colourful language in the penultimate paragraph of his judgment. 

    The [Borrowers] were not parties to the arrangement involved in the “round-robin” of cheques carried out at [the branch manager’s office] and they were and are not bound by the effect that the [Lender] and others sought to ascribe to it.  The [Lender] was entitled, if it wished, to make a silk purse out of a sow’s ear; but it could not by doing so, oblige the [Borrowers] to accept it as having that character.  No loan of the kind contemplated or agreed on under clause 3 of the Deed of Loan was ever made or provided, nor has the Principal Sum been paid to the Representative…

16. Before leaving this case, I make these two points.  First, on similar, although not identical, facts the Queensland Court of Appeal in Equuscorp[53] reached the same conclusion but one which, this time, was overturned on appeal to the High Court.  In the unanimous judgment delivered in the High Court reference was made to Australian Horticultural Finance with the Court observing:

    Perhaps that decision may be understood as turning upon its particular facts.  If, as the respondents contended in these matters in the Court of Appeal, it stands for some more general principle – that there is no “loan” unless there is “real” money lent – it is wrong and should be overruled.[54] 

    [53] [2002] QCA 380.

    [54] Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ at [47].

17. Second, the decision of the Court of Appeal in Australian Horticultural Finance, ultimately, would appear to have turned on McPherson JA’s close examination of the terms of the Deed of Loan.  The question that was asked and answered there was whether or not a loan, as required by the terms of the Deed of Loan in issue when properly construed, had been effected.  Arguably, the case does not purport to be an authority for the (absolute) proposition that there could be no “loan” unless “real” money is lent. 

18. I turn now to consider Equuscorp Pty Ltd v Glengallan Investments Pty Ltd.[55]  This case also involved a similarly constructed managed investment scheme.  Each prospective investor was required under the relevant documentation to complete and deliver to the “General Partner” an application together with a cheque made payable to the “Representative” for payment of the application price for each unit applied for.  Upon receipt by the Representative of any amount representing application monies the Representative was to hold such amounts and any income thereon as trustee for each Applicant with respect to whom the amount was paid until the “Minimum Subscription” had been achieved. 

    [55] [2001] QSC 464 (Helman J); [2002] QCA 380 (Court of Appeal) and (2005) 218 CLR 471 (High Court).

1. On 30 June 1989, a document entitled “Loan Agreement” was executed by each of the investors (as borrowers) and the second plaintiff, Rural Finance Pty Ltd (receivers and managers appointed)(in liq) as lender.[56]  The recitals referred to the investment scheme in question, and the facts that each of the borrowers had applied or intended to apply for units and that the lender (Rural Finance) had agreed to lend a specified sum for the purpose of allowing each borrower to acquire the units.  Clauses 8 and 9 of the Loan Agreement provided as follows.

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

   The Principal Sum shall be, and the Borrower hereby directs the Lender accordingly, applied in payment of the Application Monies and otherwise in accordance with the Borrower’s obligations under the Deed.

   [56]   The first plaintiff, Equuscorp Pty Ltd, sought recovery of the loan monies as a purported assignee from the lender, Rural Finance Pty Ltd.

2. The “Representative” to whom an applicant/borrower was obliged to deliver a cheque for the application price for each unit was a company called Eagle Star Trustees Ltd.  On the same date the loan agreement was executed (30 June 1989) the lender (Rural Finance) purported to make the loan so as to facilitate payment by each borrower of the amount payable to Eagle Star.  As at that date, Rural Finance had no funds, by way of overdraft or otherwise on which to draw in order to make the loans it had agreed to make.[57]  Nevertheless, on that day what was described as an “audit trail” was created at the offices of the Westpac bank. 

   [57] [2002] QCA 380 at [109] (Williams JA). It appears that this fact was irrelevant to the determination of the High Court to allow the appeal in favour of Equuscorp and the lendor (Rural Finance). See further below.

3. Essentially, debit notes to the account of Rural Finance (the lender) at the Westpac bank showed the relevant sums of money leaving its account and credit notes in favour of the representative (Eagle Star) showed those sums moving into Eagle Star’s account with the bank.  By a series of round-robin cheque transactions those same sums appeared to pass from the Eagle Star account to the accounts of other entities and then back to the lender’s account by way of, according to Williams JA[58] a “deposit of the non-existent funds”.

   [58] At [109].

4. The Queensland Court of Appeal took the view that the case was materially indistinguishable from Australian Horticultural Finance and applied similar reasoning.  The High Court disagreed.  It rejected the Court of Appeal’s reasoning in Equuscorp and cast doubt on the reasoning in Australian Horticultural Finance (see earlier).

5. In the unanimous judgment it was recognised that:

   it was of first importance to all who invested in this venture, not only that they pay for their units by 30^th June 1989 but that the money they paid be applied in the manner described in the prospectus and the agreements referred to in the prospectus.[59]

   This was necessary if the investors were to successfully claim the tax deductions expected to be available to them.  This was part of the background (more fully described in the judgment) against which the transactions, as earlier described, were effected at Westpac on 30 June 1989.  The Court described these transactions as follows.[60]

   Pursuant to written authorities signed by Mr Johnson as Managing Director of Rural Finance, Rural Finance’s account at Westpac was debited with two amounts… And Eagle Star’s account was credited with these amounts.  Westpac recorded these transactions in debit and credit notes.  Cheques were drawn by Eagle Star on its account in favour of Forestell and paid to the credit of Forestell.  Forestell drew cheques in favour of JFM and FJA for amounts calculated at $845 per unit payable to JFM (for the management fee of $833 and the price of crayfish stock of $12) and $23 per unit payable to FJA (for lease and license fees).  The intention was that the funds received by JFM and FJA would be transferred to Rural Finance pursuant to written authorities given by those companies and argument, both on appeal and in the courts below, has proceeded on the assumption that this was done. 

   [59] (2004) 218 CLR 471 at [43].

   [60] At [45]. Emphasis supplied.

6. The High Court held that each of the transactions was legally effective and that none could be said to have been a sham; “the primary Judge was wrong to characterise them, as he did by his references to ‘artifice’, ‘façade’ and ‘charade’, as shams.”[61] 

   [61] At [46]. The court said “Sham is an expression which has a well understood legal meaning. It refers to steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences.: (at [46]). See also, Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 and Raftland Pty Ltd v Federal Commissioner of Taxation (2008) 238 CLR 516 and, in particular, the discussion by Kirby J at [105]-[152].

7. It was held that, as a consequence of this set of round-robin transactions, debts were created and satisfied at all points in the chain until, at its end, Rural Finance owed JFM and FJA certain sums and the investor borrowers owed Rural Finance certain sums.  According to the High Court, of most particular relevance was that Rural Finance, in accordance with its obligations under the Loan Agreements, had applied the money it lent in payment of the application moneys due from the investor borrowers for the units being bought.[62]  The Court continued as follows.

   As the expression ‘‘real money’’ might suggest, the point which the [borrowers] sought to make in these matters appeared to be one about the economic rather than the legal effect of the transactions in question. That is, the [borrowers’] contention appeared to be a complaint that no ‘‘real’’ capital was brought into the partnerships. And as the prospectus made plain, the purpose of issuing units was to provide working capital for the venture.

   The economic proposition that no ‘‘real’’ capital was brought into the venture (or that no ‘‘real’’ money was lent) depended upon an unstated premise that the obligations which Rural Finance owed JFM and FJA, to repay the interest bearing deposits the latter companies had made, were obligations that could not, or would not, be met. As mentioned earlier, it is a proposition that would not readily accommodate the fact that some investors did not borrow the amounts they invested and it may well be that the money they invested was dealt with in the same way as the [borrowers’] application moneys were applied. But again, as mentioned earlier, this point may be left to one side.

   Had JFM and FJA deposited the moneys they received on 30 June 1989 with a bank rather than with a related company, the contention that there was no real money raised would evidently fail. Thus, the point which the [borrowers] sought to make in this regard was one dependent not only upon pointing to the relationship between Rural Finance and the depositing companies (JFM and FJA) but also upon a premise that Rural Finance would not, or could not, meet its obligations.

   Even if that premise had been made good, it would not demonstrate that no loan had been made by Rural Finance.[63] It would show only that JFM and FJA had made an improvident investment of their funds. It was not suggested that the payments made to JFM and FJA contravened any provision of the agreements governing the relationships between the [borrowers] as unit holders and other participants in the venture. Indeed, for the reasons given earlier, the making of those payments was a step of critical importance to the [borrowers]. It was the making of those payments that was thought to produce the tax consequences they sought. Nor was it suggested that the deposit with Rural Finance of the funds received by JFM and FJA contravened any provision of the agreements which governed the relationships between the parties. These are reasons sufficient to conclude that the courts below erred in deciding that Rural Finance did not lend money to the [borrowers]. But there is a further, separate, point which should be made… .

   To say that Rural Finance ‘‘would not or could not meet its obligations’’ poses the further question: when? Presumably that would have to be answered by saying: when the money was lawfully demanded. But it is not a question that permitted or required the answer: 30 June 1989. The capital raised was not to be expended then. Hence, whether Rural Finance could have met a demand on 30 June 1989 is not to the point.[64]

   What happened after 30 June 1989 showed, in any event, that the premise for this aspect of the respondents’ argument (that Rural Finance would not, or could not, repay the interest bearing deposits made by JFM and FJA) was false. Rural Finance repaid at least $5 million of those interest bearing deposits. That it raised the money to do so by factoring its debts may or may not have been commercially sensible. But the fact is that it did repay significant amounts of the interest bearing deposits.

   The respondents’ contention that Rural Finance could not pay what it owed depended, in large part, on the fact that the venture as a whole failed. That failure may well have been affected by a lack of sufficient working capital to cope with unexpected events like the need to seal ponds against leakage. But it is not necessary to explore these questions. The relevant fact is that the premise for this branch of the respondents’ argument was not made good. Even if made good, it would not have denied the legal effect of the several transactions that took place at Westpac on 30 June 1989.[65]

   [62] At [46].

   [63]   This and the passage identified at the next footnote, would seem to be the Court’s response to the issue identified earlier at fn 57.

   [64]   See the preceding footnote.

   [65]   At [48]-[54].  Emphases supplied.

8. I accept that, in the present case, if rather than employing a promissory note together with a series of round-robin indorsements, RCF, AHM and Koonara had arranged for a series of debit and credit entries in their respective bank accounts (whether by way of a round-robin series of transactions involving the provision and the presentment of cheques or otherwise) Equuscorp, as determined in the High Court, would be a complete answer to the appellants’ case.  The question before the court is whether the difference in approach adopted in the present case, as compared with Equuscorp, is sufficiently material so as to lead to a different conclusion, either as a matter of principle or as a consequence of the particular language used in the Loan Deed presently before the Court. 

9. I return to that part of the respondent’s argument that deals directly with the relevance of the promissory notes.[66]

   [66]   Summary of Argument at [68]-[78].

10. A central proposition relied upon by the respondent is that the discharge of the appellants’ obligations through the accounting on the invoices (issued by AHM) and the payments by cheque in satisfaction of the balances due on the invoices “was sufficient by itself to establish each appellant’s liability under the Loan Deed”.[67]  As such, so the respondent asserts, the promissory notes played only a secondary role.

    Notwithstanding this, the underlying transaction between Rocky Castle Finance and AHM (and Koonara, as the sub-contract manager) of payment and discharge is also conveniently evidenced by promissory notes, which are a form of payment, which payment discharged and recorded financial obligations at an aggregate level.[68]

    [67] At [67].

    [68] At [68].

11. The respondent submits that the promissory notes are evidence of the advance having been effected by payment or discharge of each appellant’s debts to AHM for Annual Management Fees.[69]  The argument is more clearly put in the following passages taken from the respondent’s Summary of Argument.[70]

    Against the transactional background set out above, the promissory notes had a confirming or supporting role.  It is wrong for the appellants to focus on the promissory notes… as if the case turned on them.  The primary case of Rocky Castle Finance… was that there was an advance or payment in the form of a discharge of the appellant borrowers’ obligation to pay management fees to AHM.  The tax invoices of AHM credited each of the appellants with the amounts advanced by Rocky Castle Finance under the Loan Deed and all parties thereafter proceeded on the basis that the appellants’ liability to AHM had been satisfied.

    .  .  .  .

    The legal effect of the promissory notes prior to their discharge was that a liability was undertaken by Rocky Castle Finance to AHM on behalf of each of the appellants, which resulted ultimately in a liability of Rocky Castle Finance to Koonara.  The liability of RCF was reflected in a corresponding liability of each of the appellants (and other like borrowers) to Rocky Castle Finance. 

    The proposition in the last sentence of the passage just quoted begs the very question that is before the court.  It is not an argument, it is an assertion.

    [69] At [69].

    [70]   At [70], [72]; emphasis supplied.

12. I agree with the respondent’s submission put during oral argument that the use or disposition by AHM and/or Koonara of any payment to it that may have been made by RCF (by way of an advance to the appellants) is an irrelevant distraction. I accept that, to the extent that AHM and/or Koonara did obtain a financial accommodation provided by RCF on behalf of the appellants, how that accommodation was used or not used is a matter, as between the appellants and AHM, to be determined in accordance with the Constitution and the Joint Venture Agreement between those parties. It is not a matter that arises for consideration here. I accept the proposition put by the respondent that the loan (if any) made to each of the appellants was to be used to discharge their obligation to pay Annual Management Fees to AHM otherwise than from their own resources and that how those fees were further applied by AHM and/or Koonara is a separate and distinct issue that has no bearing on the contractual relationship between RCF as lender and the appellants as borrowers.[71]

    [71]   See the respondents’ submissions in their written outline at [74]-[76].

13. However, I do not accept the respondent’s argument (put in its written outline) that the fact that RCF achieved a (partial) discharge of the appellants’ obligations to pay Annual Management Fees to AHM, on its own, constituted or effected the advance that RCF undertook to provide pursuant to the Loan Deed.  This was not what RCF promised to do, it was only the expected consequence of that which RCF promised to do, which was to, “advance the principal”.[72]  The appellants were not parties to the series of round-robin transactions.  The fact that RCF and AHM might have (expressly or implicitly) agreed that this conduct would satisfy RCF’s obligations under the Loan Deeds could not bind the appellants.[73]

    [72]   During oral submissions counsel for the respondent appeared to agree with this (I hesitate to use the word concession where questions of mixed fact and law are concerned) see T76.

    [73]   Cf; McPherson JA in Australian Horticultural Finance [1997] QCA 440, penultimate paragraph in the judgment.

14. I do not understand the High Court in Equuscorp to have decided anything to the contrary in this respect.  The High Court in Equuscorp held, in effect, that the round-robin transactions  there undertaken, to which the borrowers were not a party, nevertheless, as a matter of fact and law, were of a character that satisfied the lender’s obligations under the loan agreement.  Whilst the obligations of the appellants, in the present case, owed to AHM appear to have been discharged (in part) as a result of the conduct of RCF and AHM,[74] this did not, by itself, serve to characterise RCF’s conduct as constituting either a payment to AHM or an advance to the appellants, as required by the terms of the Loan Deed. 

    [74]   That is, subject to the matter raised in fn 37 above.

15. At the risk of labouring the point, whether or not there was an advance depends upon the proper legal characterisation of the steps taken by RCF and a determination of whether or not those steps satisfied its obligation to advance the principal under the Loan Deed as properly construed.

    Further analysis of the High Court decision in Equuscorp

16. The essence of the High Court’s reasoning in Equuscorp is the finding that each of the component transactions was legally effective and that debts were created and satisfied at all points in the chain as a consequence of the series of round-robin transactions.  However, it will be helpful to identify, precisely, the nature of the transactions that the court was so characterising.

17. The first (and most significant) transaction was the debiting of the lender’s bank account with its banker, Westpac, and the corresponding crediting of the representative’s bank account with its banker, also Westpac, of the amounts said to have been lent.  According to the High Court these were legally effective transactions.  At the instant the bank identified in its records the debit and corresponding credit, Rural Finance had obtained a financial accommodation from Westpac and had become its debtor for the amount of the accommodation.  At the same time, Eagle Star had become the bank’s creditor in the same amount.[75]  Rural Finance had procured the transfer to Eagle Star of a money fund made available to it by Westpac.  This was so, albeit only in the sense that Westpac participated in “fractional reserve banking” and had lent its credit[76] at Rural Finance’s request.  It was this transfer of a money fund by Rural Finance that constituted the payment made on behalf of the loan to the relevant investor borrowers.

    [75]   The fact that the same bank was involved is of no consequence.

    [76]   To this point, the situation in Equuscorp is analogous to that in Arnold (1992) 38 FCR 484.

18. Had no further components of the round-robin series of transactions taken place, Eagle Star would have been free to draw down on its credit with Westpac for its own purposes.  In fact, by prior arrangement with Westpac, the purposes for which Eagle Star might draw on the credit had been restricted to only the one purpose; the immediate transfer of the accommodation to the next entity in the chain.  Westpac only agreed to the initial debiting of Rural Finance’s account with it and the initial crediting of Eagle Star’s account with it on the condition that the complete series of pre-arranged round-robin transactions took place, precisely in the order as arranged and, in effect, eo instanti.  After all, Rural Finance had no funds in credit with the bank and no overdraft facility in place; it would seem that Westpac was only prepared to lend its credit if it were to be, in effect, immediately restored.

19. It was the “artificiality”, on one view, of the arrangement that caused the various courts that decided Equuscorp to reflect on whether or not the initial debit and credit deserved to have and retain the character of a loan.  The essence of the High Court’s reasoning on this issue is as set out in the quoted extracts above and, in particular, those parts emphasised (in italics).

20. On the facts in Equuscorp, the financial accommodation made available by Westpac was returned (by JFM and FJA) to Rural Finance, by way of interest bearing deposits (loans) in order to permit Rural Finance to (immediately) discharge its debit entry with Westpac.  Rural Finance’s characterisation as a debtor, in the amount originally advanced, remained.  However, the subsequent transactions in the round-robin operated, in effect, to replace Westpac as creditor with JFM and FJA, arguably by way of or analogously with a novation. 

    Characterisation of RCF’s conduct

1. In my view, the circumstances in the present case are distinguishable from those in Equuscorp on two bases.

2. First, the transactions engaged in by RCF as “lender” and AHM,[77] as Manager (the provision of the promissory notes) were of a character different from the cognate transactions in Equuscorp and materially so.  RCF pledged its own credit in favour of AHM and, ultimately, Koonara, when it gave no more than an unconditional promise to pay money on demand.  A critical distinction is that in Equuscorp the “credit” that was lent was that of Westpac, albeit on the facts in Equuscorp, only momentarily.  Westpac was a third party vis a vis Rural Finance and Eagle Star and it was Westpac that provided the money fund, albeit by way of lending its credit. 

   [77]   For this purpose and for the reason previously explained I treat Koonara, following the indorsement of the note in its favour, as standing in the shoes of AHM.

3. There is no evidence before the court that RCF was, like Westpac, a participant in the country’s “fractional reserve banking” system and able to “create” money in the manner discussed in Arnold.  It was RCF that directly promised to pay on demand.  It did not procure a lending of its banker’s credit.  To this point, there had been no change to RCF’s financial position apart from the accretion of a contingent liability.  There would be no such change unless and until a promissory note were to be presented and met. 

4. The situation is analogous to that, had AHM opened an overdraft facility “account” with RCF but left it undrawn.  Some management fees might be payable but no interest would fall due and no repayment obligation would arise until there had been some form of actual money transfer from RCF to AHM.

5. In short, the RCF, AHM, Koonara and back to RCF series of round-robin transactions did not involve a series of credits and debits in bank accounts held with a third party banking institution as was the case in Equuscorp.

6. The second distinguishing feature is that the position of RCF, as analysed above, remained unchanged throughout the series of round-robin transactions.  In Equuscorp the financial accommodation made available by Westpac was “returned” by JFM and FJA to Rural Finance by way of interest bearing deposits.  Rural Finance retained its character as debtor but this time not to Westpac but to JFM and FJA.  In the present case, Koonara, by further indorsement of the promissory notes in favour of RCF and delivery of the notes to RCF effected their discharge.  It is conceivable that a collateral[78] arrangement was reached whereby RCF would allow Koonara to drawn down on the funds represented by the promissory notes and notwithstanding their discharge.  However, and unlike in Equuscorp, there is no evidence or agreement before the Court of or as to any such collateral arrangement entered into between Koonara and RCF.

   [78]   It would not be possible for Koonara, as indorsee, to draw down on the notes themselves once they had been discharged.

7. Counsel for the respondent asked the Court not to assume that the series of round-robin transactions told the whole story such that Koonara was necessarily left without access to funds from RCF.  Indeed, counsel asked the Court to infer that Koonara effected the discharge of the notes for value.  Counsel submitted that, in the ordinary course, Koonara would not give away valuable promises to pay it large sums of money unless it received commensurate consideration.  Counsel submitted that the Court should infer that Koonara did receive value, in particular, a legal right to draw on RCF for the funds represented by the promissory notes.  The submission carries less weight than it otherwise might once it is appreciated that RCF and Koonara shared the same single shareholder and the same single director.[79]  To the extent that Koonara, at any time, needed or wished to draw on funds held by or available to RCF there would have been no practical impediment.  There would be less need to ensure that Koonara received “value” or acquired a legal right in exchange for its discharge of the promissory notes.[80] 

   [79]   Exhibits P44 and P46; Mr Burke Reschke in each case.

   [80]   Indeed if Koonara did wish to retain a legal right to draw against the “moneys” represented by the promissory notes, effecting their discharge seems an odd way to go about it.

8. In any event, the real difficulty with this submission is that there is simply no evidence before the court that Koonara did acquire such a legal right vis a vis RCF nor, for that matter, that it ever exercised such a right.  There is no evidence to support a finding that RCF had a legal obligation to provide funds to Koonara once the promissory notes had been discharged without presentation.

9. Counsel also maintained that RCF had the financial wherewithal to meet any request by Koonara to draw down on this “credit” should it have chosen to do so.  In this respect, counsel told the Court that the respondent was caught by surprise on the morning of trial by the defence put forward by the appellants that no “real money” ever changed hands.  Counsel maintained that as a consequence it was not in a position at the trial to prove the full nature of the financial relationship between Koonara and RCF.  By way of a limited response, the respondent (plaintiff at trial) sought to tender, by way of rebuttal, documentary evidence of a bank facility to which RCF had access.  This tender was refused.

10. It is not entirely clear to me how it came about that the respondent was taken by surprise at the trial.  In its statements of claim the respondent asserted the making of a (particularised) loan, the making of a demand for repayment and a failure to repay.  In their defences, the appellants pleaded, inter alia, that the plaintiff “had no basis for its claim” and denied liability for the claimed amount “whether pursuant to a Deed of Loan dated 30 June 2001 [sic] or otherwise”.  In addition, various emails were sent by the appellants in January 2011 to the then solicitors for the respondent.[81]  These emails would appear to have raised concerns about whether loan moneys had actually been advanced.  The Taylor email of 14 January 2011 contains the following.

    It appears that Rocky Castle will need to convince supposed “borrowers” that moneys were actually loans.

    The Gillen email contains the following statement.

    I will not be able to consider any payment demand until I can be assured that the loan funds were actually advanced to the project.

    [81]   The emails were also attached to the defendants’ pleadings (somewhat unorthodox) see Case Book tabs 2 and 4.

11. I have not heard full argument on the issue of whether the respondent was unfairly prejudiced at trial in having to meet a case for which it was not prepared.  However, it would appear from both the nature of the filed defences and the emails, that the appellants were putting the respondents to proof of each element of its claims.  As such, it ordinarily would be expected that the respondent, as plaintiff, would be ready at trial with its evidence necessary to prove that the conduct engaged in by RCF and AHM/Koonara constituted an “advance” of the “principal” as required by the Loan Deed. 

12. In any event, the Magistrate’s refusal to receive further evidence in rebuttal either at the trial or following an adjournment and after allowing the respondent time to assemble such further evidence, has not been made the subject of a notice of contention on this appeal. It is therefore unnecessary for me to reach and express a concluded view on the issue.

13. I return to the terms of the Loan Deed.  RCF promised to “advance” the “principal” as defined, that is, “the sum of $15,600 per Participation advanced by the Lender to the Borrower as provided in clause 2…”  According to clause 2, RCF agreed to make the advance in the manner directed by the appellants as Borrowers.  By agreeing to the terms of clause 2, the appellants directed RCF (and RCF agreed) to advance to AHM, at times no later than prescribed dates, identified amounts of money “in part payment of … [the relevant] Annual Management Fee payable by [each appellant] under the terms of the Joint Venture Agreement.”

14. The terms “advance” and “payment” have protean meanings.  They will take colour from the context in which they are used.  The parties during argument advanced dictionary definitions and some judicial discussions.[82]  As I have already indicated I have not found this material to be particularly helpful in the circumstances of this case.  The two terms are ordinary English words.  For the reasons given, RCF made neither a “payment” to AHM/Koonara nor an “advance” to the appellants.  In my view, there is no relevant ambiguity in the language used in the Loan Deed at least insofar as its application to the facts of this case is concerned.  The “factual matrix” as earlier described does not cause me to take a view of the language used different from its ordinary English meaning.

    [82]   Quainoo v NZ Breweries Ltd [1991] 1 NZLR 161 at 165 (Hardie Boys J with whom Cooke P and Williamson JJ agreed) and Reid Murray Holdings Ltd (in liq) v David Murray Holdings Pty Ltd (1972) 5 SASR 386 at 409 (Mitchell J).

15. There are many ways by which RCF could have satisfied the obligation to “advance the principal”, by way of making a “part payment of the… Annual Management Fee”, as previously identified in these reasons.  However, to effect an “advance” or in other words, to have lent money to the appellants, RCF would need to show that, as a result of its actions in purporting to make the advance, it had suffered a material change to its financial position.  Such a material change might include, for example, a reduction in its own funds or funds available to it or the incurring of an indebtedness to another entity (not being the recipient of the “loan” funds) such as RCF’s own bank, even if only by way of book entry and even if only momentarily, as in Equuscorp.  At no time during or as a consequence of the round-robin transactions did RCF’s financial position change in any way.  RCF became indebted to AHM and then to Koonara.  But on the evidence available that indebtedness was discharged prior to and without RCF’s financial position changing in any way from its state immediately prior to the provision of the promissory notes.

16. If attention is focussed at the instant when AHM received the promissory note and/or the instant when Koonara received the promissory note as indorsee, RCF had become a debtor to either or both.  However, there had been no payment by RCF in the sense recognised in Equuscorp, sufficient to constitute an advance by RCF.  If attention is focussed at the instant RCF regained the note following its indorsement by Koonara, there is no evidence or agreement before the court to permit a finding that RCF’s position was any different in this respect vis a vis Koonara.

17. Had RCF and AHM/Koonara engaged in a series of round-robin cheque transactions with each cheque being deposited so that corresponding credits and debits were recorded in each party’s account with its bank, the situation would probably have been no different in practice. However in law, it would have been quite different.  On the facts before the Court, RCF did no more than promise to pay AHM (and ultimately Koonara) the moneys said to have been advanced which promise was never executed.  No money fund of RCF’s, of any type, was transferred in any manner.  There was no advance of principal as required by clause 2 of the Loan Deed.

18. It follows from the foregoing that I disagree with the reasoning favoured by the Magistrate, particularly at paragraphs [30] to [42] of the reasons for judgment.  In fairness, however, I point out that it does not appear that the High Court decision in Equuscorp was drawn to his Honour’s attention.  As I have said, the situation here is distinguishable from that in Equuscorp and the analysis and reasoning of the High Court in that case indicates that a different result should follow.

19. Before leaving this issue I raise the question of whether or not the analysis would be different had AHM, or Koonara for that matter, indorsed RCF’s promissory note in favour of an unrelated or third party money lender, that is, factored the debt due from RCF to it, such that “real money”, on any analysis, entered the system.  If the money lender presented the note to RCF and payment was made it may well be that RCF would be seen to have advanced the principal.  However, whilst during the period before such a third party money lender presented the note for payment, RCF might be seen to have orchestrated a “payment” to AHM, whether or not this would have been by way of making an “advance” to the appellants would remain problematic, notwithstanding that “real money” would have entered the system by then.

    Conclusion – principal ground of appeal

20. For the reasons given, and as far as the two appellants are concerned, at no time did RCF advance the principal as required by the terms of the Loan Deed.  The appeal is allowed to this extent.

21. Order 1 in the Taylor trial[83] made by the Magistrate on 17 August 2012, that the plaintiff (RCF) recover against the defendant (Mark Taylor) in the sum of $29,972.62, is to be set aside.  Order 1 in the Gillen trial[84] made by the Magistrate on 17 August 2012, that the plaintiff (RCF) recover against the defendant (Robert Gillen) in the sum of $36,573.10, is to be set aside.

    [83]   Action number ELCCI-11-2147 (SC No. 1306 of 2012).

    [84]   Action number ELCCI-11-2148 (SC No. 1307 of 2012).

22. The consequential orders for the costs of the action in favour of the plaintiff (RCF) in each matter are also to be set aside.

    Remaining issues

23. The Magistrate also granted declaratory relief to the respondent.  Clause 7.1 of the Loan Deed provides as follows.[85]

    The Borrower must pay to the Lender all the Lender’s expenses and costs of and incidental to the enforcement of the Deed on a full indemnity basis but otherwise each party shall bear its own costs in relation thereto.

    In each matter the Magistrate, at the time of entering his orders on 17 August 2012, made a declaration in the following terms.

    The defendant is liable to pay the plaintiff all of the plaintiff’s expenses and costs of and incidental to the enforcement of the Loan Deed on an indemnity basis pursuant to clause 7.1 of the Loan Deed dated 30 June 2000.

    The appellants have also appealed against the granting of this declaratory relief.  A declaration in these terms is inappropriate and should be set aside, given, as I have found, that each appellant has no liability to the respondent under their respective Loan Deed.  There has been no (successful) “enforcement” of the deed.

    [85]   Case Book tab 22, p215.

24. In addition, the Magistrate held that the respondent was only entitled to charge simple interest on amounts payable under the Loan Deeds and which remained outstanding.[86]  By Notices of Cross-Appeal the respondent has appealed against that finding.  The respondent maintains that on the proper construction of clause 2.1 of the Loan Deed it should be entitled to charge compound interest.  Again, given my findings with respect to the principal claim, the respondent has no entitlement to interest at all.

    [86] Reasons for Judgment dated 20 July 2012 at [45].

25. In the event that there were to be a further successful appeal with my principal finding being overturned, these two further determinations by the Magistrate would need to be reconsidered.  I have given thought to whether or not I should express a view on these two issues.  I have decided against doing so.  At the moment, they remain hypothetical; any view I express would be by way of obiter dictum only.  They remain hypothetical in a context where there is likely to be a number of other former participants in the scheme whose legal obligations owed to RCF, if any, have not yet been resolved.[87]  It might be seen as invidious for me to express a view on matters not now relevant to the parties before me but which might arise between RCF and other parties before another judge or tribunal. 

    [87]   See the exchange with counsel during argument on the appeal at T61.

26. In any event, as I say, these issues will only arise if I am found to be incorrect on appeal.  The issues raise, essentially, questions of construction[88] well able to be resolved by the Full Court should it become necessary to do so.

    [88]   Although, as far as the first issue is concerned the ambit of the court’s power to grant declaratory relief in aid of enforcement of contracts and the question of utility and other discretionary considerations will also arise.

27. The appellants are to prepare draft minutes of order for each matter consistent with these reasons.  I will hear the parties on the form of the proposed minutes and on questions of costs generally.