Equuscorp Pty Ltd v Glengallan Investments Pty Ltd; Equuscorp Pty Ltd v Codd; Equuscorp Pty Ltd v Anderson; Equuscorp Pty Ltd v Prendergast; Equuscorp Pty Ltd v Thornton; Equuscorp Pty Ltd v Hgt Investments Pty Ltd

• Jurisdiction: Australia Federal only
• Judge: Gleeson CJ,McHugh,Kirby,Hayne,Callinan JJ
• Judgment Date: 16 November 2004
• Neutral Citation: [2004] HCA 55,2004-1116 HCA A
• Court: High Court
• Docket Number: B93–98/2003
• Date: 16 November 2004

[2004] HCA 55

HIGH COURT OF AUSTRALIA

Gleeson CJ, McHugh, Kirby, Hayne AND Callinan JJ

B93–98/2003

Equuscorp Pty Ltd & Anor

Appellants

Glengallan Investments Pty Ltd

Respondent

Equuscorp Pty Ltd & Anor

Appellants

and

Codd

Respondent

Equuscorp Pty Ltd & Anor

Appellants

and

Anderson

Respondent

Equuscorp Pty Ltd & Anor

Appellants

and

Prendergast

Respondent

Equuscorp Pty Ltd & Anor

Appellants

and

Thornton

Respondent

Equuscorp Pty Ltd & Anor

Appellants

and

HGT Investments Pty Ltd

Respondent

Equuscorp Pty Ltd v Glengallan Investments Pty Ltd

Contract — Loan — Written agreement and prior oral agreement — Written agreement inconsistent with terms of alleged prior oral agreement — No allegation of mistake or claim to rectification — Borrower bound by written agreement.

Contract — Loan — Direction to lender to apply money lent in payment of moneys due from borrower to third party — Series of connected and legally effective transactions creating and satisfying debts — One of those transactions satisfying amount due from borrower to third party — No payment by cheque or cash — Does a loan require the transfer of ‘real money’ — Whether loan made as agreed.

Practice and Procedure — Appeal and new trial — Remitter for further consideration.

1 Gleeson CJ, McHugh, Kirby, Hayne AND Callinan JJ. As the 1989 financial year ebbed away, each respondent in these appeals considered making a ‘tax effective’ investment. On the last day of May 1989, Mr Alastair Hassell, a marketing consultant for a group of companies associated with Mr Tony Johnson (‘the Johnson Group’), sent to one of the respondents, Mr Barry Thornton, a circular entitled, ‘Precisely What is the Best Farming Investment this Year?’. The circular suggested that the answer to this question was ‘the Red Claw (fresh water crustacean) Project in northern Queensland’ to be conducted by the Johnson Group as a ‘large-scale aquaculture project’.

Gleeson CJ

2 Each of the respondents determined to invest in this project. All were associated, in one way or another, with Mr Thornton and a company then called GWA Pty Ltd. The case against Glengallan Investments Pty Ltd, Mr Thornton's family's investment company, has been taken as typical of the claims against all respondents. No distinction has been drawn in argument between the respondents. None need be drawn in these reasons. Together, the respondents sought to acquire over 3,700 units in the project and to borrow more than $3.2 million for that purpose.

3 The circular explained that the minimum investment was 5 units at $868 each ($4,340) and that, of that sum, $4,280 was tax deductible in the initial financial year. If the investment was ‘fully borrowed’, and one year's interest was prepaid, ‘an investor would have an initial cash outlay of $781 and a deduction of $5,061’.

4 The circular pointed out that an application for investment in the venture could be made only ‘through the registered Prospectus’. So much followed from the provisions of the then applicable companies legislation (Div 6 of Pt IV of theCompanies (Victoria) Code). What was being offered to the public was a prescribed interest. A prospectus was issued on 16 June 1989, 14 days before the end of the financial year. It, too, described the taxation consequences that were said to follow from investing in the project. If the deductions described in the circular, and in the prospectus, were to be obtained in the 1989 financial year, time was short.

5 The prospectus described the proposed structure of the venture. An investor in the venture bought units in a limited partnership to be registered under thePartnership (Limited Liability) Act 1988 (Q). The terms of each partnership were recorded in a partnership deed made between Eagle Star Trustees Ltd (‘Eagle Star’), Forestell Securities (Australia) Ltd (‘Forestell’) and others. Forestell was the ‘General Partner’; Eagle Star was the ‘Representative’. Forestell, as General Partner, was given authority to manage the partnership project and the business of the partnership. Eagle Star agreed to act as representative of each of the partners: those who were registered as the holders of units in the partnership.

6 More than one partnership was formed. (The number of partnerships was at the discretion of the General Partner, Forestell.) Up to 80,000 units could be issued. The minimum subscription, which had to be received before the project commenced, was 4,000. The prospectus said that, subject to the minimum subscription being received, the first partnership would commence business on 30 June 1989.

7 The partnership deed authorised Forestell, as General Partner, to retain Johnson Farm Management Pty Ltd (‘JFM’) as manager of the project. A form of management agreement was annexed to the partnership deed. By that management agreement, JFM was obliged to meet all costs, expenses and outgoings of the partnership in its first year, but JFM was to be paid a management fee. If the fee was prepaid (that is, before 30 June 1989) the fee was $833 for each unit issued in the partnership. Forestell made a further agreement with JFM and with Farmer Johnson Aquaculture Ltd (‘FJA’) by which FJA agreed that it would grant a ‘grow out pond lease’ and a ‘facilities licence’ in respect of each partnership. The annual rent under the grow out pond lease was $20 per unit; the annual licence fee was $3 per unit.

8 Thus, by the various agreements described, each investor would pay $868 per unit; $833 would be paid to JFM; and $23 would be paid for rent and licence fees. The balance of $12 was to be available to buy crayfish stock. It was this last sum (a total of $60 for each 5 units subscribed) that the circular had said would not be tax deductible.

9 On the last day of the financial year, each respondent applied for units. Each executed a written loan agreement, agreeing to borrow the whole of the purchase price for the units from the second appellant (‘Rural Finance’). The first and principal question in these appeals is whether Rural Finance lent the respondents the amounts agreed. (The first appellant (‘Equuscorp’) sued as assignee of the loans.) Deciding whether Rural Finance lent money to the respondents will require consideration of a series of connected transactions that took place at the offices of a Melbourne branch of Westpac Banking Corporation on 30 June 1989.

10 On their face, those transactions (a round robin) appeared to be intended to constitute a payment from Rural Finance to Eagle Star of the amount of each respondent's investment, Eagle Star's payment of those amounts to Forestell,Forestell's payment of the amounts to JFM and FJA, and those companies' deposit of the sums paid with Rural Finance as an interest bearing deposit. The respondents say there was no loan, or at least no loan of what they called ‘real money’.

11 When sued by Rural Finance and Equuscorp in the Supreme Court of Queensland for money lent, the respondents answered by saying they were not indebted, because no money was lent. Alternatively, they said that they had been misled or deceived and they challenged the validity of the assignments from Rural Finance to Equuscorp.

12 At trial, the respondents succeeded in their defence that there had been no loan1. The primary judge (Helman J) concluded that the transactions at the offices of Westpac were ‘book entries … made to create an “audit trail”’2 and that each of the transactions was3 ‘a complete artifice or façade’ and a ‘charade’. The respondents” contentions about misleading or deceptive conduct and about the validity of the assignments were not decided.

13 An appeal by Rural Finance and Equuscorp to the Court of Appeal of Queensland4 failed. Williams JA, who gave the principal reasons of the Court, concluded5 that ‘it was fundamental to the performance of the various agreements associated with the venture that real money flow from the [respondents] to those entities responsible for conducting the enterprise’.

14 By special leave, Rural Finance and Equuscorp now appeal to this Court. The appeal should be allowed.

The appellants' case in the courts below

15 The appellants' case against the respondents was simple. They alleged that on 30 June 1989, Rural Finance made written loan agreements with each

respondent. By each of those agreements, Rural Finance agreed to lend, and the relevant respondent agreed to borrow, a sum which the borrower directed the lender to apply ‘in payment of the Application Moneys [for units] and otherwise in accordance with the Borrower's obligations under the [Partnership] Deed’. The appellants alleged that Rural Finance had done this but that each respondent had defaulted in the repayments of principal and interest.

The respondents' case in the courts below

16 The respondents' case was much more complex. First, they alleged that the loan agreements were made in June 1989 but were wholly oral. Each was said to be constituted by a number of conversations taking place between early June 1989 and 30 June 1989 ‘butprior to the execution of the Loan Agreement’ (emphasis added). The respondents alleged that it was a term of these agreements (referred to in the pleadings as the ‘operative agreement[s]’) that the liability of each respondent was limited. It was said that liability was limited to one payment on 30 June 1989 and two subsequent payments on 30 September 1989 and 31 December 1989, and that, thereafter, ‘the income generated by the limited partnership would be applied in extinguishment of the balance of the … loan’. It is convenient to refer to this allegation of limited liability as the ‘limited recourse’ point.

17 The primary judge held6 that the respondents should succeed on the limited recourse point. He accepted the oral evidence given by certain witnesses for the respondents about the conversations on which they relied and...