SUPREME COURT OF QUEENSLAND

JEKOS HOLDINGS PTY LTD v AUSTRALIAN HORTICULTURAL FINANCE PTY LTD

Dowsett J

4-6 December 1995; 17 May 1996 - Brisbane

Dowsett J

The scheme

Hunter Richard Hagon has been involved in the New Guinea coffee industry for many years. In June 1988 he acquired about 40 ha of land at Alstonville in northern New South Wales for the purpose of developing a macadamia farm to which he could retire. The property was known as "Gray's Lane". His plans required the injection of capital to which he did not then have access. He mentioned this to Hans Robert John Felden, a director of Zamane Securities Ltd, who referred him to Richard J Lynch. Lynch told Hagon that he had participated in a number of schemes for raising capital and that the solution to his problem was to introduce other people into the scheme. This could be done by issuing a prospectus. It would also be necessary to set up a finance company, a management company and a contracting company. In March 1990 Lynch gave him a proposal in writing. He also asked for money, and Hagon paid him $15,000, and later another $45,000, as fees. Lynch explained that the scheme was "tax-driven", that there was a tax incentive for people who invested in agriculture.

By March 1990 Hagon had acquired the shares in a number of companies, namely Okari Plantations Ltd, Okari Management Pty Ltd, Okari Marketing Pty Ltd and the defendant in these actions. Lynch and Hagon were directors of these companies. John Lawrence, a former coffee planter in New Guinea, was also a director of the defendant. He had settled in the Alstonville area and was operating a commercial nursery. Hagon apparently valued his expertise and advice. At about this time, Lynch introduced Hagon to Michael Donahoo whom Hagon understood to be an accountant working for Lynch. Donahoo became involved in the scheme on the financial side.

On 8 June 1990 the Commissioner for Corporate Affairs of the Northern Territory registered a prospectus (Ex 2). The prospectus identified a number of "parties" to the scheme. One was described as the "representative". This was Permanent Trustee Australia Ltd. I will discuss the functions of the representative in more detail at a later stage. Another party, Okari Plantations Ltd, was the "plantation owner". This company held an option to purchase Gray's Lane from Hagon. It was also said to be in the process of completing the purchase of additional land for the purposes of the scheme. The third party, Zamane Securities Ltd, was the "Manager", allegedly, "completely independent of the companies associated with this venture". The prospectus recited that this company had been established, "solely as a licensed securities dealer to specialise in Agricultural Ventures …".

Two other companies were directly involved in the scheme, one was Okari Marketing Pty Ltd, which was a wholly owned subsidiary of Okari Plantations. It was to purchase and, presumably, market the produce of the scheme. Okari Management Pty Ltd, described as the contractor, was responsible to the manager, Zamane Securities, for plantation development and operation. The scheme was regulated by an investment deed (Ex 38). Investors were also expected to enter into Plantation Licence Agreements with Okari Plantations, and Plantation Management Agreements with the representative and with Zamane Securities. Both documents were included in Ex 2.

The scheme involved the cultivation of macadamia nut trees and herbs and the marketing of the produce. The undertaking was to be conducted on 200 ha of land, including Gray's Lane. It was said in the prospectus that Okari Plantations, "… already has 40 ha of macadamia nut trees planted out and exclusive access to an established macadamia nursery". It was also said that, "A series of properties totalling 229.48 ha have been either acquired or secured under option … and additional properties will be acquired during the course of the next six months". On p 44, particulars were provided of the various properties which, it was said, Okari Plantations was entitled to acquire or had acquired.

The mechanism for investment was that an investor (described as a "grower" in the prospectus and the other documentation) was to receive what was called a participation interest, of which there were to be a minimum of 30 and a maximum of 800, each representing an investment of $12,486 and each entitling the grower to a licence over one-quarter of a hectare of macadamia nut plantation and one-twentieth of a hectare of mixed herb plantation. The scheme was to last for 14 years. At the time of applying for an interest, each grower was to enter into a Plantation Licence Agreement with Okari Plantations, the plantation owner, pursuant to which the grower was entitled to plant, grow, tend, harvest and prepare for sale macadamia nut trees and herbs on the relevant land. A licence fee was payable to Okari Plantations. That company assumed certain responsibilities for the cultivation of the land. The grower also undertook responsibilities in that regard, but was entitled to appoint, "any contractor acceptable to the Plantation Owner", to perform those responsibilities. Zamane Securities was approved for this purpose. Each grower was therefore invited to execute a Plantation Management Agreement with Zamane Securities pursuant to which, in consideration of Zamane Securities managing the plantation on behalf of the grower, the grower was to pay a prescribed fee to that company. The representative was also a party to this document. Zamane Securities subcontracted its responsibilities to Okari Management.

The grower was also asked to sign a document described as "Declaration and Power of Attorney". This document recited that the grower would be bound by the provisions of the investment deed and that:

… in consideration of the approval by the Representative and the Manager, (Zamane Securities Ltd) of this Application (for an interest) I/we hereby nominate Permanent Trustee Australia Ltd and Zamane Securities Ltd … to be my/our attorney to execute and do any assurance, act, matter or thing which the Representative or the Manager is empowered or obliged to do on my/our behalf pursuant to the terms of the Investment Deed or my/our Plantation Agreements which I/we have elected in this application to enter into (including but without limiting the foregoing to the dating of my/our Plantation Agreements, the completion of any blanks in the same and the completion of item 2 and Annexure "A" to the Plantation and Licence Agreement and any other act, matter or thing necessary or desirable to bring my/our Plantation Agreements into full force and effect) …

The representative's duties were quite limited. It was to be a party to each plantation management agreement and was authorised by the grower to do all things which the grower was empowered or obliged to do under that agreement. Pursuant to the investment deed, moneys received from investors were to be paid to the representative to be held on trust for the respective growers until the minimum subscription level was reached. Such moneys were then to be used to pay the licence fees and management fees for the first year of the scheme to Okari Plantations and Zamane Securities respectively, provided that Zamane Securities had confirmed the acceptance of each grower's application. The amount of the investment for each participation interest ($12,486) was the total of the two fees for the first year.

Included in the prospectus was a "Taxation Opinion" from Greenwood Challinor Services Pty Ltd. In describing the taxation benefits of the scheme, it referred to, "Other agreements involving the parties which are relevant for taxation purposes …". One of these was said to be:

… at the Investor's option a finance agreement with Australian Horticultural Finance Pty Ltd or such other lender as the Investor may choose, to provide a loan to finance the expenses in relation to the Venture.

Subsequently, in discussing the taxation benefits, the report said:

In the case of those Investors who have borrowed funds to cover the costs of the venture, any reasonable interest charges incurred in relation thereto should also be allowable deductions pursuant to s 51(1) of the Act.

On p 36 of the prospectus, the investigating accountants' report (provided by Messrs Ernst and Young) gave particulars of the defendant which was described as, the "Lender". A brochure circulated with the prospectus described, "gearing the investment". The effect of the proposal was that the defendant offered finance, "to approved investors on a full recourse basis". The loan was to be evidenced by a deed of loan between the defendant and the grower, a draft of which was also circulated, together with a loan application form and a standard form of letter from the defendant (signed by R J Lynch, director), expressing the defendant's willingness to advance funds to approved persons upon the security of their interests in the scheme. The grower was to pre-pay the first year's interest and make two principal repayments, each in the amount of 5.7% of the "loan funds", the first payment to be made 90 days and the second, 180 days after the granting of the loan. The balance of principal and interest was repayable by the borrower, although it was expected that the necessary funds would be available from the scheme.

There was a worked example of the borrowing mechanism in the following form:

For example based on a two unit investment of $24,972 the following cash payments are required.

Pre-paid interest - June 1990 $4407

Principal Reduction - September 1990 $1423.50

Principal Reduction - December 1990 $1423.50

Total $7254.00

Also circulated with the prospectus was a document headed, "Application Instructions". This explained how a potential investor should proceed to fill out the various documents. It was divided into two parts, one headed, "Geared Investor/Borrower", and the other, "Cash Investor". Each required the applicant to complete the application form in the prospectus, the plantation licence agreement, the plantation management agreement and the power of attorney and to deliver the documents to the manager. A geared investor was also to complete the loan application and the "Loan Agreement", presumably the deed of loan. A cash investor was to forward an appropriate cheque to the representative.

The actions

It is now necessary to say something about these 11 actions. Australian Horticultural Finance Pty Ltd is the defendant in each. All but one of the plaintiffs are companies, the shares in which are owned by people who are members of, or associated with a family described in the evidence as the "Anderson family". Each of the plaintiffs is a shareholder in G W Investments Pty Ltd, previously called "G W A Pty Ltd". The corporate plaintiffs and G W Investments are primarily investment companies. In 1990, Brian James Prendergast was the general manager of G W Investments and was also a secretary or director of each of the corporate plaintiffs. Barry Thornton, who was related to the Anderson family by marriage, was the chairman of G W Investments. One of Prendergast's duties was to assist Thornton in preparing tax returns for the corporate plaintiffs.

In about May 1990 Prendergast had a discussion with Alastair Hassall, an investment adviser with a firm of stockbrokers, Morgans. Hassall drew his attention to the investment opportunities allegedly available from participation in the Okari Plantations venture. He provided Prendergast with what was described as a "draft" of the venture, which I take to mean a draft of the prospectus. Prendergast seems to have formed the view that it would be in the interests of the various plaintiffs to participate in the venture. He contacted members of the Anderson family to explain it and the likely tax consequences. On the Tuesday prior to 30 June 1990, he received from Hassall, "a box full of kits", each of which contained a prospectus and the associated documents to which I have referred above. Exhibit 2 is an example of such a kit. The various plaintiffs executed the appropriate documents, including the loan documents, and delivered them to Prendergast who forwarded them to Hassall on 28 and 29 June. In all but one case, the relevant cheques for the pre-payment of interest to the defendant were drawn on a G W Investments' account and debited to accounts operated by the various plaintiffs with that company. The only exception was Jekos Holdings Pty Ltd, which forwarded its own cheque.

It seems that Hagon had some prior association with the Anderson family because late on the afternoon of 29 June, he inquired of Prendergast whether Mr Bill Anderson might be willing to become a "director" of the venture. Prendergast agreed to refer the request to Anderson.

In the loan application form, there was provision for the applicant to insert details of personal assets and liabilities. The various applications by the plaintiffs did not provide any of this information. In late July or early August, Hassall told Prendergast that he had been asked to have the assets and liabilities statements completed. Prendergast agreed to provide this information as at 30 June 1989. He then completed the statements and returned the forms to Hassall in late July or early August. Some of the completed loan applications are Ex 32. Prendergast said that he thought the address shown for each plaintiff on the application forms was "c/-B Thornton, GPO Box 645, Brisbane 4001". It appears that the post office box was used on each of the nine application forms which are part of Ex 32 but that in some cases, names other than Thornton's were used. On 24 July 1990, Prendergast received letters from Zamane Securities addressed to each of the investors (Ex 5). The letters confirmed the number of units assigned to each of the investors and the moneys received in respect thereof. The letter also said:

Australian Horticultural Finance Pty Ltd has advised us that your loan advance has been approved. This company will be in contact with you shortly.

We will forward copies of your Agreements in this venture once they have been returned from the Office of State Revenue for stamping.

Attached to each letter was a taxation opinion which, it was suggested, might assist the investors in the preparation of their income tax returns. The agreements referred to in the letters have never been received by Prendergast nor was he given copies of the executed agreements until he requested them from the representative in 1992. Such documents as he then received did not identify the land assigned to the various interest holders. Prendergast also received letters dated 9 August 1990 from the defendant, relating to the loan applications. Each was in the form of Ex 6 and was as follows:

I refer to your recent loan application. I am happy to advise that it was approved prior to 30 June 1990. The funds were forwarded to the Permanent Trustee Company in line with your request. Attached is your loan statement and an advice of when the two capital repayments are due. The loan documents have been forwarded to the Office of State Revenue for stamping. When these are to hand we will direct them to you. Should you have queries please contact the undersigned.

Each letter was signed by Donahoo. The loan documents were never returned. On 8 September 1990 Prendergast and his wife, at the invitation of Hagon, inspected the property at Gray's Lane. He subsequently received a fax from Hagon, which is Ex 7. It is appropriate that I set out the text in full.

Dear Brian,

1. Since your visit to Okari Plantations several matters have come up which I want to raise privately with you.

2. Five days ago I learnt that Okari may be refused loan funding required to meet its necessary capital purchases and land settlements due next month thus threatening the continuation of the whole project resulting in investors being disallowed their tax deferrals by the Commissioner.

3. An Alistair Hastle [sic]/Richard Lynch partnership financial team produced the Okari Project budgets and contemplated 10-15% of investors would subscribe fully in cash. This did not happen and Okari is left about $1m short in its immediate cash availability.

4. As well Richard Lynch told me that financing would work through a company he set up - Australian Horticultural Finance (AHF) but all that resulted was about $1.5m cash and about $8m on paper.

5. Most of the cash I put into the project has been consumed in accounting, legal, valuing, surveying, consultancy, stamp duty and very large investment adviser commissions. My personal contributions approaching $2m have been greater than the sum of cash subs of all investors combined and I have also given personal guarantees supporting the project. The above represents all I have left in Australia after my recent divorce.

6. I then planned a contribution from my money in PNG but this is now impossible because of PNG's tight currency restrictions aggravated by record low tree crop commodity prices on top of the shut down of Bougainville Copper alone providing 40% of PNG revenue.

7. I have been advised the best alternative to our problems may be a full equity participant.

8. On the farming side we are reassessing and changing our early cash income dependence from solely herbs to vegetables, fruit and herbs to enhance our cash flow and spread the risk while also providing a more appealing project to lenders and an equity participant.

9. The additional enterprises we are evaluating will include growing bananas, paw paw, sweet corn, cucumbers, sweet potato, zucchini, melons, etc between the macadamia tree rows in the first four years while there is wide unused space.

10. Further, although some 95% of dried herbs used in Australian are imported, the packing companies are now saying that they will only shift their dependence to us over an extended period as we prove reliable and quality suppliers. This is understandable but would restrict our herb cash income.

11. Meanwhile we have established contact with the largest and most successful supplier of organically grown vegetables in the State who receives premium prices from Coles and Woolworths. We anticipate growing organically grown fresh herbs and vegetables through him. He is also looking to us to set him up in a tax effective scheme for next year with a vegetable and possibly macadamia project.

12. Subject to negotiations with you on these matters we will notify the Trustee as required by the trust deed. It is understood that we will substantiate the above to you in detail and our financial and legal advisers will be available to meet and discuss this in detail this week at your convenience.

Upon receiving the fax, Prendergast had a discussion with Thornton and then spoke to Hagon by telephone, requesting certain additional information. The information sought is detailed on the front page of Ex 7. It related to the various expenses incurred in the project and the ultimate destination of the interest on loans pre-paid to the defendant.

On 20 September, Prendergast received a fax from Donahoo (Ex 8), said to provide some of the information sought and saying that further information might follow. Under the heading "Formation Expenses", it showed that of a total expenditure slightly in excess of $579,000, $242,630 had gone to solicitors and accountants and slightly more than $202,000 had gone to Lynch and Hassall, apparently as consultancy fees. The material suggested that most, if not all, of the funding had come from Hagon, including cash advances in excess of $1m and an anticipated contribution of the Gray's Lane farm and associated assets at a nominated value of $1.2m.

With respect to the funds advanced by the defendant, the information was that:

The loans arranged by Australian Horticultural Finance were done by an exchange of cheque transactions.

Cheques were exchanged between the companies creating an asset in the books of Australian Horticultural Finance (Loan Account - Grower) and Okari Management (Loan Account - Australian Horticultural Finance) and a liability in the books of Australian Horticulture Finance (Loan Payable - Okari Management).

Please note the diagram attached …

Attached was a diagram of the flow of funds purportedly generated as a result of a notional application for two units to be financed by the defendant. The diagram is central to the issues in this case. I will attach a copy to these reasons. Each of the participants had an account at the Bligh Street, Sydney, branch of the ANZ Bank. The various cheques were drawn on and deposited in those accounts.

(a) Upon application for a loan of $24,972 (the price of two units), the investor would pay interest in the amount of $4407 to the defendant, with subsequent obligations to pay $1473.50 after 90 days and a similar sum after 180 days.

(b) The defendant would "lend" to the grower the sum of $24,972, which the grower would "direct" to Permanent Trustee Co. (This was an error. The "recipient" was actually Permanent Trustee Australia, the representative, a wholly owned subsidiary of Permanent Trustee Co Ltd.)

(d) The manager "directed" part of the amount to Okari Plantations as the licence fee and the balance to Okari Management as the management fee.

(e) Each of those payees "deposited" the amounts in question with the defendant.

The venture investment deed required that the licence fee be paid by the representative to Okari Plantations, but the interposition of Zamane Securities seems to have no present significance; nor does the involvement of Okari Management.

Prendergast later received Ex 9, which appears to be an outline of the proposed operation of the scheme, together with an assessment of its capital needs. On 26 September he had a meeting with Donahoo and Hagon. They discussed restructuring the project in light of the apparent failure of the herb production operation. Prendergast received Exs 10, 11 and 12 after that meeting. Exhibit 13 is a document received by Prendergast from Hassall. There was a further meeting on or about 20 November. Exhibit 14 is a fax from Hagon to Prendergast dealing with the same subject.

Exhibit 15 is a letter from the representative to each of the growers indicating, in effect, that shortage of funds had prevented the acquisition of sufficient land to honour obligations to them and proposing that the project be restructured. Exhibit 16 is a letter dated 31 December 1990 from Okari Plantations to the growers, asserting that restructuring was necessary and asking them to ensure that they paid amounts falling due to the defendant on 30 September and 30 December. The plaintiffs did not pay these amounts. Exhibit 17 is a letter dated 15 February 1991 from Hagon to the growers, suggesting restructuring and promising that a proposal would be forthcoming. Exhibit 18 is a letter from Hagon by his agent, Mr Moser, addressed to Prendergast, inviting him to become a director of Okari Plantations and indicating that it was likely that a meeting of growers would be held on 13 or 14 June 1991. Mr Prendergast did not accept this invitation.

Exhibit 19 is a letter from Okari Management to the representative seeking a meeting of growers. Exhibit 20 is a letter from Zamane Securities to growers dated 31 July 1991. It set out in some detail the history of the project, including the termination of contracts for the acquisition of land, and made proposals for the resolution of the matter. It recorded that Prendergast, among others, had been appointed to an informal committee of growers to consider a proposal by Hagon to resolve the problem. Exhibit 21 indicated that the matter was even more complicated because Okari Plantations had granted a mortgage over its property to secure a debt to a Mr Shand. The defendant had guaranteed the debt.

Exhibit 22 is an open letter from Hagon to the investors, suggesting that one of the reasons for the failure of the project was that Lynch had advised him that between 25 and 45% of growers would probably invest in the venture using their own finance, rather than by taking advantage of the defendant's offer of finance. Had that prediction been realised (it was said) more capital would have been available for the development of the venture. In the event, all but one of the investors chose to finance the investment through the defendant. This allegedly resulted in cash flow inadequate for the acquisition of the necessary land. Bank finance was not available to fund the project. Hagon said that he had been advised that the loan book of $9m (the defendant's loan book), would be a substantial asset which could be used to secure borrowings or be sold at a discount to financiers. This expectation was not realised.

Prendergast agreed that when he sent the various documents to Hassall in late June 1990 he had not anticipated any difficulty in obtaining loans from the defendant. Hassall had previous knowledge of G W Investments and the Anderson family and had made it clear that funds would be available. Prendergast had assumed that the defendant had the necessary funds to advance to investors. He knew from the prospectus, however, that it was a $2 company which had never traded. He agreed that he had discerned from Ex 8 that there had been a "round-robin" of cheques. In evidence-in-chief, he said that he first became aware of this in 1992 or 1993 when he was told about it by his solicitor, but he received Ex 8 in September 1990.

The plaintiffs now sue to recover the amounts paid to the defendant. The defendant counter claims for the amounts of the alleged loans or to recover such amounts as moneys had and received by each plaintiff to the use of the defendant or by way of unjust enrichment.

Other evidence

While I suspect that I have already said enough to enable me to determine this case, I should summarise the other evidence. Mr Thornton was a director of the plaintiffs, Shettleston Pty Ltd and H G T Investments Pty Ltd. He was responsible for giving accounting advice to most of the plaintiffs and for preparing accounting returns on behalf of all of the corporate plaintiffs. He became aware of the Okari scheme shortly before 30 June 1990. He would have been concerned had he known that the venture was to be funded by the "round-robin" of cheques to which I have referred. He prepared the 1989-1990 tax returns for the plaintiffs, claiming tax deductions in connection with participation in the scheme. The Commissioner allowed claimed deductions for pre-paid interest but disallowed claims for pre-paid licence and management fees.

Lynch said that the defendant did not have the capacity to advance any moneys on behalf of borrowers. He had instructed Donahoo to perform the "round-robin" transactions. These were to be done prior to 30 June 1990. He said that it was always intended that the so-called financing be effected by this method. The defendant had tried, unsuccessfully, to raise funds externally. His advice to Hagon had been that the best they could expect by way of cash contributions would be 10% of the subscriptions.

According to Lynch, as the applications were received, they were processed in the sense that "round-robin" transactions were effected, but no decision was made as to whether or not to approve finance, nor as to the ultimate participation of each applicant in the scheme. These matters were dependent upon the minimum subscription level being reached and the maximum not being exceeded. In the latter case, a decision would have been made as to which subscribers were to be excluded and the relevant "round-robin" transactions reversed. It was perceived to be necessary that the "round-robin" transactions be effected prior to 30 June. It is common ground that applications by three of the plaintiffs were the subject of a "round-robin" effected on 29 June. The others were dealt with on 4 July. It is also common ground that on 13 July Donahoo executed the deeds of loan on behalf of the defendant, back-dating them to 29 June. Lynch said Donahoo was not told to effect "round-robins" after 30 June, nor was he told to back-date the deeds of loan.

Hans Felden, a director of Zamane Securities, said that the vast bulk of applications for participation interests arrived on 27, 28 and 29 June. When the applications were received in the office, they were opened to check the number of units for which each applicant had applied. This was to enable a record to be kept of the level of subscription. Any cheques were banked. He said that no allocation of land had been made as at 30 June 1990, nor had the plantation licence agreements and management agreements been signed by Zamane Securities. The licence agreements did not, in any event, require execution by that company.

On 15 June 1990 Zamane Securities had opened an account with the ANZ Bank in Bligh Street, Sydney. On 27 and 29 June and 4 July, Donahoo told Felden that he wished to bank the cheques which had been received. He described the process as a settlement. Felden drew cheques (on Zamane Securities) which he thought were drawn in favour of Australian Horticultural Finance and Okari Plantations, although he agreed in cross-examination that they were in favour of Okari Plantations and Okari Management. The amounts of the cheques were prescribed by Donahoo. Zamane Securities had no funds to meet the cheques. Felden said that he was relying upon funds to be received from the representative. Prior to these settlements, Zamane Securities had not notified the representative that any of the applications had been approved. At a meeting on 13 July, Donahoo explained to those present that the "secret of the project" was that the ANZ Bank had granted a special facility to permit the "round-robin" transactions to which I have referred.

At some stage, Felden recalled the execution of a large number of licence agreements and management agreements which were also stamped. The documents did not identify the land allocated to each grower. The documents were delivered to the representative. In September or October, there was a meeting at Alstonville at which Felden learned that Gray's Lane had not been transferred into the project. This was because of difficulties with the payment of moneys outstanding in connection with other properties. He also heard that a number of other purchase contracts had not been completed.

In a letter dated 26 June 1991 to the Australian Securities Commission (Ex 50), Zamane Securities, over Felden's signature, advised the Commission that: "By 30 June 1990, 214 growers applied for and were granted 761 units in the Okari venture."

The balance of the letter made it clear that the venture did not have sufficient land to honour its obligations to grant licences to the various interest holders. Nonetheless the defendant submits that the letter shows that the various interests had been created at this stage. Felden said that by late July 1990, Zamane had commenced the process of assigning areas to growers. He was unaware of the location of the original deeds of loan.

Lawrence Normand was the manager of the ANZ Bank at Bligh Street from January or February 1989 to May 1991. He said that Hagon and Donahoo had obtained a loan of $495,000 in early April 1990, repayable in July 1990, to assist them in the development of the plantation. They expected that funds would be available from which to repay the loan as a result of public investment in the Okari venture. These funds did not eventuate, and the time for repayment was extended. An application for an additional loan of $3.95m was made. They were advised of the bank's refusal on 1 June. Further representations were made, but the application was again declined in late June.

At some stage, there was a discussion between Donahoo and/or Hagon and Normand concerning the "round-robin" of cheques. Normand told them that the bank would require a letter from the "company" (meaning, presumably, the drawer of each cheque) advising that the "round-robin" was in the normal course of business and that there would be no breach of any legislation. Exhibit 57 also dealt with this subject. Normand was present at the "round-robin" settlements. They took place in his office. Also present were Donahoo and a representative from Permanent Trustee Australia. Normand's object was to ensure that the cheques to be drawn on various accounts were matched by corresponding deposits to those accounts.

Donahoo explained the mechanism of the "round-robin" settlements at p 193 of the transcript. He said:

I would give Mr De Silva and Mr Hall (from Permanent Trustee Australia) a cheque (in the case of these plaintiffs, drawn on the defendant) made payable to the Permanent Trustee Co for the advance of the loan. They then would attach that to the deposit slip, deposit it into that account at that bank and then hand it across to the bank manager (Mr Normand). Then Mr Hall and Mr De Silva would draw a cheque in favour of Zamane Securities Pty Ltd. Mr Felden asked me to attend the bank for him, to attend to his affairs at the bank and they gave me a cheque made payable to Zamane. I had the completed deposit slip, completed by either Mr Felden or his wife. I attached the cheque to that deposit slip and gave that to the bank manager and he made the deposit in Zamane's bank account. Then I had, before I left, two cheques from Zamane Securities that were payable to Okari Management for the management fee and Okari Plantations Ltd for the licence fee and I attached those to a deposit slip and I gave those to the bank manager and he deposited those cheques into those accounts. I then had cheques drawn on Okari Management and Okari Plantations made payable to Australian Horticultural Finance and I gave those to the bank manager and he deposited those into Australian Horticultural Finance's bank account because it was agreed that Australian Horticultural Finance would be the banker, would attend to the treasury duties of the group.

Donahoo also said that he signed deeds of loan on behalf of the defendant with each of the present plaintiffs on 13 July 1990, back-dating them to 29 June.

The issues

The parties have raised numerous and complex issues. By the statements of claim, each plaintiff asserts that:

(i) it or he offered to borrow funds on conditions which were not satisfied;

(ii) alternatively, the deeds of loan were executed by each plaintiff conditional upon execution and payment by the defendant on or before 30 June 1990, which conditions were not satisfied;

(iii) alternatively, if the deeds were otherwise binding, they were discharged by virtue of the defendant's having falsely dated them;

(iv) alternatively, any offer by each plaintiff to borrow from the defendant was conditional upon the venture proceeding, which it did not do.

The defendant alleges that:

(i) each plaintiff's offer to borrow funds was accepted by that plaintiff 's paying the pre-paid interest to the defendant;

(ii) alternatively, the parties had entered into contracts of loan, "implied from their said conduct, alternatively their said conduct and the said oral agreement; the express written terms of which are contained in the said Deed of Loan";

(iii) alternatively, if there were no binding agreements, the plaintiffs are estopped from denying the validity of the relevant deeds of loan;

(iv) the defendant is entitled to recover the moneys advanced and interest, pursuant to the various deeds of loan;

(v) alternatively, the defendant is entitled to such sums as moneys had and received by each plaintiff to the use of the defendant;

(vi) alternatively, each plaintiff has been unjustly enriched and must make restitution.

By reply and answer, each plaintiff asserts that:

(i) Prendergast's authority to act on behalf of each plaintiff was limited (this relates largely, but not entirely, to the estoppel issue);

(ii)

the deeds are not enforceable because they did not become binding until 13 July 1990;

(iii) the "round-robin" transactions were shams, designed to deceive the Commissioner of Taxation;

(iv) the defendant breached each agreement for loan by failing to pay the relevant advance prior to 30 June 1990, and each plaintiff has terminated the relevant deed;

(v) each deed of loan was back-dated to deceive the Commissioner of Taxation;

(vi) Donahoo had no authority to bind the defendant by signing the deeds of loan.

The rejoinder alleges that:

(i) Prendergast had implied or ostensible authority to bind the plaintiffs;

(ii) the defendant (presumably meaning the plaintiff ) ratified any agreement reached by Prendergast with the defendant;

(iii) to the extent that the defendant relies on agreements allegedly made by Hassall on its behalf, the defendant has ratified those agreements;

(iv) the defendant has also ratified any relevant conduct by Donahoo.

I have tried to reduce the issues to their simplest forms in an effort to display the overall shape of the case. In so doing, I may have omitted some subtle nuances of the arguments. To my mind, however, the issues are quite narrow. Each plaintiff claims to recover from the defendant the amount paid by way of pre-payment of interest either because there was never any agreement for loan concluded between the parties in question, or if there was, because the defendant did not advance any moneys pursuant to it. The defendant asserts that there were such agreements, that the relevant "round-robin" transactions discharged its obligations thereunder, and that it is therefore entitled to retain the pre-paid interest and counter claim for the outstanding principal and interest. Alternatively, if there were no binding agreements, each plaintiff is now estopped from saying so, leading to the same result. Further, the defendant claims the moneys "paid" to the representative as moneys had and received by each plaintiff to the use of the defendant or by way of compensation for unjust enrichment. In reply, each plaintiff asserts that if there was an agreement between it and the defendant, it has been terminated for breach. It denies that it is estopped from denying the binding nature of the deed of loan.

The defendant's conduct

Much of this case depends upon the significance of the defendant's participation in the "round-robin" transactions. If there was an agreement between each of the plaintiffs and the defendant, it obliged the defendant to lend to the plaintiff in question the sum specified in the deed of loan signed by that plaintiff, by paying that sum to the representative. The defendant claims that it discharged these obligations by engaging in the "round-robin" transactions, but I do not agree. There is no sensible way in which it can be said that the "round-robin" transactions amounted to payment of the principal sums to the representative. Mr Normand made it clear that the transactions were designed to ensure that the amount of each cheque drawn upon an account was matched by a deposit to the same account. The various cheques were not intended or able to facilitate transfers of funds to the representative. Neither the representative nor any of the other companies which participated in the "round-robin" acquired control over any funds.

The cheques handed to the representative could be dealt with only in a way which enabled an amount equal to the amount of the cheque to be deposited into the account upon which the cheque was drawn. The effect of the "round-robin" transactions may be tested by asking what would have happened had the representative refused to pay Zamane Securities or Okari Plantations at that time. This is by no means a hypothetical proposition. The representative was to hold funds received on behalf of investors until the manager notified their acceptance into the scheme and until the minimum level of subscription was achieved. The manager had probably not accepted the investors as growers as at 4 July 1990. Thus, pursuant to cl 8 of the investment deed, the representative should not have paid the licence and management fees. Had the representative asserted its obligation to retain the funds until the time at which they became payable, Mr Normand would clearly have indicated that the defendant's cheque in favour of the representative would be dishonoured on presentation. In that situation, it would be clear that no payment had been made as required by cl 4(a) of the deed of loan. That the representative chose to release the "funds" does not mean that the effect of the cheques drawn on the defendant's account in favour of the representative was any different. The cheques were not intended to effect the transfer of funds. They were never more than props in an elaborate facade.

It is true that at the end of the day, Okari Plantations and Okari Management were owed money by the defendant and that none of the cheques had been dishonoured, but these results were also merely elements of the facade. Although the defendant had a significant sum derived from pre-payment of interest, it had no prospect of repaying those debts. As to the fact that none of the cheques had been dishonoured, this was because none of the payees had sought to present them other than in a way which would not lead to payment. In the circumstances, it is impossible to say that the defendant performed its obligation to pay the principal sum to the representative.

In those circumstances, if there were enforceable agreements for loan, whether pursuant to the deeds of loan or otherwise, the defendant failed to advance the funds as required by those agreements. The plaintiffs were therefore entitled to terminate the agreements as they have done. I should say that argument has proceeded upon the basis that if there were contractual relationships between the plaintiffs and the defendant apart from the deeds of loan, the obligations upon the defendant in each case were identical to those set out in the deeds. This concession was not expressly made, but it was my undertaking of the conduct of the case by both sides. If such agreements have been terminated, the plaintiffs are entitled to recover the moneys paid thereunder, and the counter claims must fall.

Other matters

Two other matters require consideration. During addresses, the defendant sought to amend the defences to allege that the plaintiffs had knowledge of the "round-robin" transactions from the time at which Mr Prendergast was aware of them and that this should, in some way, prevent them from denying either the existence of the agreements for loan or, perhaps, that the defendant had discharged its obligations thereunder. I refused this application because it came so late and because it raised questions of agency and authority which had not previously been relevant. An alternative approach might have been to allege that the plaintiffs had elected to affirm the agreement with knowledge of the defendant's breach. Of course, this was also not pleaded and would also have raised the problems of authority and agency to which I have referred. In any event, such a plea could not have been successful simply because the defendant's breach was a continuing one. To the present time, no funds have been advanced by the defendant pursuant to the deeds of loan.

It might also have been alleged that the plaintiffs had, in some way, accepted the "round-robins" as being performance by the defendant of its obligations under the agreements. The same problems would have arisen had such an amendment been sought. In any event, the facts do not demonstrate any such acceptance. For the plaintiffs to continue to behave as if they held participation interests in the scheme was consistent with their rights and obligations as participants in the scheme. That did not mean that the plaintiffs had accepted the defendant's attempts to discharge its contractual obligations by participating in the "round-robin" transactions. If the defendant had failed to meet its obligations to the plaintiffs, they were at liberty to seek finance elsewhere. Indeed, the defendant's default would not per se have entitled the plaintiffs to withdraw from the scheme.

The representative and the other companies probably accepted the "round-robin" in discharge of whatever obligations any one of them had to any of the others. That, however, was not binding as between any one of the plaintiffs and the defendant. This, in my view, renders irrelevant the line of authorities referred to by the defendant in argument, namely Lau v FCT (1984) 15 ATR 932; 54 ALR 167; FCT v Lau (1984) 6 FCR 202; 16 ATR 55 and Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449. Those were cases in which a party attacked as a sham a particular transaction to which he was not a party. Where the parties to a transaction agree that the mutual discharge of obligations 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 defendant had an obligation to each plaintiff, which obligations could only have been discharged in accordance with the terms of the agreements, unless the parties agreed to vary those terms. As a matter of common understanding, what each plaintiff 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 defendant did not discharge its obligations pursuant to the various agreements, nor does the defendant now offer to do so.

Non-contractual claims

If, contrary to my assumption, there was no binding agreement between each plaintiff and the defendant, the result would be the same. If the defendant advanced moneys in anticipation of such an agreement, it might be able to recover the amounts advanced from the plaintiffs in the event that they had derived benefit as a result thereof. This would be either by way of actions for moneys had and received or by claims for compensation for unjust enrichment. The defendant so claims. The claims for moneys had and received rely upon the plea that the defendant paid money as directed by the plaintiffs. For reasons already given, I consider that it did not do so, and so those causes of action fail.

The defendant also asserts that each plaintiff derived the benefit of participation in the scheme from the defendant's "payment" and that such benefit constituted "unjust enrichment". Clearly, in the events which happened, participation in the scheme was not worth anything to the plaintiffs. Equally clearly, the only detriment suffered by the defendant was the incurrence of the debts owed to Okari Plantations and Okari Management, but as the defendant had no assets at any material time, it is difficult to classify the incurrence of those debts as a detriment. The only possible advantage to each plaintiff was a small tax deduction allowed for the pre-payment of interest. The allowance of these claims was negotiated with the Commissioner, who also disallowed deductions claimed for the licence and management fees. My view of the nature of the "loans" by the defendant to the plaintiffs means that the deductions were probably wrongly allowed. One assumes that if the plaintiffs are now entitled to recover the pre-paid interest, the deductions may be disallowed. Whether this be so or not may depend upon the terms of the agreement with the Commissioner. In any event, the benefit of the allowance of the deductions was derived from the plaintiffs' actions in pre-paying interest, not from the defendant's actions in participating in the "round-robin" transactions. I cannot see any basis for asserting unjust enrichment. If I appear superficial in my treatment of this aspect of the defendant's case, it is because no significant submission was addressed to the issue.

Estoppel

As to the question of estoppel, my view as to the defendant's failure to perform its obligations pursuant to the purported deeds means that it is not necessary to consider it further. Even if each plaintiff be estopped from denying the existence of the relevant deed, the defendant was still in breach thereof. In any event, I find it difficult to see how it can be said that the plaintiffs made any representation as to the existence or otherwise of such deeds or that the defendant acted to its detriment in reliance upon any such representations. It is difficult to characterise as representations for this purpose the allegations pleaded in paras 10 and 10A of the defence (including the particulars). That the plaintiffs may have behaved as if they were participants in the scheme does not lead to the inference that they considered the deeds of loan to be binding on them. They had committed themselves to the scheme. They were not entitled to withdraw simply because their financial arrangements had failed. As to detriment, in view of the defendant's financial position, and from what little is known of the other companies, it is difficult to see any. Again, the defendant offered little or no argument concerning this issue.

Conclusions

In the circumstances, I consider that the moneys paid by the plaintiffs were paid for a consideration which has wholly failed, and that they are entitled to recover those sums. I propose to give judgment for the plaintiffs in the various actions and to dismiss the counter claims. I will, however, hear submissions as to forms of order and as to costs. I will also consider any requests for further findings of fact.

It is my intention to refer these reasons to the Australian Securities Commission unless the parties persuade me to a contrary course.

	Pre-paid interest - June 1990	$4407
	Principal Reduction - September 1990	$1423.50
	Principal Reduction - December 1990	$1423.50

	Total	$7254.00