REASONS FOR JUDGMENT
1 The companies that make up the Westpoint group are in liquidation. Most, if not all, are hopelessly insolvent. As a consequence investors will recover only a small proportion of their investment. The rate of return will not, however, be the same for each investor. The reason is that their money has gone into different companies in the group and the value of the assets of each company is different. This case is concerned with investors who have "transferred" their investment from one Westpoint group company to another. As a result of the transfer they may be worse off. The question that arises is whether those investors can undo the transfer and prove in liquidation of the company in which they first invested their money. This and other related questions come before the court on a liquidators summons for directions. To avoid the criticism that the questions are purely hypothetical the liquidators have identified an investor, Brendan Dunphy, who initially made an investment with York Street Mezzanine Pty Ltd (in liq.) and then transferred that investment to Ann Street Mezzanine Pty Ltd (in liq.) The facts of his case found the arguments. There are two defendants, one who is an investor in York Street Mezzanine and another being an investor in Ann Street Mezzanine. There are orders that the first defendant represent all York Street Mezzanine investors and that the second defendant represent all Ann Street Mezzanine investors.
2 The best place to begin is with a sketch of the background. The business of the Westpoint group was to construct large residential and retail developments. To finance a project most of the funds were borrowed from a traditional lending institution, such as a bank. Additional finance was raised from small investors. In the case of each development a structure along the following lines was established. A development company purchased the land and undertook the development. The development company borrowed funds from an institutional lender on the security of a first mortgage over the land and a charge over its assets and undertaking. What is referred to as a "mezzanine" company raised the balance of the funds from the public. Those funds were raised by way of promissory notes. The promissory notes had a minimum face value of $50,000 and a maturity date that was usually 36 months from the issue date. Investors were to receive interest on the amount of their investment, generally at the rate of 12% per annum payable monthly in arrears, together with an additional 2% of the capital invested payable on the maturity date. The fundraising was promoted by Information Memorandum issued by the mezzanine company.
3 Money raised from investors was first deposited into an account maintained by the mezzanine company. It was then transferred into an account of Westpoint Corporation Pty Ltd which, according to the liquidators, acted as "the primary administrative entity within the Westpoint group". The transfer was recorded as a loan by the mezzanine company to the development company. The loan was secured by a second registered mortgage over the land and a second charge over the developments company's assets.
4 By at least July 2004, if not much earlier, the Westpoint group began to run out of cash. Mezzanine companies could not meet their obligations under their promissory notes. A plan was devised to extend the maturity date of the promissory notes. The plan was to persuade investors to transfer (the word used was "rollover") their investment from one mezzanine company to another by accepting a new promissory note in exchange for their old note. The new note would be given a later maturity date. If an investor decided to rollover his investment the rollover was affected by a series of book entries in the books of the relevant companies. The book entries recorded that the investor had been repaid the face value of his promissory note and that the investor had lent that amount to another mezzanine company.
5 It is convenient now to look at Mr Dunphy's dealings. He invested money with York Street Mezzanine. That company had been established to raise funds for the development of the site of the Scots Church in York Street, Sydney. The Information Memorandum issued by York Street Mezzanine described the project as the construction of 148 apartments and 10 retail shops. The development had a forecast value of approximately $128 million. The Information Memorandum stated that York Street Mezzanine hoped to raise $40 million from the public, of which up to $36 million would be raised by the issue of promissory notes. The minimum investment was $50,000. The Information Memorandum explained that "investors will receive interest of 12% per annum payable monthly in arrears plus a flat 2% payable with the repayment of capital on the Expiry Date of the Promissory Note on 30 November 2005." It was noted, however, that the "expiry date" could be brought forward to "any earlier date York Street Mezzanine in its sole discretion determines." Investors were informed that the money raised would be lent to Scots Church Development Ltd, the company that was undertaking the development.
6 The Information Memorandum contained a detachable "Promissory Note Application Form" that an intending investor was required to complete and return to York Street Mezzanine together with a cheque for the amount of his investment. The application form contained the following undertaking: "The Applicant agrees to the issue of each Promissory Note by York Street Mezzanine Pty Ltd on the following terms: 1) The Applicant will not demand payment on each Promissory Note until the Expiry Date as referred to in the Promissory Note; and 2) Full or Part payment of the face value of each Promissory Note may be made at the sole discretion of York Street Mezzanine Pty Ltd at any time before the expiry date."
7 There was a sample promissory note on the reverse side of the application form. It was described as a "Promissory Note". It contained a promise by York Street Mezzanine to pay the "Investor" a sum referred to as the "Principal Sum" (which would be the amount invested) and "Interest … at the rate of 12% per annum on a monthly basis in arrears". The principal sum plus 2% of the principal sum was to be paid on the "Expiry Date" namely 30 November 2005. The note was "non-negotiable and non-transferable".
8 Mr Dunphy received a copy of the Information Memorandum in late 2004. He applied for a promissory note with a face value of $100,000. He paid that amount to York Street Mezzanine but the evidence does not indicate how the payment was made. At any rate, on 24 January 2005 York Street Mezzanine issued Mr Dunphy with a promissory note for $100,000. The note had a maturity date of 30 November 2005.
9 In about mid July 2005 Mr Dunphy received a letter from York Street Mezzanine inviting him to "rollover" his investment into a development referred to as the Ann Street Development. The letter provided a brief description of the development referring to it as "an investment product regulated by ASIC and the Corporations Act." Enclosed with the letter was a copy of an Information Memorandum (the letter referred to it as a "prospectus") concerning the Ann Street Development. Mr Dunphy was given three options from which to choose. They were: "Option 1: Rollover your current principal sum early and be paid, in cash, your 2% redemption on [a specified date]; Option 2: Rollover your principal sum plus the 2% redemption amount effective from receipt of your signed application form; Option 3: Rollover your principal sum plus the 2% redemption amount and any top-up investment amount effective from receipt of you (sic) signed application form." Also enclosed with the letter was a rollover application form.
10 The letter informed that if Mr Dunphy decided to accept the "special offer" and "secure this limited opportunity" he was required to complete the attached rollover application form (which, I note, was on York Street Mezzanine letterhead) and post it, together with his York Street promissory note, to York Street Mezzanine. The letter went on to say that if Mr Dunphy did not accept the offer the York Street Mezzanine promissory note would be "redeemed on the current expiry date".
11 The request that Mr Dunphy return his York Street promissory note was necessary to protect the issuer. At common law, where a note was negotiable or payable to a bearer, the position was that the holder could only demand payment upon presentment the note. If the note was not negotiable it was sufficient to either produce the note or to satisfactorily account for its loss: Story's Commentaries on the Law of Promissory Notes (4th ed 1856)paras 106-112. The common law rule regarding negotiable promissory notes was harsh. This led the Chancery Court to develop the rule that if a note had been lost relief could still be obtained provided the holder indemnified the issuer in case the issuer was compelled to pay on the note to another holder: Story at paras 445-450. Now, s 74 of the Bills of Exchange Act 1909 (Cth) provides that where a promissory note that is not overdue has been lost or destroyed the holder may request the issuer to provide a replacement note provided the holder indemnifies the issuer for any losses suffered as a result of re-issuing the note and (if required) provides adequate security for the indemnity. In addition s 75 provides that an action upon a note, the loss of the note shall not be set up as a defence, provided a satisfactory indemnity is given against the claims of any other person on the note.
12 Returning to the facts, Mr Dunphy chose to rollover his investment in accordance with Option 1. He completed the rollover application form noting (by ticking the appropriate section) that he had elected to take that option. The section read: "I/We the undersigned holder of a promissory/s note issued by York Street Mezzanine Pty Ltd direct York Street Mezzanine Pty Ltd to: 1. Rollover and pay the face value of the promissory note $100,000 to the Ann Street Development, as applications (sic) monies, which are to be issued to me/us pursuant to the Information Memorandum. Pay an amount equal to 2% bonus redemption premium to me."
13 The rollover application form advised Mr Dunphy that it was important that he had read and understood all parts of the Information Memorandum for the Ann Street Development. Following this advice appeared the following statement: "When signing the direction to pay form you are acknowledging, agreeing, and consenting to be bound by the provisions of the Information Memorandum as amended from time to time."
14 The Information Memorandum contained a description of the Ann Street Development. The development site was at the corner of Ann Street and Hutton Lane in Brisbane. The proposal was to construct a tower comprising 206 residential apartments, 190 hotel apartments and 4 retail tenancies. The construction company was Ann Street Brisbane Pty Ltd. The amount required for the project was $103 million of which $63 million would be borrowed from institutional lenders and the balance raised by "the special projects company", Ann Street Mezzanine, on the security of promissory notes. Overall, the structure was the same as that adopted for the York Street development.
15 Mr Dunphy returned his completed rollover application form together with his York Street promissory note to York Street Mezzanine. A short time later, that is on 1 August 2005, Ann Street Mezzanine issued Mr Dunphy with a promissory note having a face value of $100,000 and a maturity date of 1 August 2008. In all other respects the note was identical to the York Street promissory note.
16 Each of York Street Mezzanine and Ann Street Mezzanine maintained detailed accounting records relating to the issue of promissory notes and payments made pursuant to those promissory notes. Each company also maintained detailed records of all dealings with the funds raised on the issue of promissory notes. The records included journals, ledgers, transaction reports and rollover and transfer details. They indicate that the following transactions were effected by book entry. On 1 August 2005 York Street Mezzanine paid Mr Dunphy the face value of his promissory note by making that payment to Ann Street Mezzanine. Ann Street Mezzanine lent the amount "received" from Mr Dunphy to Ann Street Brisbane. Corresponding book entries were made adjusting the inter-company liabilities between Ann Street Mezzanine, York Street Mezzanine, Scots Church and Ann Street Brisbane (the development companies) and Westpoint Corp (which also acted as group treasurer). In addition, York Street paid Mr Dunphy the 2% bonus redemption premium, not by "book entry" but either by cheque or deposit into an account Mr Dunphy maintained with his bank.
17 Following the issue of the Ann Street promissory note, Ann Street Mezzanine began to pay Mr Dunphy the interest due under the promissory note. Those payments continued until shortly before the collapse of the Westpoint group.
18 The first question that arises on these facts is whether the document issued by York Street Mezzanine as a promissory note is a document of that character. A promissory note may be described as a written engagement by one person to unconditionally pay a specified sum at a specified time to a person therein named or sometimes to his order, or often to the bearer at large: Blackstone's Commentaries, (1st ed. 1766) vol 2 at 467; Bills of Exchange Act, s 89. The liability of the maker of a promissory note is that he will pay it according to its tenor, that is in accordance with the terms of his promise.
19 The York Street promissory note was payable on 30 November 2005 or earlier at York Street Mezzanine's discretion. It is an established principle that a note cannot be expressed to be payable on a contingency: Carlos v Fancourt (1794)5 Term Rep 482, 486; [(1794) 101 ER 272, 273]. The rule is now codified: see Bills of Exchange Act, s 16. The principle has led some courts to conclude that a document will not be a promissory note if the payer has an option to pay the sum due on any day of his choosing before the maturity date. For example, the majority of the Court of Appeal in Williamson v Rider [1963] 1 QB 89 decided that an instrument payable "on or before" a specified date was invalid. They held that the option to pay earlier than the specified date was a contingency in the time of payment. Ormerod LJ dissented. He said there was no uncertainty because the maker of the note was not under any obligation to pay the note until the maturity date. He went on to say ([1963] 1 QB at 102) that "if [the maker] chooses to pay - and it is purely a matter for him - at an earlier date … then the holder of the bill is under an obligation to accept that payment."
20 The decision in Williamson v Rider was followed by a later Court of Appeal in Claydon v Bradley [1987] 1 All ER 522, albeit reluctantly: see the reasons of Dillon LJ at 525. On the other hand the decision was rejected by the Supreme Court of Canada in John Burrows Ltd v Subsurface Surveys Ltd [1968] SCR 607. The judgment of the Supreme Court was delivered by Ritchie J. He said (at 614) of a promissory note that permitted the payer to make payments "on account of principal from time to time [of] the whole or any portion thereof upon giving thirty (30) days' notice of intention prior to such payment that "the fact that the maker was accorded the privilege of making payments on account of principal from time to time did not alter the nature of his unconditional promise to pay at the time fixed by the instrument, but merely gave him an option to make earlier payment." Williamson v Rider was also rejected by the High Court of Ireland in Creative Press Ltd v Harman [1973] IR (Irish) 313. Two leading textbooks, Byles on Bills of Exchange and Cheques (27th ed. 2002) at para 24-06 and Chalmers and Guest on Bills of Exchange and Cheques (16th ed. 2005)at para 2-085 prefer the dissenting judgment of Ormerod LJ. See also A.H. Hudson, Time and Promissory Notes (1962) 25 MLR 593.
21 The position in Australia is complicated as there are conflicting decisions on the point. In Gore v Octahim Wise Ltd [1995] 2 Qd R 242 Williams J held that an instrument which permitted the maker to "repay the Principal Sum in whole or in part at any time" was subject to a contingency and so could not be characterised as a promissory note, following the decision of Williamson v Rider. In ASIC v Emu Brewery Mezzanine Ltd (2004) 52 ACSR 168 [(2004) 187 FCR 270] Simmonds J reached the opposite conclusion, preferring the approach taken by Omerod LJ instead of that in Gore v Octahim.
22 There is a difficulty with the Emu Brewery decision. Australian Securities Commission Ltd v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 492 required Simmonds J to follow Gore v Octahim unless the decision was "plainly wrong": see also Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22 at [135]. Simmonds J decided, however, that the rule laid down by the High Court applied only to intermediate appellate courts and not to first instance judges from whose decisions there is a right of appeal to an intermediate appellate court. In this respect he followed the approach suggested by Owen J in Walker v Midlink Nominees Pty Ltd (2000) 34 ACSR 210 [(2000) 22 WAR 318]. There Owen J said that only "due respect" need be given to first instance decisions of equivalent courts. Yet the contrary view had been expressed in Re Brashs Pty Ltd (1994) 15 ACSR 477 by Hayne J, then a judge of the Supreme Court of Victoria. Hayne J said (at 483): "Although the court [in ASIC v Marlborough Gold Mines] was speaking particularly of the decisions of intermediate appellate courts, I consider the point is one of general application and that I should be very slow indeed to depart from the decision of a single judge in relation to the Corporations Law unless… convinced that that interpretation is plainly wrong". Four months after his decision in Walker v Midlink Nominees Owen J was informed of Re Brashs Pty Ltd and applied it in Sentron Pty Ltd v Australian Securities and Investments Commission (2000) 158 FLR 147. Regrettably, Simmonds J seems not to have been referred to either Re Brashs Pty Ltd or Sentron Pty Ltd. In due course, however, his decision was confirmed by the Court of Appeal in Emu Brewery Mezzanine Ltd (in liq) v Australian Securities and Investments Commission (2006) 57 ACSR 752.
23 In the event, the situation which confronts me is covered by ASIC v Marlborough Gold Mines. Technically speaking, I must choose between the two decisions: - Gore v Octahim and the Court of Appeal in Emu Brewery v ASIC. But, as a matter of comity, I am required to follow Emu Brewery v ASIC unless the decision is plainly wrong. The decision is not plainly wrong. I would, in any event, have followed the Court of Appeal for three reasons. First, it is the latest decision on the point. Second, and this is a more important reason, ASIC v Emu Brewery arises out of a transaction which, in all relevant respects, is the same as that now under consideration and also involved the Westpoint group. It would be productive of great uncertainty if promissory notes issued by one company in the group were to be treated differently from promissory notes issued by another company in the same group. It would also bring the law into disrepute. The third reason is that I agree in the analysis of both the Supreme Court of Canada and the Court of Appeal.
24 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: Morley v Culverwell (1840) 7 M&W 174 [(1840) 151 ER 727]; London Banking Corporation Ltd v Horsnail (1898) 3 Com Cas 105; Chitty on Bills of Exchange (8th ed 1833) at 432-433: Story's Commentaries on the Law of Promissory Notes (4th ed 1856) paras 113-115. In other words the payment must be in legal tender (money) or by the transfer of a money fund.
25 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. Chalmers and Guest on Bills of Exchange and Cheques (16th ed, 2005)at para 8-005; Byles on Bills of Exchange and Cheques (27th ed, 2002)at para 13-04: 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: see eg. Pease v Hirst (1829) 10 B&C 122; [(1829) 109 ER 396]; Callandar v Howard (1850) 19 LJ CP 312 [(1850) 138 ER 117). For a recent example see Gokal & Co (HK) Ltd v Rippleworth Ltd [1998] CLY 370.
26 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. See, for example Manzi v Smith (1975)132 CLR 671; Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004)218 CLR 471. All that is required is an actual agreement by the relevant parties that payment be made by means of entries in books of account: Manzi v Smith at 674. 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.
27 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.
28 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: Roper v Bumford (1810) 3 Taunt 76; [(1810) 128 ER 31].
29 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.
30 Even if it were not possible to infer the agreement of Mr Dunphy to a payment by book entry then his conduct would preclude him from denying the existence of such an agreement. Here I have in mind, Mr Dunphy's acceptance without complaint of the issue to him of a promissory note by Ann Street Mezzanine. It is now too late for Mr Dunphy to deny that York Street Mezzanine had paid out its promissory note or that Ann Street Mezzanine had been paid for the promissory note it issued to Mr Dunphy.
31 Of course, the conclusion about the efficacy of the payment by book entry depends upon there being a "valid" agreement (express or implied) that the York Street promissory note could be discharged by a payment by book entry: Deputy Commissioner of Taxation (NSW) v P Iori & Sons Pty Ltd (1987) 15 FCR 363, 379. Accordingly, if Mr Dunphy could avoid the agreement to discharge the promissory note by a book entry payment (that is if the agreement could be set aside ab initio), York Street Mezzanine would still owe Mr Dunphy the face value of the note.
32 It is necessary, therefore, to examine whether Mr Dunphy is able to avoid the agreement. The first step in the analysis is to identify rather more precisely than has been done thus far the agreement in issue. In a broad sense two discreet arrangements sprung up when Mr Dunphy accepted the rollover offer. The first was an arrangement between York Street Mezzanine and Mr Dunphy. Prior to the acceptance of the offer York Street Mezzanine had the right, but not the obligation, to discharge its promissory note before maturity. However, when the offer was accepted York Street Mezzanine became bound to discharge the note by making a payment in accordance with the direction in the rollover acceptance form. That document did not state when the payment was to be made. No doubt the payment had to be made either immediately or within a reasonable time of the acceptance of the offer. York Street Mezzanine also became bound to pay the 2% "redemption amount" at the same time
33 Those aspects of the arrangement were between York Street Mezzanine and Mr Dunphy. They imposed no duties upon Ann Street Mezzanine. Nor did they confer any benefits on Ann Street Mezzanine. But in due course an arrangement between Mr Dunphy and Ann Street Mezzanine did come into existence. Mr Dunphy had directed that his money be paid to Ann Street Mezzanine "as applications (sic) monies, which are to be issued to me/us pursuant to the [Ann Street Development] Information Memorandum" and had agreed "to be bound by the provisions of the Information Memorandum." In my opinion this amounted to an offer by Mr Dunphy to take a $100,000 promissory note from Ann Street Mezzanine rather than the acceptance by him of an offer to issue a note. Even if it be assumed that when making the rollover offer York Street Mezzanine was also acting as agent for Ann Street Mezzanine, there is nothing in the language of either the rollover acceptance form or the Information Memorandum to suggest that any offer was being made by Ann Street Mezzanine. Nor do I consider that Mr Dunphy had entered into a unilateral contract of the kind discussed in New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd [1975] AC 154, 167-168, 171, 177.
34 The agreement between Mr Dunphy and Ann Street Mezzanine came into existence when Mr Dunphy's offer was accepted. It is not clear when this occurred. At the latest it was when Ann Street Mezzanine issued the promissory note in August 2005. There may have been an earlier acceptance of Mr Dunphy's offer but on the facts as presently known there was no evidence of an earlier act of acceptance which, of course, must have been communicated to Mr Dunphy.
35 The agreement Mr Dunphy made with Ann Street Mezzanine is not independent of his agreement with York Street Mezzanine. York Street Mezzanine's agreement to bring forward the maturity date of its promissory note and make a payment (by book entry) to Ann Street Mezzanine was dependant upon Ann Street Mezzanine issuing a replacement promissory note to Mr Dunphy. Put in more formal language, the performance of the obligations by York Street Mezzanine under its agreement with Mr Dunphy was conditional upon at least the existence, if not the execution, of the agreement between Mr Dunphy and Ann Street Mezzanine. The corollary is that if the agreement with Ann Street Mezzanine and Mr Dunphy can be avoided the agreement with York Street Mezzanine will fail as a consequence of the non-fulfilment of that condition.
36 In that situation the consequences would be as follows. First, the York Street promissory note would remain unsatisfied and Mr Dunphy would still be a creditor of York Street Mezzanine. Second with no payment having been made for the Ann Street promissory note Mr Dunphy would not be a creditor of Ann Street Mezzanine.
37 In this latter connection I note that because of their importance to trade all bills of exchange (including promissory notes) are prima facie deemed to have been made for valuable consideration: Philliskirk v Pluckwell (1814) 2 M&S 393 [(1814) 105 ER 427]; Crawley v Crowther (1702) 2 Freem 257 [(1702) 22 ER 1194]. But the presumption is rebuttable, at least in an action between the immediate parties to the bill: Holliday v Atkinson (1826) 5 B & C 501 [(1826) 108 ER 187]; Chalmers and Guest on Bills of Exchange and Cheques (16th ed, 2005)at paras 4-006 to 4-009; Byles on Bills of Exchange and Cheques (27th ed, 2002) at para 19-41 to 19-47. Likewise if a bill is founded on fraud, duress or illegality: Awde v Dixon (1851) 5 Eq 512 [(1851) 155 ER 798]; Bills of Exchange Act ss 95(1) and 35(2).
38 This brings me to the question whether there is any basis upon which Mr Dunphy might be able to set aside his agreement with Ann Street Mezzanine. So far as the common law is concerned, the right of rescission for fraud or misrepresentation is so well known it needs no discussion. There are, however, one or two aspects of this common law right that are worth discussing.
39 Ann Street Mezzanine is in liquidation. It is common ground that prior to its liquidation Mr Dunphy took no step to rescind the agreement. This immediately raises the question whether the fact of liquidation is a bar to rescission. In Oakes vTurquand and Harding (1867) LR 2 HL 325;the House of Lords held that a person induced by fraud to become a shareholder lost the right to rescind his subscription contract upon the winding up of the company even though he might have been entitled to do so earlier. The reason was that "innocent third parties [that is creditors] have acquired rights which would be defeated by the rescission:" Tennent v City of Glasgow Bank (1879) 4 App Cas 615, 621. In my view the principle in Oakes v Turquand cannot be extended to a person who is not a shareholder and who wishes to rescind a contract with a company that has been placed into liquidation. In Southern British National Trust Ltd (in liq) v Pither (1937) 57 CLR 89 the High Court refused to extend the rule in Oakes v Turquand to debenture holders. Dixon J said at (113-114): "It is unnecessary to examine the basis of this firmly settled rule [established in Oakes v Turquand]. But the decided cases show that its adoption was influenced by consideration of the position occupied by shareholders in an unincorporated company, who, of course, like partners, could not by repudiating their contract inter se escape liability to creditors. It was also influenced by the fact that creditors might be supposed to have acted on the face of the membership. But the fact that, when the company suspended and went into liquidation, and in time change took place in the relation of creditors and shareholders to the assets and of the shareholders inter se made the rule inevitable. It has, in my opinion, no application to the charge created in favour of other debenture holders in this case, which presents no analogy." [Citations omitted]
40 The position in England is not as clear. Initially the position taken was that Oaks v Turquand applied only to the subscription contracts. See eg Morrison, The Principles of Rescission of Contracts (1st ed, 1916)at 195-197. There is a suggestion in the most recent edition of Chitty on Contracts (29th ed, 2004) vol 1 at 6-114 that the rule is of general application. I am not satisfied that that is the true position in England. It is not the rule in Australia.
41 If rescission at common law were available to Mr Dunphy the right once exercised operates ab initio on the ground that the fraud or misrepresentation is an initial invalidating act. Redgrave v Hurd (1881) 20 Ch D 1; Derry v Peek (1889) 14 App Cas 337. That explains why the party rescinding is not entitled to compensation for the loss of his contract, but only to restitutio in integrum.
42 It is by no means clear whether the common law remedy is available to Mr Dunphy. Even in cases of fraud and misrepresentation, the right to rescind may be lost if the wronged party has, by his conduct, elected to affirm the agreement. On the discovery of the facts which entitle him to rescind, the wronged party must elect between rescission and the confirmation of the agreement. An election once made is final and cannot be revoked: Sargent v ASL Developments Ltd (1974) 131 CLR 634. Rescission will also be impossible if there can be no restitution. In Clarke v Dickson (1858) EB&E 148, 154-155; [(1858) 120 ER 463, 466] Crompton J said: "When once it is settled that a contract induced by fraud is not void but voidable at the option of the party defrauded, it seems to me to follow that, when that party exercises his option to rescind the contract, he must be in such a state to rescind; that is, he must be in such a situation as to be able to put the parties into their original state before the contract … That is founded on the plainest principles of justice."
43 The common law is not the only basis upon which the agreement might be discharged. Mr Dunphy may be able to rely on the Corporations Act 2001 (Cth) to avoid his agreement with Ann Street Mezzanine. There are two provisions that appear to be relevant. The first is s 601MB. That section relevantly provides:
"(1) If:
(a) a managed investment scheme is being operated in contravention of subsection 601ED(5) and a person (the offeror) offers an interest in the scheme for subscription, or issues an invitation to subscribe for an interest in the scheme; or
(b) a person (the offeror) fails to comply with Division 2 of Part 7.9 when offering an interest in a registered scheme for subscription or issuing an invitation to subscribe for an interest in a registered scheme;
a contract entered into by a person (other than the offeror) to subscribe for the interest as a result of the person accepting the offer, or of the acceptance of an offer made by the person in response to the invitation, is voidable at the option of that person by notice in writing to the offeror.
…
(4) Within 21 days after the notice is given, the offeror may apply to the Court for an order declaring the notice to have had no effect."
44 It will be observed that s 601MB(1) operates only on a contract to subscribe for an interest in a managed investment scheme. The definition of a managed investment scheme is found in s 9. The potential availability of s 601MB is based on the assumption that the Ann Street Development is a scheme that satisfies the definition. I have been asked to accept this assumption, at least for the time being. I think that is an appropriate course if for no other reason than that there are two decisions (including one of my own) in which it has been held that an arrangement that is in all material respects the same as the Ann Street Development is a managed investment scheme. The decisions are ASIC v Emu Brewery Mezzanine Ltd (2004) 52 ACSR 168 and Financial Industry Complaints Service Ltd v Deakin Financial Services Pty Ltd (2006) 60 ACSR 372.
45 There are several conditions that must be satisfied before a notice of avoidance can be given under s 601MB. Where the scheme is not registered the first condition is that the managed investment scheme is being operated in contravention of s 601ED(5). That section prohibits the operation of a managed investment scheme that is required to be registered under s 601EB unless the scheme is registered. It is common ground that the Ann Street Development is not registered under that section.
46 The second condition is that a person (the offeror) has offered an interest in the managed investment scheme for subscription or has issued an invitation to subscribe for an interest in the scheme. The facts here are rather sketchy but as things presently stand it does not seem that Ann Street Mezzanine made any offer to Mr Dunphy to acquire an interest in the Ann Street Development. Rather, the Information Memorandum (the contents of which have previously been described) published by Ann Street Mezzanine can fairly be described as an invitation by Ann Street Mezzanine to recipients of the memorandum to subscribe for an interest in the Ann Street Development. I have already explained how, at least in partial response to that invitation, Mr Dunphy made an offer to acquire a promissory note and when that offer was accepted.
47 If the conditions mentioned in s 601MB(1) are satisfied the contract to subscribe for the interest in the managed investment scheme is "voidable" at the option of the investor. If the investor wishes to exercise that option he must give a notice to that effect to the offeror. The offeror may within 21 days apply to the court to have the notice declared invalid (s 601MB(4)). Such a declaration will be made if "in all the circumstances it is just as equitable to make the declaration" (s 601MB(6)). If no application is made then at the end of 21 days, or if an application is made and no declaration is made after the application and any appeals have been determined, "the notice takes effect to void the contract" (s 601MB(3)). I take this to mean that the contract is void ab initio, with the consequence that the investor can recover what he paid for his investment. In other words, the parties to the contract are to be restored as far as may be possible to the position they were in before the contract was made. The alternative and unconventional meaning of "void" is that the contract is only dissolved as regards to future performance. That construction would run counter to the plain object of the section.
48 Thus, if Mr Dunphy were to give a notice under s 601MB(1) and the notice stands he would be required to return the Ann Street promissory note and repay any interest he had received from Ann Street Mezzanine. In return Ann Street Mezzanine would be obliged to refund the subscription money. Here there need not be (indeed could not be) a refund in cash. All that needs to be done would be to reverse the payment that had been effected by book entry presumably by a reversing book entry.
49 The foregoing discussion is based on an assumption that may or may not be correct. The assumption is that no money actually passed from York Street Mezzanine to Ann Street Mezzanine. That is to say, the discussion assumes that the only payment received by Ann Street Mezzanine on behalf of Mr Dunphy was a payment by book entry. However, if this assumption be incorrect and actual money did change hands, restitution by book entry would not be available. In that circumstance Ann Street Mezzanine would be indebted to Mr Dunphy for the face value of the note and because of the company's insolvency Mr Dunphy would stand in competition with all other unsecured creditors for the repayment of his debt.
50 The other provision pursuant to which Mr Dunphy might be able to set aside the agreement with Ann Street Mezzanine is s 925A of the Corporations Act. That section is located in Part 7.6, Div 11, Subdiv B. That subdivision applies to an agreement between a person (the non-licensee) and another person (the client) that constitutes or relates to the provision of a financial service by the non-licensee if the agreement is entered into in the course of a financial services business carried on by the non-licensee and the non-licensee is required to but does not hold an Australian financial services licence: see s 924A. Section 925A is the key provision in Subdiv B. The section provides that, in certain circumstances, the client may give notice stating that the client wishes to rescind the agreement. The effect of such a notice is to rescind the agreement unless rescission would affect the rights of an innocent third party: s 925B. In that event the court may make an order for the partial rescission of the agreement under s 925C if that would avoid the prejudice.
51 To determine whether s 925A has application to the facts at hand requires an examination of several provisions in Part 7 of the Corporations Act. First reference must be made to s 766A which describes when a person "provides a financial service". A person will be taken to provide a financial service if, relevantly, they (b) "deal in a financial product." According to s 766C(1)(b) a person deals in a financial product if the person "issues a financial product". A financial product is issued to a person when "it is first issued, granted or otherwise made available to a person": s 761E(2). That person "acquires the product from the issuer; and … the issuer provides the product to the person": s 761E(1).
52 Section 764A(1) provides that a "financial product" includes, amongst other things, an interest in a managed investment scheme. Certain dealings are, however, not to be treated as a dealing in a financial product. Relevantly, for present purposes s 766C(4)(d) provides that a transaction by a body corporate is not to be taken to be a dealing in a financial product "if the transaction relates only to … securities of that entity".
53 The effect, then, of s 766A and s 761E is that, subject to any statutory exceptions, an agreement will relate to "provision of a financial service" if it results in the issue to a person of an interest in a managed investment scheme.
54 In dealing with the application of s 925A I will, as before, assume that the acquisition by Mr Dunphy of a promissory note from Ann Street Mezzanine is an acquisition of an interest in a managed investment scheme. I note that an interest in a managed investment scheme is defined in s 9 to mean "a right to benefits produced by the scheme". Here the relevant scheme is not simply the issue of promissory notes by Ann Street Mezzanine. It is much wider than that. In ASIC v Emu Brewery Mezzanine Ltd (2004)52 ACSR 168, 186 Simmonds J described an almost identical scheme as one by which "investors were asked … to contribute their money so as to permit the special purpose corporate vehicle to make possible the "mezzanine" finance arrangements for the particular project described for them, and in return would gain the sorts of benefits the vehicle's participation in these arrangements would make possible for the investors."
55 Section 925A is not excluded by the exception in s 766C(4). That provision is concerned to exclude from what would otherwise be 'a dealing in a financial product' (say a managed investment scheme) a limited class of "transaction". The use of the word "transaction" focuses attention not only on the agreement pursuant to which a financial product is issued but on the whole dealing or matter of which the particular agreement forms a part. On no view of the dealings between Ann Street Mezzanine and Mr Dunphy could it be said they relate only to securities in Ann Street Mezzanine. The dealings might be of that character if the issue of the promissory note was looked at in isolation. But that is not what the exception allows.
56 Going back to s 924A, the section provides that Subdiv B applies to an agreement for the provision of financial service by a non-licensee only if the agreement is entered into in the course of a "financial services business" that is carried on by the non-licensee. "Financial services business" is defined in s 761A to mean "a business of providing financial services". I will assume that Ann Street Mezzanine carries on a financial services business. This assumption, however, is not without its difficulties. Ann Street Mezzanine was set up to perform the following functions, namely to raise $40 million, lend that amount to Ann Street Brisbane, recover the money lent and finally return it to investors. It may be impossible to deny that Ann Street Mezzanine was carrying on a business. Normally "business" is a "wide and general" concept: Actors & Announcers Equity Association of Australia v Fontana Films Pty Ltd (1982)150 CLR 169, 184. It may extend to anything a corporation does. But for s 925A to apply it would be necessary to characterise the business carried on by Ann Street Mezzanine as a "financial services business" and, it is not clear whether it was of that character.
57 Putting to one side the nature of the business carried on by Ann Street Mezzanine, s 925A is otherwise available to Mr Dunphy. This is because Ann Street Mezzanine, which did not hold a "financial service licence", entered into an agreement to provide a "financial service" to Mr Dunphy. In the result, Mr Dunphy may, at least theoretically, be able to give notice of rescission of his agreement with Ann Street Mezzanine. Whether such a notice would be effective will depend on three things. First, the notice must be given within a reasonable time after Mr Dunphy had become aware of the facts which entitle him to give the notice: s 925A(2). Second, Mr Dunphy must not by his conduct have affirmed the agreement: s 925A(3). Third, the rescission cannot prejudice the rights of innocent third parties: s 925B. Whether or not Mr Dunphy is able to satisfy those conditions is a matter for another day.
58 I trust that by now I have said enough to answer the questions raised by the liquidators. I will leave it to them to bring in short minutes of orders to give effect to these reasons. If any issue remains outstanding it can be raised by any party.
I certify that the preceding fifty-eight (58) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.