Citation: Equuscorp Pty Ltd & Anor v Glengallan Investments Pty Ltd & Ors [2001] QSC 464

[2] Mr Alastair Hasell is a company director who in 1989 was engaged as a marketing consultant by Johnson Farm Management, one of the Johnson group of companies, to procure investors in an aquaculture scheme called the `Red Claw' project. A business was to be carried on by limited partnerships registered under the Partnership (Limited Liability) Act 1988 (Q) on land near Innisfail in North Queensland. Freshwater crayfish were to be farmed, harvested, and marketed.

[3] Mr Hasell approached the chairman of the companies in the GWA group of companies, the defendant Mr Barry Thornton, with whom Mr Hasell had had dealings when he, Mr Hasell, was a stockbroker. On 31 May 1989 Mr Hasell sent Mr Thornton facsimiles of documents about the Red Claw project: exhibit 12. `Have enclosed brief data', Mr Hasell wrote, and continued, `Its very tax effective & has the right people involved & I believe its an investment in its own right'. In an undated Johnson Farm Management document headed `PRECISELY WHAT IS THE BEST FARMING INVESTMENT THIS YEAR?' a glowing picture was painted of the market for the crayfish, the rate at which they breed, and the expertise of the Johnson group, which, it was said, was committed to spending $7 million `to develop the infrastructure necessary to ensure the viability' of the project. Aquaculture was to be used to farm the crayfish. Investors could participate as partners in a limited liability partnership. The profits and income tax advantages which could be enjoyed by investors would be substantial. In the document it was asserted that the net minimum return before tax would be approximately three and a half times the investment over twelve years - but it was added that the return was not guaranteed. If an investor borrowed to cover investment costs the return would be approximately eleven times the cash outlaid, it was asserted. An investor could apply to borrow the full investment sum and elect either:

(a) To prepay one year's interest at the prevailing market rate, then around eighteen per cent., or

(b) To pay interest in arrears at the then prevailing market rate.

If the first option were selected, after fully repaying the loan and interest the investor would `receive' an estimated cash return before tax of $8,630 for every $781 outlaid. The combined effect of the taxation benefits for highest tax-bracket investors and borrowing would produce a return approximately thirteen and four-fifths times the cash outlaid, it was asserted. Johnson Farm Management was to be the farm manager, and another company in the Johnson group, Farmer Johnson Aquaculture Limited, was to be the farm owner. It was mentioned that the farm owner's holding company, Farmer Johnson Ltd, had shareholders' funds of $9.4 million and that Johnson Farm Management had over 500 clients for whom it managed `farm businesses'.

[4] Another Johnson Farm Management document Mr Hasell sent to Mr Thornton was in the form of a letter dated 12 May 1989 signed by Mr Anthony Johnson, managing director of the company. The letter mentioned that another project, `the Blueberry Hill public investment', was fully subscribed in 1988 and `proved to be another success story for the Johnson Group'. The letter continued by announcing that the group was launching `a prospectus offer in yet another exciting and innovative farm investment', the Red Claw project. The draft prospectus had, Mr Johnson wrote, been lodged with the Corporate Affairs Commission. There followed a brief summary of the investment in four paragraphs, the first two of which were:

1. The investment is structured on the basis of a Queensland Limited Partnership with an investor taking up a minimum of five partnership units at a cost of $4,340, of which $4,280 will be tax deductible. If an investor borrows the full investment and elects to prepay one year's interest, namely $781, this will also be tax deductible.

2. The overall after tax financial returns to the investor are estimated at $10,745 over the period of the investment, assuming distributions are directed to fully repay any loan and re-investment of cash surpluses. Full details of the financial projections are attached to the enclosed "Precisely . . ." (The projections differ slightly to those included in the draft prospectus and the lodged document has been amended.)

[5] On 14 June 1989 a Red Claw partnership deed was executed providing for Red Claw limited partnerships: exhibit 7. A company called Forestell Securities (Australia) Limited was to be the general partner of each partnership, and a company called Eagle Star Trustees Limited was to be the partners' representative. The parties to the deed were the general partner, each applicant and partner as defined in the deed, the partners' representative, and companies related to the partners' representative as guarantors. The following provisions were in the deed:

"Applicant" means any person who has completed and caused to be delivered to the General Partner an Application for Units in accordance with clause 3.3;

"Application" means an application in the form of Schedule 1 hereto or in such other form as the General Partner may from time to time prescribe;

"Application means the Application Moneys paid and Funds" accepted pursuant to Clause 3;

Moneys" Applicants for Units in conjunction with their Applications pursuant to clause 3.3;

"Interest Bearing means a cash deposit earning interest Deposit" and lodged with any Banking

"Initial Fund" means all the Representative's Authorised Investments and Application Moneys held by the Representative prior to the date of Minimum Subscription and to the extent that such moneys have not been applied to a Partnership Fund then such moneys after the date of Minimum Subscription;

"Last Date" means that date being the expiration of four months after the issue of the first Prospectus;

"Minimum means an amount in aggregate Subscription" subscribed and contributed to the Initial

"Partner" means a person who is the registered holder of a Unit either alone or jointly;

2.1 Each Partnership shall comprise no more than such number of Partners as the General Partner and the Representative shall determine.

2.2 If Minimum Subscription is achieved no later than the Last Date then as at the date on which Minimum Subscription is achieved, the General Partner will effect or cause to be effected a distribution of the Initial Fund, by the Representative into separate Partnership Funds for each Partnership, the funds so distributed to constitute the subscriptions and capital funds to the respective Partnerships required to be contributed by each Partner thereto.

2.3 If Minimum Subscription is not achieved by the Last Date the Initial Fund will be terminated and wound up in accordance with provisions contained herein and the Application Moneys shall be refunded to each Applicant and the Initial Fund shall thereafter be at an end.

3.1 Applications for Units shall be for no less than 5 Units.

The full application price for each Unit shall be $868.00 which shall be paid as herein set out.

Every person who wishes to apply for a Unit must complete and deliver to the General Partner:-

3.3.1 an Application for Units signed by or on behalf of the Applicant; and

3.3.2 a cheque made payable to the Representative for payment of the application price for each Unit applied for.

The General Partner may in its absolute discretion give notice in writing to any Applicant that his Application has been refused as to some or all of the Units applied for provided that such notice in writing, if to be given, shall be given within 90 days of the Application being delivered to the General Partner. The General Partner shall not be obliged to give any reasons for such a refusal and shall give a copy of the notice of refusal to the Representative and forthwith upon such notice in writing being given the Applicant shall have refunded to him such amount of his Application Moneys (together with interest) as represents the Units in respect of which his Application has been refused.

Upon receipt by the Representative of any amount representing Application Moneys for Units or part thereof the Representative HEREBY DECLARES that until Minimum Subscription it shall hold the amount and any income thereon as trustee for each Applicant in respect of which the amount was paid and that prior to Minimum Subscription the Application Moneys and any income therefrom, shall be invested only in the accounts referred to in Clause 3.6.

Any amount paid by any Applicant shall be placed by the Representative in any one or more special trust accounts each being an interest bearing bank account established in the name of the Representative and kept solely for the purpose of depositing Application Moneys.

5.1.1 The Partnerships shall be formed, constituted and governed by the provisions of this Deed and all relevant statutory and common law provisions.

5.1.2 The Partnerships shall be limited partnerships under the Act.

5.1.3 The persons comprising the Partnerships from time to time shall consist of the General Partner as general partner and the Partners for the time being as limited partners therein respectively.

5.1.4. The style of firm name of a Partnership will be "Forestell Securities (Australia) Limited and others Project No. 10 Red Claw Partnership No. [ ] (a limited partnership)" or such other name as the General Partner may determine from time to time.

5.1.5 The General Partner shall cause the Partnerships and all relevant changes and events in relation thereto to be recorded, registered and/or advertised as necessary from time to time in accordance with the provisions of the Act.

5.3.1 Application Funds shall be subscribed to a Partnership in the amount paid or to be paid by each Applicant who is to be a Partner in that Partnership as specified in the Applicant's Application.

5.4.1 All Applicants shall together with their Application deliver to the General Partner and the Representative a written acknowledgment in a form specified by the General Partner and the Representative from time to time, that they have read and agree to be bound by the terms of this Deed.

5.4.2 Forthwith following Minimum Subscription the General Partner shall nominate such number of Applicants as the General Partner and the Representative shall determine each of whom have:-

5.4.2.1 executed and delivered to the General Partner the written acknowledgment referred to in sub-clause 5.4.1 and Application referred to in sub-clause 3.3.1;

5.4.2.2 paid the amount of Application Moneys required in accordance with sub-clause 5.3.1; and

5.4.2.3 have not been refused as to the Units in question pursuant to clause 3.4;

to be the Partners to constitute the First Partnership to be formed pursuant to this Deed with the General Partner being the general partner contemplated in the Act and the Applicants being the limited partners contemplated in the Act and the General Partner shall comply with its obligations contained in Clause 5.1 in respect thereof. Thereafter, the General Partner shall continue to form Partnerships as contemplated by this Deed in accordance with the provisions hereof and in the manner hereinbefore in this clause set out until all persons complying with the provisions of this clause have become Partners in a Partnership established pursuant to this Deed.

5.6.1. Within 2 months after allotment or transfer, as the case may be, the Representative shall issue to and deliver to each Partner or person nominated by a Partner a Certificate . . .

5.6.4.2 specify the number of Units to which the same relates;

5.6.4.3 specify the Partnership in which those Units are held;

5.6.4.4 specify the total number of Units which make up the Partnership concerned;

5.6.4.5 specify the capital contribution of the holder or the Certificate; and

5.6.4.6 specify the total capital contribution to the Partnership to which the Certificate relates.

A declaration by the Representative of compliance for a Partnership (which declaration is called "Declaration of Compliance") shall take place at the registered office of the Representative (or at such other place as it may agree with the General Partner) on the earliest date following compliance with Clause 7.2 hereof.

The Declaration of Compliance shall be in writing and shall only be made if the Representative is satisfied that each of the following conditions has been satisfied:-

7.2.2 all of the Partners concerned have executed and forwarded to the General Partner a written acknowledgment in a form acceptable to the General Partner in accordance with sub-clause 5.4.1; and

7.2.3 the Partnership concerned has been registered pursuant to section 7 of the Act for which purpose the General Partner shall produce to the Representative a certificate of registration.

The Representative covenants with the General Partner and with the intent that the benefit of this covenant shall inure not only to the General Partner but to the Partners jointly and to each of them severally that:-

11.3.3 subject to the provisions of this Deed, the Representative shall retain the Partnership Funds or cause them to be retained in safe custody and shall hold them as trustee for the Partners entitled thereto upon the terms of this Deed.

[6] On 16 June 1989 the Red Claw project prospectus, dated that day and to expire on 15 December 1989, was issued: exhibit 13. It explained that the purpose of the project was to form, and generate profits from, a series of limited partnerships each of which would be governed by the terms of the partnership deed and each of which would carry on the freshwater crayfish business for twelve years. The contribution of a limited partner to a Red Claw partnership was to be measured by reference to the number of units in that partnership to which the partner would become entitled upon acceptance of an application for units. The subscription for one unit in a partnership was to be $868, and the minimum subscription for each investor five units. More than five units could, however, be applied for. The Johnson group had, it was asserted, `substantial experience and assets in rural industries including development of and equity in the major portion of the Australian blueberry industry which is centred at Corindi, Coffs Harbour'. Subject to reaching a minimum subscription level of 4,000 units, subscription to the first limited partnerships would close on 26 June 1989 and those partnerships would commence business on 30 June 1989.

[7] Included in the prospectus was a report on taxation considerations dated 2 June 1989 prepared by Ernst and Whinney, chartered accountants, for Forestell Securities (Australia). The opinion was expressed that each limited partner would be required to include in the partner's assessable income the partner's individual interest in any net income of the partnership, or would be entitled to an allowable deduction for the partner's individual interest in any partnership loss. The accountants also expressed the opinion that s. 82KL of the Income Tax Assessment Act 1936 (Cth), an anti-avoidance provision, would not apply so long as there was no `recoupment of expenses', e.g., no intention that borrowings made by limited partners to take up their partnership units should not be repaid, and the loans were in fact repaid.

[8] For those, like the defendants, interested in investing in the Red Claw project but wishing to borrow the money required, Mr Leo Respinger of the Sydney office of Johnson Farm Management had arranged with three banks (Westpac, Advance, and Barclays) to consider applications for loans. Those banks provided some finance, but soon after the middle of June 1989 they withdrew, whereupon Johnson Farm Management began to advise interested persons of a source of finance from the second plaintiff, of which Mr Anthony Johnson was a director until 29 June 1989. Mr Hasell described the second plaintiff in evidence as an `in-house finance company'. Johnson Farm Management circulated a document dated 26 June 1989 headed `THE RED CLAW PROJECT - UPDATE . . . IMPORTANT LATE NEWS': exhibit 14. The document revealed that the second plaintiff would advance six-year loans to `approved borrowers, (existing blueberry clients as well as new clients) to purchase Red Claw units' on certain terms, among which were:

s Interest - 18% p.a. - Year 1 interest payable in advance by the investor personally, subsequent interest payable from projected Project cash, yearly in arrears

s Principal - Up to 100% of Red Claw investment may be borrowed (Minimum Loan $20,000). Loan principal is repayable in part (approx. 16.4%) from Investor cash during the first 6 months. The balance is repayable over 5 years from projected Project cash.

s Security - the loan is secured against the borrower's interest in the Project. The loan is not non-recourse and the Project profits are not guaranteed.

Under the heading `TAXATION DEPARTMENT POLICY' the following appeared:

s The proliferation of guaranteed forward income projects has recently attracted detailed scrutiny by the Sydney ATO. Senior Investigating Officers of that branch, with whom Johnson Farm Management Pty Limited maintains policy contact, are now experiencing a view that such investment is capital and is not tax deductible because: ".... it is merely a capital purchase of future income".

s It is known that Sydney ATO is preparing a recommendation to Canberra ATO along those lines. Essentially Sydney ATO want an investor to bear operating business risk prerequisite to gaining tax deductions. Sydney ATO consider that when guaranteed forward income is offered " ... the promotor and not the investor is in business".

s That current ATO view may well be incorrect if tested in the courts - and Johnson Farm Management Pty Ltd's legal advisors believe it is incorrect. However in practical business terms an initial disallowal followed by an after court allowal years later is a no-win situation.

s Johnson Farm Management Pty Limited in 1987 was the first to introduce guaranteed farm income. It did so because Australian investors had little confidence that rural investment could be profitable. The Johnson Farm Management Pty Ltd's structure was copied by others in 1988 and this has proliferated in the current 1989 year.

s Due both to this proliferation and to Sydney ATO's current views, Johnson Farm Management Pty Limited decided in May 1989 to abandon "safe" investor loans and "forward minimum income" attachments in favour of "full investor risk" coupled with highly conservative project profit forecasts.

s The Red Claw Project structure has been outlined to the relevant Sydney ATO Officers who have stated "We see no problems".

[9] Discussions concerning possible investment in the Red Claw project between Mr Hasell and Mr Thornton, who acted for himself and the other defendants, took place in June 1989. (I should record here that I accept the defendant Mr Edwin Codd's evidence to the effect that Mr Thornton acted as his agent at material times.) No agreement was reached until 30 June 1989. On that day in Mr Thornton's office in GWA House, 10 Market Street, Brisbane there was a meeting at which Mr Thornton, the defendant Mr Brian Prendergast, and Mr Hasell were present. An oral agreement was reached then between Mr Thornton, acting for himself and the other defendants, and Mr Hasell on behalf of the second plaintiff. Mr Anthony Johnson, to whom Mr Thornton spoke on the telephone while the meeting was in progress, assured Mr Thornton that it would not be necessary to provide that the loans were not assignable because `being limited-recourse loans there was really nothing to assign'. (That assurance was given in response to a concern Mr Thornton had earlier expressed to Mr Hasell. Mr Thornton `had read about problems associated with this type of venture and the debts of the ventures being assigned to third-party finance companies and the projects had failed and the third-party finance companies had then proceeded to sue and recover these loans from the investors'.) Mr Anthony Johnson also promised to provide Mr Thornton with documents confirming that the loans were limited-recourse loans. In giving that assurance and in making that promise Mr Anthony Johnson was acting as the agent of the second plaintiff, as I shall explain later. It was agreed that the second plaintiff would lend each defendant all of the money required for the acquisition of units in a Red Claw partnership. The sums to be lent varied according to the number of units to be acquired: the defendants Glengallan Investments Pty Ltd and HGT Investments Pty Ltd were each to acquire 500, Mr Thornton 1300, Mr Prendergast 250, the defendant Mr Cyril Anderson 850, and Mr Codd 150. The second plaintiff accordingly agreed to lend Glengallan Investments and HGT Investments $434,000 each, Mr Thornton $1,128,400, Mr Prendergast $217,000, Mr Anderson $737,800, and Mr Codd $130,200. The unconditional liability of each of those defendants was to be limited to three payments: the first on 30 June 1989, the second at the end of September 1989 and the third and final payment (which was to be equal to the second) at the end of December 1989. The first payment was to be a pre-payment of interest and the second and third payments were to be repayments of principal. After those payments had been made the defendants were to remain liable to repay the money they had borrowed and to pay interest, but only from their shares in the profits of the project; and I should record here that it was not contended at the trial that any money had ever become owing to the plaintiffs from the defendants in that way before the crayfish project failed, in 1992.

[10] It is convenient that I mention the fate of the crayfish project now, and then return to the narrative relevant to the issues in the six proceedings. Three Red Claw partnerships were formed and registered under the Partnership (Limited Liability) Act: two relevant to this proceeding (nos. 1 and 2) on 30 June 1989, and a third (no. 3) on 20 December 1989. In all 14,555 units were sold in partnerships nos. 1 and 2 for $12,633,740 and 2,872 units in partnership no. 3 for $2,492,896. The crayfish project suffered severe cash-flow problems which led to its `reconstruction' in September 1992. The three partnerships were dissolved and a new limited partnership, `Red Claw (1992)' was formed with a view to engaging in barramundi aquaculture and growing sugar cane. The partners' representative and the farm manager, Johnson Farm Management, were removed. Forestell Securities (Australia) had resigned as general partner in 1990 and was not replaced so that the three limited partnerships were without a general partner for more than two years. A company called General Partner Management Services Pty Limited was appointed general partner of the new partnership.

[11] On 30 June 1989 each of the defendants applied to Forestell Securities (Australia) for partnership units in a Red Claw partnership by completing an application form: exhibit 8. In each case the form recited that the defendant had read the provisions of the partnership deed and agreed to be bound by its provisions. Each defendant applied for the number of units I have mentioned for that defendant. A certificate of formation and composition of a limited partnership issued by the Deputy Registrar of Commercial Acts certified that the Red Claw partnership no. 1, a limited partnership, was formed on 30 June 1989 and that the limited partners of the limited partnership as at 30 June 1989 consisted of those listed in an annexure, A. Among those listed was Mr Richard Lynch, a chartered accountant who assisted in the writing of the Red Claw project prospectus and the `marketing information', who held units in trust in the name Red Claw Syndicates nos. 1 and 2 - Lynch, Richard John. Mr Codd's units were among those units. Another certificate of formation and composition of a limited partnership issued by the same office certified that the Red Claw Partnership no. 2, a limited partnership, was formed on 30 July 1989 and that the limited partners as at 30 June 1989 consisted of those listed in an annexure, A. Among those listed were the other five defendants. See exhibit 11 for both certificates.

[12] On 30 June 1989 the second plaintiff received pre-paid interest from each of the defendants in accordance with the loan agreements: $70,000 from each of Glengallan Investments and HGT Investments, $182,000 from Mr Thornton, $35,000 from Mr Prendergast, $119,000 from Mr Anderson, and $21,000 from Mr Codd. The payments due in September and December 1989 were $35,500 from each of Glengallan Investments and HGT Investments, $92,300 from Mr Thornton, $17,750 from Mr Prendergast, $60,350 from Mr Anderson and $10,650 from Mr Codd: see exhibit 96.

[13] On 30 June 1989 a document entitled `LOAN AGREEMENT' was executed by or on behalf of each defendant: exhibit 2. In each case the document showed the second plaintiff as the lender, and the defendant as the borrower. The term of each loan was to be six years. In each case the recitals recorded that the defendant had applied, or intended to apply, for the issue to the defendant of units in a Red Claw project limited partnership formed or to be formed pursuant to the Partnership (Limited Liability) Act, and that the second plaintiff had agreed to lend the sum I have specified for that defendant, the `principal sum' set out in a schedule, for the purpose of allowing the defendant to acquire the units. Although the sum to be lent was recorded in the document in each case, a schedule of principal and interest repayment dates and amounts was left blank when the documents were executed by the defendant, but the schedule was completed after execution by the defendant without the authority of the defendant: see exhibits 1, 2, and 86. The amounts were correctly calculated, except for Mr Prendergast's document which showed amounts calculated on the assumption that his application was for seventy rather than for 250 units. Clause 1 provided that the term `Deed' referred to in the agreement was the partnership deed dated 14 June 1989, and clause 7 provided that any term defined in the deed and not separately defined in the loan agreement document - as is the case with the defined terms in the deed I have reproduced above - should have in the loan agreement document the meaning given to it in the deed. Clauses 8 and 9 provided:

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

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

Clause 24 provided that the second plaintiff retained the right to assign its rights and obligations under the agreement to `another party'. There was no provision in the loan agreement documents for limited-recourse of the kind agreed to orally, but the documents were executed by or on behalf of the defendants on the understanding that the further documents promised by Mr Anthony Johnson would be provided; and further documents were provided in December 1989, as I shall explain.

[14] The plaintiffs rely on the loan agreement documents in bringing this action. It was not in dispute at the trial that if those documents correctly recorded the agreements between the second plaintiff and the defendants, the following sums were owing on 21 February 2000: $1,056,081.37 by each of Glengallan Investments and HGT Investments, $2,745,811.56 by Mr Thornton, $528,040.68 by Mr Prendergast, $1,795,338.33 by Mr Anderson, and $316,824.41 by Mr Codd: see exhibit 28. Since 21 February 2000 further sums for interest will have accrued, of course. If the agreements contended for by the defendants are truly the ones made in each case then nothing would be owed by the defendants under them - for a number of reasons they say, one of those being that all three payments required of each of the defendants have been made.

[15] The operative agreements alleged by the defendants were, I find, those made between the second plaintiff and the defendants. The oral evidence of Messrs Hasell, Prendergast, and Thornton, which I accept as true, leads to that conclusion. Furthermore, important documents support it.

[16] A letter dated 29 November 1989, signed by Ms Kathy O'Leary as manager of the second plaintiff, was sent to each of the defendants: exhibit 29. In each case it said:

We wish to remind you that your second (and final) loan repayment in relation to your investment in The Red Claw Project falls due in December 1989.

To alleviate any concern over the Christmas period we suggest early payment and in this regard we offer you a rebate on your repayment. The rebate will be calculated daily at 18.5% p.a. and is available now until the due date. Your rebate cheque will be mailed to you on the day your payment is received.

Your cheque should be drawn in favour of RURAL FINANCE PTY LIMITED and posted to:

Should you have any queries, please do not hesitate to contact me.

We would like to take this opportunity to wish you a Merry Christmas and a prosperous New Year.

The significance of the words `and final' in the first sentence is obvious. (The defendants had made the payments due in September 1989.)

[17] Then, following a number of requests from Mr Thornton for written acknowledgment of the limited-recourse loan agreement, Mr Hasell handed Mr Thornton documents each dated 19 December 1989 and addressed to Mr Thornton. They were headed `GUARANTEE': see exhibit 15. The one received on behalf of Glengallan Investments was as follows:

OF: c/- GWA Ltd, 14th Floor, 10 Market Street, BRISBANE QLD 4000

In consideration of Glengallan Investments Pty Ltd entering into the acquisition of 500 units in the Red Claw Project, with JOHNSON FARM MANAGEMENT PTY LIMITED and applying for a loan from RURAL FINANCE PTY LIMITED for $434,000 we the undersigned hereby guarantee and indemnify Glengallan Investments Pty Ltd as follows:

1. That the only payments to be made by Glengallan Investments Pty Ltd will be as follows:

2. That no further payment will be made by Glengallan Investments Pty Ltd beyond the above to JOHNSON FARM MANAGEMENT PTY LIMITED, RURAL FINANCE PTY LIMITED, or any other party.

3. Against any claims or demands by JOHNSON FARM MANAGEMENT PTY LIMITED or RURAL FINANCE PTY LIMITED or any other party in respect of the Red Claw Project or the said loan agreement in excess of the abovementioned amount.

IN WITNESS WHEREOF the parties hereto have executed these presents on the 19th day of December 1989.

ANTHONY J JOHNSON in the presence of: ) A.J. Johnson)

affixed by authority of a resolution ) Management Pty

LIMITED was hereunto affixed by authority ) BEHALF OF

of a resolution of the Board of Directors ) (Signature of

in accordance with Memorandum and Articles ) A.J. Johnson)

The other five were in the same terms, except for variations to show the names of the other defendants and the sums payable by them. The common seal of the second plaintiff does not appear on the documents, but Mr Anthony Johnson signed them for and on behalf the second plaintiff, and his signature was witnessed by Mr Hasell. The significance of those documents is as evidence corroborating the oral evidence as to the true nature of the loan agreements, and not as establishing transactions distinct from the loan agreements.

[18] The defendants made the payments due in December 1989 earlier than the due date and in consequence received rebate cheques signed by Mr Anthony Johnson on behalf of the second plaintiff: see exhibits 159 and 167.

[19] On 7 January 1991 the first and second plaintiffs entered into an agreement recorded in a deed which provided that all of the second plaintiff's right, title, and interest in the loan agreements with the defendants was assigned to the first plaintiff. I shall return to the details of the agreement so far as they are relevant to the issues in this proceeding. It is sufficient to note now that the consideration provided for in the deed was, in the case of the loan agreements with the defendants and with a number of other investors, only an initial $1.

[20] In a letter dated 18 April 1991 (exhibit 15) written by the defendants' then solicitors to the first plaintiff following receipt by the defendants of notices of assignment of the second plaintiff's rights under the defendants' loan agreements the effect of the documents of 19 December 1989 is described: they are referred to as variations of the loan agreements of 30 June 1989. The documents were not, on my assessment of the evidence, variations of the agreements of 30 June 1989, but rather evidence of their true nature, as I have explained. The description in the letter I have mentioned is repeated in two other letters from the solicitors, also dated 18 April 1991, to the second plaintiff and to Johnson Farm Management: exhibits 16 and 17 respectively. In exhibit 15 there is the observation that `[t]he obligations are those which exist under those two documents [i.e., the written loan agreements and the documents dated 19 December 1989] and are not of a non recourse nature'. Having heard all of the evidence relevant to this subject, I conclude that when the oral parts of the agreements are taken into account, the obligations would more accurately have been described as: not of a non-recourse nature, but rather of a limited-recourse nature.

[21] Similarly inaccurate is a passage in a letter dated 9 July 1993 written by the defendants' then accountants to the Deputy Commissioner of Taxation (exhibit 170) in response to an Australian Taxation Office position paper dated 3 June 1993 addressed to the public officer of General Partner Management Services and based on an income tax audit of the Red Claw partnerships (exhibit 169). In the letter the accountants referred to the loan agreements in this way:

Our clients, generally described as the Anderson Family investors (the borrowers), entered a loan arrangement with Rural Finance Pty Ltd (RF) which was in the first instance a full recourse loan i.e. in the event of default, the lenders would have recourse to all assets of the borrowers (subject to any other higher ranking claims on such assets).

Pursuant to this loan arrangement, the borrowers made the first interest payment and the first two repayments of loan principal. However, prior to the second loan repayment being made, the borrowers renegotiated the terms of the loan arrangement with RF such that the loans were intended to become of a limited recourse nature. As previously explained to your officers, our clients were desirous from the outset of their participation in the Project to limit their commercial risk. We are advised that RF was prepared to agree to the limited recourse facility on account of the genuine expectation of profits being generated as stated in the Prospectus.

That letter was sent without consultation with Mr Thornton, who returned from overseas on about 15 July 1993. Upon seeing a draft of the letter (exhibit 173), in which the above passage appears but without the last sentence, he was, he said, `furious' and later told one of the accountants responsible for the letter that he was very angry and annoyed that he should be presented with the draft. He said it was `factually incorrect' and `totally against all of the briefing' and the other communications the defendants had had with the Australian Taxation Office. The accountant told Mr Thornton he did not think the letter had been sent but would report back to Mr Thornton. He never did report back to Mr Thornton. Following that incident the defendants dispensed with the accountants' services. It is noteworthy that in a previous letter to the Deputy Commissioner of Taxation, dated 27 November 1992 (exhibit 172), the accountants had given an explanation of the loan agreements more in accord with what I find was their true character, as the following passage from that letter shows:

The participants were able to negotiate a limited recourse financing arrangement. This has been documented by the investment promoter. Pursuant to these arrangements, after the initial interest pre-payments and two instalments of principal repayment made from our client's own cash resources, no further moneys are to be recovered from participants other than from revenues generated by the project.

The limited recourse financing arrangement was entered into on an arm's length basis. The interest on borrowings and the repayment terms were at commercial rates.

Prior to the investments being made, our clients understood that interest of $520,500 would be payable in advance on the 30 June 1989 and two principal repayments of $263,978 would be payable on 30 September 1989 and 31 December 1989 respectively.

Our clients were further assured, as disclosed in the financial projections provided and other representations made to them, that no further payments would be required as revenue from the project would ensure that the venture was self-funding from that point. Our clients then asked if Mr Johnson of Johnson Farm Management Pty Ltd and Rural Finance Pty Ltd were willing to warrant that situation as the Loan Agreement did not specifically spell this out. Out clients' understanding of the arrangement was that it was a full recourse loan in respect of the three payments mentioned above with the balance of the loan only being payable from the proceeds of the venture. In other words it was project funding in the same manner as some resource and mining development projects.

It was indicated to our clients that Mr Johnson and Rural Finance Pty Ltd would be willing to warrant the situation.

On the 19 December 1989 our clients were each presented with a document titled "Guarantee" which was the clarification sought in respect of the facility. This document was signed and acknowledged by both Tony Johnson and Rural Finance Pty Ltd . . .

[22] On behalf of the plaintiffs it was submitted that it should not be found that the loan agreements were as contended for by the defendants, and that, at best for the defendants, it should be found that the discussions on 30 June 1989 resulted in an agreement by Mr Anthony Johnson to guarantee that the income from the project would be sufficient to meet the defendants' liabilities under the loan agreements.

[23] An arrangement of the kind contended for on behalf of the plaintiffs would have revealed Mr Thornton to have been extremely gullible to say the least. He is a business man of considerable experience, and I do not accept that he was so gullible as to expose himself and his associates to a risk of the magnitude inherent in a mere personal guarantee. The agreements sworn to by Mr Thornton were entered into without the precaution of documents dated 30 June 1989 as evidence of them, so to that extent he was too trusting, but the events of that day took place in an eleventh-hour rush to take advantage of the taxation benefits of transactions entered into before the end of the financial year. Important too was the trust Mr Thornton placed in Mr Hasell with whom he had prior dealings.

[24] It is true that, to the extent that documents received by or on behalf of the defendants from Johnson Farm Management concerning the Red Claw project are inconsistent with the contention that the loan agreements were limited-recourse loans, those inconsistencies support the plaintiffs' case. It is similarly supported by the defendants' failing, as they did, to record any dissent from the contents of circulars concerning the project sent by Johnson Farm Management in November 1990, January 1991, and May 1991 (exhibits 54, 61, and 56 respectively), all of which refer to assessment of the project by the Australian Taxation Office. In the first of those circulars Mr Anthony Johnson said, `Regardless of the weight of legal opinion to the contrary, A.T.O have adopted the simple view that tax deductions must equal investor risk, dollar for dollar. ATO are not targeting the integrity of legitimate farm expenditure as a deduction. They want to see the taxpayer fully exposed to the normal business risk of borrowed money when that money is applied to the taxpayer's tax deductible expenditure'. Later he said, `We have been asked if Red Claw investors each bear the full risk for their respective loans and we have correctly given an affirmative answer'. In the January 1991 circular Mr Anthony Johnson reported that, `ATO is highly suspicious of the loans arranged by us for most red claw investors and we are certainly allied with but not legally attached to the private finance company which made the loans'. Later in the circular Mr Johnson asserted that, `we hold no direct or beneficial ownership in the subject finance company'. In the May 1991 circular Mr Anthony Johnson reported that project delays `mean their borrowers will have to make the first loan repayment, due on 30 June 1991, from their own pockets'.

[25] Of greater weight in my assessment is, however, the oral evidence of Messrs Hasell, Thornton, and Prendergast confirmed as it is by the letters of 29 November 1989. Those letters, unlike the circulars, came directly from the second plaintiff and not from Johnson Farm Management which held `no direct or beneficial ownership' in the second plaintiff. The evidence of Messrs Hasell, Thornton, and Prendergast is also of greater weight than any inference that might be drawn from the defendants' treatment of their transactions in connexion with the Red Claw project in their tax returns (see exhibits 18, 19, and 20) and any inference that might be drawn from Mr Hasell's record of his dealings with another person interested in investing in the Red Claw project, Mr Robert Reinicke: see exhibit 128. It is not in the least improbable that, in their anxiety to obtain much-needed money from the defendants on 30 June 1989, those representing the second plaintiff were prepared to enter into limited-recourse loan agreements with the defendants while not doing so with less substantial and astute investors. That course of events seems all the more probable when one learns that the second plaintiff had nothing to lend, as I shall explain.

[26] Mr Hasell's dealings with the defendants on behalf of the second plaintiff were, I find, authorized by Mr Anthony Johnson who was a director of the second plaintiff to and including 29 June 1989: see the company extract prepared by the Australian Securities and Investments Commission, exhibit 4. On 30 June 1989 Mr Anthony Johnson had authority to manage the business of the second plaintiff - such as it was since it had nothing to lend - from his brother Mr Gregory Johnson. On 29 June 1989 the latter became a director of the second plaintiff: see exhibit 4. On that day Woods & Johnson Developments Pty Ltd, of which Mr Gregory Johnson was a shareholder, acquired the two $1 issued shares in the second plaintiff: see exhibit 51. Mr Anthony Johnson continued to act as manager of the second plaintiff well after 30 June 1989, and negotiated the sale of the second plaintiff's loan book to the first plaintiff.

[27] On 26 July 1991 Messrs Philip Hennessy and Michael Dwyer, partners in the accountancy firm KPMG Peat Marwick, were appointed receivers and managers of the second plaintiff by the first plaintiff. On or about 10 February 2000, parts of a report to the first plaintiff dated 23 November 1992 concerning the second plaintiff by Messrs Hennessy and Dwyer were produced to the solicitors for the defendants: exhibit 119, and see also exhibit 47. I accept the report as accurate. The parts produced are relevant to the issues in these proceedings. Paragraph 2.3 dealt with the second plaintiff's operations. The second plaintiff, it was reported, `superficially appears to be a finance company in the usual sense i.e. obtaining deposit funds at interest from third parties which allow it to provide finance at a margin over and above the deposit interest rate to unassociated entities under varying terms with different levels of security'. But, the receivers and managers continued, `We say superficially because Rural does not actually "loan money" in other than a theoretical sense'. There follows a description of the pattern of the `loans' made by the second plaintiff, which involved a `round robin of transactions', and `[l]ittle or no actual cash was ever held by Rural'. The second plaintiff `had no staff, no office equipment or other physical assets. Its only assets were cash at bank and loans to investors in projects connected with the JFM Group or Rural's holding company, Woods & Johnson Developments Pty Ltd . . .' Paragraph 3.1 of the report revealed that the credit balances of the second plaintiff's bank accounts had been only $2,500.44 at the time of the appointment of the receivers and managers.

[28] On 30 June 1989 the second plaintiff had no funds - by way of overdraft or otherwise - on which to draw to make the loans it had agreed to make to the defendants. On that day book entries were made to create an `audit trail'. An audit of particular concern to the promoters of the scheme was one that could be carried out by the Australian Taxation Office. The audit trail was created at the offices of the Westpac Bank at 360 Collins Street, Melbourne. Debit notes to the second plaintiff's account at that bank showed sums of $7,910,084 and $3,634,316 leaving the second plaintiff's account, and credit notes to the Eagle Star Trustees' account showed those sums moving into its account: exhibits 34 and 35. By cheques drawn on Eagle Star Trustees' account those sums then appeared to pass to the Forestell Securities (Australia) account, and from there to Johnson Farm Management and Farmer Jones Aquaculture, and then back to the second plaintiff by way of `deposit' of the non-existent funds. Exhibit 141 shows the details of the audit trail. An officer of the Westpac Bank made the debit and credit entries in the second plaintiff's and Eagle Star Trustees' accounts respectively acting on the authority of letters dated 30 June 1989 signed by Mr Anthony Johnson as managing director of the second plaintiff: exhibit 43. Forestell Securities (Australia) had no funds from which to meet the cheques it used to pay Johnson Farm Management and Farmer Jones Aquaculture, apart from those notionally deposited to its credit by Eagle Star Trustees.

[29] Each loan agreement required, counsel for the defendants submitted, `a real loan of real moneys', and did not contemplate transactions of the kind shown by the audit trail, each of which was `a complete artifice or facade' and a `charade'. I accept those submissions as correct.

[30] The recitals of each loan agreement document refer to an application, or intention to apply, for the issue of units in a limited partnership pursuant to the Partnership (Limited Liability) Act and to the second plaintiff's agreeing to lend a specified sum for the purpose of allowing the defendant to acquire the units. Section 11(1) of the Act provides that any contribution made by a limited partner in a limited partnership towards the discharge of liabilities of the firm `shall be in the form of money only'. Whatever it was the second plaintiff provided to the defendants on 30 June 1989 it was not money.

[31] Clauses 8 and 9 of each loan agreement document provided that, subject to acceptance of the defendant's application pursuant to the provisions of the partnership deed, the second plaintiff thereby agreed to lend to the defendant the specified sum which should then be applied `in payment of the Application Moneys' (my emphasis) and otherwise in accordance with the defendant's obligations under the deed. Clauses 2, 3, and 5 of the partnership deed show that `Application Moneys' (my emphasis), as defined in clause 1.1, were to be paid. The application price for each unit applied for was to be paid by cheque made out to the partners' representative (clause 3.3.2), further indicating that money - real money - was required. One of the conditions to be fulfilled before nomination could have taken place under clause 5.4.2 was payment of the amount of application moneys required in accordance with clause 5.3.1. Application moneys were defined in clause 1.1 as `all moneys paid by Applicants for Units in conjunction with their Applications pursuant to clause 3.3' (my emphasis).

[32] Clause 5.3.1 provided for the subscription of `Application Funds', which were defined in clause 1.1 as `the Application Moneys paid and accepted pursuant to Clause 3' (my emphasis). Clause 5.3.1 therefore provided that application moneys paid and accepted pursuant to clause 3 should be subscribed to a partnership in the amount paid or to be paid by each applicant who was to be a partner in that partnership as specified in the applicant's application. On behalf of the plaintiffs it was submitted that the words `or to be paid' in clause 5.3.1 show that something other than a payment of money, such as a promise to pay, was a sufficient subscription to discharge the applicant's obligation in relation to the acquisition of units. In my view that is too wide a construction to place on those words. Clause 5.3.1 by referring to `Application Funds' required moneys to have been paid and accepted. The adjectival phrase `paid or to be paid' qualified the `amount' to be subscribed, and indicated that it would be the amount already paid when the applicant completed and delivered an application form or, as was perhaps the more likely circumstance, the amount about to be paid by a cheque delivered in accordance with clause 3.3.2. Neither clause 5.3.1 nor clause 5.4.2.2 contemplated anything short of payment as a condition for admission to a partnership. Even if the construction contended for on behalf of the plaintiffs were correct it would not mean that a promise to pay something other than real money would satisfy the borrower's obligation, and at all events what was contemplated by the defendants and the second plaintiff in this case was a full subscription for the units applied for.

[33] In accordance with the loan agreements, then, the second plaintiff's obligation to each defendant was to pay real money as application moneys for units in a Red Claw partnership. It did not. Therefore it did not lend the promised money.

[34] On 30 June 1989 the defendants did not know of, and did not agree to be bound by, the audit trail transactions. Indeed, as Mr Lynch who was in charge of the salesmen who marketed the venture said, potential investors were concerned about the `real funds' behind the project. The defendants most certainly were because they wished to invest in a venture with a real chance of success, which it would not have if short of capital. To Mr Lynch's knowledge no investors were ever told what actually happened at the Westpac Bank on 30 June 1989, and Mr Hasell did not know that the loans had been `made' by means of an audit trail.

[35] On 15 May 1991, after the second plaintiff had allegedly assigned the defendants' loans to the first plaintiff, there was a discussion concerning the future of the Red Claw project. The first plaintiff was then seeking the investment of further funds in the project. The following people took part in the discussion: Mr Thornton; Mr Prendergast; Mr Kenneth Schroder, a certified practising accountant and the company secretary of GWA International Limited; Mr Myles Stewart-Hesketh, then employed as the general manager of the private banking division of the first plaintiff; and Mr Anthony Johnson. Messrs Stewart-Hesketh and Johnson participated in the discussion by telephone, and Messrs Thornton, Prendergast and Schroder were in a room in GWA House. Also present at GWA House was Mr William Thompson of Morris Fletcher and Cross, solicitors, who were then acting for the defendants.

[36] Mr Thompson made notes of what was said at the meeting: exhibit 49. Further investment in the project by the defendants was the main topic of discussion. Mr Thompson recorded that Mr Stewart-Hesketh explained that the Red Claw project was `cash poor' and had funds for only two weeks: $1.5 million was needed to complete construction of ponds. Mr Johnson said that gross subscription to the project had been $15 million of which $2 million was from cash investors and $13 million from borrowers from the second plaintiff; $7 million of the loans had been sold and yielded $6 million cash, leaving a balance of $6 million. $8 million had `gone into field'. The land cost $2.3 million and `[y]our group' - presumably the Johnson group - had `carried administration costs' and `tipped in' $1 million in cash, Mr Johnson is recorded as saying. Mr Thompson's record of Mr Johnson's further account of what had happened was this:

$15M comprised $13M which partners individually borrowed + $2M in cash. Partnership received $15M and paid it to JFM as pre-payment. JFM put $2M to project and $13M on IBD in RF.

So $13M went around in circle. Intent was to sell off non-guaranteed RF loans.

Mr Thompson recorded Mr Thornton as saying later, `You are $1.5M short. What do you want from us?' Mr Johnson is recorded as replying, `I didn't come prepared to answer that today'. There followed a discussion of the possibility of the defendants' agreeing to invest more money in the project. No such agreement was reached, then or later.

[37] Mr Schroder, who had himself entered into a loan agreement with the second plaintiff on 30 June 1989, also made a record of the discussion at the meeting (exhibit 84), but did not record - or recall, as he said in giving evidence - the reference to money going around in a circle. Mr Thornton and Mr Prendergast did not recall mention of a round robin either, so that it could be that that part of Mr Thompson's record is a conclusion he drew rather than a record of a statement made. In any event, that part of Mr Thompson's record does not justify a conclusion that the defendants then became aware of the artificiality of the transactions of 30 June 1989: the mention of an interest-bearing deposit would suggest clearly that real money was involved in the transactions. There was a similar reference to an interest-bearing deposit in the circular dated May 1991 from Johnson Farm Management, exhibit 56.

[38] Mr Kevin Humphrys, consultant and investment adviser, spoke to Mr Prendergast in late 1991 at the request of Mr Anthony Johnson in an effort to persuade Mr Prendergast and his `associates' to invest further money in the Red Claw project. Mr Humphrys told Mr Prendergast that the Johnson group was suffering from a shortage of money, and that the money borrowed from the second plaintiff had been `put together' in a `back-to-back' funding arrangement. Mr Humphrys made a comment that as `the funds had been put back on deposit by the manager [i.e., Johnson Farm Management] in Rural Finance, the call on Rural Finance to meet other funding requirements had depleted their resources and that's where the cash-flow problem has occurred'. Mr Prendergast commented that that was very similar to `project financing'.

[39] I am not persuaded that, as was suggested on behalf of the plaintiffs, the following passage in the letter of 27 November 1992 from the defendants' accountants to the Deputy Commissioner of Taxation (exhibit 172) shows a knowledge of the second plaintiff's lack of funds on 30 June 1989:

(1) our clients have taken an active role in their investment in the Red Claw Project from the outset and especially from the earliest time that it became apparent that the venture required assistance in managing its financial affairs (a detailed chronology of our clients' involvement with the Project can be provided if required); and

(2) the events which have transpired, leaving the venture with funding shortfalls and doubts as to its viability in the medium term were quite unforeseen. The investments were of a genuine commercial nature and not part of any form of scheme dominated by tax considerations.

We understand that the Commissioner continues to accept the authority of the Lau decision and the associated Tax Ruling on the matter, IT2195. The only material difference between the Lau case and the Red Claw Project that is apparent based on the information available to our clients is the commercial difficulties encountered by the latter, for reasons that have been discussed above. Our clients have gone to considerable lengths in monitoring the progress of their business venture from its inception and have taken all commercially realistic steps in an attempt to maintain the commercial viability of their involvement.

Simply put, the project is undergoing significant financial difficulties which case doubt over the project's viability in the medium term. this is not any basis whatsoever to authorise the disallowance of losses and outgoings incurred by our clients in genuinely carrying on the project to this point.

The Lau case (Commissioner of Taxation v. Lau [1984] FCA 401; (1984) 6 F.C.R. 202; (1984) 57 A.L.R. 107) was another of a lender without funds to lend. The reference to it in that passage is to that part of the case which concerned the question whether Dr Lau was carrying on a business or was a mere passive investor: see p. 208 per Fox J. with whom Jenkinson J. agreed, and pp. 216-221 per Beaumont J. with whom Jenkinson J. also agreed. Paragraph 12 of the taxation ruling IT 2195, the first paragraph of the actual ruling, also concerns that issue. A later passage in the letter supports that conclusion:

From our recent meeting with you, we understand your office may seek to deny deductions claimed by participants in the Red Claw Project on the basis that, either:

1. Participation is by way of passive investment in a business carried on by Johnson Farm Management.

In the circumstances of our clients' involvement in the Project, the legal nature of the relationships of the parties to the Project and relevant case law and tax rulings, eg. Lau v FCT, IT360, IT2195, we submit that any disallowance of deductions claimed by our client on this basis is not sustainable. We request your further explanation on this aspect if you wish to pursue it as regards our clients. We would ask for you to describe relevant facts and law on which you would base this argument for our further consideration, and submission.

[40] I accept that it was not until long after 1991 that the defendants became aware of the fact that the second plaintiff had no real money to lend on 30 June 1989. The references to interest-bearing deposits would have suggested there was real money as would Mr Humphry's reference to the depletion of resources. Financial difficulties in 1991 would not signify lack of funds two years earlier.

[41] It was only in December 1995 when Mr Thornton was being cross-examined at the trial of Jekos Holdings Pty Ltd v Australian Horticultural Finance Pty Limited (writ no. 612 of 1992), and other actions tried with it, that he first became aware of a suggestion that the `loans' made to him and to the other defendants were not made by the provision of real funds. After that, details of what had happened at the Westpac Bank on 30 June 1989 gradually came to the defendants from Mr Iain Marshall, the solicitor of the firm now acting for the defendants having the conduct of their cases. Documents were disclosed, and relevant people (including Mr Anthony Johnson and a Westpac Bank employee) were spoken to, until the facts became clear. The report dated 23 November 1992 by Messrs Hennessy and Dwyer came to Mr Marshall very late, as I have recorded.

[42] The plaintiffs allege that on or about 30 June 1989 the second plaintiff lent and applied the sums it had promised to lend the defendants in accordance with the defendants' directions and in compliance with, and in discharge of, the second plaintiff's obligations under clauses 8 and 9 of the agreements. The second plaintiff did not do so, I find, because no money was in fact lent on 30 June 1989 or later.

[43] The plaintiffs allege, alternatively to the allegation to which I have just referred, that, if the sums the second plaintiff had promised to lend to the defendants were applied otherwise than in accordance with the terms of the loan agreements, those sums were so applied with the knowledge, consent, and agreement of the defendants. The time material to such knowledge, consent, and agreement would of course have been on or before 30 June 1989. That allegation cannot be sustained, I find, because none of the defendants had any knowledge of what was done at the Westpac Bank on 30 June 1989 at any material time and so were not in any position to consent or agree to what happened.

[44] As a further alternative to the allegation I referred to in paragraph [42], the plaintiffs allege that, if the sums the second plaintiff had promised to lend to the defendants were applied otherwise than in accordance with the terms of the loan agreements, the defendants and the second plaintiff agreed on or about 30 June 1989 that the manner in which the sums were in fact applied would constitute performance of the second plaintiff's obligations under the loan agreements. That allegation cannot be sustained either, I find, because, again, none of the defendants had any knowledge of what was done at the Westpac Bank on 30 June 1989.

[45] As a further alternative to the allegation referred to in paragraph [42], the plaintiffs allege that, if the sums the second plaintiff had promised to lend to the defendants were applied otherwise than in accordance with the terms of the loan agreements, the defendants, since 30 June 1989 and with knowledge of the manner in which the second plaintiff in fact performed its obligations under clauses 8 and 9 of the loan agreements and applied the sums it promised to lend, took no steps prior to the commencement of these proceedings to rescind the loan agreements, and did certain things. The plaintiffs allege, relying on the defendants' acts and omissions, that each defendant:

(a) Agreed that the manner in which the second plaintiff in fact discharged its obligation under clauses 8 and 9 constituted full and proper performance of its obligations under the Loan Agreement;

(b) Affirmed the Loan Agreement and the manner in which the second plaintiff discharged its obligations thereunder;

(c) Acquiesced in the manner in which the second plaintiff performed its obligations under the Loan Agreement;

(d) Waived any entitlement it or he may otherwise have had to insist on a different manner of performance of the second plaintiff's obligations under clauses 8 and 9 of the Loan Agreement.

In alleging that agreement, affirmation, acquiescence, and waiver the plaintiffs rely in particular on a letter dated 24 September 1991 written by the defendants' solicitors to the solicitors for the plaintiffs (exhibit 102), the defendants' failure to rescind while at the same time exercising rights as parties (exhibits 21 to 24 inclusive), their negotiating with the plaintiffs on the basis that the loans were on foot, whatever their terms (see exhibit 80), their persisting in claims for tax deductions on the basis that the loans were on foot (exhibits 19 and 20), and their recording the loans at full face value in the books of Glengallan Investments and HGT Investments (exhibits 103-106 inclusive, 108, and 109). The omission was made and all of the acts relied on were done, however, before the plaintiffs had the requisite knowledge of what had happened on 30 June 1989, and so I find there was no agreement, affirmation, acquiescence, or waiver.

[46] It follows from what I have said so far that the plaintiffs' claims must fail. There was no money lent to the defendants and no agreement, affirmation, acquiescence, or waiver upon which the plaintiffs can rely. Furthermore the defendants have performed their obligations under the agreements reached with the second plaintiff. I should record that the defendants do not seek to recover the sums paid.

[47] Those findings are sufficient to dispose of the plaintiffs' claims, but I should record my findings and, where appropriate, conclusions on three other issues raised on the pleadings. They are: whether material alterations were made to the loan agreement documents, whether the defendants' offers to acquire partnership units lapsed on 15 July 1989, and questions concerning the alleged assignments. It is not necessary for me to consider the relief sought under the Trade Practices Act.

[48] The defendants assert that material alterations were made to the loan agreement documents after they were executed by the defendants. The completion of the schedule of repayments was relied on in each case as a material alteration. The alterations were made but were not, I think, material. They were simply the result of calculations - in the case of Mr Prendergast erroneous - based on the unaltered terms.

[49] The defendants assert that they did not become partners on 30 June 1989, so that, because it was an implied term of the offer each made to acquire units in a Red Claw partnership that he or it become a unit holder on 30 June 1989, the offer lapsed in each case on 1 July 1989. The significance of the 30 June 1989 is of course obvious in the context of the income tax benefits likely to accrue to an investor. In the application forms, however, the defendants agreed to be bound by the provisions of the partnership deed. The effect of the definition of `Last Date' and of clauses 2 and 11.3.3 of the deed was that offers made in the application forms remained open for up to four months after the issue of the prospectus. Furthermore, s. 8(4)(b) of the Partnership (Limited Liability) Act provides that a certificate issued under s. 8(3), as the certificates in this case were, shall be evidence and, in the absence of evidence to the contrary, conclusive evidence that the partnership to which it refers consists or consisted of the general partners and limited partners named in the certificate as such. Mr Maxwell Collins, who in 1989 was a director of Forestell Securities (Australia) and who attended the Westpac Bank on 30 June 1989 on its behalf, gave evidence that he did not `ever' receive a declaration of compliance from the partner's representative pursuant to clause 7.2 of the partnership deed. But I accept as correct the submission made on behalf of the plaintiffs that there was in the deed no requirement that the representative deliver the declaration to the general partner. Mr Collins gave other evidence to the effect that the determination and nomination of the members of partnerships nos. 1 and 2 took place on 30 June 1989. In the result then I conclude that there is no merit in the defendants' contention as to the lapsing of their offers to acquire units.

[50] On 7 January 1991 the second plaintiff as assignor and the first plaintiff as assignee executed a deed: exhibit 25. Recital C recorded that the second plaintiff had requested the first plaintiff `to provide certain financial accommodation to it and as security for that financial accommodation . . . and for the Consideration specified in Item 4' the parties had agreed that the second plaintiff would assign to the first plaintiff `by way of security' the second plaintiff's interest in certain specified loan agreements and the second plaintiff's rights, remedies, and recourse in respect of them on the terms thereinafter appearing. The effect of clause 2.1 was to provide that all of the second plaintiff's right, title, and interest in its loan agreements with the defendants was assigned to the first plaintiff upon payment of the consideration `in the manner herein set out specified in Item 4'. The loan agreements assigned under the deed were divided into two classes: A and B. The defendants' loan agreements were all in class B.

[51] The consideration applicable to class A loans was set out in Item 4(a). That applicable to class B loans was set out in Item 4(b):

(i) an initial consideration of ONE DOLLAR ($1.00) (the "Initial Consideration");

(ii) the balance in accordance with the provisions of Clause 2.2.4.

2.2.4 Notwithstanding any other provision of this Agreement the following terms and conditions shall apply to the Class B Loan Agreements. To the extent that there is any inconsistency between the provisions of this Clause and the other provisions of this Agreement, the provisions of this Clause shall prevail.

2.2.4.1 On or shortly after the date of this Agreement the Assignee shall forward to each Customer (together with the notice referred to in Clause 4.1.2(2)) a letter substantially in the terms of Annexure A2 ("the Letter").

2.2.4.2 Provided that the Assignee is satisfied as to the creditworthiness of the relevant Customer and that such Customer shall duly sign and return to the Assignee the duplicate of the Letter, then the Assignee will calculate the Consideration for the relevant Class B Loan Agreements in the same manner as provided in Item 4(a) and such Consideration will be paid or applied in accordance with the provisions of this Agreement.

2.2.4.3 If the relevant Customer does not duly sign and return to the Assignee the duplicate of the Letter or if the Assignee is for any reason not satisfied with the creditworthiness of that Customer or with the documentation in respect of the relevant Class B Loan Agreement then:

upon receipt from the Customer of all or any moneys in respect of payments falling due in June 1991 and June 1992 the Assignee shall be entitled to deduct from the moneys received a collection fee equal to ten percent (10%) thereof and shall promptly account to the Assignor for the remaining ninety percent (90%) of those moneys less any legal or enforcement expenses relating to the collection of those moneys;

if the payments falling due in June 1991 and June 1992 are duly and punctually paid to the Assignee by the Customer then the Assignee may in its absolute discretion calculate the Consideration for the present value of the relevant Class B Loan Agreement in the manner provided in Item 4(a) and such Consideration shall be paid or applied in accordance with the provisions of this Agreement;

if the Assignee in its absolute discretion decides not to calculate the Consideration as provided in Clause 2.2.4.2 or if the payments falling due in June 1991 and July 1992 are not duly and punctually paid by the Customer to the Assignee then the Assignee shall re-assign the related Class B Loan Agreement and any relevant Security to the Assignor for the consideration of ONE DOLLAR ($1.00) and thereupon the Assignee shall be released from any obligation to pay any further amount of Consideration in respect of that Class B Loan Agreement.

Clause 2.2.1 provided that subject to the receipt by the first plaintiff of certain specified items it should pay the consideration to the second plaintiff on the `Commencement Date or on such later date and subject to such terms and conditions' as the first plaintiff in its absolute discretion should determine. `Commencement Date' was defined in clause 1.1 to mean `a date specified in Item 3', but no date was in fact specified in that item.

[52] A letter in the terms referred to in clause 2.2.4, together with a notice in the terms referred to in clause 4.1.2(2) was forwarded to each of the defendants on or about 7 January 1991. The defendants did not sign and return the duplicates of the letters and they paid no money to the second plaintiff after December 1989. None of the events and circumstances set forth in clause 2.2.4, apart from the forwarding of the letters and notices, occurred: see exhibits 157 and 167.

[53] The first plaintiff relies on the agreement of 7 January 1991, but in the alternative relies on an agreement in writing dated 16 November 1994 by which the second plaintiff assigned to the first plaintiff all its rights, title, and interest in and to the loan agreements. The first plaintiff alleges that it gave notice in writing to the defendants of those assignments on or about 17 November 1994.

[54] The defendants admit that the first and second plaintiffs purported to enter into agreements on or about 7 January 1991 and 16 November 1994 and that notices were delivered on behalf of the second plaintiff on the dates alleged but they deny that either the agreements or the notices were effective as assignments. The defendants plead that on 7 January 1991 and 16 November 1994 no debts existed between the defendants and the second plaintiff which were capable of being assigned. They further plead that the terms of the agreement of 7 January 1991 did not effect an absolute assignment of any class B loan, and alternatively that the terms of the agreement effected conditional assignments of the class B loans which assignments failed by reason of non-fulfilment of the conditions. It is further pleaded that the agreement of 7 January 1991 and the notices are void for uncertainty. Clause 17 of the Deed of 7 January 1991 provides that it is governed by the law of Queensland, and on behalf of the defendants it was submitted that the deed effects only a conditional assignment of the defendants' loans and so is outside the scope of s.199 of the Property Law Act 1974 (Q). That the assignment was conditional was manifest from clause 2.2.4 it was submitted, and it was clear that the relevant requirements of that clause had not been complied with. It was also submitted that the terms of the deed of assignment and in particular clause 2.2.4 were uncertain and not capable of bearing any coherent meaning. It was submitted further that there was no concluded agreement about when the one dollar payment contemplated by item 4 was to be paid since no date was specified in item 3.

[55] It is not necessary for me to consider further the issues relating to the alleged assignments since on my assessment of the facts of the case the defendants did not ever become indebted to the second plaintiff, but if they did their debts were discharged in December 1989. It should be noted that on the first day of the trial, Mr Keane Q.C., for the plaintiffs, conceded that if there was no loan - as was contended on behalf of the defendants and, on my assessment of the evidence, correctly so - there was nothing that could be the subject of an assignment.

[56] There will be judgment for the defendant in each proceeding.

[57] I shall invite further submissions on any further orders to be made including those dealing with costs.