Section 5(4) is not intended to be a comprehensive definition of what constitutes an offer or invitation "to the public". It was introduced to overcome the effect of Lee v Evans (1964) 112 CLR 276 which required an offer to the public to be one made to the public generally and capable of being acted on by any member of the public: see Corporate Affairs Commission (SA) v Australian Central Credit Union (1985) 157 CLR 201 at 206-208.
The prescribed interest provisions have been the subject of two recent decisions of Australian appellate courts: Hurst v Vestcorp Ltd (1988) 12 NSWLR 394 (NSW Court of Appeal) and O'Brien v Melbank Corporation Ltd (1991) 7 ACSR 19 (Supreme Court of Victoria Appeal Division). Both cases concern tax-driven investment schemes with associated borrowings. In both cases there is detailed examination of the concepts of "prescribed interest" and "offer to the public", the application of the principles of statutory illegality formulated by the High Court in Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 and the issue of severability. Rather than cite all the lengthy extracts which provide important guidance in the present case, I will treat the whole of the judgments as being incorporated in these reasons. Reference should also be made to Davies v Mortgage Acceptance Nominees Pty Ltd, unreported, Rolfe J, Supreme Court of New South Wales, 20 April 1994.
2. Was Only a Partnership Interest Offered?
At the outset, counsel for Hudson Conway argued that the mortgage and guarantee were beyond the reach of the legislation because all that was offered to the applicants was an interest in a partnership which, once formed, would thereafter buy the property from an undisclosed vendor. The process, he said, involved two distinct stages. This is perhaps no more than another way of looking at the question of severability which logically falls to be considered after determining whether there was an "offer to the public" of any and what "prescribed interest". Nevertheless, it was strongly urged as a threshold point, so I shall turn at once to it.
In developing his argument counsel pointed out that virtually all the applicants spoke of the respective Gray & Winter representative saying at the initial meeting that the firm was "putting together a partnership to acquire the Coles Myer building". Also the Gray & Winter instruction letter confirmed instructions from the accountants "to acquire the ... building for a partnership including the undersigned".
However in my respectful opinion this analysis is neither commercially realistic, nor consistent with the contemporary documentation considered as a whole. Particular expressions used by the parties will of course not be determinative of the true nature of a legal relationship or transaction.
Counsel said that a partnership existed prior to 29 June 1990 and the fact that the formal partnership agreement was not executed until later (in fact some time in August) does not alter this fact. I accept that sometimes a partnership may exist prior to the execution of a formal partnership agreement, or indeed without any written agreement at all. But for the purposes of the present argument counsel was unable to say just when it was that the partnership was formed. He suggested that it was when the last partner joined, but was unable to say when that event took place. Certainly there was no communication to or between the partners on or prior to 29 June advising of the formation of any partnership. It does not seem that anyone on the purchaser/mortgagor side of the transaction - investors, Gray & Winter, the accountants, or Nevett Ford - turned their mind to the question as to when the partnership was to come into existence. There is no suggestion in the evidence of a meeting (whether personally or by proxy) on or prior to 29 June of a newly formed partnership at which a decision to acquire the Coles Myer building was made or confirmed.
When pressed with these difficulties, counsel acknowledged that it could not be determined precisely when the partnership "crystallised", only that, whenever it did, that occasion was prior to settlement. In the days leading up to settlement, as Mr James Gray advised Mr Hamilton from time to time of the increasing number of shares taken up, there was, in counsel's words, a "rolling partnership". Perhaps he meant that on each day when the number of investors increased, there was a dissolution of an existing partnership and the creation of a new one. Apart from raising juristic problems of the kind discussed by Gowans J in Banfield v Wells-Eicke [1970] VR 481 and Carlton Cricket & Football Social Club v Joseph [1970] VR 487, that theory does not fit the essential commercial and financial structure on which all were agreed. If all that could be "sold" were, say, 17 shares, the transaction would simply not proceed, and there would be no partnership. Likewise, if the full amount were subscribed but for some other reason the sale of the Coles Myer building did not proceed, the prospect of all the disparate investors from Millicent, Port Lincoln, Ballarat, Geelong, Deniliquin and Ulverstone meeting and considering whether they should look for some other property to acquire together seems quite fanciful. The Coles Myer building investment scheme was not promoted as a new entity which would carry on the business of property investment; it was entirely transaction-specific.
What Gray & Winter were offering (in the popular or commercial rather than the legal sense: Hurst at 438, O'Brien at 337) was the opportunity to acquire a one-twentieth share (or two or more shares, or a fraction of a share) in the Coles Myer building. The acquisition of this building in shared ownership was the general intention and common understanding of both Gray & Winter and the investors. The fact that some investors were not to become legal co-owners or mortgagors on title does not alter the fact that, commercially considered, this was a co-ownership scheme. On the title 18 co-owners are noted, including Dr and Mrs Schoeman as joint proprietors of one share. Of those co-owners, five (Terrey, Henderson, Green, Haarsma and Tranter) held on behalf of themselves and family members and three held on behalf of "stranger" co-partners (Connell/Walker, Gordon/Glass and Rutt/Morgan). Of this last group, Connell and Gordon also held their half shares on behalf of their spouses and themselves. But the investors not on title had enforceable equitable rights against the legal owners of the respective shares.
Because the fruits of ownership were only to be realised over a substantial period of time, during which co-owners would be faced with complex demands of building management as well as financial and other issues as between themselves, a management structure such as a partnership, company or unit trust was essential. So viewed, the partnership was a necessary adjunct to co-ownership in the particular circumstances of this case, including the wide geographical dispersion of the co-owners and the lack of any pre-existing association between themselves or any appropriate expertise.
The documents support this analysis. The Gray & Winter instruction letter certainly speaks of the acquisition of the building "for a partnership", but the letter is specifically designed to be sufficient authority for the purchase, without the need for any subsequent authority from the partnership as a partnership. Twenty of these letters (or more or less depending on fractional or multiple shareholdings) were all that would be needed.
The application for finance does refer to "Proposed Partnership Share" but in most cases the applicant expressed that as a fraction or percentage of "the Coles Myer building". Although the document does not bear the vendor's name, the Gray & Winter representatives, according to their evidence, told prospective investors that they would have to make application to the vendor for vendor finance.
The primary marketing document, the Gray & Winter brochure, is only concerned with details of the property and the financing of the purchase. The word "partnership" does not appear. The word does appear in the one page summary, but only in the context of fixing the amount for which the investor is going to be liable.
The document constituting the legal commitment of the investor is the power of attorney. The documents the subject of the grant of power are: (i) the sale and borrowing documents (vendor's statement, contract, transfer and mortgage for $16.265 million); (ii) an assignment of rental income under the lease; (iii) documents required as "necessary or desirable" for (a) the acquisition of an estate or interest in the land; (b) the borrowing of moneys as security on the land; (c) securing the payment of money borrowed on the security of the land; (iv) any bill of sale or charge over chattels providing security for the repayment of money; (v) "a Deed of Partnership between the owners of the land", and (vi) a guarantee and indemnity with respect to any of the above. The partnership deed is thus seen as something to be agreed "between the owners of the land", that is to say, between persons who have become owners, and not as part of the process of acquiring ownership. There is no reference to any proxy or similar power authorising the attorney to vote at any partnership meeting for the purpose of acquiring property or borrowing for such purpose.
There was no separate form of application to join the partnership; nor was any document presented to investors setting out or even summarising the terms of the proposed partnership.
Finally, neither the contract of sale, the transfer, nor the mortgage make any mention of the partnership.
The mechanisms which provided for those investing in less than a full share or for holding a share on behalf of family members - declaration of trust and sub-partnership agreements - were anticipatory of the partnership which was to come into existence. But in themselves they could create a partnership which did not then exist.
In my view the partnership did not come into existence until the partnership agreement was executed in August. An agreement for a partnership of this nature was, objectively considered, always going to be constituted by a complex document. To mention but a few examples, it would have to provide for such matters as management structures, voting, meetings, financial reporting, retirement, and transfer and transmission of shares. The agreement in fact executed in August contains 35 clauses extending over 43 pages of typescript.
Fundamental to the business of the proposed partnership would be decisions as to the sale of the building or the grant of a new lease. How would such decisions be made? By unanimous consent of all partners? By a majority, and if so by a simple majority or a two-thirds, three-quarters, nine-tenths or some other fractional majority? And if by a majority then by actual consent of the requisite numbers or by a majority at a meeting? And if at a meeting on what rules as to notices, proxies etc would such a meeting by convened? Of the numerous permutations and combinations thrown up, some might be arguably preferable to others, but none could be said to be objectively "reasonable" in the sense that it could be ascertained as a sufficiently certain rule for the operation of the proposed partnership.
Applying the reasoning of Brooking J in Toyota Motor Corporation Australia Limited v Ken Morgan Motors Pty Ltd [1994] 2 VR 106 at 130-134 the conclusion is that the parties are not to be taken as intending that a partnership agreement would come into existence until they (or their attorney) had executed a document dealing with "matters which are ordinarily agreed upon in transactions of the class in question". Indeed the present case is stronger. This is not a question whether some "informal, vague and relatively short document" was legally binding - there was no document at all. Pending the execution of the partnership agreement, the rights and obligations of the group of investors would be adequately governed by the law relating to co-owners and guarantors.
When executed, the partnership agreement was expressed to have, as might have been expected, a commencing date of 29 June 1990. But that does not affect the conclusions that the partnership was not in existence on 29 June and that formation of the partnership was not an event which was to occur prior to acquisition of the property.
3. Offer or Issue by Whom?
Attorney-General (NSW) v Australian Fixed Trusts Ltd [1974] 1 NSWLR 110 was concerned with public solicitation by AFT of moneys which were then applied in taking up units in unit trusts established and managed by one or other of a number of companies associated with AFT.
It was argued that s 83(1) of the Companies Act 1961 (NSW), the equivalent of s 170(1) of the Code, only operated where the company making the offer or invitation was the company which would issue the interest and that therefore the only relevant issue was not made to the public but by the unit trust company to AFT. In rejecting this argument Street CJ in Eq said (at 117):