1995 exit agreement
140By June 1995 Mr Dierickx understood that the Tumut Project was experiencing difficulties, particularly as a result of hailstorms. On 1 June 1995 Mr Purcell of TROM wrote to Mr and Mrs Dierickx attaching the latest quarterly orchard report. It reported the loss of a substantial quantity of otherwise good fruit due to hail. Mr and Mrs Dierickx also received another letter from TROM dated 1 June 1995. It noted that they had prepaid interest for the 1994/95 financial year. The letter stated there was opportunity to prepay interest for the 1995/96 year which, after discount, would total $1,953.79. The letter advised that maintenance fees and licence fees of $1,848 and $500 per allotment would be payable in advance at 30 June 1995. TROM advised that a decision would be made shortly whether to debit those sums to Mr and Mrs Dierickx's grower's account or to require payment of them directly. The letter added that:
"The opportunity to apply to exit the Project at minimal cost as mentioned in previous correspondence is almost filled. Any investors wishing to apply should do so soon. Please call me to discuss these or any other matters."
The letter was signed by Mr Purcell.
141The previous correspondence referred to was not in evidence.
142Mr Dierickx deposed that by this time he and his wife had made repayments of principal and payments of interest totalling $12,224.13. He was alarmed that it could cost them further money to exit the project, given that they would in any event lose their investment. Some time prior to 14 June 1995, Mr Dierickx telephoned Mr Purcell. He deposed that there was a conversation to the following effect:
"25. I subsequently telephoned Mr Purcell (sometime between 1 June and 14 June 1995) to discuss the performance of the Tumut Project and my concerns about our investment. During that telephone discussion, words to the following effect were said:
Me: 'What's happening with this project? Why is it in this state? Why have we got to this?'
Mr Purcell: 'We've had numerous problems including hail and problems with water. Things are not going well. Potentially, if you don't exit the project there may be future costs that might not be covered by the project's income.'
Me: 'Why would it cost us to exit the project? Does it not have any value? I'm annoyed enough at losing our investment - why should we pay now to exit the project?'
Mr Purcell: 'Considering you have made all your payments on time, if you decide to exit today, I'll allow you to exit the project at no cost.'
Me: 'I'm not really happy about it, but I accept the offer. What happens now?'
Mr Purcell: 'I'll send a statement to you stating that you've exited the project on these terms, and that we've agreed you will not have to make an exit payment. You won't have to make any further payments, and you will no longer be a part of the project.'"
143Mr Purcell neither confirmed nor denied this conversation. He deposed he recalled having a conversation with Mr Dierickx in mid-1995 in which Mr Dierickx was cross about the performance of his investment and undertakings he felt had been given by Mr Purcell as to what would happen if the project returns didn't cover the costs of his investment in the project. Mr Purcell did not otherwise elaborate. He said "It is possible that I agreed to let the defendants exit the project at no cost during a telephone conversation with Mr Dierickx at that time and that I forgave the defendants' debt owing under their loan agreement." Given Mr Purcell's lack of credit, his evidence would be of no weight even if he had either supported or denied Mr Dierickx's version of events.
144On 14 June 1995 Mr Purcell sent another letter to Mr and Mrs Dierickx. The letter stated:
"Dear Mr & Mrs Dierickx
RE: EXIT OFFER - TUMUT RIVER ORCHARD PROJECT
Further to our previous correspondence and conversations regarding your investment, we attach schedule of 'Possible Future Charges' plus an 'Application to Exit' for each investment.
Please read both pages carefully and do not hesitate to contact either Jan Davidson or myself should you have any further queries. Should you wish to exit the project, you should complete the Application and return it within ten days of this date.
We stress that each application to exit will be assessed on an individual basis and that acceptance of applications will be at the sole discretion of the Manager."
145The last paragraph of this letter is inconsistent with there being a concluded oral agreement for Mr and Mrs Dierickx to "exit" the project.
146The enclosed schedule of "Possible Future Charges" noted that licence agreement fees for 1994/95, 1995/96, and 1996/97, and maintenance charge payable under the farming agreement for 1995/96, and interest under the loan agreement for 1995/96 and 1996/97 would be $11,385.10. These were described as "possible future charges before allotments become self-funding". The document described an "Exit Offer" as follows:
"EXIT OFFER
Each application to exit the Project will be based on the [sic] each applicant[']s circumstances but a broad guide to the financial imposts of withdrawing would be that all interest to the date of the application plus Licence Fees, if not already paid, would be payable upon approval of the exit application. In your case this is an amount of $NIL. Acceptance of the application will be at the Manager's sole discretion and may be subject to future events. Upon our acceptance and your payment, all obligations that you have to us and we have to you would come to an end."
147Also enclosed was a form entitled "Application to Exit Tumut River Orchard Project" addressed by Mr and Mrs Dierickx to TROM. The form stated:
"I hereby apply to exit the Tumut River Orchard Project in respect of the Farming Allotments set out above. Upon acceptance of this application I accept that all my rights and obligations under Project Agreements; the Licence, Farming and loan Agreement (including the outstanding loan balance of $15,630.34), shall extinguish and also that I/we shall have no further recourse to Tumut River Orchard Management Ltd in regard to any matter arising from the Project or my involvement with it.
Please find enclosed a cheque for $NIL
This is made up of
interest 1993/94 unpaid: $PAID
interest 31/4/95 of: $PAID
Licence Fees 1994/95 $PAID
I understand that the Manager may accept or reject this application at its sole discretion.
I tend [sic] the sum of $NIL in full and final satisfaction of all outstanding interest payable under the loan agreement, the repayment of the loan balance (which I understand to be $15,630.34) and all outstanding charges. I accept that the Fruit Proceeds from the 1995 harvest have been fully expended in meeting my obligations for farm Maintenance, Management fees and Harvesting and Marketing costs and any balance outstanding in respect of these and all charges payable [pertaining] to the Project Agreements are also discharged by the acceptance of this payment."
148This document was signed by Mr and Mrs Dierkickx on 24 June 1995 and sent back to TROM who received it on 30 June 1995.
149HPM produced from the records of TROM an unsigned copy letter from TROM addressed to Mr and Mrs Dierickx dated 23 June 1995. This letter stated:
"Dear Mr & Mrs Dierickx,
Exit Application - Tumut River Orchard Project
Unfortunately we have not been able to confirm your exit from the Project.
This may change, so we will retain your application. Until then your rights and obligations under the Project agreements remain in place.
A decision on whether to charge Licence and/or maintenance fees will be postponed until 1 October, 1995, when a clearer picture of the Tumut River Orchard Trust's position will emerge. Interest and other fees (if applicable) will accrue until you are able to exit.
Interest and Licence fees for 1994/95 are payable if you did not prepay interest or did not pay Licence fees before applying to exit. If you sent a cheque in respect of those amounts as part of your exit application we shall apply it to any outstanding interest or fees unless we hear from you within 10 days of this date.
Please note that additional interest will be payable if you are able to exit the Project in the future. To minimise this amount we will contact you if and as soon as it is possible for you to exit."
150There was no evidence from HPM as to when the letter was printed, or whether it was posted. TROM's computer records treat Mr and Mrs Dierickx as an ongoing investor. The document produced may have been a form letter, subsequently printed out, with the insertion of Mr and Mrs Dierickx's details. Mr Dierickx denied receiving this letter. He noted that the letter pre-dates Mr and Mrs Dierickx's signing their application to exit the Tumut River Orchard Project. That application was signed on 24 June 1995 and received by TROM on 30 June 1995. It would make no sense for TROM to have sent this letter before it received Mr and Mrs Dierickx's application. Indeed the record states that their application would be retained, but no such application had been sent at this time. I accept Mr Dierickx's evidence that this letter was not received.
151Mr Dierickx deposed that after 30 June 1995 he and his wife received no further requests for payments in respect of the Tumut Project until 1999, and that they ceased to declare any primary production income or claim expenses in relation to the Tumut Project. Mr Dierickx said that he regarded the letter of 14 June 1995 as a "form letter" for general circulation and he focused on the application form that showed that he and his wife did not have to pay any further moneys to be released from the project. Although the form stated that "the manager may accept or reject this application at its sole discretion" Mr Dierickx's evidence was that he understood that that discretion had already been exercised.
152I would not reject Mr Dierickx's evidence of his conversation with Mr Purcell on the ground of the inconsistency between that conversation and the correspondence received from TROM dated 14 June 2005, nor from the fact that when the application to exit the project was remitted by Mr and Mrs Dierickx to TROM they did not write a covering letter asserting that the discretion to permit them to exit the project had already been exercised.
153I formed a generally favourable impression of Mr Dierickx. He was prepared to make concessions against interest. For example he said that he read the complete prospectus and other documents that were given to him. It was his case that he was misled into thinking that the loan was without recourse. He did not attempt to take shelter, as a less than truthful witness might readily have done, behind an assertion that he did not read the fine print of the investor loan agreement.
154Nonetheless, in deciding whether to accept his evidence as to the agreement he said he made with Mr Purcell in June 1995, I have regard to the observations of McLelland CJ in Eq in Watson v Foxman (1995) 49 NSWLR 315 at 319 that:
"... human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self interest as well as conscious considerations of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience."
155One test of the evidence is whether after 30 June 1995 Mr and Mrs Dierickx ceased to declare any primary production income or to claim deductible expenses in relation to the Tumut Project.
156Mr Dierickx acknowledges receiving a letter dated 15 September 1995 enclosing a tax statement. This related to the tax year ended 30 June 1995. The letter is not inconsistent with an exit agreement having been made.
157No demand was made on Mr and Mrs Dierickx in the following financial year for the payment of interest, licence fees or management fees. This is consistent with an exit agreement having been arrived at, but might be explained by the charges being paid from Mr and Mrs Dierickx's share of orchard income. However, it does appear from the statement accompanying the letter of 14 June 1995 that TROM then anticipated that investors would have to pay licence fees, farm management fees and interest out of their own pockets at least up to June 1997. However, the document stated that the figures provided were only estimates and actual cash demands might decrease or increase.
158Mr Dierickx was an investor in other orchard projects managed by TROM or TPL. On 25 June 1993 he had signed an application to acquire two farming allotments in a managed investment scheme managed by TROM known as the Coonabarabran Orchard Project and applied for a loan in respect of that project. Mrs Dierickx was not an investor or borrower in respect of that project.
159On 24 June 1996 Mr Dierickx applied to acquire two farming allotments in another managed investment scheme managed by TROM known as the Treetop Plums Project Investment. Again Mrs Dierickx was not an investor in that project. Mr Dierickx also invested in two other agricultural projects, one involving tea tree oil, and another involving macadamia nuts.
160On 29 August 1996 TROM sent a letter to Mr and Mrs Dierickx which read as follows:
"Dear Mr & Mrs Dierickx
TUMUT RIVER ORCHARD PROJECT
ALLOTMENT NUMBERS: 486, 487
Please find attached your Taxation Schedule for the Tumut River Orchard Project for the year ended 30 June 1996. A net cash distribution of $464.93 per allotment was achieved.
This has resulted in a cash and tax neutral position after interest on your investor loan.
Your Annual Report will be forwarded shortly.
Should you have any queries please contact Heather Pow of this office."
161Enclosed with that letter was a statement headed "Net Cash Distribution Schedule" in respect of the two farming allotments 486 and 487 for the Tumut River Orchard Project. It showed taxable income being "net orchard proceeds" of $7,335.75. It also included the following:
" Description of Deduction Tax Act Tax Deduction
Works & Services Section Allowable
B. Harvesting & Marketing 51(1) $4,520.96
C. Orchard Maintenance 51(1) $1,782.90
(12 months to 30.6.96)
D. Administration Fee 51(1) $102.02
E. Net Income Distribution $929.87
F. Interest 51(1) $929.87
G. Other Expenditure 51(1) ..........."
162If an exit agreement had been made as Mr Dierickx deposed, and if he had paid attention to the documents he received, he would have appreciated that TROM was treating him and his wife as if they were still investors in the project, and presumably still liable under the loan agreement. Mr Dierickx did not recall receiving the documents, but they were included in the documents of which he gave discovery and so he must have received them. In cross-examination he said that in 1997 his wife had started a business. She was in Adelaide. Most of his time was spent in Sydney. They got behind in their tax returns and it was not until three or four years later that he provided all documents for three or four years' tax returns to his accountant. The accountant prepared the returns.
163Mr Dierickx was cross-examined about his wife's tax return for the year ended 30 June 1996. Mrs Dierickx's tax return for 1996 included an item 49 for business income and deductions. Under the heading "Primary Production" the tax return recorded the figure of $7,335. Under the heading "Expenses" there were three items, namely:
"Total interest expenses $930
Repairs and maintenance $1,783
All other expenses $4,622 totalling $7,335"
164This was in accordance with the net cash distribution schedule enclosed with TROM's letter of 29 August 1996.
165It is not clear when this return was signed. But I infer it was after 2000. It is clear that Mr and Mrs Dierickx were often substantially late in having their tax returns prepared. For example, Mrs Dierickx's 2001 tax return was not prepared until July 2008 (exhibit D).
166Mr Dierickx supplied the documents he had received from TROM to his accountant. I infer that he did not tell his accountant that he and his wife had ceased to have any involvement in the Tumut River Orchard Project after 30 June 1995. I infer that the documents were sent many years after 1995. The accountant used the documents and incorrectly included all of the income and all of the expenses in Mrs Dierickx's return. I infer that there was none in Mr Dierickx's return. Mrs Dierickx relied on her accountant and her husband in relation to the preparation of her tax returns. I find that neither she nor Mr Dierickx gave the returns any close attention. Had they done so, one of two things should have been done. Either, if the exit agreement were made as is now alleged, the items for business income and expenses should have been excluded from Mrs Dierickx's return. Alternatively, 50 per cent of the figures for income and expenses should have been included in both returns. Given that there is no difference between income and expenses, it is understandable that no-one may have paid too much attention to the matter. Mrs Dierickx's 1996 tax return goes some way to casting doubt over Mr Dierickx's evidence on this topic, but is not conclusive.
167On 26 September 1997 TROM wrote to Mr and Mrs Dierickx as follows:
"Dear Mr & Mrs Dierickx,
TUMUT RIVER ORCHARD PROJECT - ALLOTMENT Nos: 486, 487 STATEMENT OF INCOME AND EXPENSES
Please find attached your details for inclusion with your 1996/97 taxation return.
The audit of the Trust Accounts has not yet been finalised. However, these are expected to be through within the next few weeks. It is unlikely that there will be any adjustments required, but this is not impossible. We have had many enquiries from investors to get the statements out so, at the risk of some minor modifications, we have proceeded with their preparation.
As you will see, revenue is up and costs are down. Revenue for 1991 and 1992 Tumut investors went from $1.56 million last year to $2.17 million, and expenses per tree and tray were down. This produced a Net Distribution of $1,772.30 per Allotment which was almost twice the revised projection of $926.00, and we look forward to further improvement next year.
The distribution has allowed us to meet interest costs and prepay a portion of the license fees for 1997/98, which are payable in advance.
I urge you to read about all the other activities going on in the Treetop group in the Annual Report, as you will see that they are directly complementary to the viability of the Tumut River Orchard.
If you have any queries, please contact either Dianne Johnson or myself."
168The distribution schedule accompanying the letter of 26 September 1997 stated that in respect of the two allotments in the Tumut River Orchard Project of Mr and Mrs Dierickx, there had been taxable income derived of $11,445.52 and deductible expenditure of the same amount. The expenditure consisted of harvesting and marketing costs of $4,308.29, orchard maintenance of $4,008.86, an administration fee of $48.69, interest of $2,344.50, and licence fees paid in advance for the following financial year of $735.19.
169Mr Dierickx admits receiving this correspondence and attached statement. If he gave it any attention, he must have appreciated that TROM was asserting that he and Mrs Dierickx had not exited from the project. He did not raise a query or make any complaint. He attributes this to the pressure of work.
170I infer that none of the information included in the 30 June 1997 distribution schedule was incorporated into the tax returns of Mr or Mrs Dierickx. Their tax returns for 1997 were not tendered.
171Mr Chapman deposed that a statement of deductible expenditure was forwarded to Mr and Mrs Dierickx by TPL in respect of the year ended 30 June 1998. Mr Dierickx denied receiving such correspondence and I accept that denial. No tax return for the 1998 financial year was tendered. This is of some significance because the statement of deductible expenditure allegedly sent to Mr and Mrs Dierickx for the year ended 30 June 1998 showed an excess of expenditure over income (including licence fees, but not including interest) of $1,289. Had Mr or Mrs Dierickx received this document and thought that they were still participants in the project, they could be expected to have included deductions for the year ended 30 June 1998.
172On 16 March 1999 TPL made demands on Mr and Mrs Dierickx in respect of licence fees payable in respect of the two allotments in the Tumut River Orchard Project. On the same day it demanded payment of interest of $2,344.50 in respect of the loan which was said to have a balance as at 30 June 1998 of $15,630. Mr and Mrs Dierickx admit having received notice of assignment of the loan dated 29 May 1998. I infer it was sent with the letter dated 8 July 1998 referred to in paragraph [54].
173Mr and Mrs Dierickx did not pay immediately any of the amounts demanded. Neither after receiving notice of the assignment of the loan, nor after receiving the demands of 16 March 1999 did they write back to TPL stating that their loan and the licence fees had been discharged in 1995.
174TPL made a follow-up demand on 13 April 1999. Mr Dierickx deposed that when he received this correspondence on the letterhead of TPL, he believed that the payments demanded related to the Treetop Plums project. He said that that project had previously used the TROM letterhead and that contributed to confusion. At that time he had changed employment, was commuting from Adelaide to Sydney for work, had a newborn son, was helping his wife run a new business from home, and had little time to deal with bills and correspondence.
175Mr Dierickx sent TPL a cheque dated 3 May 1999 for $4,344.50. This was the same amount as the two licence fees of $1,000 said to be payable for the 1997/98 and 1998/99 financial years, and $2,344.50 for the interest claimed. Mr Dierickx said that it was only during the course of these proceedings that he had come to realise that the payments related to the Tumut project and not the Treetop Plums project. The difficulty with that evidence is that Mr Dierickx must have had before him the demands from TPL for interest of $2,334.50 and two years' payment of licence fees of $2,000 when he drew the cheque. The demands expressly referred to the moneys as being payable with respect to the Tumut River Orchard Project. Mr Dierickx drew the cheque on his and his wife's joint account. The Tumut River Orchard Project was the only project in which they were both investors.
176On 4 November 1999 TPL sent a further letter to Mr and Mrs Dierickx attaching an Operating Loan Account Interest and Licence Fee Statement for the 12 months ended 30 June 1999. The letter said that the statements were "in relation to your investment in the Tumut River Orchard Project". TPL asserted that the interest was payable "under the full recourse loan". It also said that licence fees were due.
177On 6 December 1999 TPL sent what appears to be a pro-forma letter to Mr and Mrs Dierickx stating:
"Re: TUMUT RIVER ORCHARD PROJECT - ALLOTMENT(S) 486, 487
We wish to offer to capitalise your Interest and License Fee Payments to your loan account.
Please tick and sign the appropriate box and return this letter to us within 14 days.
Capitalise 1998/99 Interest as previously billed to my Loan Account (please tick)
Capitalise 1990/00 License Fees as previously billed to my Growers Account (please tick)"
178Mr Dierickx ticked the two boxes and faxed the copy letter back to TPL on 29 December 1999. He wrote on the letter "I get so much paperwork from you guys that I don't know where I'm at anymore." In cross-examination Mr Dierickx said that he was confused when he received the letter of 6 December 1999, but accepted that the reason he was confused was because he understood that the document related to the Tumut River Orchard Project. When it was put to him that he did not ring up anyone at TPL to say that there was a mistake and there was no interest or licence fee to be capitalised, Mr Dierickx suggested that that was the effect of his handwritten note. He had to accept that that was not the effect of the note. Mr Dierickx gave the following evidence as to his understanding of what was involved in capitalising the debt:
"Q. I suggest you agreed to capitalise and you understood what capitalising meant, didn't you?
A. What I understood by capitalising meant that I didn't have to pay it.
Q. Yes, that it became part of your debt that you didn't have to find the cash at the moment?
A. That's correct.
...
Q. You've given your understanding of what capitalising was and involved in that Mr Dierickx was the proposition that you were accepting there would be an on going indebtedness which would now include the amounts for which you were ticking?
A. No, I didn't see that from that.
HIS HONOUR
Q. I think you gave two answers at least as to your understanding of what capitalising interest meant or what it involved. Could you just explain to me again what you say you understood capitalising interest to involve at that time?
A. Well that the payment didn't have to be made and that I guess it would be, look I'm not sure whether I thought it meant at the time that Treetop would get a tax deductibility for the fact that we hadn't paid it and that it had been capitalised. I certainly didn't understand at the time that that invalidated my exit agreement."
179The overall effect of this evidence is that Mr Dierickx was saying that he believed that by ticking the two boxes, he would not have to pay the amounts of interest or licence fees, although at one point he accepted that he understood that what capitalising meant was that he did not have to find the cash at the moment to pay that part of the debt that would be capitalised. I think the latter was Mr Dierickx's understanding.
180Mr and Mrs Dierickx were also cross-examined about their tax return for the year ended 30 June 1999. Mr Dierickx's tax return for that year included a sum for primary production of $5,894 and expenses totalling $17,483. Mrs Dierickx's return for that year included a figure of $3,697 as being a distribution from trusts and other deductions relating to that distribution of $8,394.
181It was suggested to Mr Dierickx that these figures were only explicable on the basis that they included income and expenses for the Tumut River Orchard Project as identified in the distribution statement for the 30 June 1999 financial year (which they denied receiving). It is not possible to reconcile the figures. I need not go through the attempted cross-examination in that respect. The cross-examination did not show that the figures for expenses were in accordance with distribution statements received in respect of the three projects managed by TPL. Moreover, there are two other projects which would also affect the figures. In any event, even if some parts of the figures were derived from a statement provided by TPL to Mr and Mrs Dierickx, which was forwarded to their accountant for the purposes of preparation of tax returns, I do not think that they gave any sufficient attention to the detail of the returns that any adverse inference could be drawn on the present issue.
182Mrs Dierickx was also cross-examined in relation to her 2001 tax return. It included a reference to the Tumut River Orchard Project and to two other projects, although no amounts were included in the return in respect of income or expenses. I do not think that anything can be drawn from this, except to reinforce my conclusion that Mr and Mrs Dierickx did not give careful attention to their tax returns. Mrs Dierickx's 2001 tax return was prepared in July 2008. Mr and Mrs Dierickx had filed a defence in March 2008 in these proceedings in which they pleaded the exit agreement. No conclusion could be drawn from this reference in the tax return to the Tumut River Orchard Project that Mrs Dierickx's or Mr Dierickx's claim that the exit agreement had been made was recent invention. As previously mentioned, all it shows in my view is the lack of attention to the tax returns.
183Taking into account the warning of McLelland CJ in Eq in Watson v Foxman, I am not satisfied that an exit agreement was made as Mr Dierickx deposed to. Whilst I would not reject his evidence on the basis of the preparation of his or his wife's tax returns, the fact is that he made two payments on 3 May 1999 referable to his and his wife's asserted liability under the Tumut River Orchard Project. He agreed to the capitalisation of further interest and licence fees. Whilst I can accept that under the pressures that Mr and Mrs Dierickx were experiencing at the time their tax returns were being prepared that they did not give full attention to the contents of the returns, I think that if Mr or Mrs Dierickx had the belief in 1999 that Mr Purcell had agreed that they should have no further involvement in the Tumut River Orchard Project, they would not have paid the moneys claimed, nor agreed to the capitalisation of interest and licence fees.
184My rejection of Mr Dierickx's evidence on this part of the case must have some impact on my assessment of his credibility in respect of other parts of the case. However, I should make it clear that in rejecting his evidence in respect of this part of the case, I do not consider him to have been an untruthful witness. Rather, I think there has been the process of subconscious reconstruction to which McLelland CJ in Eq referred in Watson v Foxman.