FEDERAL COURT OF AUSTRALIA

BCI Finances Pty Limited (in liq) v Binetter [2018] FCAFC 189

ORDERS

THE COURT ORDERS THAT:

1.    The appeal (insofar as it relates to the first respondent) be dismissed.

2.    The appellants pay the first respondent's costs of the appeal, to be taxed if not agreed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be allowed.

2.    Subject to paragraph 4 below, paragraphs 5, 6 and 10 of the costs orders made by the primary judge on 15 December 2017 be set aside and in lieu thereof it be ordered that:

5.    Each of the first, second, fourth, sixth, seventh, eighth, ninth and tenth respondents pay the first applicant's costs on the ordinary basis, as agreed or taxed, with such liability to be joint and several, and with the liability of the first respondent limited to the assets of the estate of the late Emil Binetter.

6.    Each of the first, second, fourth, sixth, seventh, eighth, ninth and tenth respondents pay the second applicant's costs on the ordinary basis, as agreed or taxed, with such liability to be joint and several, and with the liability of the first respondent limited to the assets of the estate of the late Emil Binetter.

10.    The first and second applicants pay the costs of the fifth respondent on the ordinary basis, as agreed or taxed.

3.    Subject to paragraph 4 below, the respondents pay the appellant's costs of the appeal, as agreed or taxed.

4.    There be liberty to apply within seven days if any party wishes to raise a matter regarding the form of these orders.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

OVERVIEW

1    These appeals raise questions concerning the liability of directors of companies for their conduct in involving the companies in a scheme for the dishonest evasion of taxation, the result of which was the assessment of taxation imposed on the companies. The scheme has some complexity because of the lack of reliable evidence about its detail. That lack of reliable evidence is a consequence, in part at least, of the people involved being either dead or unwilling to give evidence, the existence of dishonesty and secrecy at various times, the destruction of documents in a fire, and the consequent doubt that reasonably arises as to whether documents that do exist reflect, or fully reflect, underlying transactions, rights and liabilities.

2    That said, there is some degree of simplicity of narrative and structure, which emerges through the documentary detail. In 1950, the brothers Emil and Erwin Binetter came to Australia as refugees from war-torn Europe. They (or their father) had been born in a town in Slovakia that gave its name to one of the corporate entities involved. From 1950, the brothers worked together, married and raised families. By 1988, Emil and Erwin had removed considerable sums of money from Australia (upon which no income tax had been paid) and deposited such in overseas banks. It is unnecessary to explore whether there was any augmentation of the untaxed funds overseas, other than by the expedients adopted in the scheme with which this case is concerned.

3    The events over the period from 1988 to 2014 involved Emil and Erwin, until their respective retirements and deaths, Gerda (the wife of Emil), Margaret (the wife of Erwin), Gary (the son of Emil), and Andrew, Michael and Ronald (the sons of Erwin). There were other children of Emil (Debbie and Lisa) and Erwin (Peter). They played no part in the present underlying facts. Some of the various corporate entities that were involved were controlled by the families separately, others were jointly controlled. There was no suggestion in the cases put by the liquidators that Ronald participated in any dishonesty.

4    In 1971, Erma Nominees Pty Limited (Erma) was incorporated with Erwin and Margaret (and from 1996, Andrew) as directors, and Milgerd Nominees Pty Limited (Milgerd) was incorporated, with Emil and Gerda (and from 1993, Gary) as directors.

5    In 1973 or 1974, Erwin, Michael (then around 19 years old), and Ronald (then around 16 years old) visited Tel Aviv and attended a bank, probably the Israel Discount Bank (IDB). Ronald, on the instruction of his father, signed a name that was not his name to open an account. It would appear that by 1974 Erwin, at least, had set up offshore accounts.

6    In 1975, Erwin incorporated EGL Development (Canberra) Pty Limited (EGL) with himself as a director. In 1988, Erwin and Emil incorporated Ligon 158 Pty Limited and Ligon 159 Pty Limited (Ligon 158 and Ligon 159). Andrew, Erwin and Margaret became directors of Ligon 158, and Emil, Gerda and Gary became directors of Ligon 159.

7    In 1990, Emil became a director of EGL, as did Gary and Michael in 1996 and Andrew in 2001. The shareholders of EGL were Milgerd and Erma. Thus, EGL was at relevant times a company owned and controlled by both branches of the family.

8    In 1991, Ligon 268 Pty Limited (Ligon 268) was incorporated, of which Erwin and Michael were shareholders and Erwin, Andrew, Michael and Ronald were directors.

9    In 1992, BCI Finances Pty Limited (BCI) was incorporated. It was a jointly owned and controlled company, with Erwin, Emil, Margaret, Andrew and Gary as directors.

10    In 2006, Binqld Pty Limited (Binqld) was incorporated with Michael as shareholder and Andrew as director.

11    Whilst other entities were at times relevant, the above companies reveal the following structure:

(a) Erma and Milgerd were holding companies for the respective families, also being trustees for respective family trusts.

(b) EGL and BCI were jointly owned finance companies for both families. (Binqld was later a finance company for Erwin's family, controlled by Andrew and Michael). The description "finance companies" should not be misunderstood. The business of these companies and the reason for incorporation of at least BCI and Binqld was the borrowing of money offshore in the manner to which we will come, and the on-lending of these funds to the companies conducting the family businesses and investments.

(c) Ligon 158 and Ligon 159 were shareholding and investing companies: Ligon 158 being a shareholder in companies running a juice business, owning factory premises, and investing otherwise; Ligon 159 owning commercial real estate and otherwise investing.

(d) Ligon 268 was the trustee of Ronald's medical practice, as well as acting as a finance company.

12    With this brief corporate background, it is helpful to describe in broad outline the nature of the transactions which are the subject of the case. The precise detail varied over time and for different entities. But there was a broad similarity of events and circumstance that makes such a summary useful. A finance company of the family group (such as EGL or BCI) received funds from an Israeli bank. This is said, by the Binetter interests, to be a commercial loan. The loan was secured by a deposit of cash in equivalent amount held by the Israeli bank. This cash deposit was constituted by moneys upon which no tax had been paid and which had been removed from Australia by members of the family. (We leave aside any augmentation over time by funds paid to the Israeli banks by this scheme.) Guarantees were given to the banks by members of the family and some of the family companies. The money that was brought on-shore, by loan it was said, was on-lent to other companies in the group for use as working capital in the family's businesses. The on-borrowers paid interest to the finance company, which made payments to the bank which it characterised as deductible interest payments to the bank.

13    For some years the Commissioner of Taxation (the Commissioner) accepted this structure that formed the basis of the tax returns of BCI and EGL: that there were borrowings from the relevant Israeli banks, on-loans to the relevant group companies, and so BCI and EGL were entitled to deduct interest payments to the Israeli banks against interest income from the on-borrowing companies. At no time was there any disclosure of the deposits of cash that secured the advances from the banks. The loans were always presented as loans secured only by personal or company guarantees.

14    After revelation of the family name in the records of one Philip Egglishaw that led to the well-known tax investigation called "Operation Wickenby" the Commissioner began a detailed tax audit of the family companies. The Australian Taxation Office (ATO) eventually issued amended assessments to the four companies that acted as finance companies (BCI, EGL, Ligon 268 and Binqld) based on fraudulent evasion of tax. These amended assessments did not recognise the deductibility of interest to the Israeli banks, nor the existence of loans from these banks, treating the inflow of money from Israel via the banks as income.

15    After some resistance to the amended assessments the four companies went into liquidation, being unable to pay the amended assessments. The Commissioner funded the liquidators of the companies to bring actions in the names of the companies alleging that the directors of the companies (BCI, EGL, Ligon 268 and Binqld) breached their fiduciary duty to the respective company by causing them to participate in the transactions of "loan" and thereby causing loss to the company being the relevant assessment. The claim also sought relief against the companies receiving the on-lent funds on the basis of their knowing participation in a fraudulent breach of director's duty.

16    Some preliminary comments should be made about the approach to the facts and the issues. First, there is little doubt that the secrecy (from the ATO, in particular) of the money in offshore accounts was a paramount consideration for members of the family. This can be best illustrated by some matters revealed by the evidence. On one occasion Michael Binetter discussed with an adviser in Israel the willingness of an apparently bribed and suborned bank officer in Israel to tell falsehoods to the Commissioner, if called upon (as he was, and did), to the effect that the only security for the loans was the guarantees. In the same meeting, Michael asked the adviser whether he could assist in locating someone who would help in (unlawfully) destroying the files of the Israeli bank. Both aspects of this conversation (in 2012, while tax appeals commenced by the finance companies were on foot) reveal the danger, fully appreciated by Michael, in the ATO becoming conversant with the details of the back-to-back cash deposits. The unusual clarity of this aspect of the evidence came from a written précis of evidence attested to by Deborah Huber (the wife of Ronald) who was present at the meeting and acting as Hebrew interpreter. The secrecy of the offshore moneys and the desire to utilise them, and if possible augment them, was the driving force, and determining feature, of the structure of the arrangements.

17    Secondly, much of the focus of debate in argument was whether it could be concluded that the advances from the Israeli banks were loans. As shall be seen, that was a central consideration of the primary judge's reasoning and conclusions. But there is a subtlety to that question. The advances of funds may have been repayable, and so loans in principle, and as to principal. Nevertheless, their proper characterisation also depends on what can be concluded about the deposits of money as security, and the setting of the interest rates. It is open to conclude from the evidence that the Israeli banks were prepared to lend any sum up to an amount placed on deposit with them for a fee. There is evidence that on occasions the fee was 0.3% of the sum lent. They would agree to lend at an interest rate requested by the borrower, paying an interest rate on the security deposit either slightly less than or the same as the requested borrowing rate. It is not always clear from the evidence how the fee was paid to the bank. Thus, if, as it is open to conclude, the requested interest rate bore a direct relationship, sometimes set by the fee, to the interest rate on the deposit, the payment of interest by the on-borrowing company (say Ligon 158) to the finance company (say EGL) funded the payment of "interest" to the Israeli bank, which was used to pay the interest on the deposit and, sometimes at least, the bank fee. So, if one recognises the conformity of interests of all concerned (the family business entity (Ligon 158), the family finance company (EGL) and the family members owning the offshore deposits), one sees pre-tax revenue of Ligon 158 augmenting the secret cash deposit in Israel, through the medium of a tax deduction in EGL for the payment to the Israeli bank of "interest". The amount of money thus augmenting the deposit accounts could be adjusted according to domestic profit of the on-borrowing companies, and management of the risk of discovery, by setting the borrowing rate (in arrears) with consequent amendment to the deposit rate. The advances from the Israeli banks and their terms can thus be seen to be driven by the commercial needs and convenience of the on-borrowing companies and the overriding and dishonest intention of the relevant family members involved to use and augment the offshore funds in eliminating taxation as far as possible on the family business and investments. The involvement of the lender was accommodated by its fee, which was either taken from the "interest" payment or collected otherwise in some fashion.

18    Once one appreciates the reality of the above, the characterisation of the arrangements as commercial loans at interest becomes problematic (to say the least) to any honest person, even if the advance of principal can be viewed as an advance that must be repaid at some time.

19    At [177] of her reasons, the primary judge recorded her understanding of the liquidators' case, in particular in its reference to "purported" rates of interest. Her Honour described the case as follows:

… [I]t was that the rates of interest stipulated in the loan documentation were not rates for interest charges that were imposed by the bank as amounts that it would earn on the transactions but, rather, rates that were used to calculate the quantum of payments by the borrower to the bank wholly or partly for the benefit of an entity other than the bank, being an entity associated with one or more of the respondents.

20    Another way of expressing the matter would be that given the circumstances of the setting up of the loan and the willingness of the bank to enter the arrangement for a fee, passing most or all of the interest through to the deposit account, the interest was not an expenditure of the finance company calculated from a practical and business point of view to effect the borrowing, but rather to augment the deposit. The expenditure, from a practical and business point of view, necessarily incurred to obtain the loan for the purpose of gaining or producing assessable income from the on-borrowing company, was the true negotiated cost of the loan: the fee and the lack of use of the deposit funds (though the interest accrued was free to be used) during the life of the loan.

21    Such a practical and business view not being one based on "juristic classification of the legal rights, if any, secured, employed or exhausted in the process" (see Hallstroms Pty Ltd v Commissioner of Taxation (Cth) (1946) 72 CLR 634 at 648), was not one that would be the province only of a lawyer or tax practitioner. It is a practical business view plain to an honest person familiar with the details of the arrangement.

THE PROCEEDING BELOW AND THE APPEALS

22    The applicants in the proceeding below were BCI, EGL, Ligon 268 and Binqld (the finance companies), each of which was in liquidation. The joint and several liquidators of each company were (and are) John Sheahan and Ian Russell Lock (the liquidators).

23    The respondents to the proceeding below were:

(a)    Gary Binetter, as legal personal representative of the late Emil Binetter (Gary's father);

(b)    Margaret Binetter, as legal personal representative of the late Erwin Binetter (her husband);

(c)    Margaret Binetter, in her own right;

(d)    Andrew Binetter;

(e)    Gary Binetter, in his own right;

(f)    Michael Binetter;

(g)    Milgerd;

(h)    Erma;

(i)    Ligon 159; and

(j)    Ligon 158.

Without intending any disrespect, it will generally be convenient to refer to the individual members of the Binetter families simply by their first names. We will refer to Milgerd, Erma, Ligon 159 and Ligon 158 as the "downstream companies".

24    The finance companies' claims were pleaded in their second further amended statement of claim filed 7 September 2015 (the statement of claim). In summary, the claims were based on allegations of:

(a)    breach of fiduciary, common law, equitable or statutory duties owed to the finance companies by the respondents below who were directors of the finance companies at the relevant times; and

(b)    knowing participation by the other respondents below in the breaches of duty by the directors.

The finance companies also relied at trial on a document styled "amended narrative".

25    The alleged breaches by the directors concerned the finance companies' dealings with two banks in Israel: Bank Hapoalim, in the case of BCI; and IDB in the case of the other finance companies.

26    At the behest of the liquidators, the finance companies' case was based on a complex analysis of the transactions between the finance companies and the two Israeli banks, and on the factual context in which those transactions took place. In summary, the finance companies argued that the respondents below participated in a scheme for the purpose of evading or avoiding liability to pay income tax. The alleged scheme involved, as an important element, using funds in Switzerland or Israel (referred to as "offshore deposits") as security for advances from the Israeli banks of amounts equivalent to the offshore deposits. The finance companies contended that the respondents' conduct in participating in the scheme led the finance companies to incur the liabilities which arose when the Commissioner issued notices of assessment, amended assessment and penalty assessment to the finance companies between December 2009 and July 2010 (the revised assessments). Those liabilities comprised income tax, penalties and interest incurred under the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936), the Income Tax Assessment Act 1997 (Cth) (the ITAA 1997) and the Taxation Administration Act 1953 (Cth) (the TAA). In summary, the liabilities arose from the disallowance of deductions for interest expenses claimed to have been paid to the Israeli banks and the inclusion of amounts transferred from the Israeli banks to the finance companies as part of their assessable income.

27    The finance companies' claim was quantified principally by reference to the tax liabilities arising from the revised assessments. Claims for relief were also made with respect to the costs of the winding up of the finance companies and there were claims for ancillary relief in the nature of charging orders over various identified assets. The claims totalled over $120 million as at 27 September 2015.

28    At trial, Ronald gave unchallenged affidavit evidence on behalf of the finance companies. The primary judge accepted his evidence.

29    Deborah Huber, the wife of Ronald, gave evidence at trial following the grant of a certificate under s 128 of the Evidence Act 1995 (Cth). She was not cross-examined. The primary judge accepted her evidence.

30    The respondents below adduced no oral evidence, but the evidence tendered by the finance companies included affidavits made by Emil, Margaret, Andrew and Gary in tax appeal proceedings brought by the finance companies.

31    The primary judge's principal judgment in relation to liability was delivered on 18 November 2016: BCI Finances Pty Limited (in liq) v Binetter (No 4) [2016] FCA 1351 (the Liability Judgment). The primary judge dismissed the finance companies' cases against Margaret and Gary. Her Honour upheld the finance companies' claims against the other respondents below, and listed the matter for hearing on the form of orders to give effect to the reasons and the question of costs.

32    After a further hearing, on 15 December 2017 the primary judge delivered further reasons for judgment: BCI Finances Pty Limited (in liq) v Binetter (No 5) [2017] FCA 1524 (the Quantum Judgment). In addition to issues concerning the quantum of damages, these reasons dealt with costs. One of the issues concerned the appropriate costs orders in relation to the unsuccessful defence of Emil's estate and Erwin's estate (the first and second respondents below). On behalf of Margaret, it was argued that the costs order against her (in her capacity as legal personal representative of the late Erwin Binetter) should be limited to the assets of the estate, and there should be no set-off of the liabilities for costs as between BCI and Margaret. The primary judge rejected these arguments. Her Honour also rejected comparable arguments that were advanced by Gary in relation to Emil's estate.

33    On 16 April 2018, the primary judge published further reasons for judgment, dealing with certain outstanding issues: BCI Finances Pty Limited (in liq) v Binetter (No 6) [2018] FCA 500.

34    Four appeals were instituted against the judgments and orders of the primary judge:

(a)    An appeal brought by BCI and EGL against the dismissal of their claims against Gary and Margaret (proceeding No NSD2109/2016) (the Liquidators' appeal).

(b)    An appeal brought by Gary against the costs orders made by the primary judge (proceeding No NSD188/2018) (Gary's costs appeal).

(c)    An appeal brought by Michael against the findings of liability against him (proceeding No NSD189/2018) (Michael's appeal).

(d)    An appeal brought by Margaret (in her capacity as the legal personal representative of the late Erwin Binetter), Margaret in her own right, Andrew, Erma and Ligon 158 (proceeding No NSD195/2018). This appeal was structured in two parts, referred to as Section A and Section B:

(i)    Section A involved an appeal by Margaret (in her capacity as the legal personal representative of the late Erwin Binetter), Andrew, Erma and Ligon 158 (the Andrew parties) against the findings of liability against them (the Andrew parties' appeal).

(ii)    Section B involved an appeal by Margaret against the costs orders made by the primary judge (Margaret's costs appeal).

35    While judgment was reserved, settlement was reached in respect of the following appeals or parts of the following appeals:

(a)    The part of the Liquidators' appeal concerning Margaret.

(b)    The whole of Michael's appeal.

(c)    The whole of the Andrew parties' appeal.

(d)    The whole of Margaret's costs appeal.

36    The appeals that remain on foot are therefore as follows:

(a)    The Liquidators' appeal insofar as it relates to Gary.

(b)    Gary's costs appeal.

37    In the Liquidators' appeal, the finance companies' grounds of appeal are set out in a supplementary notice of appeal. Grounds 1-4 relate to Gary, while grounds 5 and 6 relate to Margaret. In light of the settlement, only grounds 1-4 remain relevant.

38    Further, in the Liquidators' appeal, Gary relies on an amended notice of contention. This contains a single ground, namely that the primary judge erred in finding that the transactions between BCI and EGL and the Israeli banks were not loans and in failing to hold that there was no breach of Gary's duties to BCI and EGL because the advances from the Israeli banks were interest-bearing loans. In support of this contention, Gary relies on the submissions made by the Andrew parties, both in writing and at the hearing of the appeals. Accordingly, in order to deal with this contention it will be necessary to consider the submissions made on this issue by the Andrew parties. It is logical to consider this contention before considering the finance companies' grounds of appeal.

39    Accordingly, the issues raised by the appeals that remain on foot can be summarised as follows:

(a)    whether the primary judge erred in finding that the transactions between BCI and EGL and the Israeli banks were not loans and in failing to hold that there was no breach of Gary's duties to BCI and EGL because the advances from the Israeli banks were interest-bearing loans;

(b)    whether the primary judge erred in finding that Gary was not liable for breach of the duties he owed to BCI and EGL; and

(c)    whether the primary judge erred in relation to certain costs issues relating to Gary.

40    The balance of these reasons will be structured as follows. First, we will set out a statement of the facts. Secondly, we will provide a summary of the reasons of the primary judge. Thirdly, we will consider each of the issues raised by the appeals.

STATEMENT OF THE FACTS

41    The following statement of the facts is substantially based on the Liability Judgment. In addition, we have drawn on the chronology contained in the Appeal Book and some of the documents in the Appeal Book to which we were taken during the hearing of the appeals. It is necessary to set out the facts in some detail for the purposes of considering the issues raised by the appeals. Among other things, the detailed factual narration is relevant to the question whether the advances by the Israeli banks were loans. It also provides context in which to evaluate the contentions that Gary breached his duties as a director of BCI and EGL and that the primary judge erred in not so concluding.

42    All references to dollars ($) are to Australian dollars unless otherwise indicated.

Key individuals

43    Emil and Gerda are the parents of Gary. Emil died on 17 December 2014.

44    Erwin and Margaret are the parents of Andrew, Michael and Ronald. Erwin died on 25 August 2009.

45    Erwin and Emil conducted a shoe manufacturing business at Marrickville, Sydney until around 1990. At some time, they commenced investing in property and property development. By the time of BCI's incorporation in 1992, the brothers had amassed a portfolio of property investments which they valued in the several millions of dollars. Erwin and Emil engaged in numerous joint business ventures.

46    In about 1997, Emil and Erwin decided to separate their business dealings. However, Emil and Gary continued to be directors of EGL until September 2001 and Erwin and Emil were directors of BCI until Erwin's death and Emil's retirement.

47    By April 2004, Erwin had been diagnosed with dementia. However, the primary judge did not find that he lacked mental capacity to make decisions affecting the finance companies at any point in time prior to his death.

48    Between 1986 and 2007, Gary was employed as a flight steward with Qantas Airways. Australian Securities and Investments Commission searches showed that he had an address in Double Bay, Sydney, while he was a director of BCI and EGL. In more recent times, Gary has lived in Israel.

49    Michael is or was a solicitor, specialising in commercial tax law.

50    Ronald is an ophthalmic surgeon.

The corporate entities

BCI

51    BCI was incorporated on 1 May 1992. The primary judge inferred that Erwin and Emil caused the incorporation of BCI. The company's registered office was in Rose Bay, New South Wales (at the home address of Erwin and Margaret) from 17 October 1996. BCI's principal place of business was at that address from 30 June 1994.

52    At all material times, BCI carried on business as a financier, on-lending funds it obtained to other entities which used the funds for business purposes.

53    At all relevant times, the shareholders of BCI were Erwin and Emil.

54    In relation to the directors of BCI:

(a)    Erwin was a director from 4 May 1992 until his death on 25 August 2009;

(b)    Emil was a director from 4 May 1992 to 20 June 2013; and

(c)    Margaret, Andrew and Gary were directors from 25 January 1994 onwards.

55    The primary judge observed that, although Margaret and Gary each held the position of director of BCI from January 1994, the evidence did not suggest that either Margaret or Gary played an active role in the management of BCI; on the other hand, her Honour said, Erwin, Emil, Andrew and Michael were actively involved in the management of BCI at various times.

56    BCI was:

(a)    placed in administration under the provisions of Pt 5.3A of the Corporations Act 2001 (Cth) on 5 March 2014;

(b)    wound up by resolution of its creditors passed pursuant to s 439C of the Corporations Act on 23 April 2014; and

(c)    wound up by order of this Court made on 27 August 2014.

EGL

57    EGL was incorporated on 20 June 1975. Its registered office was in Rose Bay, New South Wales, from 28 October 1996 to 14 October 2014.

58    The business of EGL was that of a finance company. The sole activity of EGL, from December 1988, was to operate as an intermediary in relation to transactions with IDB.

59    The shareholders of EGL were Milgerd and Erma.

60    In relation to the directors of EGL:

(a)    Emil was a director from 31 January 1990 to 28 September 2001;

(b)    Erwin was a director from 18 July 1975 until his death on 25 August 2009;

(c)    Andrew was a director from 28 September 2001 until at least 20 April 2012;

(d)    Gary was a director from 16 October 1996 to 28 September 2001; and

(e)    Michael was a director from 16 October 1996 to 28 September 2001.

61    The primary judge observed that: there was ample evidence that Erwin and Emil were actively involved in the management of EGL; Andrew was actively involved in the management of EGL from around the time of his appointment as a director of EGL (September 2001); and the evidence did not suggest that Gary played an active role in the management of EGL.

62    EGL was wound up in insolvency by order of the Supreme Court of New South Wales on 2 March 2015 on the application of the Deputy Commissioner of Taxation.

Ligon 268

63    Ligon 268 was incorporated on 22 April 1991. The company was incorporated, at the suggestion of Erwin, to be the trustee of the Bankstown Eye Trust. This trust was associated with Ronald (who, as noted above, is an ophthalmic surgeon). The paperwork for the incorporation of the company and the establishment of the trust was arranged by Michael and presented to Ronald for signing. In about 1998 or 1999, Ligon 268 expanded its activities to include lending funds to companies associated with Erwin. The registered office of Ligon 268 was in Rose Bay, New South Wales from 16 July 1991 to 14 October 2014.

64    Ligon 268 conducted the administration of Ronald's medical practice. Ronald paid the costs incurred by Ligon 268 along with a 15% service fee. Ronald's income came from his surgical practice and he was not a signatory on Ligon 268's bank accounts. When his practice became successful, he lent money to Ligon 268 at the request of Erwin.

65    The shareholders of Ligon 268 were Erwin and Michael, with Michael owning nine of the ten issued shares.

66    In relation to the directors of Ligon 268:

(a)    Erwin became a director on 6 September 1991 and ceased to be a director on his death on 25 August 2009;

(b)    Andrew was a director from 30 June 1992;

(c)    Michael was a director from 5 July 1991 to 30 June 1992; and

(d)    Ronald was appointed as a director on 5 July 1991 and ceased to be a director on 27 March 1992, at his request.

67    Ligon 268 was wound up in insolvency by order of the Supreme Court of New South Wales on 2 March 2015 on the application of the Deputy Commissioner of Taxation.

Binqld

68    Binqld was incorporated on 12 April 2006. From incorporation until 12 December 2010, Binqld had its registered office in Rose Bay, New South Wales.

69    The primary judge found that a substantial purpose for the establishment of Binqld was to obtain funds from IDB to fund and invest in the Nudie juice business.

70    At all times, Michael was the sole shareholder of Binqld.

71    Andrew was a director of Binqld from 12 April 2006 onwards. The evidence available at trial showed that Binqld was principally managed by him.

72    Binqld was wound up in insolvency by order of the Supreme Court of New South Wales on 2 March 2015 on the application of the Deputy Commissioner of Taxation.

Milgerd

73    Milgerd is a combination of the names Emil and Gerda. Milgerd was incorporated on 4 November 1971. At all relevant times, the shares in Milgerd were held by Emil and Gerda.

74    Emil was a director of Milgerd from 4 November 1971 until 22 November 2012. Gerda was a director from 4 November 1971 to 19 February 2003. Gary was a director of Milgerd from 18 January 1993. Milgerd appears to have been principally managed by Emil.

Erma

75    Erma is a combination of the names Erwin and Margaret. Erma was incorporated on 4 November 1971. At all relevant times, the shareholders of Erma were Erwin (or his estate) and Margaret.

76    Erwin was a director of Erma from 4 November 1971 until his death. Margaret was also a director of Erma from 4 November 1971. Andrew was a director from 17 April 1996.

Ligon 159

77    Ligon 159 was incorporated on 26 February 1988. Emil was a director of Ligon 159 from 9 May 1988 until 22 November 2012. Gerda and Gary were directors from 9 May 1988. As at January 2015, the shareholders of Ligon 159 were Gary, as well as his sisters, Debbie and Lisa. In the absence of evidence that Gerda or Gary participated actively in the management of Ligon 159, the primary judge found that it was more likely than not that Ligon 159 was principally managed by Emil.

Ligon 158

78    Ligon 158 was incorporated on 26 February 1988. Erwin was a director of Ligon 158 from 6 July 1991 until his death. Margaret was also a director of Ligon 158 from 9 May 1988 to 9 May 1991, and again from 6 July 1991. Andrew was a director from 9 May 1988.

79    The shareholders of Ligon 158, as at January 2015, were Erwin, Margaret, Andrew, Michael and Ronald, as well as Peter, the fourth son of Erwin and Margaret.

The Nudie Juice business

80    In May 1990, Erwin set up a company called Tamarama Fresh Juices Pty Ltd and appointed himself and Andrew as its directors. The company bought a business called Tamarama Fresh Juices, which operated from Marrickville. Erwin arranged the funding to buy this business and, in about 1992, to buy out a competitor to increase the scale of the juice operation.

81    Between 1990 and 1993, the juice business tripled in size. To accommodate it, Erwin organised the purchase of premises located at Corish Circle, Pagewood (the Pagewood premises). The premises were owned, at least by July 2003, by Ligon 158.

82    Andrew was appointed a director of Nudie Pty Ltd from about 31 October 2002. Ligon 158 is a shareholder in Nudie Pty Ltd, and also a shareholder in Nudie Foods Pty Ltd.

83    The Nudie brand was launched in January 2003. From July 2003, the Nudie juice business was carried on from the Pagewood premises.

84    In May 2004, Andrew was appointed a director of Nudie Foods Pty Ltd.

85    On 12 July 2004, Andrew was appointed a director of Nudie Foods Australia Pty Ltd. Andrew became the Chief Operating Officer of the Nudie juice business in October 2004, and the Chief Executive Officer in March 2005.

86    In late December 2014, the Nudie juice business was sold for approximately $80 million.

The Israeli banks

Bank Hapoalim

87    Bank Hapoalim is a banking corporation organised and existing under the laws of the State of Israel. Bank Hapoalim carried on a business of banking in Israel, which included the provision of loans.

88    Baruch Etzion is a former officer of Bank Hapoalim.

89    Mr Etzion first met Erwin and Emil in about 1992. He was introduced to them by Yacov Loew-Beer of IDB. Mr Etzion claimed (in a statutory declaration and an affidavit) to have been in charge of the "credit/loan department for major customers of the Bank" and, in that role, dealt with the "loans" provided by Bank Hapoalim to BCI.

90    After their first meeting, Mr Etzion met Erwin and Emil occasionally in Israel over several years. The meetings occurred in his office at the bank. In November 1997, Mr Etzion was introduced to Andrew by Erwin – again, in Mr Etzion's office in Israel.

91    Mr Etzion made a statutory declaration dated 16 December 2009, in which he described himself as a lawyer admitted in Israel and a former Deputy General Manager of the Central Branch of Bank Hapoalim in the period 1985 to 1999. From 1999 to his retirement on 31 December 2001, Mr Etzion worked in the legal department of Bank Hapoalim. On 4 October 2011, Mr Etzion affirmed an affidavit in a tax appeal brought by BCI in this Court (the BCI tax appeal).

92    Mr Etzion was not called as a witness in the proceeding below, but the finance companies tendered the statutory declaration and the affidavit. The primary judge stated that the evidence of Deborah Huber, set out below, strongly suggested that Mr Etzion had been corrupted by one or more members of the Binetter family.

93    The finance companies contended at trial, and the primary judge accepted, that each of Bank Hapoalim (Switzerland) Limited, Bank Hapoalim (Schweiz) and Banque Hapoalim (Suisse) SA was, and together were, banks carrying on the business of banking in Switzerland from an office at 33 Stockerstrasse Zurich, Switzerland (together, Bank Hapoalim Switzerland) as part of, or in conjunction with, the banking business operated by Bank Hapoalim.

IDB

94    IDB is a banking corporation organised and existing under the laws of the State of Israel. IDB carried on a business of banking in Israel, which included the provision of loans.

95    Hagai Peled and Fernanda Barisaac were representatives of IDB with whom some of the respondents below had dealings.

Back-to-back loans

96    At trial, there was expert evidence of Barry Ben Zeev, an Israeli banker and long term employee of Bank Hapoalim, to the effect that in cases where the collateral (or security) for a loan was a deposit of money, the loan would be described as a "back-to-back loan". In particular, back-to-back loans were where the loan matched the deposit in terms of the maturity date. If the loan term was for five years, then the deposit would also be given a five year term and "applicable" interest rate. The deposit would have to be at least the same size as the loan. The deposit for the back-to-back loan would also be in the same currency as the loan because otherwise the bank would be exposed to foreign exchange risk. The primary judge appears to have accepted this definition of a "back-to-back loan": see [161], [164] and [167] of the Liability Judgment. The primary judge also referred (at [169]) to the evidence of Mr Ben Zeev in which he stated that "when the loan is fully collateralised by cash the exposure to the Bank is very low. If the borrower defaults then the Bank is able to access the deposit".

The period before 1988

97    In 1973 or 1974, Erwin, Michael and Ronald visited Tel Aviv and attended a bank, probably IDB. Erwin instructed Ronald to sign a name, which was not Ronald's name, for the purpose of opening an account.

1988

98    On 20-23 December 1988, EGL entered into an arrangement with IDB for the advance of funds.

99    On 21 December 1988, Erwin and Margaret held a meeting of the directors of Erma. The minutes recorded, relevantly, that IDB had agreed to provide EGL with "certain facilities in an amount not exceeding SFr 17 million on the terms contained in a Facility Letter", a draft of which was tabled at the meeting.

100    The evidence below included a handwritten ledger for EGL with entries dating from 30 June 1982. Entries dating from 30 December 1988 referred to IDB. The 30 December 1988 entry referred to a loan of SFr 7,157,033.37 received from IDB and on-lent to Milgerd and Erma. An entry dated 30 June 1989 referred to overseas travelling expenses for a trip by Emil to Israel to arrange working capital loans from IDB. An unsigned letter dated December 1988 from EGL to IDB requested the grant of a loan facility in the amount of SFr 17 million, although the handwritten ledger entry for 30 December 1988 referred to an amount of SFr 9,085,000. The unsigned letter was provided by EGL to the ATO to justify deductions of interest expenses.

101    EGL's loan request letter requested that the loan facility be provided on the following terms as to interest:

4.    The loan shall bear interest on its outstanding balance at a rate which shall be 9.35% p.a. less withholding tax in Australia resulting in 8.5% payable to you but should we pay such interest no later than twenty one (21) days after the date upon which interest is due then interest on the outstanding balance shall be at the rate of 7.997% p.a. less [withholding] tax in Australia resulting in 7.27% payable to you. Such rate of interest shall be fixed for the first two years of the loan facility and thereafter shall be at such rate to be agreed between us from time to time however, should we not agree upon a new rate from time to time, the rate shall be the last rate agreed and if no such rate exists the rate shall be the aforesaid rate.

Interest shall be paid at the end of each six month period as from the date the loan is drawn, as aforesaid or other period or periods as agreed.

Increased Costs. If due to either (i) the introduction of or any change in the interpretation of any law or regulation or (ii) the compliance by you with any request from any central bank or other governmental authority, there shall be any increase in the cost (including reserve requirements) to you of agreeing to make or making funding or maintaining the loan, then we shall from time to time upon demand by you, pay to you additional amounts sufficient to indemnify you against such increased costs. A certificate as to the amount of such increased costs, submitted to us by you, shall be conclusive.

5.    Each and every payment of principal or interest shall be effected on its due date of payment to Israel Discount Bank Ltd., Tel Aviv in your favour.

102    EGL's loan request letter stated that the obligation to make the proposed loan was conditional upon the provision of guarantees by Milgerd, Erma, Emil and Erwin, board resolutions approving the loan and the guarantees, and an opinion of Emeric Szanto (an accountant) "reflecting favourably to our power to enter into the transactions contemplated by this letter". The evidence included guarantees signed by Erwin, Milgerd and Erma dated 23 December 1988 in favour of IDB under an agreement made or intended to be made on 23 December 1988. There was also an unsigned but stamped and initialled guarantee in the name of Emil.

103    The evidence included a letter dated 22 December 1988 from Mr Szanto to IDB in which Mr Szanto referred to himself as the auditor of the "Binetter Group" and set out a list of assets and liabilities of Erwin. The assets totalled $15,931,000, while the liabilities were nil. The assets included equity in Erma, which had interests in various items of real property in the Sydney area and in Queensland, shareholdings and term deposits.

1988-2000 – advances from IDB to EGL

104    Between December 1988 and October 2000, EGL received total funds of $27,703,280.38 from IDB.

105    The funds advanced to EGL up to July 1989 were lent to Milgerd and Erma, and used for the following business purposes:

(a)    in December 1988, the sum of $4,777,299 was on-lent to Ligon 159 and Ligon 158 to buy units in the Auburn Investment Trust, which trust purchased the property at 265 Parramatta Road, Auburn;

(b)    in 1989, the sum of $2.2 million was on-lent to Ligon 159 to contribute a further sum of $2.2 million in the Auburn Investment Trust;

(c)    in 1989, the sum of $2.2 million was on-lent to Ligon 158 to contribute a further sum of $2.2 million in the Auburn Investment Trust;

(d)    in 1989, part of the money was used by Milgerd for the following business purposes:

(i)    it was on-lent to Ligon 159, which purchased an office block at 12 Cordelia Street, Brisbane on 15 December 1989 for $1,175,000;

(ii)    it was on-lent to Ligon 159, which used the money to purchase a shopping strip at 548 Ipswich Road on 22 February 1990 for $1,850,000;

(e)    to fund Milgerd's interest in an investment in Broadbeach, Queensland; and

(f)    in 1989, part of the money was used by Erma to fund the interest of Erma in the investment in Broadbeach, Queensland.

106    Further:

(a)    advances in June 1991 were transferred to Erma, which lent the money to Ligon 158, and Milgerd, which lent the money to Ligon 159;

(b)    an advance in June 1993 was on-lent to Erma which in turn lent it to Ligon 158; and

(c)    an advance in August 1993 was on-lent to Milgerd, which on-lent the funds to Ligon 159, which used the funds to buy a shopping centre in North Richmond.

107    The evidence below did not reveal how funds advanced to EGL in 2000 were used. However, around that time, correspondence between EGL and IDB referred to Erma in connection with the advances. The primary judge inferred that the funds advanced to EGL in 2000 were on-lent to Erma.

1989

108    There were no primary records of any payment of interest expenses by or on behalf of EGL to IDB during the year ended 30 June 1989. The handwritten ledgers of EGL were not conclusive evidence, and the primary judge did not accept that they were accurate in the absence of supporting contemporaneous records.

1990

109    On 15 June 1990, Erwin on behalf of EGL and Erma sent a facsimile to IDB which stated:

According to our agreement of Dec. 1988 we will repay you before the end of June 1990 the sum of Sw.Fr. 1,000,000.00 on the loan granted to Erma Nominees P/L. through E.G.L. Development (Canberra) P/L.

110    There was no evidence of an agreement to repay SFr 1 million to IDB before the end of June 1990.

111    There were no primary records evidencing any payment of interest expenses by or on behalf of EGL to IDB during the year ended 30 June 1990.

112    A facsimile from Erwin on behalf of Erma dated 19 July 1990 to IDB referred to a remittal of SFr 1 million that day. The facsimile stated:

The position after this transfer is:

(Subtotals omitted.)

113    The primary judge observed that: there was no apparent reason why Erwin wrote to IDB with this information; and it was not apparent why IDB might have had an interest in the question of the "share" of each of Erma and Milgerd – on their face, the guarantees provided by Erma and Milgerd were each referable to the whole of EGL's borrowings.

1991

114    By letter dated 27 May 1991 from Erwin on behalf of EGL to IDB, EGL requested a remittal of SFr 4.8 million. The letter stated, relevantly:

This loan amount will be utilised against the [guarantee] of:-

Erma Nominees Pty. Ltd.    Sw. Fr. 2,800,000.00

Milgerd Nominees Pty. Ltd.    Sw. Fr. 2,000,000.00

115    On 11 June 1991, EGL received the following amounts from IDB:

(a)    $2,338,006; and

(b)    $1,673,640.

116    The $2,338,006 was transferred to Erma, which lent the money to Ligon 158.

117    The $1,673,640 was transferred to Milgerd, which lent the money to Ligon 159.

118    As for previous years, there were no primary records evidencing any payment of interest expenses by or on behalf of EGL to IDB during the year ended 30 June 1991.

119    By letter dated 26 July 1991 from Mr Szanto on behalf of EGL to IDB entitled "Interest payments on loan account of E.G.L. Development (Canberra) P/L", Mr Szanto wrote:

Referring to the recent additional borrowing of

Sw. Fr. 4,800,000.--

we advise you of the following interest payments:

a,    On 23 July 1991 by MILGERD NOMINEES PTY. LTD.

on Sw. Fr. 2,000,000.--

for 20 days from 11 June, 1991

to 30 June, 1991

in Australian Dollar currency:     [$]A 7,932.44

b,    On 26 July, 1991 by ERMA NOMINEES PTY. LTD.

on Sw. Fr. 2,800,000.--

for 20 days from 11 June, 1991

to 30 June, 1991

in Swiss Franc currency:    [Sw. Fr.] 13,000.--

The above two interest payments payments [sic] satisfies all of our interest obligations to 30 June, 1991.

120    The primary judge observed that: no explanation was given for why Mr Szanto wrote to the bank to inform it of the payments; and a possible explanation was that the bank was not the recipient of the payments, and the letter was written to create the false impression that the payments were interest payments to IDB.

1992

121    By facsimile dated 28 February 1992 from Mr Szanto on behalf of Erma to Lloyds International Ltd, Mr Szanto provided "Confirmation of request to transfer by TELEGRAPHIC TRANSFER Sw. Fr. 356,250.00 from our Swiss Franc account". The request was for a transfer to IDB "whose bank account is with the Union Bank of Switzerland. Bahnhofstrasse 45. Zurich. Switzerland. THEIR ACCOUNT NO. IS: 791-598". The facsimile requested the following message:

Being interest payment for six months, from 1st. Jan. 92 to 30th. June, 92 on loan granted to EGL Development (Canberra) P/L.

Loan no.: 971014/13692.

Borrowing of Erma Nominees Pty. Ltd.

For the attention of Mr. Loew-Beer.

122    The primary judge observed that: the evidence did not explain why an interest payment to IDB would be made to an account in Switzerland, rather than to an IDB account with a number corresponding to the loan number; the evidence did not demonstrate that this Swiss account was an account owned by IDB or that an interest payment to IDB could be made to that account; a likely explanation was that this facsimile recorded a payment that was falsely described as a payment of interest on a loan from IDB to EGL but which was, in truth, a payment to a Swiss bank account owned by Erwin and Emil; it was not necessary, however, to make a finding about this matter, or about other similar correspondence which recorded payments to the Union Bank of Switzerland.

123    In its tax return for the year ended 30 June 1992, EGL disclosed gross interest income of $1,751,410 and claimed deductions for overseas interest expenses of $1,750,410. The primary judge found that the evidence did not justify a conclusion that this amount, or any amount, was paid by way of interest to IDB during the year ended 30 June 1992 by or on behalf of EGL.

124    In or around November 1992, members of the Binetter family took steps to arrange transactions between Bank Hapoalim and BCI.

125    In or around 1992, Mr Loew-Beer of IDB introduced Erwin and Emil to Mr Etzion of Bank Hapoalim. They met in Israel.

126    The evidence below included a letter dated 6 November 1992 from Mr Szanto to Mr Etzion in which Mr Szanto identified himself as the auditor of Milgerd, Erma, Ligon 158, Ligon 159, Emil and Erwin. The letter certified that those six entities had a net value in excess of US$25 million and listed 17 assets said to be their major assets.

127    A facsimile copy of minutes of a meeting of the directors of BCI dated 10 November 1992 was obtained from the files of Bank Hapoalim. The minutes recorded that Erwin and Emil resolved that:

[F]or the proper handling of the corporation's funds, it was convenient to open an account with Bank Hapoalim, Central Branch, Tel-Aviv, Israel in addition to the company's other accounts.

…

Mr Emil Binetter, Mr Erwin Binetter and Mr Michael Binetter each acting individually, be and is hereby authorised, for and on behalf of this corporation, to sign and draw cheques against such account and to manage and transact any other business of whatever nature with such bank with the broadest powers …

128    The primary judge inferred that, by about late 1992, Emil, Erwin and Michael had agreed to enter into discussions with Bank Hapoalim through, among others, Mr Etzion, and to enter into transactions whereby a substantial amount would be advanced by Bank Hapoalim to BCI on terms that included dealings with Bank Hapoalim Switzerland and the provision of a deposit of offshore funds as security for the advance.

129    The evidence below included a document dated 10 November 1992 entitled "Deed of continuing guarantee unlimited in amount" signed by Erwin and Emil in favour of Bank Hapoalim in respect of "credit in the form of loans in foreign currency" that BCI had received or might receive from time to time. A similar document was executed on behalf of Erma, Milgerd, Ligon 158 and Ligon 159. The latter document was signed by Erwin and Margaret on behalf of Erma and Ligon 158 and by Emil and Gerda on behalf of Milgerd and Ligon 159. Each document referred to Mr Szanto's 6 November 1992 letter, and verified its accuracy.

1993

130    The evidence below included a letter dated 6 January 1993 from Bank Hapoalim Switzerland to a Mr Ben Zeev, a banker at Bank Hapoalim in Israel. (This was a different person to the expert witness of the same name referred to at [96] above.) The letter was copied to Mr Etzion and was entitled "Australian deal". The letter was produced by Bank Hapoalim from its records relating to BCI. The letter stated:

As I wrote to Mr. M. Reshef we lost contact with the client and we shall review the documentation sent to us when the matter becomes relevant again.

I would like to draw your attention to Mrs. R. Zmiri's memo in Hebrew to Mr. Reshef, dated October 5, 1992, in which she states in paragraph 3 that both deed of pledge and our confirmation to Central Branch are kept with us and not sent to Tel Aviv as written in your message.

131    This letter confirmed the existence of a "deed of pledge" and a "confirmation" from Bank Hapoalim Switzerland to Bank Hapoalim prior to the May 1993 advances, referred to below. The primary judge considered it likely that the deed of pledge and confirmation referred to in the January 1993 letter recorded terms on which advances from Bank Hapoalim to BCI would be secured by an offshore deposit.

132    The letter showed that an apparently significant aspect of the arrangements concerned the location where the "deed of pledge" and the "confirmation" were to be stored. The primary judge considered this to be consistent with an arrangement between BCI and Bank Hapoalim by which the offshore deposit to be provided as security for advances would be concealed.

133    The letter also showed that, in around January 1993, Mr Etzion was probably aware of the existence of the deed of pledge and the confirmation, and that they were relevant to the advances ultimately made in May 1993.

134    By letter dated 6 January 1993, Michael wrote to Mr Etzion concerning some amendments apparently proposed by Mr Etzion in relation to a "letter of undertaking". The letter was addressed "Dear Baruch" and was signed "Michael". The primary judge inferred that Michael had been introduced to Mr Etzion by this date.

135    The evidence included a facsimile dated 6 January 1993 from Erwin on behalf of Erma to Lloyds Bank entitled "Confirmation of request to transfer by TELEGRAPHIC TRANSFER Sw. Fr. 206,230.00 from our Swiss Franc account". The request was for a transfer purportedly to IDB, and it stated the same account details at the Union Bank of Switzerland mentioned in the February 1992 facsimile. The facsimile requested the following message:

This is a partial interest payment. Being the balance of interest due for the period from 1st. July, 92 to 31. Dec. 92. SW. Fr. 150,000.00 was remitted to you on 29th. Dec. 1992.

Reference loan granted to EGL DEVELOPMENT (CANBERRA) P/L. Loan No. 971014/13692. Borrowing of Erma Nominees P/L. Attention: Mrs. Miriam Cohen.

136    The payment did not appear to be recorded in the EGL handwritten ledgers. The primary judge was not satisfied that this was a payment of interest to IDB, in the absence of other evidence that the Union Bank of Switzerland bank account was owned by IDB.

137    On 25 April 1993, BCI resolved to enter into an arrangement with Bank Hapoalim for the advance of funds. On that date, Erwin and Emil held a meeting of the directors of BCI. Under the heading "Proposed loan from Bank Hapoalim BM", the minutes recorded:

PRODUCED to the meeting was a form of letter of undertaking intended to be entered into by this company with Bank Hapoalim B.M. Central Branch, Tel Aviv, Israel.

RESOLVED:

(1)    to agree to the terms of the letter of undertaking produced to the meeting, being a letter of undertaking between this Company and Bank Hapoalim B.M. Central Branch, Tel Aviv, Israel;

(2)    to date the letter of undertaking this 25th day of April 1993; and

(3)    to execute the said letter of undertaking under the common seal of this Company and to authorise Mr Emil Binetter and Erwin Binetter to attest the affixing of the common seal of this Company to the said letter of undertaking and to cause delivery of the said letter of undertaking to Bank Hapoalim B.M. Central Branch, Tel Aviv, Israel.

PRODUCED at the meeting was a form of request for provision of credit.

RESOLVED that this company agree to the terms of the request for provision of credit and authorise each of Mr Emil Binetter, Mr Erwin Binetter and Mr Michael Binetter on their own to negotiate the terms of any provision of credit, to fill in any request for credit, to execute any request for credit, to make any request for credit and to deliver any request for credit, in each case on behalf of this Company to Bank Hapoalim B.M. Central Branch, Tel Aviv, Israel.

138    The minutes also recorded that the directors had agreed to execute a deed of charge in favour of Bank Hapoalim. The deed of charge, dated 25 April 1993, was in evidence. It referred to the two 10 November 1992 guarantees as "Collateral Securities".

139    The evidence below included a document entitled "Letter of undertaking" dated 25 April 1993, executed by BCI and signed by Erwin and Emil (the 1993 letter of undertaking). The document referred to past or future requests to Bank Hapoalim "to provide me, from time to time, with credit by means of loans in freely convertible foreign currencies". Clause 7(k) recorded that the financial certificate issued by Mr Szanto dated 6 November 1992 was true and correct. Clause 9 provided:

As security for the due and punctual performance of all or any of my undertakings hereunder or pursuant hereto, all securities given or which may be given (if any) by me and/or on my behalf to the Bank and also all bills and other negotiable instruments which I have delivered and/or may deliver (if any) to the Bank from time to time, shall serve as collateral as well as all the additional securities which may be given by me to the Bank after the signing of this Letter of Undertaking.

140    Neither the 1993 letter of undertaking, nor the deed of charge, referred to any security for loans in the form of a deposit.

141    The primary judge accepted the finance companies' submission that the 1993 letter of undertaking and the charge were deliberately drafted without reference to the offshore deposit that had been or would be provided as security for the advances to be made pursuant to these documents, and found that the documents were drafted in this way to permit BCI to provide them to the ATO, if necessary, in support of deductions that BCI intended to claim in its tax returns for overseas interest expenses. Based in particular on Michael's 6 January 1993 letter, the primary judge found that Michael participated in the creation of the documents in this form and for this purpose.

142    On 27 April 1993, BCI took further steps to enter into an arrangement with Bank Hapoalim for the advance of funds. By letter of that date, Michael wrote to Bank Hapoalim, purportedly as the Australian solicitor to BCI, in connection with the 1993 letter of undertaking. The letter set out certain opinions concerning BCI and the letter of undertaking under Australian law. Paragraph 9 of the letter stated:

Mr Emil Binetter and Mr Erwin Binetter who attested the affixing of the seal of the Borrower to the Letter of Undertaking had the right[,] power and authority to do so and any one of Mr Emil Binetter, Mr Erwin Binetter and Mr Michael Binetter has the right to sign on any Request for Provision of Credit and/or to give any certificate, notice and other instrument pursuant to the Letter of Undertaking.

143    By a second letter dated 27 April 1993, Michael wrote to Bank Hapoalim, purportedly as the Australian solicitor to Milgerd, Erma, Ligon 158, Ligon 159, Emil and Erwin, concerning guarantees given in connection with banking facilities granted or to be granted by Bank Hapoalim to BCI.

144    By another letter dated 27 April 1993, from Emil on behalf of BCI, BCI enclosed 10 documents in relation to a "proposed loan from Bank Hapoalim" to BCI.

145    The evidence also included a letter dated 27 April 1993 from Bank Hapoalim to Bank Hapoalim Switzerland, copied to Mr Etzion, entitled "Australian transaction" and seeking agreement to the wording of a draft "letter of irrevocable instructions to be issued to you by the pledgor in connection with the a/m transaction". The letter continued:

Please note that in order to proceed we require your agreement to the wording of the said draft. …

Please note that our customer has agreed to the said wording.

146    This letter was produced by Bank Hapoalim from its records relating to BCI. It provided confirmation of the existence of the deed of pledge referred to in the 6 January 1993 letter referred to at [130] above, and of Mr Etzion's probable knowledge of its existence.

147    The evidence included a letter dated 11 May 1993 from EGL to IDB which foreshadowed a transfer of SFr 6 million to loan account "Code NO. (&971057 A/c. NO. 13692" to "reduce the principal of our loan account. This reduction of the account is to be applied in connection with the borrowing of ERMA NOMINEES PTY LTD." The loan account details corresponded with the account number on the 28 February 1992 and 6 January 1993 facsimiles identified above.

148    On 13-14 May 1993, BCI requested 12 advances of funds from Bank Hapoalim totalling SFr 6 million. The evidence included 12 letters dated 13 May 1993 from BCI to Bank Hapoalim, by which BCI purported to request the provision of credit in accordance with the 1993 letter of undertaking. Each letter requested the provision of credit in the amount of SFr 500,000. Each letter provided that interest would be at the rate of 6.2% per annum, less Australian interest withholding tax. The interest rate of 6.2% was completed by hand, apparently on behalf of BCI rather than by the bank. Each letter was signed by Erwin.

149    On 14 May 1993, there was a meeting of Erwin and Emil as directors of BCI that resolved:

1.    To become a party to Bank Hapoalim BM's arrangement for executing transactions by means of instructions given by telephone and/or fax.

2.    To empower each and every one of Mr Emil Binetter, Mr Erwin Binetter and Mr Michael Binetter to give instructions as aforesaid.

150    The minutes were certified by Michael as BCI's solicitor.

151    By letter dated 17 May 1993 from Bank Hapoalim to Michael, the Bank requested that a deed of charge be duly registered in favour of the bank and that confirmation evidencing the registration be provided.

152    By a further batch of 12 letters, dated 27 May 1993, from BCI to Bank Hapoalim, BCI purported to request the provision of credit in accordance with the 1993 letter of undertaking. Again, each letter requested the provision of credit in the amount of SFr 500,000. Again, each letter provided that interest would be at the rate of 6.2% per annum, less Australian interest withholding tax. Each letter was signed by Emil.

153    Between 17 and 28 May 1993, Bank Hapoalim advanced SFr 12 million to BCI. That amount was then transferred to other Binetter entities.

154    By an undated letter from Erwin and Emil on behalf of BCI to the International Services Manager, Australia and New Zealand Banking Group Ltd (ANZ Bank), signed around 17 May 1993, BCI requested that ANZ Bank open a Swiss franc currency account for BCI. The individuals authorised to arrange transfers of funds from the account were Michael, Erwin, Emil, Gary and Andrew. The letter identified Michael's title as "authorised person", and Erwin, Emil, Gary and Andrew each as "director".

155    The evidence below included a document entitled "Authority for Operations" which identified the signature of persons authorised to operate an ANZ Bank account in the name of BCI. The "Authority for Operations" document identified Erwin, Margaret, Gary and Andrew as holding the office of "director", while Michael was said to hold the office of "authorised signatory". Each of Erwin, Emil, Margaret, Andrew, Gary and Michael (amongst others) provided specimen signatures on the "Authority for Operations" document.

156    According to BCI's appeal statements in the BCI tax appeal, the funds BCI received from Bank Hapoalim in 1993 were on-lent to EGL to enable EGL to refinance a portion of loans it had received from IDB.

157    The handwritten ledgers of BCI recorded the amount of SFr 12 million as having been received on 17 May 1993 from Bank Hapoalim and lent first to EGL, and through it then to each of Erma and Milgerd.

158    Erma advanced the funds received from EGL to Ligon 158. Milgerd advanced the funds received from EGL to Ligon 159.

159    According to EGL's statement of facts, issues and contentions (SOFIC) in the tax appeals commenced by the finance companies, in May 1993, EGL repaid to IDB the following amounts:

(a)    $5,829,770.60 (described as "repayment by Erwin Binetter"); and

(b)    $6,030,150.17 (described as "repayment by Emil Binetter").

160    The amounts corresponded with the figures set out in the BCI handwritten accounts as amounts lent to Erma and Milgerd via EGL. The $6,030,150.17 loan was recorded in the EGL ledgers, as "new loan to Milgerd". The ledger recorded payments made by Milgerd on behalf of EGL to IDB totalling approximately $6,030,150.17. There was no obvious reference to the $5,829,770.60 loan to Erma in the EGL ledger.

161    A balance sheet attached to EGL's 1993 income tax return recorded that overseas loans reduced from $17,039,544 to $7,318,767.80 during the year ended 30 June 1993. The difference between those two figures was $9,720,776.

162    By letter dated 4 June 1993, from Erwin on behalf of EGL to IDB, Erwin wrote:

RE:    OUR LOAN ACCOUNT:

CODE NO. 971057

A/c. No. 13692

Around the time you receive this letter, you will have received

Sw.Fr. 100,000.00

(One Hundred Thousand Sw. Fr.)

into the above account to reduce the principal of our loan account.

This reduction of the principal account is to be applied in connection with the borrowing of ERMA NOMINEES PTY. LTD.

The loan is now reduced from Sw.Fr. 3,100,000.00 to the round figure of Sw.Fr. 3,000,000.00

163    A letter dated 7 June 1993 from Erwin on behalf of EGL to IDB referred to a rate of 5.4% net of withholding tax on "the new SF 2,000,000 facility" and a rate of 7.27% net of withholding tax "on the outstanding SF 3,000,000 existing facility". An unsigned letter from Erwin on behalf of Erma on behalf of EGL (sic) to IDB, also dated 7 June 1993, requested remittal of SFr 2 million and stated: "When remitting this SF 2,000,000 please state that this loan is based on our new loan agreement."

164    According to the EGL SOFIC, on 10 June 1993, EGL received a transfer of $2,010,050 from IDB. This amount was lent by EGL to Erma which in turn lent it to Ligon 158.

165    By facsimile dated 10 June 1993, Mr Szanto wrote on behalf of EGL to Therese Poulton, International Services Manager, ANZ Bank, as follows:

RE:    Sw.Fr. 2,000,000.00

We were advised that the above amount was credited to our Sw.Fr. account no. 527028-001

We are asking you to remit out of these funds ONLY ON THE 11th. JUNE, 1993

BY TELEGRAPHIC TRANSFER

Sw.Fr. 330,785.00

TO:

ISRAEL DISCOUNT BANK LTD.

16 Mapu Street.

Tel Aviv. Israel.

whose bank account is with the Union Bank of Switzerland. 45 Bahnhofstrasse. Zurich. Switzerland, with the following message:

"Being interest payment on Loan No. 971057/13692 of E.G.L. Development (Canberra) Pty. Ltd. for the period from 1 Jan. 93 to 30 June, 93.

Borrowing of Erma Nominees Pty. Ltd.

Attention; Mrs M. Cohen.

166    The primary judge stated that the effect of this instruction, when read with the 7 June 1993 letters and EGL's SOFIC, appeared to be that a portion of an amount advanced by IDB would immediately be returned to IDB, albeit into a bank account in Switzerland. The primary judge considered this letter to reinforce the suspicion that IDB was not the owner of a Swiss bank account with the Union Bank of Switzerland and that the payments into that account were not, in truth, payments of interest expenses on a loan from IDB; rather, the primary judge said, they may have been payments that augmented offshore funds that were originally owned by Erwin and Emil and, from some unknown time, also owned by Andrew, Michael and Gary.

167    In its tax return for the year ended 30 June 1993, EGL disclosed gross interest income of $1,308,480 and claimed deductions for interest expenses within Australia of $1,308,480. However, the profit and loss statement attached to the tax return referred to an expense of $1,308,480 as "Interest paid to Israel Discount Bank Ltd". There were no primary records to support the payment of interest expenses to IDB on behalf of EGL during the year ended 30 June 1993.

168    The primary judge inferred that the manner in which the advance of SFr 12 million was documented was agreed between Emil, Erwin and Michael with knowledge of the totality of the arrangements by which the advance was procured; that agreement included creating and executing documents that gave the appearance that there was a transaction comprising loans totalling SFr 12 million secured only by the guarantees set out above and a charge over the assets of BCI; however, as each of Emil, Erwin and Michael knew, the advance was secured by an offshore deposit of SFr 12 million.

169    Based on later evidence of two deposits, called "fiduciary" deposits, upon which interest was earned, the primary judge inferred that each of Emil, Erwin and Michael knew that the deposited funds would earn interest. Based on the fact that Emil, Erwin and Michael were able to procure the deposits, the primary judge inferred that they each owned the deposits and, therefore, earned any interest income that was earned on the deposits.

170    The primary judge also concluded that Emil and Erwin as the directors of BCI decided that BCI would:

(a)    record advances totalling $11,859,921.30 to EGL in the records of BCI in the manner set out above; and

(b)    advance those funds to Erma and Milgerd in the amounts recorded in the records of BCI.

171    Erma advanced the funds received from EGL to Ligon 158, while Milgerd advanced the funds received from EGL to Ligon 159. The primary judge found that Emil and Erwin as the directors of BCI (but not Michael) agreed for these advances to occur.

172    According to EGL's SOFIC, in August 1993, EGL received a transfer of $4,153,685.40 from IDB.

173    By letter dated 13 August 1993 from Erwin on behalf of BCI to Bank Hapoalim, Erwin requested "a schedule of dates when interest is payable and the amounts of interest payable so that there can be no misunderstanding as to the amounts payable and the dates on which interest is to be paid". The letter also requested confirmation "that payments are to be received at Central Branch, Tel Aviv".

174    A second letter dated 13 August 1993, from Erwin on behalf of BCI to Bank Hapoalim enclosed a deed of charge dated 25 April 1993 and a certificate of entry of a charge.

175    A letter dated 16 August 1993 from Emil on behalf of EGL to IDB referred to a net interest rate of 7.27% until the end of December 1993 on a "further drawdown of the loan to [EGL] to the extent to which it will be on lent to [Milgerd] namely SFR4,000,000", reducing to 6% (inclusive of Australian withholding tax) from 1 January 1994. The letter referred to a total loan of SFr 7.5 million.

176    A letter dated 30 August 1993 from Erwin on behalf of EGL to IDB stated, relevantly:

We confirm your agreement as follows:-

a,    From 1 January, 1994 the loan facility of SF 2,000,000 referred to in our letter of 7 June, 1993 and the above referred to amount of SF 3,000,000 will be governed upon the same basis as the proposed SF 4,000,000 loan, referred to in our letter of 16 August, 1993. Accordingly, from 1 January 1994 interest shall be at the rate of 8 per cent (8%) per annum reduced to 6% per annum if paid on time being 30 June and 31 December, though if interest is paid more than two monthsslate [sic] from those dates then additional 1% interest above the 8% interest is payable for each and every additional month of delay. In relation to the payment of interest we will pay Australian interest withholding tax therefore for [example] if interest is paid on time then the rate is 6% with 5.4% to be sent to you and 0.6% payable as withholding tax.

177    The substance of the 30 August 1993 letter was confirmed by a letter from IDB to EGL dated 1 December 1993, which referred to a "loan facility of SwFr.2,000,000".

178    By facsimile dated 5 November 1993, Erma requested Lloyds Bank Ltd to make a telegraphic transfer of SFr 171,120 to Bank Hapoalim (account number 343415-00001) with the following message:

For the attention of Mr Baruch Etzion. Representing interest payment by BCI Finances Pty Ltd, borrowing of Ligon 158 Pty Ltd of Sw Fr 6,000,000 interest due on 14.11.93. Please forward receipt.

1994

179    On 25 January 1994, Gary became a director of BCI.

180    By facsimile dated 10 February 1994, Erwin on behalf of Erma wrote to Lloyds Bank Ltd in Sydney. The facsimile stated: "Confirmation of request: Please transfer by TELEGRAPHIC TRANSFER Sw.Fr. 281,750-00". The request was for a transfer to IDB "whose bank account is with the Union Bank of Switzerland, 45 Bahnhofstrasse, Zurich". No account number was stated. The facsimile requested the following message to accompany the transfer:

Being interest payment on borrowings of Sw.Fr. 5,000,000 from 1st. July, 93 to 31 December, 1993.

Account of E.G.L. [DEVELOPMENT] (CANBERRA) P/L.

Loan no.: 971057/13692

Borrowing of Erma Nominees P/L.

Attention: Mrs. Miriam Cohen.

181    By letter dated 17 February 1994, Erwin on behalf of EGL wrote to IDB requesting, relevantly:

The term of all loan facilities between the Bank and this company be for a period of 5 years except that after 1 June 1994 the whole or any part or parts may be repaid on one or more times upon one month's notice stating the amount to be repaid.

182    By letter dated 22 February 1994, Erwin on behalf of Erma wrote to IDB concerning "the finalisation and extension of our existing loan agreement".

183    A letter dated 15 March 1994 from IDB to EGL referred to "AUD$4,153,685.40 loan; (arising from the agreed conversion of Swiss Franc facility of SwFr 4,000,000.00)".

184    A letter dated 20 March 1994 from IDB to EGL entitled "Loan arrangements" referred to letters dated 17 and 22 February 1994 and "the finalisation and extension of our existing loan agreement".

185    By letter dated 29 March 1994, the Erwin Binetter Family Trust wrote to the Deputy Commissioner of Taxation, as follows:

This is to advise you that on 25 April, 1993 an associate company, B.C.I. FINANCES PTY. LTD. (Tax file no. 40 548 737) entered into a loan agreement with BANK HAPOALIM B M of 50 Rothschild Blvd., Tel Aviv, Israel, to borrow Swiss Francs 12,000,000.00

The purpose of this borrowing was to onlend this amount to two Trusts, viz.;:–

a,    The Erwin Binetter Family Trust.    Sw.Fr. 6,000,000-00    

(File no. 51 324 546)

b,    The Emil Binetter Family Trust.    Sw.Fr. 6,000,000-00

(File no. 51 324 551)

"B.C.I. Finances" and the above mentioned two Trusts agreed in a separate contract, that:-

a,    The Trusts will pay the interest on behalf of "B.C.I. Finances" to "Bank Hapoalim" in proportion [to] what they borrowed respectively from "B.C.I. Finances".

b,    The rate of interest [that] the two Trusts pay to "Bank Hapoalim" will be 6.2%, less the Interest Withholding Tax. This rate is the same as that agreed on between "Bank Hapoalim" and "B.C.I. Finances".

 c,    The term of the loan will be for 5 years.

d,    The Trusts will pay the Interest Withholding Tax on any amount of interest paid to "Bank Hapoalim".

As this letter is written solely on behalf of The Erwin Binetter Family Trust, we are advising you furthermore:-

1.    The purpose of the borrowing by the Erwin Binetter Family Trust was to refinance their onerous borrowings, which carried an interest rate of 8.0777%

2.    On the 26 May 1993, Bank Hapoalim B M transferred Sw.Fr. 6,000,000.00 to B.C.I. Finances, via ANZ Bank, Martin Pl. and Pitt St. Branch. Sydney, and the Erwin Binetter Family Trust received a converted Austral Dollar amount of $A 5,829,770-60.

186    There were no primary records substantiating an interest rate of 8.0777% on any borrowings.

187    The Emil Binetter Family Trust also wrote to the Deputy Commissioner on 29 March 1994, stating:

This is to advise you that the trustee as trustee of this trust agreed on or about 13 May 1993 with B.C.I. Finances Pty Ltd (A.C.N. 055 988 531) to borrow at interest swiss francs from that company upon terms that:

(a)    this trust would pay to the lender to B.C.I. Finances Pty Limited, Bank Hapoalim B.M., such interest as is payable by B.C.I. Finances Pty Limited to Bank Hapoalim BM in respect of the amount of swiss francs borrowed by this trust from B.C.I. Finances Pty Limited subject to deduction and remission to the Australian Taxation Office of any applicable interest withholding tax.

(b)    this trust would indemnify B.C.I. Finances Pty Limited for all costs expenses and liabilities which B.C.I. Finances Pty Limited is responsible to the Bank in respect of the swiss francs borrowed by this trust from B.C.I. Finances Pty Ltd and which B.C.I. Finances Pty Limited drew down from the Bank.

(c)    this trust would be entitled to any exchange gains referrable to and would be responsible for any exchange losses referrable to the swiss francs borrowing by this trust from B.C.I. Finances Pty Limited which B.C.I. Finances Pty Limited drew down from the Bank.

(d)    the terms of the loan [are] such that any amounts draw down by B.C.I. Finances Pty Limited from the Bank and on-lent to the trust which are to be repaid by B.C.I. Finances Pty Limited to the Bank shall require this trust to repay the equivalent amount to B.C.I. Finances Pty Limited.

The purpose of the borrowing by this trust was to increase this trust's working capital for use in this trust's businesses and refinance various borrowings of this trust.

188    By facsimile dated 30 March 1994 from Erwin on behalf of EGL to IDB, Erwin confirmed the Bank's conversion of "our last borrowing, on 9th. June, 1993" of SFr 2 million to Australian dollars, being $2,010,252.

189    By facsimile dated 6 April 1994 from Erwin on behalf of Erma to Lloyds Bank Ltd, Erwin requested a transfer of SFr 200,000 by telegraphic transfer to IDB "whose bank account is with the Union Bank of Switzerland, 45 Bahnhofstrasse. Zurich. THEIR BANK A/C. NO. IS: 791-598". The facsimile requested the following message:

Being final repayment on the principal of the account of the original loan of Sw. Fr. 1,000,000 borrowed on 20 July, 1989 on account of E.G.L. DEVELOPMENT (CANBERRA) P/L.

Borrowing of Erma Nominees Pty. Ltd.

Attention: Mrs. Miriam Cohen.

190    By letter dated 4 May 1994, IDB wrote to EGL as follows:

This letter serves to confirm the agreement between the Israel Discount Bank Ltd. and your Company, that the interest rate agreed to between us in relation to A$2,010,252.00 loan, arising from the agreed [conversion] of part of the Swiss Franc loan facility (Sw.Fr. 2,000,000.00 transferred on 10 June, 1993) and converted on 29 March, 1994 to A$2,010,252.00 loan, is –

at the rate of 7.1/2% (Seven and half per cent) per annum,

before deduction of Australian Interest Withholding Tax.

We note that this part of the above loan facility, as converted, relates to the onloaned loan by your Company to Erma Nominees Pty. Ltd.

191    A note attached to BCI's tax return for the year ended 30 June 1993, which return was dated 11 May 1994, asserted that BCI had borrowed SFr 12 million which was on-lent to Milgerd and Erma as trustees. The note also asserted that prior to this transaction, Milgerd and Erma had borrowed from EGL. The note stated, in part:

Note to the Commissioner of Taxation

During the current taxation year BCI Finances Pty Ltd, (File No. 40 548 737) entered into a loan agreement with Bank Hapoalim BM of 50 Rothschild Blvd, Tel Aviv, Israel to borrow Swiss Fr 12,000,000-00.

The purpose of this borrowing was to onlend this amount to two trusts:

a)    The Emil Binetter Family Trust SWFR 6,000,000

b)    The Erwin Binetter Family Trust SWFR 6,000,000.

The main conditions of the borrowing between "BCI Finances" and the "Bank Hapoalim" were:

1.    The term of the loan was for 5 years;

2.    The rate of interest is 5.4% 5.5% 6.2% net in the hands of the lender [?], that is The borrower to [indecipherable] the Australian Interest Withholding Tax;

3.    Penalties apply for late payment of interest;

4.    The security for the loan was provided by the above mentioned two family trusts ...

The 2 trusts entered into the abovementioned agreement because they wanted to refinance their previously contracted borrowings which carried an onerous interest rate of 7/27% 8.0777% net in the hands of the lender. The borrower paying the interest withholding tax.

Notes to the Commissioner of Taxation continued

Prior to the borrowing from "BCI Finances", the 2 trusts borrowed funds from "EGL Development (Canberra) Pty Limited", File No: 81 573 751 who in turn borrowed the funds from "Israel Discount Bank Limited" of 16 Mapu Street, Tel-Aviv, Israel.

The terms of the borrowing were similar to that of from "BCI" via the "Bank Hapoalim" but the Israel Discount Bank charged 7.27% net interest ...

It is advised to you furthermore as stated in the first paragraph of these notes:-

a)    Bank Hapoalim transferred via ANZ Bank, Martin Pl, 8 Pitt St, Sydney, SwFr 6,000,000 on 28 May 1993 to BCI Finances P/L re the borrowing of the Emil Binetter Family Trust. This was converted to $A 6,030,150.70

b)    Bank Hapoalim transferred via ANZ Bank, Martin Pl, 8 Pitt St, Sydney, SwFr 6,000,000 on 28 May 1993 to BCI Finances P/L re borrowing of the Erwin Binetter Family Trust. This was converted to $A 5,829,770.00

192    A facsimile dated 27 June 1994, from Erwin on behalf of EGL and Erma to IDB referred to a drawdown of $1.5 million requested on 9 June 1994, and requested that the drawdown be increased to $2.5 million.

193    In its tax return for the year ended 30 June 1994, EGL disclosed gross interest income of $291,725 and claimed deductions for overseas interest expenses of $290,725. The profit and loss statement attached to the tax return referred to interest income received from Erma of $34,876 and from Milgerd of $256,848.99.

194    There were no primary records recording payment of the overseas interest expenses.

1995

195    In its tax return for the year ended 30 June 1995, EGL disclosed gross interest income of $1,290,481 and claimed deductions for overseas interest expenses of $1,289,490. There were no primary records recording payment of the overseas interest expenses.

1996

196    IDB issued a credit note to EGL dated 1 February 1996 referring to two amounts of $236,600 and $236,250 respectively with the following particulars: "Transfer received from ANZ Bank, representing payment of interest until 2.1.96". The payments were identified as made to accounts with the numbers 016799 and 016802.

197    By letter dated 11 June 1996, IDB wrote to EGL concerning the interest rate on a loan number 803189-016799. The loan amount was stated to be $5.51 million.

198    In its tax return for the year ended 30 June 1996, EGL disclosed gross interest income of $1,787,983 and claimed deductions for overseas interest expenses of $1,786,416. The 1 February 1996 credit note provided some evidence of payment of overseas interest expenses of $472,850. There were no primary records recording payment of the remaining $1,313,566.

199    On 10 September 1996, Erwin and Margaret held a meeting of the directors of EGL. The minutes recorded, relevantly, the following resolution:

[T]hat the existing loan of the Company from the Israel Discount Bank Ltd. at Tel Aviv, Israel (Aud. 5,500,000.-) be enlarged by the addition of a new drawdown of Aud. 350,000.- on the same conditions as the original Loan Agreement.

200    The evidence below included a handwritten letter of request from Erwin on behalf of Erma to IDB in accordance with the resolution.

201    By letter dated 18 September 1996, from IDB to Erma, IDB wrote:

Re:    Loan account of E.G.L. Development (Canberra) Pty. Ltd. Loan number: 803189-016799 AUD5,500,000.-

This is in reply to your fax of 11th September 1996.

Please be informed that in principle we agree to enlarge the above loan, adding AUD350,000. -

For this purpose, we need to receive the following documents:

a.    A copy of the Minutes of the meeting of the Board of Directors, in which it was decided the present request, indicating the names of the persons who signed on behalf [of] the Company.

b.    A personal guarantee from the Directors of the Company.

Other conditions remain unchanged.

202    On 16 October 1996, Gary became a director of EGL.

1997

203    AUSTRAC records in evidence at trial showed funds transferred by BCI to Bank Hapoalim in the year ended 30 June 1997 of $653,686. The overseas interest expenses disclosed in BCI's tax return for the year ended 30 June 1997 were $674,814. There was no evidence to explain the $21,128 difference. The ATO adjusted BCI's overseas interest expense deduction by the amount of $21,128. That is, the Commissioner accepted that the payments totalling $653,686 were deductible expenses.

204    In its tax return for the year ended 30 June 1997, EGL disclosed gross interest income of $1,218,291 and claimed deductions for overseas interest expenses of $1,217,808. There were no primary records of payment of these interest expenses. The AUSTRAC records in evidence did not include any payments that might comprise part or all of these interest expenses.

205    According to an affidavit affirmed by Gary on 20 December 2012, in about 1997 Emil told him that Emil and Erwin had decided to separate their business dealings "now that the children are getting older".

206    In November 1997, Erwin and Andrew went to Israel where Erwin introduced Andrew to Mr Etzion.

207    On 20 November 1997, there was a meeting of Erwin and Emil as directors of BCI concerning a request to Bank Hapoalim for provision of credit to convert the existing loan from Swiss francs into Australian dollars. The minutes recorded the following resolution:

RESOLVED that this company agree to the terms of the request for provision of credit and authorise each of Mr Emil Binetter, Mr Erwin Binetter and Mr Michael Binetter on their own to negotiate the terms of any provision of credit, to make any request for credit and to deliver by facsimile any request for credit, in each case on behalf of this company to Bank Hapoalim B.M. Central Branch Tel Aviv Israel.

208    On about 20 November 1997, BCI amended the arrangement for the advance of funds with Bank Hapoalim (advances 1-12) by converting it from Swiss francs to Australian dollars (this was Erwin's share). A statement of account produced by Bank Hapoalim for account 343415 referred to the amount as a "loan" (AB Pt C, tab 195, p 3708).

209    By letter dated 20 November 1997, Michael wrote to Bank Hapoalim, stating that he acted as the Australian solicitor to BCI in connection with an amendment to the letter of undertaking to the Bank dated 20 November 1997. The letter concluded by saying that "any one of Mr Emil Binetter, Mr Erwin Binetter and Mr Michael Binetter has the right to sign on any Request for Provision of Credit and/or to give any certificate, notice and other instrument pursuant to the Letter of Undertaking".

210    Bank Hapoalim produced a letter dated 20 November 1997 from Erwin on behalf of BCI entitled "Request for Provision of Credit – Loans 1-12/Our Letter of Undertaking for Credit Dated April 25th, 1993, as amended November 20, 1997". The letter requested the provision in foreign currency account number 343415 of credit in Australian dollars in 12 approximately equal amounts totalling $6,177,288.20. It stipulated the repayment date as 20 November 1998. There was also in evidence a document entitled "Amendment" between BCI and Bank Hapoalim dated 20 November 1997, executed by BCI and signed by Erwin and Emil.

211    On or about 25 November 1997, BCI amended the arrangement for the advance of funds with Bank Hapoalim (advances 13-24) by converting it from Swiss francs to Australian dollars (this was Emil's share). On that date, there was a meeting of Erwin and Emil as directors of BCI concerning a request to Bank Hapoalim for provision of credit to convert "the existing loans 13-24 inclusive into Australian dollars". The minutes recorded a further resolution authorising:

[E]ach of Mr Emil Binetter, Mr Erwin Binetter and Mr Michael Binetter on their own to negotiate the terms of any provision of credit, to make any request for credit and to deliver by facsimile any request for credit, in each case on behalf of this company to Bank Hapoalim B.M. Central Branch Tel Aviv Israel.

212    Bank Hapoalim produced a letter dated 25 November 1997 from Emil on behalf of BCI entitled "Request for Provision of Credit – Loans 13-24/Our Letter of Undertaking for Credit Dated April 25th, 1993, as amended November 20, 1997". This letter requested the provision, again in foreign currency account number 343415, of credit in Australian dollars in 12 approximately equal amounts totalling $6,188,757.10. The letter stipulated the repayment date as 30 November 1998.

1998

213    On 11 February 1998, Michael met with Philip Egglishaw, and requested quotes for two "back-to-backs". Michael's proposal was that funds would be deposited with an offshore branch of a United Kingdom bank, apparently as security for a loan of funds "to a purpose formed Australian company" which would lend to another Australian company that would invest in real estate. The finance companies submitted at trial that Mr Egglishaw's file note of his meeting with Michael "provides incontrovertible evidence of Michael's role in actively procuring back to back arrangements". They did not submit that the file note could be connected to any of the transactions the subject of this proceeding.

214    On or about 9 April 1998, Ligon 268 entered into an arrangement with IDB for the advance of funds. The evidence included a form on the letterhead of IDB entitled "General Conditions for management of foreign currency debitory accounts" dated 9 April 1998. It was executed by Ligon 268 and included three stamps in Hebrew script that referred to Erwin, Andrew and Michael. In addition, the evidence included the following documents dated 9 April 1998:

(a)    a form on the letterhead of IDB entitled "Application to effect banking operations as per phone instructions", executed by Ligon 268; and

(b)    a form on the letterhead of IDB entitled "Application to act upon facsimile orders", on the rear of which were three stamps in Hebrew, referring to Erwin, Andrew and Michael.

215    There was also in evidence a form on the letterhead of IDB completed on behalf of Ligon 268 requesting the opening of a foreign currency account, and identifying Andrew, Erwin and Michael, by their signatures, as the "attorneys" of Ligon 268. The form stated the account number as 982-01-627887.

216    Finally, there was in evidence an undated document, executed by Ligon 268, entitled "Loan application in foreign currency for a foreign resident".

217    On 3 May 1998, Ligon 268 received an advance from IDB of $850,000 and on 6 May 1998 it received a further advance of $800,000.

218    By letter dated 26 June 1998, Emil wrote on behalf of BCI to Mr Etzion, Bank Hapoalim as follows:

According to our agreement, I have sent one (1) years interest in advance, till 28 May, 1999, for account Number 71940801001 000.086. Representing payment by B.C.I. Finances Pty Ltd borrowing of Milgerd Nominees Pty Ltd. Please acknowledge receipt.

219    This account number was different from BCI's Bank Hapoalim account number, identified above as 343415.

220    AUSTRAC records in evidence at trial showed funds transferred by BCI to Bank Hapoalim in the year ended 30 June 1998 of $314,340. The overseas interest expenses disclosed in BCI's 1998 income tax return were $1,032,294. There was no evidence to explain the $717,954 difference. The ATO adjusted BCI's overseas interest expense deduction by this amount. That is, the Commissioner accepted that payments totalling $314,340 were deductible expenses.

221    In its tax return for the year ended 30 June 1998, EGL disclosed income of $955,724 and claimed deductions for overseas interest expenses of $955,391. There were no primary records of payment of these interest expenses. The AUSTRAC records in evidence did not include any payments that might comprise part or all of these interest expenses.

222    By letter dated 4 August 1998, from Bank Hapoalim to BCI, the bank acknowledged receipt of $356,249 and stated "This sum would cover the interest due on your loan no. 343415/10004 till 28.5.1999".

223    On or about 20 November 1998, BCI renewed advances 1-12 with Bank Hapoalim until 20 November 2002 at an interest rate of 6% . On or about 23 November 1998, BCI renewed advances 13-24 with Bank Hapoalim until 30 November 2002 at an interest rate of 6%.

224    The evidence below included a letter from Erwin on behalf of BCI to Bank Hapoalim dated 20 November 1998 headed "Request for provision of Credit" referring to an amount of $6,177,288.20 and a similar letter dated 23 November 1998 from Emil on behalf of BCI, referring to an amount of $6,188,757.10. In submissions on behalf of BCI and EGL in the Liquidators' appeal, it was submitted that the latter letter (AB Pt C, tab 166) was signed by Gary. This was disputed by Gary, who submitted that the letter was initialled by Gerda rather than Gary. The initials appear to be consistent with other documents initialled by Gerda (see, eg, AB Pt C, tabs 152 and 156). And the signature at the end of the letter appears to be Emil's signature (see also AB Pt C, tabs 152 and 156). Accordingly, we are not satisfied that Gary signed or initialled the letter.

225    The evidence below also included two Bank Hapoalim statements in relation to account number 343415 in the name of BCI (AB Pt C, tabs 184, 185). Each statement was headed "Re: Amendment – Loan Confirmation and Repayment Schedule". One statement referred to a "loan amount" of $6,177,288.20, the other to a "loan amount" of $6,188,757.10.

226    Other documents created around this time were:

(a)    minutes of a meeting of Erwin and Emil Binetter as directors of BCI on 20 November 1998, at which the following resolution was passed:

IT WAS RESOLVED that this company borrow and extend its borrowing from [Bank Hapoalim] upon the basis of a Request for Provision of Credit acceptable to any one of Erwin Binetter and Emil Binetter and any one of Erwin Binetter, Emil Binetter and Michael Binetter be and are hereby authorised and empowered for and on behalf of and in the name of this company and as its corporate act and deed and upon terms and conditions as may be agreed to in writing by any of the aforesaid to execute a Request for Provision of Credit to [Bank Hapoalim]. This resolution shall continue in full force and effect until [Bank Hapoalim] shall receive written notice from this company or by one of the aforesaid persons of the revocation of this resolution.

(b)    a document entitled "Reaffirmation of guarantee" dated 20 November 1998 signed by Erwin on behalf of Erma and Ligon 158;

(c)    minutes of a meeting of Erwin and Margaret as directors of Ligon 158 on 20 November 1998, at which it was resolved that Ligon 158 "guarantee and reaffirm its guarantee in favour of [Bank Hapoalim]";

(d)    a document entitled "Reaffirmation of guarantee" dated 23 November 1998 signed by Emil, marked with a facsimile stamp with the name "Andersen Legal". Andersen Legal was a law firm at which Michael worked;

(e)    a document entitled "Reaffirmation of guarantee" dated 23 November 1998 signed by Emil and Gerda on behalf of Milgerd and Ligon 159;

(f)    minutes of a meeting of Emil and Gerda as directors of Ligon 159 on 23 November 1998, at which it was resolved that Ligon 159 "guarantee and reaffirm its guarantee in favour of [Bank Hapoalim]";

(g)    minutes of a meeting of Emil and Gerda as directors of Milgerd on 23 November 1998, at which it was resolved that Milgerd "guarantee and reaffirm its guarantee in favour of [Bank Hapoalim]";

(h)    a letter from Michael to Bank Hapoalim dated 24 November 1998, in which Michael stated that he had acted as the Australian solicitor to BCI "in connection with the Request For Provision Of Credit dated 20 November 1998 and Request For Provision Of Credit dated 23 November 1998 … which related to the previous loans numbered 1 – 24 (inclusive) signed by the Borrower". The letterhead referred to the Pagewood property as Michael's address. The letter also stated:

Mr Emil Binetter and Mr Erwin Binetter who have signed the 1998 Loan Requests had the right, power and authority to sign the 1998 Loan Requests on behalf of the Borrower and any one of Mr Emil Binetter, Mr Erwin Binetter and Mr Michael Binetter has the right to sign … any certificate, notice and any other instrument pursuant to the 1998 Loan Requests.

1999

227    By letter dated 29 January 1999, IDB wrote to EGL concerning "Loan No. 803189-16799 in the amount of AUD 4,750,000" confirming that the "above loan was granted to you on July 2nd, 1998 for a period of 5 years, until July 2nd, 2003. At present the loan's balance is AUD2,700,000".

228    In his 20 December 2012 affidavit, Gary stated that, sometime in 1999, Emil told him that he had told Erwin that "it is time to completely separate our businesses … I have decided to set up a new company and refinance my part of the EGL loan through the new company". According to the affidavit, the company Civic Finance Pty Limited (Civic) was incorporated to refinance the EGL loan with IDB.

229    By letter dated 8 June 1999, Erwin on behalf of EGL wrote to IDB as follows:

As you are aware loans by your bank to this company have been on lent to one of two companies, namely, Erma Nominees Pty Limited and Milgerd Nominees Pty. Limited. As you are also aware Milgerd Nominees Pty. Limited does not wish to have loans through this company any longer. To this end a Deed of Novation was presented to you for approval.

Despite representations to you, your bank has declined to accept the Deed of Novation as an appropriate method for the separation of the various loans.

Accordingly it is proposed that this company repay loans to you, to the extent to which loans from you, have been lent to Milgerd Nominees Pty. Limited.

Consequently once those loans are repaid, which will occur prior to 30 June 1999, Milgerd Nominees Pty. Limited will cease to guarantee any monies outstanding by this company.

230    On 24 June 1999, Erwin and Margaret held a meeting of the directors of Erma at which Erwin advised that IDB had agreed to provide certain facilities to EGL on the terms contained in a draft facility letter. The meeting resolved that Erma enter into an instrument of guarantee in favour of IDB.

231    The same day, Erwin wrote to IDB on behalf of EGL requesting a loan facility in an amount of $10 million.

232    AUSTRAC records in evidence at trial showed an outgoing, on 29 June 1999, of $144,544 from an unidentified ordering customer to IDB, for which the receiving customer was identified as EGL. The EGL handwritten ledgers identified an amount of $144,544 as a payment by Erma on behalf of EGL for interest for six months to 30 June 1999.

233    In its tax return for the year ended 30 June 1999, BCI claimed deductions for overseas interest expenses of $677,344. There were no primary records of payment of these interest expenses. The AUSTRAC records in evidence did not include any payments that might comprise part or all of these interest expenses.

234    In its tax return for the year ended 30 June 1999, EGL disclosed gross interest income of $280,282 and claimed deductions for overseas interest expenses of $273,367. The only primary record that might demonstrate that there was a part payment of these amounts was a 29 June 1999 AUSTRAC record for transfer of $144,544.

1999-2006 – advances from IDB to Ligon 268

235    Between March 1999 and April 2006, Ligon 268 received 44 payments totalling $9,379,000 from IDB.

236    According to Ligon 268's SOFIC, the funds advanced by IDB to Ligon 268 were used for its own and associated businesses' purposes as well as on-lending for other purposes. There were advances to entities including Ligon 158 and Tamarama Fresh Juices Australia Pty Ltd as trustee for the TFJA Trust (TFJA).

2000

237    On or about 28 March 2000, EGL entered into an arrangement with IDB for the advance of $10 million in funds.

238    The evidence below included a document dated 28 March 2000, apparently signed by Erwin, entitled "General Conditions for Management of Foreign Currency Debitory Accounts", with the customer account number 803-16799. This account number matched references to an account held by EGL.

239    On 11 April 2000, a facsimile was sent from an unknown sender to EGL, comprising a one page form marked with the letterhead of IDB and executed by EGL (and signed by Erwin). The form was headed "Framework instrument for the creation of an approved deposit for the grant of loans in foreign currency" (the April 2000 IDB framework instrument). The form was not fully completed. Relevantly it provided:

We the undersigned hereby request to deposit with you, to the credit of a deposit account that shall be opened in our names, the amount particularised below in connection with the grant of loans by you:

240    The document did not particularise an amount to be deposited. The form contained the following section concerning interest:

INTEREST

On the deposit:

… % per annum (annual adjusted interest … %) (The interest rates mentioned in this instrument shall be changed from time to time in accordance with the Bank's determination and in coordination with the customer)

On the loan:

… % per annum (annual adjusted interest … %) (or as shall be specifically prescribed for every borrower separately in a notice to be sent separately).

241    In handwriting, the amount of 7.2% was inserted as the figure for annual adjusted interest on the loan. No other figures were inserted.

242    The primary judge inferred that the April 2000 IDB framework instrument was part of a larger document that included terms to the effect of the terms set out in the March 2004 framework instrument, discussed below.

243    The evidence included a document dated 28 March 2000 entitled "Loan application in foreign currency for a foreign resident", signed by Erwin on behalf of EGL requesting a loan of $10 million on 2 July 1998, repayable on 2 July 2008. Clause 8 of the document referred to a lien that the bank would have "on all monies and/or securities that we have deposited and will deposit with you".

244    There was also in evidence another document entitled "Loan application in foreign currency for a foreign resident", signed by Erwin on behalf of EGL apparently requesting a loan of $10 million on 2 July 1998. The form identified the loan number as 16799. Concerning interest, the form stated:

The loan shall bear compound interest at the rate of LIBOR plus 7.2% per annum. The interest shall be determined for every period of 6 months, commencing with the granting of the loan, two business days before the commencement of each such period.

245    The primary judge observed that the documents referred to above tended to bear out the contention, made by Gary and associated parties, that Emil ceased to be involved in the dealings between EGL and IDB from around 1999 or 2000. Emil ceased to be a director of EGL on 28 September 2001.

246    On 12 May 2000, EGL received $1 million from IDB.

247    In its tax return for the year ended 30 June 2000, BCI claimed deductions for overseas interest expenses of $679,836. There were no primary records of payment of these interest expenses. The AUSTRAC records in evidence did not include any payments that might comprise part or all of these interest expenses. The notes to the balance sheet attached to the tax return recorded that the interest was paid directly to Bank Hapoalim: by Erma as to $340,986 and by Milgerd as to $338,850.

248    In its tax return for the year ended 30 June 2000, EGL disclosed gross interest income of $544,061 and claimed deductions for interest expenses within Australia of $75,933 and overseas interest expenses of $468,128. The EGL handwritten ledgers recorded a payment made on 30 December 1999 of interest net of withholding tax to IDB of $184,389 and a payment on 28 June 2000 of interest net of withholding tax in the sum of $283,739.

249    The evidence below included an unsigned letter dated 6 July 2000 from Erwin on behalf of EGL to IDB requesting a drawdown of $250,000 "from the loan account of EGL Development (Canberra) Pty Ltd Code No. 803189 Account No. 016799 (Erma Nominees P/L)".

250    The evidence included a similar unsigned letter dated 6 October 2000 from Erwin on behalf of EGL to IDB requesting a drawdown of $500,000 "from the loan account of EGL Development (Canberra) Pty Ltd Code No. 803189 Account No. 016799 (Erma Nominees P/L)".

251    By facsimile dated 10 October 2000 entitled "Loan No. 16799" from IDB to EGL, the bank wrote:

Following our phone conversation of October 5th regarding your request to increase loan facilities from AUD 10 Million to AUD 15 Million; we are pleased to inform you that the above has been approved.

All conditions of the loan in question remain unchanged.

Please confirm the above by signing this letter and returning same by fax.

252    The letter was signed by Erwin immediately above the words "We confirm the contents of this letter".

253    The evidence included an unsigned letter dated 10 November 2000, from Erwin to IDB that stated:

RE: INTEREST ON LOAN ACCOUNT

As discussed with you on 1 November 2000 the interest payable to The Israel Discount Bank Ltd from January 1 2001 will be 8.50% Net to the Bank on all outstanding loans.

254    Under the name of Erwin was a file name including the words "family affairs" (in the folder path) and "IDB drawdown by 268 191399". The primary judge stated that: the unsigned letter was probably a copy of a letter that was sent on the letterhead of Ligon 268; and the drafter of the letter probably considered advances from IDB to Ligon 268 to be appropriately classified as "family affairs" and not the sole concern of one person or entity.

255    An AUSTRAC report in evidence recorded a payment of $170,493 from EGL to Bank Hapoalim (that is, not to IDB) on 17 November 2000, with the message:

Attention Baruch Etzion

Interest payment BCI

Finances Due November

256    The account number for the payment was 3421500001, a different account number from the account number designated by Bank Hapoalim for BCI (which was 343415). There were no documents explaining why EGL purportedly made a payment of interest on behalf of BCI. There was no evidence from Bank Hapoalim that identified the owner of account number 3421500001.

2001

257    In its tax return for the year ended 30 June 2001, BCI claimed deductions for overseas interest expenses of $677,041. The notes to the balance sheet attached to the tax return recorded that the interest was paid directly to Bank Hapoalim: by Erma as to $338,206 and by Milgerd as to $338,835. There was an AUSTRAC report that recorded the latter payment on 25 June 2001, but the beneficiary customer was Ariana Birk and the account number was 209220 (which does not match the 343415 account number previously identified as BCI's account number with Bank Hapoalim).

258    In its tax return for the year ended 30 June 2001, EGL disclosed gross interest income of $834,544 and claimed deductions for overseas interest expenses of $832,107.

259    On 28 September 2001, Emil, Michael and Gary ceased to be directors of EGL and Andrew became a director of the company.

260    By letter dated 17 October 2001, Erwin wrote to IDB requesting a drawdown of $50,000 from "loan account Code No. 803189 Account No. 016799" to be remitted to Blanford Finances Pty Ltd (Blanford), a company which Andrew described as an agent of EGL. An AUSTRAC report of the transfer identified the ordering customer as "Ourselves".

261    By letter dated 29 October 2001, Erwin wrote to IDB requesting a second drawdown of $50,000 from "loan account Code No. 803189 Account No. 016799", again to be remitted to Blanford. An AUSTRAC report of the transfer again identified the ordering customer as "Ourselves".

262    The evidence below included a facsimile dated 29 November 2001 from IDB to EGL that referred to "Loan No. 803189-016799 in the amount of AUD11,380,000". The letter requested remittal of $421,116 "which represents interest at the rate of 7.2% p.a." as per the following details:

(e. & o. e.)

The amount of AUD421,116.- should be in our possession not later than January 7th, 2002.

263    There was no AUSTRAC record of a payment in this amount.

2002

264    The evidence below included an unsigned letter from Erwin to IDB dated 14 January 2002, which stated:

RE:    REPAYMENT OF LOAN

ACCOUNT: 627887

This is to confirm with you that A$200,000 (Two Hundred Thousand Australian Dollars) was remitted to you for repayment of loan of Ligon 268 Pty Ltd. This fax has been confirmed with you by telephone.

265    There was no AUSTRAC record of this payment.

266    The evidence included an unsigned minute of a meeting of Erwin, Margaret and Andrew as directors of EGL on 18 January 2002. The finance companies contended at trial that this was not a genuine document. It was submitted that the document came to light in 2012, and that Margaret was never a director of EGL. The minute recorded the following:

267    In the absence of corroborative evidence from IDB, and in the absence of verification of the minute by Andrew, the primary judge did not find that there was an agreement of the kind described in the unsigned minute.

268    In its tax return for the year ended 30 June 2002, BCI claimed deductions for overseas interest expenses of $754,261. The profit and loss statement attached to the tax return recorded that interest of $678,835 was paid to Bank Hapoalim. There were in evidence AUSTRAC reports of three payments from BCI to Bank Hapoalim that equalled $678,835, on 23 November 2001, 6 June and 27 June 2002. For the first, the beneficiary customer was Ligon 158 (attention Mr  Etzion), and the account number was 3421500001; for the second, the beneficiary customer was "Bank of Hapoalim" and the account number was 3421500001; for the third, the beneficiary was "BCI Finances Pty Ltd Ligon 159 PL" and the account number was 209220.

269    In its tax return for the year ended 30 June 2002, EGL disclosed gross interest income of $965,248 and claimed deductions for overseas interest expenses of $965,133.

270    The evidence included a document entitled "Amendment", dated 20 November 2002, which purported to extend repayment dates of the November 1998 advances from Bank Hapoalim to BCI to 31 May 2004. The document was signed by Erwin and Emil on behalf of BCI and included a handwritten certification by Michael. By the document, BCI reaffirmed the representations and warranties made in the 1993 letter of undertaking and the deed executed by BCI in favour of Bank Hapoalim.

271    The evidence included an AUSTRAC report of an outgoing payment of $170,000 from Ligon 158 to Mr Etzion on 27 November 2002. The payment was described as "Mr Baruch Etzion interest by Ligon Pty due 22/11/02". The account number was 3421500001.

272    By this time, Mr Etzion had left Bank Hapoalim, having retired from there on 31 December 2001. He claimed that he continued to act as a liaison between the bank and the Binetters after his retirement, but, as the primary judge noted, this did not explain his apparent receipt of payments that were claimed as interest expenses paid to Bank Hapoalim.

2003

273    In January 2003, the Nudie brand was launched.

274    In April 2003, Erwin was examined by a consultant neurologist, Dr O'Neill, at the request of Ronald. In a report of the examination, Dr O'Neill recorded that he had explained to Erwin that there was objective evidence of worsening cognitive function since Dr O'Neill had first seen him.

275    By letter dated 24 June 2003 to IDB, apparently signed by Erwin on behalf of EGL, Erwin requested a drawdown from "loan account Code No. 803189 Account No. 016799" of $220,000.

276    From July 2003, the Nudie juice business was carried on from the Pagewood premises.

277    In its tax return for the year ended 30 June 2003, BCI claimed deductions for overseas interest expenses of $754,261 (that is, the same amount as for the year ended 30 June 2002). The profit and loss statement attached to the tax return recorded that the interest of $678,835 was paid to Bank Hapoalim. There was a single AUSTRAC report of a payment of $170,000 from BCI to Bank Hapoalim on 20 May 2003. That report showed the beneficiary customer as Mr Etzion. The account number was 3421500001.

278    In its tax return for the year ended 30 June 2003, EGL disclosed gross interest income of $1,037,210 and claimed deductions for overseas interest expenses of $1,037,193.

279    In 2003, Erwin, Michael, Andrew and Ronald travelled to Israel to meet with Bank Hapoalim. Before the visit, either Michael or Andrew told Ronald that they needed to discuss loans with the Israeli banks. Ronald was asked to come along so he could look after Erwin, who was not well. The primary judge observed that the fact that Ronald was asked and agreed to make this trip supported a conclusion that the dealings with the Israeli banks were for the ultimate benefit of Michael, Andrew and Ronald as well as their father.

280    While in Israel, the four men went to Bank Hapoalim for a meeting with bankers and their legal advisers. The meeting lasted between 20 minutes and one hour, and no documents were exchanged.

281    Ronald gave affidavit evidence of accompanying Erwin on the trip to Israel in 2003, during which he observed his father to be physically unwell and showing early signs of vascular dementia and memory loss.

282    The evidence included an unsigned letter from Erwin to IDB dated 25 October 2003 which stated:

RE: INTEREST ON LOAN ACCOUNT

As discussed with you on 1 September 2003 the interest payable to The Israel Discount Bank Ltd from October 1 2003 will be 7.30% Net to the Bank on all outstanding loans to Ligon 268 Pty Ltd

283    On 20 November 2003, Bank Hapoalim Switzerland sent a facsimile to Bank Hapoalim in the following terms:

Back-to-back transaction

Australian Dollar Loan Facility granted by yourselves to one of your clients

Our fiduciary deposit for AUD 6,177,2888.17 [sic] placed with yourselves as security

Dear Mrs. Emilie

Our above stated fiduciary deposit matured for value today, November 20, 2003. On November 18, 2003 we telephoned Mr. Goldberg (Credit Department Tel. 5673502) who informed us that your Bank will extend the loan until May 2004 and that we are to rollover our fiduciary deposit until May 31, 2004.

We have today established that you have in fact repaid to us the total amount of our fiduciary deposit plus the interest. Only the interest payment should have been effect [sic].

Consequently, we shall remit back to you the amount of AUD 6,177,288.17 however, we shall most probably not be in a position to effect repayment for value today, November 20. Any loss of interest is to be born [sic] by your Bank.

284    The following day, 21 November 2003, Bank Hapoalim Switzerland sent a further facsimile to Bank Hapoalim concerning the same transaction. The letter stated:

Back-to-back transaction

Australian Dollar Loan Facility granted by yourselves to one of your clients

Our fiduciary deposit for AUD 6,177,288.17 placed with yourselves as security

Ladies and Gentlemen

As already stated in our faxletter of November 20, 2003 Bank Hapoalim Tel Aviv has granted an Australian Dollars loan. As collateral for your Bank, we have placed a fiduciary deposit with you, which matured value November 20, 2003.

On November 18, 2003 Mr Goldberg (Credit Department Tel. 5673502) has given us instructions to roll over the deposit until May 31, 2004 since your Bank is also extending the loan facility until May 2004. This was also confirmed by Mr. David Kirschenbaum of the Legal Department.

On November 20, 2003 late afternoon we have noticed that you have repaid to us the full amount of our deposit, e.g. AUD 6,177,288.17 plus the interest. In fact you should have paid us only the interest, in the same manner as you have done for all previous roll-overs in the past.

We discussed the matter on the phone and you have requested us to repay the funds to yourselves. We have effected such payment today value, November 21, 2003 and any loss of interest is to be borne by your Bank. A copy of our swift payment has been sent today to Mr. Alon Keden.

Since your Bank has granted the loan and we are only providing the collateral, we are of the opinion, that it is indeed your responsibility to take the lead in this transaction.

285    The amount of the fiduciary deposit matched the amount in the 20 November 1998 BCI request for credit signed by Erwin on behalf of BCI.

286    The primary judge found (at [687] of the Liability Judgment) that the documents showed that there was an arrangement between Bank Hapoalim and BCI (which Bank Hapoalim called a "back-to-back" transaction) comprising:

(a)    an advance of monies from Bank Hapoalim to BCI on terms that included an obligation of repayment, that is, a loan; and

(b)    a deposit of an equivalent amount by Bank Hapoalim Switzerland from funds procured by or on BCI's behalf, probably on terms that, if BCI defaulted on its repayment obligation, Bank Hapoalim would have recourse to the deposit.

287    The primary judge stated that there was no evidence that the arrangement was materially different at any time, except as to the amounts advanced.

288    The evidence below included a record printed on 24 November 2003, which appeared to be an internal bank record of Bank Hapoalim. It referred to a "Fixed Loan/Deposit Confirmation" and identified the sender as Bank Hapoalim Switzerland and the receiver as Bank Hapoalim. The principal amount was stated as AUD$6,177,288.17. The interest rate was stated as 5.1%. The sender to receiver information was:

/A/ZH/TRUST FUNDS

//ROLLOVER/SPECIAL AGREEMENT BANK T

//BACK FINANCING

289    A facsimile dated 24 November 2003 marked with the details of Kevin Munro & Associates, a former employer of Michael, showed that Michael was involved in the November 2003 dealings with Bank Hapoalim. In particular, Michael witnessed two documents dated 10 November 2003 entitled "Reaffirmation of guarantee" addressed to Bank Hapoalim from Erwin and Emil, and from Milgerd, Erma, Ligon 158 and Ligon 159. In the case of the former document, the signatures of Erwin and Emil were certified as genuine by Michael. For the latter document, Michael also certified that Erwin and Emil were authorised to bind each guarantor.

290    The evidence below included an AUSTRAC report recording a transfer of $169,000 from Ligon 158 on 28 November 2003. The beneficiary customer was Mr Etzion and the account number was 3421500001. The details of payment were:

ATTENTION OF MR BARUCH ETZION

REPRESENTING PAYMENT LIGON 158 P/L

2004

291    Dr O'Neill examined Erwin again on 20 January 2004. His report recorded that Ronald felt that there had been further deterioration in his father's recent memory but that he was still driving the car safely.

292    In an affidavit made in October 2011, Gary gave an account of a meeting that he attended with Emil at IDB on 16 March 2004. On that account, Gary had some prior beliefs about Emil's dealings with IDB (Gary said to his father, "You have been a good customer. You even paid interest in advance"). According to Gary, at the meeting, Emil said to Ms Barisaac of IDB:

Fernanda, I need your help. I have a loan from another bank which I would like to repay. I would like to borrow money from your bank in order to do this. I intend paying the money back in about one year.

293    Gary recounted a similar conversation the same day with an officer of Mercantile Discount Bank, another Israeli bank. Then, he recounted a meeting with Mr Etzion in which Emil told Mr Etzion that he would be repaying "the loan to Bank Hapoalim".

294    The evidence below included documents relating to the establishment of arrangements between Civic, a company associated with the Emil side of the family, and IDB. There was a document dated 19 March 2004, signed by Emil and Gary and titled "Framework Instrument for the creation of an approved deposit for the grant of loans in foreign currency" (the March 2004 framework instrument). The first page was similar to the April 2000 IDB framework instrument signed by Erwin in 2000. The March 2004 framework instrument referred to a deposit of $3,690,000. The depositor was identified as "C/A 791628", notwithstanding that the form provided for the identification of the depositor by name, passport number and address. The document included "Provisions, terms and conditions that shall apply to the deposit against the grant of the loans". Clause 1 provided relevantly:

1.1    The Israel Discount Bank Ltd … shall, in its discretion and subject to the matters set forth in the terms and conditions of this instrument, grant loans in the deposit currency against the deposit monies to borrowers …

…

1.4    Without prejudice to all the aforegoing, the amount of the balance of the loans shall not exceed the balance of the deposit monies less an appropriate safety margin in the Bank's sole discretion, unless the Bank decided to act otherwise in a specific case or in general.

295    Clause 2 provided relevantly:

2.1    The interest that shall be credited to us on the amounts in the deposit shall be freely available to us, and the Bank shall transfer it to the credit of the account from time to time in accordance with the Bank's usual procedures herein.

2.2    You shall, in accordance with all statutory provisions, be entitled to deduct at source or otherwise the tax and any other levy and charge that shall apply to the deposit and the interest thereon, such that every payment on your part in respect of the deposit shall only be made available to our credit after the deduction as aforesaid.

296    A draft letter dated 19 March 2004 was obtained from IDB. The letter included the following handwritten annotation:

Dear Hagai,

Kindly have this re-typed on IDB letterhead (as it is, including the date) and post it to us at the address below. Thank you!

297    As the primary judge observed, plainly enough this was a request for IDB to create a document that would be back-dated.

298    The draft letter was in the following terms:

CIVIC FINANCES PTY LTD

2/63 BAY STREET

DOUBLE BAY NSW 2028

AUSTRALIA

19 March 2004

Attention: Mr Emil Binetter

Dear Mr Binetter,

This letter is to confirm agreement between the Israeli Discount Bank Ltd and your company.

Civic Finances Pty Ltd agreed that from 27 May 2004 interest of 6.00% p.a. (including Australian Withholding Tax) will be paid on the existing loan of AUD1,000,000 (one million Australian Dollars) and an additional loan amount of AUD3,690,000 (three million, six hundred and ninety thousand Australian dollars), provided that the interest on these amounts is paid on or before the due date (that is to say, 30 June and 31 December each year).

Civic Finances Pty Ltd will pay Israel Discount Bank 5.40% p.a.

Civic Finances will pay the Withholding Tax of 0.60% due in Australia.

We note that the above facility relates to the loan by your Company to Ligon 159 Pty Ltd.

This confirms the content of loan documents signed by you.

However in any event, the loan documents will always prevail.

299    According to an affidavit affirmed by Andrew on 27 July 2012, he visited IDB with Erwin in March 2004. On that occasion, he met Ms Barisaac and Mr Peled of IDB.

300    In April 2004, Margaret visited Dr O'Neill without her husband. She reported that Erwin had remained in bed for most of the day. Dr O'Neill told Margaret that Erwin had dementia for which there was no additional useful treatment that could be recommended.

301    In May 2004, the Pagewood premises were destroyed by fire. According to an affidavit prepared by Andrew for proceedings in the AAT commenced by Binqld (the Binqld tax appeal), records destroyed in the fire included records of BCI, EGL, Erma and Ligon 158.

302    On 24 May 2004, $3.69 million was transferred from an account in Zurich with UBS AG (UBS) to an account with IDB. The primary judge stated that this amount was probably the deposit of $3.69 million referred to in the March 2004 framework instrument.

303    The SWIFT transfer form named the ordering customer as "Batorove Kesy Foundation". At trial, Andrew and associated parties did not dispute that the father of Erwin and Emil was born in the village of Batorove Kosihy (also known as Batorove Kesy) in Slovakia. The transfer form identified the beneficiary customer only as "/ATTENTION HAGAI PELED 791628".

304    The primary judge found that the Batorove Kesy Foundation was probably an entity owned by Erwin and Emil.

305    The primary judge stated that the funds from UBS appeared to have been received into an IDB account number 130-0803-18-997560.

306    A letter dated 21 May 2004 signed by Emil on behalf of Civic to IDB requested that $3.69 million be sent to Ligon 159's bank account.

307    On 25 May 2004, Bank Hapoalim Switzerland wrote to Bank Hapoalim. The letter stated:

Two back-to-back transactions, concerning

Two Australian Dollar Loan Facilities granted by yourselves to two of your clients

As security for the above loans, we have placed with yourselves:

Our fiduciary deposit for AUD 6,188,757.00 maturing May 31, 2004

Our fiduciary deposit for AUD 6,177,288.17 maturing May 31, 2004

Ladies and Gentlemen

Please be informed that we have two back-to-back Australian Dollar transactions whereby we have placed the following fiduciary deposits with your Bank as collateral for two loans you have granted to two Australian clients:

AUD 6,188,757.00

From: November 28, 2003

Maturity date: May 31, 2004

Interest rate: 5.1%

Interest amount: AUD 162,197.01

Interest days: 185

AUD 6,177,288.17

From: November 20, 2003

Maturity date: May 31, 2004

Interest rate: 5.1%

Interest amount: AUD 168,897.35

Interest days: 193

We understand that your Loans will not be repaid and that the transactions will be rolled over for a further 6 months (from May 31, 2004 until November 30, 2004) with the same conditions.

Consequently, our above stated Fiduciary Deposits placed with yourselves must NOT be repaid to us on May 31, 2004..

The two interest amounts, e.g.: AUD 162,197.01 and: AUD 168,897.35 are however to be transferred as follows:

value May 31, 2004

To our AUD account maintained with

ANZ, Melbourne (anzbau3mxxx)

Australia and New Zealand Banking Group Ltd., Melbourne

308    Gary signed a document dated 27 May 2004 entitled "Loan application in foreign currency for a foreign resident" in connection with the advance from IDB to Civic.

309    An IDB document entitled "Withdrawal of Foreign Currency Loan/Credit" recorded "your instructions dated 27/05/04 to withdraw loan for the amt of 3,690,000.00 AUD from acc. No. 803-18-997560 at branch 130 and credit acc. no. 980-18-955159 at branch 130".

310    In this document, IDB apparently referred to the transfer of $3.69 million from the account into which it had been deposited by Batorove Kesy Foundation, to another account, as a "loan".

311    A bank statement for an account in Sydney in the name of Ligon 159 recorded a receipt of $3,689,995 on 27 May 2004. The printed narration for the transaction on the bank statement was "Ourselves". The primary judge found that the narration accurately summarised the true position, which was that the ultimate source of the funds was the $3.69 million sent from UBS in Switzerland by the Batorove Kesy Foundation to IDB. Next to the printed narration were the handwritten words "from Israel Discount Bank". These words reflected the fact that the funds came from UBS in Switzerland via IDB (and, in that sense, "from" IDB). The primary judge stated that, without more evidence, it was not clear whether the funds were transferred from IDB to Ligon 159 pursuant to a loan arrangement involving an obligation of repayment to IDB.

312    The Ligon 159 bank statement also recorded a credit of AUD$2,499,981 on 27 May 2004, apparently from a related entity, Advance Finances Pty Ltd (Advance). A handwritten note next to this entry stated "from Mercantile (Israel)".

313    On 28 May 2004, Ligon 159 transferred $6,188,757 to an account in Israel. The relevant AUSTRAC report identified the beneficiary customer as BCI and the account number as 209220. This was one of a number of references to account 209220 in the documents, and the second time that it was associated with the name "Birk". The details of payment were:

SWIFT CODE POALILIT ATT A BIRK FOR

LOAN PAYMENT BEHALF LIGON 159 LTD

314    The primary judge found that it was more probable than not that Emil, as a director of both Ligon 159 and BCI, arranged Ligon 159's 28 May 2004 transfer of $6,188,757.

315    On 27-28 May 2004, Emil's share of the BCI funds advanced by Bank Hapoalim was discharged with funds advanced by IDB and Mercantile Discount Bank.

316    On 31 May 2004, Bank Hapoalim sent a facsimile to Bank Hapoalim Switzerland titled "Back-to-back transactions" which stated:

Following your fax transmission of 25 May 2004 this is to inform you that we renew the loan for AUD 6,177,288.17 for an additional period of six months, from 31 May 2004 until 30 November 2004. Please advise us of the rate of interest applied to the relevant deposit (bearing in mind that the margin stands at 0.3%).

The deposit for AUD 6,188,757.00 is released and the credit facility against this deposit is cancelled.

Please relay to us your customer's further relevant instructions.

We have no objections regarding the transfer of the interest, and we would like to point out that until now our consent (i.e. of the Central Branch) to this extent was not required. Therefore please contact Mr. Y. Wodnik (Back Office – Tel Aviv) with any questions pertaining thereto.

(Emphasis added.)

317    Based on this facsimile, the primary judge found that, around the time of Ligon 159's 28 May 2004 transfer of $6,188,757, the amount of $6,188,757, which had been deposited as a "fiduciary deposit" by Bank Hapoalim Switzerland with Bank Hapoalim, was returned by Bank Hapoalim to Bank Hapoalim Switzerland.

318    The facsimile confirmed that the arrangements between BCI and Bank Hapoalim thereafter included that an amount of $6,177,288.17, previously advanced to BCI, remained secured by an equivalent amount deposited as a "fiduciary deposit" by Bank Hapoalim Switzerland with Bank Hapoalim.

319    The facsimile also confirmed, as would be expected, that the deposit that supported the $6,177,288.17 advance was accruing interest. The primary judge inferred, from Bank Hapoalim's request to be advised of the rate of interest applied to the deposit, that Bank Hapoalim did not set the interest rate apart from the margin of 0.3%. In this regard, the primary judge noted that Andrew and associated parties did not dispute the finance companies' proposition that the indifference to the interest rates revealed in the 31 May 2004 facsimile disclosed that the arrangement under discussion in the facsimile was a back-to-back transaction. Nor did they dispute the proposition that the 0.3% represented Bank Hapoalim's fee for facilitating the transaction. During the appeal hearing, the Andrew parties accepted that Bank Hapoalim in Israel was indifferent to the interest rate (T51). It was submitted that the rate was set by Bank Hapoalim Switzerland.

320    By facsimile dated 1 June 2004, Bank Hapoalim Switzerland confirmed that $6,188,757 should be repaid "to our AUD account maintained with ANZ, Melbourne". This was the same account mentioned in the 25 May 2004 facsimile from Bank Hapoalim Switzerland to Bank Hapoalim.

321    The evidence below included an AUSTRAC report of a transfer of $178,826 from Ligon 158 on 2 June 2004. The beneficiary customer was Mr Etzion. The account number of the beneficiary customer was 3421500001. The details of payment were:

ATT MR BARUCH ETZION INTEREST

[PAYMENT] BY LIGON.158 INT DUE 28/05/04

322    On 2 June 2004, Gary sent a facsimile to IDB on behalf of Civic in the following terms:

Re:    loan of AUD3,690,000

I am going away on holidays on 11 June and therefore need to organise the interest payment due on 30 June 2004 prior to that date.

Kindly fax (to the above number) or email (garybinetter@hotmail.com) the amount of interest due on the loan at 30 June 2004 based on the interest rate of 6.5% p.a.

323    On 11 June 2004, BCI executed documents to renew its account for the advance of funds with Bank Hapoalim for Erwin's share. On that date, Erwin and Andrew held a meeting of directors of BCI. The minutes of the meeting referred to a letter of undertaking by BCI to Bank Hapoalim and a request for the provision of credit by BCI to Bank Hapoalim. The directors approved, among other things, "the execution, dating and delivery, from time to time, of forms of Request for the provision of Credit by [BCI] to Bank Hapoalim B.M, by any one of Erwin Binetter, Andrew Binetter and Michael Binetter and/or for any one of [them] to give any certificate, notice and other instrument pursuant to the Letter of Undertaking".

324    The same day, Erwin and Andrew signed a document entitled "Letter of Undertaking" on behalf of BCI. The document contained terms concerning security for the performance of undertakings given, but no reference to any security in the form of a deposit. The primary judge inferred from this document that each of Erwin and Andrew was participating in the management of BCI insofar as it involved transactions with Bank Hapoalim, and each was aware of the terms of the arrangements between BCI and Bank Hapoalim around this time.

325    The evidence below included a letter from BCI to Bank Hapoalim dated 11 June 2004 and entitled "Application for Provision of credit – My Letter of Undertaking (Mem Shin 20(E) for Credit in Foreign currency dated 11 June 2004" requesting credit in the sum of $6,177,288.20, repayable on 31 May 2014. This document was signed by Erwin and Andrew on behalf of BCI. It bore endorsements stamped at the Embassy of Israel in Canberra on either 9 November 2004 or 11 September 2004.

326    On about 21 June 2004, EGL ordered a transfer of $200,000 to Blanford. The evidence included an unsigned letter from Andrew to IDB requesting a drawdown from loan account "Code No. 803189 Account No. 016799" in that sum.

327    In its tax return for the year ended 30 June 2004, BCI claimed deductions for overseas interest expenses of $386,504. There were no primary records to substantiate payment of any part of this amount.

328    In its tax return for the year ended 30 June 2004, EGL claimed deductions for interest expenses to IDB of $1,140,040. There were no primary records to substantiate payment of any part of this amount.

329    By message dated 6 July 2004, Bank Hapoalim wrote to Bank Hapoalim Switzerland as follows:

re

your fiduciary deposit for aud 6,177,288.17 placed with

ourselves from 20.11.03 until 31.05.04

back-to-back transaction – roll-over dollar loan facility

further to your letter dated 18.06.04, we hereby inform you that since the deposit topic is not under our responsibility and since we are dealing with the loan facility topics only, we are not in the capacity to credit you with the amount claimed in your letter.

330    The letter dated 18 June 2004, mentioned in this message, was not in evidence.

331    The evidence included a document entitled "Deed of Continuing guarantee unlimited in amount" addressed to Bank Hapoalim signed by Erwin and dated 18 July 2004. The recitals referred to BCI as the "Borrower".

332    There was in evidence a similar document dated 18 July 2004 signed by Erwin and Andrew on behalf of Erma and Ligon 158.

333    On 12 August 2004, Andrew was informed that Erwin had Alzheimer's disease by a psycho-geriatric specialist named Dr Brodaty.

334    By facsimile dated 26 November 2004, Bank Hapoalim Switzerland wrote to Bank Hapoalim as follows:

Back-to-back transaction

Australian Dollar Loan Facility granted by yourselves to one of your clients

Our fiduciary deposit for AUD 6,177,288.17 placed with yourselves as security

Ladies and Gentlemen

We have been trying to roll over to roll-over [sic] our fiduciary deposit with your Bank as follows:

AUD 6,177,288.17

Value date: November 30, 2004

Maturity date: February 28, 2005

Interest rate: 5.10%

No payment of the Capital is to be effected to us value November 30, 2004. (Only the interest due is to be remitted).

335    The evidence included another letter, dated 30 November 2004, from BCI to Bank Hapoalim entitled "Application for Provision of credit – Our Letter of Undertaking (Mem Shin 20(E) for Credit in Foreign currency dated 11 June 2004" and requesting credit in the sum of $6,177,288.20 on 30 November 2004, repayable on 28 February 2005. The application was signed by Andrew on behalf of BCI. The primary judge stated that this letter might suggest that the terms of the facility were not extended to 31 May 2014, as had been requested in June 2004, but were extended only to 30 November 2004.

2005

336    On about 5 January 2005, Andrew wrote to Premium Business Services on behalf of Erma, requesting a transfer of $748,896.66 from Ligon 158 to IDB, with the following message:

Attention Mr. Hagai Peled

Interest for 12 months to 30 June 2001 as follows on behalf of E.G.L. Development (Canberra) Pty. Limited on Erma Nominees Pty. Ltd's account. Loan No. 803189 – 0167992.

337    The AUSTRAC report of the transfer recorded the beneficiary customer as EGL. The details of payment were:

INT 12MTHS TO 300601 BEHALF EGL

DEVELOPMENT CANBERRA PL ON ERMA NO

338    The evidence included a letter dated 1 March 2005 from BCI to Bank Hapoalim entitled "Application for Provision of credit – Our Letter of Undertaking (Mem Shin 20(E) for Credit in Foreign currency dated 11 June 2004", requesting credit in the sum of $6,177,288.20 on 1 March 2005, repayable on 30 August 2005. The letter was signed by Andrew on behalf of BCI. The application bore the facsimile stamp of "Kevin Munro & Assoc", where Michael worked. The primary judge inferred that Michael assisted BCI to arrange an extension of its arrangements with Bank Hapoalim around this time.

339    The evidence included a document dated 23 March 2005 entitled "Re: loan confirmation and repayment schedule for loan no. 10008 Branch 600 Acc 343415". The loan amount was $6,177,288.00. At the bottom of the document were "remarks" including "Int. rate: deposit + 0.3000%". Based on this document, the primary judge concluded that BCI's purported payments of interest to Bank Hapoalim comprised a fee calculated as a margin (probably of about 0.3%, consistent with the 31 May 2004 facsimile referred to above) that was received by the bank, and an amount equivalent to interest paid by the bank on the fiduciary deposits that secured the advances from Bank Hapoalim.

340    The evidence included an unsigned letter dated 31 March 2005, from Andrew on behalf of EGL, to Premium Business Services, requesting a transfer of $868,619.52 from Ligon 158 to IDB with the following message:

341    The evidence included an AUSTRAC report of a transfer of $868,620 on 4 April 2005. Ligon 268 was the ordering customer. Ligon 158 was the beneficiary customer and the account number was 8031890167992. The details of payment were:

ATT HAGAI PELED INTEREST 12 M

30/03/2002 EGL DEVELOPMENT PL

342    The evidence included an AUSTRAC report of a transfer of $183,500 on 24 May 2005. The ordering customer and the beneficiary customer were both BCI. The details of payment were:

ATT – MR BARUCH ETZION INTEREST

PAYMENT FOR LIGON PL 30/09/2005.

343    In its tax return for the year ended 30 June 2005, BCI claimed deductions for "interest expenses overseas" of $487,222.

344    In its tax return for the year ended 30 June 2005, EGL claimed deductions for "interest expenses overseas" of $1,215,173.

345    Paragraph 22 of Andrew's affidavit prepared for the Binqld tax appeal stated:

… in the second half of 2005, the following were the funding needs of the Binetter entities:

(a)    Ligon 158 required funds to start the construction work on the Pagewood premises;

(b)    Ligon 158 and Ligon 237 required funds to increase their investment in the Nudie business;

(c)    Tamarama Fresh Juices needed to purchase equipment for the Nudie and Tamarama business;

(d)    Funds to be paid to Winmar, which was the nominee for a partnership of investors, to enable Winmar as nominee to pay up its obligations concerning the investment in an Investec fund in Australia. Ligon 158 was one of the partners in that partnership.

346    The evidence included a letter dated 5 September 2005 from BCI to Bank Hapoalim entitled "Application for Provision of Credit – My Letter of Undertaking (Mem Shin 20(E) for Credit in Foreign currency dated 11 June 2004" and requesting credit in the sum of $6,177,288.20 on 8 September 2005, repayable on 8 May 2006. The application was signed by Andrew on behalf of BCI.

347    By letter dated 8 September 2005, Andrew on behalf of BCI wrote to the Commonwealth Bank of Australia to request a transfer of $182,000 to account number 34215-00001 with the following message:

For the attention of Mr Baruch Etzion. Representing interest payment by B.C.I Finances P/L to 31 March 2006 Please forward receipt.

348    The evidence below included another letter from BCI to Bank Hapoalim, dated 14 September 2005, entitled "Application for Provision of Credit – Our Letter of Undertaking (Mem Shin 20(E) for Credit in Foreign currency dated 11 June 2004" requesting credit in the sum of $6,177,288.20, repayable on 8 March 2006. The application was signed by Andrew on behalf of BCI.

349    In late 2005, Andrew visited IDB in Israel.

350    In an affidavit prepared for the Binqld tax appeal, Andrew recounted how he had described the Nudie juice business to IDB bank officers in late 2005 as follows:

28.    … In March 2005 I was appointed CEO of the Nudie fruit juice business. The juice business has really taken off in Australia. Nudie was the No. 1 new company start-up in 2004 as voted by Australian Business Review Weekly Magazine, which is the Australian equivalent of Forbes Magazine. We are getting a lot of good financial press in the Australian Business media. We have even been in discussion with a Richard Branson company with a view to acquiring it. Nudie is being sold in more than 4,000 shops in Australia including major supermarket chains. Nudie employs more than 100 people.

29.    … CHAMP, who are Australia's largest private equity business owned by Castle Harlan in New York in 2004 invested an initial investment of $5.5 million in the Nudie business. This investment values the [Nudie business] at $29 million.

30.    … The fire at the factory in May 2004 where the Nudie business was being run from set the Nudie business back but we are rebounding from this set back.

31.    … The fire destroyed all the equipment used to manufacture the juices for the Nudie and Tamarama business but Nudie outsourced the manufacture to various premises around Australia. But we need to get back into the Pagewood premises and manufacture the juice there, which will be more profitable for Nudie. My father wants to set up a new company to borrow monies from your bank so that it can on lend to Ligon 158, so that Ligon can rebuild the Pagewood premises so that Nudie can get back into its premises. Also we want to borrow money so that Ligon 158 and Ligon 237 can increase their investments in the Nudie Group business. Currently we own about 27.5% of Nudie, but my father wants to take control of Nudie because as you can see it is a growing business. Tamarama Fresh Juices had the equipment for the juice business at the Pagewood factory which was also destroyed in the fire. A loan is also needed so Tamarama can buy equipment for Nudie and the Tamarama business to be kept at the Pagewood premises.

32.    … My father also wants to borrow monies to invest in the Investec Fund, it is a private equity fund run by David Gonski. As you know he is a South African born Jewish Australian who is regarded as one of the best business minds in Australia. He is Chairman of Investec. David has invited my father to invest alongside him in the Fund. Also the Binetter entities may need funding for other business purposes.

January to May 2006

351    On about 18 January 2006, Andrew on behalf of EGL wrote to Premium Business Services to request a transfer from EGL of $3,053,165.28 to IDB with the following message:

352    The AUSTRAC report of this transfer contained the following details of payment:

ATTENTION: MR HAGAI PELED, INTEREST

FOR LOAN NO. 803189-0167992

353    The primary judge observed that it appeared that the initial transfer was rejected because the Commonwealth Bank of Australia had wrongly stated the beneficiary to be Mr Peled. By letter dated 27 January 2006, Andrew requested that the transfer be made for the benefit of:

Loan No. 803189 – 0167992.

Being interest on behalf of E.G.L. Development (Canberra) Pty. Limited on Erma Nominees Pty. Ltd's loan account

354    On 26 January 2006, Andrew on behalf of BCI signed a document entitled "Limited power of representation", permitting Mr Etzion to deal with Bank Hapoalim on its behalf and to receive information from Bank Hapoalim "about any of our loan accounts with the Bank". It was marked with a facsimile stamp dated "30 Jan 2006 14:39".

355    The evidence included a letter to Bank Hapoalim, in Michael's handwriting, signed by Andrew on behalf of BCI, which "acknowledge[d] that our application for a loan of A$10 million for 10 years awaits the approval of you". This document was marked with a facsimile stamp dated 30 Jan 2006 14:40.

356    In February 2006, Ronald re-married Ms Huber (they had divorced in 1992). After Ms Huber asked some questions about financial matters, Ronald mentioned her questions to Michael, who instructed Ronald not to discuss Ligon 268 with Ms Huber, saying "We don't want her to know anything about the family businesses".

357    The evidence included a letter signed by Andrew, apparently on behalf of BCI, dated 8 March 2006. It was sent by facsimile dated 8 March 2006 from Bank Hapoalim Switzerland to Bank Hapoalim. The letter was addressed to Bank Hapoalim and entitled "Application for Provision of credit – Our Letter of Undertaking (Mem Shin 20(E) for Credit in Foreign currency dated 11 June 2004". The letter requested the provision of credit in Australian dollars in the amount of $10 million.

358    Also forming part of the facsimile dated 8 March 2006 was a letter of the same date addressed to Bank Hapoalim Switzerland. This letter was signed by Andrew on behalf of "The Pledgor". It was entitled "Deed of Pledge and Declaration of Assignment executed by us on Account No. 7196960" (the letter of irrevocable instructions). The recitals to the letter recorded that "pursuant to the Deed of Pledge we have pledged a deposit held with you as specified in the Deed of Pledge … as collateral for all claims vested in [Bank Hapoalim]". The recitals also recorded that "the Deposit and the credit balance thereof are to create a fund that … serve for satisfaction and payment of any and all amounts due and payable by the Debtor to [Bank Hapoalim]".

359    The letter of irrevocable instructions recorded that the "Deposit … is pledged and assigned pursuant to the Deed of Pledge". It included the following clause:

Your obligations to pay any amount on account of the Deposit either to us or to our order, to the extent of the amount outstanding from time to time by the Debtor to [Bank Hapoalim], pursuant to the Documents of Undertaking, ceases to be an ordinary obligation between a bank and its customer or depositor so that, to the extent of the amount outstanding from time to time by the Debtor to [Bank Hapoalim] pursuant to the Documents of Undertaking, it is and shall be contingent upon your receiving from [Bank Hapoalim] written advice to the effect that there are no amounts owing by the Debtor to [Bank Hapoalim] (hereinafter: "Notice of Release") before your becoming obligated to make any payment on account of that part of the credit balance of the Deposit which does not exceed the amount outstanding from time to time by the Debtor to [Bank Hapoalim] pursuant to the Documents of Undertaking.

360    The letter of irrevocable instructions operated to provide "collateral" for the "provision of credit" made by Bank Hapoalim, and was expressed to be irrevocable except with the consent of Bank Hapoalim. It concluded with the words: "This letter is regarded as constituting an inseparable part of the Deed of Pledge".

361    The evidence included two other letters dated 8 March 2006. Each was signed by Andrew on behalf of BCI, and was addressed to Bank Hapoalim. Both of the letters requested credit in the sum of $6,177,288.20. One letter provided for an interest rate of 6.67% per annum less Australian interest withholding tax. The primary judge observed that, from the document's footer, it appeared to have been created by Mr Etzion. The other provided for an interest rate of 7% per annum less Australian interest withholding tax. The latter letter was sent by facsimile from Kevin Munro & Associates on 13 March 2006.

362    The evidence included several more letters from Andrew on behalf of BCI to Bank Hapoalim around this time. One was dated 8 April 2006, and requested credit of $3,850,000 at an interest rate of 7%, repayable on 8 March 2011. The primary judge observed that, from the document's footer, it appeared to have been created by Mr Etzion. Another was dated 8 April 2006 and requested credit of $3,822,717.80.

363    The evidence included a letter from BCI to Bank Hapoalim dated 22 April 2006, entitled "Application for Provision of credit – Our Letter of Undertaking (Mem Shin 20(E) for Credit in Foreign currency dated 11 June 2004". It was signed by Andrew on behalf of BCI and requested "that you provide me in my foreign currency account with you No. 343415" an amount of $3.85 million in accordance with the terms set out in the 11 June 2004 letter of undertaking. There was also an unsigned letter dated 22 April 2006 from Andrew on behalf of BCI requesting a drawdown from loan account number 343415 of $3.85 million.

364    On 26 April 2006, BCI received $3,848,552 from Bank Hapoalim (representing the amount of $3.85 million less charges imposed by Bank Hapoalim).

365    According to BCI's appeal statement in the BCI tax appeal, the advance that it received in April 2006 was used for purposes set out in Andrew's 31 October 2011 affidavit, namely:

(a)    $2,816,633.64 was lent to EGL so it could repay its loans that it had with IDB, which loans had initially been used by EGL for various investments;

(b)    $650,000 was lent to Winmar Investment Trust which was then invested with a managed fund with Investec;

(c)    $244,158.59 was paid to Bank Hapoalim as interest;

(d)    $110,000 was partially used to invest in Nudie, that being $44,008 and the balance of approximately $50,000 was used as a partial interest payment to BCI;

(e)    $26,780.93 was used to pay legal fees incurred by BCI; and

(f)    $1,463.46 was deducted on account of bank fees.

366    The sum of $3,848,552 and $6,177,288 is $10,025,840, being approximately the amount of credit referred to in two applications for provision of credit in May 2006. The primary judge stated that it appeared that, by this time, there was a deposit of about $10 million that secured the advances from Bank Hapoalim to BCI.

367    As for earlier advances from BCI, documents were prepared in connection with the advance that gave the appearance that the transaction comprised a loan from Bank Hapoalim to BCI, secured only by guarantees and a charge over the assets of BCI when the true position was that the advance was secured by a "back-to-back" deposit. The primary judge inferred that Michael, together with Andrew, procured the preparation of the relevant documents. The primary judge also inferred that Michael knew that the advance was secured by a "back-to-back" deposit that would earn interest income offshore to the ultimate benefit of the owner of the deposit.

368    On 28 April 2006, BCI transferred $2,816,633.64 to Ligon 158. The same day, Andrew on behalf of EGL wrote to Premium Business Services requesting a transfer from Ligon 158 of $2,816,633.64 to IDB. He requested that the transfer be accompanied by the following message:

Interest for the period 01 July 2005 to 30 April 2006 and partial loan repayment as follows on behalf of E.G.L Development (Canberra) Pty. Limited on Erma Nominees Pty Ltd's account. Loan No. 803189-0167992.

369    On or about 1-4 May 2004, Binqld entered into an arrangement with IDB for the advance of $4 million in funds. The evidence below included a form dated 1 May 2006 entitled "Application to Receive a Foreign Currency Loan" signed by Andrew on behalf of Binqld, applying for a loan in the sum of $4 million. The primary judge observed that the document appeared to have been partly completed in the handwriting of Michael. At trial, the finance companies disputed the authenticity of this document, and nine other similar documents annexed to an affidavit of Andrew dated 27 July 2012.

May 2006 to January 2008 – advances from IDB to Binqld

370    Between May 2006 and January 2008, Binqld received 10 payments totalling $22.9 million from IDB.

371    The funds transferred from IDB to Binqld were on-lent to other companies for various purposes.

May to December 2006

372    By letter dated 22 May 2006, Andrew on behalf of BCI wrote to the Commonwealth Bank of Australia requesting a transfer from BCI of US$20,000 to:

Bank of Hapoalim B.M

50 Rothschild Blvd.

Tel Aviv Israel

For Account No:- 34215-00001

With the following message:-

"For the attention of Mr. Baruch Etzion. Representing legal fees by B.C.I Finances P/L. Please forward receipt."

373    Based on this letter, the primary judge found that: account number 34215-00001 was an account owned or controlled by Mr Etzion; and it was an account from which Mr Etzion made payments at the direction of Andrew. However, the primary judge did not accept at face value any of the messages that purported to record the purpose of funds transferred to account number 34215-00001.

374    Also on 22 May 2006, Andrew on behalf of BCI wrote to the Commonwealth Bank of Australia requesting a transfer of $244,158.79 to:

Bank of Hapoalim B.M

50 Rothschild Blvd.

Tel Aviv Israel

For Account No:- 34215-00001

With the following message:-

"For the attention of Mr. Baruch Etzion. Representing interest payment by B.C.I. Finances P/L to 8 September 2006 as calculated below Please forward receipt."

375    On 7 June 2006, Andrew sent a facsimile to Ophira Perry of IDB, annexing a signed form entitled "Application to receive a foreign currency loan". The customer was identified as Ligon 268 and the loan amount sought was $11,250,000. The proposed repayment date was 31 May 2016. The form contained a provision for interest but no rate was inserted into that provision. Andrew had initialled the form at various places.

376    In July 2006, the ATO commenced an audit into the affairs of BCI, Ligon 158 and another company that the ATO had identified as associated with Erwin, namely Rawson Finances Pty Ltd. By a letter dated 31 July 2006 addressed to Erwin care of Mark Douglass of MDA Lawyers, and entitled "Confirmation of income tax audit", the ATO sought information that included details of all funds received by BCI from overseas and funds sent overseas by BCI, as well as details of any loans held by BCI.

377    The letter stated, relevantly:

The Commissioner is particularly concerned with the prevalence of offshore schemes and has expressed this in his Media Release NAT 2005/35 dated 10 June 2005. In that Media Release, a copy of which is attached, the Commissioner states that any persons who may have been caught up in these schemes should come forward and clear up their tax position.

378    The media release attached to the ATO's 31 July 2006 letter relevantly stated:

Over the last two days the Tax Office has acted on information suggesting that individuals have entered into offshore schemes directed at creating fictitious deductions or concealing income from tax. The schemes rely on the use of offshore structures put in place by scheme promoters.

"The information indicates that in some cases deductions are claimed for payments for expenses and services that are fictitious," Tax Commissioner Michael Carmody said.

"In other cases, assessable income derived offshore is not brought to account in Australia. This income is secretly returned to Australia disguised as a loan, an inheritance, a gift, or through credit and debit cards."

379    The media release referred to breaches of the tax law, potential criminal behaviour being referred to the Australian Crime Commission and warrants having been issued. It also referred to the possibility of penalty discounts being available to people who came forward to "clear up their tax position".

380    The primary judge stated that it must have been obvious to those of the first to sixth respondents below who took an interest in the tax affairs of the finance companies that the tax audit would involve investigations by the ATO into the transactions between the finance companies and the Israeli banks, because the terms on which those transactions were made were critical to the proper tax treatment of advances from the banks to the finance companies and to whether the finance companies could substantiate their deductions for interest expenses. It followed, her Honour said, that those individuals readily appreciated, from shortly after the commencement of the tax audit, that:

(a)    the tax audit might uncover information about the relevant arrangements between the finance companies and the Israeli banks that would cast doubt on the proper tax treatment of the advances and on whether the deductions could be substantiated;

(b)    BCI, EGL and Ligon 268 might be assessed to pay additional tax, penalties and interest for unpaid tax if they could not substantiate their tax returns and, in particular, their deductions for interest expenses; and

(c)    Binqld might be assessed in a similar fashion if it pursued transactions with IDB that were relevantly similar to the transactions between BCI, EGL and Ligon 268 and the Israeli banks.

381    The primary judge found that Erwin and Emil were in a position to appreciate what the tax audit was likely to involve for those companies of which they were directors, because they were the original architects of the scheme that was found to have been established and implemented. Further, the primary judge found that Andrew and Michael were in a position to appreciate more generally that the tax audit would involve consequences of the kind that she had described in relation to each of the finance companies, because they took charge of the finance companies' responses to the audit and therefore were required to familiarise themselves with the financial affairs of the finance companies, to the extent that they were not already fully aware.

382    On 31 August 2006, the ATO met with MDA Lawyers and complained that no information had been received from BCI pursuant to the 31 July 2006 letter. There followed correspondence and meetings between the ATO and MDA Lawyers to progress the audit.

383    By letter dated 8 September 2006, the ATO confirmed that the audit was extended to include EGL and Ligon 268.

384    By letter dated 19 September 2006 from Andrew on behalf of EGL to Premium Business Services, Andrew requested a transfer of $5,278,137 from Ligon 158 to IDB with the following message:

Attention Ms. Ophira Perry

Interest for the period 01 May 2006 to 19 September 2006 and partial loan repayment as follows on behalf of E.G.L Development (Canberra) Pty. Limited on Erma Nominees Pty Ltd's account. Loan No. 803189 – 0167992.

385    The source of these funds included $3.1 million from TFJA and $1.99 million from Binqld via Erma.

386    On 12 September 2006, Ligon 158's bank account was credited with $4.77 million.

387    According to Andrew, in mid-October 2006, he sought $3 million for Binqld from Ms Perry of IDB, noting that "we have repaid $5 million from EGL". On 1 November 2006, Binqld transferred $3 million to Ligon 158. The majority of those funds were subsequently invested in the Nudie juice business.

388    By letter dated 14 November 2006, Andrew requested a transfer of $161,063.01 to IDB, which he referred to as "Interest for the period 05 May 2006 to 05 November 2006 … on behalf of Binqld Finances Pty Limited".

389    On 1 December 2006, Binqld transferred $1.5 million to Ligon 158. The majority of those funds were subsequently invested in the Nudie juice business.

390    Similarly, on 20 December 2006, Binqld transferred $1.2 million to Ligon 158. Again, the majority of those funds were subsequently invested in the Nudie juice business.

1992-2008 – BCI and EGL's tax returns

391    It is convenient, at this stage of the chronology, to describe the tax returns filed by BCI and EGL in respect of the years ended 30 June 1992 to 30 June 2008. It is unnecessary for present purposes to describe the tax returns filed by Ligon 268 and Binqld.

BCI

392    BCI's first tax return was for the year ended 30 June 1993 and was dated 11 May 1994. A tax loss of $648 was disclosed.

393    The tax returns for the years ended 30 June 1994 to 30 June 2001 were lodged more or less on time. Sheets inserted into the returns typically recorded that interest income was received from Erma and Milgerd by way of direct payment to Bank Hapoalim.

394    BCI did not file tax returns for the next five years and did so only after the ATO tax audit commenced in July 2006.

395    In its tax returns for the years ended 30 June 1993 to 30 June 2008, BCI claimed deductions of many millions of dollars. The primary judge stated that it appeared that BCI claimed, as deductible expenses, amounts equivalent to the interest purportedly paid or payable by BCI to Bank Hapoalim.

396    The affairs of BCI were managed by Erwin and Emil, at least during the period in which the 1994 to 2001 tax returns were lodged. In the primary judge's view, it was probable that each of Erwin and Emil procured the preparation and lodgement of BCI's 1994 to 2001 tax returns, and approved the contents of the returns.

397    The primary judge found that Michael (with Andrew), procured the lodgement of the finance companies' outstanding income tax returns after the commencement of the ATO tax audit.

398    The primary judge did not find that Erwin and Emil procured or approved the lodgement of tax returns by BCI after the commencement of the ATO tax audit. Nor did she find that Margaret or Gary played any role in procuring or approving the lodgement of any of BCI's tax returns.

399    Based on these conclusions and on the various signatures on the tax returns and the identification of Erwin as the public officer in several returns, the primary judge found that the following respondents below caused BCI to claim the deductible expenses claimed in the following tax returns:

(a)    Erwin, for the 1994 to 2001 tax returns;

(b)    Emil, for the 1994 to 2001 tax returns;

(c)    Andrew, for the 2002 to 2008 tax returns; and

(d)    Michael, for the 2002 to 2008 tax returns.

EGL

400    EGL lodged its income tax returns for the years ended 30 June 1992 to 30 June 2007 on the dates as set out in [378] of the Liability Judgment, claiming the interest expenses there set out.

401    EGL never disclosed any significant taxable income in any of these tax returns.

402    The primary judge found that the affairs of EGL were managed by Erwin and Emil, at least until about April 2001. In her Honour's view, it was probable that each of Erwin and Emil procured the preparation and lodgement of EGL's 1992 to 2000 income tax returns, and approved the contents of each return.

403    Michael was a director of EGL when the company lodged its 1996 to 2000 income tax returns. The primary judge considered it more likely than not that the 1996 to 2000 income tax returns were lodged with Michael's approval of their contents.

404    The primary judge did not find that Gary played any role in the lodgement or approval of any of EGL's income tax returns.

405    Based on these conclusions and the various signatures on the tax returns and the identification of Erwin as the public officer in several returns, the primary judge found that the following respondents below caused EGL to claim the deductible expenses claimed in the following tax returns:

(a)    Erwin, for the 1992 to 2000 tax returns;

(b)    Emil, for the 1992 to 2000 tax returns;

(c)    Andrew, for the 2001 to 2008 tax returns; and

(d)    Michael, for the 1996 to 2008 tax returns.

2007