FEDERAL COURT OF AUSTRALIA

Patrick v Capital Finance Pty Ltd (No 2) [2002] FCA 1570

TRADE PRACTICES –– misleading and deceptive conduct –– representative proceedings – prospectus issued for stage production “Crazy For You” – applicant invested money in stage production – tax-driven investment scheme – loans made to investors – assignment of loans – use of investors’ funds – purchase of term bonds as security – representations made in prospectus – allegation that representations as to use of investors’ funds were misleading – knowledge of respondents – claim of aiding and abetting misleading conduct – whether case to answer

CONTRACT –– agreements underpinning investment scheme – obligations of various respondents –– allegations of breach of contractual obligations – claim of interference with contractual relations – whether case to answer

EQUITY – investment scheme – Crazy For You investors’ fund – investors’ representative – trustee – fiduciary duties – trust property – allegations of breach of fiduciary duties – claim of accessorial liability – Barnes v Addy claim – whether case to answer

PRACTICE AND PROCEDURE – applicant’s case closed –– no-case submission – relevant principles – causes of action related –– evidentiary hiatus – whether case to answer

Income Tax Assessment Act 1936 (Cth)

Trade Practices Act 1974 (Cth) ss 51A, 52, 75B

Union Bank of Australia Pty Ltd v Puddy [1949] VLR 242 applied

Prentice v Cummins (No 5) [2002] FCA 1503 referred to

Jones v Dunkel (1959) 101 CLR 298 referred to

Rasomen v Shell Company of Australia Ltd (1997) 75 FCR 216 referred to

Protean (Holdings) Ltd v American Home Assurance Co [1985] VR 187 referred to

Residues Treatment & Trading Co Ltd v Southern Resources Ltd (1989) 52 SASR 54 referred to

Preston v Dowell (1987) 45 SASR 111 referred to

Trade Practices Commission v Allied Mills Industries Pty Ltd (1981) 37 ALR 225 referred to

James v Australia and New Zealand Banking Group Ltd (1986) 64 ALR 347 referred to

Sargent v ASL Developments Ltd (1974) 131 CLR 634 cited

Yorke v Lucas (1985) 158 CLR 661 cited

Barnes v Addy (1874) LR 9 Ch. App. 244 referred to

Royal Brunei Airlines v Tan [1995] 3 WLR 64 cited

WILLIAM GEORGE DOUGHTY PATRICK (for himself and as representing the persons referred to in paragraph 1 of the Statement of Claim) v

CAPITAL FINANCE CORPORATION (AUSTRALASIA) PTY LIMITED

(ACN 074 692 443), CAPITAL FINANCE CORPORATION (AUSTRALASIA) PTY LIMITED (ACN 074 692 443), CAPITAL FINANCE CORPORATION (AUSTRALIA) PTY LIMITED (ACN 074 352 104), CAPITAL FINANCE CORPORATION PTY LIMITED, (ACN 064 512 385), KERROD GRANT PARK, OVERSEA-CHINESE BANKING CORPORATION LIMITED (ABN 073 598 035), CHRISTOPHER COOTE, PHILLIP EMANUEL PRODUCTIONS LIMITED (ACN 002 693 512)

V 637 of 2001

TAMBERLIN J

SYDNEY (HEARD IN MELBOURNE)

18 DECEMBER 2002

THE COURT ORDERS THAT:

1.         The proceedings be relisted for further hearing.

2.         Costs be reserved.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                     This judgment concerns a no-case submission by the first six respondents (that is to say excluding the seventh respondent which did not participate on the hearing) to this representative action brought by Dr Patrick as a participant in a tax-driven investment scheme relating to the issue of a prospectus on 22 April 1996 for a theatrical production named “Crazy For You” (“the Prospectus”), which was to be staged in various Australian cities during 1996 and 1997.  

2                     The applicant’s case has been closed in so far as it concerns the applicant Dr Patrick, who was one of the participants in the Crazy For You Investment Scheme (“the Investment Scheme”) and whose case been presented first in the proceeding.  He invested $100,000 using funds which he borrowed from the first respondent (“Capital Australasia”) which was incorporated on 2 July 1996.  The fifth respondent (“OCBC”) was the party from which Capital Australasia acquired the funds to lend to Dr Patrick and the party to whom his loan was assigned by Capital Australasia.

3                     The first to third respondents collectively, (“Capital”) are companies controlled by the fourth respondent, Mr Park.  He can be described as the controlling mind of Capital.  

4                     The second respondent (“Capital Australia”) is a related corporation to the other two Capital companies.  The third respondent, (“Capital Finance”) is the company which entered into a loan agreement in June 1995 with the Bank of Singapore (Australia) Limited (“BOSA”), a wholly owned subsidiary of OCBC, and effectively is the party to which loan applications were made by the majority of the investors in the Crazy For You production.  Some investors preferred to make cash investments.

5                     The sixth respondent, Mr Coote (“the Representative”) is an accountant, designated in the Prospectus and who fulfilled the role of a participants’ representative in relation to the production.  The seventh respondent, Phillip Emanuel Productions Limited (“Management Company”) was charged with management of the Crazy For You production.

6                     In these reasons I will for convenience refer to the first four respondents as the “Park/Capital interests” as they have common and overlapping interests given the central role of Mr Park in relation to their control.

7                     The Investment Scheme was tax-driven and the principal events under consideration occurred towards and shortly after the end of the financial year of 1996, up to about September of that year.  The Investment Scheme was to be offered to investors as a tax effective investment as it would allow a deferment of income tax by way of a secured capital return to the participants over several years.

principles on no-case submission

8                     The applicant did not contend that the respondents should be put to their election as a condition of making the no-case submission, citing authority to the effect that where fraud is alleged, the just and convenient course is not to require an election.  This is a case in which fraud is alleged and the considerations stated by Fullagar J in Union Bank of Australia Ltd v Puddy [1949] VLR 242, at 245-6 apply.  I therefore acceded to this course.

9                     The general principles applicable to deciding a no-case submission were recently reviewed by Sackville J in Prentice v Cummins (No 5) [2002] FCA 1503 at [109] ff and it is not necessary to set them out in great detail in these reasons.

10                  In Jones v Dunkel (1959) 101 CLR 298 at 330-331, Windeyer J considered the principles concerning the making of a no-case submission in a civil case without a jury.  His Honour said:

“When there is no jury, the proposition  ‘no case to answer’ may obviously mean far more than, ‘is there evidence on which a jury could find for the plaintiff ?’  It may mean ‘would you, the judge, on the evidence given, find for the plaintiff ?’” (Emphasis added)

11                  The Full Court also considered the applicable principles in Rasomen Pty Ltd v Shell Company of Australia Ltd (1997) 75 FCR 216.  In that case, the Court applied the observations of Young CJ, (with whom Fullagar J agreed) and those made by Tadgell J in a separate judgment in the Victorian Court of Appeal case of Protean (Holdings) Ltd v American Home Assurance Co [1985] VR 187 at 215.  Relevantly, Young CJ said:

“Where a trial judge entertains a submission that there is no case to answer without requiring an election, any one of three results may ensue. The judge may conclude that the evidence could sustain a finding against the party making the submission, in which case he would overrule the submission and allow the case to proceed. The second possible result is that the case is so finely balanced that the judge is not satisfied that even if the evidence could sustain a finding against the party making the submission, he would be prepared to make the necessary finding himself.  Where the case is being tried without a jury, a trial judge in such a position would no doubt allow the case to proceed. …

The third possible result of a submission that there is no case to answer is that the judge is persuaded by it and decides to uphold it.” (Emphasis added)

12                  In the third possible situation, where the submission of no case to answer is accepted, the Chief Justice considered that a trial Judge in reaching his or her conclusion is entitled to draw all proper inferences from the evidence but cannot draw inferences against the party making the submission based on the absence of evidence from the moving party.

13                  I have approached the no-case submission on the basis that the relevant question for determination is: whether on the present state of the evidence at the close of the applicant’s case, if no further evidence is called, I would find for the applicant?

14                  The no-case submission is presented on the basis that there are critical gaps in the evidence adduced to this point so that the applicant’s case is not made out.  In particular, the respondents submit that there is an evidentiary hiatus as to essential elements in each of the causes of action pleaded: see Residues Treatment & Trading Co Ltd v Southern Resources Ltd (1989) 52 SASR 54 at 68.

15                  In Residues Treatment, Perry J, at 68 considered that there are four categories of cases in which a no-case submission might be advanced.  His Honour identified these categories as follows:

“1.       Where no reference at all to the evidence is required.

  2.       Where a reference to the evidence is required only to establish that there is an evidentiary hiatus or failure to adduce any evidence as to an essential element in the cause of action.

  3.       Where it is argued that on a consideration of the evidence adduced by the plaintiff taken at its highest from the plaintiff’s point of view, the evidence could not support the causes of action pleaded.

  4.       The situation where it is contended that although there is some evidence to support the plaintiff’s claim, it is so weak and unreliable that it should be dismissed without calling upon the defendant.”  (Emphasis added)

16                  In the course of submissions, senior counsel for OCBC said that this case falls within the second category, namely where there is an evidentiary hiatus or failure to adduce evidence as to an essential element of a cause of action.

17                  This is a case where, because of the close relationship in the underlying legal and evidentiary substratum of the allegations contained in the various causes of action, it is appropriate that if there is a case to answer on one of the causes of action pleaded against a respondent, the whole case against that respondent should proceed and be heard in respect of each cause of action: see the remarks of von Doussa J in Preston v Dowell (1987) 45 SASR 111, at 116.  In my view, these remarks are apposite to the present case.  The purpose of such an approach is to provide for the due administration of justice by ensuring that the Court does not prematurely dismiss a cause of action following a no-case submission where later evidence, in respect of a cause of action in which there was a case to answer, might establish that the first-mentioned cause of action was wrongly dismissed.

18                  It is appropriate to keep in mind the observations of Sheppard J in Trade Practices Commission v Allied Mills Industries Pty Ltd (No 3) (1981) 37 ALR 225 at 231 in relation to a no-case submission:

“An outstanding question … is what is to happen if I find a case to answer against some, but not all, respondents.  The usual practice is not to dismiss a case against any respondent at that stage, but only to do that if there is still no case to answer against a respondent at the close of any evidence which may be led by the respondents against whom there is a case: Menzies v Australian Iron & Steel Ltd (1952) 52 SR (NSW) 62.”

19                  The observations of Toohey J in James v Australia and New Zealand Banking Group Ltd (1986) 64 ALR 347, at 400, must also be kept in mind:

“When a no case submission has an evidentiary foundation rather than a basis in some proposition of law, there is no logical inconsistency in the court holding that there is a case to answer but thereafter dismissing the claim …  A rejection of a no case submission does not carry with it an inevitable consequence that the claim must succeed.”

Case pleaded against OCBC

20                  OCBC was the respondent whose submissions formed the primary arguments adopted by the other respondents in advancing the no-case submission.  It is therefore appropriate to concentrate on the case put by OCBC.  In summary, the allegations against OCBC as pleaded can be summarised as follows:

• that it knew and agreed to implement, the Investment Scheme;
• that it knew the “true extent” of the Management Company’s investment obligations;
• that it knew that the representations in the Prospectus were misleading and deceptive;
• it knew that approximately sixty-eight per cent of all monies advanced by OCBC to Capital Australasia and in turn lent by it to the applicant, would be used by the Representative and the Management Company to pay for term bonds issued by OCBC;
• that it participated or assisted in a breach of fiduciary duty;
• that it knew it was receiving trust property;
• that it knew it had committed fraud in relation to the Investment Scheme and the representations in the Prospectus;
• that it aided and abetted the contraventions by Capital Australasia, the Representative and the Management Company;
• that it interfered with contractual relations;
• that it engaged in deceit in accepting payments.

21                  OCBC contends that in respect of each of these claims there is no case to answer because there are critical gaps in the evidence adduced by the applicant.  The causes of action alleged against OCBC are:

·        it is liable as an accessory to contraventions of the Trade Practices Act 1974 (Cth) (“the Act”)andto a breach of fiduciary duty;

·        it has intentionally induced breaches of contractual relations;

·        it is guilty of deceit in accepting payments;

·        it has made misleading representations;

·        it is liable as recipient of participants’ funds knowing of a breach of trust or of fiduciary duty by the Representative.

22                  I turn now to each of the particular allegations in respect of which it is said by OCBC that there is a critical gap in the evidence.  As indicated above, in the course of dealing with these matters, I will also express my views with respect to submissions made by the other respondents.

knowledge of and agreement to implement the Crazy for you investment scheme

23                  From the above outline of allegations and claims it is apparent that the complaints against OCBC require knowledge on its part of each of the matters raised.  OCBC and the other respondents deny such knowledge.  They also rely on the failure by the applicant to prove, as a matter of fact, the actual flow of participants’ funds back to OCBC to secure the term bonds.  This factual allegation is at the heart of the allegations against all parties. OCBC contends that there is a lack of sufficient evidentiary basis for the allegations of fact.

24                  In order to make good the allegations of knowledge on the part of OCBC, counsel for Dr Patrick refers to its financial interest in the Investment Scheme, evidenced by the lending and security transactions and to correspondence from solicitors who acted for both it and its subsidiary company, BOSA.  BOSA transferred rights and obligations assigned to it by companies in the Capital group of companies to OCBC shortly after 30 June 1996.

25                  The retainer of OCBC’s solicitor, Mr Hutchings of Cornwall Stoddart, was to investigate and advise generally on the Investment Scheme.  The knowledge of the solicitors it is said, can be imputed to OCBC: Sargent v ASL Developments Ltd (1974) 131 CLR 634, at 658.  I accept that this applies in the present case.

26                  In the course of acting for BOSA and OCBC, that firm had arranged for an examination of the Prospectus and the basic documents underpinning the transactions and the production to which the lending was related.  The firm also retained a consultant, Mr Patterson, who expressed “significant concerns” about the loans.  On the basis of this a draft, qualified Solicitor’s Certificate was drawn.  OCBC became aware of these concerns prior to 30 June 1996.  Of particular concern to Mr Patterson was why so much money ($5.5 million) was required to be raised when the Management Company was only obliged to pay a maximum of $1 million to the pre-production costs.  This concern and the work undertaken by the solicitors and their consultants in raising the concerns grounds an inference of knowledge by OCBC through its officers and agents of the Investment Scheme and the relevant documents.  I note that the Offer to Borrow form was prepared by OCBC’s solicitors in conjunction with Capital.  There were many documents adduced in evidence which support the conclusion that OCBC was aware of the proposed course of action in relation to the financing of the Investment Scheme and that it was to receive part of the total funds paid on behalf of the participants.

27                  The Offer to Borrow documents refer to the definitions of “investment” and “prospectus” as set out in the Prospectus.  OCBC and BOSA are specifically named in Item 13 of the Schedule to the documents underlying the borrowing from Capital Australasia.  Item 13 of the Schedule forms part of the documents executed by Dr Patrick when entering into the relevant transaction.

28                  From this material it is apparent that OCBC knew the nature and extent of the investment and must be taken to have been aware that the associated documents, including the Prospectus, had an important bearing on the subject matter of the loan.  I am satisfied on the present state of the evidence, that it would be reasonable to draw an inference that both the Park/Capital interests and OCBC knew that it was being represented that a substantial proportion of the participants’ funds were to be used for the Crazy For You production whereas in fact they were to be used to pay OCBC for the term bonds and would not be directed to the staging or pre-production or running costs of the production and that Dr Patrick was not aware of this.  I am satisfied that by inference from the evidence, it has been shown that OCBC was aware that a major part of the investors’ funds were to be diverted to purchase security for their repayment obligations.  I am not satisfied that OCBC knew the precise percentage of the total investment diverted but such precise knowledge is not necessary to the applicant’s case.  The loan offer, as OCBC must have been aware, made no reference to the use of the loan funds to purchase the security and nor did the Prospectus.  The silence of the Prospectus on this point was misleading because, in substance, the Prospectus effectively represents that the total investors’ funds were needed and would all be used to meet the expenditure for the budgeted thirteen week period.  In addition, it is reasonable to draw the inference that OCBC and Park/Capital knew that the investors would be seeking a tax deduction for the year ended 30 June 1996 given the date of the Prospectus and the list of loans and investments that had been made prior to 30 June 1996.

29                  The respondents’ “hiatus” submission is that there is no evidence from which a court could or would infer that any substantial part of the participators’ funds were actually used to purchase the bonds.  It is submitted that the flow of funds relied on by the applicant does not represent the true position and that it does not take account, in particular, of the fact that bank warrants and bank cheques were used to effectuate the flow of funds and that it is equally or more likely that the funds used to purchase the term bonds came from another source, such as prospective profits or takings from the production.  In other words the evidence does not establish that the source of the funds used to purchase term bonds was from the participants.  It is said that there was no circular flow of funds because the circle was broken by payments from other institutions.

30                  The question whether investors’ funds were diverted back to OCBC is finely balanced on the present state of the evidence and the position is not free from doubt, but I think this is a matter on which the case should proceed having regard to the inferences which can, and at this point, should be drawn in favour of the applicant.

31                  It is also to be noted that the settlement was carried out at the same branch of the Australia and New Zealand Banking Group Limited (“ANZ”) and that the ANZ were bankers to Mr Coote, to the Management Company and to Phillip Emanuel International Pty Ltd.

32                  The interposition in the funds flow of the bank warrants and bank cheques does not in my view detract from the applicant’s case on this aspect because no satisfactory explanation, as opposed to speculation, has been suggested by the respondents to rebut the inference for which the applicant contends.

33                  Commercial reality, the overall interwoven structure of the Investment Scheme, the central role of OCBC and the timing of the flow of funds, together with the state of the financial accounts of the respondents, as shown by the bank statements which are in evidence, point to the use of the investors’ funds in this series of transactions to pay for the term bonds issued by OCBC, contrary to the representations in the Prospectus and related documents.  The evidence supports the inference that there was an exchange of cheques in a circular flow of funds on the same day among contractually and financially connected parties which created the appearance of a series of related financial transactions in the course of which a substantial amount of the money originally generated from OCBC did not go into the underlying project, the subject of the investment.  The funds simply flowed through the various sectors of the transaction circle.  Although the funds flow cannot be traced with exactitude at this point, there are sufficient indications in the evidence from which it can be reasonably inferred that the financing of the transaction were effectuated in the way contended for by the applicant with the knowledge of the first five respondents at least.  In my view, the first five respondents have not made good the submission that there is no case to answer in so far as there has been a failure on the part of the applicant to prove the use of participants’ funds to secure the term bonds or because of a lack of knowledge of the essential facts.

management company’s investment obligations

34                  The relevant allegation made by the applicant is that OCBC knew the true extent of the Management Company’s investment obligations.  The Co-producer’s Equity Agreement (“Equity Agreement”) in cl 7 provides that the Management Company has no obligation to advance any excess funds in the event that pre-production costs exceed the budget costs.  This is not pointed out in the Prospectus, where the statement is made that the Management Company will contribute $1 million and that it is one of the parties responsible for any shortfall in the running costs and losses.  It is submitted for OCBC that this allegation is not made out because cl 7 does not limit the Management Company’s contribution to the production to $1 million but only limits the pre-production contribution to $1 million.  In my view the failure to point this out is a significant omission in the Prospectus, which is careful to point out, with specificity, a host of other matters and arrangements, and I do not accept the submission of OCBC on this point.  This limitation is a matter which was drawn to the attention of the solicitor for OCBC in the course of preparing the draft Solicitor’s Certificate.  I do not accept the explanation proffered by OCBC that this represented a misreading of the Equity Agreement, both in general and on the part of the solicitor for OCBC.  Nor is there much to be said for OCBC’s submission that if the Prospectus failed to summarise accurately the terms of the Equity Agreement, this is not something for which OCBC is responsible.  The question is not whether OCBC is responsible as a party to the Prospectus, but whether it knew of the essential facts which constituted the misrepresentation.

35                  I am not persuaded that OCBC’s submission, that there is no case to answer because, among other matters, this allegation has not been made out, succeeds.

knowledge of misleading prospectus representations

36                  As indicated above, it is submitted for OCBC that there was no allegation or evidence that any particular person at OCBC knew the terms of the representations pleaded or their falsity.  In my opinion the imputed knowledge of the solicitor on the present evidence can be attributed to OCBC in relation to the contents of the documentation and the specific concerns.  The documents support the inference that Mr Lawrence, the OCBC Manager of Corporate Banking for Victoria, was aware that the distribution of the funds was contrary to the representations in the Prospectus.  I am satisfied that the Certificate of the solicitor, which was sent to Mr Lawrence on 25 June 1996, was known to Mr Lawrence and that it represented the results of a careful examination of the Prospectus by the solicitor, and that this can be attributed to the recipient of the solicitor’s letter and to OCBC.

37                  For reasons given above I am satisfied that OCBC knew of the Investment Scheme and its terms and appreciated that the Prospectus, in so far as it dealt with the use of the participants’ funds, would be relied on by persons investing in the Scheme, having regard to, amongst other matters, the representations in the borrowing arrangements.  As indicated earlier I am satisfied that it is established at this point by inference that a large part of the monies raised were not used to fund the running costs of the Crazy For You production as represented, but were diverted to pay for the term bonds issued by OCBC.  It is said that it has not been established that OCBC intended this result.  However, having regard to the knowledge which can be attributed to OCBC, and given its central role and the profit it stood to make, I am persuaded on the evidence as it now stands that it should be inferred that OCBC acted in the light of such knowledge to implement the arrangements and not to take any action to dispel any misrepresentations.

38                  I accept, as the respondents contend, that the allegation is framed too widely because some participants invested their own funds but that is not the subject matter of this application and nothing turns on this.

Knowledge that sixty-eight per cent of monies advanced would be used to pay for term bonds

39                  For the reasons given above, I am satisfied that, in substance, there is a case to answer on this aspect. The exact percentage is not material.  The point is that a very substantial proportion of the investment was diverted away from the production.  Likewise, in relation to the claims alleging participation or assistance on the part of OCBC in the breach of fiduciary duty, on the basis of the matters discussed thus far and for reasons given below, I am satisfied that a case has been made out, in the absence of any further evidence, from which it could be inferred that OCBC assisted in the breach of fiduciary duty by the Representative.

knowing receipt of trust property

40                  I am satisfied that the participants’ monies were held on trust and were paid contrary to the terms of that trust and that OCBC was, on an objective basis at least, dishonest and was aware of the facts which gave rise to that payment.

fraud in relation to the investment scheme and the PROSPECTUS representations

41                  I am satisfied that the execution of the Offers to Borrow was procured without disclosure of the diversion of the funds to purchase term bonds.  I am not satisfied at this point that actual, intentional and subjective fraudulent intent, as opposed to objective dishonesty, has been made out against OCBC.  The diversion of the investment monies to be used for the purchase of the term bonds supports the inference that those funds would not and were not intended to go towards the production as represented in the Prospectus.

Interference with contractual relations

42                  It is claimed that by reason of the matters alleged, OCBC intentionally induced breaches of agreement by the Representative, the Management Company and Capital Australasia.  I am not satisfied at this point that an intent to induce a breach of any agreement has been established and I find there is no case to answer on this aspect.  The position of OCBC, as I see it, is essentially one of failure to act and it is not one of actively procuring or inducing a breach of any obligation.

misrepresentation

43                  It is alleged that by accepting payments from participants without informing them about the diversion of their funds intended to be effected under the Investment Scheme, OCBC made a false representation to participants that the money advanced would be used for the purpose of funding the costs of the production as set out in the budget in the Prospectus.

44                  In my opinion, on the evidence, as it now stands, the failure of OCBC to point out the inaccuracy in the Prospectus could not be said to amount to an implied representation to this effect.  I am not persuaded that there has been any actual representation by OCBC, as principal, as to what Mr Coote, might do with the money.  Nor can any implied representation to this effect be extracted from the matters now in evidence.

45                  In relation to the allegation that the representations were in fact false and misleading, I am persuaded at this stage of the proceeding, that the money was advanced by Capital Australasia pursuant to the Offer to Borrow and that it was not used for the purpose of funding the production so that the Prospectus was misleading and deceptive in this respect.

aiding and abetting the contraventions by capital, the representative and the management company

46                  The conduct of OCBC, on the present state of the evidence, provides a basis for the inference that there has been a knowing, albeit indirect, aiding and abetting by OCBC of the contraventions by the other respondents because OCBC had knowledge of the essential matters which made up the contravention: see Yorke v Lucas (1985) 158 CLR 661 at 670.  It is necessary, that OCBC must be an intentional participant, in that based on knowledge of the essential elements of the contravention, it did not take any steps to prevent the operation of the misrepresentation.  I would infer at this point in the case, that such knowledge existed so that a case to answer has been made out on this allegation.

liability as recipient

47                  The claim in this respect is that OCBC is liable as a recipient of and chargeable with part of the trust property of the participants and assisted with knowledge in a breach of duties on the part of the Representative.  The relevant trust fund is said to be that of Mr Coote, who held the monies on behalf of the participants.  It is said that OCBC knowingly acted dishonestly, in an objective sense, and facilitated the breach by Mr Coote of his fiduciary obligations.

48                  At this point I am satisfied that there is a case to answer on this claim.

the case against mr coote

49                  The claim against Mr Coote is that he was in breach of the Deed of Investment with the Management Company dated 8 March 1996 (“Investment Deed”), and the Production Management Agreement with the Management Company and Phillip Emanuel International Pty Ltd (“Production Agreement”)  and that he breached his fiduciary duties as trustee and as representative of the participants.  In addition damages are sought under the provisions of the Act.

50                  The breaches of the Investment Deed alleged against Mr Coote are, in substance, that he did not use his best endeavours to comply with the Income Tax Assessment Act 1936 (Cth) to procure a maximum taxable contribution.  It is said that the purchase of the term bonds issued by OCBC adversely affected the ability of the participants to obtain a tax deduction in respect of their investment.  It is also said that Mr Coote permitted monies raised from the participants to be expended otherwise than in the staging and running of the production by allowing a portion of the monies to be applied to the purchase of term bonds.  It is said that the Representative did not exercise proper diligence in carrying out his duties and functions to protect the rights and interests of the participants.  The particulars of this include assertions that Mr Coote ought to have known that the participants would rely on the information in the Prospectus and that the information was misleading.  In addition, it is said that Mr Coote did not ensure that the information in the Prospectus was accurate and not misleading and that he ought to have known that the payment for the term bonds on 6 August 1996 had the effect of repaying OCBC a substantial amount of the monies borrowed under the Offers to Borrow, thereby creating a situation where in effect, Capital Australasia was lending no more than thirty-two per cent of the loan monies to the participants for use in the Crazy For You production.  Further, in making those payments, the participants’ ability to obtain a tax deduction in respect of their investment was compromised. It is said that the payment for the term bonds was not authorised by the Investment Deed and was not disclosed in the Prospectus or the budget appearing in the Investment Deed.  So far as the breaches of the Production Agreement are concerned, it is said that Mr Coote paid money knowing that the Management Company intended to use a large portion to purchase term bonds and thereby not apply it to the payment of expenses for the presentation of the production as represented in the Prospectus. 

51                  In relation to the Prospectus, it is said that Mr Coote made representations that the pre-productions costs and running costs would total $5.5 million and that these would be paid from monies raised from the participants.  It is said that the budget was represented to be accurate and that the total costs of the production were detailed in the Prospectus.  Because of his knowledge of these matters, it is said that Mr Coote was engaged in misleading and deceptive conduct.  Essentially these allegations turn on Mr Coote’s knowledge in relation to the flow of funds from the investors to OCBC for purchase of the term bonds.  In relation to breach of fiduciary duty, it is said that by reason of his position as representative of the participants and trustee of the Crazy For You Fund pursuant to the Investment Deed and Prospectus, fiduciary duties were owed to the participants.  It is said that these were breached by the Representative in failing to ensure that the trust property was applied in accordance with the Investment Deed and the Prospectus, by permitting the use of monies from the participants in a manner not in accordance with the Investment Deed and Prospectus.

52                  It is alleged by the applicant that Mr Coote’s knowledge is to be inferred from the fact that he received a copy of the Prospectus and that the Equity Agreement and the obligations of the Management Company under it are referred to in the Prospectus.  He consented to be the Representative and he was a party to the Production Agreement which refers to the Equity Agreement and he attended the three settlements and observed the circular transactions which then took place at the end of which the term bonds were purchased from OCBC.  Mr Coote, it is said, was aware that at the end of the circular process the Management Company was left with less than had been paid to it by him.  He was therefore on notice to inquire in the interests of the participants.  In relation to each of the settlements he executed a document entitled “Representative’s Declaration” relating to the role which he was to undertake as holder of the term bonds.

53                  Mr Coote’s role in relation to the Investment Scheme was a critical one in that he was the trustee for and representative of the participants and owed duties to them of a both contractual and fiduciary nature arising from his functions.  For the reasons outlined above, in relation to the submissions of OCBC, I am satisfied that, on the evidence as it presently stands, there is a case to answer in relation to the allegations of breach of fiduciary duty and of breaches of the agreements to which he was a party.  Accordingly, I consider that there is a case to answer made against Mr Coote and the claim against him should be allowed to proceed.

the case against park/ capital

54                  As against the Capital Australasia and Capital Australia, an order is sought for (i) damages for breach of the Offers to Borrow, (ii) damages pursuant to the Act, and a declaration is sought that Capital Australasia and Capital Australia knowingly received trust money that belonged to the applicant and were an accessory to the breach by the Representative of fiduciary and trustee duties.  Aggravated damages are also sought.  In addition, a declaration is sought that Mr Park and Capital Finance knowingly received trust property that belonged to the applicant or were an accessory to a breach by Mr Coote of fiduciary and trustee duties.  An order is also sought for consequential relief for an unspecified amount of damages.

55                  In relation to breach of the Offers to Borrow it is said that the Park/Capital interests did not make any advance of monies for the sole purpose of making the investment as stated in the Prospectus nor did they make any payment to the Representative for that sole purpose.  Furthermore, it is said, there is a breach in the payment not having been made on or before 30 June 1996 so as to enable a tax concession to be provided in respect of that financial year.

56                  It is also alleged that the Park/Capital interests represented to the participants that monies would be advanced pursuant to the terms of the Offers to Borrow and such monies would be used for the purpose of funding the running costs of the Crazy For You production in circumstances where it is claimed that the Park/Capital interests knew the terms of the investment documents and knew that they were inconsistent with the Investment Scheme in not disclosing that the Offers to Borrow were to be assigned and that the money was intended to be used for the purchase of term bonds.

57                  It is claimed that by establishing the Investment Scheme, implementing it and arranging for the preparation of the documents relating to the Investment Scheme and by entering into the Offers to Borrow with knowledge of the arrangements in relation to the purchase of term bonds, the Park/Capital interests engaged in misleading and deceptive conduct giving rise to a claim for damages.  This is because it is said they knew that by reason of the financing arrangements, a large amount of the monies would not be advanced for the production but would be used for the purchase of bonds.  In the alternative, it is alleged that by establishing the Investment Scheme and implementing it, the Park/Capital interests aided, abetted and procured a contravention of ss 51A and 52 of the Act, induced such a contravention and were directly and knowingly concerned in a contravention of those provisions.

58                  Recipient and accessory liability is also alleged against the Park/Capital interests by reason, primarily, of the knowledge that the majority of the monies advanced and lent to the applicant would be used by the Representative and the Management Company to pay for term bonds issued by OCBC.  Fraud on the part of Capital Australia and Capital Australasia is also alleged by reason of the knowledge which the Park/Capital interests had in relation to the Investment Scheme.

59                  Although the Park/Capital interests are not mentioned in the Prospectus, it is clear that Mr Park, who was the controlling mind of the first three respondents, was centrally involved in the implementation of the financing arrangements in conjunction with OCBC.  This close involvement in the financing arrangements is evidenced by the affidavit of Mr Park in evidence and is reinforced by the witness statement by Mr Lawrence of OCBC, to which Mr Park referred, and with which he agreed.  There is correspondence between Mr Park and Mr Lawrence of OCBC dated 30 May 1996 in relation to a series of film and theatrical finance transactions between the Park/Capital interests and BOSA during the relevant period, which  includes the production of Crazy For You.  There is also a letter of 3 June 1996 concerning the issue of term bonds.  In addition there is mutual input in the formulation and settling the terms of the loan documents and of the assignment of rights and obligations to BOSA.  An internal memorandum within BOSA of 13 June 1996 from Mr Lawrence relating to the Crazy For You tax deferment project specifically states that we “will continue to have mortgaged to us our own term bonds being the security for our principal”.

60                  It can reasonably be inferred at this stage of the proceeding that the Park/Capital interests were aware of the relevant concern expressed by the consultant, Mr Patterson, to the solicitors for BOSA, as is evident from the facsimile dated 25 June 1996 sent to Mr Park.  OCBC was also informed by Capital that a newly incorporated company would be used for the loan transaction and this entity was incorporated some days after 30 June 1996.  Some months later, on 20 November 1996, Capital wrote to Dr Patrick informing him of the assignment of the loan to OCBC.  The affidavit of Mr Park in evidence indicates that it was his practice to obtain a copy of the relevant prospectus in relation to investment schemes and it can be inferred that he considered the provisions of the Prospectus in the present case.  It is also clear that Capital Australasia was requested to arrange for the issue of the security to provide a guaranteed return to the participants in the Investment Scheme.

61                  In view of the detailed and ongoing regular involvement of the Park/Capital interests in the lending transactions and their undoubted familiarity, prior to the investment of Dr Patrick, with the proposed arrangements and the terms of the Prospectus, I am satisfied on the evidence as it presently stands and without the benefit of any positive countervailing evidence, that a reasonable inference would be drawn that the Park/Capital interests were aware of and acquiesced in the misleading representations in the Prospectus concerning the employment of the funds arising from silence and that they knew of the passing of the participants’ funds to OCBC such that they would be liable as accessories in relation to the breaches of  the provisions of the Act.  There is also, in my view, a case to answer in relation to the Barnes v Addy claim: see Barnes v Addy (1874) LR 9 Ch. App. 244 at 251-2 and Royal Brunei Airlines v Tan [1995] 3 WLR 64.

62                  Having regard to the matters which have been discussed above in considering the submissions of OCBC, the pivotal role played by the first four respondents in relation to the implementation of the Investment Scheme overall and their actions in entering into the loan agreements with the knowledge of the proposals in relation to the disbursement of the payment of the monies, I am satisfied that a case has been made out on the present state of the evidence against the Park/Capital interests for accessory liability and that the case ought to proceed against the first four respondents on all claims.

damages and reliance

63                  Although evidence has been led and cross-examination in relation to damages and reliance has taken place, it is not in my view, appropriate to decide these questions on this no-case submission given that these are representative proceedings.  In the circumstances of this case it is more appropriate to decide them after all evidence has been adduced.

conclusion

64                  A case to answer has been established against each of the respondents and therefore the matter should be permitted to proceed in relation to all respondents.  I reserve the question of costs in relation to the no-case submission.

Associate:

Dated:              18 December 2002