FEDERAL COURT OF AUSTRALIA Patrick v Capital Finance Corporation (Australasia) Pty Ltd [2004] FCA 120 TRADE PRACTICES - misleading and deceptive conduct - representative proceedings - prospectus issued for stage production "Crazy For You" - participants borrowed money to invest in "Crazy For You Fund" - tax-driven investment scheme - loans made to investors - assignment of loans - representations made in prospectus - allegation that representations as to use of investors' funds were misleading - allegation that 68% of investors funds used to purchase term bonds as security rather than production costs - knowledge of respondents - claim of aiding and abetting misleading conduct - onus on applicant to establish that investors' funds were misapplied in manner alleged - alleged misapplication of funds not established - causation and reliance - applicant did not rely on representations contained in the prospectus - held - applicant's case against all respondents must fail. CONTRACT - agreements underpinning investment scheme - Crazy For You Fund - Deed of Investment - Co-Producers Equity Agreement - Co-Producers Agreement - Production Services Agreement - Production Management Agreement - obligations of various respondents - allegations of breach of contractual obligations - co-producers obligations under various agreements not restricted to pre-production expenses but include production running costs. EQUITY - investment scheme - Crazy For You Fund - investors' representative - trustee - fiduciary duties - trust property - allegations of breach of fiduciary duties - claim of accessorial or recipient liability in relation to trust funds - Barnes v Addy claim - test for accessorial or recipient liability - precise principle not critical - whether a reasonable person would be put on inquiry of a breach of trust or fiduciary duty - sufficient case not established - issue of funds being knowingly received - claim to set loans aside - applicant not permitted to 'approbate and reprobate - no offer of restitution by applicant - constructive trust. PRACTICE AND PROCEDURE - representative proceedings brought under Part IVA of the Federal Court of Australia Act 1976 (Cth) - persons who borrowed money to invest in the Crazy For You Fund said to constitute a class - no challenge to proceedings being brought as a representative action. Income Tax Assessment Act 1936 (Cth) Trade Practices Act 1974 (Cth) Fair Trading Act 1999 (Vic) Fair Trading Act 1987 (NSW) Patrick v Capital Finance Pty Ltd (No1) [2002] FCA 1566 cited Jones v Dunkel (1959) 101 CLR 298 cited Consul Development Pty Ltd v D.P.C Estates Pty Limited (1975) 132 CLR 373 referred to Koorootang Nominees Pty Ltd v ANZ Banking Group [1998] 3 VR 16 referred to Barnes v Addy [1874] 9 Ch App 244 referred to Commonwealth v Verwayen (1991) 170 CLR 394 at 421 cited Verschures Creameries Limited v Hull and Netherlands Steamship Company Limited [1921] 2 KB 608 referred to Maguire v Makaronis (1997) 188 CLR 449 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 LTD (ACN 074 692 443) CAPITAL FINANCE CORPORATION (AUSTRALIA) PTY LTD (ACN 074 352 194), CAPITAL FINANCE CORPORATION PTY LTD (ACN 064 512 385), KERROD GRANT PARK, OVERSEA-CHINESE BANKING CORPORATION LIMITED (ABN 073 598 035), CHRISTOPHER COOTE AND PHILLIP EMANUEL PRODUCTIONS LIMITED (ACN 002 693 512) V 637 OF 2001 TAMBERLIN J ADELAIDE (HEARD IN MELBOURNE) 26 FEBRUARY 2004 IN THE FEDERAL COURT OF AUSTRALIA VICTORIAN DISTRICT REGISTRY V637 OF 2001 BETWEEN: WILLIAM GEORGE DOUGHTY PATRICK (for himself and as representing the persons referred to in paragraph 1 of the Statement of Claim) APPLICANT AND: CAPITAL FINANCE CORPORATION (AUSTRALASIA) PTY LTD (ACN 074 692 443) FIRST RESPONDENT CAPITAL FINANCE CORPORATION (AUSTRALIA) PTY LTD (ACN 074 352 104) SECOND RESPONDENT CAPITAL FINANCE CORPORATION PTY LTD (ACN 064 512 385) THIRD RESPONDENT KERROD GRANT PARK FOURTH RESPONDENT OVERSEA-CHINESE BANKING CORPORATION LIMITED (ABN 073 598 035) FIFTH RESPONDENT CHRISTOPHER COOTE SIXTH RESPONDENT PHILLIP EMANUEL PRODUCTIONS LIMITED (ACN 002 693 512) SEVENTH RESPONDENT JUDGE: TAMBERLIN J DATE OF ORDER: 26 FEBRUARY 2004 WHERE MADE: ADELAIDE (HEARD IN MELBOURNE) THE COURT DIRECTS THAT: The parties bring in Draft Short Minutes of Order to give effect to these reasons for judgment within twenty-one days. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIAN DISTRICT REGISTRY V637 OF 2001 BETWEEN: WILLIAM GEORGE DOUGHTY PATRICK (for himself and as representing the persons referred to in paragraph 1 of the Statement of Claim) APPLICANT AND: CAPITAL FINANCE CORPORATION (AUSTRALASIA) PTY LTD (ACN 074 692 443) FIRST RESPONDENT CAPITAL FINANCE CORPORATION (AUSTRALIA) PTY LTD (ACN 074 352 104)) SECOND RESPONDENT CAPITAL FINANCE CORPORATION PTY LTD (ACN 064 512 385) THIRD RESPONDENT KERROD GRANT PARK FOURTH RESPONDENT OVERSEA-CHINESE BANKING CORPORATION LIMITED (ABN 073 598 035) FIFTH RESPONDENT CHRISTOPHER COOTE SIXTH RESPONDENT PHILLIP EMANUEL PRODUCTIONS LIMITED (ACN 002 693 512) SEVENTH RESPONDENT JUDGE: TAMBERLIN J DATE: 26 FEBRUARY 2004 PLACE: ADELAIDE (HEARD IN MELBOURNE) REASONS FOR JUDGMENT 1 The applicant ("Dr Patrick") is a medical practitioner who sues the respondents for himself, and on behalf of the fifty-eight persons named in the Schedule to the Fourth Further Amended Statement of Claim ("Fourth FASC"). Dr Patrick and the represented persons will be referred to collectively as "the participants". They are persons who had borrowed money in order to purchase or acquire an interest in an investment known as the Crazy For You Fund, which was a tax driven investment scheme designed to defer income tax for the financial year ended 30 June 1996 over a six year period. The participants allegedly made their investments in reliance upon information contained in a prospectus issued on 22 April 1996 ("the Prospectus"). The Prospectus was issued to offer interests for purchase to persons who had executed an "Offer to Borrow" document in which either the first respondent, Capital Finance Corporation (Australasia) Pty Ltd ("Capital Australasia") or the second respondent, Capital Finance Corporation (Australia) Pty Ltd ("Capital Australia") were described as "lenders". "Crazy For You" is the title of a musical production which was to be financed, in part, by investment from the participants. The participants claim to have suffered loss and damage as a consequence of their investments. 2 At the close of the applicant's case, a no case submission was made by the first to sixth respondents. I refused to grant this application and my reasons are set out in a judgment delivered on 18 December 2002: see Patrick v Capital Finance Pty Ltd (No 1) [2002] FCA 1566. In the course of the hearing, I delivered judgments on matters raised by the parties on several interlocutory matters. 3 My reasons for judgment refusing the no case submission provide a brief background to the proceedings and indicate the substantial issues raised in the course of the proceeding having regard to the evidence addressed at that stage. Subsequent to dismissal of that application, substantial additional oral and written evidence was adduced by Dr Patrick and the respondents. Parties 4 Dr Patrick is a surgeon who lives in Sydney. He invested $100,000 in the Crazy For You Fund and sues on behalf of persons who borrowed money to invest in the fund, who are said to constitute a class for the purpose of representative proceedings, brought under the Federal Court of Australia Act 1976 (Cth) ("Federal Court Act"). 5 The first, second and third respondents (Capital Australasia, Capital Australia and Capital Finance Corporation Pty Ltd ("Capital Finance"), collectively "Capital") are members of a group of finance companies that are effectively under the control of the fourth respondent ("Mr Park"). Mr Park is a director of the first two respondents, and the Managing Director of Capital Finance. 6 The fifth respondent, Oversea-Chinese Banking Corporation ("OCBC"), is a bank carrying on business as a finance provider. The Bank of Singapore (Australia) Limited ("BOSA") is an Australian subsidiary of OCBC, and it entered into a number of transactions relating to the Crazy for You Fund prior to 1 July 1996. On that date, BOSA assigned all its rights, title and interest in those transactions to OCBC. 7 The sixth respondent ("Mr Coote") is a qualified chartered accountant who operates his own chartered accountancy firm. According to the Crazy For You Fund documents, which refer to him as "the Representative", Mr Coote's role in the Crazy For You Fund was to represent the interests of the participants. 8 The seventh respondent, Phillip Emanuel Productions Limited ("Phillip Emanuel Productions"), is a management company which at all material times carried on business with respect to films and theatrical stage presentations. This company did not participate in the hearing and no evidence was adduced, nor submissions made, on its behalf. The controlling mind of entities in the Phillip Emanuel group of companies is Mr Phillip Emanuel ("Mr Emanuel"). He was not called to give evidence, and the Court was informed that he was out of Australia. Although not a party, another corporation in that group, Phillip Emanuel International Pty Ltd ("Phillip Emanuel International"), played an important role in the events that gave rise to the present dispute. issues 9 The following issues have been canvassed in the pleadings and over the course of the hearing in this matter: whether the respondents engaged in misleading and deceptive conduct; whether the Offers to Borrow should be set aside; whether funds were knowingly received; whether trust property was received in the knowledge that it belonged to the participants with awareness of their misapplication, whether there had been breaches of fiduciary or trustee duties; whether the respondents were aware of, or accessories to, breaches of trust, contract, or fiduciary duties, and whether there should be compensation. 10 During the hearing, many of the pleaded allegations raised by the applicant were abandoned or substantially modified in the light of the evidence. This was a helpful and realistic approach, as it significantly reduced the number of issues requiring determination. 11 The pleadings in this matter were substantially amended prior to, and during the course of, the hearing. The final statement of claim on which the matter proceeded to hearing was the Fourth FASC. An application was made to file a Fifth Further Amended Statement of Claim ("Fifth FASC") but amendments sought in that document were not allowed. The applicant's final submissions were based on a Third Further Amended Application filed in Court on 2 May 2003 ("the Third Amended Application"), which refers to a document described as "the Fifth FASC". As the respondents pointed out in final address, the latter document was in the nature of a convenient aide memoire. It recorded numerous deletions to the Fourth FASC. This judgment will refer to the "Fifth FASC" as a convenient reference point because it is referred to in the Third Amended Application and in the applicant's submissions. As recorded later, a number of arguments that the applicant made in final address were not the subject of the pleadings, and for that reason, among others, they were opposed by the respondents. 12 At the conclusion of the hearing, counsel for the applicant stated in written submissions that the "live" causes of action against the various respondents by reference to the "Fifth FASC" were as follows: (a) As Against Capital/Mr Park (I) Misleading and deceptive conduct and aiding and abetting such conduct. (II) Recipient and accessorial liability in relation to trust property. (III) Fraud resulting in the avoidance of the loan agreements. (IV) Constructive trust. (b) As Against OCBC (I) Recipient and accessorial liability in relation to trust property. (II) Setting aside the loan agreements. (c) As Against Mr Coote (I) Breaches of the Investment Deed. (II) Breaches of fiduciary duty. 13 The common questions of law and fact raised by the applicant in the Third Amended Application are as follows (shown here without indicating where the amendments have been made): "(a) Whether as a matter of fact the Fourth Respondent on behalf of the Capital Group established and implemented the Crazy For You Investment Scheme as alleged in paragraphs 13 and 16 of the Fifth Further Amended Statement of Claim for the purposes alleged in paragraph 14 of the Fifth Further Amended Statement of Claim; (b) Whether as a matter of fact the Fifth Respondent had the knowledge of the Crazy For You Investment Scheme, and agreed to implement it, as alleged in paragraph 15 of the Fifth Further Amended Statement of Claim; (c) Whether, as a matter of law and fact, the Offers to Borrow contained the express and implied terms alleged in paragraphs 27, 28 and 28A of the Fifth Further Amended Statement of Claim. (d) Whether, as a matter of law and fact, the First Respondent and/or the Second Respondent accepted the Offers to Borrow in accordance with the terms alleged in paragraph 27(g) of the Fifth Further Amended Statement of Claim. (f) Whether, as a matter of fact, advances were made by the First Respondent pursuant to the Offers to Borrow referred to in paragraph 26A of the Fifth Further Amended Statement of Claim, and (i) what the source of the money used to make those advances was; (ii) to who or whom those advances were made; (iii) to what use those advances were put. (k) Whether as a matter of law and fact the prospectus representations referred to in paragraph 41 of the Fifth Further Amended Statement of Claim were misleading or deceptive or likely to mislead or deceive, or contained the material omissions alleged in paragraph 51A of the Fifth Further Amended Statement of Claim; (l) Whether as a matter of law and fact the Sixth and Seventh Respondents breached the terms of the Investment Deed as referred to in paragraph 37 of the Fifth Further Amended Statement of Claim; (m) Whether as a matter of law the First and/or Second Respondents breached the terms of the Offers to Borrow as referred to in paragraph 40 of the Fifth Further Amended Statement of Claim; (n) Whether as a matter of fact the First, Second, Third and Seventh Respondents had the knowledge and intention alleged in paragraph 47 of the Fifth Further Amended Statement of Claim; (p) Whether as a matter of law and fact the First and/or Second, Third, Fourth and Seventh Respondents engaged in conduct that was misleading and deceptive as alleged in paragraphs 49, 56 and 57 of the Fifth Further Amended Statement of Claim; (r) Whether as a matter of law and fact the First and/or Second, Third, Fourth and Seventh Respondents did: (i) aid, abet, counsel or procure a contravention of ss. 51A and 52 of the Trade Practices Act (Cth) and/or ss. 10A and 11 of the Fair Trading Act (Vic) and ss. 41 and 42 of the Fair Trading Act (NSW). (ii) induce a contravention of ss. 51A and 52 of the Trade Practices Act (Cth) and/or ss. 10A and 11 of the Fair Trading Act (Vic) and ss. 41 and 42 of the Fair Trading Act (NSW); (iii) were, directly or indirectly, knowingly, concerned in or a party to a contravention of ss. 51A and 52 of the Trade Practices Act (Cth) and/or ss. 10A and 11 of the Fair Trading Act (Vic) and ss. 41 and 42 of the Fair Trading Act (NSW); as alleged in paragraphs 51, 58, 68G and 73 of the Fifth Further Amended Statement of Claim. (s) Whether, as a matter of fact, the First, Second, Third [and] Fourth Respondents had the knowledge and intention alleged in paragraphs 53, 61 and 66 of the Fifth Further Amended Statement of Claim; (t) Whether as a matter of law and fact, the fifth respondent disregarded or had wilfully and recklessly failed to make enquiries of the fact that the payments which were made out of the Crazy For You Fund referred to in the particulars to paragraph 37(a) of the Fifth Further Amended Statement of Claim were made in breach of the representative's fiduciary and trustee duties. (u) Whether the Sixth Respondent owed any and if so which of the fiduciary duties alleged in paragraph 59 of the Fifth Further Amended Statement of Claim; (v) Whether as a matter of law the Sixth Respondent breached his fiduciary duties to the Participants as referred to in paragraphs 59 and 60 of the Fifth Further Amended Statement of Claim; (w) Whether as a matter of law and fact, the First and/or Second and/or Third and/or Fourth and/or Fifth Respondents were guilty of the conduct referred to in paragraph (a) and/or (b) of paragraph 63 of the Fifth Further Amended Statement of Claim (z) Whether as a matter of fact it was the intention of the First and/or Second Respondents that monies to be raised from the Participants under the Offers to Borrow would not be used for the purposes of the Production, but were to be used for the purpose of purchasing term bonds, as alleged in paragraph 67 of the Fifth Further Amended Statement of Claim (aa) As a matter of law, whether and to what extent the Fifth Respondent's interest as assignee of the Offers to Borrow (if any) is subject to the claims of the Participants. (ab) Whether as a matter of fact the First and/or Second and/or Third and/or Fourth and/or Fifth and/or Sixth respondents had the knowledge referred to in paragraph 13 C of the Fifth Further Amended Statement of Claim." 14 Many of these questions are not required to be answered in the light of final submissions, but the list provides a useful overview of the matters raised during the hearing. 15 A central factual question is that adverted to in paragraph (f), regarding the use that was made of the moneys that the participants advanced pursuant to the Offers to Borrow. This is an issue on which other claims depend. The gravamen of the applicant's case is that 68% of the loan funds that the participants invested was used to purchase term bonds from OCBC, rather than being applied towards the cost of the "Crazy For You" production, and that Capital, Mr Park, Mr Coote and OCBC were aware, or ought to have been aware, that the participants' funds had been misapplied. These funds were said to have been misapplied because they were not used for the pre-production, production and running costs of the "Crazy For You" musical production, as required by the Crazy For You Fund documents. A primary question, therefore, is whether the evidence establishes the misapplication or diversion of the participants' funds to purchase term bonds from OCBC. If the alleged misapplication is not established, then, because the other allegations made against the respondents are dependent on this allegation being made out, the applicant's case must fail. THE Applicant's case 16 The applicant's case is to the following effect. The proceeding is brought as a representative proceeding under Part IVA of the Federal Court Act. It concerns the marketing of an investment scheme proposal for the stage production "Crazy For You", which scheme was represented to have certain tax advantages for investors in the deferral of income tax payments over a six year period. 17 The budget for the staging of the production, according to the Prospectus, was $5.5 million. 18 Dr Patrick invested $100,000 in the Crazy For You Fund. There were in total one hundred and fifteen investors in the Crazy for You Fund. Of these, sixty-two were borrowers, in that they obtained loan funds arranged by Capital to finance their investments. Dr Patrick sues on behalf of himself and the other participants who borrowed for the purpose of investing in the Crazy For You Fund. No challenge was made to the matter proceeding as a class action under Part IVA of the Federal Court Act. 19 The Crazy For You Fund was promoted as an investment which had good prospects of providing a 100% deduction of the cash value of the initial investment, in relation to contributions made in the taxation year ended 30 June 1996. It was marketed during the months of May and June 1996, with a view to investors obtaining a tax advantage for the tax year ended 30 June 1996. 20 A total of about $5.45 million was subscribed by investors. Of that amount, $4.743 million was borrowed from Capital Australasia, and $707,000 was contributed in cash. The three settlements, whereby the investments using the borrowed funds were made, and the loans from Capital Australasia to the participants were assigned to OCBC, took place on 19 July 1996, 6 August 1996 and 21 August 1996. There were other settlements in relation to the cash investments, but they are not material for present purposes. 21 Dr Patrick borrowed from Capital Australasia, made his investment in the Crazy For You Fund, and, on this basis, claimed a tax deduction for the year ended 30 June 1996. The scheme involved the payment of interest on the borrowed funds on a monthly basis. These interest payments were deducted from Dr Patrick's account, and totalled in the order of $51,000. 22 Of the total amount borrowed, a sum of $3,235,550.00 is alleged to have been used to purchase a series of term bonds from OCBC. These bonds matured over six monthly periods from 1 July 1997 to 1 July 2002 in amounts precisely calculated. In the first six month period of each of the years, 2% of the amount invested had to be paid. In the second six month period, 3% of the amount invested had to be paid, together with a balloon investment at the end of the period, which amounted to 75% of the principal invested. The applicant's case is that $3.235 million of investors' funds was diverted to purchase the term bonds, which secured the repayment to OCBC of the amount of the principal of the loans. Allegedly, this proportion of the funds was not used in relation to the production, but rather as a guarantee to OCBC that the loan principal would be repaid. The term bonds were used to match the repayment obligations under the terms of the loan. 23 In July 1999, the Australian Taxation Office ("ATO"), having investigated the claims for tax deductions, produced a report of its findings in relation to the Crazy For You Fund (the "ATO Report") and denied tax deductibility for reasons that will be explained in more detail later in these reasons, but which included the use that was made of the participants' funds. 24 Dr Patrick says that if he had been aware of the proposed diversion of the funds then he would not have invested. He says that he was induced to enter the Crazy For You Fund without being told that 68% of his investment was going to be used to fund the repayment of the capital invested by him, and that only 32%, at most, was to be used in relation to the production. the crazy for you fund documents 25 The Crazy for You Fund was one of a number of tax driven investment schemes in entertainment productions that were made between BOSA, OCBC, Capital and other parties in the period 1995-1997. 26 The first relevant document in evidence is a letter of 20 June 1995, in which a framework was proposed between Capital and the "Bank" (at that time BOSA) in relation the assignment of loans made by Capital to investors in various stage productions, including "Crazy For You.". That proposal was accepted on 30 June 1995, and established an arrangement which relevantly provided: "1. Nature of Proposal The Bank will, at its discretion, take assignments from Capital of Qualifying Loans (as defined below). The Bank will pay Capital for each Qualifying Loan an amount equal to the principal amount of the loan as at the date of assignment. The Bank will also engage Capital to manage all Qualifying Loans which the Bank buys from Capital. 2. Qualifying Loans The Bank will buy a loan from Capital only if it satisfies the following criteria relevant to each facility, those criteria being set out in the schedules annexed hereto. The following criteria will also apply, to all facilities: (i) The Bank's solicitors must have certified that the underlying transaction and documentation in each case is legally satisfactory. (ii) The borrower must satisfy the Credit Approval Guidelines specified in the Bank's letter dated 24 March 1995. (iii) The loan must not have been in default at any time. (iv) The loan must have been made on the terms of the Loan Agreement approved by the Bank; those terms must include: (a) an acceptable interest rate of not less than 1.75% per annum over and above the Bank's cost of funds as determined by the Bank for each of the terms, the penalty rate to be 3.75% per annum above the Bank's costs of funds; (b) interest payable monthly in arrears; (v) The Bank's solicitors must certify that all the Bank's security requirements in respect of the loan have been satisfied. … (Emphasis added) 27 On 8 March 1996, a key document in relation to the Crazy for You Fund, the Deed of Investment, was prepared. The parties to the Deed of Investment were Mr Coote (as the "Representative"), Phillip Emanuel Productions, (as the "Management Company"), and those persons who would subsequently execute investment applications (the "Investors"). That document recited that: "A. The Management Company proposes to co-produce a live stage presentation entitled 'Crazy For You' (the 'Stage Presentation') based upon the songs of George Gershwin. B. The Management Company proposes to commence rehearsals for the Stage Presentation in August 1996. C. The total Budget Cost being a maximum of $5,500,000, will be met from Investments and as such is the amount proposed to be raised pursuant to this Deed. D. The terms and conditions of this Deed shall be binding on the Representative and Management Company and each Investor as if each Investor were a signatory to this Deed …" (Emphasis added) 28 Clause 2 defined "Budget Cost" to mean the amount that Phillip Emanuel Productions must contribute to the total budget cost for the stage presentation, plus other costs of Phillip Emanuel Productions, to a maximum of $5.5 million. 29 The "Pre-Production Budget" is defined as that part of the total budget cost attributable to the costs incurred prior to the first public presentation of the stage presentation. 30 The "Running Budget" is defined as that part of the total budget cost attributable to costs incurred by the ongoing public presentation of the stage presentation. 31 Clause 23.1 provided that: "The Management Company will with all due diligence proceed to expend the Investments in the making of the Stage Presentation pursuant to this Deed within 13 months from the end of the Financial Year in which the Investments are received." 32 The Second Schedule to the Deed of Investment set out a budget, which totalled $5,500,000, in respect of pre-production costs, general overheads, production costs and running costs. 33 In addition to the Deed of Investment there were other constituent documents of the Crazy For You Fund. The first was the Co-Producers Equity Agreement of 29 March 1996 between Gordon Frost Attractions Pty Limited ("Gordon Frost") and the Adelaide Festival Centre Trust ("the Trust"), referred to as "the Producers", and Phillip Emanuel Productions, referred to as "the Co-Producer" (the "Co-Producers Equity Agreement"). In this agreement, Phillip Emanuel Productions agreed to procure investment in the capitalisation of the production by contributing $1,000,000 to the pre-production costs. Recital C provided: "The Co-Producer has agreed to pay or procure investment in the capitalisation of the Production by contributing or procure (sic) contributions to the funding of Pre-Production Costs on the terms and conditions set out in this Agreement; (see attachment B)" 34 A copy of attachment B was not included in the Court Book. 35 Clause 7 of the Co-Producers Equity Agreement provided: "(a) The capital required to provide the initial funding of the Pre-Production Costs for the Season is $3,000,000 ('the Capitalisation') which is represented in the Pre-Production Costs budget as in Attachment B. (b) Provided the Producers are fully complying with all its [sic] obligations under the Agreement and the Co-Producer's Agreement, the Co-Producer shall contribute the sum stated in the Schedule hereto [$1,000,000] towards the Capitalisation on the date or dates and in the proportion referred to in the Schedule; and the Producers shall (whether by itself or from its own resources or by obtaining investments from third party Co-Producers) use reasonable endeavours to procure contributions for the balance of the Capitalisation provided that the Co-Producer may withdraw its contribution by notice in writing if the Producers does [sic] not match the Co-Producer's contribution to the balance of capitalisation pro rata by July 15, 1996. Any sums contributed by the Producers to the Pre-Production Costs in excess of the Capitalisation shall be treated as a loan by the Producers to the Production which shall be repayable in priority to any repayment to the Co-Producer and any other Co-Producer or Co-Producers …" (Emphasis added) 36 The same parties also executed another agreement, known as the "Co-Producers Agreement". 37 Under this agreement, Phillip Emanuel Productions as "Co-Producer" agreed to provide to the Trust and Gordon Frost, as "the Producers", services in connection with the production. Clause 6, which related to the budget, provided: "The budgets for Pre-Production Costs and Weekly Running Costs for the Production, which have been drawn up by the AFC [the Trust] in consultation with GFA [Gordon Frost] shall be considered final and may only be varied by mutual consent. These budgets are attached and marked as Attachment B and C, respectively." 38 Clause 8(a), entitled "Production Services", provided that: "The Co-Producer agrees on the reasonable request of the Producers to provide services where applicable in relation to the following: i. all stage facilities and services; ii. writing and directing services; iii. pre-production and production supervision services; iv. services of actors and actresses; iv. all musical facilities and services" (Emphasis added) 39 This makes it clear that Phillip Emanuel Productions was bound to provide services and facilities for the running of the production. It appears that these documents were not executed until the first settlement on 19 July 1996, but this is of no significance for present purposes. 40 The next document is the "Production Services Agreement" made between Phillip Emanuel Productions and Mr Coote, as representative of the participants. It contains an agreement by each of the participants to provide services to Phillip Emanuel Productions to assist it in producing the stage production. Clause 2 related to the obligations as to production of the musical and provided: "The Participant severally agrees to provide such necessary Production Services, facilities and personnel required to co-produce and present the Stage Presentation in accordance with the items and amounts set out in the Stage Presentation Budget." (Emphasis added) 41 Clause 19.1 provided for payment of "fees" for "services" to be made to participants: "In consideration for provision of Production Services, the Co-Producer shall pay to the Participant, or as it may direct, the fees to be calculated in accordance with Item 11." (Emphasis added) 42 Item 11 of the Schedule to the Production Services Agreement set out the fees to be paid to the participants. These fees, over a period of six years, total 100% of the "Production Contribution Moneys", which is the money invested by each participant. It is apparent from this that the participants' capital was not at risk. The fees were in an amount equal to the total capital investment. 43 The "Production Management Agreement" dealt with the participants' appointment of Phillip Emanuel International, as the production management company, to carry out and perform the participants' obligations to Phillip Emanuel Productions. The parties to the Production Management Agreement were Phillip Emanuel Productions (as "Co-Producer"), Phillip Emanuel International (as "Production Management Company"), Mr Coote (as "Representative") and persons who subsequently became a party to the agreement by virtue of the Deed of Investment (as "Participants"). The relevant provisions of this were as follows: "3.1 The Participant appoints the Production Management Company and the Production Management Company accepts such appointment, for the duration of the Rehearsal Time and the Season, to supervise and administer the performance of the Participant's obligations to the Co-Producer in accordance with the Production Services Agreement and the Participant's participation in the production of the Stage Presentation upon the terms and conditions of this Agreement. … 4.1 The Production Management Company covenants with the Participant that it shall require the Production Contribution Moneys to be spent only for the purposes referred to in clause 3.1 of this Agreement or for such additional purposes as required or authorised under the Trust Deed or in respect of which notice is given in the Prospectus and not otherwise. 4.2 The Production Management Company is irrevocably authorised by the Participant to call upon the Representative to make payments to the Production Management Company out of the Production Contribution Moneys Account to enable the Production Management Company to perform its functions under this Agreement." (Emphasis added) 44 Clause 10 of the Production Management Agreement provided: "10.1 All Pre-Production Expenses and Running Expenses for the Stage Presentation which are to be contributed by a Participant will be contributed by that Participant pursuant to the Prospectus in one lump sum payment of Production Contribution Moneys to the Representative. The Representative will then immediately settle those moneys on the Co-Producer and Production Management Company, who will then expend those funds to meet Pre-Production Expenses for the Stage Presentation, and then Running Expenses for the Stage Presentation as detailed in the Stage Presentation Budget. 10.2 For the avoidance of doubt, on 12 July 1996, all production Contribution Moneys contributed by a Participant will be paid to the Production Management Companyby the Representative to enable it to fulfil its obligations under this Agreement. The Production Management Company must then provide the Co-Producerwith such funds as are necessary to enable the Co-Producer to fulfil its functions under the Production Services Agreement, the Co-Producer's Agreement and the Co-Producer Equity Agreement." (Emphasis added) 45 On 22 April 1996, Phillip Emanuel Productions published the Prospectus. This Prospectus was for the subscription of $5.5 million to be used to finance the production of the musical "Crazy For You". It stated that the stage presentation was a co-production between Phillip Emanuel Productions, Gordon Frost and the Trust. It also stated that participants must play an active role in the production of the stage presentation (this is directed to tax deductibility considerations) and that participants would contract with the Production Management Company [Phillip Emanuel International] to assist them in fulfilling this role. There was a reference to "Participants Entitlements" where it was stated that participants would be entitled to fees which, over the relevant period of six years, would total 100% of the cash value of their initial investment. In relation to income tax concessions, the Prospectus stated: "The Investment of a Participant could potentially be characterised under section 51(1) of the Tax Act as money which has been expended in the course of an income producing activity, that is, the production of the Stage Presentation. A tax concession may therefore be available to all Participants in the 1995/96 financial year in relation to the full amount of the Investment. However, neither the Management Company nor the Representative guarantees the availability of any tax concession and Investors should refer to the independent taxation opinion on pages 15-18 and to their own financial and legal advisers with respect to the availability of any concessions." (Emphasis added) 46 In relation to "The Producers' Contribution", the Prospectus stated that the Management Company [Phillip Emanuel Productions] would contribute one million dollars to the pre-production costs for the stage presentation. It stated that the running costs for the production were $296,000 per week and that Gordon Frost, the Trust and the Management Company were responsible for any shortfall in the running costs and any losses. 47 Importantly, in relation to security for the payment of fees to participants, the Prospectus stated: "In respect of the abovementioned fees payable to Participants (up to a maximum of $5,500,000, depending upon total subscriptions under this Prospectus) the Management Company [Phillip Emanuel Productions] will provide or procure the Security (refer definition in Glossary) to secure the fees. As at the date of this Prospectus the Security has not yet been issued. If the Management Company is unable to provide or procure the Security any Investments received will be returned in full to the respective Participants. The Management Company does not anticipate that it will be unable to provide the Security." (Original emphasis) 48 The term "Security" was defined in the glossary to the Prospectus as meaning one or more of the following, as approved by the Representative [Mr Coote]: "(a) any security, letter of credit, guarantee or bill of exchange issued, guaranteed or endorsed by an Australian bank; (b) bonds issued by any State Government or the Commonwealth Government or any government or semi-government instrumentality or statutory corporation which is rated at least A- by Australian Ratings, Moody's Investors Services or Standard Poors Index; or (c) a managed fund comprising of the above securities referred to in paragraphs (a) and (b). (d) In the event that Participants are borrowing funds from a lender, any security approved by the Investors' Representative and the lender and which may be issued by a corporation or financial institution other than those stated in (a), (b) and (c) above." (Emphasis added) 49 It is apparent that a central feature of the investment in the Crazy for You Fund was that the payment of fees equal to 100% of the amount of the initial investment would be secured by "Security" as defined. This security was important to the investors. 50 The Prospectus included a taxation advice in the form of a letter from Gadens Ridgeway Lawyers ("Gadens Ridgeway"), dated 19 April 1996, addressed to the directors of Phillip Emanuel Productions. The advice listed and described the constituent documents of the Crazy for You Fund. It stated that the budget cost of the production was $5.5 million. In relation to income tax concessions, the advice stated that participants were required to expend funds to facilitate the production of "Crazy For You" under the Production Services Agreement. It continued: "Subject to the comments in this letter these funds should be deductible pursuant to s.51(1) of the Income Tax Assessment Act on the basis that the expenditure is incurred in gaining or producing assessable income, or alternatively, incurred in carrying on the business for that purpose. Subject to our comments below, it is our opinion that: (a) the expenditure of production moneys by participants in relation to the provision of the theatrical production services for 'Crazy For You' is deductible under section 51(1) by reason of these being characterised as outgoings necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income; (b) the expenditure is available as a deduction at the time, and to the extent to which, the Production Management Company requires the Representative to pay to it the production management fee in conformity with the express contractual stipulation pursuant to the terms of the Production Management Agreement; (c) provided the participants entered into the contemplated transactions with the dominant purpose of making a profit from the project itself, Part IVA, the general anti avoidance provision should not apply. Further, it is our view that there are no other provisions of the Act that would have a justified application to the transactions contemplated." (Emphasis added) 51 It is not in dispute that the clear inference to be drawn from the tax advice and the Prospectus was that the moneys raised pursuant to the Prospectus would all be applied towards the stage production. 52 Under the heading "Explanation of Budget" the Prospectus stated: "The Management Company [Phillip Emanuel Productions] is obliged, under the Production Management Agreement, to contribute up to $1,000,000 of the total Pre-Production Costs for the Stage Presentation. In addition to raising the $1,000,000 of the Pre-Production Costs, the Management Company is raising funds from Participants to contribute to the Running Costs of the Stage Presentation. Set out below is the full budget for the Stage Presentation. Section 1 shows the Pre-Production Costs in total, being $3,000,000 and the Management Company's share of those Pre-Production Costs as being $1,000,000. Section 2 of the Budget shows the general overheads payable by the Management Company only with respect to the issue of this Prospectus, and section 3 shows fees payable to the Management Company out of funds raised under this Prospectus. Finally, section 4 of the Budget shows the projected weekly Running Budget, which, if the full amount is raised under this Prospectus, will be paid for a total of 12 weeks (plus part week 13) by the funds invested by the Participants." (Emphasis added) 53 This statement indicates that money was being raised from participants for Phillip Emanuel Productions to contribute both to the pre-production costs and the running costs of the stage presentation. 54 The Prospectus summarised the contractual arrangements concerning the stage presentation as follows: "In summary, the effect of the Production Services Agreement and Production Management Agreement is that the Investments which are subscribed under this Prospectus are paid to the Representative by the Participants, and that money is then paid to the Production Management Company [Phillip Emanuel International] for its services under the Production Management Agreement. In turn, the Production Management Company must then provide the Management Company [Phillip Emanuel Productions]with funds to enable it to perform its obligations to its partners with respect to the payment of Pre-Production Costs, and to satisfy the other costs to the Management Company detailed in the Budget. The balance of funds will be used to offset Running Costs of the Stage Presentation." (Emphasis added) 55 The Prospectus also contained warnings for potential investors. For example, it stated: "Investment in stage presentations is subject to a high degree of risk and the investment being the subject of this Prospectus should be considered speculative." 56 There were also warnings as to the uncertainty of the taxation consequences of the participants' investments. 57 The evidence indicates that OCBC did not receive a copy of the Prospectus until some time in June 1996. 58 On 30 May 1996, Mr Park wrote to Mr Lawrence of BOSA (later OCBC) outlining a number of proposed transactions and schemes for the forthcoming tax period. These schemes included the Crazy For You Fund. On 31 May 1996, Cornwall Stodart Lawyers ("Cornwall Stodart") confirmed to its client, BOSA, that it would act on its behalf in the proposed transactions, whereby Capital would lend money to selected participants, and BOSA would take assignments of those loans on certain terms. 59 On 13 June 1996, Mr Lawrence wrote an internal memorandum which listed a number of tax deferment projects that BOSA had been asked to fund for the year ending 30 June 1996. It included the Crazy for You Fund. 60 Mr Lawrence confirmed: "We will continue to have mortgaged to us our own Term Bonds being the security for our principal." 61 It was a requirement of BOSA, before it was prepared to purchase loans made to investors in stage productions, that the investor be entitled to 100% return of capital invested, which was fully secured. The security was provided by BOSA itself rather than another financial institution. In so doing, BOSA reduced the credit risk of the capital invested in the transaction, but remained exposed to the credit risk of the borrower in respect of interest payments and accordingly, conducted credit checks before it would approve the assignment of a loan. 62 In June 1996, Mr Patterson, a former partner at Cornwall Stodart, was provided with, and reviewed, a number of documents in relation to the Crazy For You Fund on behalf of BOSA/OCBC. On 17 June 1996, Mr Patterson sent a fax to Mr Hutchings of Cornwall Stodart, enclosing a draft of a letter to be provided, by Cornwall Stodart, to Mr Lawrence (as the Manager of Corporate Banking for "OCBC Australia") in relation to the project. Mr Patterson raised some concerns about the transaction. One of these was expressed as follows: "5. Copy of executed Co-Producers Equity Agreement between Gordon Frost Attractions Pty Ltd and the Adelaide Festival Trust as 'Producers' and Phillip Emanuel Productions Ltd as 'the Co-Producer' dated 29 March 1996. NOTE – we have not been provided with copies of any of the various attachments referred to in this agreement. This is significant, since as we understand this agreement, the Co-Producer is bound only to provide $1 million towards the 'Pre-production costs (clause 7(b)); the Producer is obliged to meet all other expenses of mounting the production – see Recital C and clause 3. If this be correct, we cannot understand why the promoter needs to raise so much money." (Emphasis added) 63 This expression of concern was relied on by the applicant, as a circumstance which should have triggered enquiries, by the respondents, as to how the invested funds were to be used. 64 Dr Patrick completed an investment application and wrote out a cheque for $4,683.00, dated 25 June 1996, to Capital Finance Corporation. This committed him to making the investment, and on this basis he claimed a deduction for the year ended 30 June 1996. The investment application and cheque were given to Mr Ahearn, Dr Patrick's financial adviser, who forwarded them to Pacvest Securities Limited ("Pacvest"), which was the sponsoring broker identified in the Prospectus. On 28 June, Dr Patrick completed a loan application made to Capital Finance, which was received by Capital on 1 July 1996. 65 On 1 July 1996, Mr Coote sent a fax to Phillip Emanuel Productions with a list of the investment applications that had been made to the Crazy For You Fund, including that of Dr Patrick. 66 On 9 July 1996, Mr Park wrote to OCBC to confirm that a new entity, Capital Australasia, had been incorporated to serve as the financing vehicle for the Crazy For You Fund. 67 In early July 1996, credit inquiries were made, at Capital's request, with respect to Dr Patrick's loan application. The results were provided to OCBC to enable it to consider whether to agree to purchase Capital's loan to Dr Patrick. Cornwall Stodart also carried out a due diligence exercise in relation to the proposed loans, including the loan to Dr Patrick. On 8 July 1996, OCBC sent a memorandum to Capital, conditionally approving the assignment to OCBC of the proposed loan to Dr Patrick. On 16 July 1996, Capital Australasia wrote to Dr Patrick, conditionally approving a loan to him. 68 On 17 July 1996, Cornwall Stodart wrote to OCBC setting out the matters that it would certify in relation to each of the loans proposed to be assigned to OCBC by Capital. 69 On 18 July 1996, Cornwall Stodart sent Mr Park a letter, setting out the outstanding matters in relation to the Crazy for You Fund, including the concern expressed by Mr Patterson in relation to the need for funds. 70 Mr Hutchings of Cornwall Stodart then spoke with Mr Olivestone of Pacvest, and the reservation that Mr Patterson had expressed in June was resolved by Mr Olivestone, to the satisfaction of Mr Hutchings. Mr Hutchings then completed the solicitor's certificate, which was signed and issued without this reservation. 71 The first settlement of the investments involving the Capital loans and the assignments to OCBC occurred on 19 July 1996. settlement of 19 July 1996. 72 This settlement was held at the branch of the ANZ Bank in Sydney, since this was Mr Coote's bank, and he was the receiver of the funds. Cornwall Stodart provided a settlement schedule to OCBC, and Mr Lawrence provided a set of instructions for Mr Ho, who attended the settlement on behalf of OCBC. 73 The following transactions took place at this settlement. OCBC entered into a Deed of Assignment and Management with Capital Australasia and Capital Finance to affect the assignment of the first tranche of the loans from Capital to OCBC and paid Capital Australasia $2.698 million for the purchase of those loans. OCBC had issued a bank warrant in that amount on behalf of Capital Australasia, in favour of Mr Coote, which it handed over on settlement. It had also issued term bonds with a total future value of $2.698 million, for which it charged Capital Australasia $1.576 million, which were deposited into Capital Australasia's account with OCBC. OCBC collected an ANZ bank cheque on behalf of Capital Australasia for $1,808,030.00, which it paid into Capital Australasia's account with OCBC. Of this amount, $1.576 million was shown as a debit in favour of OCBC to pay for the term bonds. This amount was to secure the repayment of the loan made by Capital Australasia. OCBC retained the term bonds and collected the unit certificates, the manager's declaration executed by Phillip Emanuel Productions, and a declaration from Mr Coote, as part of the security. Mr Ho ensured that the Production Services Agreement and Production Management Agreement had been duly executed. 74 Similar procedures were followed in relation to the two other settlements involving OCBC that took place on 6 and 21 August 1996. At these settlements, bank warrants issued by the Commonwealth Bank of Australia were collected by OCBC for payment into Capital Australasia's OCBC account. The settlement in relation to Dr Patrick was 6 August, but nothing turns on this. The evidence includes instructions from OCBC to Mr Ho who attended the settlement, in similar terms to those in respect of the settlement of 19 July 1996. For the purposes of these proceedings, it is not necessary to set out in detail what occurred in the later transactions. 75 I now turn to consider the evidence of the principal witnesses. These were Dr Patrick; Mr Park; Mr Lawrence; Ms Enconniere and Mr Ho of OCBC; Mr van Nieuwkuyk and Mr Frost from Gordon Frost; Mr Patterson and Mr Hutchings of Cornwall Stodart, and Mr Coote. EVIDENCE OF DR PATRICK 76 Dr Patrick gave evidence that in June 1996 he wanted to make investments that would be profitable and have the effect of deferring his payment of income tax from the financial year ending 30 June 1996 until a later year. 77 Dr Patrick said that he attended the office of his accountant, Mr Spitzer, on about 25 June 1996, for a meeting that was also attended by his financial adviser, Mr Ahearn. Mr Ahearn controlled an entity called the Locums Group, that provided financial, accounting, and other services to the medical profession. A few weeks before 25 June 1996, Mr Ahearn telephoned Dr Patrick and suggested some investment proposals, one of which was the Crazy For You Fund. He then sent Dr Patrick a copy of the Prospectus. Dr Patrick produced a brochure concerning "Crazy for You", which he said was given to him at the meetingwith Messrs Spitzer and Ahearn He said he decided, at that meeting, to make an investment of $100,000, and to borrow this from Capital. He signed a cheque for $4,683.00 payable to Capital Finance. That cheque was drawn on Dr Patrick's company account, which was operated by the company that Dr Patrick had incorporated to manage his medical practice. Dr Patrick also signed an application for units in the Crazy For You Fund totalling $100,000. The application was taken from the Prospectus. 78 Dr Patrick said that he was given a copy of the Prospectus some time prior to the meeting on 25 June 1996, but does not specifically recall when he received it. He said he had seen some advertising with respect to the musical "Crazy For You" on the back of taxi cabs. He said he had a "good read" of the Prospectus. He admitted that he did not study it, but says that he read it sufficiently to attempt to make an informed decision as to whether to invest in the Crazy For You Fund. He said that he thought that the stage production had an excellent chance of commercial success as he had read reviews about it. 79 Dr Patrick also received a prospectus for another production known as "Peter Pan", but he preferred the "Crazy for You" production. 80 Dr Patrick understood from the Prospectus that the whole of the invested funds would be spent in accordance with the budget contained in it, noting that the $5.5 million to be raised from investors was the same figure contained in the Prospectus budget. He understood that the Management Company [Phillip Emanuel Productions] agreed to make progressive payments to him of his investment, and that these payments would be secured by security obtained from the Management Company. He believed the investment proposal would be effective to provide a "reasonable chance" of an income tax deduction in the 1996 tax year. 81 On 28 June 1996, Dr Patrick signed an application to Capital Finance and BOSA for loans of $200,000 for which $100,000 was for the Crazy For You Fund. He gave the application to Mr Ahearn to send to Capital Finance. Towards mid-1996, Dr Patrick received copies of an Offer to Borrow, and a direct debit authority, which documents he executed and sent to Capital. 82 Dr Patrick said that he was not aware of any assignment of the loan until about November 1996, but knew that a loan had been made. He claimed a tax deduction for the $100,000 for the investment for the year ended 30 June 1996, and he paid interest on the loan until August 2000. In October 2000, Dr Patrick received a letter from the Deputy Commissioner of Taxation, disallowing the deduction. He said he only became aware that some of the funds for the investment had not been used for the purpose of the production as a consequence of the ATO investigation, and that this use of the funds made him angry. He said that if he had been aware that less than one third of his loan would be available for the production, he would not have entered into the transaction. He claimed that the effect of the transaction on him was that he was bound to pay interest on the whole of the $100,000 and that he did not get his tax deduction for the 1996 year. On 25 April 2002, Dr Patrick entered into a settlement with the Deputy Commissioner of Taxation. Dr Patrick says that around the time of his investment in the Crazy For You Fund, he had been looking at other investments, such as purchasing rental property for negative gearing. 83 On cross-examination Dr Patrick said that he decided to make an investment in the production at the meeting with Messrs Spitzer and Ahearn of 15 June 1996, but that this was a confirmation of the decision he had already made prior to the meeting. He said that if he were to put funds into a theatre investment he would prefer it to go into "Crazy For You". It was as a result of what was said at the meeting that he made his decision to invest and signed a cheque to Capital Finance. He understood that by signing the investment application he was legally committed to purchasing 100 units in the investment. He was cross-examined as to differences between his earlier affidavits and his "consolidated affidavit" sworn on 25 November 2002, concerning the matters that he took into account when making the decision to invest. It is evident from the cross-examination that Dr Patrick's answers in relation to these matters were in the nature of reconstruction, rather than recollection. 84 Dr Patrick knew that the Management Company [Phillip Emanuel Productions] had to purchase a security that would return 100% of the investment by 1 July 2002. He said that he did not direct his attention to the way in which the security would be paid for. He said that he believed that the security would be furnished from receipts derived from the production. His evidence regarding his understanding of the way that the tern bonds would be financed was unsatisfactory. 85 Dr Patrick said that he went into the investment on the basis that it would be profitable, because otherwise he would have been going into it for the dominant purpose of getting a tax concession. This answer has the flavour of reconstruction. He says he did not see the Crazy For You Fund as tax avoidance, but that it suited him because it deferred payment of his tax. 86 Dr Patrick claims that he would have been concerned if a substantial amount of investors funds did not go into the show as this could affect its success. However, he agreed that if the Prospectus said that running costs for the production were $296,000 per week, and if Gordon Frost and the Trust were responsible for any shortfall in running costs, and for losses, it would have been very unlikely that he would have been concerned about under funding. He said that his major concern was that the investment would be a genuine tax effective investment. He agreed that he would have had minimal concerns in relation to under funding, given the producers who were standing behind the production. 87 Dr Patrick was cross-examined in some detail about the allegations of fraud raised by him in the pleadings, which were subsequently withdrawn, against Mr Park, Capital and OCBC. 88 Dr Patrick said that he would not have invested in the Crazy For You Fund except for the tax deduction. In so doing, he relied on the advice of Mr Ahearn in relation to an earlier decision by him to invest in a production known as "The Ugly Dumpling". This also involved a tax driven investment scheme. 89 Dr Patrick's position was that he had a good income and had to get some legitimate tax relief, and that he was very keen to do something to reduce his taxable income for the year ended 30 June 1996. He said that he was certainly very enthusiastic about getting the largest tax advantage legitimately available to him, but only if his financial adviser advised that it (which I take to mean the tax benefit) was likely to be effective. He said that he relied on the advice given to him. He agreed that he was not going to trust his own reading of the Prospectus or the brochure, which is why he sought advice. 90 After making the investment, Dr Patrick showed virtually no interest in following through the affairs and progress of the musical production. 91 Having regard to the cross-examination of Dr Patrick, I am not satisfied that his evidence is reliable or accurate in relation to his reasons for investing and his likely alternative investment options to the Crazy For You Fund. I have no doubt that this is due to the considerable lapse of time between the events in question and the swearing of Dr Patrick's affidavits and the hearing. I do not consider there was any indication of dishonesty in Dr Patrick's evidence, but I am not persuaded that he relied on any representations in relation to term bonds. 92 I am satisfied that the only material and operative purpose in investing in the Crazy for You Fund, as evidenced by Dr Patrick's later inaction, and the strength of his desire to obtain tax relief, was to obtain a tax deduction. I am also satisfied that he would have invested in the Crazy for You Fund in any event, having regard to his discussions with his consultant and accountant. I find that he did not direct his attention, or attach any importance, to the question as to how the term bonds were to be financed. This is particularly so given the time at which he decided to invest and his urgent desire to minimise his income tax. I consider that if he had not invested in the Crazy For You Fund he would have most likely, in his eagerness to secure a taxation benefit, have entered into a similar fund. 93 I do not accept the submission that Dr Patrick would not have entered into a tax driven investment scheme in June 1996 if he had not invested in the Crazy for You Fund. The circumstances and the evidence point strongly to the contrary. It is also apparent from the evidence that Dr Patrick did not have the money to pay the tax for the investment, and that he had to borrow. EVIDENCE OF MR PARK 94 Mr Park controls the actions of Capital. He has been involved in the finance industry since 1988 and founded the Capital group of companies in 1994. The business is a finance and management business concerned with the procurement of finance for promoters and investors in tax schemes. It is not a promoter or marketer of tax schemes involving public prospectuses, and it does not draft any such prospectuses or their underlying documents. 95 Mr Park has never established any loan or investment scheme and the contention that he "established" the Crazy for You Fund is not pressed by the applicant. He stated that during 1996 he did not in any way implement the Crazy for You Fund or organise for others to act in accordance with it. He had no input into or knowledge of the creation of the Deed of Investment, the Prospectus, the Production Services Agreement, the Production Management Agreement or any other document referred to in the Prospectus. From time to time he had dealings with D & D Tolhurst Limited ("Tolhurst"), but Mr Park had no dealings with Tolhurst in respect of the Prospectus. He had dealings with Mr Olivestone, Managing Director of the sponsoring broker, Pacvest, but not in respect of the creation of the drafting of Prospectus. Mr Park said that he was first introduced to Mr John Frost in 1997 or 1998. He has had no association with Gadens Ridgeway, and has never provided tax advice to any investor. 96 Mr Park noted that a great number of prospectuses are released onto the market every year, seeking investments in film or theatrical productions. Many are tax driven. Many investors require finance. It is a common feature that return of investors' capital is guaranteed or that the risk to capital is minimised. 97 Mr Park explained that investors are procured by promoters to the ventures and by investment advisers. Capital's role in relation to OCBC was to provide or procure specific purpose loans tailored to particular investments, and securities, which may be covered by a prospectus. This service is also offered by the major banks in Australia. It is common industry practice for a financier to provide loans to investors and, subject to negotiation, such security as required by the prospectus. Both Capital and OCBC only enter these loans where acceptable security is provided by way of deposit of a security to be provided pursuant to a prospectus. This is a usual requirement. 98 In March 1996, Mr Park was contacted by Mr Olivestone, with whom he had had previous dealings. Pacvest had been appointed as marketing agent and sponsoring broker to raise funds "Crazy for You". Mr Olivestone said the promoters were Phillip Emanuel Productions, the Trust and Gordon Frost. Mr Park knew these organisations by market reputation, and regarded them as leading members of the arts and entertainment industry. He knew that Phillip Emanuel Productions had an "outstanding" reputation in the entertainment industry, and that Mr Emanuel had been involved in previous Pacvest ventures where the Capital group and OCBC had provided funding. Mr Olivstone also told Mr Park that Tolhurst was to be the underwriter, and Mr Park had high regard for the professionalism and integrity of Tolhurst. Mr Olivestone told Mr Park that the proposed investors would have good credit ratings, and that many had already been sourced and committed by investment advisers. In late April 1996, Mr Emanuel met with Mr Park at Capital's premises. At this meeting, Mr Emanuel explained the "Crazy For You" proposal. Mr Emanuel said that he had leading co-producers in the Trust and Gordon Frost. He spoke in glowing terms about "Crazy For You". Mr Park said that in deciding to become involved, Capital and OCBC, as financiers, would not give any weight to the prospects of commercial success of the production, but that investors would be assessed on credit rating and adequacy of security. He said that if Capital were to enter into an agreement to provide security, this would take the form of OCBC term bonds or letters of credit. He told Mr Emanuel that OCBC was the source of Capital's funds, and that final acceptance of this proposal would be subject to the approval of the solicitors for OCBC, Cornwall Stodart. No firm commitment was made at that time by Capital. 99 Mr Park was aware that the Prospectus had to satisfy the regulator (then the Australian Securities Commission, or "ASC", a body that has subsequently been replaced by the Australian Securities and Investment Commission, or "ASIC"). He assumed the Prospectus would have been subject to scrutiny by the regulator, the underwriters, the investors and other participants, together with the advisers to those parties. It did not occur to him that a fraudulent or a misleading prospectus would be produced, or that any of the parties would mislead the public. 100 Mr Park received a copy of the completed Prospectus in late April 1996, from either Mr Olivestone or Mr Emanuel. He did not read the Prospectus in detail, but noted that investors were to be provided with security that OCBC could rely on. It was his practice to send prospectuses to Cornwall Stodart for them to investigate, and, if necessary, for them to draft related finance documents. A firm commitment to provide financing was made in late May or early June 1996. Capital did not undertake any analysis of the Crazy For You Fund. The creditworthiness of the investors was investigated by another entity. 101 Prior to June 1996, Capital commenced work on the loan applications (pending OCBC approval) and on the Offers to Borrow. It began supplying these to Pacvest. Otherwise, there were no further discussions between Capital and Mr Emanuel until immediately prior to the first settlement of the financed investments on 19 July 1996. 102 Negotiations as to the pricing of the securities took place between Messrs Emanuel and Park after April 1996. Capital's pricing was confirmed immediately prior to each settlement and depended on the prevailing 1, 3 and 5 year swap rates at the time of each settlement, less a margin. The calculation was based on net present value of future payments due under the securities. This resulted in the total amounts to be paid for the securities by Mr Emanuel and his companies being $1,808,030.49 for all eleven term bonds in respect of the settlement of 19 July; $1,074,752.88 for all of the eleven term bonds in respect of the settlement of 6 August 1996, and $352,767.26 for all eleven term bonds in respect of the third settlement of 21 August 1996. 103 Capital arranged a draft letter of engagement evidencing the security request that Capital had made to Phillip Emanuel Productions prior to each of these settlement dates, together with a promise to pay. In the case of the settlement of 19 July 1996, the amount to be paid by Phillip Emanuel Productions for the issue of the security was $1,808,030.00. The amounts for the securities were settled and executed on behalf of Phillip Emanuel Productions in readiness for each settlement, and sent to Capital on the day of settlement. 104 After the delivery of each request by Phillip Emanuel Productions, Mr Park arranged for the issue of the security for the guaranteed return of an amount equal to the principal of the loan to the investors. This was in exchange for the payment of the amounts set out in the Phillip Emanuel Productions security request. These sums were paid direct to Capital Australasia by Phillip Emanuel Productions, and in return, Capital Australasia procured the security in the form of term bonds from OCBC. All relevant documentation for Capital was prepared on its behalf by Cornwall Stodart under instructions from either Capital or OCBC. The documentation comprised pro-forma documents modified to suit the transaction. Mr Park relied entirely and acted on Cornwall Stodart's advice to OCBC regarding the legality and propriety of the transaction. Mr Park had no discussion with any one to the effect that OCBC or Capital would lend the invested funds to pay for the security. There was no understanding or assumption that this would be the case. In his mind the cleared funds to acquire the security would be provided by either one or more of the Trust, Gordon Frost or Phillip Emanuel Productions. He had no idea that monies lent to the applicants might be misapplied. He did not have any idea that any monies would be used by Mr Coote or Phillip Emanuel Productions to pay for the term bonds issued by OCBC. 105 Neither Mr Park, nor any officer of Capital, attended any of the settlements involving finance. Mr Park had no idea what cheques were drawn, except for those that he instructed OCBC to draw on Capital's behalf, and those which were made in favour of Capital to procure the security. The Offer to Borrow required that all security necessary to support the loan be in place and available prior to any advance being made. So far as Mr Park was aware, neither Capital or OCBC provided any funds to purchase those securities. 106 Mr Park noted that Capital and OCBC were only involved in three of the five settlements that took place in relation to the Crazy For You Fund. Other banks were involved in the remaining two settlements. 107 Mr Park referred to the fax that he received around 17 June 1996 from Mr Hutchings of Cornwall Stodart, which included a draft qualified certificate, seeking clarification of issues raised. On 25 June 1996, he received a fax from OCBC, which enclosed the same certificate for his attention. On 18 July 1996, he received a faxed letter from Mr Hutchings, which set out a number of queries. He sent these to Mr Olivestone of Pacvest, because he was not in a position to answer the queries raised, and left it to Mr Olivestone to sort all the issues directly with Cornwall Stodart and/or Mr Emanuel. Mr Park heard no more of these matters and assumed all was in order. He had no contact with Dr Patrick or any of his advisers prior to 30 June 1996, and does not know when Dr Patrick's loan application was forwarded to Capital. He does not dispute Dr Patrick's recollection that he first received the Offer to Borrow and direct debit authority for execution in mid-July 1996. 108 Mr Park has no recollection of receiving a copy of any licence agreements, joint venture agreements, the Co-Producers Equity Agreement, or any agreement between the Trust and Gordon Frost, the Production Services Agreement, the Production Management Agreement, or the Underwriting Deed of 3 April 1996 ("the Underwriting Deed"). 109 Mr Park states that, in relation to the settlement of 19 July 1996, he had arranged, through Cornwall Stodart, for the drafting of a letter from Mr Emanuel on the Phillip Emanuel Productions letterhead to be addressed to Capital Australasia, which stated that under the terms of the Investment Deed it was Phillip Emanuel Productions' obligation to arrange for the issue of adequate security for a guaranteed return to the investors in the amount of $1.808 million; requested Capital Australasia to arrange for the issue of the security on the basis of a promise by Phillip Emanuel Productions to pay that sum for the security; and confirmed that this was inclusive of all Capital's fees and expenses. This letter is in evidence. 110 Mr Park said that he did not make any inquiries of Mr Coote, or anyone else, as to the intended application of the funds to be received by Mr Coote at the settlements. He had no reason to do so. He was told that the purpose for which the investors' funds were required was to fund the project. He said that he had no dealings with Mr Coote and that to his knowledge, no officers of his company had dealings with Mr Coote in relation to the Crazy For You Fund. 111 In Mr Park's understanding, none of the settlements could have occurred unless the security was in place prior to settlement because OCBC would not have advanced the funds if the security had not been obtained. 112 Mr Park also gave evidence that he had been told by Mr Emanuel that the money for the security was coming from one or other of the co-producers, namely Gordon Frost or the Trust. He said that he was told that one or other of the co-producers was going to provide cash for the securities. He regarded this as normal customary practice. He did not think that it was an unusual feature of the transactions that the obligations were to be secured by the term bond. He did not consider it necessary to ask whether Phillip Emanuel Productions could meet its obligations. His relied on his understanding that if the funds for the term bonds were not provided on settlement, then it would not proceed. 113 Mr Park denied the allegation that he was not concerned about the source of the funds because he knew the investors' money was going to be used to purchase the term bonds. He was not concerned about the legality of the scheme and he referred to the fact that the documents had been vetted by regulatory bodies before presentation to Capital, and that they were passed onto Cornwall Stodart and OCBC for their examination. He relied on the regulatory authorities and Cornwall Stodart, with the knowledge that Cornwall Stodart was acting for OCBC. He did not make other inquiries as to the proposal or employ other solicitors. In relation to the concern raised by Mr Patterson in June 1996, Mr Park said that he immediately put the relevant parties together to resolve the question, and that this was done. He emphatically denies awareness that any of the investors' money was going to be used or might be used to pay for the term bonds. 114 Mr Park impressed me as a reliable witness and his evidence was not materially weakened in cross-examination. I accept his evidence and consider it to be consistent with the circumstances, the documentary evidence and the obligations of the parties under the Crazy For You Fund documents. evidence of Mr lawrence 115 In oral testimony, Mr Lawrence of OCBC confirmed that he had no contact with Mr Coote and did not know of any contact between any officer of OCBC and Mr Coote, apart from that which took place with Mr Ho at the settlements. He confirmed that between April and August 1996 he held the position of Lending Manager in the Victorian branch of BOSA/OCBC. He was less senior than Ms Enconniere, an officer of OCBC whose evidence is considered below. 116 Mr Lawrence said that it was not his practice to keep diary notes of conversations. He said that initially he had spoken infrequently with Mr Park until around 30 June 1996, when he spoke more frequently with him, in relation to the Crazy For You Fund. 117 It is apparent from his cross-examination that Mr Lawrence trusted and relied on his lawyers to resolve any discrepancies or difficulties in relation to the documentation or settlement issues. He said that he sent the letter raising the queries from Cornwall Stodart to Mr Park because Mr Park had contact with the promoters, and understood the issues relating to the information that the lawyers required. He did not think it necessary to carry out his own investigation in respect to the query regarding the funding of the term bonds. His position was that any concern in respect of the funding raised by the lawyers would be, and was, satisfactorily resolved so far as they were concerned, and this was reflected in the provision of the final certificates. Mr Lawrence said that if the query had not been resolved by Cornwall Stodart, then he have been concerned. He stated that he had no reason to believe that the money for the bonds would not be provided at settlement. He relied on the fact that the same procedure had been followed in previous transactions that OCBC had entered into, and the fact that OCBC would not proceed to settlement if the lawyers expressed any due diligence concerns in their certificates. He denied that he was aware that money for the term bonds was to come out of the investors' funds. 118 Mr Lawrence was, in my view, a reliable witness. I accept his evidence. He was not shaken in any way in cross-examination and the position which he adopts is consistent with accepted commercial practice, namely reliance on solicitors' certificates and final advice, together with the fact that the term bonds would not have been issued if the funding was not available. This accords with the position taken by OCBC's solicitor, Mr Hutchings of Cornwall Stodart. There was nothing in the circumstances that should have alerted Mr Lawrence to the possibility that the investors' funds might be misapplied. evidence of ms enconnierE 119 Ms Enconniere has been employed by BOSA and OCBC since 1993. At relevant times, she was the head of Corporate Banking Victoria at BOSA, and subsequently at OCBC. She was senior to Mr Lawrence, and has considerable banking experience, having been in the industry since 1979. 120 Ms Enconniere said that in June 1994, Mr Park saw her to see if BOSA was interested in taking assignments of loans to investors in projects that were fully secured by term bonds issued by Australian banks. She sought approval from BOSA's committee on a general product basis, that approval relating to the type of transaction that BOSA was prepared to do, as opposed to the identity of any particular borrower. 121 In June 1996, Ms Enconniere received a memorandum from Mr Lawrence which set out the groups of loans that Capital proposed to assign to OCBC in 1996, including those relating to the Crazy For You Fund. For investors to be approved by OCBC, they had to satisfy all of OCBC's usual credit approval requirements. 122 On 10 July 1996, Mr Lawrence prepared a memorandum recommending that approval be given for Capital Australasia to be the corporate entity used for the Crazy For You Fund. Ms Enconniere set out the procedure OCBC used to vet applications, and stated that the approval was conditional on OCBC being able to take a charge over term bonds issued by a reputable financial institution as security for the 100% guaranteed return to the investor. She said that in 1996, the instruments used were term bonds issued by OCBC. 123 In cross-examination Ms Enconniere said that she was not concerned to conduct inquiries about the ability of a party to pay for the term bonds, because she was lending to investors in the Crazy For You Fund and not to the producers or the promoters of the Fund. She said that if a loan were being made to a person on the basis that there would be security from that person, then the means of that person would be investigated. In the present case, her position was that if the funds were not forthcoming at settlement, then the settlement would be cancelled. On the hypothetical assumption put to her that there was doubt as to whether there were sufficient funds available to pay for the term bonds, Ms Enconniere's position was that she would seek advice from the lawyers to find out if that were correct, and that if it was decided that the settlement was to go ahead, OCBC would go to the settlement and see whether the monies were available at the settlement. If they were not, the settlement would not proceed. 124 Ms Enconniere denied any knowledge as to the way the producers paid, or proposed to pay, for the term bonds. When asked where she thought the producers got the money from if not from the money that had come into the production from the Capital loans, she said that as far as she was concerned, it could have come from private investors, the producers' private funds, or from somewhere else. 125 I accept Ms Enconniere's evidence. It was not diminished in cross-examination, and I found her to be candid witness. She was experienced in the industry and her answers were consistent with acceptable commercial practice and the scheme documentation. evidence of mr ho 126 Mr Ho was employed by OCBC and BOSA from 19 April 1995 to 12 June 2002. He was assistant manager with OCBC at the Sydney office. On 19 July 1996, 6 August 1996 and 21 August 1996, he attended settlements at the Martin Place branch of the ANZ Bank in Sydney. Prior to attending each settlement, Mr Ho received a memorandum from Mr Lawrence, giving him instructions for each settlement. These followed a common form. Set out below is the memorandum to Mr Ho in respect of the settlement of 19 July 1996: "OCBC BANK Oversea-Chinese Banking Corporation Limited 19 July 1996 URGENT URGENT MEMORANDUM To :Brian Ho From: :Stephen Lawrence Subject :FILM FINANCE SETTLEMENT – "CRAZY FOR YOU" As per our recent telephone conversation, this is to confirm that we require your representation to attend a Film Finance settlement on our behalf in Sydney. Details of the settlement are as follows: 1. Obtain from Judy Lew Term Bonds numbered 19960025 – 19960035 inclusive for a total face value of $2,698,000.00 2. Collect warrant for $2,698,000 from Shane Chapman in favour of the Investors Representative, Mr Christopher Coote and take to settlement. WE WILL ADVISE BY PHONE WHEN TO HAND OVER THE WARRANT. 2A. Attend Settlement at: ANZ Bank Level 1, 20 Martin Place, Sydney Contact : Karin Kragh Tel: 02 226 6870 Date: 19 July 1996 Time: 4 p.m. 3. Collect a Bank Cheque payable to Capital Finance Corporation (Australasia) Pty. Ltd. for A$1,808,030.49 and can you please credit that amount to account number 3001-118695-115 held at OCBC Bank Melbourne. [This was the Capital Australasia account] We will advise you the amount at settlement. 4. All Term Bonds are to be retained by OCBC Bank. (allow inspection if required) 5. Collect the unit certificate issued to each borrower (Please ensure that each borrower (as attached) is issued with the unit certificate. 6. Collect the Manager's Declaration duly executed by Phillip Emanuel Productions Ltd. This document should be: .dated .initialled by the directors/secretary of Phillip Emanuel Productions Ltd where deletions/changes are made. 7. Collect the Representative's Declaration duly executed by Mr Christopher Coote. This document should be: .witness and signed where indicated by an independent adult; .dated. .initialled by Mr Christopher Coote where deletions/changes are made. 8. Please ensure that the following agreements are signed by the parties indicated below and the signed copy should be the exact agreements as enclosed. These signed agreements will be retained by them. a) The Production Services Agreement Phillip Emanuel Productions Ltd and Christopher Coote to execute the Production Services Agreement. b) Production Management Agreement Phillip Emanuel Productions Ltd, Phillip Emanuel International Pty. Ltd. and Christopher Coote to execute the Production Management Agreement. Regards. [signed] STEPHEN LAWRENCE Manager Corporate Banking Victoria A Member of the OCBC Group" 127 Mr Ho confirms that he attended the three settlements and followed the instructions contained in the memorandums in respect of each settlement. He did not recall anything unusual about any of the settlements. He had no specific recall of any particular settlement. I accept his evidence. evidence of Mr van Nieuwkuyk 128 There were two witnesses from Gordon Frost, namely Mr van Nieuwkuyk and Mr John Frost. 129 The applicant called Mr van Nieuwkuyk, who at relevant times was employed by Gordon Frost as an executive producer. He was employed throughout 1996, and was involved in the production of "Crazy For You". He had many dealings with Mr Emanuel, and attended two of the relevant settlements. His assistant attended the third. 130 Mr van Nieuwkuyk agreed that Gordon Frost did not have any funds in its account to pay for term bonds. Nor did it have any assets of its own to secure the payment that it was required to make. He stated that Mr Emanuel told him that he had arranged for funds to be deposited into Gordon Frost's account with the Commonwealth Bank so that it could provide the relevant funds at settlement. On 19 September 1996, Mr van Nieuwkuyk sent Mr Emanuel an invoice in respect of the bank charges that the Commonwealth Bank had levied on Gordon Frost which indicates that Gordon Frost was acting, in effect, as banker on behalf of the Phillip Emanuel interests. He recalls that Mr Emanuel or one of his companies paid the invoice. 131 In cross-examination Mr van Nieuwkuyk confirmed that Mr Emanuel had never told him that it was even contemplated to use investors' funds to purchase security bonds. He said that a bank warrant was needed early on the day of settlement, which was issued by the Commonwealth Bank, and brought to settlement. He said that the bank finance used at settlement had been paid for by cleared funds prior to the settlement and that the same position applied in respect of bank cheques. He said that so far as he was aware, there was never any question of investors' funds being diverted to purchase the term bonds. He was referred in cross-examination to an earlier statement by him, to the effect that, so far as he was aware, the Commonwealth Bank had issued warrants on the basis that funds would be paid to Gordon Frost, and that Mr Emanuel or one of his companies deposited funds in the Gordon Frost account prior to settlement. Mr van Nieuwkuyk confirmed that in his experience, Gordon Frost's bank manager would not have allowed bank warrants for the sums in question to be issued without asset backing. 132 Mr van Nieuwkuyk also confirmed that he understood that the investors' funds were to be used either for running costs, or for a combination of pre-production costs and running costs. He had only a vague recollection of what precisely occurred at settlements, but said that to the best of his recall, nothing occurred which led him to believe that investors' moneys were being used to purchase term bonds. He did not recollect meeting Mr Coote, or having any dealings with him. He confirmed that there were a series of sub-settlements, with people moving to and fro in different areas of the bank where various parts of the settlements were carried out. 133 In re-examination, Mr van Nieuwkuyk reconfirmed his recollection that funds were deposited in Gordon Frost's account prior to the issue of the bank warrants or bank cheques for the settlements. To the best of his recall, he had conversations with Gordon Frost's bank manager prior to settlement. When asked whether his understanding was that funds would be in place to cover the withdrawal, he confirmed that they always were in place before the cheques or warrants were drawn. On being further pressed in re-examination, he confirmed that before attending the settlements, he rang Gordon Frost's bank manager and made an inquiry about the state of the company's account in order to make sure that everything was in order. He said that he was told that it was. 134 I found Mr van Nieuwkuyk to be a reliable witness, with reasonably accurate recall. His account of events was credible and should be accepted without reservation. Counsel for the applicant attempted, in address, to down-play the force of Mr van Nieuwkuyk's evidence because it was vague and based on imperfect recollection. However, I do not accept these criticisms and I accept the testimony given by van Nieuwkuyk. His evidence came closest to indicating how the funds for the purchase of the term bonds were provided, and supported the conclusion that funds were paid into the Gordon Frost account and cleared prior to settlement. evidence of Mr Frost 135 Mr John Frost was at all material times a director of Gordon Frost, and had been so since 10 October 1989. That company is involved in the production of entertainment events and has raised money to pay for such productions. In late 1995 or early 1996, Gordon Frost and the Trust agreed to produce the musical theatrical production "Crazy For You". The other co-producer was Phillip Emanuel Productions. Gordon Frost did not have any assets of its own to invest. Mr Frost said that Phillip Emanuel Productions represented to him that it could raise one million dollars for the production. By late July 1996 the three producers had raised investments of approximately three million dollars for "Crazy for You". Approximately one million dollars had been raised by Phillip Emanuel Productions. Mr Frost's recollection is that investment monies would have been forwarded to the Trust, which was controlling the financial accounts, and that these monies were intended to be used for pre-production costs for "Crazy For You". The role of Gordon Frost, in addition to raising some money, was to provide creative input. 136 Mr Frost referred to the settlements in July and August 1996. He agreed with a request from Phillip Emanuel Productions for Gordon Frost to act as a "bank" on behalf of Phillip Emanuel Productions, by receiving, and immediately sending on, all monies received at settlement. He says that payments were made by Gordon Frost to the Trust to fund the "Crazy for You" production, and to another company which he could not recall. He recalled that Phillip Emanuel Productions was associated with a finance company named Capital, but had no knowledge of their business dealings. He referred to a subpoena to produce bank records, and said that, as at 28 November 2002, he had not received those records from the bank, and was unable to locate Gordon Frost's copies, but that he thought they would show that Gordon Frost did not have funds of its own to finance the production. 137 Mr Frost was recalled by the applicant on 28 April 2003. On that occasion, he was referred to bank statements from the Commonwealth Bank, which had been produced in relation to the account maintained by Gordon Frost in respect of the "Crazy for You" production. He said that having seen those statements, he recalled that he arranged for an account to be opened in the name of Gordon Frost with the University of Sydney branch of the Commonwealth Bank, after he had received requests from Mr Emanuel for a Gordon Frost company to act as banker for transactions in relation to "Crazy For You" that involved a Phillip Emanuel company. Mr Frost recalled that Mr Emanuel was "very insistent" about the matter, but could not recall Mr Emanuel's explanation as to why Gordon Frost was being asked to act as a banker. Mr Frost stated that Gordon Frost was able to perform the "banking" function because funds were made available to it by Mr Emanuel or an Emanuel company. He said that he made it clear to Mr Emanuel that Gordon Frost would raise its share of pre-production costs from investors that it would approach. He said that he never intended that any Gordon Frost company would contribute its own money to fund the costs of the production, and that they had no capacity to do so. The Commonwealth Bank records for the Gordon Frost account, at the University of Sydney branch, indicate that a deposit of $2,608,030.00 was made on 19 July 1996. On the same date, a telegraphic transfer of $800,000 and a warrant for $1,808,030.00 are recorded as debits. Annexed to Mr Frost's affidavit is an invoice from Mr van Nieuwkuyk, there described as director and executive producer, to Phillip Emanuel Productions, covering bank charges for the five transactions that passed through the Gordon Frost account. It was sent on 19 September 1996. 138 In oral testimony, Mr Frost stated that he had no doubt about the probity of Mr Emanuel, or any of his associated companies, and that Mr Emanuel had a very good reputation. Mr Frost confirmed that it was Mr van Nieuwkuyk who liaised with Mr Emanuel about the parts of the Prospectus that referred to Gordon Frost. He also confirmed that ultimately, the "Crazy For You" production ran from December 1996 through to June 1997 in Sydney, and later had seasons in Melbourne and Brisbane, but subsequently closed for want of sufficient demand. He said the only reason that the show closed was because no-one bought tickets. 139 Mr Frost was referred to a series of receipts given by Mr van Nieuwkuyk in relation to settlements with the investors. Although his recollection was vague, he said that he was satisfied at the time that the statements regarding the investors' funds being used for running costs and pre-production costs was an accurate one. In making this statement, he relied on the documents which had been signed by himself and Mr van Nieuwkuyk at about the time of the settlement. 140 Mr Frost confirmed that it was the common practice for running costs expenses to be paid out of the proceeds of ticket sales. He confirmed that the opening and running of the accounts, and the arrangements in relation to settlements, were handled by Mr van Nieuwkuyk on behalf of Gordon Frost. It was Mr van Nieuwkuyk who gave instructions to the Commonwealth Bank. As Mr Frost understood the position, any instructions in relation the receipt or disbursement of funds through the Commonwealth Bank account would have come from either Mr van Nieuwkuyk or Mr Taylor, another officer of Gordon Frost. He confirmed that Mr Emanuel never told him that the monies that were the subject of the receipts were going to be used to purchase term bonds. Mr Frost signed three of the five receipt documents. He confirmed that he and Mr van Nieuwkuyk had said that monies received were being used either for running costs or a mixture of pre-production and running costs and that this his understanding at the time when the receipts were signed. There was no reason to doubt the evidence given by Mr Frost and I accept it. evidence of MR PATTERSON 141 Mr Patterson, a solicitor, was called by OCBC. He was a partner of Cornwall Stodart until 31 December 1995 and thereafter assisted the firm on a consultancy basis. In June and July of 1996 he looked at the documents which constituted the Crazy For You Fund in order to prepare a solicitor's certificate on behalf of Cornwall Stodart to BOSA/OCBC regarding the title to the loans that were to be assigned to it. In the course of examining these documents, Mr Patterson looked at the Co-Producers Agreement and had some initial concern about the amount of money required to be contributed by the co-producer to the running of the production. Specifically, he was concerned as to why the promoter needed to raise so much money: see paragraph 62, above. This concern was raised in a report to Mr Hutchings of Cornwall Stodart, and described as significant, in relation to how much money was going towards the pre-production costs. 142 Mr Patterson did not have any personal communication with Mr Park about this question, which occurred to him when, on his reading of the documents, there appeared to be an anomaly between the amount of funds being raised and the amount of funds being applied. In cross-examination, Mr Patterson stated that the difficulty with those comments, on reconsideration, was that they reflected a misunderstanding of the documents and that he had misdirected himself when he raised the question. He only realised this mistake when he was later asked to review his advice in 2002, prior to the hearing. After sending his letter of 24 June 1996 to Mr Hutchings, he played no further part in the wording of the ultimate form of the certificate. The matter was thereafter handled by Mr Hutchings. Mr Patterson did not consider it was necessary or appropriate to investigate whether the promoter of the Crazy For You Fund had the means to provide the security, or where its funds were coming from, because if the money was not provided there would be no settlement and his client would not be at risk. When it was put to him that there would be a lot of time and effort wasted in the preparatory work prior to settlement if the funds were not produced, he responded that this is a risk that is taken in any transaction. 143 Mr Patterson was a reliable witness and there was no reason to doubt the accuracy of the evidence given by him. evidence of MR HUTCHINGS 144 Mr Hutchings is a partner of Cornwall Stodart. On 12 June 1996, Cornwall Stodart was engaged by OCBC to advise on the nature of the interests proposed to be acquired by OCBC by way of security on taking assignments of loans from Capital Australasia in relation to the "Crazy For You" production. 145 The role of Cornwall Stodart was to check that the legal documentation in respect of each loan was in order before the assignment was taken by OCBC. The firm was also to provide certificates about the assignments, prepare documentation in connection with them, and advise OCBC on the procedure for settlement. Mr Hutchings was responsible for this work. 146 During July and August 1996, Cornwall Stodart reviewed the documentation. On about 17 June 1996 Mr Hutchings received a draft "qualified certificate letter" which was proposed to be given by the firm to OCBC. He sent a copy by facsimile to Mr Park on 17 June 1996, enclosing the draft certificate, and seeking an explanation from Mr Park, Mr Emanuel or their advisers, as to the flow of the gross proceeds referred to in the last part of the draft certificate concerning the Crazy For You Fund. The concern was in relation to why the promoter needed to raise so much money, and was based on the reading of the agreements by Mr Patterson at that time. 147 On 25 June 1996, Mr Hutchings sent a draft of the qualified certificate letter to Mr Lawrence of OCBC. He said that he had to furnish the finalised qualified certificate letter to OCBC before it could proceed with the settlement, and on 18 July 1996, he sent Capital a letter with questions that he needed to resolve before he could complete the certificate letter, including the matter of the amount of the funds to be raised. He notes that records seen by him indicate that Capital transmitted the letter to Mr Olivestone of Panvest. On 18 July 1996, he was contacted by Mr Olivestone. Having spoken with Mr Olivestone, he completed the certificate letter, and furnished it to OCBC on that day. He said that at no time did he think that the money that the investors were contributing was going to be used to purchase the term bonds which were to be issued by OCBC. His belief was that the investors' money was going to be applied in the manner contemplated in the Prospectus. 148 On 31 July 1996, Mr Hutchings signed a form in respect of Dr Patrick, indicating that the documentation regarding Dr Patrick's loan had been checked by the firm and was in order. During July-August 1996, Mr Hutchings had discussions with Mr Lawrence as to whether the documentation was in order in respect of particular proposed loans. 149 On 17 July 1996, 6 August 1996 and 19 August 1996, Cornwall Stodart provided OCBC with letters relating to the suitability and acceptability of loans to be assigned. These were qualified certificates that it would get good title to the loans assigned, and that they would be enforceable. 150 In cross-examination, Mr Hutchings said that prior to issuing the certificates, he received an assurance from Mr Olivestone as to how the monies would be expended, and he re-read the Crazy For You Fund documents. Having examined the Co-Producers Agreement, he concluded that Phillip Emanuel Productions was responsible for the running costs, and that the concern previously expressed by Mr Patterson was not soundly based. He said that he was not concerned as to the source of the funds, because it was apparent from the Prospectus that they were to be provided by Phillip Emanuel Productions. His position was that OCBC was protected, because no settlement could happen unless the money was on the table. In his view, there was an obligation on the part of Phillip Emanuel Productions to provide all the monies and settlement could not take place until they were provided. It did not occur to him that there would be any undue waste of work or time if the settlement did not go ahead. He did not consider that the settlement might not take place. He considered that the Trust was a well regarded organisation, but did not have any knowledge of the financial affairs of Gordon Frost. He did not consider it necessary to make any inquiries as to whether the funds would be present at settlement. 151 No reason was shown to doubt in any way the evidence given by Mr Hutchings. I accept his evidence as accurate and reliable as well as being supported by the documentation. evidence of mr coote 152 Mr Coote has been practising as an accountant since 1965. He was first involved with Mr Emanuel in about 1990. Mr Emanuel approached Mr Coote in early 1996, in relation to acting as the investors' representative for the stage production "Crazy For You". On 19 March 1996, Mr Coote gave Mr Emanuel some biographical information, which was the source of text incorporated in the Prospectus in relation to the representative. Apart from consenting to the inclusion of his name and a biography, he did not have any input into any part of the Prospectus. In April 1996, he received from Mr Emanuel extracts from the Prospectus in relation to the definitions of "Security", "Remuneration" and "Representative". Mr Emanuel informed him, on 26 April 1996, that the Prospectus had been approved by the ASC. Mr Coote then received the various Crazy For You Fund documents from Mr Emanuel. He read them, and did not ask for amendments or query the contents. Gadens Ridgeway were the lawyers in Sydney who provided Mr Emanuel with tax advice, as well as legal advice, concerning the management of the Crazy For You Fund. 153 Mr Coote executed a number of documents as investors' representative for the Crazy For You Fund, including the Underwriting Deed, the Deed of Investment, the Production Services Agreement, the Production Management Agreement, and the Representative's Declarations that were made to Capital Australia on 19 July 1996, 1 August 1996 and 21 August 1996 ("the Representative's Declarations"). 154 Mr Coote referred to the Deed of Investment, and stated that his understanding of his role was that he was to receive funds on behalf of investors, place them into a trust account, and then provide them to Phillip Emanuel Productions, which would invest the funds in the production. He stated that he received the gross proceeds in accordance with the Deed of Investment and distributed the proceeds to the investors. He stated that the Production Services Agreement was a contract between each participant/investor and the management company that supervised the production. He also referred to the Production Management Agreement and the Representative's Declarations. He saw the latter as securing the rights of the lender over the guaranteed return to the investors. 155 On 6 June 1996, Mr Coote attended an investment presentation for the Crazy For You Fund at the Wentworth Hotel in Sydney. He explained that there were two types of investors, those who paid cash, and those who borrowed the investment from Capital Australasia pursuant to the Offer to Borrow. If an investor wished to borrow funds for their investment, he or she would sign and complete an investment application, a power of attorney and the Offer to Borrow, and send it to Pacvest, which was the sponsoring broker. Pacvest sent Mr Coote the original of each investor's investment application and a cheque. For those who borrowed, Pacvest would sign the application, and indicate in a covering letter that the investment was pursuant to an application to borrow. Mr Coote did not receive a copy of the investor's Offer to Borrow. Between 17 May 1996 and 1 July 1996, Mr Coote received copies from Pacvest of about one hundred and fifteen investment applications relating to the "Crazy For You" production. He prepared a progress report for the investment as at 3 July 1996, compiled by Pacvest, which recorded investor's names, identity numbers, amounts of investment applied for, the date the investment application was sent to Mr Coote, the date the loan application was sent to Capital, the name of the agent, and whether payment was by cheque or financed. 156 On 20 September 1996, Mr Coote had calculated the total of investments to be $5.45 million. Of this, $707,000 was by way of cash investment and $4.743 million was financed. On receiving investors' cheques, Mr Coote deposited them in a trust account he had established at the Lindfield branch of the ANZ Bank called "Crazy For You Trust Account". He kept a running list of investors. When he deposited money into the trust account he faxed a copy of the list to Phillip Emanuel Productions. Phillip Emanuel Productions would notify the investor that the investment had been accepted by way of a standard letter to cash investors, and an alternative standard letter to financed investors. 157 In his first statement, Mr Coote referred to all the settlements. For present purposes, it is only necessary to refer to that of 19 July 1996, which was a settlement involving the provision of finance. Mr Coote said that on that day, he attended the branch of the ANZ Bank in Martin Place, Sydney, where he met Mr Emanuel, Mr Ho from OCBC and two others who he later identified as Mr van Nieuwkuyk of Gordon Frost and an ANZ Bank Manager, whose name he believed was Karen. 158 Mr Coote said that initially, he met Mr Emanuel downstairs, and waited for others to arrive. He was then shown to a settlement cubicle upstairs where the transactions took place. He said that Mr Emanuel had a general debit form from BOSA for $2.698 million, which was made payable to "Christopher Coote Crazy For You Trust Account". This was the amount that the second round of investors had borrowed from Capital Australasia to invest in the Crazy for You Fund. Mr Coote deposited that money into the ANZ Trust Account. He then withdrew the same amount from the ANZ Trust Account by way of debit form payable to Phillip Emanuel Productions (later corrected to Phillip Emanuel International) and arranged for ANZ to issue a bank cheque to Phillip Emanuel Productions for the same amount. Mr Emanuel handed Mr Coote eleven term bonds issued by OCBC, in which the maturity dates corresponded to the payment dates referred to in the Production Services Agreement. Each of the OCBC term bonds were mortgaged to OCBC. Mr Coote handed them to Mr Ho, who represented OCBC at the settlement. On completion of this exercise, Mr Coote was asked to wait in a cubicle, and the other parties present went to another cubicle, where further transactions were effected. About a quarter of an hour later the ANZ bank manager returned, and provided Mr Coote with copies of the documents relating to the transactions to which he was a party. 159 Procedures at the other settlements that Mr Coote attended were similar to those set out above. He says that they were also similar to other stage production settlements in which he had been involved as the investors' representative. He said that nothing at the settlements gave him any cause for concern. The fact that securities were provided by the same financial institution that lent the investment monies to financed investors was consistent with Mr Coote's previous experience. He stated that he had no communications with respect to the production with Capital, or any of its officers, and apart from OCBC being present at settlements, he had no communications with OCBC with respect to the production. All Mr Coote's significant dealings and communications were with Mr Emanuel. He knew that Phillip Emanuel Productions was to provide or procure the securities, but had no knowledge of its financial position or resources. He stated that he was not informed of, nor was he otherwise aware of, the source of funds used to acquire the securities. 160 Mr Coote said that he had no reason, at any time, to believe that any of the parties breached any of the agreements to which he was a party. He specifically recalled that the representative of one of the producers, Gordon Frost, was present at, and participated in, the settlement of 19 July 1996, and said that he believed that a representative of that company was present and participated in other settlements. 161 Mr Coote stated that, in his experience, the usual practice if securities were to be acquired prior to settlement was that the acquiring party would be required to pay. He stated that the fact that the securities were acquired at the respective times of the settlements gave him no reason for concern, and stated this is the usual practice, because if securities were acquired prior to settlement, the acquiring party are necessarily required to pay or lose interest for the period prior to settlement, on the money used to acquire the securities. Mr Coote provided details regarding the procedures that occurred at each of the settlements. Following the final settlement, he had no further involvement in the Crazy For You Fund, until it was time for the investors to receive their guaranteed instalment payments of their original investments. On 1 July 1997, when the cash investors were due to be paid 2% of their initial investment, Mr Coote made the necessary arrangements. He followed a similar procedure in relation to the first payment due to the financed investors. 162 On 25 July 2002, Capital informed Mr Coote that the final 75% principal reduction had occurred, and all borrowers were notified accordingly. 163 In cross-examination, Mr Coote stated that the monies were paid over to Phillip Emanuel International and not to Phillip Emanuel Productions. He agreed that the mechanical steps which he described, namely the attendance and actions on settlement, and ensuring that the investors received the payments of principal by way of fees over the six year period, could have been done by a junior clerk in his office. He stated that the due diligence and vigilance that he envisaged he would implement in his role as the investors' representative was to ensure that the investors received their guaranteed payments of the money. He was aware that the whole of the moneys received from the financed investors was to be applied for one purpose, which was the pre-production and running costs of "Crazy For You". He agreed that it was important that the moneys were applied for that purpose. He considered that he was contractually bound after the execution of the Production Services Agreement to immediately pay over the sums that he received on behalf of the investors to Phillip Emanuel International. He relied on the promise by Phillip Emanuel International to apply the money for the stage production. He said that it was not unusual in these transactions to advance the funds in stages and that it is usual procedure that the money should be paid across for the production as a lump sum. 164 Mr Coote said that when he went to the settlements involving finance, the securities were physically on the table. He was not aware of the source of the funds. He did not think it was necessary to make inquiries of those present at the meeting as to the source of the funds. He considered that the terms of reference for his participation was limited to giving the money over to the production company. He said that he was not responsible for the actions of Mr Emanuel, and that he believed that the funds would be properly applied. He made no investigations into what happened to the funds after they left his control, and stated that if, hypothetically, he had been aware that investors' funds were to be used to purchase term bonds he was not sure what he would have done, but that he would have probably have sought legal advice. 165 In further cross-examination, Mr Coote stated that in his dealings with Mr Emanuel he had found him to be honest and trustworthy, and he had no reason to doubt his dealings in relation to the Crazy for You Fund. He stated that Mr Emanuel was a senior member of the industry with a good reputation. 166 In my view, Mr Coote's evidence should be accepted. Mr Coote's evidence was not materially shaken in cross-examination, nor was his credit successfully impeached. Allowing for the lapse of time, and for some relatively minor matters raised in cross-examination, I find his evidence to be trustworthy. The ato report of july 1999 167 As noted above, the ATO investigated the claims for tax deductions in relation to the Crazy For You Fund in July 1999, and denied the income tax deductions in relation to the investments. In May 2001, Dr Patrick filed Notices of Objection to the ATO's taxation assessment. On 25 April 2002, he entered into a settlement deed with the ATO. Under the settlement he was charged no penalty or interest in respect of the tax owed, and was given a two year interest-free period for repayment. The tax that he is liable to pay in respect of the initial investment of $100,000 was not to be payable until, at the earliest, 23 May 2003. The fees he received in respect of the investment were treated as capital and not income receipts. He has recouped his investment in the Crazy for You Fund over the period of six years since 30 June 1996 and was able to discharge the principal of his debt to Capital Australasia. He ceased to pay interest in August 2000. 168 The ATO Report was not admitted into evidence as proof of the truth of its contents, but on the limited basis that it provides an explanation as to the history of the matter, and as to the circumstances in which, and the reasons why, the ATO disallowed the tax benefit. 169 The ATO Report says that "Crazy For You" opened in Sydney in November 1996, ran for approximately 31 weeks, and closed earlier than the proposed 52 week season, thereby causing a substantial loss. The main factor in the lack of success was said to be that the box office came in under budget. The production was budgeted for an 80% occupancy rate, but achieved only 66%. The running costs exceed budgeted costs for a variety of reasons. "Crazy For You" subsequently opened in Melbourne, where a new partner was introduced, and the production made a profit of about $145,000. It then moved to Queensland, where it incurred a loss. 170 The ATO ruling on the claim for deductibility was first, that the funds contributed went to the provision of capital and created an asset for the production, and that the participants were not engaged in carrying on a business, so that claims under subsection 51(1) of the Income Tax Assessment Act 1936 (Cth) ("Income Tax Assessment Act") would be disallowed. Second, it concluded that the interest the participants paid on loans to finance their investment was not incurred in gaining or producing assessable income, and was capital in nature. Third, it ruled that any income derived from the investment was a return of capital to the extent it was less than, or equal to, the initial contribution. Fourth, Part IV of the Income Tax Assessment Act applied, because the investment was carried out with a dominant purpose of obtaining a tax benefit. The ATO also considered that it was appropriate to impose a culpability penalty, and that the Commissioner should not remit interest due. 171 There is no suggestion in the ATO Report that the production failed because of a lack of initial capital to cover the twelve week period specified in the budget contained in the Prospectus. In my view, the statements of fact that the ATO Report contains concerning the implementation of the Crazy For You Fund, cannot be given any weight, because the extent of the material before the ATO is not known. On its face, the assertions in the ATO Report are formed by way of inferences from some of the relevant documents. There is no indication that any persons or officers were examined in the course of the analysis by the ATO. Nor is there any indication as to the totality of the material examined. 172 I now turn to consider, whether the evidence establishes that the participants' funds were misapplied to purchase term bonds from OCBC. As noted above, the applicant's case is premised upon this central factual issue. use of PARTICIPANTS' funds 173 The applicant's case is that approximately 68% of all monies advanced by OCBC to Capital Australasia, and lent by Capital Australasia to the participants, was (or was intended to be) used by the investors' representative and the management company to pay for the term bonds issued by OCBC, and not for the purpose of the production. It is for the applicant to satisfy the Court that the participants' funds were misused in this way. 174 The applicant contends that the concurrent "round-robin" of cheques on the settlement days reveals that there was simply a circular flow around the table of the same funds that came from OCBC, with the end result being that about two-thirds of the advance went back immediately to OCBC and was not used for the production of "Crazy for You" and that if participants had known of this application or proposed application of funds they would not have invested and suffered loss. 175 The applicant tendered funds flowcharts in evidence in an attempt to demonstrate the claimed circular movement of funds. It is said that the effect of the evidence is that the funds advanced by Capital can be traced through bank accounts to the payment by Capital Australasia to Gordon Frost to buy the term bonds, and that irresistible inferences to this effect are to be garnered from the documents in evidence. It is alternatively said that, but for the borrowed funds of the investors, Gordon Frost would not have been able to pay for the term bonds. This alternative is a different case from that opened for the applicant, and is not pleaded. It is to the effect that if the Martin Place branch of ANZ had made a temporary loan it was clear as a matter of inference that it only did so because it was promised immediate repayment at or after each settlement. 176 The applicant relies on Mr Frost's evidence that Gordon Frost did not have any assets or money to contribute to the production. In relation to the evidence of Mr van Nieuwkuyk, the applicant says that it may be that Mr Emanuel, who did not give evidence, led Mr van Nieuwkuyk to believe that Phillip Emanuel Productions would arrange for the funds to be obtained to pay for the term bonds, but that this was incorrect, and that no funds were or could have been obtained from Phillip Emanuel Productions or the Trust. The only funds available were those originating from OCBC. 177 It is said to be clear from Phillip Emanuel Productions' bank statements that Phillip Emanuel did not have sufficient funds to make any payment. Therefore, it is said to follow that the funds could not have come from that account, and that the Court should infer that no funds were available to Phillip Emanuel Productions to finance the purchase of the term bonds. The applicant refers to the fact that $5.5 million was raised, and that the entire sum was paid to Mr Coote during the five settlements. It points out that Mr Coote paid the entire sum to Phillip Emanuel International on the five settlements and that most of this came from funds borrowed from Capital Australasia. It is said that Phillip Emanuel Productions used one million dollars of the $5.5 million to make the payment required of it by the Co-Producers Equity Agreement and that therefore, there was in the order of $4.5 million left over. Two hypothetical questions are then posed by the applicant. The first is: where did the $4.5 million go if it was not used to pay for the term bonds? The second is: why would Phillip Emanuel Productions or Phillip Emanuel International raise $5.5 million and then use $3.235 million of its own money to pay for term bonds that were to operate for a six year period in relation to a high risk venture entertainment production? It is submitted in relation to the latter questions that such conduct does not make commercial sense. 178 Reliance is placed by the applicant on the ATO Report, but as indicated in these reasons, I do not think that report can be relied on to substantiate the applicant's case in relation to the movement of funds, having regard to the fact that it is apparent that the ATO did not have access to all the oral and documentary material now before me, and the report was not admitted as evidence that the assertions in it are correct. It was admitted as evidence of the reasons for disallowance and as part of the background history. 179 The applicant says that the bank statements for Phillip Emanuel International show that the only deposit made in its account between 25 June and 18 July 1996 was a sum of $677,000, and that, by 18 July 1996, that sum was reduced to $11,000. It is said to be clear from the cash settlement on 5 July 1996, that $644,134 was paid over to Gordon Frost on that day. Reference is made to the payment, on 19 July 1996, of $2.608 million into the Phillip Emanuel International account, which corresponds with a withdrawal from the trust account of Mr Coote. On the same date, a cheque in the sum of $2.608 million was debited to the Phillip Emanuel International account, and a deposit was credited to the account of Gordon Frost. The inference is said to be that, contrary to what Mr Emanuel was said to have told Mr van Nieuwkuyk about the deposit of funds, the sum deposited into the Gordon Frost account was derived from the sum that Phillip Emanuel International obtained at the settlement on 19 July 1996 from Mr Coote. It is submitted that similar inferences should be made in respect of other payments made on 6 and 21 August 1996. It is said that the Court should infer that but for the payment received by Phillip Emanuel International from Mr Coote on 19 July, 6 August and 21 August 1996, the payments would not have been made to Gordon Frost. 180 The applicant refers to the fact that evidence was not called from Mr Emanuel to support the conclusion that he obtained funds from a source independently of Mr Coote. There was evidence during the hearing that Mr Emanuel was not within the jurisdiction, and neither he nor any of his companies appeared during the course of the hearing to defend the position of the seventh respondent. However, the onus is squarely on the applicant to establish the alleged flow of funds as an essential part of his case. It does not assist his case to rely on the fact that Mr Emanuel was not called by the respondents. It is also claimed that there was no evidence forthcoming from the banks that issued the cheques and warrants, nor from Mr Olivestone of Pacvest, the sponsoring broker. It is said that if Mr Emanuel was called in aid of the respondents' case, he may have been able to establish that he obtained funds from a source independently of Mr Coote with which to make the payments for the term bonds. Once again, the onus is not on the respondents to establish this fact. The question is whether the applicant has shown, on the evidence adduced, that a positive inference can be drawn that the participants' funds were misapplied in the manner alleged. It is not necessary in this case for the respondents to establish where the funds for the purchase of the term bonds in fact came from: cf Jones v Dunkel (1959) 101 CLR 298 at 304 and 308. At 304 Dixon CJ said: " … the plaintiff must fail unless he offers evidence supporting some positive inference implying negligence which arises as an affirmative conclusion from the circumstances proved in evidence and one which they establish to the reasonable satisfaction of a judicial mind." 181 The applicant's suggestion that the respondents failed to call the nominated witnesses in these proceedings does not advance the position of the applicant. The matter must be decided on the evidence as it now stands before me. 182 Similarly, it is not necessary, in my view, for the respondents to provide answers to the hypothetical questions raised by the applicant in relation to the application of the funds, or the reasons why the producers, or any other person, would pay for the term bonds issued by OCBC. These questions distract attention from the real question, which is whether the applicant has inferentially or otherwise established that the participants' funds were misapplied. 183 The central consideration, in considering the applicant's case, is that the term bonds were purchased with a bank cheque or bank warrant. In the normal course this would indicate, on the evidence before me, that cleared funds of someone other than the participants were used to purchase the bonds, since it is evident that cleared funds were necessary to purchase the bank cheque or warrant prior to the three settlements in question. The evidence now before me by both parties indicates that such funds were in place prior to settlement. Because the indication is that there were cleared funds prior to settlement, the suggestion of a "round robin" of cheques is of no assistance. 184 The respondents' case derives strong support from the evidence of Mr van Nieuwkuyk of Gordon Frost, who was the witness most directly involved in the transaction. He was called by the applicant and his evidence was clear, and confirmed several times, that funds had been deposited into Gordon Frost's bank account prior to each settlement. He agreed that proceeds of any bank warrants or bank cheque used at settlement were paid from funds deposited and cleared prior to the settlement, and said that, as far as he was aware, there was never any question of investors' funds being used to purchase the term bonds at settlement. He agreed that Gordon Frost's bank manager would not have allowed bank warrants to have been issued without funds having been provided previously. Mr van Nieuwkuyk confirmed that his understanding was that the investors' funds were to be used either for the running costs, or for a combination of the pre-production costs and running costs of the production. In re-examination, Mr van Nieuwkuyk agreed that his recollection was that, before attending settlements at ANZ's Martin Place branch, he had spoken with Gordon Frost's bank manager and made inquiries about the state of the company's account. As far as he recalls, he was told that everything was in order prior to effecting the settlements. 185 In addition to the above evidence, Gordon Frost issued five receipts to Phillip Emanuel Productions between 5 July and 21 August 1996 for funds received at settlement, which stated that the money was for the pre-production and/or running costs of "Crazy For You". The evidence is that the terms of these receipts reflected the understanding of both Mr Frost and Mr van Nieuwkuyk. 186 In answer to the reliance by the respondents on the funds for purchase of the term bonds having been provided by bank cheque or bank warrants, and therefore requiring cleared funds, the applicant submitted that it should be inferred that some arrangements were in place whereby the bank cheques or warrants were provided pursuant to some form of a short term credit facility. Such an arrangement was said to be in the nature of a daylight or overnight credit facility or accommodation, based on an assurance to the banks that the funding would be provided from monies of the investors in the course of the settlements. The difficulty with making this inference is that there is simply no evidence to support the submission. It is speculation rather than inference. Nowhere in the evidence is there any material which goes to the existence or terms of any such short term credit facility, or as to the parties, times or circumstances in which such arrangements were made. I am not prepared to draw this inference. 187 Nor does the evidence of Ms Wright, an accountant, in so far as it refers to the flow of funds, advance the applicant's case. Ms Wright assumed that the participants' money was used to purchase term bonds and this was not a matter on which she was able to give any useful evidence. Her exercise was a purely arithmetic one. Moreover, she was asked to assume, wrongly, that monies were paid by Mr Coote to Phillip Emanuel Productions rather than to Phillip Emanuel International, and from Phillip Emanuel Productions to Capital rather than Gordon Frost. Moreover, she did not have access to documents concerning the involvement of Gordon Frost. 188 The evidence of the bank statements of Phillip Emanuel Productions and the position of Gordon Frost do not provide any sufficient basis for an inference that Mr Emanuel could or did not procure sufficient funding from resources available to them to finance the provision of term bonds as contemplated by the documents. 189 In final address, the applicant's submissions departed from the pleadings, in relation to the argument that but for the borrowed funds Gordon Frost would not have been able to pay for the term bonds. This is in substance a new case to that raised on the pleadings, and I think that to allow it could lead to unfairness to the respondents. In any event, I am not persuaded that the inference sought to be raised can be derived from the circumstances against any of the respondents. The alternative case sought to have been made is speculative and depends on inferences said to be available from the bank statements. These inferences conflict with the evidence of Messrs Frost and van Nieuwkuyk, which support the view that there were cleared funds prior to settlement. In addition, the evidence of Mr Ho, which was to the effect that there was nothing untoward or unusual at any of the settlements, lends further support towards negating the inferences sought to be advanced by the applicant. 190 Accordingly, I am not prepared to draw the inferences sought to be drawn by the applicant as to the use of the participants' funds on any basis advanced by the applicant. 191 For the above reasons, it is my conclusion that the applicant has failed to make out its case as to the misapplication, diversion, or use of the participants' funds. 192 The consequence of this conclusion is that the applicant's case against all respondents must fail, because it depends on the primary allegation that there was a misapplication of the participants' funds away from the production to the purchase of the term bonds. ACCESSORIAL AND RECIPIENT LIABILITY - OCBC 193 The applicant's submission against OCBC is that the proper test for accessorial or recipient liability is whether a reasonable and honest person should have been aware that the conduct in question was dishonest. The applicant submits that, in the present case, the question can be formulated as being whether a reasonable and honest banker in the position of OCBC should have been aware that the conduct in question would have been regarded by reasonable and honest bankers as dishonest. 194 The applicant does not submit that it is sufficient for the principle for accessorial or recipient liability to be formulated in terms of whether a reasonable person would be put on inquiry of a breach of trust or fiduciary duty. The applicant relies on the statement of principle in Consul Development Pty Ltd v D.P.C Estates Pty Limited (1975) 132 CLR 373 ("Consul Development") at 412 in the judgment of Stephen J, and the summary of the authorities made by Hansen J in Koorootang Nominees Pty Ltd v ANZ Banking Group [1998] 3 VR 16, to submit that it is not necessary for the breach by the fiduciary to have been dishonest. The applicant submits that it is not necessary to show that the recipient of property knew of any breach of fiduciary obligation, or was wilfully blind to the obvious, or wilfully and recklessly failed to make inquiries that a honest and reasonable person would make. 195 OCBC contends that the proper application of the principle in Barnes v Addy [1874] 9 Ch App 244 to the circumstances of the present case, in the light of the authorities, is not whether an honest banker would have been put on inquiry but rather whether it has been established that OCBC had knowledge of facts that would tell of impropriety, breach of trust or breach of duty, to a reasonable person: see Consul Development at 398. In the alternative, it submits that the test can be formulated as whether a defendant had been dishonest in the sense of having knowledge that what was being done would be regarded as dishonest by honest people. OCBC's submission is that it is not sufficient to show that the defendant had knowledge of circumstances which would have put a reasonable person on inquiry of a breach of trust or fiduciary duty, and that the applicant has adopted the wrong test for both accessorial and recipient liability. In the present case, the determination of the exact formulation of the principle is not critical, because I consider that even on the criteria contended for by the applicant, a sufficient case has not been made out. 196 The applicant refers to eleven circumstances which are said to have been sufficient to make an honest banker in the position of OCBC aware of the source of funds paid to it for the purpose of purchasing the term bonds. Some of the matters raised were not pleaded and I have indicated where this is the case. Nevertheless, I have considered all matters raised by the applicant and the argument based on them, and have made a determination with regard to them as set out below. 197 The first circumstance is that the loans that OCBC took on assignment were transaction-specific, and incorporated representations in the Prospectus, and that OCBC's solicitors settled the terms of the loan agreements. This particular was not pleaded, and was not put to OCBC's witnesses as a reason to be out on inquiry. In view of this, I do not think that it would be fair to permit this matter to be raised at this late stage, because it would cause prejudice to OCBC, who could have conducted its case otherwise if given proper notice of this submission. Notwithstanding this, I do not consider that this circumstance on its own provides any support for holding that OCBC was or should have been aware of any breach of trust or fiduciary duty. 198 The second circumstance is that OCBC's officers and solicitors had read and considered the Prospectus, which did not contain anything that could have justified a view that the participants' funds would be used to purchase the securities. The fact that OCBC's officers and solicitors considered the Prospectus is in itself neutral, and would not indicate any irregularity. The Prospectus in fact confirmed that Phillip Emanuel Productions, the management company, was to provide the security. This does not assist the applicant. 199 The third circumstance is that OCBC knew the security would take the form of its own term bonds. Again, this is a newly raised matter. I do not think it can be raised at this late stage. Nevertheless, it does not advance the applicant's case and is not sufficient, either on its own or taken cumulatively, such as to call for investigation by an honest banker or to make such a banker aware of any irregularity. 200 The fourth circumstance is that OCBC is said to have known that the amount to be realised from investors' funds matched the budgeted figures for the production in the Prospectus. This is true, but it does not provide a basis which supports the applicant. It simply confirms the agreed fact that the participants' funds were to be applied in accordance with the budget in the Prospectus. 201 The fifth circumstance is that OCBC is said to have known that, at the settlement, there would be a passing around of cheques, or a "round robin", which would start with a payment by Capital Australasia t Mr Coote, and conclude with a substantial payment for the bonds by Capital Australasia to OCBC. This was not pleaded, and it was not put to OCBC's witnesses as a reason for OCBC to be put on inquiry as to the source of funds paid to OCBC for the purchase of the term bonds. There was no cross-examination by the applicant of Mr Ho, who was OCBC's representative on the settlements, as to his understanding. The fact that the security was purchased at the same settlement where the participants' contribution monies were paid is not sufficient to indicate a basis for inquiry. No "round-robin" has been established. It is clear from the Prospectus that Phillip Emanuel Productions was obliged to procure the security. There was no requirement that it should be procured earlier than necessary. Even if it were to be assumed (contrary to my finding) that there was any breach of duty on the part of Mr Coote, it had not yet occurred, and there was nothing to suggest to OCBC that there was such a possibility. 202 The sixth circumstance is that this was a highly unusual transaction, which afforded OCBC a guarantee of loan principal repayment (by way of its own term bonds), such that the bank was put on notice that there was a real risk of participants' funds being used to make the substantial payment for the term bonds. This was not pleaded, or put to OCBC's witnesses, and should not be allowed at this late stage. OCBC could have led evidence to the effect that this was not highly unusual, if it were raised squarely as a specific circumstance placing OCBC on notice. In my view, there is nothing inherently unusual about a bank seeking proper security for an advance of $3.25 million. There was no evidence that it was not an usual transaction at the relevant time. 203 The seventh circumstance is said to be that OCBC knew the transactions were driven by income tax considerations by the investors. Again, this is a neutral consideration. It was not previously raised. The evidence indicates that there are many tax driven entertainment schemes each year, so that nothing unusual arises from this consideration. It is a new allegation, and there could have been cross-examination of witnesses on this matter had it been raised at the appropriate time. It should therefore not be allowed. In any event, there is no substance in it. 204 The eighth circumstance is said to be that OCBC could not have reasonably believed that the producers of the show would have put up the amounts to fund the capital repayment to the investors over a six year period from their own funds if they had immediate access to an obvious source for the payment of those substantial amounts. This is a new allegation. No evidence was led to support it. It was not put to witnesses. It should not be allowed at this late stage. It is in the nature of conjecture. The evidence suggests that several of the involved parties, including Ms Enconniere, Messrs Spitzer and Ahearn, Gadens Ridgeway and Mr Tolhurst, were of the view that the producers could have put up such funds. 205 The ninth circumstance is simply that an honest person in the position of OCBC would have been put on inquiry as to where the funds were coming from. This conclusion is mere assertion and depends on proof of other allegations raised. 206 The tenth circumstance is that an honest person in the position of OCBC would have thought the whole arrangement was too good to be true. This again is an assertion, not a submission. The evidence does not support this suggestion. 207 The eleventh circumstance is that OCBC was taking assignments of loans in respect of which the repayment of principal was secured, and its only risk and expense was with regard to interest payments by the investors on the loans. This was not pleaded. However, there was evidence from OCBC that the risk of non-payment of interest could still be significant, notwithstanding the credit checks that had been carried out on investors. It was not specifically put to OCBC witnesses that this was a reason for being put on notice of circumstances which could give rise to liability for accessorial or recipient liability. It does not point to or tell of dishonesty. 208 Finally, the applicant says that the whole arrangement on its face was too good to be true, which is essentially a repetition of the previous submission. No evidence was called to support this submission. If it had been, one could expect evidence to have been called for by the respondents. None of the solicitors, advisers or regulatory authorities appear to have taken this view. I am not persuaded that this is the case. There was risk as to interest payments. It is also asserted that in these circumstances it was "easy" for OCBC to adopt the view that there would be no settlement if the funds were not provided for the securities. In my view, there is nothing unusual or uncommercial in taking the position that if funds are not duly provided on settlement, the settlement will not proceed. There is no obligation on a financier to make inquiries into whether moneys committed will be forthcoming, or into the resources of those providing them. As to the latter point, OCBC had no reason to doubt the reputation, integrity or substance of Gordon Frost, the Phillip Emanuel interests or the Trust. 209 For the above reasons, it is my view that none of the circumstances raised by the applicant, either alone or taken cumulatively, make good its submission that OCBC is liable either as recipient of funds or an accessory, to any misapplication of funds. In many instances, the circumstances relied on were simply not raised in the pleadings or particulars, and there would be substantial unfairness to the respondents if they were now permitted to be raised. Nevertheless, even accepting the principles as to liability advanced by the applicant, and considering the specific matters raised, no case has been made out against OCBC on this basis. Accessorial and recipient liability - capital and mr park 210 The applicant also seeks to make a case of recipient and/or accessorial liability as against Capital and Mr Park. 211 The applicant submits that the Court should find as a fact that Mr Park was aware that the participants' funds were to be used to purchase the term bonds. As Counsel for Capital and Mr Park has stated, the submissions on these matters departed from the pleadings on which the case was fought. The case was not run as a circumstantial case. It was brought as a direct evidence case and the evidence simply does not support the allegations made. 212 The applicant concedes that its case against Capital and Mr Park is circumstantial, but says that it should be permitted to rely on it because it is based on inferences against Mr Park that are referable to the evidence adduced in order to establish that Mr Park was aware that participants' funds were to be used to purchase the term bonds. Initially, the case had been formulated on the basis that Mr Park "established" the Crazy For You Fund and was responsible for the creation of its constituent documents. The applicant abandoned this position on 1 May 2003, and sought to make out a case on the basis of the circumstances raised. 213 Counsel for Mr Park and Capital submits that the applicant should not be permitted to rely on the circumstantial case now sought to be made. In my view, there is substance in this submission. I think it would be unjust to now allow the applicant to make a circumstantial case when it did not raise it earlier, it was not pleaded, and the matter was not conducted on this basis. I am assured by Counsel for Mr Park and Capital that because the case was not pleaded on the circumstantial basis now argued, matters were not raised in the course of cross-examination, nor consideration given to the need for additional evidence, to meet the suggestion that the transaction was an extraordinary one which would have placed Mr Park and Capital on notice. I accept this argument. Nevertheless, I do not consider that there is any substance in the circumstantial case sought to be made. 214 The applicant says that the following matters give rise to sufficient knowledge or involvement on the part of Mr Park and/or Capital to attract accessorial or recipient liability. 215 First, it is said that 68% of the monies borrowed by participants from Capital Australasia was used to purchase the term bonds. This is conjecture. It has not been established. It is a central contention and for this reason the case against all respondents fails as decided earlier. 216 Second, it is said that Mr Park played an important role in arranging for the provision of the funds to investors. It is said that he arranged for most of the loan funds to be provided by OCBC and that this was done by way of simultaneous settlements at which OCBC took assignments of loans. Mr Park participated in the preparation of the Crazy For You Fund transactions and loan documentation. He met with Mr Olivestone, the sponsoring broker, as early as February 1996, and had a meeting with Mr Emanuel in April 1996. However, these circumstances do not establish, by reasonable inference or otherwise, any awareness by Mr Park of actual or apprehended misapplication of funds. Indeed, the suggested inferences do not follow from these circumstances on the balance of probability. They are matters of speculation and surmise rather than inference. 217 Third, it is said that Mr Park did not call Mr Olivestone or Mr Emanuel to give evidence. In my view, there was no obligation on Mr Park or Capital to call these witnesses. Mr Emanuel apparently could not be located, and no basis has been laid for any reasonable inference which could be strengthened by the calling of either Mr Olivestone or Mr Emanuel. In addition, it is for the applicant to prove its case on the misapplication of funds and it chose not to call these witnesses to support its case. 218 Fourth, it is then said that Mr Park was aware that the Prospectus did not disclose that 68% of the participants' funds were to be used to purchase the term bonds. This presupposes, contrary to my finding, that participants' funds were used to purchase the term bonds. 219 Fifth, it is said that Mr Park was aware that Phillip Emanuel Productions was not in a financial position to pay its co-producers the sum of $800,000. In my view, this had not been established. The suggestion that such a conclusion could be reached is speculative. The position is the same in relation to the financial position of the Trust. This raises a question as to whether, in the circumstances, it was incumbent on Mr Park and Capital to make inquiries as to these matters. In my view, it was not. 220 Sixth, it is said that Gordon Frost/the Trust and Mr Emanuel did not have the funds required to purchase the term bonds. This has not been established on the balance of probabilities. It is suggested that this could have been readily ascertained if a simple inquiry had been made. This does not follow. Mr Park is said to have made no inquiries to ascertain how the loans had been marketed, but he was not required to do so. This was not his concern, and the mere fact that he considered he had no cause for concern does not support an argument that he knew, or ought to have known, that there was a breach of fiduciary trust. The Crazy for You Fund documents do not contemplate such a possibility. 221 I accept Mr Park's evidence that he thought the producers were reputable and substantial entities with financial substance, and I do not consider that an inference should be drawn that this view was not reasonably open to him. 222 This position is not altered by the fact that the Crazy For You Fund was tax driven. The fact that Mr Park did not make any inquiries in relation to the letters from OCBC's solicitors of 17 June and 18 July 1996 does not carry the matter any further. In my view, there was no obligation on Mr Park to do anything other than refer the matter to the appropriate person. He did this by referring the matter to Mr Olivestone. There is nothing unusual in Mr Park's decision to pass Cornwall Stodart's queries into Mr Olivestone. His reason for doing so was that Mr Olivestone was considered to be the appropriate person, and in my view no adverse inference can be drawn in support of this reason. 223 Seventh, it is suggested that something turns on the fact that it was not put to Mr Frost, who was called by the applicant, that Mr Frost told Mr Emanuel that a company in the Gordon Frost group would be paying for the security, or that Gordon Frost had sufficient funds to pay for the security. This possible question, in my view, does not carry the matter any further. It is also suggested that it is unusual that Mr Park did not maintain contemporaneous written records of his conversations and it is suggested that this is probably because he wanted to minimise the opportunity for scrutiny. This is a big leap. This inference does not arise from the fact that written notes were not maintained. 224 Eighth, there is some criticism of the fact that the affidavit of Mr Park was not sworn until 10 February 2003. It is suggested that this impacts adversely on his credit and that this course was adopted for tactical reasons at a time when Mr Park knew that Mr Emanuel or Mr Olivestone would not be called. This does not follow from the fact that his affidavit was sworn late, and I do not accept this criticism as having any weight. 225 Ninth, it is claimed that it is probable from the fact that Mr Park was involved in arranging the execution of some of the Crazy For You Fund documents, and had considered the letters from Cornwall Stodart of 17 June and 18 July 1996, that there must have been some further communication between Mr Park and Mr Emanuel. The inference does not follow. It is mere speculation that Mr Park may have had dealings with Mr Emanuel directly, in relation to the pricing of the payment for the term bonds for the three settlements, and it does not follow that Mr Emanuel told Mr Park that the investors' money was to be used in a manner contrary to that required by the documentation. 226 Tenth, it is said that Park deliberately refrained from making any inquiries because the probable result would have been that there were no funds available and he would have been obliged to disclose that information. Again, this does not follow and is simply an assertion. 227 Eleventh, Mr Park is criticized for not retaining solicitors other than OCBC's firm Cornwall Stodart. In my view, this is not of any significance. The inference suggested to flow from this that it is probable that Mr Park was aware that other solicitors would recommend inquiries into the co-producers capacity to pay. This does not follow. 228 Twelfth, it is suggested that because of the high risk nature of the business of theatrical productions, Mr Park was aware that the producers would not risk their own capital. Again, this is speculative. 229 Thirteenth, the fact that Capital Australasia earned a substantial amount from the Crazy For You Fund is said to support the conclusion that Mr Park and Capital were aware or should have become aware, of any misapplication of funds, or that they were involved in such conduct. This does not follow. It is a neutral consideration. 230 Fourteenth, it is said to be important that Mr Park did not notify Mr Emanuel of the cost of each set of term bonds until 24 hours before each settlement. The suggested inference is that it was probable that Mr Park was aware that the co-producers would not have enough time to make arrangements to provide the cleared funds and would be likely to use the funds advanced by Capital Australasia. This is speculation and I do not draw this inference. It was necessary for the cost to be calculated by reference to prevailing rates on the day of settlement. 231 Fifteenth, it is said that it is probable, by reason of his experience, that Mr Park was well aware that the participants' funds were being used. It is also alleged that Mr Park, as an experienced lender, would have realised that it made no commercial sense for the producers to go to the trouble of raising $5.5 million and then be faced with the obligation of using $3.25 million of their own money before the production started to pay for term bonds. This matter was not pleaded and nor was it particularised in the pleadings. If it had been raised at an appropriate time, evidence may have been brought from experienced lenders to deal with this question. Leave should not be granted to raise this matter at such a late stage and this submission should not be entertained. In any event, I do not accept that it was necessarily uncommercial, because the evidence adduced leaves open substantial gaps as to the overall commercial position said to support this argument, such as the ability of Mr Emanuel to procure finance to pay for the term bonds. This assumes the conclusion sought to be established. 232 None of these matters raised by the applicant, taken either individually or cumulatively, lend support to the applicant's case. On their face they lack any real substance. 233 Another matter relied on by the applicant in relation to Mr Park and Capital is that Phillip Emanuel Productions was party to an agreement with the Trust and Gordon Frost, pursuant to which Phillip Emanuel Productions was obliged to invest only one million dollars in the production and not $5.5 million. This is incorrect. Under the Co-Producers Equity Agreement, Phillip Emanuel Productions, agreed to contribute one million dollars towards capitalisation of pre-production costs, and to use reasonable endeavours to procure contribution for the balance of the capitalisation. Pursuant to clause 10.1 of the Production Management Agreement, Phillip Emanuel Productions and Phillip Emanuel International were obliged to expend the investors' funds to meet pre-production and running expenses for the stage presentation. The obligation is not restricted to pre-production expenses. Under clause 10.2 of the Production Management Agreement, Phillip Emanuel International is required to provide Phillip Emanuel Productions, with the funds necessary to enable it to fulfil its functions under the Production Services Agreement, the Co-Producers Agreement and the Co-Producers Equity Agreement. These include the running costs of the production. 234 Finally, it is said that Mr Park was an unconvincing witness, and that he should be disbelieved regarding his lack of knowledge of the use of the participants' funds. I do not agree. I accept the evidence of Mr Park, and found him a reliable witness. I did not find that he was shaken on any significant material point. I am satisfied that Mr Park and Capital had no awareness of, or basis on which to suspect, misapplication of funds as alleged, or otherwise. Mr Park and Capital are not subject to any accessorial or recipient liability, even on the legal principles contended for by the applicant. SETTING ASIDE THE LOAN AGREEMENTS - OCBC 235 The applicant claims that by reason of fraud on behalf of Capital in relation to the execution of the Offers to Borrow, each of the loan agreements were void from the inception as against each of the participants, and are liable to be set aside. It is said that OCBC's interest as assignee of the Offers to Borrow is subject to the claims of the participants, who suffered loss as a consequence of the fraud. 236 This claim against OCBC fails because fraud has not been established against Mr Park or Capital. I am not satisfied that Mr Park or Capital intended, or ought to have been aware, that moneys raised under the Offers to Borrow were to be used to purchase the term bonds. There was no intention on the part of Mr Park and Capital for the participants' funds to be used for any purpose than the purposes of the production. 237 Moreover, I do not consider that the rescission of Dr Patrick's loan agreement can or should now be ordered. Repayments of the principal have now been made, and the loan agreement has been affirmed by the settlement with the ATO with knowledge of Dr Patrick's claimed rights. A tax deduction has been received for interest payments in respect of the loan. In my view, therefore, there has been a decision by Dr Patrick to affirm the loan agreements: see Commonwealth v Verwayen (1991) 170 CLR 394 at 421; Verschures Creameries Limited v Hull and Netherlands Steamship Company Limited [1921] 2 KB 608 at 611-612 where Scrutton LJ said: "A plaintiff is not permitted to 'approbate and reprobate'. The phrase is apparently borrowed from the Scotch law, where it is used to express the principle embodied in our doctrine of election – namely, that no party can accept and reject the same instrument: … The doctrine of election is not however confined to instruments. A person cannot say at one time that a transaction is valid and thereby obtain some advantage, to which he could only be entitled on the footing that is valid, and then turn around and say it is void for the purpose of securing some other advantage. That is to approbate and reprobate the transaction." 238 In my view, these observations apply to the present case. 239 In addition, rescission is not an appropriate remedy because there has been no offer of restitution by Dr Patrick. In particular, he has not, as a condition of his claim for relief, offered to relinquish any entitlement to the proceeds of the term bond, or pay an amount equal to the interest benefit of the loan as a condition: see Maguire v Makaronis (1997) 188 CLR 449 at 474-7 and 496-500. 240 For these reasons, the claim that the loan agreements should be set aside as against OCBC is not made out. misleading and deceptive conduct by CAPITAL AND MR park 241 The allegation, as finally pleaded, is that each of the Capital companies represented to the participants that Capital would advance moneys pursuant to the Offer to Borrow, that these monies would be used for the purpose of funding the running costs of the production, and that prior to execution of the Offers to Borrow by the participants, the Capital companies knew the terms of the Crazy For You Fund documents, including the representations contained in the Prospectus. It is alleged they knew that the Crazy For You Fund documents were inconsistent with the Prospectus representations, because the Prospectus did not disclose that the Offers to Borrow were intended to be assigned, and the documents did not disclose that the moneys were intended to be used for the purchase of term bonds. 242 For reasons given above I do not accept that Mr Park had any knowledge, or intention, or any awareness, in relation to any alleged diversion of funds from the purpose stated in the Prospectus. Moreover, I do not agree that there were any misleading or deceptive representations in the Crazy for You Fund documents. 243 It is alleged that Capital was aware that Phillip Emanuel Productions was obliged to invest only one million dollars in the production; that that obligation was not disclosed to the participants, and that Capital and Mr Park knew this because Mr Park had a copy of the Prospectus, which refers to the Co-Producers Equity Agreement and the obligations of Phillip Emanuel. Productions. These allegations arise because it is said that under the Co-Producers Equity Agreement, Phillip Emanuel Productions was only obliged to contribute one million dollars to pre-production costs. However, it is an incorrect interpretation of the arrangements to allege that Phillip Emanuel Productions was only obliged to invest one million dollars. A proper reading of the Co-Producers Equity Agreement shows that the moneys raised were to be used for running costs as well as pre-production expenses. There is no evidence, in my view, to support the suggestion that the representation as to the use of the participants' funds was untrue, and this claim for misleading and deceptive conduct must therefore fail. In my view, there were reasonable grounds on the basis of which Mr Park and Capital were entitled to rely to form its opinion. I find that neither Mr Park, nor any member of the Capital group, was aware or ought to have been aware that the monies advanced might be used to purchase term bonds. 244 The alternative claim of aiding, abetting or procuring a contravention of the Trade Practices Act 1974 (Cth),the Fair Trading Act 1999 (Vic), or the Fair Trading Act 1987 (NSW), or of knowingly inducing or being involved in such contraventions, has not been made out. constructive trust – CAPITAL AND MR PARK 245 The applicant claims that by reason of the conduct of Mr Park and Capital in arranging for preparation of the Crazy For You Fund documents, and entering into loan agreements with the notice, intention, and knowledge of the limited obligations of the management company, any payments made by the participants under the Offers to Borrow are held on constructive trust for each of the participants, and the first two respondents are liable to reimburse each of the participants. 246 This claim fails for the same reason as the claim in respect of accessory or recipient liability. breaches of THE DEED OF investment By mr coote 247 The applicant alleges that in breach of the Deed of Investment, Mr Coote did not use his best endeavours to comply with s 51(1) of the Income Tax Assessment Act to allow the participants to qualify for maximum taxation deductions, and that he made an investment of monies which resulted in prejudicing the participants from qualifying for a tax deduction. It is said that Phillip Emanuel Productions expended monies for purposes other than the production, by allowing some of the monies to be applied to the purchase of term bonds, which prejudiced the participants' qualification for the maximum tax deductions. In addition, it is said that Mr Coote did not exercise due diligence in watching the interests of the participants. Specifically, it is said that he permitted or took part in the issue of the Prospectus which he ought to have known would be relied on. It is said that Mr Coote did not ensure the information in the Prospectus was accurate and not misleading; that he ought to have known that the payments had the effect of repaying OCBC 68% of the amounts borrowed, so that Capital Australasia did not lend more than 32% of the loan money to the participants for use in the production, and that Mr Coote knew that the making of these payments would prevent the participants obtaining a tax deduction. There is then a wrap-up allegation that Mr Coote did not take all steps to ensure compliance with the Investment Deed. 248 For reasons given earlier, there is no substance in any allegation that Mr Coote knew or ought to have known that the true extent of the investment obligation of Phillip Emanuel Productions was limited to one million dollars. 249 In relation to the claims based on the misapplication of the participants' funds, for reasons given previously, this central fact has not been made good and therefore the claim must fail. 250 The claims for tax deductions by participants were disallowed by the ATO for four principal reasons, as indicated earlier in this judgment. The ATO formed the view that the dominant purpose of the participants in making the investment must have been to obtain a tax deduction. This view enlivened the operation of Part IVA of the Income Tax Assessment Act. I am not persuaded on the evidence that it was ever Mr Coote's intention, or that he was aware in any way of any intention that the term bonds should be purchased from the participants' funds. I accept Mr Coote's evidence, and I accept that he did not have reason to believe that any party had breached any agreement. The circumstances were not such as to put him on inquiry. 251 Having regard to the documents comprising the Crazy For You Fund, Mr Coote was, in my view, entitled to proceed, in the absence of any indication to the contrary, on the basis that funds would be spent on pre-production expenses and on running costs for the production in compliance with the documentation. 252 The other claims against Mr Coote depend on his knowledge that participants' funds would be diverted and that the assignments to OCBC had the effect of repaying OCBC 68% of the amount borrowed. These matters have not been made out. 253 The applicant also submits that for Mr Coote to discharge many of his obligations under the Deed of Investment, he needed to act in a way which was independent of the interests of the producers, and to make active inquiries of them as to the use to which they intended to put the participants' funds that he handed to Phillip Emanuel International. It is said that he should have inquired as to the source of each payment for the term bonds and considered whether the funds might not be available to those parties, having regard to their resources, which he should have investigated and did not do so. More particularly, it is said that he did nothing other than carry out certain mechanical tasks, for which he received substantial remuneration. The "general law" is invoked to support a proposition that, by failing to make inquiries, including a demand that the appropriate documents, such as bank statements, be produced to him before and after each of the settlements, Mr Coote preferred the interests of the producers to the interests of the investors. Similarly, it is alleged, in the alternative, that by his inaction, Mr Coote preferred his own interests to the interest of the investors. Essentially, the submission is that Mr Coote should have taken steps to satisfy himself that participants' funds would be used solely in connection with the stage production, and not for purchase of term bonds, and this would have involved making an inquiry of Mr Emanuel and his companies. 254 In my view, it was not necessary or appropriate, in the circumstances of this case, for Mr Coote to conduct the investigations suggested. I am not persuaded that they would have achieved any result, so far as approaching Mr Emanuel was concerned. Furthermore, having regard to the reputation of the Emanuel group, the Trust and Gordon Frost, considered in conjunction with the Crazy For You Fund documentation and the obligations imposed on Mr Coote, I do not consider it was incumbent upon him to make inquiries. 255 Much was sought to be made out of the fact that the tasks performed by Mr Coote were "mechanical" and that he appeared uncertain as to what he might have done had he been hypothetically informed that the monies were to be diverted to purchase term bonds. In my view, nothing flows from these matters. Given that I have concluded that the monies were not in fact misapplied, and that in any event, Mr Coote was not in a position where he was aware, or ought to have been aware, of circumstances which required further investigation, and which might have led to discovery of the misapplication of funds, I do not consider that any of the claims of breach of the Deed of Investment have been made out. Fiduciary and trustee duties of mr coote 256 So far as the duties imposed on Mr Coote are concerned, Counsel for Mr Coote pointed out that the money was applied by him as required by the Prospectus, the Deed of Investment and the Production Management Agreement. It was central to the Crazy For You Fund that the participants' money was paid to Phillip Emanuel International as required by the Production Management Agreement, on the provision of security for payment of fees payable under the Production Services Agreement, which ensured return of the participants' capital by way of fees. Mr Coote gave evidence that, on all of the settlements that he attended, the securities were "on the table" and available on his arrival, and that he received them in exchange for money paid to Phillip Emanuel International. In my view, it has not been established that Mr Coote failed to act in the best interests of the participants, or to safeguard the participants' interests in the production, or their claim for a tax deduction. 257 For the above reasons, the causes of action alleged against Mr Coote must fail. CAUSATION AND RELIANCE 258 As noted above, I do not accept Dr Patrick's evidence that he relied in any way on representations that the investors' funds would not be used to purchase the term bonds in order to secure repayment of principal when he invested in the Crazy For You Fund. He agreed in evidence that he had to get some taxation relief for the financial year ended 30 June 1996. The timing of his investment, and the rush with which it was effected, are important to bear in mind when considering his likely reasons for the investment. In my view, the only significant operative reason for Dr Patrick's investment was his keen desire to get the immediate tax benefit. He entered into this scheme with a sense of imperative urgency, without giving the matter any real thought, except with respect to obtaining the tax advantage. He made the final decision to invest after speaking with his accountant and adviser. It is probable, in my view, given the history of his previous tax driven investment, that he would have invested in another scheme of a similar type in great haste if he had not invested in the Crazy For You Fund. It would not have been of any concern to him, in my view, if he were told (contrary to the fact) that the funds were to be used for the purchase of the term bonds. He simply gave the matter no thought. Given his strong belief in the attractiveness of the production and its likely success, it is possible that he believed there would be ample funding from the takings of the production and that it would not therefore be under-funded. 259 Dr Patrick did not show any interest in, or follow up, the progress of the production. He did not check the extent of any pre-sales. He did not attend any meetings of investors or vote or otherwise communicate about and participate in the progress of the production. 260 As pointed out in cross-examination, the possible rate of return on the "investment" was extremely low in commercial terms, and was clearly not the operative incentive for entering into the scheme. A sensitivity analysis of the 149 week season, assuming a 95% audience capacity, would have been barely sufficient to allow Dr Patrick to recover the amount paid in interest. In fact, the audience capacity went down to 40% during the period in Brisbane, and down to 66% in the Sydney season, which lasted for 31 weeks. 261 Dr Patrick admitted that the way that the "the security" was to have been paid for did not cross his mind. He relied on his accountant and adviser. He had a strong belief that the production would do well. His understanding was that the investors' funds would be used until the revenue from sales was sufficient to meet the ongoing expenses. He was referred to the Prospectus and said that he would have been reassured if he had known that the producers were obliged to meet any shortfalls in running costs. He agreed that if he had read the Prospectus, it was very unlikely that he would have been concerned about any under-funding, or at least, that this would have been of minimal concern. 262 The evidence of Dr Patrick was largely based on reconstruction as he had no clear recollection. This is understandable, having regard to the fact that the events in question occurred over five years prior to his giving evidence. He did not answer questions directly. In many instances, his evidence was not given in a careful or responsive manner, and he frequently delayed answering questions in order to reconstruct what would have happened. He conveyed the distinct impression that he adapted his answers in order to be consistent with the case he wished to press on the Court. 263 Dr Patrick omitted to raise a number of matters in his earlier affidavit evidence to those raised in later evidence. His initial extensive sweeping claims of fraud were substantially withdrawn and found no support in the evidence. 264 The evidence indicates that the project did not fail because it was under-funded during the initial period contemplated in the budget to the Prospectus, but rather because it was not a box office success. The tax scheme failed for a number of reasons quite independent of funding considerations and this is made clear in the ATO Report. That the production did not achieve the targeted audience capacity is evident from the occupancy rates referred to earlier. 265 I find that Dr Patrick did not rely on any representations as to the use of the investors' funds in relation to the source of payment for the term bonds, and that any loss which Dr Patrick claims to have suffered was not caused by or did not flow from the conduct of any of the respondents. The production failed for reasons other than under-funding, and the tax deductions were disallowed for reasons independent of the alleged application of the participants' funds to the funding of term bonds. loss and damage 266 It is not necessary for me to make a finding as to whether Dr Patrick suffered any loss as a consequence of the conduct of the respondents, and I do not do so. I am not satisfied that the applicant has made out its case. However, even if any claim succeeded against any of the respondents, I find that Dr Patrick has not suffered any loss as claimed or indeed any loss at all, having regard to the settlement and the allowances made by the ATO and the benefits obtained by Dr Patrick referred to in the evidence. Common questions 267 In response to those questions set out in the Third Amended Application which are common to the claims of the group members, and give rise to 'live" issues between the parties, my answers, indicated in bold, are as follows: "(a) Whether as a matter of fact the Fourth Respondent on behalf of the Capital Group established and implemented the Crazy For You Investment Scheme as alleged in paragraphs 13 and 16 of the Fifth Further Amended Statement of Claim for the purposes alleged in paragraph 14 of the Fifth Further Amended Statement of Claim." No "(b) Whether as a matter of fact the Fifth respondent had the knowledge of the Crazy For You Investment Scheme, and agreed to implement it, as alleged in paragraph 15 of the Fifth further Amended Statement of Claim." No "(c) Whether, as a matter of law and fact, the Offers to Borrow contained the express and implied terms alleged in paragraphs 27, 28, and 28A of the Fifth Further Amended Statement of Claim." Not necessary to answer "(d) Whether, as a matter of law and fact, the First Respondent and/or the Second Respondent accepted the Offers to Borrow in accordance with the terms alleged in paragraph 27(g) of the Fifth Further Amended Statement of Claim." Yes, by the first respondent "(f) Whether, as a matter of fact, advances were made by the First Respondent pursuant to the Offers to Borrow referred to in paragraph 26A of the Fifth Further Amended Statement of Claim, and: (i) what the source of the money used to make those advances was; (ii) to who or whom, those advances were made; (iii) to what use those advances were put." Yes – advances were made by Capital Australasia pursuant to Offers to Borrow (i) the source of money for the loans was the purchase price paid by OCBC to the first respondent for the loans. (ii) the loans were made to participants and paid to Mr Coote, in exchange for units in the production. (iii) Mr Coote paid the monies to Philip Emanuel International. The participants' money was not used to pay for the term bonds. "(k) Whether as a matter of law and fact the prospectus representations referred to in paragraph 41 of the Fifth Further Amended Statement of Claim were misleading or deceptive or likely to mislead or deceive, or contained the material omissions alleged in paragraph 51A of the Fifth Further Amended Statement of Claim." No "(l) Whether as matter of fact of law and fact the Sixth and Seventh Respondents breached the terms of the Investment Deed as referred to in paragraph 37 of the Fifth Further Amended Statement of Claim." As regards the sixth respondent - no As regard the seventh respondent - not known "(m) Whether as a matter of law the First and/or Second Respondent breached the terms of the Offers to Borrow as referred to in paragraphs 40 of the Fifth Further Amended Statement of Claim." No "(n) Whether as a matter of fact the First, Second, Third, and Seventh Respondents had the knowledge and intention alleged in paragraph 47 of the Fifth Further Amended Statement of Claim." No "(p) Whether as a matter of law and fact the First and/or Second, Third, Fourth and Seventh Respondents engaged in conduct that was misleading and deceptive as alleged in paragraphs 49, 56 and 57 of the Fifth Further Amended Statement of Claim." No "(r) Whether as a matter of law and fact the First and/or Second, Third, Fourth and Seventh Respondents did: (i) aid, abet, counsel or procure a contravention of ss. 51A and 52 of the Trade Practices Act (Cth) and/or ss. 10A and 11 of the Fair Trading Act (Vic) and ss.41 and 42 of the Fair Trading Act (NSW); (ii) induce a contravention of ss. 51A and 52 of the Trade Practices Act (Cth) and/or ss.10A and 11 of the Fair Trading Act (Vic) and ss. 41 and 42 of the Fair Trading Act (NSW); (iv) were, directly or indirectly, knowingly, concerned in or a party to a contravention of ss 51A and 52 of the Trade Practices Act (Cth) and/or ss.10A and 11 of the Fair Trading Act (Vic) and ss. 41 and 42 of the Fair Trading Act (NSW)." (i) No (ii) No (iii) No "(s) Whether, as a matter of fact, the First, Second, Third [and] Fourth Respondents had the knowledge and intention alleged in paragraph 53, 61 and 66 of the Fifth Further Amended Statement of Claim." No "(t) Whether, as a matter of law and fact, the fifth respondent disregarded or had wilfully and recklessly failed to make enquiries of the fact that the payments which were made out of the Crazy For You Fund referred to in the particulars to paragraph 37(a) of the Fifth Further Amended Statement of Claim were made in breach of the Representative's fiduciary and trustee duties." No "(u) Whether the Sixth Respondent owed any and if so which of the fiduciary duties alleged in paragraph 59 of the Fifth Further Amended Statement of Claim." No "(v) Whether as a matter of law the Sixth Respondent breached his fiduciary duties to the Participants as referred to in paragraphs 59 and 60 of the Fifth Further Amended Statement of Claim." No "(w) Whether as a matter of law and fact, the First and/or Second and/or Third and/or Fourth and/or Fifth Respondents were guilty of the conduct referred to in paragraph (a) and/or (b) of paragraph 63 of the Fifth Further Amended Statement of Claim." No "(z) Whether as a matter of fact it was the intention of the First and/or Second Respondents that monies to be raised from the Participants under the Offers to Borrow would not be used for the purposes of the Production, but were to be used for the purpose of purchasing term bonds, as alleged in paragraph 67 of the Fifth Further Amended Statement of Claim." No "(aa) As a matter of law, whether and to what extent the Fifth Respondent's interest as assignee of the Offers to Borrow (if any) is subject to the claims of the Participants." No "(ab) Whether as a matter of fact the First and/or Second and/or Third and/or Fourth and/or Fifth and/or Sixth respondents had the knowledge referred to in paragraph 13C of the Fifth Further Amended Statement of Claim." No CROSS-CLAIM 268 Dr Patrick has not made out any cause of action raised against any of the respondents. It is therefore appropriate that the cross-claim be allowed and that a declaration be made on the basis that the loan agreements are valid, and that, in the case of Dr Patrick, he is liable to pay outstanding sums under those agreements. I am not presently persuaded that I ought to make a general declaration as to other participants represented by Dr Patrick. I will hear further argument on the appropriate form of any declaration bearing in mind that there may be relevant circumstances in respect of members of the group whereby defences may be established to the cross-claim. I am not suggesting that there are any such defences, but I require further submissions from Counsel in relation to this matter in the event that the parties cannot agree. Costs 269 I have been asked to reserve the questions of costs for further argument after the parties have had an opportunity to consider these reasons for judgment. I will do so in view of the history of this matter. conclusion 270 The application is dismissed as against each of the respondents. I direct the parties to bring in draft Short Minutes of Order to give effect to these reasons within twenty-one (21) days. I certify that the preceding two hundred and seventy (270) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin. Associate: Dated: 26 February 2004 Counsel for the Applicant: Dr C L Pannam QC T J McClean Solicitor for the Applicant: Corrs Chambers Westgarth Counsel for the First, Second, Third and Fourth Respondents: E N Magee QC D M Austin Solicitor for the First, Second, Third and Fourth Respondents: Voitin Walker Davis Counsel for the Fifth Respondent: R M Garratt QC M Moshinsky Solicitor for the Fifth Respondent: Cornwall Stoddart Counsel for the Sixth Respondent: P M Bornstein Solicitor for the Sixth Respondent: Phillips Fox No appearance by the Seventh Respondent. Dates of Hearing: 20, 21, 25, 26, 27, 28, 29 November 2002 10, 11, 12, 13, 14 February 2003 28, 29, 30 April 2003 1, 2 May 2003 30 June 2003, 1 July 2003 Date of Last Written Submissions: 1 July 2003 Date of Judgment: 26 February 2004