Commissioner of Taxation v Normandy Finance and Investments Asia Pty Ltd (Special leave decision)

Court appealed from: Federal Court of Australia (Full Court)

Commissioner of Taxation
v. Normandy Finance and Investments Asia Pty Ltd

[2016] FCAFC 180
2016 ATC 20-595
[2017] HCATrans 166

Date of decision: 18 August 2017

Result: Appeal dismissed with costs.

RDR Summary

The High Court dismissed the taxpayers' application for special leave to appeal the Full Federal Court's decision in Commissioner of Taxation v Normandy Finance and Investments Asia Pty Ltd [2016] FCAFC 180.

The majority of the Full Court held that the primary judge erred in finding that although the loan agreement contained sham terms, the underlying transaction was not a sham, and in finding the case on a basis rejected by the applicants.

The High Court, constituted by Nettle and Gordon JJ, dismissed the special leave application with costs on the basis that an appeal had insufficient prospects of success.

Appeal dismissed with costs.

Transcript of proceedings

Melbourne on Friday, 18 August 2017, at 10.36 AM

MR S.H. STEWARD, QC : If the Court pleases, I appear with my learned friend, MR D.J. McINERNEY, for the taxpayers. (instructed by Arnold Bloch Leibler Lawyers)

MR D.B. McGOVERN, SC : May it please the Court, I appear with my learned friend, MS J.E. JAQUES, for the respondents. (instructed by the Australian Government Solicitor)

NETTLE J: Mr Steward.

MR STEWARD: If the Court pleases, there is a preliminary matter which is whether the Court is of the view that we need to seek leave as we filed the application within 28 days of the second tranche of reasons given by the Full Federal Court.

NETTLE J: Is there any opposition if need be required?

MR McGOVERN: No, your Honour.

NETTLE J: In that case, if and insofar as leave be required it is granted, Mr Steward.

MR STEWARD: I am indebted to the Court. Obviously what is striking about this case is the extreme division of opinion below, perhaps unprecedented in a tax case in recent times, between two judges who found for my clients with little or no hesitation - were the words used - as against two judges who decided that that decision was incapable of rational reconciliation with the evidence. But this is no mere visitation case and we do not - - -

GORDON J: It sounds like it.

MR STEWARD: It could be put up on that basis but, as I will seek to explain, what drove the difference between the two parties, as it were, below was a serious misapplication of what this Court decided and held in Suvaal's Case. In order to make good that proposition, and you will see that the error about Suvaal is most poignantly expressed at paragraph 142, application book 208, but before I get to that paragraph there are some salient which I need to remind the Court of as they bear upon the central issue of procedural unfairness and the application of Suvaal.

One commences with the basal proposition that it was a ground of objection, that these payments were loans, but without specifying whether that was to be in the form of a written agreement or not, just bare ground loans. At the commencement of the trial which took place over 16 days, save for one exception for one of the loans, it is clear that the taxpayers contended that the balance of the loans were evidenced by written agreements. During the trial and by the eighth day, just before Mr Townsing, the controlling mind of the taxpayer, was called to give evidence, the primary judge gave notice of what is called the "alternative case", he gave notice.

NETTLE J: This was the eighth day of the trial.

MR STEWARD: Eight day of trial, just before Mr Townsing went into the box.

NETTLE J: I am sorry to interrupt but is it true, as it is said, that all the other witnesses by then had been cross-examined?

MR STEWARD: I think all but one, that is true, but as your Honour will remember, the majority below decided that those other witnesses were of no moment.

NETTLE J: I do not remember that but I take your point.

MR STEWARD: I will come back to that then. Now, counsel for the Commissioner did not object to this. Rather, he encouraged it, saying that it was perfectly proper for the judge to do so because, in his words, a judge does not have to just sit by. The next thing that happened was that counsel for the Commissioner cross-examined Mr Townsing, asking him questions, amongst other things, about the existence of an intention to repay all the advances, including the intention for the one undocumented loan, and you see an example of that at application book 185 at about point 6, when a general question was asked:

Well, I want to suggest to you that you knew and intended that there would never be a repayment of any of these loans?

Mr Townsing replied:

I disagree.

The primary judge saw and heard that answer and many like it and ultimately accepted it as true.

GORDON J: So just so I am clear on that point, as I read the trial judge's reasons for decision, there are multiple findings in respect of each of the loans that there was an obligation of repayment.

MR STEWARD: Correct, and what is important to remind oneself about that, your Honour, is that most of the advances took place before the written agreements were executed, so that the question for determination was at that time, at the time of each advance, was there an intention of repayment?

NETTLE J: Mr Steward, I take your point, with respect. As I understood the Full Court's decision, it was that whilst there might have been an obligation of repayment, it remained the evidence of Mr Townsing throughout that the obligation was in accordance with the terms of the written agreement and once that was disbelieved there was no evidence as to what was the nature of the obligation for repayment and therefore that the taxpayer had failed to discharge the burden of proving the assessment as excessive, am I right?

MR STEWARD: Your Honour, that is not quite right. There was evidence of anterior, underlying loans.

NETTLE J: No, I understand, you would say so, but that is the point, is it not?

MR STEWARD: No, I do not - no. If that had been a point - - -

GORDON J: Can we just take it in bits then. So, we have the findings about obligation of repayment in respect of each of the loans. We then have the documentation of it.


GORDON J: We have a finding that in respect of those pieces of paper they are a sham to the point of trying to demonstrate arm's-length dealing by the primary judge.

MR STEWARD: Not quite. Some of the terms were held to be pretences, some, in particular some of the conditions precedent were held to be pretences, but what the primary judge never decided was that the promise to repay was a pretence. There was no finding about that whatsoever, and that is part of the problem with the majority judgment as they slide into this sort of impression that the whole of the agreements were shams.

GORDON J: All right. Assume that for the moment you are correct about the way in which the trial judge made those findings, what is your answer to the contention though that your client's case at trial was that these agreements recorded accurately each of these matters? Therefore, in a sense, you lose for that reason.

MR STEWARD: Well, your Honour, that is the kicker, that is precisely the kicker. That was not his only case. As I was about to show, he started off day one of the trial that is his case.

GORDON J: Where is the best example of that?

NETTLE J: I understand it was opened and so forth but the evidence that Townsing gave was it was the written agreement.

MR STEWARD: Yes, but he also gave evidence that he intended to repay. You see - - -

NETTLE J: But not otherwise than pursuant to the agreement.

MR STEWARD: Let me bundle it in this way. There are two aspects of the alternative case that Justice Edmonds decided. Part A involves acceptance of some of Mr Townsing's evidence - that is, his answers that he intended to repay the loans. Part B involved him rejecting some of Mr Townsing's evidence, including his repeated assertion that he believed that the terms of the agreements that were being impugned were not pretences. That is what happened below, and it was perfectly proper for his Honour so to decide. What the Full Court did was decide that as a matter of procedural fairness his Honour was precluded from so deciding and in doing so they misapplied Suvaal. That is the problem.

GORDON J: So, just so I can put it in a nutshell, if one takes as a proposition you need an obligation of repayment for a loan and one takes the factual scenario here in chronological order one has findings by the trial judge of a loan being made or an advance being made to which there was an attachment of an obligation of repayment at that time, subsequently documented. Where is Mr Townsing's evidence that there was an obligation of repayment in his mind from the time of advance?

MR STEWARD: Well, your Honour, you do not have all of the transcript before you. We are limited to what is in the judgment below.

GORDON J: We do not have a finding by the trial judge to that effect, do we?

MR STEWARD: I beg your pardon?

GORDON J: Do we have a finding by the trial judge to that effect?

MR STEWARD: I do not think we have a finding that it is as specific as that.

GORDON J: Well, I wondered about that. If you go, for example, to 86 in relation to the payments from Normandy Asia to Normandy Australia, I read the first sentence as being:

With little or no hesitation, I find . . . obligation of repayment . . . at the time each payment was made -

MR STEWARD: I beg your pardon, you are right, your Honour.

GORDON J: Now, similar language is used in respect of in 104, 110 and 141. Now, where is the evidence that supports that finding?

MR STEWARD: Well, your Honour, part of it was in the transcript I just took your Honour to. When a general question was put to Mr Townsing, you did not intend to pay any of these loans, did you? And he said, I disagree. Now, the primary judge who had the benefit of seeing and hearing that answer made that decision, and this is very important to understand. On appeal the case was not decided on the basis of Robinson Helicopter grounds. It was not decided that the primary judge had misused his advantage. It was not decided that the conclusion was glaringly improbable. Paragraph 164 of the majority make that quite clear; it was not decided on that basis. It was decided on the basis that Suvaal, as they read it, precluded the primary judge from reaching the decision that he reached, that he could not accept the alternative case. I was going to go on and just address a few more of those procedural fairness facts.

NETTLE J: Yes, it is not as important as the substance. It is all at 163, 164 of the Full Court's decision.

MR STEWARD: It is 142, and then 163, 164 is where we get to it.

GORDON J: I keep going back to this but I cannot quite understand it. If you take the first one that I took you to and you look at the findings of fact made by the trial judge, whether they are right or wrong they are findings of fact made.


GORDON J: He starts at 83 and then at 84 and 85 sets out the evidence he relies upon in order to support that conclusion I took you to at 86.


GORDON J: It is the same, is it, with respect to each of the other loans?

MR STEWARD: Yes, mutatis mutandis; so the loans to Advant and the loans to Pilmora.

NETTLE J: That does not seem to be contradicted by the Full Court. It is simply that their Honours take the view that it was not open to the judge so to approach the matter given the way the case was conducted below and the evidence adduced below.

MR STEWARD: Correct, and let us get to the nub of it. It is at paragraph 142. They took the view that in Suvaal if notice had been given by the judge in that case of the judge's case theory, it would have made no difference to the outcome. In other words, in Suvaal, even with notice of the judge's point, the judge was foreclosed from adopting it because it was not the plaintiff's point. That is not what Suvaal decided at all.

GORDON J: But does it matter on your analysis? You would say that it did not alter the case either given the earlier findings in relation to repayment for the existence of the loans.

MR STEWARD: Well, quite right, your Honour, but our point is also this. In our case notice was given; on the eighth day the opportunity was there for the Commissioner to test it and cross-examine on it - - -

GORDON J: One of the witnesses.

MR STEWARD: The main witness, the man who was found to be the controlling mind of all the entities, and this being a case about his subjective intention as controlling mind.

GORDON J: Well, the reason why I asked that is because, if I take you back to 86, he relies not only on the Townsing evidence but the evidence of others as well, he says that.

MR STEWARD: He does do that, your Honour.

GORDON J: He talks about the evidence of - I forget their names now, I am sorry about this, but - - -

MR STEWARD: Mr Yunus and so on.

GORDON J: Mrs Glover, Mr Yunus and Mr Ross.


GORDON J: As well as the other circumstances set out in detail in the paragraphs above.

MR STEWARD: He does do that, and at paragraph 170 of the majority I am reminded - is it paragraph 170? I will come back to that, your Honour.

NETTLE J: Sorry, Mr Steward, I am still harping on like a broken record, but at 163 in the second sentence, accepting all of the things that you have said about the judges' findings, their Honours seem to be of the view that those findings were not only inconsistent with the evidence of Townsing being "the directing mind and will" of the company, but incapable of a "rational reconciliation with that evidence".


NETTLE J: Now, that is either good or it is bad.

MR STEWARD: We disagree with it.

NETTLE J: If it is a good proposition, you plainly lose. If it is a bad proposition, then you are in with a chance.

MR STEWARD: That is so, your Honour, and we do disagree with it. Take a look at it. At no point do they explain in any sort of reasoned way why it was incapable of rational reconciliation.

GORDON J: What is your best point as to the reason why it is wrong?

MR STEWARD: Because it is capable of rational reconciliation.

GORDON J: What is the rational explanation that makes it wrong?

MR STEWARD: Yes, because, as I said before, what happened was for the alternative case to be accepted, the primary judge accepted some part of Mr Townsing's evidence and rejected the other part, and it was perfectly sensible for him to do that. What he did was he rejected those answers given by Mr Townsing, a layperson, about whether the parties were at arm's length, and I might add I am not quite sure what is the probative value of answers from a layperson about that question, and secondly, he rejected the layperson's answers that some of the terms and agreements were pretences. He said they were not. He believed they were not. He was a layperson.

GORDON J: What is the rational connection? What is the link that establishes the fact that makes that statement wrong, other than what I referred to before - that is the findings about repayment from the date of payment?

MR STEWARD: The link is this. The majority seem to have taken the view that Mr Townsing's belief about arm's-length dealings and his belief about the pretence of some of the terms necessarily extended the sham to a belief about his intention of repayment. So a confined rejection of evidence below was expanded by the majority in the Full Court without, with respect, any basis to do so.

NETTLE J: You are into Fox v Percy territory, are you not?

MR STEWARD: Yes, we are. There is a bit of a theme about that today.

NETTLE J: Not a great start for a special leave application.

MR STEWARD: Save for the Suvaal point, which is paragraph 142, where they have interpreted Suvaal as saying that even with notice a judge is foreclosed from deciding the case on the judge's point, even with notice. And do not forget, your Honours, by the time the case closed, and there was a two week adjournment between the close of evidence and closing, not only had the Townsing taxpayers adopted the judge's point as an alternative case, but my learned friend took issue with it and debated it on its merits.

At no stage on procedural fairness did he ask for Mr Townsing to be recalled. He did not ask for Yunus to be recalled. He did not complain that he had been shut out from testing a proposition. He said nothing. He rated it, quite rightly, on its merits, and the first time procedural fairness was raised as a point is when he loses and it is in his notice of appeal.

Our proposition and the reason why special leave should be granted is because this Court cannot allow the Full Federal Court's interpretation of Suvaal to be maintained, because our point is that if a judge does give notice and the judge is free to adopt the judge's point and is free to accept some part of the evidence below and to reject others based upon what his Honour or her Honour sees as the demeanour of the witnesses.

GORDON J: It is also a question possibly about what is a loan.

MR STEWARD: There is a question about what is a loan and there is an excellent expression of what that is in the primary judge's judgment, but the one thing that must be borne steadily in mind here is that the primary judge's advantage of seeing Mr Townsing and his express finding that each advance was impressed with an obligation of repayment remains unchallenged on Robinson Helicopter grounds and that the only basis for shutting down Mr Townsing's appeal was on the basis that my learned friend had been denied procedural fairness. In our respectful submission, he was not. He was given notice of the judge's point and he debated it.

Could I just briefly take the Court to Suvaal just to make the point that Suvaal turns on the proposition - and it is at paragraph 18 in the joint judgment of Chief Justice Gleeson and Justice Heydon - that what happened in Suvaal is that the judge's point was never disclosed to the parties. No one knew about it. That is why no one could test it. So this Court quite rightly decided that because it was not an issue at all below - and that is what Justice Callinan said at paragraph 145 - that the case could not be decided on that basis. The fundamental points that the majority make is that even with notice, however, Suvaal would have been decided in that way. We disagree.

If notice is given, then the problem in Suvaal does not exist. Notice here was given and our learned friends had a fair opportunity to address it. Can I just say one other thing, and that is this. There is an appeal from the Administrative Appeals Tribunal as well here.

GORDON J: Do you pursue that?

MR STEWARD: Only in this sense, your Honour. We made a complaint in our written submissions that no question of law was articulated, put that aside. Our point is that in relation to that proceeding, and in relation to the proceedings to be remitted, we do not say that they individually merit special leave.

GORDON J: They could be parked, could they not?

MR STEWARD: Well, our point is that if you are going to grant leave in the other matter, it is probably appropriate that they all go up simply as a matter of efficiency, particularly because, your Honour - - -

GORDON J: Why would we take those questions?

MR STEWARD: - - - the AAT proceeding was found to stand or fall on the - - -

GORDON J: That is my point. So why could you not make an agreement between the parties that that would stand or fall depending upon the outcome of if you were granted leave?

MR STEWARD: I would be happy to do that, your Honour.

GORDON J: So just so I am clear, that means that if we were minded to grant leave it would leave questions - you would take up, what is it, the whole of 97 and 98 and questions 1 and 2 in 99. Is that the way it would work?

MR STEWARD: Yes, it would, your Honour. If the Court pleases.

NETTLE J: Thank you, Mr Steward. Mr McGovern.

MR McGOVERN: If your Honours please, one of the critical features of the case and in particular the approach of the Full Court looking at the judgment of Justice Edmonds is to identify the alternative case and, in our respectful submission, it is the alternative case as identified by the Full Court at paragraph 163 and that itself replicates, in effect, what Justice Edmonds decided at paragraph 105 as to - I beg your pardon, application book page 57, paragraph 106.

The alternative case is also expressed in various similar ways in other parts of the application book but the thrust of the alternative case was that his Honour's finding was that the purpose of the written agreements was involving a pretence or a sham that the limited purpose - and that is paraphrasing - for the limited purpose of deceiving third parties as to arm's-length dealings, whereas the dealings were not independent, but that nonetheless it was intended that the advances were loans.

So it is a two-pronged matter, the alternative case. I should interpolate to say that it is true enough that the objection was cast in very general terms about the existence of a loan but by the time the case came to trial there were appeal or revised appeal statements which have to be seen in the context as indicating that in five of the six instances the taxpayers were relying upon written agreements and entirely relying upon written agreements. I should just point this out to your Honours so that there is no confusion - - -

GORDON J: Could you just explain one aspect of that? How does that sit then with paragraph 104 which are findings made by his Honour in relation to that very allegation of "window dressing" where his Honour sets out that the two payments were intended by both parties at the time they were made to be subject to an obligation of repayment, that was the time when the "two payments were truly loans", predicated on the evidence set out. As I said to Mr Steward, it seemed to be a formula of words that replied to each of the advances, and then goes on to say that:

the evidence of Mr Townsing . . . is paramount . . . and while the contrary was put to him, he denied it and there is no reason not to accept his evidence.

MR McGOVERN: Well, your Honours, it is important to appreciate what his Honour is there looking at and to read paragraphs 104 to 106 in context because once there were written agreements that were in play in all but one instance, I just wanted to point out that in the case of Normandy Asia to Normandy Australia which I think was referred to by the Court earlier, that was the one agreement which the Commissioner on the appeal did not seek to rely upon as affected by what I might call the Suvaal point because that involved transfers of money from a long time previously and an agreement that came into existence, I think, on 7 May 2008.

So that has to be looked at entirely by itself, and on the question of the way that was dealt with, their Honours on the appeal found that there were three errors in the primary judge's approach to that particular loan. Justice Logan did not deal with any of those matters and those three errors are not matters that are actually referred to in the application for special leave.

GORDON J: But that does not apply here though because in Normandy Asia his Honour refers at the foot of 105 to the fact that there were payments made beforehand. He says:

the payments . . . occurred some seven months beforehand -

So we are dealing, are we not, in most of the cases with an agreement having been found by way of a loan agreement with an obligation of repayment and payments having been made, including some repayments, before the creation of the written document.

MR McGOVERN: Your Honour, with respect, no, and the precise point is this. If your Honour looks at paragraph 104, what his Honour is talking about there is about the intention as opposed to looking at the question of whether as a matter of objective determination there is or is not an agreement for loan. His Honour is there talking about intention which is, of course, relevant to the question of sham and is an exception to the objective theory.

But paragraph 104 does not take the matter any further than his Honour's necessity then to confront paragraph 105, so to speak, because paragraph 105 is where his Honour has to deal with all of the written agreements which are relied upon by the applicants and relied upon in the appeal statements, relied upon in the course of the trial, right up to Mr Townsing giving evidence.

When Mr Townsing gives evidence the trial judge himself intervened at a particular point and sought to clarify with Mr Townsing what the position was in relation to the arm's-length arrangements and his Honour said, well, looking at it in effect as independent, whether the parties were independent from each other, Mr Townsing declined to agree with that proposition and having declined to agree with the proposition he steadfastly maintained that all of the loans were at arm's length and the evidence that had been called before was all directed towards parties who were on the lending side, so to speak, giving evidence about the existence of, in effect, negotiations towards a loan.

GORDON J: So am I wrong to read the balance of 106 and 107 as not dealing with the objective evidence sufficient to make a finding of obligation of repayment?

MR McGOVERN: Yes, your Honour.

GORDON J: What is his Honour dealing with there where he says:

Such pretended terms did not, however, impugn the intention of the parties -

and then goes on to deal with his finding of payments by way of loan carried interest and then says in 107 "reinforced by the clear evidence" of what had occurred. He says:

The Commissioner did not contend that any of these payments . . . did not occur -

They were just "something else". Then he goes on to set out the 12 reasons as to objective circumstances as to why there was an obligation of repayment.

MR McGOVERN: Well, your Honours, we would firstly say that the majority of the Full Court was correct to look at the analysis as being referable, firstly, to the question whether or not there was a contractual promise to repay, in the sense that there was an obligation to repay which was made in return for a payment of money.

So there is a level of confusion that one can be drawn into as to the question about repayment because the address paragraph 107 is talking about subsequent events and questions about whether or not there were actually movements of money which were relied upon as repayments of the loan, so, if you like, at the back end of the transaction rather than at the front end which is - the critical question was whether or not there had been shown to be an obligation to repay which was exchanged for a promise or a payment that was made in the first instance. Absent the written agreements which were relied upon and continue to be relied upon by the applicants, there was no basis upon which one had any evidence of an obligation to repay.

NETTLE J: This is the point the Full Court makes at 165 and 166?

MR McGOVERN: Yes, your Honour, yes.

NETTLE J: Last sentence of 165.

MR McGOVERN: Yes, and the passage that my learned friend took your Honours to has to be read in context. That is talking about a financial capacity to actually meet the burden of the obligation to pay in the first place.

GORDON J: Just so I am clear, your proposition is that there was no finding by the primary judge of an obligation of repayment at the time the payments were made, absent the agreement.

MR McGOVERN: That is so, your Honours.

GORDON J: That is what I am asking because the assumption made by the Full Court at 120 is that other than the agreement between Normandy Asia and Normandy Australia:

the focus is on the loans said to have been created by the five written loan agreements.

There is a very sharp factual distinction. The majority in the Full Court proceed on the basis that there was no earlier finding of an obligation of repayment at the time the payment was advanced and, in some circumstances, repaid before the existence of the written loan agreement.

MR McGOVERN: That is so, your Honours, and that was correct, with respect. What we submit is that paragraphs 104, 105 and 106 bespeak of two errors, in effect. One was the Suvaal point, which was that his Honour ultimately found that the written agreements were a pretence to a limited extent, i.e. only to fool third parties into believing that the parties were dealing with each other at arm's length - - -

NETTLE J: Just pausing on that first point, it is that point that is dealt with in the last sentence of 165 of the Full Court, namely although the judge said that it was not possible in the sense of being proper for him to reach that alternative separate from the written agreement?

MR McGOVERN: Yes, yes.

NETTLE J: So that the Full Court appears to be recognising the findings to which her Honour Justice Gordon is referring but saying they were not open to be made as establishing agreement dehors the written agreement. Am I right?

MR McGOVERN: Yes, your Honour, and I am just reminded also by reference to paragraph 170 in the Full Court judgment in the majority - - -

NETTLE J: It is the last sentence again of that.

MR McGOVERN: Yes, yes, that is right. So, your Honours - - -

NETTLE J: Well, Suvaal or not, it might stand or fall upon the rectitude of that conclusion by the Full Court that it was not open to the trial judge to find an agreement dehors the written agreement given the evidence given by Townsing.

MR McGOVERN: Yes, but the evidence given by Townsing was quite clear because when he was pressed to seek to embrace the alternative case as we have described it - - -

NETTLE J: He threw away the lifeline.

MR McGOVERN: He threw away the lifeline and we submit on a question of notice or the Suvaal point, the Suvaal point can be simply looked at in a different way, namely as the question of whether or not the finding is open. But on the question of practical unfairness, when a witness declines to agree with the proposition that the loan is - the written agreement is there for a limited purpose, namely to deceive third parties, then it becomes hypothetical to seek to cross-examine him even further in relation to that proposition.

This is, if you like, the error that appears in Justice Logan's judgment apart from the fact that Justice Logan analysed the Suvaal point by reference to the only loan agreement which we did not rely upon in the Full Court as supporting the argument that we advanced on the basis of Suvaal. The points made by the Full Court at paragraph 163 - this is at page 216 of the application book - that the written agreement, and they in effect in the first six lines summarised the alternative case and say that it:

was not open in the circumstances of this case. It was a conclusion not only inconsistent with the evidence of the directing mind and will of the borrowers, but was incapable of any form of rational reconciliation with that evidence.

That was because he denied it. As their Honours go on:

Mr Townsing, precluded any possibility of the credibility of the alternative case being explored in cross-examination (which is fatal in and of itself, given that Mr Townsing was the directing mind and will of the taxpayers).

But I just wanted to take your Honours briefly to that passage from Justice Logan where Justice Logan, in effect - and I will get my learned junior to assist in picking up the passage but, in effect, put it in quotations that - yes, I have found it. It is at page 164 of the application book, and it is at about line 42:

In respect of the Normandy Asia/Normandy Australia and Normandy Asia/Pilmora impugned loans, the Commissioner chose not to cross-examine Mr Townsing about his motivations for "disguising genuine non-arm's length loans as being at arm's length", a subject upon which he has seized on appeal as a basis for an asserted denial of procedural fairness.

That was never a quote that came from the evidence of Mr Townsing but it seems to be the notion that pervades the judgment - - -

NETTLE J: Justice Edmonds.

MR McGOVERN: - - - that it was incumbent upon the Commissioner to having, in effect, heard the denial that this was not for the stated limited purpose to then go on and cross-examine Mr Townsing about why he would hypothetically disguise genuine non-arm's length loans as being arm's length. So we submit that on the question of Suvaal, once one identifies the alternative case as it was found by the trial of the primary judge and as identified by the majority in the Full Court at paragraph, I think, 163, then the judgment of the majority was perfectly in line with and a proper application of the Suvaal principle because the Suvaal principle looks at the question of whether or not the conduct of the case by, in this instance, the principal witness has precluded the cross-examination to achieve an outcome which challenges what is found to be the ultimate alternative case by the primary judge.

GORDON J: I thought that was a reference back to 86 of the primary judge's judgment when he was talking about:

It was never put to Mr Townsing that Normandy Australia never intended, at the time each payment was made to it by Normandy Asia, to repay the payment -

then referred to a passage of the transcript which dealt with that other loan as addressed by Justice Logan.

MR McGOVERN: It is certainly, because of the fact that it is not referenced anywhere, your Honour may be correct in that. But, of course, Justice Logan, we submit in our written submissions, did approach the matter based upon the only loan that we said was not affected by the Suvaal error. We did not argue that. Secondly, his Honour has proceeded upon the basis of looking at the objection as being something that permitted the taxpayer to, as it were, be at large and his Honour ignores the points that are raised by the majority in the Full Court about the text of the amended appeal statements, the way in which they precisely identified the written loan agreements in each instance as being the basis upon which the claim was being made.

It is true that the Full Court did refer to the fact that it may not have been a difficulty that various witnesses had passed by over the eight days but all of those witnesses were directed towards seeking to establish the, in effect, arm's-length dealings between the parties, and when Mr Townsing came to give his evidence and then the judge gave him the various lifelines and he declined to take up the alternative case, his Honour's warning, or putting counsel on notice at, I think, page 190, 191 - sorry, it is page 192 of the application book. This is where his Honour at about line 30 says:

That may lead to the view that because there's so many of those provisions which are just a pretence that the instruments are a pretence themselves but it does not necessarily lead to the conclusion that the underlying transaction is not one by way of loan. So I put you on notice of that.

GORDON J: So that is dealing with the proposition I put to Mr Steward that you have these findings by the primary judge that the underlying transactions - putting aside the written documentation - themselves are sufficient. It is clear that is the way his Honour approached it at paragraph 89 after dealing with that passage I took you to at 86:

even if [they] were a pretence or a sham -

the primary judge says, both of them:

did not intend them to have effect according to their terms, that would not render the anterior payments . . . over the years since 1999 anything other than loans to and borrowings by . . . if that was the common intent of both parties at the time the payments were made, which I find it was.

So you have this underlying acknowledgment, finding, that you have a payment from day one and that the subsequent documentation of it in whole or in part is a sham. Why does that matter? Why does the subsequent bit matter?

NETTLE J: It is as good as or as poor as 162 of the Full Court's reasons, is it not, the last sentence of 162, "acceptance by a judge of a case irreconcilable with the evidence"?

MR McGOVERN: I am sorry, your Honour?

NETTLE J: Paragraph 162 of the Full Court.


NETTLE J: Last sentence, last couple of lines, the judge's findings granted that they were made are not to be upheld because they are "irreconcilable with the evidence".

MR McGOVERN: Yes, but it is his Honour's findings that the documents were a sham for the limited purpose of deceiving third parties and nothing more than that.

NETTLE J: Whereas the Full Court says at 165 the two cannot be separated in that fashion, they are inexorably bound.


NETTLE J: It is all about 162 to 165 - we are still where we were at the outset really, are we not? Either what is said by the Full Court in those paragraphs is correct, in which case there is really no point for appeal, or it is wrong in which case there might be.

MR McGOVERN: Yes. Well, your Honours, we seek to persuade the Court that the approach of the majority was correct in the context of the particular case.

NETTLE J: We understand that, thank you.

MR McGOVERN: In the context of the particular case, as I submitted, looking at the alternative case and defining the alternative case in the way that the majority did which we say is a correct compilation of the findings of the primary judge that it was for the limited purpose of deceiving third parties but nonetheless there was a loan, that it is that alternative case which was not relied upon by the applicants.

It was expressly disavowed by Mr Townsing when it was put to him and his Honour gave him the lifelines, and the alternative case having been expressly denied, the practical injustice, if it is put on a procedural fairness basis, is that by reason of the express denial that obviated or cut off any prospect of any cross-examination on the point because - - -

NETTLE J: Thanks, Mr McGovern, you are out of time.

MR McGOVERN: Thank you, your Honour.

NETTLE J: Mr Steward, any reply?

MR STEWARD: Just one matter by way of reply and returning to paragraph 165 and the final sentence, and bearing in mind that this was not a Robinson Helicopter Case, that final sentence of 165, in our respectful submission, represents an inappropriate appellant interference and fact finding by the primary judge because here is the critical point, whereas they could not see a distinction, the primary judge did back at paragraph 106 of his Honour's judgment when he said on the one hand I find there was an intention of repayment, but as a separate matter I find that some of the terms of the written agreements were pretences and I also find that they did not deal at arm's length. Separate matter.

So from the primary judge's advantage they are separate matters. The appellate court has conflated the two, and as for the proposition that there was no evidence to support a finding of a contractual intention of repayment prior to the written agreements, that is not so, and one can see even in the limited parts of the transcript which appear in the majority at application book 178 at about line 20 when my learned friend says:

And I want to suggest to you that you didn't need to have any loan agreement in a written form in place as between Advant Proprietary Limited and Normandy Asia before you could effect a transfer of funds from Normandy Asia to Advant Proprietary Limited; isn't that the case?

MR TOWNSING: A written agreement, that appears to be the case.


MR TOWNSING: But verbally, that's not the case.

So the transcript is littered with references of Mr Townsing repeatedly saying "I intended these advances to be repaid" and the primary judge who had the advantage of seeing and hearing him accepted his credit on those answers, bearing in mind that in a sham case you effectively have to make a finding, in order to find that there was a sham, that there was an intention to deceive. That was the description used in Justice Leeming's judgment, an intention to deceive.

NETTLE J: I think we have come back to Fox v Percy.

MR STEWARD: If your Honour pleases, that is all I want to raise.

NETTLE J: Thank you, Mr Steward. The Court will adjourn briefly to consider this application.



NETTLE J: Without endorsing all of the reasons for judgment of the majority of the Full Court we are not persuaded that an appeal to this Court would enjoy sufficient prospects of success to warrant the grant of special leave. The application is dismissed with costs.

Thank you very much, ladies and gentlemen.