VH-EJM was being operated on dual circuit training on runway 30. A mixture of left and right circuits had previously been flown, with the last one being a right circuit. Stop and go landings were being made. On the last approach air traffic control had instructed the pilot to make the next circuit a left circuit. VH-FNE was lined up on runway 35 and after VH-EJM had crossed the runway intersection the controller cleared VH-FNE for take off. On climb the crew of VH-FNE observed VH-EJM to be approaching their flight path, on a right circuit. The climb of VH-FNE was stopped and VH-EJM passed about 200 feet above and slightly behind VH-FNE. The pilot of VH-EJM had seen VH-FNE. At about the same time as the pilots of the two aircraft saw each other the air traffic controller, who had been looking in another direction at a third aircraft, looked back and saw VH-EJM flying a right circuit and in conflict with VH-FNE. Traffic information was given to VH-FNE and the pilot of VH-EJM was advised of the mistake and to continue with the right circuit. Significant Factor The following factor was considered relevant to the development of the incident: 1. Misunderstanding of the instruction to make a left circuit, by the pilot of VH-EJM.