As the marathon Great Southern trial finally draws to a close in the Victorian Supreme Court – just before the first anniversary of its commencement (link) – there has been a significant, relevant judgment delivered. Last week the Victorian Court of Appeal handed down its decision in another class action case involving failed agribusiness managed investment schemes with questions raised about their product disclosure statements – Woodcroft-Brown v Timbercorp Securities Ltd & Ors  VSCA 284.
In dismissing the investors’ appeal, the Court of Appeal held that the trial judge Judd J had not erred in any of his challenged findings. One of those was that the Timbercorp directors did not have actual knowledge of a significant risk to viability until bank support wavered. This was well after publication of the last PDS, and after the collapse of Lehman Brothers in late 2008, which was swiftly followed by the sudden termination of negotiations Timbercorp had been engaged in for the sale and leaseback of certain of its properties and forestry assets. Even then the directors were able to manage those set-backs and address them opening new negotiations with other parties, keeping the banks onside, until their support was withdrawn shortly before Timbercorp’s collapse in mid-April 2009 .
Beginning in 1992, the Timbercorp Group operated a number of horticultural and forestry managed investment schemes (MISs), including almonds, olive oil, grapes and eucalypt plantation projects, with Timbercorp Securities PL as the Responsible Entity. Timbercorp Finance PL’s role was to lend money to investors so that they could invest in the MISs. The defendants to the litigation were those two companies plus three persons who were directors of both companies and of the holding company Timbercorp Ltd.
The Timbercorp Group invested in excess of $2 billion on behalf of about 18,500 investors. Using a combination of debt and equity, the Group would acquire and develop land into plantations and orchards to generate a long term revenue stream from management fees and licence fees and would sell interests in the project to investors. The land and its developments would then be sold either into a property trust where the Group would retain some of the equity in the asset, or it would be sold to a third party buyer, usually on a sale and leaseback basis.
The Group also generated profit by Timbercorp Finance lending to investors, usually up to 90 per cent of their investment. In addition the Group raised funds by securitising its loan book and using the loans as security for finance bonds and bank facilities. To fund the infrstructure and working capital of the projects, the Group would sell assets, raise equity, securitise loans, and arrange debt facilities with the Commonwealth Bank, ANZ, HBOS and Westpac.
After the Group began to experience trouble, Timbercorp kept its bankers informed of developments and the Group’s financiers entered into or renegotiated facilities, extended repayment dates, increased facility amounts and, when necessary, modified covenants to avoid a breach.
The Group’s profitability began to be affected by an adverse tax announcement by the ATO impacting upon the Group in 2007/08. Three days before Lehman Brothers collapsed the Group was managing that issue and its impact, and had already commenced negotiations with various third parties for the sale and leaseaback of a number of its properties and forestry assets.
When Lehman Brothers collapsed in the US on 15 September 2008, this lead to the effective closure of global markets. The next day, one of the purchasers terminated negotiations and the others soon followed. In November further steps were taken to seek to sell assets, and the Group’s auditors expressed concerns about the business as a going concern, noting its working capital deficiency of $82.8 million
In December 2008 Timbercorp Ltd presented an “apparently healthy position” in its Annual Report, including a directors’ declaration of solvency, though the opinion in the audit report included was guarded.
The Group managed to maintain bank support until April 2009, when it collapsed and went into voluntary administration; liquidation followed in June 2009. At the time the company was wound up, Timbercorp Finance had outstanding loans to more than 14,500 investors totalling $477.8 million.
First Instance Judgment
In striking contrast with Great Southern, the Timbercorp trial ran over (only) 24 sitting days. It dealt with common questions and only looked at individual loss, reliance and causation in relation to the appellant Mr Woodcroft-Brown, and a Mr Van Hoff.
Mr Woodcroft-Brown had commenced proceedings on his own behalf and on behalf of persons who, at any time during the period 6 February 2007 and 23 April 2009 acquired or held an interest in a MIS of which Timbercorp Securities was the Responsible Entity. Earlier investors were represented by Mr Van Hoff, who had invested in MISs before and after 6 February 2007 and financed the majority with money borrowed from Timbercorp Finance, and evidence was led from him as to breach, causation and reliance.
Mr Woodcroft-Brown argued that had certain matters been disclosed, he would neither have invested in the MISs nor borrowed money from Timbercorp Finance. Mr Van Hoff made a similar argument on behalf of early investors. In particular, they argued that Timbercorp Securities failed to disclose in its Product Disclosure Statement (PDS) information about significant risks, or risks that might have had a material influence on the decision to invest, in breach of disclosure obligations under the Corporations Act 2001 (Cth). They also argued that the Directors’ declarations made in two scheme financial reports were false or misleading and in breach of the Corporations Act, the ASIC Act 2001 (Cth) and the Fair Trading Act 1999 (Vic). The relief sought included declaratory relief, damages and/or compensatory orders, including an order that investors were not liable for repayment of the loans from Timbercorp Finance.
The directors denied the allegations against them, claiming to have taken reasonable steps to ensure that the PDSs would not be defective, a defence under s 1022B(7) of the Corporations Act.
His Honour Justice Judd at first instance found comprehensively in favour of the defendants. His Honour found that they were not required to diclose the risk identified by the plaintiffs, that there had been no misleading or deceptive conduct and, in any case, that there had been no relevant reliance by Mr Woodcroft-Brown or Mr Van Hoff on the alleged non-disclosures or representations. His Honour also made several adverse findings about the way the plaintiffs conducted their case. The first instance judgment may be read here.
The Non-Disclosure of Risk Case – see -
It was necessary for the plaintiffs to establish that there was an obligation to disclose certain matters under either s 1013D or s 1013E of the Corporations Act. Broadly, those provisions relevantly require PDSs to include information which a person would reasonably require for the purpose of making a decision as a retail client whether to acquire the financial product, including information about any significant risks associated with holding the product, and information which might reasonably be expected to have a material influence on their decision.
Section 1013C(2) of the Corporations Act qualifies that, by not requiring disclosure to the extent the information concerned is not known to the disclosing party, here Timbercorp Securiites or any director of it. Section 1013F(1) contains a further qualification, providing that information is not required to be included in a PDS if it would not be reasonable for a prospective (my word) retail client considering the product to expect to find the information there.
The plaintiffs had argued that there should have been discosure of the ‘structural risk’ in each PDS issued after April 2000, and of information about ‘adverse matters’ (matters which put the Group at a heightened risk of failure) as and when they occurred.
His Honour held that because of financial information about the Group available on its website, Annual Reports, ASX announcements and the material prpared by analysts, the information the plaintiffs argued ought to have been provided to potential and existing investors was not required because of the operation of s 1013F.
His Honour found ultimately that the appellant failed to satisfy or displace the operative effect of s 1013C(2) given the absence on the evidence of actual knowledge by the corporation or its directors of the risks as alleged, due to the way in which the appellant pleaded its case. For instance the Directors did not have actual knowledge that the adverse matters (such as the tax issue and the GFC) posed a risk that Timbercorp Securities would be unable to fulfil its contractual obligations, until the Directors realised bank support became equivocal. That was the point at which the ‘adverse matters’ stopped being the types of events that management deals with day to day and address, and turned into a crystallised risk to viability (see  and -).
In order to succeed on appeal, the appellant needed to demonstrate that the findings of fact of his Honour on these issues, were not open.
The Misrepresentation Case – -
Section 1022A of the Corporations Act defines a disclosure document or statement (including a PDS) as ‘defective’ if, inter alia, it contains a misleading or deceptive statement. Section 1022B(7) provides a defence of having taken reasonable steps to ensure it would not be defective. Section 12DA of the ASIC Act, prohibiting misleading or deceptive conduct in certain documents, and s 9 of the Fair Trading Act, prohibiting misleading or deceptive conduct in trade or commerce, were also relied upon by the plaintiffs.
They alleged the Timbercorp Group had made two types of false or misleading representations. The first was that the Group was financially sufficiently strong that investors would reasonably expect the MISs to be managed for the foreseeable future and that the principal risks associated with the relevant MISs were fully disclosed. His Honour found that the representations as to the Group’s strength were too vague and uncertain to be actionable, and that there were reasonable grounds for that confidence in any case.
The second was that scheme contributions equalled or exceeded the cost of establishing and maintaining a scheme, in that investors’ payments would be ‘quarantined’ and applied only to their relevant MIS, and MIS contributions would be sufficient to fund the relevant MIS. His Honour held that those representations alleged were not in fact made, and were indeed inconsistent with the PDSs and other generally available information.
The appellant also argued that Timbercorp Securities and the Directors made statements in March and September 2008 that were misleading or deceptive, to the effect that there had been no circumstances that had or may have significantly affected the operations of the relevant MISs. Judd J found that their case here failed on both causation and reliance. It was necessary for the appellant to establish that there was reliance placed upon the non-disclosures and the misleading conduct so as to cause entry into the investment product and, therefore, subsequently to cause loss. His Honour did not believe the evidence advanced by the appellant, or by Mr Van Hoff, on these issues (see ).
The Court of Appeal added the observation that the provisions relied on in relation to misleading conduct did not operate in relation to the disclsoure obligations in the PDSs per ss 1041H(3) and 1041K(2) of the Corporations Act, and s 12DA(1A)(c) of the ASIC Act (see ).
Shift in the appellant’s case – see -
There was a dispute both at trial and on appeal as to whether the appellant’s case had shifted during the course of the trial such that the appellant pursued a case that went beyond his pleading. The shift concerned the identification of the risks the appellant alleged should have been disclosed. The trial judge found that during the course of the trial, the appellant had materially shifted his conception of the relevant risk and in doing so departed from his pleaded case. One of the changes the trial judge found was the change in the way the appellant relied on the ‘adverse matters’ (such as the tax issue, and the GFC) in that, rather than focusing on their importance as stand alone risks, they achieved their materiality from the risk to the Group’s financing facilities increasing the risk of failure.
His Honour took the view that the reformulation of the appellant’s case was an attempt to ‘sidestep’ the opinions in the joint experts’ report, that as long as the Group’s bankers continued to support the Group’s operations, there was no significant risk that the Group would not have the financial capacity to manage any of the schemes through to their contemplated completion.
His Honour held that the appellant should be confined to his case as pleaded, both because the expert reports and the joint expert report were directed to the case as pleaded, and because of the way in which the respondents had fashioned and presented their evidence in response to that case. The Court of Appeal found no error in his Honour’s approach. Their Honours noted that on appeal, the appellant purported to urge the very case that was not pleaded at trial and which the trial judge rejected. Moreover, so the Court of Appeal observed, even if the appellant was permitted to advance the unpleaded case it was not supported by the evidence at trial.
The appeal was heard by their Honours Warren CJ, Buchanan JA and Macaulay AJA, who delivered a joint judgment.
After a discussion of the decision below, they reviewed the detailed evidence led by the Directors about the Group’s business model and the effect of the events of 2008.
The Group’s business model was to create capital intensive assets with a long term income stream and then to sell those assets within the period of three to five years. For each horticultural scheme, after five years the consequences of failing were intended to reduce to virtually nothing. For each forestry scheme, from about five years, the consequences of failure were intended to reduce gradually until harvest. The appellant submitted that the proper test would be that a risk of total loss of the investment must be disclosed unless the chance of the risk materialising was negligible.
In 2007 moving into 2008, the financial position of the operation was seen to be strong and profitable. The Court noted that importantly, as at 30 September 2008, there was no indication of any risk by reason of financial circumstances to the Group’s capacity to discharge its obligations in relation to the management of the projects. It was not until the last quarter of the 2008 calendar year, following the collapse of Lehman Brothers and after the proposed sale of forestry assets to Harvard Management Company failed to proceed, that banker support wavered. Even then, banker support continued into the new year, with the banks providing Timbercorp with an opportunity to dispose of assets.
At the end of 2008, the bankers for the Group were prepared to increase support. As late as November 2008, the CBA agred to vary loan covenants and extend expiry dates into 2009. Judd J had found there was no sign of the Group having difficulty in securing from capital markets the requisite funding for its activities.
Indeed Judd J had noted that the experts’ report provided a complete answer because, whilst the bank support evaporated eventually after the Lehman collapse, before that time, there was no reason to conclude that it would not be continued on an indefinite basis. In light of that, the experts’ opinion was that there was no significant risk that the Group would not have had the financial capacity to manage any of the schemes through to their contemplated completion, for their full term.