Recovering “your” money when entities collapse – when can you successfully claim a Quistlose Trust?

When a company collapses, those who had paid money to it for a particular purpose are, unsurprisingly, often keen to retrieve “their” funds. This is especially so for those who paid over money shortly prior to the collapse, or in any case where the money had not been applied for the intended purpose by the time of the collapse.

This article is about a way recovery may be achieved in equity, in some circumstances. These issues can of course arise in external administrations, hence it is also useful for administrators, receivers and liquidators to be across the principles governing Quistclose trusts.

Some of the introductory remarks below are of historical interest, as physical money has less relevance in commercial life in Australia in 2023. However as the law developed in part in that context, these remarks are instructive as to the current state of play as to property rights, the electronic recording of bank accounts and transfers of funds, and when a Quistclose trust may arise.

The first point to make is that physical money itself is capable of being the object of property rights, but is fungible. That is, one unit is identical to and interchangeable with any other unit. Once it is mixed with other money it cannot be separately identified in the same way, it has been said, that a raindrop cannot be separately identified once it has fallen into the ocean. At that point property in money is lost at common law.1

If physical money is paid into a bank account, it “passes into currency”2 and ownership of the money itself passes to the bank, which may use the money for its own lending and other purposes. The item in which any property rights may be held becomes the chose in action constituted by the debt owed by the bank to the account holder.

A bank account is nothing more or less than a chose in action, consisting “in the contractual right against the bank, ie in a debt, but a debt fluctuating in amount as moneys might be deposited and withdrawn”.3 “[T]hough in a popular sense it may be said that a depositor with a bank has “money in the bank”, in law he has but a chose in action, a right to recover from the bank the balance standing to his credit in account with the bank at the date of his demand, or the commencement of action. That recovery will be effected by an action for debt. But the money deposited becomes an asset of the bank which may use it as it pleases…”.4

Thus it is common, but a fallacy, to point to a bank account – yours or someone else’s to whom you had paid money – and say that it holds “your money”. In truth what is held is a chose in action – a debt owing by the bank to the account holder. (The reason bank accounts are so secure, particularly in Australia, is the Australian Government scheme guaranteeing deposits in banks, building societies and credit unions.)

For an entity or person who has paid money to a company for a particular purpose, the question becomes: when will equity respond to the circumstances of the payment by impressing the funds / chose in action with a trust?5

It can be an important question.

Principles – Quistclose Trusts

A Quistclose trust may arise where A pays money to B to be used for a particular purpose, and the circumstances of this transaction are such that equity regards B as holding that money – or rather, its value – on trust for A. That is, in equity, A retains a proprietary interest – not in the money itself of course, but rather in its traceable product (generally the chose in action which is the recipient’s bank account). Making a payment or a transfer for a purpose is not enough to give rise to a trust, even if that purpose is not effected and the money is subsequently misdirected or the company fails. Equity requires more before it will respond.

The prevailing view in Australia is that the Quistclose trust is explained on express trust principles, although this is not settled. Some judges continue to discuss a resulting trust analysis upon the failure of the purpose of the payment in line with the English position stemming from the early cases, including Lord Millett’s judgment in Twinsectra Ltd v Yardley6 (see below). It may be that when the position is settled here, both are embraced as the correct analysis, arising in different circumstances.

The principles governing when a Quistclose trust will be held to have been created may be distilled as follows7

  1. The question whether a Quistclose trust has been created will be answered by reference to the intention of the parties and the ‘essence’ of their bargain.8 The intention not to part with the beneficial ownership of the funds must be sufficiently indicated.9.
  2. The relevant intention is to be inferred from the language used by the parties in question, having regard to the nature of the transaction and the relevant circumstances of the relationship between them. It is ascertained by reference to the objective intention of the parties,10 outwardly manifested.11
  3. In determining the intention of the parties at the time, the Court can take into account events and documents which postdate the date on which the trust is said to have been created, although little weight may be given to what the parties say was the nature of the transaction at a subsequent point in time.12
  4. In a commercial setting there must be clear evidence that the parties intended a trust to arise in circumstances where a trust would not normally exist.13
  5. Quistclose trust does not arise simply because money is paid for a particular purpose. The mere provision of money or property for a purpose is not enough.14 ‘An expectation or general understanding falls short of the necessary mutual intention that funds have been provided on the express condition that they will be earmarked for use exclusively in accordance with an agreed purpose’.15
  6. The parties must intend that the money not be used at the free disposal of the recipient.16 The transferee must be subject to restrictions on the use of the money for any other purpose.17
  7. Payment of the money into a separate account may be indicative, but not determinative, of the existence of a Quistclose trust.18 However a lack of evidence of an express requirement to keep money separate is a powerful indicator of an absence of an intention that the money was to be held on trust,19
  8. The onus of proof lies on those who assert that a trust was created.20
  9. If there was a trust, but it was created for an illegal purpose (such as the purpose of avoiding tax obligations), then the trust must fail as a matter of public policy.21
  10. Trust obligations arise where equity operates on the conscience of the holder of the legal interest. A person cannot be a trustee of property if that person is ignorant of the facts alleged to affect their conscience. That is, unless a putative trustee is aware that they are intended to hold the property for the benefit of others, their conscience will not be affected in a relevant way.22

It is clear from the authorities that the two key requirements are those at principles (5) and (6) above. As the New South Wales Supreme Court observed last year, in order for a transfer of funds or assets to be characterised as held on a Quistclose trust, the Court will look to whether the parties outwardly manifested a mutual intention that – 

  1. The money was provided for a specific purposeand
  2. The recipient was to be subject to restrictions on the use of the money for any other purpose.23

Precedents – When the Courts will and will not uphold a Quistclose Trust claim

The most useful way to gain an understanding of how the principles are applied and where the Courts tend to draw the line as to when a Quistclose trust has and has not been created is to read cases. It is worth making sure to have regard to the most recent iterations of the Courts’ application of the principles, to see the current approach. You can then consider the facts of the case before you, and the picture will generally become clearer as to on which side of the line it likely falls.

Here, then, is a selection of 11 Quistclose trust cases, falling variously either side of the line. These are in chronological order and are mostly Australian, though I have included several English decisions. The frequency with which the issue continues to arise recently is eloquent as to how important a potential claim the Quistclose trust continues to be.

(1) Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567

In the original Quistclose decision, Rolls Razor was seeking financing, and turned to the company of a significant shareholder. Quistclose Investments agreed to provide finance but as a precondition, Rolls Razor was required to pay all pre-declared dividends. The evidence was that the mutual intention of Quistclose and Rolls Razor, and indeed the essence of their bargain, was that the sum advanced by cheque should not become part of the assets of Rolls Razor but should be used exclusively for the payment of the particular class of creditors. The cheque drawn by Quistclose in favour of Rolls Razor, which represented the moneys borrowed by Rolls Razor, had been paid into a special account with Barclays who, importantly, had been informed that the account was to be used only to pay the dividend to those creditors. Rolls Razor subsequently went into liquidation. The findings as to the parties’ mutual intention was held to give rise to a primary trust in favour of those entitled to a dividend, and that if the purpose could not be carried out, the money was then held on a secondary trust to be returned to Quistclose. Quistclose trust found.

(2) Twinsectra Ltd v Yardley [2002] UKHL 12; [2002] 2 AC 164

In this case, Yardley obtained a loan from Twinsectra to buy a property. Twinsectra asked for a solicitor’s undertaking to secure the loan; the undertaking was to ensure that the moneys lent were not disbursed pending the acquisition of property and would only be used to acquire property. The solicitor S gave the undertaking. The moneys lent were applied in breach of the undertaking. It was argued that given Twinsectra was a commercial lender, it was difficult to conclude that it intended to retain beneficial title or create a trust over the money advanced, but failed to make this explicit in the loan agreement; that instead, all indicia pointed to an unsecured loan protected by a high interest rate and a solicitor’s personal undertaking. However, the Appellate Committee held that the solicitor’s undertaking, which was given as a condition of payment, gave rise to a Quistclose trust. Clauses 1 and 2 of the undertaking made it clear that the money was not to be at the free disposal of Mr Yardley.24 Lord Millet observed at [73] that it was not enough that the money was lent for a particular purpose because money so lent without more is at the free disposition of the borrower. Quistclose trust found.

(3) David Alan Thomson v Golden Destiny Investments Pty Ltd (No 2) [2015] NSWSC 1929

This case in 2015 involved a property development that had failed. NGI had contributed $6 million on behalf of investors. NGI argued that the $6 million was at all times impressed with a Quistclose trust. The Court however held that it was not. There was no evidence of such a mutual intention nor did the plaintiffs ever constitute themselves as trustees, nor did GDI. Once the monies were paid away to the plaintiffs, without it being impressed with a trust, it became the plaintiffs’. It was no longer NGI’s money or the investors’. Upon rescission of the original contracts, the plaintiffs were obliged to repay the $6 million to GDI. There existed a chose in action. GDI was indebted to NGI. But there was no trust. No Quistclose trust.

(4) First City Monument Bank PLC v Zumax Nigeria Ltd Ltd [2019] EWCA Civ 294

The issue in this case was whether a financial institution (IMB) held on trust for Zumax moneys credited to IMB’s bank account with Commerzbank by a nominee for Zumax from its account with a different bank, and transmitted with instructions that the credits were for onward transmission to Zumax. The Court of Appeal of England and Wales held that a trust was not established because, per Newey LJ (Lewison and Males LLJ agreeing) –

  1. In so far as it was said that the trust was an express trust, there had to be certainty of intention, objects and subject matter (which was not shown), and
  2. In so far as a resulting trust was relied upon, it was not enough to show that the moneys were paid for a purpose. More had to be shown. This could be demonstrated by showing that the money was not at the free disposition of the recipient. However that could not be shown here because there was no segregated bank account for these credits and the parties would expect the moneys held by a bank to be used by the bank for its own purposes. No Quistclose trust.

(5) Nikitins (Liquidator) v EncoreFX (Australia) Pty Ltd (in liq) No 2) [2021] FCA 27

In this case in 2021, the company EncoreFX operated a business providing foreign exchange services to businesses. On a particular day two customers deposited about $800,000 to be exchanged into USD. However before the funds could be exchanged, EncoreFX was placed into external administration. The Court found that the moneys were held under a statutory trust established by Australian financial services legislation (s 981H of the Corporations Act 2001 (Cth), although the alternative claim to a statutory trust under s 1017E failed). In obiter, it went on to find that the funds were not held on a Quistclose trust. Colvin J observed –

  1. The fact that before the payment of one of the customers, its CEO expressed the need to feel his company’s money would be safe. An employee of the recipient company said his company’s funds would be held in a trust bank account pending completion of the transactions. The Court attributed no weight to this oral conversation, as there was no evidence as to what authority (if any) that employee had to make representations on behalf of EncoreFX. Instead the correct approach was to focus upon the nature of the transaction and the objective intention.
  2. The Court examined the PDS and found the language was equivocal as to whether funds paid would be held separately. This was not enough to establish a trust. No Quistclose trust.

(6) Krejci, in the matter of Union Standard International Group Pty Ltd (in liq) [2021] FCA 1483

In this case in 2021, Union Standard had provided financial services to various customers, including a class known as “investing clients”. When it went into liquidation, there were insufficient funds to pay all creditors. The investing clients claimed a priority over funds in a particular account, on the basis those funds were held on trust for the investing clients. The Court held that a statutory trust was established by Australian financial services legislation. It went on to consider, in obiter, whether a Quistclose trust was established. It found that it was, on the basis that –

  1. everything the investing clients were told indicated to them that their funds were held and used by Union Standard as a trustee, on trust for those clients. They were told this directly by Union Standard’s agents. They were told this throughout the documentation.
  2. Quistclose trust arose as moneys were paid by investing clients to Union Standard not to become part of Union Standard’s general assets but only to be used for the purpose of Union Standard using the moneys to generate leverage in trading transactions on behalf of the investing clients. Quistclose trust found.

(7) Re BBY Limited (Receivers and Managers Appointed)(in liq) [2022] NSWSC 29

This was a case last year where money was transferred for a purpose (payment of a margin call). The payer imposed no restrictions or conditions on BBY as to its treatment of the funds, other than its repayment within a short-time frame. Relevantly, no request was made for BBY to segregate the $3m from its general assets. The payer was not told that the funds would be deposited into a trust account of BBY, nor was an undertaking given by anyone on behalf of BBY that the $3 million advance would be used solely for paying margin calls in relation to the Aquila trade and for no other purpose, and was to be retained by BBY until so applied. The payer could have, but did not, place any conditions or restrictions on the use of the funds by BBY, or the ability of BBY to mix the funds with other monies. The payer’s submissions “conflated an expectation or general understanding that funds would be used for a specific purpose with the mutual intentions of the parties. The question [was] whether the objective intention of the parties was that the funds advanced would remain the beneficial property of the lender (even if not an exclusive beneficial interest) until the borrower applied those funds in the manner required by the stipulated purpose.” The Court held that the payment was not of moneys impressed with a trust, the payer became a creditor of BBY, and the payment was an unfair preference. No Quistclose trust.

(8) Prickly BayWaterside Ltd v British American Insurance Company Ltd (Grenada) [2022] UKPC 8 

In this Privy Council decision last year, a Mrs Lee had paid the respondent Baico a sum of money which the appellant Prickly Bay asserted was intended to be used for the purpose of payment in two years’ time of an amount which would then have become due and payable to a Mr Steele. Baico had given a guarantee that this sum would be duly paid. Prickly Bay contended that in this context Mrs Lee retained the beneficial right and title to the moneys and that Baico, having failed to pay under the guarantee, was liable to return the moneys to her. Prickly Bay failed both at first instance in Grenada, on appeal to the Eastern Carribean Court of Appeal, and in the Privy Council. In dismissing the appeal, the Board of the Privy Council observed, inter alia – 

  1. It was critical that there was no requirement that the funds be segregated, so long as money to the same amount was then paid as intended pursuant to the contractual obligations assumed. (at [42])
  2. There was nothing to indicate that Prickly Bay (or Mrs Lee on its behalf) retained any beneficial interest in the money or that it did not form part of the general assets of Baico once paid over to it. What was created was a contractual arrangement, not a trust. (at [44])
  3. Mrs Lee had remedies in contract against Baico, but did not require Baico to act as a fiduciary or to keep her subscription moneys separate from any of its own moneys. Those aspects of the parties’ arrangements were inconsistent with the retention by Prickly Bay (or Mrs Lee) of any partial beneficial interest under a Quistclose trust to enforce the performance of the purpose of the trust or alternatively the return of the moneys. (at [46]) No Quistclose trust.

(9) Goo v Sim [2022] NSWSC 420

In this case last year, the plaintiffs and Mr Sim had entered into a business venture to create an online remittance portal for the real-time transfer of money between individuals in Australia and South Korea. Mr Sim set up a South Koren company global HR for the new business. A sum of $110,000 ($109,000 cash and $1,000 transfer) was given to Mr Sim by one of the plaintiff companies, just before Global HR was incorporated, and a second cash amount of $50,000 was given to Mr Sim two months later by another plaintiff. It was alleged Mr Sim had then used the money for his own benefit rather than for the business venture, although Mr Sim said it was used for his salary and business expenses. A range of claims were brought, including a contention that the $110,000 was held on a Quistclose trust. The plaintiffs claimed the $110,000 did not become Global HR’s property or part of its assets because of the specific purpose for which the money was paid, which Global HR knew. The Court accepted that objectively, it must have been the purpose of the parties that the $110,000 was to be transferred to Global HR and to be used only for its establishment and ordinary business operations in connection with the establishment of the online remittance business in Korea. However it was not sufficient to show the money was advanced for such a purpose. There had to be other objective indicators of an intention to create a trust, and an intention that the money not become part of the general assets of Global HR. There was no evidence that Mr Goo and Mr Sim discussed a requirement to keep the money in an account separate from any other money Global HR might receive, a powerful indicator of an absence of intention that the money was intended to be held on trust. The plaintiffs did not point to any language used by the parties that was suggestive of the $110,000 being held on trust. No Quistclose trust.

(10) Eumeralla Estate Pty Ltd v Chen [2022] VSCA 78

I regard this case as probably the low water mark of Quistclose trust cases, in that at first blush it looks like a case where money was paid into a company’s bank account for a purpose, as is always the case, but with no explicit restrictions. However there was more to it than that. This was a joint venture case, with a JV agreement governing the parties’ dealings. The defendants had paid $430,000 into the JV vehicle Eumeralla’s bank account for the future development of a particular property. Ultimately the sale did not proceed. One of the plaintiffs moved the money out of the account inconsistently with the intended purpose. The Court of Appeal held that Eumeralla held the money on trust for the defendants, on the basis that the money was paid into Eumeralla’s account for a particular purpose known to all parties. It was significant that: Eumerella was incorporated to further the mutually agreed purpose of the parties, being the corporate vehicle for the property purchase and development, it conducted no other business and had that single purpose, the payment occurred pursuant to a joint venture agreement, it was not open to the plaintiffs to withdraw the money from the account as they did. Quistclose trust found.

(11) Jieyun International Investments Pty Ltd v Toorak Development Group Pty Ltd [2022] VSC 387

In this case last year, loan money was advanced by Jieyun under a loan deed pursuant to which the moneys advanced “must only be used for the Approved Purpose”, which was the purchase by Toorak Development of certain Toorak properties, and the payment of development and construction expenses. The deed repeated that the parties acknowledged and agreed that the loan must only be used for the Approved Purpose. The Court held that the moneys were held on a Quistclose trust, inferring the intention to create a trust from –

  1. Both Jieyun and Toorak Development expressly acknowledged and agreed that the advances must only be used for the Approved Purposes. This was intended to make clear that the advances were not intended to become the beneficial property of Toorak Development 
  2. There was an express restriction on the manner in which the trustee Toorak Development could deal with trust assets
  3. The fact that Toorak Development was an SPV to be trustee of the TDG Unit Trust, established for the purpose of carrying on the business of real estate, in developing the particular properties.  Quistclose trust found.


Quistclose trusts can be a useful tool for recovery in equity, if the circumstances of the relevant transaction/s support them. They become more acutely important when the recipient subsequently collapses. If a trust arose and the payor retains a proprietary interest in the funds paid, it may be traceable into the recipient’s bank account / chose in action and potentially – subject to matters like the tracing rules – recovered. So – when will that be the case?

The principles distilled above should be read in full. However it is clear from the authorities that the two key requirements are those at principles (5) and (6) above. As the New South Wales Supreme Court concluded last year in Re BBY Ltd, in order for a transfer of funds or assets to be characterised as held on a Quistclose trust, the Court will look to whether the parties outwardly manifested a mutual intention that –

  1. The money was provided for a specific purposeand
  2. The recipient was to be subject to restrictions on the use of the money for any other purpose

If equity would so respond, this can be a valuable claim.


  1. As to the last point, see Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (Lipkin Gorman), 572 per Lord Goff of Chieveley.
  2. There is no property in currency: Lipkin Gorman at 563 per Lord Templeman. It is said that when money passes into currency property goes with possession: Ilich v The Queen (1987) 162 CLR 110, 128 per Wilson and Dawson JJ, 138-139 per Brennan J.
  3. Russell v Scott (1936) 55 CLR 440, 450-451 per Dixon and Evatt JJ.
  4. Croton v The Queen [1967] HCA 48; (1967) 117 CLR 326, 330 per Barwick CJ.
  5. Note that in some cases, a statutory trust may arise under Australian financial services legislation, such as s 981H or s 1017E of the Corporations Act 2001 (Cth). That is a topic for another paper.
  6. See eg Salvo v New Tel Limited [2005] NSWCA 281 (Salvo) at [32]-[53] per Spigelman CJ; Legal Services Board v Gillespie-Jones (2013) 249 CLR 493 at [112]-[127] per Bell, Gageler and Keane JJ; Raulfs v Fishy Bite [2012] NSWCA 135, [44]-[55] per Campbell JA; See also Abandoning the Quistclose Trust in Insolvency, Balani R, (2021) 42(1) Adelaide Law Review 259, 263. Cf Salvo at [76]-[78] per Handley JA, McManus RE Pty Ltd v Ward (2009) 74 NSWLR 662 at [25] per Palmer J, Adam v Hasabo [2019] NSWSC 1167 at [252] per Robb J; Eumeralla Estate Pty Ltd v Chen [2022] VSCA 78.
  7. The original decision is Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567.
  8. Nikitins (Liquidator) v EncoreFX (Australia) Pty Ltd (in liq)(No 2) [2021] FCA 27 (Nikitins v EncoreFX) at [100], citing Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 30 FCR 491 (Re Australian Elizabethan Theatre Trust), 502-503 per Gummow J.
  9. Prickly Bay Waterside Ltd v British American Insurance Company Ltd [2022] UKPC 8; [2022] 1 WLR 2087 (Prickly Bay) at [32] per Lady Arden, delivering the judgment of the Privy Council.
  10. Nikitins v EncoreFX at [100], citing Re Australian Elizabethan Theatre Trust at 503, Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253 at [53]-[59] per Gummow and Hayne JJ.
  11. Re BBY Limited (Receivers and Managers Appointed)(in liq) [2022] NSWSC 29 (Re BBY Limited).
  12. Prickly Bay at [37].
  13. Prickly Bay at [47].
  14. Prickly Bay at [34]; Twinsectra Ltd v Yardley [2002] 2 AC 164 (Twinsectra v Yardley) at [73].
  15. Nikitins v EncoreFX at [101], citing Legal Services Commissioner v Brereton [2011] VSCA 241; (2011) 33 VR 126 at [96] per Tate JA, Nettle and Ashley JJA agreeing.
  16. Nikitins v EncoreFX at [101], citing George v Webb [2011] NSWSC 1608 at [211] per Ward J, and Twinsectra Ltd v Yardley at 185.
  17. See Re BBY Limited.
  18. Nikitins v EncoreFX at [102], citing Walker v Corboy (1990) 19 NSWLR 382, 397-398 per Meagher JA.
  19. Raulfs v Fishy Bite [2012] NSWCA 135 at [61] per Campbell JA, Meagher and Barrett JJA agreeing.
  20. Nikitins v EncoreFX at [103], citing Peter Cox Investments Pty Ltd (in liq) v International Air Transport Association [1999] FCA 27; 161 ALR 105 at [49] O’Loughlin J.
  21. Earth Civil Australia Pty Ltd, RCG CBD Pty Ltd, Bluemine Pty Ltd, Diamondwish Pty Ltd and Rackforce Pty Ltd (all in liq) [2021] NSWSC 966 at [2686] per Ward CJ in Eq. Note this principle applies to all express trusts, not only Quistclose trusts.
  22. Eumeralla Estate Pty Ltd v Chen [2022] VSCA 78 at [83(g)] per the plurality. This trust law principle is not exclusive to Quistclose trusts, however this was a Quistclose trust case.
  23. See Re BBY Limited.
  24. See Prickly Bay at [23].

Newsflash: Great Southern settlement deed approved

Yesterday in Melbourne Justice Croft approved the deed of settlement ending the Great Southern class action proceedings – Clarke (as trustee of the Clarke Family Trust) & Ors v Great Southern Finance Pty Ltd (Receivers & Managers Appointed)(in liquidation) & Ors [2014] VSC 516. I will not make comment on this case, but instead will refer to a few key parts of the judgment –

The principal terms of the Deed of Setlement are set out at [57] and are usefully summarised at [64], which summary is reproduced here –

  1. “The insurers of GSMAL will pay $23.8 million, to be disbursed as follows:
    1. $20 million to M+K Clients, to be disbursed pro rata based upon amounts paid by each M+K Client to M+K for legal fees and disbursements;
    2. $250,000 to Javelin Asset Management Pty Ltd; and
    3. $3.55 million to be disbursed pro rata to investors who invested pursuant to a Product Disclosure Statement issued in relation to a scheme managed by GSMAL, such disbursement to take place in accordance with the terms of a proposed Scheme of Arrangement.
  2. Group Members’ loans entered into to fund the investments and now held by Bendigo and Adelaide Bank Limited (or its related entities) will be admitted as valid and enforceable, and the BEN Parties will waive interest relating to overdue amounts accrued and unpaid as at the Approval Date.
  3. Group Members’ loans entered into to fund the investments and now held by Javelin Asset Management Pty Ltd will be admitted as valid and enforceable, and borrowers with Javelin loans will have 28 days from the Approval Date to make an election to either:
    1. make payment of the outstanding loan balance in full within 14 days of making the election and receive a 20% discount on the loan balance (being the balance as at 1 May 2014); or
    2. agree to a deferred settlement with the loan balance discounted by 17% if the balance is met by way of 12 equal monthly payments; or
    3. agree to an extended term where the terms are varied so that the first 12 months after the Approval Date are interest free and then 5% per annum for the remainder of the Revised Term.
  4. The Lead Plaintiffs, on behalf of themselves and on behalf of Group Members, will release the other parties (and their related entities or persons) from all Claims arising out of the contents of each Product Disclosure Statement, the Loan Agreements and or the allegations made in or the facts giving rise to all the relevant proceedings.
  5. The Group Proceedings will be dismissed with the parties bearing their own costs.”

His Honour took the unusual step of annexing the mammoth 2012 page unpublished judgment he had written but had never been delivered (calling them the “Great Southern Reasons”) to this judgment approving the settlement deed. His Honour notes at [2] that the trial of the Great Southern proceedings had extended over 90 sitting days from October 2012 to October 2013. Judgment was reserved. On Wednesday 23 July 2014 the parties were informed that the judgment was ready and listed for delivery on Friday 25 July. Within hours, the Court was notified that the proceedings had settled.

At [3] Croft J notes that the Great Southern Reasons are not published as reasons for judgment, simply annexed to this one, which suggests that as a precedent to future cases their status may be uncertain, and perhaps something less than obiter. Nevertheless his Honour explains why he has had regard to his Great Southern Reasons in considering whether to approve the Deed at [50]-[56], in particular at [56].

7.3% of the 21000 group members notified the Court of their objections to the settlement. These are considered by his Honour from [83].

As Croft J’s approval judgment at [6] makes clear, if the proceeding had not settled and the Great Southern Reasons had been handed down as his Honour’s judgment in the case, the plaintiffs’ claims would have been wholly unsuccessful. Moreover, given the length and expense of the proceedings and the trial, costly adverse costs consequencse for the plaintiffs are likely to have followed. This settlement avoids that outcome and achieves finality in the litigation.

Newsflash: High Court denies Timbercorp investors special leave to appeal

On Thursday (10 April 2014) the High Court of Australia refused special leave to appeal to the Timbercorp investors from last October’s Victorian Court of Appeal decision.

For those who would like a more detailed understanding of the case, I wrote a detailed review last October discussing the first instance judgment of his Honour Justice Judd and the appeal judgment of the Victorian Court of Appeal – link.

Broadly, the Court of Appeal had held that 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.

The transcript of the special leave application is not yet up on Austlii. However reports are starting to appear in the press – an article appearing in Saturday’s Age is here.

Newsflash: High Court today dismissed Willmott Forests appeal

In a 4:1 judgment the High Court today held that liquidators of landlord companies – not only liquidators of tenant companies – can disclaim leases under s 568(1) of the Corporations Act 2001 (Cth), and that the disclaimer terminates the tenants’ rights arising under the leases. The judgment in Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers Appointed)(In Liquidation) [2013] HCA 51 is now on Austlii and can be read in full here.

The majority was French CJ, Hayne, Kiefel and Gageler JJ, with his Honour Gageler J delivering his own judgment. The dissenting judgment was that of Keane J.

Their Honours French CJ, Hayne and Kiefel JJ identified the central question of construction of s 568(1) as being whether a lease granted by a landlord company to a tenant is “a contract” within the meaning of s 568(1)(f). It is, according to their Honours, by virtue of s 568(1A) of the Act which provides that “[a] liquidator cannot disclaim a contract (other than an unprofitable contract or a lease of land) except with the leave of the Court”  (see [4]). The question then became whether the reference to “a lease of land” in s 568(1A) should be read as referring to any lease to which the company is a party, or only to leases of which the company is the tenant? Their Honours concluded the former was correct.

Broadly, the power of disclaimer of liquidators under s 568(1) is expressed as a one to “disclaim property of the company”. What such “property” includes is then set out in sub-paragraphs, (f) of which is “a contract”.

The appellant advanced two principal arguments. The first was that the only relevant property of the landlord company capable of being disclaimed was its unsaleable reversionary interest in the land the subject of the leases; the second, that the tenants’ leasehold estates would survive disclaimer of the lease contracts (see [27]). Their Honours French CJ, Hayne and Kieffel JJ considered and rejected the first of these arguments at [28]-[50] and the second at [51]-[55].

In relation to the second, their Honours held that it follows from the operation of s 568D(1) that, from the effective date of the disclaimer, the company’s liability to provide the tenant with quiet enjoyment of the lease property and the tenant’s rights to quiet enjoyment of the property are terminated. If the tenant suffers loss thereby, the tenant may prove for that loss in the winding up (see [8]). At [57], to make the point clear, their Honours expressly held that from the day on which the disclaimer takes effect, each tenant’s estate or interest in the land would be terminated.

Strikingly, though, their Honours added their own observation, under the sub-heading of “Questions not considered”, demonstrating a consciousness of at least some of the ramifications of their judgment, a matter to which I will later return:

Obviously, a tenant whose lease has been disclaimed by the liquidator of a landlord may consider that being left to proof as an unsecured creditor in the winding up gives little effective compensation for what has been taken away. Whether that is so in this case was not examined in argument and is not considered. Nor has there been any occasion to consider in this case whether the liquidators require the leave of the “Court” before disclaiming the investors’ leases or, if they do require leave, what considerations would inform the decision to grant or refuse leave. It may be noted that the Act does provide expressly, in s 568B(3) that the “Court”, on application, may set aside a disclaimer “only if satisfied that the disclaimer would cause, to persons who have, or claim to have, interests in the property, prejudice that is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company’s creditors” (emphasis added). Again, however, whather or how that provision would apply in this case was not explored in argument.”

Heads Up – Willmott Forests High Court Appeal – Judgment imminent

The High Court of Australia is to hand down judgment in the Willmott Forests High Court appeal this Wednesday 4 December. I will be interstate for a mediation, but will provide an update as soon as I am able.

To refresh your memories as to developments to this point –

  • February 2012 – The first instance decision of Davies J of the Victorian Supreme Court as to whether the disclaimer of a lease by the liquidator of the landlord’s company extinguishes the tenant’s proprietary interest in the land is handed down. Her Honour held that it did not – see my post here;
  •  September 2012 – The Victorian Court of Appeal overturns the judgment of Davies J and holds that a leasehold interest in land is extinguished by the disclaimer of the lease agreement by the liquidator of the lessor, pursuant to s 568(1) of the Corporations Act 2001 (Cth) – see my post here;
  • May 2013 – The High Court grants special leave to appeal that decision – see my post here;
  • August 2013 – The High Court hears the appeal – see my post here.

No doubt many of us are awaiting the High Court’s decision with interest.

Timbercorp appeal fails, as the Great Southern trial draws to a close

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 [2013] 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 [29]-[57]

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 [38] and [40]-[53]).

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[58]-[71]

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 [68]).

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 [67]).

Shift in the appellant’s case – see [71]-[86]

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.

On Appeal

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.

Grounds of appeal 
Some of the specific grounds of appeal raised were as follows –
Ground 1 – [125]-[132]  The complaint was essentially that his Honour had erred in construing the expression “significant risk” in s 1013D(1)(c) of the Corporations Act. The Court of Appeal held that the trial judge was correct when he said the definition was intended to be a flexible requirement tailored to the type of product involved and its particular circumstances. Amongst the constellation of issues in weighting ‘significant risk’, there is the probability of the occurence, the degree of impact upon investors, the nature of the particular product, and the profile of the investors, together with other matters. This group of issues is not closed and will vary depending upon the circumstances. (See [125]-[132])
Ground 2 [133]-[141] Again as to the construction of s 1013D(1)(c), the appellant argued his Honour erred in his assessment of when a risk is “significant”. This ground invoked matters associated with management of risk. In essence, the appellant submitted that the trial judge erred in holding that a risk is not significant if it is capable of successful management and is being managed. However the Court of Appeal disagreed that his Honour considered management of risk for the purposes of construction of the section. Rather, his Honour considered it as a matter of evidence and something that may intercept the potential emergence of a risk of significance.
Ground 4 –  [144]-[157] – The appellant argued his Honour erred in his construction of s 1013F, which provides for what information need not be included in a PDS.
Ground 13[212]-[225] -The appellants alleged that in his analysis of whether “the financial representations” and “project contributions representations” were misleading or deceptive, his Honour erred by failing to consider the effect of each PDS on an ordinary and reasonable reader. The criticism made was the focus of the analysis should be the effect of the representations upon the persons to whom the representations were addressed, not upon the mental state of the person making the representations.
The Court of Appeal expressed the view that whether the representations were misleading and deceptive did depend at least in part upon the mental state of the maker of the representations, because they would ordinarily be understood as statements of opinion. They were not apt to mislead if the opinion was genuinely and reasonably held by the maker of the statements. Their Honours also noted that the obligation to disclose risks to the schemes depended upon the actual knowledge of the risks. The respondents met the allegations with detailed evidence of their management of the business risks including the taxation announcement and the credit crisis, and the state of mind of the Directors as to the Group’s financial health and future prospects. It was entirely appropriate, so their Honours averred, for the trial judge to have regard to this evidence in determining whehter the alleged representations were misleading or deceptive. In any event, so the Court found, the trial judge did not simply analyse the representations from the standpoint of the respondents, but examined their likely effect upon the class of investors to whom the PDSs were addressed.
Counsel for the appellant submitted that the trial judge erred in that he failed to consider the impression which the PDSs would have had upon a relatively unsophisticated investor. However the Court disagreed that his Honour’s reasons disclosed that he unduly elevated the understanding and experience of the investors. Their Honours noted that the only two investors to give evidence were both knowledgeable and sophisticated. One was a qualified engineer and successful business engaging in property development through several companies. He was familiar with the share market and was computer literate. He understood balance sheets and P&L statements. The other, Mr Van Hoff, was the sole shareholder and director of a company that conducted a transport business. He had been in business for some 22 years, had a portfolio of shares and a self-managed superannuation fund. In any event, the plurality observed that the appellant’s claim failed for reasons which did not turn upon the perceptiveness, sophistication or knowledge of the investors.
Ground 14 – reliance – [226]-[239] – The appellant challenged the trial judge’s finding that there was no relevant reliance by the two plaintiffs on the alleged non-disclosures, by concluding that the sole driver for their decision to invest was the tax-effective nature of the projects and that they were indifferent to the content of the documents, and that there was a necessary inconsistency between reliance on the strength of the group, and the assumption that projects were quarantined one from another.
To succeed, the appellant had to establish that the alleged representaions constitued a decisive consideration in the decision to invest in the Timbercorp scheme. The witness statements of Mr Woodcroft-Brown and Mr Van Hoff recorded that they read the PDSs and stated their reliance on the representations in temrs which were virtually identical and which echoed hte allegations made in the statemnt of claim. The Court of Appeal described it as unsurprising that the trial judge stated he placed little reliance on this formulaic evidence.
In light of evidence given on cross-examination, the trial judge was not persuaded that the appellant Mr Woodcroft-Brown had read the PDSs in any detail. There had been a meeting with a financial adviser where he was presented with a number of PDSs for a three different investments schemes for him to consider, with a view to reducing his tax liability on a profit earnt, and did not have time to do much more than skim through them. The trial judge concluded that the appellant acted on the recommendation of the financial advisor, motivated by his “anxious desire” to obtain a tax deduction. The trial judge found that the actual content of the PDS or the absence of information, was not what induced the appellant to invest in the project. It was a matter of selecting a project to provide him with the required tax-relief. His Honour said he had no doubt that the financing option – 12 months interest free = was an inducement.
The trial judge found similarly with respect to Mr Van Hoff. He was not satisfied that Mr Van Hoff read any of the PDS in any detail. He may have glanced at parts, but was willing to invest without careful consideration of the documents. That was treated as undermining his evidence insofar as he relied on the contents of the documents, or the absence of information contained in them. His Honour found that Mr Van Hoff did not look to the PDSs as a source of information to assist him in his decision to invest in Timbercorp schemes. He chose the schemes on the basis of advice from his accountant and others, in search of tax relief.
Counsel for the appellant submitted that there was no inconsistency between investing with a view to obtaining a tax-deduction, and investing to obtaining income. However the Court of Appeal observed that while it may be acepted that the appellant and Mr Van Hoff were not indifferent to whether their investments would be profitable, it does not follow that their hope of profit was derived from any representations made by the respondents.
Their Honours upheld the trial judges’ conclusions here also.
Overall, the Court of Appeal held that the appellant had failed to demonstrate that the factual conclusions the trial judge made upon the application of correct legal test were not open to his Honour to find. They held that none of the grounds succeeded, and dismissed the appeal.
Not a good result for the investors in the Timbercorp management investment schemes, although the Timbercorp liquidators should be commended for their announcement following the judgment that they would offer some borrowers a chance to settle their loans and receive a 15% or 10% discount on their debt, although even this may do little to assuage the ongoing financial pain of the borrowers.
It could be a long while yet before his Honour Justice Croft hands down his judgment in Great Southern. After the 24 sitting days of the Timbercorp trial from late May to early July 2011, Judd J handed down his judgment an admirable 2 months later. After the almost full calendar year of the Great Southern class action trial, albeit with breaks punctuating that timeframe, Croft J will have a sizeable job ahead, and it is hard to see how his Honour’s judgment could be likely to be delivered much before mid-2014, and possibly later.
Thus it could be a while yet before we learn what evidentiary problems the Great Southern investors might have had and whether they went to issues that were sticking points in Timbercorp, such as reliance or causation. Nor will we know for a while in detail what the evidence disclosed about the knowledge of the representors in the Great Southern PDSs as to the risks of the investments at the relevant times.
We also do not yet know whether there was a smoking gun in the new evidence found on several company servers and computers that were discovered late in the trial. It has been reported that this development lead to the reconvening of the trial after evidence had been thought to have been closed, and the recalling of several witnesses. It was reported that counsel for the Great Southern investors submitted that the new evidence showed Great Southern used cash top-up payments to mask the fact that log yields from plantations were below forecast. It was not until the 11th month since the trial opened that evidence was reportedly heard from the former head of forestry at Great Southern, that the company was aware at a material time that plantations were not meeting forecast yields. It was also submitted by counsel for the investors that to sate investor demand, the firm bought plots not suitable for yielding plantations as forecast in the PDS (link).
In any event what we can probably be confident of, is that much will now be made in final oral submissions of the Court of Appeal’s judgment in Timbercorp by the Great Southern defendants.

Snapshot updates on Willmott Forests, phoenixing and new offers of compromise rules

Willmott Forests

Earlier this month the High Court heard the appeal against the Victorian Court of Appeal’s decision in Re Willmott Forests Ltd (Receivers and Managers appointed)(in liquidation) v Willmott Growers Group Inc and Willmott Action Group Inc [2012] VSCA 202.

I wrote on the Victorian Court of Appeal’s decision last year here. (My reviews of earlier Willmott Forests decisions are here and here.) In short, the Court of Appeal held that a tenant’s leasehold interest could be extinguished by disclaimer of the lease agreement by the liquidator of the lessor, pursuant to s 568(1) of the Corporations Act 2001 (Cth). The transcript of the High Court hearing of the appeal from that decision may be read here, and the parties’ written summaries of argument are available online here (under the heading for proceeding M99 of 2012).

The Victorian Court of Appeal’s decision has excited some controversy. In their summary of argument for special leave to appeal from that decision, Willmott Growers Group Inc noted that disclaimer of a lease by a liquidator of a corporate tenant is common (at [42]). However, they argued that disclaimer of a lease by a liquidator of a corporate lessor is a novel use of the liquidator’s disclaimer power, and that the implications of the Court of Appeal’s decision are far reaching. Tenants, particularly retail shop tenants, typically invest substantial sums into the goodwill and fit-out of their leased premises. Much of this expenditure is lost of the tenant is forced to relocate. Also, as the Court of Appeal’s decision erodes the security of tenure under a lease, it may impact upon the willingness of banks and financiers to grant finance on the security of a lease. They noted that the consequences for lessees, in particular retail tenants, are significant. The Victorian Court of Appeal had indicated at [51] that the implications of its decision extended to “shopping centre leases”. (See [36]-[41] of the applicant’s summary of argument.)

We await the High Court’s judgment with interest.

Update on draft legislation targeting phoenix companies

Early last year I wrote about a set of two draft bills that had been released by the Gillard government directed at cracking down on phoenix companies. These were the Corporations Amendment (Phoenixing and other measures) Bill 2012 (the Phoenixing Bill), and the Corporations Amendment (Similar Names) Bill 2012 (the Similar Names Bill). You can read my detailed discussion of those two draft Bills here.

Briefly, the Phoenixing Bill comprised two measures. One was to give ASIC administrative powers to order the winding up of abandoned companies. The primary aim of this measure was said to be the protection of workers’ entitlements, and their ability to access GEERS, with the additional benefit of enabling a liquidator to investigate the affairs of an abandoned company, including suspected phoenix activity or other misconduct. The second set of measures in that Bill was to facilitate the online publication of corporate insolvency notices. As many of you will know, this Bill was enacted last year and ASIC’s insolvency notices website went live in July 2012.

The draft Similar Names Bill proved to be more controversial. Broadly, it proposed amendments to the Corporations Act which would impose personal joint and individual liability on a director for debts of a company that has a similar name to a pre-liquidation name of a failed company (or its business) of which that person was also director for at least 12 months prior to winding up.  The debts for which a director could were to become personally liable were debts incurred by the new (phoenix) company within five years of the commencement of the winding up of the failed company. There was to be scope for directors to obtain exemptions from liability.

My comments on that draft Bill may be read here. There were numerous other fairly significant criticisms made of the draft legislation, set out in submissions lodged by a number of bodies concerned with the proposals, including the Australian Institute of Company Directors and the Law Council of Australia. Their criticisms included that the exposure draft drew no distinction between failed companies, and those abandoned or placed into liquidation for the purpose of engaging in phoenix activity; it did not define “fraudulent phoenix activity” or require a dishonest intention on the part of directors to defraud or deceive creditors before it imposed personal liability; and that it effectively reversed the presumption of honesty or “innocence”, unless the contrary were proven.

It appears that those submissions and the draft reforms were under consideration, as that Bill was not then introduced to Parliament. Indeed it had still not been introduced by the time of the dissolution of Parliament and the onset of the caretaker conventions ahead of the upcoming federal election. Thus the future of the draft Bill, or any other legislative measures to be taken to address phoenix activity, will be a matter for a future federal government to consider.

New Victorian Supreme Court Rules on Offers of Compromise

These are to come into effect on 1 September 2013 and can be read here.

The amendments include a new rule 26.02(4) which requires the issue of costs to be expressly addressed in an offer of compromise. Offers of compromise may be expressed to be inclusive of costs, if preferred by the offeror. New rule 26.02(4) requires that:

“An offer of compromise must state either – 

(a) that the offer is inclusive of costs; or

(b) that costs are to be paid or received, as the case may be, in addition to the offer.”

Note that the minimum time for which an offer of compromise must remain open to be accepted remains 14 days (r 26.03(3)), although there has been an adjustment to the timeframe for payment to be made post acceptance, where the offer does not provide otherwise (increases to 28 days – see the amendment to rule 26.03.01.)

New rule 26.08(4) provides for a defendant whose offer of compromise is unreasonably refused to be awarded standard costs up to the time of the offer and indemnity costs thereafter, unless the Court otherwise orders.

New rule 26.08.01 provides for Courts to take into account pre-litigation offers when making a determination as to costs. Thus offers made even when no litigation is yet on foot ought be given careful consideration. Potentially, the unreasonable refusal of a pre-litigation offer could leave a party exposed to an increased costs order.

Newsflash – High Court grants special leave to appeal in Willmott Forests – disclaimer of leases

Yesterday the High Court granted special leave to appeal the Victorian Court of Appeal’s decision in Willmott Forests Ltd (Receivers and Managers appointed)(in liquidation) v Willmott Growers Group Inc and Willmott Action Group Inc [2012] VSCA 202.

The transcript of the special leave application is not yet up on Austlii. However my friend and colleague Sam Hopper has posted a very useful update on his blog here. Also the parties’ summaries of argument are available online here (scroll down to the table for proceeding M99 of 2012).

I wrote on the Victorian Court of Appeal’s decision last year here. In short, the Court of Appeal held that a tenant’s leasehold interest could be extinguished by disclaimer of the lease agreement by the liquidator of the lessor, pursuant to s 568(1) of the Corporations Act 2001 (Cth).

In their summary of argument for special leave, Willmott Growers Group Inc noted that disclaimer of a lease by a liquidator of a corporate tenant is common (at [42]). However, they argued that disclaimer of a lease by a liquidator of a corporate lessor is a novel use of the liquidator’s disclaimer power, and that the implications of the Court of Appeal’s decision are far reaching. Tenants, particularly retail shop tenants, typically invest substantial sums into the goodwill and fit-out of their leased premises. Much of this expenditure is lost of the tenant is forced to relocate. Also, as the Court of Appeal’s decision erodes the security of tenure under a lease, it may impact upon the willingness of banks and financiers to grant finance on the security of a lease. They noted that the consequences for lessees, in particular retail tenants, are significant. The Court of Appeal had indicated at [51] that the implications of its decision extended to “shopping centre leases”. (See [36]-[41] of the applicant’s summary of argument.)

We await the High Court’s decision with interest. It is expected the appeal hearing will take place later this year, potentially August 2013, with the judgment to follow sometime thereafter.

Newsflash: Great Southern Class Actions to start tomorrow (Monday 29 Oct)

One of the largest set of group proceedings yet commenced in the Supreme Court of Victoria is set to start tomorrow (Monday 29 October 2012). The trial will be heard by his Honour Justice Croft and at this stage is estimated to run for 4-5 months. Interestingly, the Supreme Court is providing a live streaming facility on its website, for the viewing of the opening addresses. The webcast portal may be found here.

The Great Southern class actions comprise in excess of 22,000 group members and individual plaintiffs. According to the Supreme Court website, there are 16 group proceedings and 12 individual proceedings which were commenced in the Supreme Court with respect to various agribusiness projects (managed investment schemes) undertaken by Great Southern on behalf of investors. The various agribusiness projects included forestry, horticulture, viticulture and cattle schemes. There are also a large number of County Court proceedings which were uplifted to the Supreme Court (though a large number of these were stayed pending the outcome of the trial).

In broad terms, the Great Southern class actions involve various claims against the Great Southern entities and their directors, including whether certain product disclosure statements for the various agribusiness projects complied with the Corporations Act 2001 (Cth), and whether the Great Southern entities breached their statutory duties as responsible entities variously of the managed investment schemes. There are also allegations of misleading and deceptive conduct.

Each of the 16 separate group proceedings, brought pursuant to Part IVA of the Supreme Court Act 1986 (Vic) relates to a distinct product disclosure statement issued in respect of one or more Great Southern managed investment schemes. The plaintiffs were investors in these schemes.

In the months leading up to the commencement of trial, there have been a multitude of pre-trial issues to be addressed, and disputes to be resolved. One of these has been a contest between the parties as to whether a claim for privilege could be maintained by Great Southern Managers Australia Limited (GSMAL) in a board paper that contained some legal advice. The plaintiffs/investors wanted to tender the so-called “2005 Board Paper” at trial. The issue was whether or not  s 124 of the Evidence Act 2008 (Vic) permitted them to do so.

Last month, on 5 September 2012, the Court of Appeal handed down its judgment on the issue. Aside from a minor point as to the breadth of the declaration to be made, their Honours agreed with his Honour Sifris J, who had held at first instance that  s 124 of the Act permitted the plaintiffs/investors to tender the document.

Various arguments were advanced, but in essence, the issue turned on the proper construction and operation of s 124 of the Act; the section governing the loss of client legal privilege where the privilege is that of joint clients. Section 124 provides as follows –

“124. Loss of client legal privilege – joint clients

(1) This section only applies to a civil proceeding in connection with which 2 or more parties have, before the commencement of the proceeding, jointly retained a lawyer in relation to the same matter.

(2) This Division does not prevent one of those parties from adducing evidence of – 

(a) a communication made by any one of them to the lawyer; or

(b) the contents of a confidential document prepared by or at the direction or request of any one of them – 

in connection with that matter.”

The legal advice said to be contained in the June 2005 Board Paper consisted of emails which contained legal advice provided to GSMAL as principal client, which had been sought by GSMAL for the benefit also of scheme members (investors).

The Court of Appeal agreed with Sifris J’s conclusion that the requirement of a lawyer having been ‘jointly retained’ in s 124(1) was met in circumstances where the advice as sought for the benefit of the scheme members (investors). The section does not require all of the joint privilege holders to expressly retain the lawyer. It is directed to the substance of the transaction, not the agency through which it is effected. (See [21]-[30]).

For this and other reasons, the Court of Appeal held the plaintiffs/investors entitled to adduce evidence of the 2005 Board Paper at the trial. The judgment may be read in full here.

It will be interesting to see how this proceeding unfolds, including how significant this particular evidence proves to be.

Newflash – Willmott Forests investors mount High Court appeal

In a much anticipated move, Willmott Forests investors have lodged an application for special leave to appeal to the High Court of Australia, from the Victorian Court of Appeal’s recent decision on a question of disclaimer of leases by a liquidator, according to a report in today’s Australian Financial Review.

My review of the Court of Appeal’s decision – from which the Willmott Forests investors seek to appeal – is here. My reviews of earlier Willmott Forests decisions are here and here.

The Australian Financial Review article is here, and credit must go to my friend and colleague Sam Hopper for noting this development; his post is here.

Little is yet known publicly of the detail of the special leave application. I will monitor developments and seek to keep readers informed. In the meantime, I note that the website of one of the two investor groups involved in the litigation – Willmott Action Group Inc – appears to have been dismantled. It is unclear as to what, if anything, this signifies.