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and address them opening new negotiations with other parties, keeping the banks onside, until their support was withdrawn shortly before Timbercorp’s collapse in mid-April 2009.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: proposed PPSA amendments to “un-deem” certain PPS leases in future

Last Wednesday 19 March 2014, a bill was introduced into Parliament to amend section 13 of the Personal Property Securities Act 2009 (Cth) to remove the provision that deems leases of serial-numbered goods of more than 90 days to be a ‘PPS lease’. The bill, called the Personal Property Securities Amendment (Deregulatory Measures) Bill 2014 (Cth), and Explanatory Memorandum may be accessed on the Federal Parliament’s website here.

The provision to be removed is s 13(1)(e). Those who are familiar with it will be aware of the questions and uncertainties to which that provision has already given rise. It should be noted however that the change, when enacted, will apply only in respect of transactions entered into after the amendment has been enacted (per ss 2 and 7 of the Bill and the insertions to Schedule 1).

The EM notes that this should simplify the deeming provisions in the PPS Act and minimise the need for small and medium hire businesses to make registrations in respect of leases of a term of less than 12 months. This should reduce the number of transactions gtiving rise to PPS leases and reduce the compliance cost born by small and medium hire businesses.

The EM also notes that the change will bring the Australian PPS Act into alignment with PPS regimes in New Zealand and Canada on this point. Thus to the extent that the activities of Australian enterprises cross over into these jurisdictions, this alignment may have benefits for Australian financiers, businesses and legal practitioners.

For those who wish to read the EM for themselves, the direct link to it is here.

References: (1) Parliament of Australia’s webpage for the Personal Property Securities Amendment (Deregulatory Measures) Billl 2014 (link); (2) Client update of Allens Linklaters entitled “PPSA Amendments for ‘Serial Numbered goods'”, wirtten by Andrew Boxall and Daniel MacPherson (link)

The High Court hears Newtronics appeal – liquidators’ liens

Last Thursday (6 March) the High Court heard the appeal in Stewart as liquidator of Newtronics Pty Ltd (in liquidation) v Atco Controls Pty Ltd (in liquidation), the central issue in which concerns liquidators’ equitable liens and the Universal Distributing principle. Presiding were their Honours Crennan, Kiefel, Bell, Gageler and Keane JJ.


Very briefly, in a previous action in the Victorian Supreme Court, the liquidator of Newtronics had sued its parent company Atco and the receivers that Atco had appointed pursuant to the terms of the security it held over Newtronics’ assets. Against Atco, the liquidator of Newtronics claimed that letters of support or comfort Atco had provided to Newtronics gave rise to a contractual obligation not to call upon its secured debt until all other creditors were paid. Against the receivers, Newtronics’ claims were for trespass and conversion.

At first instance, in those proceedings, the Court found in favour of the liquidator of Newtronics as against Atco in relation to the letters of comfort, but found in favour of the receivers in relation to trespass and conversion. This judgment of Pagone J of December 2008 was appealed. Shortly before the Court of Appeal hearing, the liquidator of Newtronics and the receivers settled their dispute, resulting in the receivers paying the liquidator a settlement sum of $1.25 million. The appeal between Newtronics and Atco went ahead, and Atco was successful in a unanimous judgment of Warren CJ, Nettle and Mandie JJA of October 2009 (link). Special leave sought by Newtronics was refused in April 2010 (link).

Atco subsequently commenced the present proceedings seeking recovery of the settlement sum pursuant to the terms of its security. Its application was an appeal under s 1321 of the Corporations Act 2001 (Cth) against a decision of Newtronics’ liquidator regarding the $1.25 million settlement sum (see below). Atco argued that those proceeds of the earlier litigation were caught by the charge held by it over Newtronics’ assets, and should have been paid to it under that charge.

The liquidator of Newtronics, relying on the long-standing Universal Distributing principle, contended that he held an equitable lien over the settlement sum for his remuneration and the expenses of the earlier action against Atco and the receivers which had realised the settlement sum. Atco argued that the liquidator’s claim to the equitable lien could not be sustained in this particular case. One aspect which makes this an atypical case, is that the funds in question did not represent the realisation of an asset of the company. Rather, it was the result of advsersarial litigation brought by the liquidator against the secured creditor and its receivers, impugning the security or the creditor’s rights to enforce it, in an action in which the liquidator was ultimately unsuccessful. Atco complained of its considerable costs incurred in defending the litigation which it could not fully recover (above the amount of taxed costs).

The Universal Distributing Principle and the judgments in the present proceedings to date

In Re Universal Distributing Co Ltd (in liquidation) (1933) 48 CLR 171, the High Court held at 174 –

“The security is paramount to the general costs and expenses of the liquidation, but the expenses attendant upon the realisation of the fund affected by the security must be borne by it.”

At first instance in April 2011 Efthim AsJ agreed that Atco was entitled to the $1.25 million. The liquidator of Newtronics appealed that decision and in July 2011 was successful (link to decision of Davies J). In the subsequent appeal judgment, it was noted that the fact that the liquidator’s costs were properly incurred appeared to have been of considerable weight in her Honour Davies J’s decision to award a lien (see [47] of the judgment of Warren CJ on appeal).

In June 2013 Atco’s appeal to the Court of Appeal was unanimously upheld by their Honours Warren CJ, Redlich JA and Cavanough AJA (link).

The Issues

At the heart of this case is an interesting contest. On the one hand, a secured creditor is asking to receive the $1.25 million fruits of litigation the liquidator undertook in execution of his duties, without having to bear the costs of realisation of those funds. The liquidator of Newtronics put his case on the basis that in performing his statutory duties he has made funds available in the liquidation that otherwise would not have been available (as to their availability, see below). The liquidator submitted in the alternative that resort may be made to a more general expression of the principle upon which an equitable lien may be conferred, that it would be unconscientious for the secured creditor to assert its rights. Indeed Davies J had held that it would unconscientious for Atco to take advantage of the fund created by the liquidator in the course of the performance of his duties, without entitling the liquidator to his costs and expenses out of that fund, regardless of whether Atco consented to the realisation or not (see generally [61]-[104] of the appeal judgment).

On the other hand, a liquidator is asking that the Universal Distributing principle apply where the liquidator acted to realise the funds not only without the willingness or consent of the secured creditor, but against the secured creditor’s interests. This point appears to have weighed in the balance for her Honour Warren CJ, who took the view at [43] that the principle as articulated in Universal Distributing requires some willingness on the part of the secured creditor to participate in the winding up. Her Honour found support inter alia from the judgment of Tadgell J in Moodemere Pty Ltd (in liq) v Waters [1988] VicRp31; (1988) VR 215 at [15]. In her Honour’s view, the fact that Atco at all times opposed the means by which the liquidator obtained the settlement sum meant Atco has not “come in to the winding up” in the way described in Universal Distributing (see [46]). In relation to Newtronics’ liquidator’s submission as to unconsientiousness, Atco relied on Falcke v Scottish Imperial Insurance Co (1887) LR 34 Ch D 234 and Lumbers v W Cook Builders Pty Ltd (in liq) [2008] HCA 27; (2008) 232 CLR 635 as establishing that a stranger conferring a benefit in the absence of an express or implied request is not sufficient to create a liability for the cost of its conferral. As Bowen LJ said in Falcke’s Case: “…Liabilities are not to be forced on people behind their backs any more than you can confer a benefit upon a man against his will.” Newtronics’ liquidator argued (unsuccessfully) that those cases operate in a distinct field from the area of equitable liens and ought be distinguished as the liquidator was not an officious bystander but was acting pursuant to a statututory duty owed to creditors.

There are a number of complexities to this case the detail of which I do not descend into here. But to mention a few of particular note: One is that the first set of proceedings challenging Atco’s rights to enforce its security, initiated by Newtronics and its liquidator, was the subject of an indemnity funding agreement with Seeley International Pty Ltd, the major unsecured creditor of Newtronics. When Newtronics went into liquidation, Atco was owed approximately $8.75m by Newtronics; Seeley was owed approximately $13.9m. In the application for approval of the indemnity agreement before Gordon J in the Federal Court, the liquidator had explained that in funding that litigation, Seeley was not seeking to obtain a proportion of any moneys recovered. It was simply agreed that the liquidator would approach the Court pursuant to s 564 of the Act to seek orders that the Court afford Seeley priority. However as events transpired, the liquidator did not approach the Court under s 564, seek directions or inform Atco, but simply made a decision to and did pay the $1.25 million to Seeley within 2 days of receiving it, on the basis that Seeley had funded the liquidator’s costs and expenses under the indemnity agreement. It was that decision in respect of which Atco brought its appeal in these proceedings under s 1321 of the Act. Her Honour Warren CJ took the view that these were all matters that were relevant to the competing equities of the parties (see [103]).

In the particular facts of this case, then, either way, it does not appear that the liquidator was going to be left unrewarded for his work and legal expenses in creating the fund represented by the settlement sum. Either Seeley would pay them under the indemnity agreement (indeed it appears Seeley already had), or Atco will be required to pay them. However, the precedent this High Court decision sets will be important for liquidators moving forward, and there being certainty as to whether and when they can expect to be compensated for their time and money spent in recovering assets covered by a creditor’s security.

Another notable aspect of the facts of this case, is that the liquidator contended his lien secured the entirety of the $1.25 million settlement sum, as his legal costs and expenses referable to the preservation, realisation and getting in of that settlement sum were in excess of the money recovered (see [9] of the judgment of Davies J). On one view, then, the arguments as to whether equity ought allow a secured creditor to receive the fruits of a liquidator’s efforts without deduction for remuneration incurred in and the costs of those efforts are somewhat hollowed by this fact. That deduction would wipe out those fruits.

Note that in the unanimous appeal judgment, his Honour Redlich JA sets out a useful summary of his conclusions as to why no equitable lien arose in favour of the liquidator over the settlement sum at [133].

The transcript of the High Court appeal hearing makes for some interesting reading and may be read here. To the best of my knowledge this will be the first occasion since Universal Distributing in 1933 that the High Court has had the opportunity to consider in detail and pronounce upon the principles governing when the liquidator’s equitable lien will arise and its scope. We await their Honours’ decision with interest.

[References:  (1) The various judgments and transcript cited above, via Austlii; (2) Article: “High Court to consider the scope of a liquidator’s lien” by Andrew Chambers, Nicole Ward and Julia Wheeler of K&L Gates, via Mondaq – link ]

ASIC appeals the decision in ASIC v Franklin (liquidator), in the matter of Walton Construction PL (in liq) [2014] FCA 68

On 13 February 2014 the Federal Court refused an application by ASIC for the removal of liquidators because of an apprehension of a lack of independence and impartiality, brought under s 503 of the Corporations Act 20001 (Cth). ASIC had also claimed that the DIRRI (declaration of relevant relationships) made by the liquidators upon their appointment as administrators was deficient, and had sought a declaration that they had contravened s 436DA of the Act. The case is that of Australian Securities and Investment Commission v Franklin (liquidator), in the matter of Walton Construction Pty Ltd (in liq) [2014] FCA 68.

It is important to note that ASIC did not challenge the liquidators’ independence and impartiality in the performance of their duties either as adminstrators, and then as liquidators, of the companies (Walton Construction Pty Ltd and Walton Construction (Qld) Pty Ltd). Rather, it was a matter of the appearance to the hypothetical fair minded observer. ASIC contended that a reasonable apprehension of a lack of independence and impartiality existed because of the following matters –

  • they were appointed administrators on the referral of the Mawson Group, which provides business advisory and restructuring services to companies in financial difficulty;
  • the Mawson Group had worked with the companies prior to their collapse;
  • shortly prior to going into administration the companies had assigned debts and sold assets, which transactions the liquidators would need to investigate, where –
  • * the other parties to the transactions appeared to be connected with the Mawson Group, based on company searches, and
  • * the effect of the debt assignments and asset sales was the transfer of a significant part of the business of the companies,
  • there was a need to investigate whether those transactions could be challenged as uncommercial transactions or unreasonable director-related transactions, whether the directors had breached their duties, and whether Mawson Group personnel were involved in such breaches, where –
  • * the Mawson Group was involved in the appointment of the insolvency practitioners who would be investigating the transactions involving entities connected to the Mawson Group,
  • * the Mawson Group had referred six other voluntary administrations to the firm of the liquidators,
  • * these referrals had generated a material volume of work with significant fees for the firm, and
  • * in 3 of the other 6 administrations, there were also antecedent transfers of assets and debt assignments by the companies, to entities connected with the Mawson Group.

ASIC contended that the significance of these matters was that the liquidators must investigate Mawson Group’s involvement in those transactions, and those associated with Mawson Group, in circumstances where the liquidators’ firm had an ongoing commercial relationship with the Mawson Group which generated significant fees for the firm, and where the persons who would be the subject of those investigations included those who referred the appointments to them. ASIC submitted that these matters gave rise to a reasonable perception or apprehension that the liquidators would not bring an impartial and unprejudiced mind to the investigation of the pre-appointment transactions, and would favour interests assocated with the Mawson Group at the expense of the interests of creditors, whether consciously or not.

This perception or apprehension of a lack of independence would be heightened by the alleged lack of full disclosures in the DIRRI, so ASIC contended, in the mind of the hypothetical fair minded observer.

The Legal Principles

Her Honour Davies J had regard to the following legal principles –

  1. It is settled law that a liquidator may be disqualified from continuing to act in the winding up of a company where the hypothetical fair minded observer would perceive a lack of independence or impartiality on the part of the liquidator in the discharge of his or her functions, even where independence and impartiality have in fact been maintained (see [2] and the authorities there cited);
  2. The disqualification principle gives due recognition to the requirement that liquidators must not only be independent and impartial, they must be seen to be independent and impartial, which is fundamental to the integrity of the winding up process (see [2] and the authorities there cited);
  3. Thus the discretion under s 503 of the Act will commonly be exercised in favour of removing a liquidator where it appears that the liquidator is in a position of apparent conflict because of some relationship (direct or indirect) or connection (see [2] and the authoriites there cited; note that I would query the use of the word “commonly” here);
  4. The test for determining whether a hypothetical fair minded observer would apprehend a lack of independence and impartiality requires the articulation of a logical connection between the matters which, it is said, may impede or inhibit the liquidators from acting impartially in the interests of all creditors in the discharge of their duties, and the feared deviation from discharging their duties and responsibilities impartially (see [6] and the authorities there cited);
  5. The test is an objective test viewed through the legal fiction of the hypothetical fair minded observer, and the apprehension of lack of independence must be reasonably formed. For the apprehension to be reasonable, it is axiomatic that the apprehension must be informed and arise upon an understanding of the actual circumstances in which the claim of apprehended lack of independence is made (see [6]).

The Court’s Decision

The question of the “logical connection” referred to in 4 above proved to be the tripping point. ASIC pointed to the character and nature of the liquidators’ business association with the Mawson Group, where the Mawson Group was involved in the very transactions that would need to be investigated, and the lawfulness of the conduct of the Mawson Group would come into question.

However the Court held that the logical connection was not made out. Davies J took the view (at [8]-[9]) that the knowledge attributed to the fair minded observer, appropriately informed, would include –

  • an awareness about the functions and duties of liquidators;
  • an awareness that liquidators have statutory duties and responsibilities that they must discharge;
  • an awareness  that it is the liquidators’ duty to discover whether any transactions are voidable, whether any conduct of persons has been in breach of the Act or given rise to some other civil or criminal liability;
  • knowledge that the liquidators’ firm is commonly referred voluntary administrations and other insolvency work by solicitors, business advisors and accountants, and that this was the nature of the liquidators’ firm’s business relationship with Mawson Group;
  • knowledge that as Mawson Group was a business advisory firm providing corporate restructuring advice to troubled companies, and its relationship with the companies in this case was a professional one;
  • knowledge that there is nothing about the conduct of the other insolvencies referred by Mawson Group to the liquidators’ firm that brings the firm’s independence and impartiality into question, having regard to their professional relationship with the Mawson Group; and
  • knowledge that if there was any deficiency in the DIRRI, such deficiency was inadvertent and not intended.

With an appreciation of those matters, the Court concluded, the fair minded observer may reasonably conclude that the liquidators would similarly discharge their statutory duties and responsibilities impartially and as required by law, uninfluenced by their relationship with the Mawson Group (at [9]).

The Court was not persuaded that there was any substance in the claim of apprehended lack of independence, and refused the application to remove the liquidators (at [10]).

Section 436DA – Disclosure in the DIRRI

At the time of their appointment as administrators, the (now) liquidators declared in the DIRRI that:

“The [companies were] referred by Mr P McCurry of Mawson Group, who refers us insolvency type matters from time to time. Referrals from solicitors, business advisors and accountants are common place and do not impact on our independence in carrying out our function as Administrators…”.

ASIC’s complaint was that this did not go far enough, and ought also have addressed why they did not believe that this referral relationship resulted in any actual or perceived conflict of interest or duty, in the context of the additional factor here – the potential need to investigate transactions involving the Mawson Group. ASIC contended that this omission meant the DIRRI was deficient by failing to meet the requirement of s 60(1)(b). ASIC contended that even if the liquidators were not aware of the involvement of Mawson Group in transactions they would need to investigate at the time of making the DIRRI, s 436DA(5) required that they update the DIRRI with the information when they did become aware of it. ASIC argued that the creditors needed to know that the Mawson Group may be investigated, to enable them to make an informed decision about whether to replace the administrators.

Davies J observed that the starting and end point is s 60 of the Act. Her Honour considered the policy objectives of s 60 and the passages in that regard in the relevant 2007 explanatory memorandum, commenting also upon the relevant 2004 Parliamentary Joint Committee Report and the 1998 CAMAC Report at [14]-[17].

However her Honour referred to the High Court’s judgment in Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 91 ACSR 359 at [39] and cautioned against looking at what the EM says over construing the text of s 60. Whilst accepting that the primary purpose of the DIRRI is to enable creditors to make informed decisions about whether to replace an administrator, the content of the DIRRI is a matter prescribed by statute, and it is necessary to examine what the section requires.

The Court noted that the liquidators had disclosed their firm’s business association with Mawson Group and explained why the referral relationship did not compromise their independence in carrying out their function as administrators. ASIC argued that the liquidators had not gone far enough in the DIRRI, but the Court disagreed and declined the declaration ASIC sought (at [22]-[23]).

Decision Appealed

The Federal Court of Australia portal shows that ASIC lodged a notice of appeal last week on 26 February 2014. Consent orders were made by Jessup J on 28 February 2014 that the hearing of the appeal be expedited and listed for hearing on an estimate of one day. The portal also shows that the appeal is listed for a callover before Marshall J on 29 April 2014.


Three points to make about this case.

First – the Court’s decision demonstrates clearly that, as with other cases such as Accord Pacific Holdings Pty Ltd v Gleeson as liquidator of Accord Pacific Land Pty Ltd (in liq) [2011] NSWSC 1021, the courts do not exercise their discretion in s 503 lightly, even where it is not an actual lack of impartiality or independence that is alleged, but the appearance of it.

Secondly, as was noted in the National Safety Council of Australia decision of the Full Court of the Victorian Supreme Court ([1990] VicRp2; [1990] VR 29), this judgment of the Federal Court was a discretionary judgment. Therefore the limitations upon a court of appeal’s interfering with such a judgment ought be borne in mind. The principles upon which an appellate court interferes in such a judgment were considered by the High Court in Lovell v Lovell [1950] HCA 52; (1950) 81 CLR 513. At 519 Latham CJ quotes from the judgment of Dixon, Evatt and McTiernan JJ in House v The King [1936] HCA 40; (1936) 55 CLR 499 at 504-5 where their Honours said this:

“The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he [or she] allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into acount some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred.”

The onus upon ASIC here as a party seeking to have an appellate court interfere with a lower court’s exercise of discretion is a heavy one. As Kitto J observed in Lovell v Lovell at 533, it takes “a clear conclusion that the judge was plainly wrong” to justify the reversal of his or her decision.

Thirdly, it will be interesting to see on appeal whether, if this relates to one of the grounds of appeal, all of the matters listed above which Davies J in this case attributed as matters that would be within the knowledge or awareness of the hypothetical fair minded observer are upheld by the Full Court.

When will a DOCA be terminated on the grounds of commercial morality?

Happy New Year, and welcome to my first post for 2014. At the end of last year, the Queensland Court of Appeal handed down judgement in a notable case, in favour of termination of a deed of company arrangement on public interest grounds. The DOCA had been approved by related party creditors, but their Honours took the view that it was detrimental to commercial morality by precluding public investigation into questionable related-party dealings of a company in administration – in Promoseven Pty Ltd v Prime Project Development (Cairns) Pty Ltd (Subject to a Deed of Company Arrangement) [2013] QCA 405.


In 2005 Prime Project Development (Cairns) Pty Ltd (Prime) and Promoseven Pty Ltd (Promoseven) entered into a joint venture agreement to carry out a property development in Cairns. The joint venture vehicle was a company named Bluechip Development Corporation (Cairns) Pty Ltd (Bluechip). HSBC provided $21 million to fund the development, secured by a first registered mortgage. Both Prime and Promoseven advanced millions of dollars in funds to Bluechip to progress the development, some of which was secured by a second registered mortgage given by Bluechip over the development.

The development was completed in 2009, and was then progressively being sold down by Bluechip. HCBC’s indebtedness was discharged, save for the claim of one subcontractor. However by 2010 Prime and Promoseven were in dispute. Promoseven succcessfully applied to have Bluechip wound up in insolvency, and Prime was ordered to pay Promoseven’s costs (relevantly, making Promoseven a creditor of Prime).

At the heart of the case, was this:  In August 2011, Prime transferred all of its interest in the Bluechip mortgage – alleged to have been valued at some $9 million – to a related company Refund. This dealing is discussed in more detail below.

Prime went into administration in May 2013. It had eleven creditors on administration. One was Promoseven. Of the other ten creditors, nine were related parties. The related parties voted to adopt a DOCA which would give the unrelated creditors a return of 4.3 to 7.4 cents on the dollar. Without a liquidation, there would be no investigation into the affairs of Prime and no public examination of its directors.

Promoseven applied inter alia under s 445D of the Corporations Act 2001 (Cth) for an order terminating the DOCA on the basis that it produced an injustice, by precluding an investigation into Prime’s pre-administration related-party dealings.

Promoseven also relied upon s 600A of the Act, which deals with the powers of the court where the outcome of voting at a creditors’ meeting has been determined by related entities. Broadly, it empowers the Court to make certain orders, including an order setting aside the resolution, if it is satisfied inter alia that the resolution would not have passed without the related party votes, and that the voting outcome was contrary to the interests of creditors or a class of creditors as a whole, or is unreasonably prejudicial to the interests of the non-related creditors.

(It should be noted that under reg 5.3A.07(1)(a) of the Corporations Regulations (2001) (Cth), a company that has executed a DOCA that is later terminated under s 445D by the court, “is taken to have passed a special resolution under s 491 that the company be wound up voluntarily“.)

First Instance

As the Court of Appeal noted at [42], under s 445D there are effectively four grounds upon which a DOCA can be terminated. These are –

(a) if effect cannot be given to the deed without injustice or undue delay – s445D(1)(e);

(b) if the deed, or something done under it, would be oppressive, unfairly prejudicial to, or unfairly discriminatory against, one or more of the creditors – s 445D(1)(f)(i);

(c if the deed, or something done under it, is contrary to the interests of the creditors of the company as a whole – s 445(1)(f)(ii); and

(d) if the deed should be terminated for some other reason – s 445D(1)(g).

At first instance, Martin J of the Queensland Supreme Court noted that under sub-section 445D(1)(e) it is the “effect” of the deed rather than its purpose which is to be considered. The question, his Honour said, is whether the effect of the deed is unfair or inequitable in the impact it has upon one or more of the creditors bound by it (at [15]).

In considering s 445D(1)(f), his Honour said a court does not proceed “upon mere possibility or speculation, it makes a determination on the characteristics of the deed as they are seen to be at the date of the hearing“. One looks, his Honour said, to the effect of the deed as a whole and assesses its unfairness, if any, to the applicant being in mind the scheme of Pt 5.3A and the interests of other creditors, the company, and the public generally (at [16]).

The applicant Promoseven made two allegations –

(1) That the vast majority of creditors were related entities of Prime. The inference ought be drawn that the creditors who voted for the DOCA were either controlled by or friendly to Prime. This does not of itself require that anything be done, but it detracts from the arguments for the DOCA that a majority of creditors has made a commercial decision as to what is in the interest of creditors as creditors (at [23]);

(2) The DOCA would have the effect of precluding investigation into the transfer by Mr Knell of a chose in action (a second registered mortgage) valued at $9 million to a related company called Refund (at [24]).

In relation to this last point, his Honour remarked pointedly that Promoseven did not allege that it was inevitable that this transaction would be unwound; rather it argued that the transaction “might be voidable” and “there is a prospect” that proper enquiries into Prime’s affairs would result in a greater return to creditors than that offered under the DOCA (at [25]).

He noted that even if the transfer were set aside, Promoseven had failed to demonstrate the unfairness or prejudice required to engage the various sections on which it relied – (at [31]). Martin J also observed that the administrators had recommended the DOCA, and there was unchallenged expert evidence that whilst the DOCA would result in a small dividend to creditors, under a winding up the likely return to creditors would be nil (at [27]).

Martin J cited the object of Pt 5.3A of the Act, set out in s 435A which provides –

“The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or

(b) if it is not possible for the company or its business to continue in existence – results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.”

His Honour took the view that the orders sought by the applicant Promoseven would be inconsistent with the object of Pt 5.3A (at [31]), and that Promoseven could not demonstrate the effect necessary to engage s 445D or the prejudice which s 600A requires to be shown (at [32]). (There was also an issue as to whether the liquidators would be funded properly if the DOCA was set aside and the company was wound up – see [33]).

His Honour was in little doubt of the correct course to take on this application. He held that “the overwhelming weight in the balance of this application” was that even if the company was liquidated and the transfer was unwound, the creditors would suffer. In dismissing the application, he observed:

“While the public interest is an element to be considered, the applicant’s case did not rise high enough to demonstrate that it was sufficient to overcome the other factors to which I have referred.”

The Appeal Decision

The Court of Appeal disagreed, and took an entirely different approach.

The Court examined the dealings between the related companies Prime and Refund in greater detail, and had distinct reservations about the commerciality of the arrangement, in particular –

  • on the face of the Agreement there was no attempt to quantify the value of Prime’s half interest in the second mortgage, making it difficult to conclude that it was sold for value, particularly between related entities (at [53]);
  • the purchase price was difficult to identify. It was defined to mean “$3,710,701.23 plus any lawful adjustments to the loan account as at the date of completion or revision thereafter made hereunder“. The sum stated was acknowledged in Recital B to be simply the state of the loan account between the companies as at a certain date (at [54]);
  • the purchase price was then met not in the form of money, but by the issuing of redeemable preference shares by Refund. The Agreement said nothing about payment being made that way. There was no evidence as to how that came to pass. However 3,710,702 shares were issued to Prime which, on the face of it, suggested that each preference share was worth one dollar. But there was no evidence that this was so (at [55]);
  • the Administrators’ Report was the only source of evidence about the adjustments to the purchase price. It noted that a final accounting was completed on 21 March 2013, resulting in Refund being required to and issuing a further 4,668,658 preference shares to Prime. However there was no evidence to show that this equated to an advance of $4,668,658. And there was nothing to show why Refund was “required” to issue further preference shares (at [56]);
  • the question of the value of the redeemable preference shares in Refund was unanswered. The Administrators’ Report was the only source of information on this, but it was not sworn and the basis for some of the information it set out was not apparent. What information there was, cast doubt on the true worth of the preference shares (at [57]);

The effect of the agreement was that Prime sold its interest in the mortgage – its only substantive asset – to Refund for a consideration, the value of which would be determined by Refund, and dependent on how Refund chose to structure its business affairs (impacting whether any dividends would become payable to redeemable preference shareholders, like Prime). Related though they were, Prime could not control how Refund went about its affairs. Their Honours concluded that the result was that the consideration was uncertain, if not illusory (at [58]).

What made it worse – particularly notable where transparency was a problem – was Recital G, which provided that the purchase price would be left outstanding, by way of loan or similar transaction, so that “the start up business activities of [Refund] may be funded“. Nowhere was it explained why it would be in Prime’s interest to defer receipt of the purchase price to this end. Prime was divesrting its only substantive asset. It was not at all clear why it had any legitimate interest in being Refund’s benefactor, the Court noted (at [59]).

The Court of Appeal remarked twice on the fact that even though the transaction was between companies controlled by “the one set of directors” (a husband and wife Mr and Mrs Knell), no director went on oath to depose as to the rationale of the agreement. It required explanation, and they did not explain it. The Court said it made it very difficult to reach a conclusion that there was commercial justification to the Agreement (at [50]-[51] and [60]).

There were also a series of related transactions, which raised concerns. In summary –

  • Prime subsequently contracted with a company called Bypass to purchase $4.2 million worth of shares in Bypass, in part-payment of which it transferred to Bypass the 3,710,702 preference shares it held in Refund. (These were the shares Refund had issued to Prime, in part satisfaction of the price Refund had to pay to purchase Prime’s interest in the second mortgage over Bluechip.)
  • Then in June 2012, Bypass transferred those 3,710,702 preferential shares in Refund to another related company called Radanco (owned and operated by Mr Knell’s nephew), purportedly for $10 million. The ASIC document detailing that transaction was signed by Mrs Knell.
  • Less than 2 months later, those same shares were purportedly transferred by Radanco to MDA, another company controlled by Mr and Mrs Knell, for only $15,000. Mrs Knell signed the ASIC document for that transaction also. (It was this company – MDA – which had proposed the DOCA in question, proposing to contribute $80,000, most of which was to pay administration costs.)

There was no material put before the Court explaining how it could be commercially justifiable that the same shares which are transferred for $10 million in June 2012 could then be transferred for $15,000 two months later. Nor, in the face of allegations by the Knell family that Prime did not in fact contract to purchase Bypass shares and that there had been a fraud, did they explain why two Knell family companies would then seek to take transfers of shares which had been obtained from Prime in circumstances of fraud. The Court remarked that those unexplained transactions did little to dispel the sense that Prime had been involved in transactions without an apparent commercially justifiable basis.

The Court of Appeal concluded that the circumstances surrounding Prime’s transfer of its interest in the mortgage to Refund was such that an investigation by a liquidator should not be prevented by the related parties forcing a DOCA on the other creditors. A public examiation of the affairs was warranted, and the institution of claw back litigation may prove to be warranted. It would, in the sense of the terms used by the Full Federal Court in Emanuele v ASC (1995) 63 FCR 54 at 69-70, “be deterimental to commercial morality to dispense with the opportunity which the winding up law provides for the investigation of the affairs of Prime” (at [84]).

The Court of Appeal did not consider that the absence, at that point in time, of a final commitment to fund a liquidator in full to completion of the liquidation weighed against the conclusion.


This case illustrates how fine a line it can sometimes be between success and failure, on applications to terminate deeds of company arrangement. The Court at first instance took one approach and reached a firm conclusion that the DOCA should stand; the Court of Appeal took an entirely different approach, with a different emphasis and analysis, and unanimously reached the opposite conclusion.

Cases such as these tend to turn on their own facts in the same way that, for example, shareholders oppression actions do. In each case it will be a matter of evaluating and adding together the various aspects and circumstances of the pre-administration dealings in question to test whether, considered together, the balance is tipped in favour of scrutiny of what took place, over letting a decision of creditors to endorse a DOCA stand. If, as was the case here, there is a lack of transparancy or certainty about key aspects of an arrangement where a significant asset is being transferred away from the company, and questions are raised which are not answered or explained by those who could do so, it becomes more likely that a Court may conclude that the interests of the public require investigation into what took place. In Promoseven, the Court was so concerned that it gave precedence to the public interest in commercial morality, without requiring that it be satisfied as to the utility of the investigations and the likelihood of a satisfactory recovery and better return for creditors.

One example of a case where the balance tipped the other way, was the NSW Court of Appeal’s decision in Vero Insurance Ltd v Kassem [2011] NSWCA 381; (2011) 86 ACSR 607. There, although Young JA noted that the transactions had ‘some indicia that they are worthy of investigation‘, all three judges of the Court of Appeal declined to terminate the DOCA, considering that good reason is required to override the choice of a majority of creditors to enter a DOCA. An example of another case where, like in Promoseven, the balance tipped in favour of terminating the DOCA which was described by the Court as “a device by which Mr Triguboff and his associated companies are avoiding scrutiny of a number of highly questionable transactions the net effect of which is to allow TMPL to walk away from a tax debt of $19,551,033.77…” is Deputy Commissioner of Taxation v TMPL Pty Ltd (subject to a Deed of Company Arrangement)(No 3) [2011] FCA 1403.


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.

National Bankruptcy Congress – Sydney – 9 December 2013

Many of you will already be familiar with the annual outstanding Practical Insolvency Conferences held by Traill & Associates in Sydney each year in March/April, chaired by Richard Fisher AM. This year Rosie’s firm is also holding a National Practical Bankruptcy Congress on Monday 9 December 2013 in Sydney. I do not yet know if my practice will permit me time to duck up to Sydney myself, but  I have reviewed the program and it looks excellent. Topics to be covered include –

  • Sections 104 and 178 challenges to Trustees’ decisions – a review of recent cases and various practical recommendations;
  • Dealing with conflicts of interest – ss 156A and 179 – Applications to remove Trustees – a review of recent cases including Barlaw Pty Ltd v Crouch [2012] FCA 961;
  • Trustees’ remuneration issues;
  • Regulator issues – AFSA’s practitioner inspection program and other issues, presented by Mark Findlay, Director of Regulation and Enforcement, Central Region, AFSA;
  • Part XI – Insolvent estates – a presentation by my highly esteemed Melbourne colleague barrister Peter Agardy, outlining the implications of Re Macryannis; McDonald v Young [2012] FCAFC 137 and other recent cases;
  • Dealing with claimed trusts;
  • Voidable transactions – ss 120, 121 and 122 – a review of recent cases by the reknowned Sally Nash of Sally Nash & Co Lawyers, Sydney;
  • Recent cases on costs and sales of property – coverage of recent cases including Sopikiotis, in the matter of Sopikiotis (Bankrupt) v Vince (Trustee) [2013] FCAFC 24; Tadrosse v Barnden [2013] FCCA 207; Barnden v Tadrosse (No 2) [2013] FCCA 744;
  • Personal insolvency agreements;
  • Dealing with vexatious and/or litigious bankrupts and unreasonable creditors – presented by Scott Pascoe, partner, PPB Advisory;
  • And my personal favourite – s 139ZQ notices – are they a waste of time, or a useful tool when used correctly – to be discussed by a panel of speakers.

For those interested to attend, the full program and invitation to attend may be found here.

Principles of Proprietary Remedies out now…

Hot off the press, and being launched today, is the keenly anticipated new book Principles of Proprietary Remedies by Associate Professor Elise Bant and Emeritus Professor Michael Bryan. It is available for sale through Thomson Reuters (here).

Notably, the book presents a synopsis by Elise Bant and Michael Bryan of the conclusions drawn from the four-year Australian Research Council Discovery Grant project they led, to identify and explore the principles that guide the award of proprietary relief. Their analysis and conclusions are spread over a number of chapters, which set out a consideration of the principles of proprietary remedies, another of defences, bars and discretionary factors, and the writers’ conclusions as to a proposed model for proprietary relief.

The book also includes a collection of essays by leading Australian judges and scholars addressing a range of issues arising in the context of proprietary relief including questions of doctrine and taxonomy and the rationales of proprietary relief, and examining the award of proprietary relief in cases including those of breach of fiduciary duty, theft, fraud, accessorial breaches (Barnes v Addy), estoppel and unjust enrichment.

I highly recommend this book to all readers.

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.