Kerr v Australian Executor Trustees (SA) Ltd

[2019] NSWSC 1279

Supreme Court

New South Wales

• Summary available
• Amendment notes

Medium Neutral Citation:

Kerr v Australian Executor Trustees (SA) Ltd; Australian Executor Trustees (SA) Ltd v Fuller and others trading as Sparke Helmore Lawyers [2019] NSWSC 1279

Hearing dates:

1-3 and 8-10 July 2019; further submissions 12 and 23 July and 13 September 2019

Decision date:

26 September 2019

Jurisdiction:

Equity - Commercial List

Before:

Stevenson J

Decision:

Plaintiff entitled to equitable compensation from the first defendant for breach of trust. First defendant’s cross claim against second to sixty-first defendants to be dismissed.

Catchwords:

EQUITY – trusts and trustees – breaches of trust –professional trustee – pine plantation investment scheme – whether trustee acted in breach of trust by surrendering security without receiving amount due to covenantholders or alternative security – what equitable compensation should be awarded

 

EQUITY – equitable remedies – equitable compensation – causation – whether retainer of solicitors by trustee an answer to claim for breach of trust – nature of advice given to trustee by solicitors – whether a reasonable trustee would have relied on the advice given

  CONTRACTS – solicitors – retained by trustee to advise whether transaction documents contained onerous or unusual provisions and whether documents in order for execution – whether such advice was an adequate response to the retainer – whether trustee would have entered transaction in any event

Legislation Cited:

Civil Liability Act 2002 (NSW)
Corporations Act 2001 (Cth)
Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA)
Real Property Act 1886 (SA)
Transfer of Land Act 1958 (Vic)
Trustee Act 1925 (NSW)
Trustee Act 1936 (SA)

Cases Cited:

Ahrkalimpa Pty Ltd v Schmidt (No 3) [2019] VSC 197
Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd [2018] HCA 43; (2018) 360 ALR 1
Armory v Delamirie (1722) 1 Stra 505; (1722) 93 ER 664
Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504; [1995] FCA 1663
AVWest Aircraft Pty Ltd as trustee for AVWest Aircraft Trust v Clayton UTZ (A firm) (No 2) [2019] WASC 306
Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664
Breen v Williams (1996) 186 CLR 71; [1996] HCA 57
Bristol and West Building Society v Mothew [1998] Ch 1
Brogue Tableau Pty Ltd v Binningup Nominees Pty Ltd (2007) 35 WAR 27; [2007] WASCA 179
CGU Insurance Ltd v One.Tel Ltd (in liq) (2010) 242 CLR 174; [2010] HCA 26
Citicorp Australia Ltd v O’Brien (1996) 40 NSWLR 398
Dalleagles Pty Ltd v Australian Securities Commission (1991) 4 WAR 325
Dominic v Riz [2009] NSWCA 216
Elder’s Trustee & Executor Co Ltd v Higgins (1963) 113 CLR 426; [1963] HCA 48
Fischer v Nemeske Pty Ltd (2016) 257 CLR 615; [2016] HCA 11
Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46
Howe v Earl of Dartmouth (1802) 32 ER 56
John Pfeiffer Pty Ltd v Rogerson (2000) 203 CLR 503; [2000] HCA 36
Keddie v Stacks/Goudkamp Pty Ltd [2012] NSWCA 254
Kingsgrove RSL v Spasevski [2002] NSWCA 342
Korda v Australian Executor Trustees (SA) Ltd (2015) 255 CLR 62; [2015] HCA 6
Kowalczuk v Accom Finance Pty Ltd (2008) 77 NSWLR 205; [2008] NSWCA 343
Maxitherm Boilers Pty Ltd v Pacific Dunlop Insurances Pte Ltd [1998] 4 VR 559
National Trustees Executors & Agency Co of Australasia Ltd v Dwyer (1940) 63 CLR 1
O’Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262
Oztech Pty Ltd v Public Trustee of Queensland (No 15) [2018] FCA 819
Partridge v Equity Trustees Executors & Agency Co Ltd (1947) 75 CLR 149; [1947] HCA 42
Polkinghorne v Holland (1934) 51 CLR 143; [1934] HCA 28
Provident Capital Ltd v Papa (2013) 84 NSWLR 231; [2013] NSWCA 36
Rahme v Benjamin & Khoury Pty Ltd [2019] NSWCA 211
Surfstone Pty Ltd v Morgan Consulting Engineers Pty Ltd [2017] 2 Qd R 66; [2016] QCA 213
The Australian Special Opportunity Fund LP v Equity Trustees Wealth Services Ltd [2015] NSWCA 225
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52
Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642
Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15

Texts Cited:

E Sykes and S Walker, The Law of Securities, (5th ed, 1993, Law Book Co)
J D Heydon, M J Leeming and P G Turner, Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (5th ed, 2015, LexisNexis Butterworths)
M Davies, A Bell and P Brereton, Nygh’s Conflict of Laws in Australia (9th ed, 2013, LexisNexis Butterworths)

Category:

Principal judgment

Parties:

David Kerr as additional trustee for the S.E.A.S Sapfor Forests Pty Ltd scheme (Plaintiff)
Australian Executor Trustees (SA) Limited (First Defendant/Cross-Claimant)
Adam John Fuller and others trading as Sparke Helmore Lawyers (Second to sixty-first Defendants/Cross-Defendants)

Representation:

Counsel:
A J Sullivan QC with D Sulan and S Hartford-Davis (Plaintiff)
J R J Lockhart SC with C McMeniman (First Defendant/Cross-Claimant)
S R Donaldson SC with A R Zahra (Second to sixty-first Defendants/Cross-Defendants)

  Solicitors:
Piper Alderman (Plaintiff)
Gilchrist Connell (First Defendant/Cross-Claimants)
YPOL Lawyers (Second to sixty-first Defendants/Cross-Defendants)

File Number(s):

SC 2017/164674

TABLE of contents

The issues

Mr Kerr’s case

AET’s position

Decision

The scheme

The Trust Deed

The Tripartite Agreement

The Encumbrances

The events leading to the Tree Sale Agreement

Gunns’ first proposal

The Deed of Variation

Gunns’ revised proposal

First retainer of Sparke Helmore

Sparke Helmore 17 August 2011 Certification

Events leading to Sparke Helmore’s 22 December 2011 advices

The 22 December 2011 “Certification” and “Confirmation”

The transaction

Completion

Events after completion

The Covenantholders’ loss

The context of the breach of trust

The breaches of trust alleged by Mr Kerr

AET’s release of the Encumbrances

AET’s failure to discover the ANZ Charge

Payment of the purchase money into Gunns’ overdraft account

What was Mr Howard’s understanding of the nature of the Encumbrances?

AET’s retainer of Sparke Helmore

The retainers and advice

The 17 August Certification not relied on in final submissions

The scope of the 5 December 2011 retainer

Unusual or onerous provisions

Advice about risk mitigants

The 22 December 2011 Certification

The 22 December 2011 Document Confirmation Advice

Was Sparke Helmore’s advice adequate?

What would AET have done if Sparke Helmore had advised it appropriately?

Did AET’s breach of trust cause the Covenantholders’ loss?

The Payout Counterfactual

(a) No contemplation by Gunns that proceeds of Covenantholders’ assets be used to reduce Gunns’ debts

(b) ANZ contemplated payout to the Covenantholders

(c) Gunns’ financial imperative

(d) Gunns was powerfully motivated to avoid a “no transaction” scenario

(e) Gunns willing to sell at undervalue

AET’s response to the Payout Counterfactual

(a) Would ANZ only have agreed to release $16 million?

(b) Would Gunns have responded to a refusal to release the Encumbrances by excising the Scheme Land from the sale?

(c) Would Gunns have required retention of the amounts on account of its Covenantholder subsidiaries?

(d) Would Gunns have refused to release the 2011 and 2012 Harvest Proceeds?

(e) The 2011 Harvest Proceeds received by AET

Conclusion on the Payout Counterfactual

Quantum

Deductions contended for by AET

(a) Post Tree Sale Agreement settlement deductions

(b) Commissions payable to the Milling Company and the Forest Company

The Receiver Costs

The Appointment Costs

The Judicial Advice Costs

Apportionment issue

Exoneration under the Trustee Act

Conclusion

Judgment

1. The first defendant, Australian Executor Trustees (SA) Ltd (“AET”), is a professional trustee company.

2. AET was the trustee of a trust established on 6 March 1964 by a document called “1964 Trust Deed” made between AET and S.E.A.S Sapfor Forests Pty Ltd (the “Forest Company”). By the Trust Deed, AET agreed to be trustee of a forestry scheme concerning pine forests growing on land owned by the Forest Company in an area in Victoria and South Australia known as the “Green Triangle”. I will call the land owned by the Forest Company on which the trees were planted the “Scheme Land”. I will call the trees planted on the Scheme Land the “Scheme Trees”. The beneficiaries of the trust were investors in the scheme, known as “Covenantholders”.

3. On 7 April 2017, the plaintiff, Mr David Kerr, was appointed by this Court as additional trustee of the trust for the purpose of bringing these proceedings, for the benefit of the Covenantholders, against AET alleging a breach of its duties as trustee arising out of the sale in 2012 of the Scheme Land and the Scheme Trees.

4. The scheme established by the Trust Deed predated managed investment schemes now governed by the provisions of Ch 5C of the Corporations Act 2001 (Cth). Schemes such as that in this case were regulated by state legislation requiring an approved deed which was to contain a number of statutory covenants. The Trust Deed was such an approved deed.

5. Under the scheme established by the Trust Deed, Covenantholders acquired “Covenants” in return for capital investment in the scheme. The Covenants entitled Covenantholders to a payment from the Forest Company in the event that Scheme Trees were logged, milled and sold by an associated company, S.E.A.S Sapfor Harvesting Pty Ltd (the “Milling Company”), and the proceeds paid by the Milling Company to the Forest Company.

6. Each Covenantholder was entitled to a rateable share of the net proceeds of the sale of timber referrable to the relevant planting year. Some Covenants also contained an additional entitlement to receive a rateable share of any appreciation in the value of land between the time of planting and the time at which timber was felled or the land ceased to be the subject of the Covenant.

7. Also on 6 March 1964, AET, the Forest Company and the Milling Company entered into a “Tripartite Agreement” pursuant to which the Milling Company agreed to:

1. fell and remove trees from the Scheme Land as directed by the Forest Company; and

2. market and sell the timber.

8. The Tripartite Agreement specified how the proceeds of sale of the timber were to be dealt with. I describe that process below at [54] to [56]. In effect, the Milling Company was entitled to retain a commission of 20%, pay a commission of 5% to the Forest Company and retain the balance until well into the year following receipt. The parties referred to this as the “Proceeds Distribution Process”.

9. Covenantholders’ interests were protected by a requirement in the Trust Deed that AET register “Encumbrances” on the title of the Scheme Land which, as I have said, was owned by the Forest Company. The Covenantholders had no security from the Milling Company.

10. In 1964, the Forest Company and the Milling Company were subsidiaries of Auspine Ltd. In 2008, Gunns Ltd acquired Auspine. The Forest Company and the Milling Company thereby became subsidiaries of Gunns.

11. On 8 February 2010, Gunns, the Forest Company and the Milling Company granted a fixed and floating charge to ANZ Capel Court Ltd (the “ANZ Charge”) over their assets as security for repayment of money lent by ANZ to the Gunns Group. The Forest Company thereby acted in breach of an express requirement of the Trust Deed that it not encumber the Scheme Land without AET’s consent.

12. In early 2011, Gunns decided to sell the Scheme Land and, ultimately, the Scheme Trees (the “Proposal”).

13. Sale of the Scheme Land required AET’s consent under the Trust Deed. AET gave such consent in the circumstances I describe below. AET retained Sparke Helmore to provide advice about the transaction. The nature of the advice sought and given and its consequences so far as concerns AET are matters of contention.

14. Ultimately, on 15 March 2012, AET, the Forest Company and the Milling Company entered into contracts with a third party to sell the Scheme Land and the Scheme Trees. The relevant contract was called the “Tree Sale Agreement”. There were also various contracts in relation to the sale of the Scheme Land.

15. The consideration to be paid by the purchaser referrable to the Covenantholders’ interest in the Scheme Trees was $33,999,999 (the “Tree Sale Proceeds”). The consideration to be paid by the purchaser referrable to the Covenantholders’ interest in the Scheme Land was $4,882,380.58 (the “Land Sale Proceeds”).

16. AET was a party to the Tree Sale Agreement. The Tree Sale Agreement included provisions that:

1. on completion, AET discharge the Encumbrances it held over the Scheme Land; and

2. the proceeds of sale of the Scheme Land and the Scheme Trees, save for $1, be paid to the Milling Company.

17. The transaction completed on that basis. AET discharged the Encumbrances and, apart from $1, received nothing on completion.

18. The result was that the proceeds were to be dealt with by the Milling Company, and then the Forest Company, in accordance with the Proceeds Distributions Process; that is, held by the Milling Company until the following year, and only then paid to the Forest Company and thereafter to AET.

19. In fact, evidently because the Milling Company did not hold a separate bank account, the Tree Sale Proceeds and the Land Sale Proceeds were paid into Gunns’ overdrawn account with ANZ Banking Corporation Ltd.

20. At the time the sale was settled, there were amounts that the Forest Company was obliged to pay AET from the 2011 and 2012 harvest years. These amounts were payable around mid-2012, in the case of the 2011 harvest year, and around mid-2013, in the case of the 2012 harvest year. The parties referred these amounts as the “2011 Harvest Proceeds” and the “2012 Harvest Proceeds”.

21. The 2011 Harvest Proceeds totalled $11,051,041.49, of which $4,952,579.60 was received by AET. My attention as not been directed to evidence as to when this money was received. Evidently it was before completion of the Tree Sale Agreement.

22. The 2012 Harvest Proceeds totalled $5,148,552.31, none of which was received by AET.

23. Gunns and its subsidiaries, including the Milling Company and Forest Company, were placed into external administration on 25 September 2011; long before the Milling Company was obliged, under the Proceeds Distribution Process to make any payment to the Forest Company. The Land Sale Proceeds and the Tree Sale Proceeds were thereby lost. Neither AET, nor the Covenantholders, received a cent.

24. AET instituted proceedings against the receivers of the Forest Company and the Milling Company. AET alleged that the Forest Company and the Milling Company held the Tree Sale Proceeds and the Land Sale Proceeds on trust for the Covenantholders. That claim was upheld in the Supreme of Victoria and in the Victorian Court of Appeal, but ultimately dismissed by the High Court of Australia: Korda v Australian Executor Trustees (SA) Ltd (2015) 255 CLR 62; [2015] HCA 6.

The issues

25. The following issues arise:

1. Did AET breach its duty as trustee to vindicate and protect trust property?

2. Is AET liable to pay equitable compensation to Mr Kerr by reason of its breaches of duty?

3. What is the quantum of any such compensation?

4. Is AET able to avoid liability by reason of its reliance upon the advice of Sparke Helmore?

5. What liability does Sparke Helmore have to AET in relation to the advice sought and obtained about the Proposal generally and the Tree Sale Agreement in particular?

6. Is AET entitled to exoneration under s 85 of the Trustee Act 1925 (NSW) or s 56 of the Trustee Act 1936 (SA)?

7. Did Sparke Helmore fail adequately to advise AET and, if so, are they liable to pay damages to AET?

8. Are the claims brought by Mr Kerr against AET apportionable such that the relevant provisions of either the Law Reform (Contributory Negligence and Apportionment of Liability) Act2001 (SA) or the Civil Liability Act 2002 (NSW) apply? If so, what is a just and equitable apportionment?

Mr Kerr’s case

26. Mr Kerr contends that AET acted in breach of its duties as trustee under the Trust Deed by agreeing to the sale of the Covenantholders’ interest in the Scheme Trees and the Scheme Land on the basis that the Encumbrances were discharged without ensuring that:

1. the Tree Sale Proceeds and the Land Sale Proceeds be paid to it, rather than the Milling Company;

2. the 2011 Harvest Proceeds and 2012 Harvest Proceeds be paid to it;

3. alternatively, the Covenantholders’ interest be adequately secured.

27. Mr Kerr also contends that AET acted in breach of its duties as trustee by:

1. failing to discover the existence of the ANZ Charge, or if it did discover it, failing to act with proper vigilance in light of that discovery; and

2. allowing the Tree Sale Proceeds and the Land Sale Proceeds to be paid into Gunns’ overdraft account.

28. Mr Kerr contends that AET thereby acted in breach of its duty:

1. to protect and vindicate the rights attaching to trust property, namely the Encumbrances: CGU Insurance Ltd v One.Tel Ltd (in liq) (2010) 242 CLR 174; [2010] HCA 26 at [36]; Fischer v Nemeske Pty Ltd (2016) 257 CLR 615; [2016] HCA 11 at [111];

2. to “exercise all due diligence in carrying out its functions and duties and in watching the rights and interests of the Covenantholders”; a duty expressly imposed under cl 21 of the Trust Deed; and

3. in equity, to exercise the same care as an ordinary prudent business person would exercise in conducting the business as if it was his or her own: Oztech Pty Ltd v Public Trustee of Queensland (No 15) [2018] FCA 819 at [342], citing Breen v Williams (1996) 186 CLR 71 at 137; [1996] HCA 57; Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504 at 516; [1995] FCA 1663 (Finn J).

29. Mr Kerr seeks to recover the following amounts on behalf of the Covenantholders:

1. the Tree Sale Proceeds not paid to AET: $33,999,998;

2. the Land Sale Proceeds: $4,882,380.58;

3. the 2011 Harvest Proceeds: $11,051,041.49, including the $4,952,579.60 actually received by AET;

4. the 2012 Harvest Proceeds: $5,148,552.31;

5. the costs incurred by AET in the Korda litigation (the “Receiver Costs”): $1,664,500.41;

6. costs associated with the appointment of Mr Kerr as additional trustee (the “Appointment Costs”): $371,976.90;

7. costs associated with judicial advice sought and obtained by Mr Kerr pursuant to s 63 of the Trustee Act 1925 (NSW) (the “Judicial Advice Costs”): $270,757.94; and

8. interest at court rates from the date of breach, said to be 16 March 2012, on the lost Tree Sale Proceeds, Land Sale Proceeds, 2011 Harvest Proceeds and 2012 Harvest Proceeds.

30. With interest, the amount claimed by Mr Kerr was, at the conclusion of the hearing, in the order of $82.46 million.

31. Mr Kerr, alternatively to his claim against AET, makes a claim against Sparke Helmore that in effect adopts AET’s claim (see [35] below).

AET’s position

32. AET now accepts that, leaving aside the advice it sought and obtained from Sparke Helmore, by acting as I have set out, it acted in breach of its duty to exercise due care and diligence, and thus in breach of trust.

33. Thus, in final submissions, Mr Lockhart SC, who appeared with Mr McMeniman for AET, accepted that AET’s conduct “fell below the standard required by the contractual arrangements which imposed obligations of care, vigilance, matters of that sort”.

34. AET disputes that the Encumbrances were trust property and thus disputes it acted in breach of a duty to protect and vindicate such property.

35. AET contends that by seeking, obtaining and relying on advice from Sparke Helmore about the Proposal and the transactions I have described it either:

1. did not breach its duty to Covenantholders at all; or

2. should be exonerated for such breach or relieved from liability for under s 85 of the Trustee Act 1925 (NSW) or s 56 of the Trustee Act 1936 (SA).

36. Alternatively, AET seeks to have its liability apportioned between Sparke Helmore (and other parties) and, by its cross claim, seeks damages from Sparke Helmore.

Decision

37. The Encumbrances were trust property. By agreeing to release the Encumbrances without receiving payment of the Tree Sale Proceeds, or security equivalent in value to the Encumbrances, AET acted in breach of its duty as trustee, including its duty to vindicate and protect that trust property.

37. The fact that AET sought Sparke Helmore’s advice does not, without more, exonerate it from the consequences of that breach.

38. The advice that Sparke Helmore gave AET was not adequate and was not advice that any reasonable trustee would have relied on.

39. AET would have proceeded to complete the Tree Sale Agreement even if it had received adequate advice from Sparke Helmore. Accordingly, AET’s cross claim against Sparke Helmore fails.

40. Mr Kerr’s claims are governed by the law of South Australia and are therefore, as Mr Lockhart accepted in final submissions, not apportionable.

41. AET is not entitled to exoneration under s 56 of the TrusteeAct 1936 (SA) or s 85 of the Trustee Act 1925 (NSW).

42. Mr Kerr is entitled to recover equitable compensation from AET in the amounts sought by him, except for the Receiver Costs.

43. As the Receiver Costs were paid out of the 2011 Harvest Proceeds and Mr Kerr is entitled to recover the 2011 Harvest Proceeds, Mr Kerr is not entitled also to recover the Receiver Costs.

The scheme

45. The scheme was governed by:

1. the Trust Deed;

2. the Covenants, which appeared as a schedule to the Trust Deed;

3. the Tripartite Agreement; and

4. a Settlement Deed made between AET, the Forest Company and the Milling Company in October 1999.

The Trust Deed

46. The Trust Deed recited that the Forest Company was “formed for the purpose of…acquiring lands and planting the same with pine trees and preserving the forests so planted until such time as [they] should become marketable”. It also stated that the Forest Company proposed to raise funds for that purpose by inviting the public to subscribe for covenants of a kind to be described in prospectuses.

47. By the Trust Deed, the Forest Company appointed AET to act as trustee for the Covenantholders (cl 1). The Forest Company also promised AET that it would observe and perform the terms, conditions, agreements and obligations contained or implied in the Covenants (cl 2). In order “to secure due compliance by [it] with the terms and conditions hereof…that until the timber growing on the [Scheme Land] is…cut and milled and disposed of and the proper proceeds paid to [AET]”, the Forest Company and AET agreed that:

1. the Forest Company would not sell or encumber the Scheme Land without AET’s consent (cl 2(d)(i));

2. AET’s consent “shall not be unreasonably withheld subject always to [AET] being reasonably satisfied that…the Forest Company is able to continue to observe and perform its obligations pursuant to the [Trust Deed] and that there being no material prejudice to the interests of the Covenantholders or any reduction in the protected [sic] afford [sic] to them pursuant to the Deed” (cl 2(d)(i));

3. the Forest Company would deposit all certificates of title to land on which timber was to be grown in a nominated bank safe deposit, or as otherwise mutually agreed, in the joint names of the Forest Company and AET (cl 2(d)(v)); and

4. AET would prepare, and AET and the Forest Company would execute, “encumbrances” of the kind set out in the Sch 10 of the Real Property Act 1886 (SA) prohibiting any dealings with the land without AET’s consent “to secure the performance and observance” by the Forest Company of its obligations under the Trust Deed (cl 2(d)(v)); and

5. AET and the Forest Company would cause the Encumbrances to be registered on the title of the Scheme Land (cl 2(d)(v)).

48. Finally, by the Trust Deed, the Forest Company promised to pay AET monies it received from the Milling Company pursuant to the Tripartite Agreement, less a commission of 5%, within 30 days of receipt (cl 12(d)).

49. By the Trust Deed, AET agreed that, on receipt of monies from the Forest Company, it would “hold same in the interests of the respective Covenantholders” (cl 12(e)).

50. AET promised to hold various assets on trust for the Covenantholders including:

1. a “Maintenance Fund” and “Covenantholders’ Distribution Accounts” into which monies paid to AET by the Forest Company would be deposited (cl 20A(a) and (b)); and

2. the “Titles to Planted Land” being the certificates of title deposited in the joint names of the Forest Company and AET (cl 20A(c)).

51. Clause 20A(c) repeated, as part of the description of the assets that AET held on trust for the Covenantholders, the provision in cl 2(d)(v) that AET would prepare, and that it and the Forest Company would execute, and that AET would then register, Encumbrances on the title of the land described in the certificates of title.

52. AET also promised to “exercise all due diligence and vigilance in carrying out its functions and duties and in watching the rights and interests of the Covenantholders” (cl 21A(a)).

53. For their part, by cl 14 of the Covenants, the Covenantholders agreed that they:

“…shall accept [their] due proportion of the benefits from the sale of timber under the scheme laid down in the said Tripartite Agreement…in full satisfaction and discharge of all and singular the obligations of the [Forest] Company and the Covenantholder shall have no further claim whatever on the [Forest] Company.”

The Tripartite Agreement

54. By the Tripartite Agreement, the Forest Company appointed the Milling Company to “fell and remove from [its] plantations all trees then growing thereon as the Forest Company shall specify” (cl 3). The Forest Company also granted the Milling Company the “sole and exclusive right to sell…standing timber or timber felled and sold in log (peeled or unpeeled) or chip form from [the] plantations subject to covenant” (cl 14(a)).

55. The Tripartite Agreement set out the Proceeds Distribution Process.

56. It thus provided that the “monies received by the Milling Company from the sale of such logs or milled and manufactured timber shall be retained by the Milling Company” and would be applied in the following manner:

1. 20% of gross proceeds would be paid to the Milling Company (cl 9(a));

2. 5% of the balance would be paid immediately to the Forest Company (cl 9(d)); and

3. the balance would be paid to the Forest Company “by five instalments on the last days of April, June, July and August then next following” the September by which the Milling Company received the monies (that is in the next year) (cl 9(f)).

The Encumbrances

57. The Encumbrances established Covenants between AET and the Forest Company that stipulated that the Forest Company, as “encumbrancer”, would “observe and perform all and singular the terms conditions and provisions contained and comprised in” the Trust Deed.

58. The Encumbrances were statutory instruments under the Real Property Act 1886 (SA) and the Transfer of Land Act 1958 (Vic). Once registered, the Encumbrances were recorded on the certificate of title of the land in question. A transfer of that land was subject to the Encumbrances. Both the Real Property Act and the Transfer of Land Act provided that the secured party had a power of sale in the event of default.

59. In E Sykes and S Walker, The Law of Securities, (5th ed, 1993, Law Book Co) it was stated:

“The statutes confer on the charge much the same rights and remedies as in the case of the mortgage. Thus, he or she is given a right of sale on default in payment of the annuity or in the observance of any other covenant”.

60. The Encumbrances were in the name of AET and provided security for the performance of the Forest Company’s obligations under the Trust Deed. The registration of the Encumbrances thus prevented the Forest Company from dealing with the Scheme Land without the consent of AET.

The events leading to the Tree Sale Agreement

Gunns’ first proposal

61. On 14 January 2011, Gunns issued an Information Memorandum concerning the possible sale by it of its “Auspine Land Estate and Plantations”. The Information Memorandum stated:

“Gunns is seeking to sell the land and plantations that comprise the former Auspine portfolio.

The Auspine Land Estate includes 64 pine plantation sites totalling 46,252 hectares in the [Green Triangle], of which 27,966 hectares is in Victoria and 18,286 hectares is in South Australia. The net planted area is approximately 41,500 hectares comprising 90% of the gross land area. The remaining 10% is comprised of approximately 2,000 hectares of native vegetation and planation infrastructure such as gravel pits, fire breaks and roads.

The majority of the standing timber on the plantations is owned by a third party under a Forest Property Agreement with the balance of the standing timber owned by Gunns or subject to Covenant Holder, Trust or Investor by Contract ownership.

Gunns proposes to sell the entire estate with the prospective purchaser enjoying all of the benefits attributable to owning a high quality pine estate in Australia’s premier plantation region.”

62. Under the heading “Covenant Holders”, the Information Memorandum stated:

“The Covenant Holder scheme was operated for many years by [the Forest Company]. The last plantings occurred under the Covenant Holder scheme in 1985. Investors in Covenants hold an interest in the stumpage cash flows from the forest but do not hold any formal forest property ownership or lease over the Auspine Land Estate. As security the Trustee (Australian Executor Trustee) for the Covenant Holder Scheme holds an encumbrance charge and/or caveat (together ‘Encumbrance’) over the entire land title that includes any current Covenants. Encumbrances are removed as each title is clear felled.”

63. On 8 February 2011, Gunns’ General Counsel, Mr Tri Nguyen wrote to Mr Stuart Howard at AET.

64. Mr Howard was then the Senior Relationship Manager Corporate Trust at AET. He was the only lay witness AET called in the proceedings.

65. Mr Nguyen said that Gunns was considering selling the Auspine Estate noting that, under the Trust Deed, AET’s consent was required. Mr Nguyen noted:

“Obviously covenant holders’ interests remain protected under the trust deeds and the various registered encumbrances and whoever buys the land will take it subject to those interest [sic].”

66. On 4 March 2011, Mr Nguyen wrote to AET, formally seeking AET’s consent to the proposed sale. Mr Nguyen said:

“…Gunns is considering the sale of its 64 pine plantation sites in the Green Triangle (‘Softwood Estates’), including:

●   The outright sale of the Softwood Estates; and

●   The sale of Gunns’ interest in the plantation timber, including its interests in and pursuant to the covenant holder scheme and other third party investors.

Pursuant to the Trust Deed your consent is required in respect of any land that contains covenant holder interests. We therefore seek your consent.

As stated previously, covenant holders’ interests remain protected under the trust deeds and the various registered encumbrances and whoever buys the land will take it subject to those interests.

On a related issue, as we are selling the land and our own plantation, there is a strong likelihood that whoever the purchaser may be, may want to enquire about purchasing the entire plantation on our land. This transaction may involve an offer by a third party for all covenant holder interests as well. I will notify you if an offer is forthcoming.”

67. Thus, at this stage, Gunns’ proposal involved the possible sale of the Scheme Land, subject to the Encumbrances, but not the Scheme Trees. However, in his last paragraph, Mr Nguyen foreshadowed the possibility of a sale of “all covenant holder interests as well” and thus, in effect, the winding up of the scheme. This was the Proposal (see [12] above).

68. AET, through Mr Howard, responded on 16 March 2011:

“Clause 2(d)(i) of the Trust Deed states that ‘the Forest Company will not sell land of which it is the proprietor nor without the consent of the Trustee encumber such land’. This undertaking by the Forest Company remains in force until the timber on the land has been harvested and the proceeds distributed. As there is still unharvested timber on this land, it would appear that the Trust Deed would need to be amended before the sale of the land could take place.

The Trust Deed may be varied with the consent of the Forest Company and the Trustee in accordance with Clause 20(D)(b) [sic: 20E(b)] which stipulates that ‘no alteration, variation or amendment shall be made which will materially prejudice or minimise the measure of protection of the holders of the said Covenants by these presents.’

The second item in your letter relates to the possibility of a third party purchasing the land, as well as purchasing the covenant holder interests as well. This would result in all covenant holder interests being held by one entity. The Trust Deed does not appear to deal directly with the possibility of all covenants being transferred from one party to another. If this offer was to eventuate it would be prudent to call a meeting of covenant holders to consider the offer and if thought reasonable, to accept it. You have mentioned that this option may not be desirable due to the costs associated with calling a meeting of covenant holders.

As discussed previously, the Trustee agrees in principle with what is being proposed in your letter, however, consent is dependent on covenant holders not being materially prejudiced and their interests not being diminished Having regard to what you have proposed it may be appropriate that the Trustee seeks independent advice in relation to consenting to you the proposals.”

69. At that time, cl 2(d)(i) of the Trust Deed prohibited the Forest Company from selling the Scheme Land. Thus, Mr Howard’s point was that if the Scheme Land were to be sold, the Trust Deed would need to be amended and that, by reason of cl 20E(b) of the Trust Deed, such amendment could not “materially prejudice or minimise the measures of protection” of the Covenantholders. This led to cl 2(d)(i) being amended by the Deed of Variation, made on 14 April 2011, to the effect set out at [47(b)] above. I set out the terms of the amendment below.

70. Nonetheless, Mr Howard expressed AET’s agreement in principle to Gunns’ proposal, subject to the interests of Covenantholders not being materially prejudiced or diminished and to the possibility of AET obtaining independent advice. Such advice was not sought for several months.

The Deed of Variation

71. Later on 16 March 2011, Mr Nguyen sent Mr Howard a proposed Deed of Variation of the Trust “to enable to the proposed transaction to proceed”.

72. Mr Howard responded on 17 March 2011 asking, amongst other things:

“Can you please characterise the nature of the encumbrances (easements, charges, profits a prendre etc.) and explain in more detail if the sale of the land will alter the ability of the Forest Company to fulfil its obligations under the Trust Deed. Suitable wording in this regard should also be included in the Deed.”

73. In response to Mr Howard’s inquiry about the “nature of the encumbrances”, Mr Nguyen responded the same day:

“The registered encumbrances basically says [sic] that the Forest Company agrees to observe and perform its obligations under the Trust Deed. An incoming purchaser is also bound by this meaning they have to allow access to the trees to be maintained and eventually harvested, etc…”.

74. On 25 March 2011, Mr Howard wrote to Mr Nguyen stating:

“In order for the Trustee to form the opinion that the variation to the Deed is appropriate and that the sale of land is not materially prejudicial to the interests of the covenant holders we require the following:

-   A letter from the lawyers who have drafted the contract of sale, addressed to the Trustee, stating that the conveyance of the encumbrances from the vendor to the purchaser does in fact transfer all rights and obligations contained in the encumbrances and will bind the purchaser”.

75. In response, Gunns arranged for letters to be written by lawyers in Victoria and South Australia and addressed to Mr Howard which stated, in the case of the Victorian lawyers, that:

“The end result is that the Encumbrances remain registered on the title of the Land and the purchaser, as registered proprietor of the Land, assumes the rights and obligations of [the Forest Company] contained in the Encumbrances”.

And, in the case of the South Australian lawyers, that:

“Upon registration at the Land Titles Office of a transfer of the Land to the purchaser of the Land, the purchaser will hold the Land subject to the Encumbrances.”

76. On 30 March 2011, the Forest Company wrote to Mr Howard at AET giving this assurance:

“As per the terms of the [proposed] Deed of Variation that Mr Nguyen has provided to you I confirm that the sale of the Auspine land is not and will not be materially prejudicial to the interests of the covenant holders. The primary reasons being:

1.   There is no material change (if any) in the way in which the covenant holders’ interests are managed;

2.   Their interests, currently protected via the terms of the [Trust] Deed and the related Tripartite Agreement, which are further enhanced via validly registered encumbrances will remain.”

77. These exchanges are relevant to Mr Howard’s understanding of the effect of the Encumbrances. I return to this below.

78. On 14 April 2011, AET, the Forest Company and the Milling Company executed the Deed of Variation which had the effect of varying cl 2(d)(i) of the Trust Deed to read as I have set out at [47(b)] above. It thus read:

“The Forest Company will not:

1.   sell land of which it is the registered proprietor; or

2.   encumber such land

without the consent of the Trustee, which consent shall not be unreasonably withheld subject always to the Trustee being reasonably satisfied that the Forest Company is able to continue to observe and perform its obligations pursuant to the Deed and that there being no material prejudice to the interests of the Covenantholders or any reduction in the protected [sic] afford [sic] to them pursuant to the Deed”.

Gunns’ revised proposal

79. On 1 June 2011, Gunns provided the ASX with a “Market Update”. In that update Gunns stated that it was “managing the exit from a number of businesses deemed non-core” and that its board had agreed to achieve “the sale of the Green Triangle softwood planation estate in SE Australia”.

80. By 24 June 2011, Gunns had evidently reached an agreement in principle to sell its plantation estate. Thus on 24 June 2011 Gunns wrote to AET:

“I refer to your recent discussions with Tri Nguyen and confirm that as a result of a competitive bidding process conducted by us and our financial advisor ANZ Corporate Advisory, we have reached an agreement in principle with a U.S.-based timber investment management organization [sic] on the purchase of Gunns’ softwood plantation estate in the Green Triangle including the standing timber and land the subject of the Covenant Holder schemes. The agreement is subject to the buyer securing financing and other customary conditions, and the sale would be expected to close no later than 31 October 2011.

Subject to completion adjustments including adjustments for any harvesting of standing timber carried out prior to completion of the sale we expect a net return to Covenant Holders of approximately $45.7M.

As mentioned, this offer was as a result of a competitive bidding process and we believe this is the best price that we are able to secure from the process. In our view this represents a good opportunity for Covenant Holders to realise a timely return for their investments, particularly given the current state of the market and the industry as a whole.”

First retainer of Sparke Helmore

81. This led Mr Howard to write to Mr Adam Fuller at Sparke Helmore on 27 June 2011:

“Gunns have put forward a proposal for the sale of standing timber that relates to covenant holder interests (please refer to the proposal at the bottom of this email).

I attach the following documents in relation to this transaction:

-   1964 Trust Deed;

-   1694 Tripartite Agreement; and

-   1999 Deed of Settlement.

Could you please provide a quote for providing advice on whether:

(a)   the proposal complies with the Trust Deed and associated documents;

(b)   it is detrimental or materially prejudicial to the Covenant Holders;

(c)   the Trustee’s position is satisfactorily protected;

(d)   there are any other issues you feel are relevant to this matter.”

82. On 14 July 2011, Gunns wrote to AET stating that “only two offers were received for the Covenant Holder Standing Timber” and that the proposed purchaser:

“…is currently conducting further due diligence but are not willing to proceed further until they can get assurances from you on:

1.   You will not object to the sale of the standing timber; and

2.   You will execute the necessary releases so that the legal and beneficial interest in both the land and the trees passes to [the proposed purchaser] free of any interest by the covenant holders.”

83. On 15 July 2011, Mr Howard sent an email to his superior, Mr Philip Joseph:

“I spoke to Adam Fuller from Sparke Helmore yesterday and they have completed most of their review of the proposal for the sale of the standing timber and the trust documentation. [Mr Fuller] should be sending an email today summarising their view and he commented that, subject to receiving some more information in a couple of areas, the proposal looks to be in line with the terms of the trust documents.

We should receive the final advice early next week.

[Mr Nguyen] also rang yesterday to gauge our response to the queries in the email below and to advise that he will be in Sydney next Wednesday, so we may need to discuss this matter. On the basis that our legal advice is that the proposal is allowed under the documents and we are happy to proceed, we would not object to the sale of the timber and would execute the necessary releases to transfer the interests to the purchaser.” (Emphasis added.)

84. The emphasised passage suggests that Mr Howard’s state of mind, at this stage, was that the advice being sought from Sparke Helmore was as to whether Gunns’ proposal was “allowed” under the Trust Deed and that AET’s consent to the Proposal was also contingent on it being “happy to proceed”. This becomes relevant to the question of the extent to which AET relied on the advice ultimately given by Sparke Helmore.

85. On 20 July 2011, Mr Nguyen advised Mr Johnston by email (with a copy to Mr Howard) that:

“Completion is anticipated to be at the end of October 2011. We then require from the Trustee information on opening balances of undistributed amounts carried forward (if any). Once this information is available we expect to be able to, within a 2-3 weeks [sic] period, prepare relevant schedules for review and audit.

Please note that we have been experience 5-6 weeks [sic] time frame with the audit so that will need to be taken into consideration.

Distribution to the Trustee for subsequent distribution to covenant holders can proceed soon after that.”

86. On 29 July 2011, Mr Andrew Johnston from Sparke Helmore sent Mr Joseph a “draft sign-off” from Sparke Helmore “for your review and comment”. The “draft sign-off” was substantially in the same terms as that ultimately provided on 17 August 2011 (see [94]-[100] below).

87. On 2 August 2011, Mr Howard sent Mr Johnston an email that Mr Nguyen had received from the solicitors for the then proposed purchaser of the Scheme Land, who stated that one document the purchaser would require “from the Trustee on completion” was:

“Release in registrable form by Trustee of all encumbrances registered by the Trustee on the titles to the land”.

88. Mr Howard must have understood from this that it was likely, as must have been obvious in any event, that any purchaser of the Scheme Land would want clear title on completion, and thus that the Encumbrances would then need to be released.

89. On 3 August 2011, Mr Howard sent a further email to Mr Joseph referring to the advice sought from Sparke Helmore and stating:

“The purpose of the advice was to ensure that Gunns’ proposal to sell the standing timber was in accordance with the transaction [sic: trust] documents. Assuming it is, the valuation would then be reviewed against [the proposed purchaser’s] offer and if competitive, we would consent to the proposal.” (Emphasis added.)

90. Mr Howard agreed in cross-examination that he intended to say “trust documents” rather than “transaction documents”.

91. The words I have emphasised in this email suggest, once again, that Mr Howard’s state of mind at this stage was that Sparke Helmore’s advice was being sought as to whether Gunns’ proposal was permissible under the Trust Deed.

92. Thus Mr Howard gave this evidence in answer to questions from Mr Donaldson SC who appeared with Mr Zahra for Sparke Helmore:

“Q. … So, at least by 3 August 2011 you'd arrived at the view, hadn't you, that provided it was permitted under the scheme documents and provided the valuation stacked up with the offer, you should go ahead and consent to the proposal?

A. That's what that says, yes.”

93. On 12 August 2011, Mr Johnston caused an ASIC search to be undertaken of the Forest Company, the Milling Company, Auspine and Gunns. Those searches revealed the existence of the ANZ Charge.

Sparke Helmore 17 August 2011 Certification

94. On 17 August 2011, Sparke Helmore sent AET a letter of “certification”. I will call this document “the 17 August 2011 Certification”.

95. The letter stated:

“3.2   We have been advised by the Forest Company that:

(a)   the Covenantholders have purchased Covenants under which they are entitled to, amongst other things:

(1)    certain net proceeds from the sale of Standing Timber in respect of the planting year for which a Covenant was purchased; and/or

(2)   a percentage of the value (determined at the time when all of the Standing Timber is sold in accordance with the Trust Documents) of certain freehold land on which the Forest Company has planted Standing Timber in respect of a Covenant; and

(b)   the Forest Company and the Milling Company propose to sell all of the Standing Timber and the real property on which the Standing Timber is located to [the proposed purchaser] in accordance with the Documents (Proposal).”

96. “Documents” was defined to mean those listed in Schedule 2 to the letter, and included the Trust Deed.

97. Under the heading “Certification”, Sparke Helmore said:

“Based on our review of the Documents and subject to the assumptions and qualifications set out in this letter, we are of the opinion that:

…

(c)   if the Forest Company proceeds with the Proposal, this would not of itself be materially prejudicial to the Covenantholders’ interests under the Trust Documents; and

(d)   on the basis of (a), (b) and (c) above, the Trustee is able to provide its consent to the Proposal.”

98. Included in the “assumptions” to which this certification was said to be subject were that:

“(jj)   the Forest Company:

(1)   has done and will do everything in its power to inquire into and investigate measures calculated to secure reasonable financial returns to the Covenantholders;

(2)   has inquired into the best method of cutting and felling the Standing Timber; and

(3)   has used and will use its best endeavours to obtain reasonable returns for each Covenantholder”.

And:

“(mm)   the sale of any Standing Timber and any real property on which Standing Timber is located (and any amendment of any Trust Documents to allow for the sale of any Standing Timber and any real property on which Standing Timber is located) will not:

(1)   affect or impact in any way the Forest Company’s ability to observe and perform its obligations under the Trust Documents;

(2)   materially prejudice the interests of any Covenantholders; or

(3)   reduce any protections, rights or benefits afforded to any Covenantholders pursuant to the Trust Documents”.

99. The “qualifications” included that:

“(k)   on and after the date of this letter, all parties’ obligations under or in connection with the Trust Documents, the Covenants and the Proposal (including any Environmental Law) will be strictly complied with, including that:

(1)   each Covenantholder will receive his or her due proportion of the benefit in respect of the relevant Covenant in accordance with the Trust Documents; and

(2)   all moneys due to a Covenantholder in respect of the relevant Covenant will be paid to that Covenantholder in accordance with the Trust Documents; and

(3)   the Forest Company will:

(A)   comply with all of its obligations in connection with distributing proceeds to the Covenantholders…”.

100. These assumptions and qualifications were repeated in a further advice given by Sparke Helmore to AET on 22 December 2011. As I discuss below, AET’s attention in final submissions ultimately focused on 22 December 2011 advice.

Events leading to Sparke Helmore’s 22 December 2011 advices

101. On 4 November 2011, Mr Nguyen wrote to Mr Howard:

“Just to give you an update, we are still negotiating with [the proposed purchaser] as well as a third party…

It is likely that instead of being the purchaser, [the proposed purchaser] will sell their trees as a part of the transaction with [the third party] being the ultimate purchaser of the…Auspine and Covenant Holder Trees.

This does not affect the work that has been done with respect to the Covenant Holder trees as [the proposed purchaser] is simply being replaced by [the third party].”

102. On 22 November 2011, Mr Nguyen sent Mr Howard a draft of the Tree Sale Agreement.

103. That prompted Mr Howard to send Mr Nguyen an email on 23 November 2011:

“Please provide the details of the purchaser. The opinion from Spark[e] Helmore and the Letter of Undertaking from the Gunns entities will both need to be amended to reflect the correct details of the purchaser and then re-executed. At present, both these documents specifically state that [the proposed purchaser is] the purchaser and the representations and warranties also refer to [the proposed purchaser]”.

104. On 28 November 2011, Mr Nguyen sent Mr Howard a draft of a proposed Put & Call Option which, he said, “allows for [the purchaser] to nominate an eventual purchasing entity”. Mr Nguyen said that the matter about which Mr Howard had enquired on 23 November 2011 was “a mechanical exercise” and that “you can simply refer [to] the Purchaser as the entity…under the Put & Call Option”.

105. On 29 November 2011, Mr Howard wrote to Mr Johnston of Sparke Helmore:

“As discussed last week, we have advised that [the proposed purchaser] is no longer the purchaser of the standing timber relating to covenant holders. There is a Put & Call Option Deed to be entered into by the sellers and purchaser, as attached. Under this document, the purchaser may appoint a nominee to enter into the sale contracts.

As the letter of undertaking previously provided by the Auspine companies and your legal opinion to AETSA in relation to this matter specifically name the purchaser as [the proposed purchaser], could you please amend these documents to reflect the details of the new purchaser, or their appointed nominee in accordance with the Put & Call Option Deed?”

106. On 3 December 2011, Mr Nguyen sent Mr Howard the “final version of the Tree Sale Agreement for review”.

107. Schedule 3 of that document contained an “Apportionment between Sellers” of the “Initial Purchase Price”. It showed AET as one of the “Tree Owners” but that its “Portion of Initial Purchase Price” was “$0”; whereas the Forest Company’s “Portion of Initial Purchase Price” for South Australia was $20,216,073 and for Victoria was $31,783,927.

108. This matter did not escape Mr Howard’s attention. On 5 December 2011, Mr Howard wrote to Mr Nguyen:

“…has the purchase price that is applicable to covenantholders interests been finalised? In Schedule 3 of the Tree Sale Agreement it appears to be zero”.

109. Mr Nguyen replied within minutes, stating that the consideration under the Tree Sale Agreement referable to Covenantholders’ interests was to be paid to the Forest Company; $20,216,073 in respect of the South Australian assets and $13,783,927 in respect of the Victorian assets.

110. That prompted Mr Howard to write to Mr Nguyen on 7 December 2011. First, Mr Howard observed:

“The Tripartite Agreement and the Deed of Settlement contemplate the marketing/sale of the standing timber by the [Milling] Company, however, the Tree Sale Agreement sets out the Forest Company as the entity receiving the sale proceeds that relate to covenantholder interests.”

111. Mr Nguyen replied by email later that day:

“You are correct, it should be [the Milling Company] that is doing the selling pursuant to the powers given to it in the Deed of Settlement. We will amend the agreement to reflect this”.

112. In his email, Mr Howard posed the following question:

“Also, if [AET] is a party to the Tree Sale Agreement as one of the Sellers, rather than just consenting to the sale, why aren’t the proceeds coming directly to [AET]?” (Emphasis added.)

113. Mr Nguyen replied:

“The Trustee holds the beneficial interest and thus is the party required by the Purchaser to legally effect the sale. We are adopting a similar process to a harvesting and distribution event hence the proceeds, given the process is being managed by the [Milling] Company, needs to first go to the [Milling] Company for processing and the usual auditing to take place along with existing distribution going to the Trustee for final distribution to [the Covenantholders].” (Emphasis added.)

114. In effect, Mr Nguyen told Mr Howard that the money payable under the Tree Sale Agreement was to be dealt with as if the Proceeds Distribution Process was applicable. That is, the funds would be paid to the Milling Company, which would deal with funds in accordance with the regime specified in the Tripartite Agreement.

115. None of this caused any concern to Mr Howard. In his affidavit he said:

“My understanding of Mr Nguyen’s above response, at the time of receiving it, was that covenantholders’ share of the proceeds from the Third Proposal would be distributed in accordance with the process for distributions outlined in the Tripartite Agreement... This did not raise any alarm with me at the time because:

(a)   if it was in accordance with the terms of the Trust Deed, I believed it was appropriate, particularly as it was my understanding that there was no other process for distribution of proceeds permitted under the Trust Documents; and

(b)   the Forest Company had never previously defaulted on any of its obligations under the Trust Documents since my involvement with the Trust from 2006.”

116. Although an affidavit of Mr Johnston was served and was included in the Court Book, Mr Donaldson did not call Mr Johnston. Nonetheless, a number of Mr Johnston’s file notes are in evidence.

117. One is dated 7 December 2011, and records an attendance of 20 minutes from 4.20 pm to 4.40 pm between Mr Johnston, Mr Howard and “Annette”; evidently Ms Annette Strickland from AET, who was copied in to the email exchange between Mr Howard and Mr Nguyen earlier in the day.

118. In setting out the terms of that file note, I have expanded some obviously abbreviated terms thus “[ ]” and have emphasised some entries with underlining.

119. So expanded, the note reads:

“Covenantholder = Gross

$34 M[illion] – Forest Co distributes to AET

• when thinnings/harvest – P[ut and] C[all Option] transfers the net proceeds

• 20% to Milling Co.

• 5% commission.

• I just thought we were consenting

• Purchaser wants us to sign I think. It’s fine though.

Were also asking for:

- We get instructions from trust manager. We get them to say all the R[epresentions] + W[arrantie]s from them are correct ----> back to back

S.E.A.S. gives that to us.

[AJ or AS]: We’ll look into getting security from Gunns as well.

- back to back rep[resentations]

- letter of U[ndertaking]

- valuation – been updated

net 33 M[illion]

= 34 M[illion]. I’m happy w[ith] that.

• They’ll do an ASX notice once docs signed.

- Covenantholders will be advised (T[rust]ee will be told). Done by 31 Jan.

• I’m away tomorrow arvo + Friday

- take the doc as final

• I’m reas[onably] comfortable w[ith] the R[epresentations] + W[warranties] + U[ndertaking]s

• Not too concerned w[ith] the commercials

• No real constraint to us to pay the $ to covenantholders. Just subject to the Trust docs.” (Emphasis added.)

120. I think it likely that Mr Howard made the remarks that I have underlined. It is not clear who said something to the effect “[w]e’ll look into getting security from Gunns as well”. The note could read “AJ” (Mr Johnston of Sparke Helmore) or “AS” (Ms Strickland of AET).

121. The note shows that:

1. Mr Howard understood that the effect of activation of the Put & Call Option Deed would be that proceeds of the sale of the Scheme Land and the Scheme Trees – that is “$34 M” – would be “transferred to” the Milling Company and then the Forest Company and be subject to deduction of their commissions of 20% and 5%; that is be dealt with in accordance with the Proceeds Distribution Process;

2. Mr Howard knew the Encumbrances were to be discharged on settlement; hence Mr Johnston or Ms Strickland spoke of “getting security from Gunns as well”;

3. Mr Howard was comfortable to give certain representations, warranties and undertakings (evidently those called for in the Tree Sale Agreement) and was not concerned with “the commercials”; that is, I would infer, the potential risk of selling Scheme Land and Scheme Trees and waiting for the Proceeds Distribution Process to be applied to the proceeds of those sales, rather than retaining the Scheme Land and Scheme Trees and continuing the current arrangements, which included Covenantholders having the security from the Forest Company of the Encumbrances;

4. Mr Howard saw there being no “constraint” on AET requiring it to ensure that the Land Sale Proceeds and Tree Sale Proceeds be paid to Covenantholders; and

5. it was satisfactory to Mr Howard that payment of those proceeds be “just subject to the Trust Docs”; that is, in accordance with Proceeds Distribution Process.

122. Consistently with those conclusions, at 4.47 pm, some three minutes later, Mr Howard forwarded to Mr Johnston his email exchange with Mr Nguyen and said:

“As discussed, here is the email that I sent to [Mr Nguyen] today and his responses. Please disregard his response in relation to the letter of undertaking. [Mr Nguyen] was referring to the letter provided back in March 2011 from the Forest Company that the proposal to sell the timber was a good thing, rather than the August 2011 letter of undertaking.

Attached is the form of instruction that we will receive from [the Forest Company].

I’ll send the updated valuation information in a separate email.

Please let me know if you have any queries.”

123. The only reference in this email to the discussion minutes before about the proposed flow of funds payable under the Tree Sale Agreement is the first sentence. Evidently, Mr Howard was content with what Mr Nguyen had told him, and with his discussion with Mr Johnston and Ms Strickland about that matter. He did not ask Mr Johnston anything further and was, in effect, sending Mr Johnston his email exchange with Mr Nguyen for information and because he had told Mr Johnston about it; hence the words “as discussed”.

124. In the meantime, on 5 December 2011, Mr Howard had sent Mr Johnston a copy of the draft Tree Sale Agreement and asked:

“Could you please provide a quote to review this document and the Put and Call Option Deed (sent last week) and to provide a legal signoff to [AET] in the attached format?”

125. Mr Howard’s reference to the “attached format” was to a pro forma letter addressed to AET enquiring:

“1. Details of document(s);

2. Confirmation that the document reflects the instructions from the Manager;

3. Any unusual or onerous provisions in the document(s);

4. Confirmation that the document includes the Trustee’s limitation of liability clause; and

5. Confirmation that the document is in order for execution”.

126. On the following day, 6 December 2011, Mr Johnston wrote to Mr Howard:

“Thanks for asking for an estimate on this.

We estimate that our costs will be $4-5K (excl. GST and disb.) to review the Put & Call Option Deed and Tree Sale Agreement (Documents) and provide a sign-off on them.

Our estimate is on the basis that:

● our scope remains as above;

● the only new documents we’re required to review are the Documents (and these are in substantially final form);

● our sign-off is limited to the matters contained in the form provided;

● there are no material issues, requiring further work, identified in our review of the Documents;

● we’re not required to advise on any regulatory (including taxation) issues; and

● the matter completes before Christmas.”

127. On 8 December 2011, Mr Johnston sent an email to Mr Nguyen:

“As discussed with Ben, we’ve completed our preliminary review of the Tree Sale Agreement and the Put and Call Option Deed (Documents) on behalf of AET.

At the moment, AET is simply included as a ‘Seller’ in both Documents. Consequently, AET is making various reps, warranties and undertakings and subjecting itself to a number of obligations (including a broad indemnity for the Tree Buyer’s Loss following the breach of any Warranty by any Seller) which go over and above its role and are extraneous to the purposes of it being a party to the Documents. Those main purposes, as we understand it, being:

●   consenting to the sale of the Covenant Holder Standing Timber pursuant to the Trust Documents; and

●   providing reps and warranties re. its power to consent to the arrangements and its indemnification from trust assets (as set out in clause 3.7 of the Schedule 4 of the Tree Sale Agreement).

Having regard to the above, could we ask that the Documents are amended to reflect this?”

128. In his closing submissions, Mr Lockhart submitted that this email was a reply to Mr Nguyen’s email of 7 December 2011 to Mr Howard, which contained the responses I have set out above at [111] and [113]. I do not think this is correct.

129. Mr Howard’s email to Mr Johnston of 7 December 2011, following the 20 minute conference that day, did not suggest that there was anything that Mr Howard wanted Mr Johnston to do about his exchange with Mr Nguyen.

130. Mr Johnston’s 8 December 2011 email to Mr Nguyen was dealing with a different subject; namely whether AET should, in the Tree Sale Agreement, make representations and/or give undertakings. In the 7 December 2011 conference Mr Howard had expressed reasonable comfort with so doing.

131. On 9 December 2011, Mr Nguyen replied to Mr Johnston’s 8 December 2011 email:

“The Purchaser’s view is that the Trustee under the Trust holds beneficial title and is required as the seller and it is appropriate that it provides such warranties as a seller.

From our perspective, given that we have been managing the Trees we are prepared to provide the Trustee with the indemnities to cover any of the warranties required by the Purchaser.

Please let us know urgently if this would be suitable and if so please provide us with a draft for review as soon as possible.”

132. Sparke Helmore replied the same day:

“We’re taking instructions from AET re. your further indemnification offer.

That aside, we note that the documents are drafted with AET as a Seller on a joint and several basis (clause 13.10 of the [Tree Sale Agreement]). At the very least this (along with clause 7.6) needs amendment to have AET as a Seller on a several basis from the other Sellers. Please revert to the Purchasers to confirm this is acceptable and in the meantime we will draft an indemnity into the Gunns group undertaking for consideration by AET.”

133. Mr Johnston thereafter drafted undertakings which were ultimately given to AET by Gunns, Auspine, the Forest Company and the Milling Company on 15 December 2011. Sparke Helmore referred to these undertakings in its 22 December 2011 advice, with which I deal below.

134. On 20 December 2011, Mr Johnston arranged for further ASIC searches of the Forest Company, the Milling Company, Auspine Ltd and Gunns Ltd to be undertaken. Those searches revealed the ANZ Charge.

135. On 20 December 2011, Mr Nguyen wrote to Mr Johnston about a proposed “GST side letter”. He wrote:

“As discussed, the purchase of the [formerly proposed purchaser’s] Trees may attract GST, which [the purchaser] has not contemplated.

So that we can facilitate the transaction (for the benefit of all parties involved), we have agreed to use the proceeds from our own [Tree Sale Agreement] with [the purchaser] (including [Covenantholders’] interest) to assist [the purchaser] in funding the GST but only as a loan and [the purchaser] will have to repay that when they get their GST refund. Subject of course to the Trustee being comfortable.”

136. On 21 December 2011, Mr Howard sent an email to Mr Johnston:

“Have you spoken to [Mr Nguyen] following our phone call this morning? If the [Covenantholders’] proceeds are not affected, can we not be involved in the side letter?” (Emphasis in original.)

137. Later on 21 December 2011, Mr Johnston wrote to Mr Nguyen:

“Further to your emails since yesterday, we have now discussed the issues with AET and respond as follows:

●   on the basis of your correspondence and the information provided (noting that we have not seen/reviewed the ‘Relevant Agreements’ other than the Tree Sale Agreement), it is not clear that the proposed loan of the GST liability (Proposed Loan) would not affect the Covenantholders’ sale proceeds;

●   the Proposed Loan is not contemplated by the procedure for distributing sale proceeds of Covenantholder timber under the Trust Documents. It’s therefore also not clear that any party is able, under the terms of the Trust Documents, to use proceeds in this way (irrespective of whether the Proposed Loan may only affect Gunns’ proceeds as a Covenantholder);

…

●   if, as set out in your last email, the land proceeds of sale (under the docs that we haven’t yet seen/reviewed) are enough to cover the GST, then presumably the loan can be done without the need for any side letter from AET.

Given the above, a Side Letter in the form provided is not acceptable to AET. The Proposed Loan should rather be dealt with by Gunns (or [the originally proposed purchaser]) funding or making provision for the GST liability separately.”

138. This email exchange is relevant to the question of Gunns’ anxiety to ensure that the sale of the Scheme Trees and Scheme Land proceeded. I return to this below.

The 22 December 2011 “Certification” and “Confirmation”

139. On 22 December 2011, Sparke Helmore sent to AET (Mr Howard) two documents. The first was a certification in similar terms to the 17 August 2011 Certification. I will call this document the “22 December 2011 Certification”.

140. In the 22 December 2011 Certification, Sparke Helmore’s recitation of the “Proposal” was the same as in its letter of 17 August 2011.

141. Under the heading “Certification” Sparke Helmore repeated what was said in the 17 August 2011 Certification (set out at [97] above) and, in addition, certified that based on their review of the “Documents” and subject to the assumptions and qualifications set out in the letter (which were the same as in the 17 August 2011 letter) that:

“Based on our review of the Documents and subject to the assumptions and qualifications set out in this letter, we are of the opinion that:

…

(c)   if the Forest Company proceeds with the Proposal, this would not of itself be materially prejudicial to the Covenantholders’ interests under the Trust Documents; and

(d)   on the basis of (a), (b) and (c) above, the Trustee is able to provide its consent to the Proposal.

(e)    in order to facilitate the Proposal, the Trustee has the power to enter into the following documents:

(1)   a Put and call option deed to be entered into between, among others, the Trustee, the Forest Company and the Milling Company;

(2)   a Tree Sale Agreement to be entered into between, among others, the Trustee, the Forest Company and the Milling Company; and

(3)   a Side Letter Agreement to be entered into between, among others, the Trustee, the Forest Company and the Milling Company.”

This, relevantly, did no more than add subpar (e) to the corresponding Certification in the 17 August 2011 Certification (see [97] above).

142. It is on the second document sent by Sparke Helmore to AET on 22 December 2011 that, in final submissions, Mr Lockhart placed most reliance.

143. I will call this document the “22 December 2011 Document Confirmation Advice”.

144. That document was headed “Tree sale documents to be entered into by [AET]” and recited that:

“[The Forest Company] and [the Milling Company] propose to sell all of the Covenant Holder Standing Timber and the real property in which the Covenant Holder Standing Timber is located in accordance with the Trust Documents”.

145. The expression “Trust Documents” was defined by reference to the definition in the Tree Sale Agreement, and therefore included the Trust Deed, the Tripartite Agreement, the Settlement Deed and the Covenants.

146. The letter recorded that:

“We have acted as your legal advisors in connection with reviewing the following documents on your behalf:

(a)   a Put and call option to be entered into between, amongst others, [AET], the [purchaser], the Forest Company, the Milling Company, Auspine Limited…and Gunns Limited…;

(b)   a Tree Sale Agreement to be entered into between, among others, [AET], the Forest Company, the Milling Company, Auspine and Gunns...; and

(c)   a Side Letter Agreement to be entered between, among others, [AET], the Forest Company, the Milling Company, Auspine and Gunns.

(the Documents).”

147. The letter continued:

“5 Confirmation in relation to the Documents:

We confirm that:

(a)   the Documents have been reviewed and settled in accordance with the instructions given by Stuart Howard;

(b)   the Trustee proposes to enter into the Documents as part of the ‘Seller’ group, which is the group of entities selling the Covenantholder Standing Timber and certain other assets…(Other Assets). The Documents contain various obligations, liabilities, representations, warranties and undertakings of, or given by, the Trustee in relation to the Sellers (other than the Trustee), the Other Assets and matters or things in connection with the Sellers (other than the Trustee) and the Other Assets. In accordance with your instructions, such provisions in the Documents are acceptable to the Trustee on the basis that it has received the benefit of the representations, warranties, undertakings and indemnities from the Forest Company, the Milling Company, Auspine and Gunns which are contained in the Undertaking Letter and the Milling Company Sign Off;

(c)   each Document includes a limitation of liability clause for the Trustee, that was provided and approved by the Trustee; and

(d)   on the basis of:

(1)   (a), (b) and (c) above, and

(2)   the Proposal being acceptable to the Trustee,

we confirm that the Documents are in order for execution by the Trustee.” (Emphasis added.)

148. The letter then stated that it was subject to the assumptions and qualifications thereafter set out which included the assumptions and qualifications which relevantly reflect assumptions (jj), (mm) and qualification (k) in the 17 August 2011 Certification that I have set out above at [98] and [99].

149. To repeat, those assumptions and that qualification were:

“(jj)   the Forest Company:

(1)   has done and will do everything in its power to inquire into and investigate measures calculated to secure reasonable financial returns to the Covenantholders;

(2)   has inquired into the best method of cutting and felling the Standing Timber; and

(3)   has used and will use its best endeavours to obtain reasonable returns for each Covenantholder;

…

(mm)   the sale of any Standing Timber and any real property on which Standing Timber is located (and any amendment of any Trust Documents to allow for the sale of any Standing Timber and any real property on which Standing Timber is located) will not:

(1)   affect or impact in any way the Forest Company’s ability to observe and perform its obligations under the Trust Documents;

(2)   materially prejudice the interests of any Covenantholders; or

(3)   reduce any protections, rights or benefits afforded to any Covenantholders pursuant to the Trust Documents;

…

(k)   on and after the date of this letter, all parties’ obligations under or in connection with the Trust Documents, the Covenants and the Proposal (including any Environmental Law) will be strictly complied with, including that:

(1)   each Covenantholder will receive his or her due proportion of the benefit in respect of the relevant Covenant in accordance with the Trust Documents; and

(2)   all moneys due to a Covenantholder in respect of the relevant Covenant will be paid to that Covenantholder in accordance with the Trust Documents; and

(3)   the Forest Company will:

(A)   comply with all of its obligations in connection with distributing proceeds to the Covenantholders…”.

150. Mr Lockhart’s case was that the 22 December 2011 Document Confirmation Advice incorrectly certified that the Tree Sale Agreement was “in order for execution” by AET, and that it should have drawn attention to, as “unusual or onerous provisions”, the provisions in the Tree Sale Agreement that:

1. the Encumbrances were to be discharged on completion; and

2. the relevant proceeds were to be paid to the Milling Company and not to AET.

The transaction

151. Mr Nguyen was anxious that AET execute the Put & Call Option prior to Christmas. On 22 December 2011, he sent an email to Mr Howard and Mr Stewart:

“Please urgently advise on the status of signing.”

152. Mr Howard responded that the document should be executed “shortly”, to which Mr Nguyen replied:

“Anything to get me away from the cliff face would be gratefully accepted.”

153. On 22 December 2011, the purchaser, Gunns, the Forest Company, the Milling Company, AET and various other Gunns’ subsidiaries executed the Put & Call Option which, as the name suggests, gave the purchaser the right to call for, and the Gunns interests a right to put to the purchaser the obligation to purchase the Scheme Land and Scheme Trees.

154. On 22 December 2011, Gunns announced to the market:

“The company has a heads of agreement with a purchaser for the MIS loan book. The purchaser is currently finalising transaction due diligence with completion scheduled in January 2012. This transaction is expected to reduce debt by approximately $85 million through cash received and the retirement of securitisation facilities.”

155. On 15 February 2012, the Forest Company wrote to AET, enclosing discharges of the Encumbrances and stating:

“We would be pleased if the attached documents could be executed and once signed could you please post them to Tri Nguyen…and he will hold them in escrow until completion of the transaction”.

156. On 8 March 2012, at Mr Nguyen’s request, AET forwarded the discharges of the Encumbrances to the purchaser’s solicitor.

157. In the meantime, on 24 February 2012, Mr Nguyen wrote to Mr Howard and Mr Stewart:

“One of the [purchaser’s] investors has withdrawn from the transaction due to their exposure to the European financial situation. [The purchaser] is in the process of securing two more investors but those investors will not be able to complete their investment approval process until late May/June.

The remaining investor in the [purchaser’s] pool of fund[s] has agreed to proceed with the current transaction albeit in a varied form.

In order to proceed with Completion and keep the structure of the Purchaser …in place Gunns has agreed to take the place of the investor that withdrew by becoming a member of the two…established trusts (Staple Fund) that will own and operate the assets. Once [the purchaser] has finalised the arrangement with the new investors they will come into the Staple Fund and Gunns will exit the Staple Fund. This is expected to be done by late May/June.

This allows the transaction to Complete (anticipated for 16/03/12), rather than having to wait until [the purchaser] and the new investor complete their investment approval process and settle then, which will be late May/June. Gunns by agreeing to this also meant that it will be difficult for [the purchaser] to withdraw from the transaction altogether for lack of fund[s], which they currently can due to it being one of the conditions precedent, thus ensuring the sale will proceed.”

158. By agreeing temporarily to become a member of the Staple Fund that would own and operate the various assets after the purchase, Gunns was in effect providing vendor finance.

159. Again, this is said by Mr Kerr to bespeak Gunns’ anxiety to ensure that the transaction completed.

160. On 9 March 2012, Gunns wrote to ASX requesting a trading halt:

“The Company requests a trading halt effective immediately for two business days.

The Company has been advised that the Richard Chandler Corporation does not intend to proceed with its participation in the proposed Company equity raising as outlined to the market on 8 February 2012.

The Company is in discussions with equity investors in respect of the raising. Further information will be provided in respect of the recapitalisation when these discussions are concluded.”

161. On 13 March 2012, Mr Johnston and Mr Howard had a telephone call which Mr Johnston recorded in these terms, again expanding some obviously abbreviated terms thus “[ ]”:

“● Gunns issues – it is what it is

◦ [Undertaking] from all parties. That’s the risk we’re taking

◦ I don’t know what alternatives we can take

◦ I don’t think there’s anything else we can do

◦ I’ll let you know if there is but all we can do [at the moment] is just sit [and] hope/wait it’s fine

I understand the [Undertaking]/indemnity is only as good as the parties backing it (i.e. Gunns)”.

162. The note appears to set out comments made by Mr Howard. Mr Lockhart submitted that those comments should have alerted Mr Johnston, and thus Sparke Helmore, that Mr Howard did not know what alternatives were available to or that there was anything that AET could do.

163. I do not agree. By now AET was committed to the transaction. The note does not suggest that Mr Howard was seeking any advice. Rather, Mr Howard was acknowledging the problematic position AET was then in. He knew Gunns was in trouble: it had just requested a trading halt. He knew the Tree Sale Proceeds were not to be paid to AET, but rather to the Milling Company. This had been discussed at some length with Mr Johnston on 7 December 2011. Mr Howard was simply acknowledging the commercial reality of the position AET was then in.

164. These matters caused some amendments to the Tree Sale Agreement to be made.

165. On 15 March 2012, Mr Howard wrote to Mr Johnston:

“Given the recent amendments to the Tree Sale Agreement…could you please confirm that your signoff dated 22 December 2011 is still current?”

166. Mr Howard was referring to the 22 December 2011 Document Confirmation Advice.

167. On 14 March 2012, Sparke Helmore gave this “Confirmation”:

“Confirmation

We confirm that:

(a)   the Amending Deed has been reviewed and settled in accordance with the instructions given by Stuart Howard;

(b)   the Amending Deed includes a limitation of liability clause for the Trustee, that was provided and approved by the Trustee; and

(c)   on the basis of:

(1)   (a) and (b) above; and

(2)   the Proposal being acceptable to the Trustee,

we confirm that the Amending Deed is in order for execution by the Trustees.”

168. Sparke Helmore added the following qualification, arising out of Gunns’ trading halt:

“(g)    The shares of Gunns Limited (the ultimate holding company of the Gunns Group Parties and listed on the Australian Securities Exchange) were recently placed in a trading halt and there has also recently been a reduction in the share price and the total market capitalisation value of Gunns Limited. As a result, the value and utility of the indemnities and other benefits provided to the Trustee under [various letters of undertaking given by Gunns] (including the ability of the parties to the [letters of undertaking] to make payment under any indemnities) may have been adversely affected. Notwithstanding this, we confirm the trustee’s instructions that the proposal, the [letters of undertaking] are acceptable to it from a commercial perspective.”

Completion

169. The Tree Sale Agreement was executed on 15 March 2012. As I have mentioned, the consideration payable by the purchase for the Scheme Trees was $33,999,999. Of that, only $1 was payable to AET. The balance, $33,999,998 was payable to the Milling Company. In return, AET agreed that the Discharges of Encumbrances delivered to the purchaser’s solicitor on 8 March 2012, would no longer be held in escrow.

420. Mr Lockhart said:

“What this all shows is that at the time, in the hypothetical world with which the Court is confronted, what we say is, had AET come along and said, we are not happy, we are not prepared to release out security unless you give us moneys on completion; then a variety of factors to which we point would dictate - we say, the most probable outcome is the bank would have been prepared for some moneys to be released to AET, but not anything in excess of the value of its security, being 16 million; which is not terribly much less than what the covenantholders would be entitled to get, leaving aside the Gunns companies' covenantholders, in any event.” (Emphasis added.)

422. Mr Lockhart’s statement was made in the context of a submission that the most that ANZ was likely to permit be paid to Covenantholders was the value of the Scheme Land which, Mr Lockhart submitted was $16 million. I will turn to that submission shortly.

423. Subject to what follows, the matters I have set out from [381] to [422] point strongly to the conclusion that, had AET insisted that it would not discharge the Encumbrances without payment to it of the Covenantholders’ entitlements, in effect the Tree Sale Proceeds, ANZ and Gunns would have acceded to AET’s demands.

424. What follows is consideration of a number of arguments put by Mr Lockhart to the contrary effect.

(a) Would ANZ only have agreed to release $16 million?

425. As set out at [421], Mr Lockhart submitted that, in any negotiation with ANZ, ANZ would only have agreed to release to AET, and thus to the Covenantholders, an amount equal to the value of the Scheme Land.

426. Mr Lockhart submitted that the evidence showed that the Scheme Land “had been independently value as being $16 million”. Mr Lockhart submitted:

“In the light of that valuation and Gunns’ financial circumstances (which Gunns’ secured lender, the ANZ, was acutely aware of and was pressuring Gunns to address by selling assets and paying down debt), it is likely that Gunns (and the ANZ) would only have agreed to:

a.   Release funds to AET, on completion, up to the value of the security represented by the Encumbrances i.e. $16 million (being the amount of the prior ranking security to that held by ANZ); or

b.   Provide substitute security for up to that value i.e. $16 million.”

427. The valuation upon which Mr Lockhart relied was the “Abridged Land Valuation Results”, which is an appendix to a valuation prepared by VDFC Forestry Consultants in July 2011. That valuation shows that the $16 million figure is one prepared by Colliers a year earlier, in June 2010.

428. Mr Sullivan submitted that a more reliable guide to the value of the Scheme Land at the relevant time was the amount that the purchaser had agreed to pay for the land under the land sale contracts.

429. Initially, Mr Sullivan submitted that the value attributed to Covenantholder lots in the land sale contracts was $24,934,000. Mr Lockhart submitted in reply that this calculation overlooked an earlier sale of Covenantholder land and that the true price of Covenantholder land in the land sale contracts was $18,320,000. I understand that this is now accepted by Mr Kerr.

430. However, the nature of the Encumbrances is that they do not secure only the value of the land. They secured “all and singular” the obligations of the Forest Company under the Trust Deed. Were the Covenantholders to exercise their power of sale under the Scheme Land they would, no doubt, only recover an amount equal to its value. But they were entitled to maintain the Encumbrances on the title of the Scheme Land until all monies due to them from the Forest Company were paid.

431. In those circumstances, I am not prepared to speculate that ANZ would only have agreed to release to AET the value of the Scheme Land.

(b) Would Gunns have responded to a refusal to release the Encumbrances by excising the Scheme Land from the sale?

432. Mr Lockhart submitted, again in response to the Payout Counterfactual, that if payment to it of $16 million was not acceptable to AET:

“…the likely response from Gunns/ANZ would have been to excise the sale of Covenantholder land from the transaction so that Gunns could still obtain the Tree Sale Proceeds (being about $34m, which was double the value of the Covenantholder land) without having to pay anything to AET on completion.”

And that:

“Under that scenario:

a.   The proposed sale would probably have gone ahead with the Covenantholder trees being sold (either as standing timber or as felled and sold by Gunns) but not the land in respect of which there were Covenantholder Encumbrances;

b.   The Encumbrances would likely have remained in place;

c.   Gunns Limited, Auspine Limited, the Forest Company and the Milling Company would still have gone into administration in September 2012; and

d.   AET would have been left to enforce the Encumbrances.”

433. Mr Lockhart did not point to any evidence which could justify that submission. It involves a high degree of speculation.

434. As Mr Sullivan submitted, it involves “precisely the kind of speculation, against a plaintiff and in favour of a defaulting trustee, which equity forbids in a claim for equitable compensation against a defaulting trustee”. Mr Sullivan pointed to Elliott J’s observations in Ahrkalimpa, at [34], which I set out earlier:

“…when assessing quantum and considering what would or ought to have happened if no breach had occurred, the court should not speculate against the plaintiff, or assume something might have occurred when, in fact, it did not.”

435. In any event, it appears to me unlikely that Gunns would have proceeded this way. As early as 14 January 2011 Gunns had stated in its Information Memorandum that it wished to “sell the entire estate” (see [61] above).

436. And, as I have set out at [405], Gunns’ Chairman’s report for FY2011 emphasised how “pivotal” the asset sale program was for Gunns’ future financing requirements.

437. On 8 December 2011, an officer of ANZ wrote to Gunns’ Company Secretary, Mr Chapman, enquiring:

“…is it the entire estate that is being sold?”

438. Mr Chapman replied:

“The sale comprises land and tree interests owned by the group in the Green Triangle region. Land area is approx. 42,000 ha all of which (apart from some minor equity interests (2,000 ha) held by Investors) is currently owned by the Company. The ownership of the trees is split between the Company (15%), GMO (75%) and Covenant Holders/Investors (10%). As part of the transaction the Company has agreed the purchase of the GMO and Covenant Holder trees from those parties to sell all land and tree [sic] to the purchaser. By doing this the estate could be sold on an unencumbered basis to the new owner and realise a better price. The group will not retain any of the estate following the sale.” (Emphasis added.)

439. Thus Gunns emphasised to its lender that the sale of its entire interest in the Green Triangle had been effected to “realise a better price”. In those circumstances, it seems unlikely that Gunns would have excised the Scheme Land.

440. Further, and as a practical matter, there is no evidence that the Scheme Land could be excised. Gunns’ property interests were located on a large number of disparate sites to the east of South Australia and the west of Victoria. There was no evidence that the Scheme Land titles were contiguous or that non-Covenantholder titles could be sold independently of Covenantholders’ titles. It may be that Covenantholders’ interests were surrounded by non-Covenantholder interests in certain parts of the estate. There is no evidence either way.

441. I am not prepared to speculate that, had Gunns been faced with a refusal by AET to release the Encumbrances, Gunns would have sought to excise the Scheme Land from the sale.

(c) Would Gunns have required retention of the amounts on account of its Covenantholder subsidiaries?

442. As at 30 June 2012, the Forest Company and Auspine were Covenantholders. Mr Lockhart produced a complicated series of calculations designed to show that the value of the Covenants owned by the Forest Company and Auspine was in the order of $5.17 million. In those circumstances, Mr Lockhart submitted, again in response to the Payout Counterfactual:

“It is likely that had AET (contrary to our primary submission) been successful in negotiating the payment to it of the Tree Sale Proceeds…Gunns/ANZ would not have released [the value of Gunns’ subsidiaries’ covenants] to AET, but rather would have forgone any right to payment of those proceeds from AET so that it could hold on to them to immediately pay down Gunns’ debt. The same approach would have been applied to the 2011 Harvest Proceeds and the 2012 Harvest Proceeds that Gunns would have been entitled to be paid as a Covenantholder.”

443. In my opinion, this submission overlooks the point that, whatever Gunns might have proposed, AET as trustee had a duty to act impartially, and not to favour one beneficiary over others: Howe v Earl of Dartmouth (1802) 32 ER 56.

444. The counterfactual posed by Mr Lockhart assumes that AET would have acceded to a proposal by Gunns to prefer the interests of its subsidiary Covenantholders, who on this hypothesis would have been paid immediately, to the interests of all the other Covenantholders who would, on this hypothesis, have to await a distribution in due course.

445. Not only is it a matter of speculation as to whether Gunns would have adopted this position, AET could not have agreed to it without acting in breach of trust.

(d) Would Gunns have refused to release the 2011 and 2012 Harvest Proceeds?

446. Included in the amounts that, under the Proceeds Distribution Process, would ultimately be paid to Covenantholders were the 2011 Harvest Proceeds and the 2012 Harvest Proceeds.

447. As I mentioned at [29]:

1. the 2011 Harvest Proceeds totalled $11,051,041.49 of which $4,952,579.60 was actually been received by AET; and

2. the 2012 Harvest Proceeds totalled $5,148,552.31.

448. In the ordinary course, the 2011 and 2012 Harvest Proceeds were payable in accordance with the Proceeds Distribution Process; that is, between April and August 2012 for the 2011 Harvest Proceeds, and between April and August 2013 for the 2012 Harvest Proceeds.

449. In those circumstances, Mr Lockhart submitted, again in response to the Payout Counterfactual:

“In any scenario, Gunns would not have allowed the 2011 Harvest Proceeds and the 2012 Harvest Proceeds to leave Gunns’ possession (particularly the portion of those proceeds referrable to the Covenants owned by Gunns) in circumstances where those proceeds were not yet due for payment and Gunns was facing significant liquidity problems.”

450. This submission can only have application to that part of the 2011 Harvest Proceeds as was not paid to AET, and to the 2012 Harvest Proceeds. No question of what Gunns “would have allowed” can arise in relation to that part of the 2011 Harvest Proceeds as were actually paid to AET.

451. Under cl 2(d)(i) of the Trust Deed, AET could reasonably withhold its consent to the sale of the Scheme Land by the Forest Company in circumstances where there might be material prejudice to the interests of Covenantholders or a reduction in the protection afforded them.

452. As the Encumbrances secured “all and singular the terms, conditions, covenants and provisions” contained in the Trust Deed, they secured to the Covenantholders payment of the 2011 Harvest Proceeds and the 2012 Harvest Proceeds. While the Encumbrances only secured performance by the Forest Company of its obligations, AET was not obliged to release the Encumbrances until such time as all of its obligations, including passing on to AET the 2011 and 2012 Harvest Proceeds, had been completed.

453. Mr Howard gave no thought to the matter. Thus he gave this evidence:

“Q. And you now know, although you were under a misapprehension at the time - when I say, "the time", I mean March 2012 - that the encumbrances which were registered on the various titles would have provided security for the unpaid amounts of those distributions, don't you?

A. I know that now, yes.

Q. But you never turned your mind, did you, to whether AET should seek to have those amounts paid to it at the time of discharging the security given in March 2012?

A. Not at that time, no.”

454. Mr Sullivan drew attention to the observations of Handley JA in Kingsgrove RSL v Spasevski [2002] NSWCA 342 at [42]:

“The approach of Gaudron J and other High Court Judges, which has been referred to…places an evidentiary onus on the party in breach of duty. The breach of duty has created difficulties of proof which would not exist if the duty had been performed. Evidentiary presumptions are available against wrongdoers for other legal purposes (Armory v Delamirie (1722) 1 Stra 505 [(1722) 93 ER 664] and Houghton v Immer(No 155) Pty Ltd (1997) 44 NSWLR 46 at 49) and I see no reason why such a presumption should not be available in cases such as the present. This provides a further basis for finding that the club’s breaches of duty caused or materially contributed to the respondent’s injury.”

455. I find his Honour’s observations to be apposite here.

456. In those circumstances, I accept Mr Sullivan’s submission that, as the party in breach, AET bears the onus to establish that the unpaid 2011 Harvest Proceeds and the 2012 Harvest Proceeds would not have been paid, had a demand been made. I am not prepared to speculate against Mr Kerr in favour of AET, the defaulting trustee, as Mr Lockhart has invited me to do; particularly as it is clear that AET, through Mr Howard, gave no thought to the matter at the time.

(e) The 2011 Harvest Proceeds received by AET

457. It is common ground that AET received $4,952,579.60 of the 2011 Harvest Proceeds. My attention has not been directed to evidence indicating when AET received these funds. However the parties’ submissions proceeded upon the basis that this sum was received prior to completion of the Tree Sale Agreement.

458. This amount was not distributed to Covenantholders in the ordinary course. Mr Lockhart submitted that the funds had been “appropriately held” and “are the only assets of the trust available for the trustees (including Mr Kerr) to have resort to in respect of any costs incurred in administrating the trust that they may be indemnified for.

459. Evidently, these funds were used to fund the Korda litigation and are thus included in the Receiver Costs that Mr Kerr seeks to recover. In those circumstances a question of double recovery arises, which I deal with below at [492]-[494].

460. As Mr Sullivan submitted, had AET not breached its duties, this amount would have been distributed to Covenantholders in the ordinary course. AET does not suggest to the contrary. As Mr Sullivan put it:

“There is no part of the counter-factual, on any issue of causation, which could impact on Mr Kerr’s right to recover these amounts. The putative conduct or attitude of Gunns or its lenders is irrelevant to this particular loss”.

461. Accordingly, subject to the question of double recovery, Mr Kerr is entitled to succeed on this issue.

Conclusion on the Payout Counterfactual

462. None of the matters advanced by Mr Lockhart persuades me to depart from the preliminary conclusion I expressed above at [423]. Mr Kerr has established that, had AET insisted on receiving payment in exchange for discharging the Encumbrances, it is probable that it would have received the Tree Sale Proceeds.

463. It is, however, necessary to consider some further arguments developed by Mr Lockhart as to whether Gunns would have succeeded in negotiating certain deductions from the amount payable to AET from the Tree Sale Proceeds.

464. Mr Kerr and AET dealt with these questions under the heading “Quantum”.

Quantum

465. I have set out at [29] above the amounts claimed by Mr Kerr. To repeat, Mr Kerr claims:

1. the Tree Sale Proceeds: $33,999,998;

2. the Land Sale Proceeds: $4,882,380.58;

3. the 2011 Harvest Proceeds actually received by AET: $4,952,579.60;

4. the 2011 Harvest Proceeds not received by AET: $6,098,461.89;

5. the 2012 Harvest Proceeds: $5,148.552.31;

6. the Receiver Costs: $1,664,500.41;

7. the Appointment Costs: $371,976.90;

8. the Judicial Advice Costs: $270,757.94; and

9. interest from the date of breach on (a)-(e) above.

Deductions contended for by AET

(a) Post Tree Sale Agreement settlement deductions

466. The Tree Sale Agreement called for adjustments to be made, after settlement, to account for the difference between the harvesting areas referred to in the Tree Sale Agreement and the harvesting areas in fact transferred to the purchaser on completion; such difference being accounted for by ongoing harvesting of timber in the meantime.

467. Mr Lockhart calculated that the adjustment required in favour of the purchaser was $3,281,481.80.

468. Mr Sullivan criticised the basis upon which the figure of $3,281,481.80 was calculated but submitted that the larger point was that there was no evidence that any such adjustment had been made. Mr Sullivan repeated that submission orally in final address.

469. I gave Mr Lockhart leave to put in short submissions in reply. Mr Lockhart did not mention this matter in those submissions.

470. That, it seems to me, is the end of the matter.

471. However, for completeness, I should record that, in final submissions, Mr Sullivan accepted that if, as I have found, Mr Kerr was to recover the unpaid 2012 Harvest Proceedings, it would be reasonable to deduct the amount of $3,281,481.80.

472. Thus Mr Sullivan said:

“The trees in question here that were culled were trees which would have produced what we call the 2012 harvest proceeds. So if this deduction was one which needs to be taken off, that’s fair enough, in our respectful submission, if we were to get the 2012 harvest proceeds, that would be equitable. If, however, it was to be found that one wouldn’t have done a deal whereby those proceeds were properly and adequately secured so that the covenantholders would get them when they came in, we would say as a matter of equity, it would be inequitable to reduce AET's liability by the post-settlement adjustment of the tree sale agreement in those circumstances”.

(b) Commissions payable to the Milling Company and the Forest Company

473. Mr Lockhart submitted that:

“The Tree Sale Proceeds need to be reduced by the 5% commission that the Forest Company was entitled to and the 20% commission that the Milling Company was entitled to under the Trust Deed [and the] Tripartite [Agreement]”.

474. Mr Lockhart’s submissions continued:

“Documents that have recently been produced by ANZ reflect the fact that the $34 million Tree Sale Proceeds did not include these commissions, which reflects the expectation that they were payable. In addition, it should be noted that the relevant timber valuation provided by VDFC Forest[ry] Consultants in November 2011 (which updated the July 2011 valuation relied on by the plaintiff), recommended a fair net value amount for the Tree Sale Proceeds of $33.105m that was not net of commissions (contrary to what the plaintiff contends).” (Emphasis in original.)

475. The “[d]ocuments that have recently been produced by ANZ” included a document dated 30 January 2012 called “Project Saturn Update”.

476. Mr Lockhart did not refer to this document in oral address but it records ANZ’s understanding that the amount to be distributed to Covenantholders following settlement was to be $26 million “over May-September 2012”. I assume that the inference I am invited to draw is that the difference between that figure and the Tree Sale Proceeds of $33,999,998 was on account of commissions to be paid to the Milling Company and the Forest Company, which would have been in the order of $8 million.

477. This may be how ANZ saw things. But if the consideration that Gunns had negotiated be paid to it for the Scheme Trees, and thus the amount to be passed on to Covenantholders, took account of the commissions payable to the Milling Company and the Forest Company, there would be no basis for Gunns to argue that the amount payable to Covenantholders would be subject to deduction of those commissions.

475. On 19 August 2011, Gunns obtained a valuation of the Scheme Trees from VDFC Forestry Consultants. In that valuation, Mr Cross, of VDFC Forestry Consultants, opined that the net value of the Scheme Trees was $34,756,612. The schedules annexed to that valuation make clear that that figure is net of deductions for the 20% commission to which the Milling Company was entitled and the 5% commission to which the Forest Company was entitled.

476. On 23 November 2011, Mr Howard wrote to Mr Nguyen requesting a “letter from the valuer” confirming that AET could rely on the valuation as well as:

“Confirmation that the purchase price is the best market price reasonably obtainable at this time and is in line with the valuation.”

480. On 23 November 2011, Mr Nguyen replied saying that he would “liaise with the Valuer ASAP” and, a few minutes later, emailed Mr Howard:

“Further to my last email, the Valuer’s valuation was based on the standing timber as at June. Obviously there has been a further harvesting so we are asking him to provide an update valuation based on projected standing timber as at 24/1/2012 (the Completion/Settlement date).”

481. On 24 November 2011, VDFC Forestry Consultants produced a further valuation of the Scheme Trees of $33,105,149.

482. In his covering letter of 24 November 2011 addressed to AET, Mr Cross said:

“It is my view that the recommended market price of $33,105,149 is a fair and reasonable estimate of the value of the resource according to industry market prices and is based on evaluation of current industry conditions and log purchase prices.”

483. The second valuation is also dated July 2011 on its front cover but the disclaimer is dated 24 November 2011 and the valuation is expressed to be “based on inventory at 24 November 2011”. Mr Cross opined:

“…the use of the discounted value of $33,105,149 at Market price stumpages would represent a fair net value for the purchase of the Covenantholders’ resource. This includes the benefit of potential growth at the end of the rotation, and takes account of all the reasonable expenses for both parties (buyer and seller) with a fair return to Covenantholders…”. (Underlined emphasis added. Bold emphasis in original.)

484. As did the first valuation, the second valuation refers in terms to “expenses” which include the commissions payable to the Milling Company and the Forest Company. At par 7.2.3 of the valuation Mr Cross said that in calculating cash flows the “annual expenses per hectare” were calculated and that:

“The expenses were planation insurance, annual maintenance costs of 5% of land value [it is common ground that this is not a reference to the Forest Company Commission] as land rental costs. This derived a net present value which can be regarded as the market value of the holding at this date”.

485. Although I do not find the valuation to be pellucid on this point, it appears unlikely that this was intended by Mr Cross to be an exhaustive list of the “expenses” he included when determining the discounted value of $33,105,149.

486. It does appear, although he did not spell this out in this valuation, that the commissions payable to the Milling Company and the Forest Company were included in the expenses that Mr Cross took into account. The indication that this must be so is that Mr Cross’s second valuation is only $1,650,851 less than his first valuation. It is likely that the difference is attributable to the “further harvesting” of timber, which Mr Nguyen referred in his 23 November 2011 email between June and November 2011. The first valuation was net of the Milling Company and Forest Company commissions. Those commissions amount to some $8 million and could not account for the relatively modest difference between Mr Cross’s two valuations.

487. Overall, it appears probable that both of Mr Cross’s valuations are net of commission.

488. Mr Lockhart submitted that it was unlikely that the Tree Sale Proceeds were net of commission because “the purchaser is an unrelated entity” and that “it wouldn’t make sense for the figure of the actual sale to have taken from it what is to be paid to Milling and Forest”. But that is not the point. The point is that if, as I have said at [477] above and as the valuations suggest, the negotiated price took account of the commissions otherwise payable to the Milling Company and the Forest Company, there would be no basis for Gunns to contend that those commissions be later paid out of the funds due to the Covenantholders.

489. Further, as was said on behalf of Mr Kerr in submissions in reply:

1. the sale of the Scheme Land remaining on the wind up of the trust was not a matter covered by the Trust Deed and Tripartite Agreement, which contemplated a long term scheme where the timber would be felled, milled and sold progressively rather than with the Scheme Land in a single transaction;

2. whether the Milling Company and the Forest Company would, in those circumstances, have been entitled to the commissions specified in the Trust Deed and Tripartite Agreement is by no means clear; and

3. in those circumstances, it may be that Gunns did not think the commissions were payable.

490. There is no direct evidence of what Gunns intended in relation to the commissions. The valuations suggest the purchase price for the Scheme Trees was negotiated taking into account commissions otherwise payable to the Milling Company and the Forest Company.

491. In those circumstances I am not prepared to infer, in AET’s favour, that Gunns would in any negotiation, have insisted on a deduction on account of such commissions.

The Receiver Costs

492. These are the costs incurred by AET in pursuing the Korda litigation. It is true, as Mr Kerr submits, that litigation would never have been necessary if AET had received payment or substitute security.

493. However, as I have mentioned, AET used part of the paid 2011 Harvest Proceeds to fund the Korda litigation.

494. In those circumstances, I think Mr Lockhart was correct to submit that if, as I found, Mr Kerr is entitled, as compensation, to payment of the full amount of the Paid 2011 Harvest Proceeds, it would be double counting to also receive the Receiver Costs in circumstances where those costs were paid from those proceeds.

The Appointment Costs

495. These are the costs incurred to secure Mr Kerr’s appointment as independent trustee to bring these proceedings.

496. AET denied, and in these proceedings continued to deny, the claims of Mr Kerr and had previously refused to investigate them. AET, through Sparke Helmore, denied liability and went so far as to assert that these proceedings had no prospects of success.

497. In his closing submissions, Mr Kerr summarised AET’s conduct following the High Court’s decision in Korda as follows:

“Following the High Court’s decision in Korda in March 2015, AET did not take any steps to investigate or to seek to recover the fund [sic] which had been lost. For example, there is no evidence that it independently investigated the reason why it had discharged the encumbrances, nor does it appear it considered whether it had a claim against Sparke Helmore in relation to the advice which it had received.

From around 10 June 2015, a Covenantholder, Mr Armour, began writing to AET requesting documents and asking for information and explanations concerning the loss of the moneys due to Covenantholders.

Sparke Helmore continued to act for AET. Sparke Helmore’s responses, on behalf of its trustee client, to Mr Armour, denied liability, stated that any such proceedings had no prospects of success, and threatened Mr Armour with indemnity costs if he commenced proceedings. Part of Sparke Helmore’s response on behalf of AET to requests for documents in respect of the encumbrances was that ‘[c]omplete records from that long ago are no longer available’ and that Mr Armour should ‘search the public record with respect to those matters’.

On 28 January 2016, Mr Armour requested that AET cease acting as trustee or appoint an additional independent trustee to consider claims against AET. Mr Armour offered to fund any investigation. AET refused these requests. One apparent reason offered for the refusal was at best misguided: AET wrote that ‘[t]he enquiries which [AET] is undertaking in response to the matters raised in [Mr Armour’s] correspondence do not involve a review of its conduct on behalf of Covenantholders, but on its own behalf’.

Ultimately, Mr Armour commenced proceedings for the appointment of an additional trustee, which resulted in Mr Kerr being appointed as an additional trustee to pursue claims against AET and Sparke Helmore.”

498. In final submissions, AET did not dispute any of these matters. In those circumstances, Mr Kerr is entitled to recover the Appointment Costs.

The Judicial Advice Costs

499. These are the costs incurred by Mr Kerr in obtaining advice from this Court pursuant to s 63 of the Trustee Act 1925 (NSW) that he would be justified in bringing these proceedings.

500. AET did not dispute that if Mr Kerr was otherwise entitled to equitable compensation he should recover these costs.

Apportionment issue

501. At the outset of the hearing, AET asserted that Mr Kerr’s claim was apportionable under either ss 3 and 4 of the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) or s 34 of the Civil Liability Act 2002 (NSW).

502. AET named Sparke Helmore and the Forest Company as concurrent wrongdoers.

503. The question arises as to whether the law of South Australia or New South Wales applies to this question.

504. Mr Lockhart accepted that if South Australian law applies, there can be no apportionment.

505. AET drew attention to the opinion expressed by the learned authors in Nygh’s Conflict of Laws in Australia (9th ed, 2013, LexisNexis Butterworths) at [20.23] that:

“Some of the legislative provisions are phrased in terms of what a Court should do, rather than in terms of the rights and obligations of the parties themselves. That makes them appear procedural in effect, operating as a directive to the Courts of the legislative jurisdiction.

For example, all eight jurisdictions have modified the rules of joint and several liability by introducing proportionate liability for claims concerning economic loss or property damage”. (Emphasis added.)

506. The learned authors of that text also make this observation at [16.32]:

“Close attention must be paid to the form of the relevant rule when determining whether it is substantive or procedural. A legislative provision phrased in terms of what a court should do, rather than in terms of the rights and obligations of the parties, appears procedural in effect, operating as a directive ‘governing or regulating the mode or conduct of court proceedings’ in the legislating jurisdiction.

For example, all eight Australian jurisdictions have modified the rules of joint and several liability by introducing proportionate liability for claims concerning economic loss or property damage. … Except in South Australia, the provisions in question are cast in terms of the matters the forum court must take into account in determining the defendant’s liability… It would seem that this strong local policy should be applied even in cases where the lex loci delicti retains joint and several liability or has introduced proportionate liability in a different way. Conversely, it need not be applied in other jurisdictions that do not have comparable legislation, where courts are free to ignore the…instruction about what they must consider when reaching a decision.” (Underlined emphasis added.)

507. In John Pfeiffer Pty Ltd v Rogerson (2000) 203 CLR 503; [2000] HCA 36 at [99], the High Court observed that a guiding principle in determining whether an issue is substantive or procedural is that:

“…matters that affect the existence, extent or enforceability of the rights or duties of the parties to an action are matters that, on their face, appear to be concerned with issues of substance, not with issues of procedure.”

508. The High Court also observed that “all questions about the kinds of damage, or amount of damages that may be recovered, would likewise be treated as substantive issues governed by the lex loci delicti”: John Pfeiffer at [100].

509. In my opinion, apportionment legislation is concerned with matters of substance, and not merely matters of procedure. It directly affects the extent of the parties’ rights or duties, as well as any amount of damages that may be recovered.

510. As Mr Kerr submitted, that although the Trust Deed does not have a choice of law clause, the Trust has its most real and substantial connection with South Australia, and not New South Wales, as:

1. each of AET, from the date of its appointment until 2006, and the Forest Company, had their registered offices in South Australia;

2. the amendment to the Trust Deed made on 13 December 1998 was “authorised by the Corporate Affairs Commission of South Australia”;

3. the Scheme Land was predominately based in South Australia;

4. the Settlement Deed was expressed to be governed by the law of South Australia; and

5. each of the 17 August 2011 Certification, 22 December 2011 Certification, and 22 December 2011 Document Confirmation Advice assumed that “the Trust Deed and the Tripartite Agreement are governed by the laws of South Australia”.

511. The lex loci delicti here is the law of South Australia. It thus follows from Mr Lockhart’s concession that no question of apportionment arises.

Exoneration under the Trustee Act

512. Finally, AET sought to be exonerated under either s 56 of the Trustee Act 1936 (SA) or s 85 of the Trustee Act 1925 (NSW) on the basis that it “acted honestly and reasonably, and ought fairly to be excused” for the breach of trust that I have found.

513. There is no basis to conclude that AET acted otherwise than honestly.

514. AET submitted that it had acted reasonably in that:

“a.    It was clear that AET entrusted Sparke Helmore to advise AET of any matter in relation to the sale proposal that was detrimental or materially prejudicial to the Covenantholders;

b.    That was an entirely reasonable and appropriate course of conduct given that Sparke Helmore held itself out as being a firm with the skill, expertise and experience in the relevant field of law and practice;

c.    Although AET were professional trustees, the subject matter – particularly the nature and effect of the Encumbrances – involved technical areas of the law; and

d.    AET relied on Sparke Helmore to provide advice in relation to such matters, but no advice was forthcoming on the nature of the Encumbrances that were required to be released under the Transaction Documents and the mitigating steps that could be taken to avoid material prejudice to the Covenantholders that may be occasioned by the release of the Encumbrances.”

515. In my opinion, AET is not entitled to the benefit of either of the sections relied on. It did not act reasonably. It relied upon advice from Sparke Helmore that no reasonable trustee would have relied on.

516. In Elder’s Trustee & Executor Co Ltd v Higgins (1963) 113 CLR 426; [1963] HCA 48, the High Court said, at [452]:

“…although a professional trustee is not beyond the protection of the section, ‘such a trustee would have to establish a strong case before the court would apply the section in its favour’: Partridge v. Equity Trustees Executors and Agency Co. Ltd. [(1947) 75 CLR 149 at 165; [1947] HCA 42] and see National Trustees Executors and Agency Co. of Australasia v. Dwyer [(1940) 63 CLR 1 at 23].”

517. No such “strong case” has been made out here.

Conclusion

518. I invite the parties to confer and agree on the orders necessary to give effect to these reasons.

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Amendments

27 September 2019 - [498] - last words in sentence corrected from "Receiver Costs" to "Appointment Costs".

Decision last updated: 27 September 2019