Korda and Ors v Australian Executor Trustees (SA) Limited

[2014] HCATrans 175

[2014] HCATrans 175

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M37 of 2014

B e t w e e n -

MARK KORDA

First Applicant

BRIAN WEBSTER

Second Applicant

S.E.A.S. SAPFOR FORESTS PTY LTD (ACN 007 872 120)

Third Applicant

S.E.A.S. SAPFOR HARVESTING PTY LTD (ACN 007 511 211)

Fourth Applicant

GUNNS LIMITED (ACN 009 478 148)

Fifth Applicant

and

AUSTRALIAN EXECUTOR TRUSTEES (SA) LIMITED (ACN 007 870 644)

Respondent

Application for special leave to appeal

HAYNE J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 15 AUGUST 2014, AT 10.21 AM

Copyright in the High Court of Australia

____________________

MR P.D. CRUTCHFIELD, QC:   If the Court pleases, I appear with MR R.G. CRAIG for the applicants.  (instructed by Ashurst Australia)

MR J.R.J. LOCKHART, SC:   If the Court pleases, I appear with MR M.I. BORSKY, for the respondent.  (instructed by Sparke Helmore)

HAYNE J:   Yes, Mr Crutchfield.

MR CRUTCHFIELD:   Your Honours, the majority decision of the Court of Appeal appears to be the first authoritative statement of what “commercial necessity” means or at least what it might mean in the scope of its potential application.

HAYNE J:   Let us assume that questions of commercial necessity and their application in this case are controversial.

MR CRUTCHFIELD:   Yes.

HAYNE J:   Do we not need to be given the documents?

MR CRUTCHFIELD:   Well, your Honours only need to receive – it is common ground – the prospectus which contains the covenant which the covenant holder applied for and the 1964 trust deed and the tripartite agreement. 

HAYNE J:   Do we not particularly need to be given the tripartite agreement?

MR CRUTCHFIELD:   Yes.

HAYNE J:   What do we find there that is relevant to the issue?

MR CRUTCHFIELD:   One finds at least two things, your Honours.  First, one observes that the Milling Company is not a party to the trust deed.  It is a separate obligation it has to pay the money from the proceeds of the sale of the timber to the Forest Company.  That is in clauses 8 and 10 of that agreement.

HAYNE J:   Clause 9 is also perhaps relevant, is it not, at page ‑ ‑ ‑

MR CRUTCHFIELD:   Yes, I should have said 8 to 10.

HAYNE J:   Yes, page – what is it, 236 of the application book?  We have numbers of numerations on there.

MR CRUTCHFIELD:   Yes, exactly:

All moneys received by the Milling Company from the sale of such logs . . . shall be retained by the Milling Company and applied in manner following –

and it takes its slice, in effect.  It then pays the money to the Forest Company, the Forest Company takes its slice and then the Forest Company pays the money to the trustee for the covenant holders and, as your Honours know, it is a classic administration style trust, an old style 1961 Companies Act trust where the trustee collects the money on behalf of the covenant holders.  Now, if your Honours take the 1980 prospectus, let us just take that by way of example. 

HAYNE J:   Just before – I know you need to get to the prospectus, but in the tripartite agreement, what does it matter that paragraph 9 or clause 9 provides that:

All moneys received by the Milling Company from the sale . . . shall be retained . . . and applied –

Is that a language of debtor/creditor?  Is it language of trust?  What is the obligation that is created?

MR CRUTCHFIELD:   We submit it is language of debtor/creditor.  Our friends say it is the language of trust and I am not going to tell your Honours that there are not indications in these documents either way that help my friend and help me.  But if your Honour then goes to 9(f), just by way of example, which is on 238:

All moneys payable by the Milling Company to the Forest Company pursuant to Sub‑clause (e) of this Clause and payable in respect of any year –

Your Honours will see they are payable by instalments.  In the meantime Milling Company can happily pay a dividend.  There were findings by the trial judge, not disturbed on appeal, implicitly accepted even by the majority in paragraphs 43 and 44, that the Milling Company and Forest Company were free to use the proceeds of the sale of the timber in their own business and for their own purposes and one sees that also from the ‑ ‑ ‑

HAYNE J:   In face of the obligation to retain.

MR CRUTCHFIELD:   Absolutely, your Honour.  That was the finding of the trial judge – I can take your Honours to it – and it was expressly ‑ ‑ ‑

HAYNE J:   Well, a finding that they did or a finding that they were entitled?

MR CRUTCHFIELD:   They were entitled to, yes, by reason of clauses 8 to 10.  If your Honour goes, for example, I can make that good, paragraph AB18, perhaps paragraph 76 at AB30, last sentence:

I do not accept that the ability by the Forest Company and the Milling Company to use the funds (and through the process that they were engaged in derive other funds) or proceeds deprived the proceeds so derived of the character of trust funds.

So it was common ground that there was an express trust that the proceeds of the sale – and to return to your Honour Justice Hayne’s question, what happens then under clause 9 after the Milling Company and Forest Company take their cuts, the money is then paid to the trustee for the covenant holders, and no doubt your Honours have looked at the trust deed, when you go to the trust deed, clause 20A, if I could very briefly take your Honours to that.

HAYNE J:   Page?

MR CRUTCHFIELD:   It is page 182.  Your Honours will see that is the trust:

The Trustee –

that is AET –

declares that it will hold the following assets in trust for the Covenantholders –

and the maintenance fund – (b):

A separate banking account shall be maintained by the Trustee . . . into which proceeds from the sale of timber and any other moneys to which the Covenantholders may be entitled shall be paid by the Forest Company.

Now, the effect of the majority’s decision is notwithstanding there was this express trust, that the majority has said there is a trust of all of the timber proceeds and all of the land which renders otiose the express trust.  There were also those findings by the trial judge not disturbed on appeal ‑ ‑ ‑

HAYNE J:   Why does it render it otiose?

MR CRUTCHFIELD:   Because one has an overarching trust, the covenant holders are held to be the beneficial owners of the land, at least until the timber is milled.

HAYNE J:   Yes, but who is trustee at various stages?  That is why I say why is it otiose.

MR CRUTCHFIELD:   Well, it renders it – we accept that – it may not be otiose but it renders it in the face of the documents where one has one express trust, that express trust becomes some kind of at least a sub‑trust of other trusts.  The trustees of ‑ ‑ ‑

HAYNE J:   No, it is the trust that regulates the position of one trustee and it does so clearly.  The other one does so less clearly, you say not at all, but what are we to get out of the fact that there is one document regulating one party’s trust obligations, quite plainly and expressly, but then there is another document with other parties, of which the trustee is one, I accept, which you say is disputable.

MR CRUTCHFIELD:   Well, the effect of the majority’s decision is it seems there are three trustees – I accept what your Honour says, there may be separate trust funds but there is the AET as a trustee and then we have Milling Company and Forest Company as trustees. 

HAYNE J:   In respect of certain property.

MR CRUTCHFIELD:   Precisely.

HAYNE J:   Yes.

MR CRUTCHFIELD:   Now, the 1980 prospectus perhaps demonstrates, we submit, our point best because in the 1980 prospectus – before I get there can I just go to how the court got to the result that they did – I withdraw that, I will go to the prospectus first.  It is easier to do it that way.  I will go to the 1980 prospectus which appears at 245 and following, and if one goes first to the application form which is at 263.

A covenant holder applies for a covenant in terms of the covenant incorporated in the prospectus.  Then one goes to the covenant which appears at 252, and one sees in paragraph 1 what the covenant holder is entitled to.  It is 95 per cent, et cetera, of the “proceeds from the timber”.  Then paragraph 2, your Honours will see “The Company has planted”.  Of course your Honours might have observed the trial judge made a finding, and it was important to the trial judge’s finding that the money that the covenant holders paid to the company was used to acquire the land upon which the timber was located and milled.  Plainly that is incorrect but it was an important finding.  Then one sees paragraph 4:

This Covenant is issued subject to the provisions –

of, relevantly, the trust deed and has the similar language.  Then over the page – I am sorry, your Honours, 253 at the bottom your Honours will see 20A is effectively reproduced.  It summarises, it says we:

will pay the balance to the Trustee for the Covenant‑holders –

at the bottom of the left‑hand side of the page, 253.  So the balance, the money – after the timber is sold and the Forest and Milling Company take their cuts, paid to the trustee for distribution to the covenant holders.  Over the page, there are protections for the covenant holders in that the trustee – the company has to lodge the title deeds with the trustee and caveat can be registered.  Then at the bottom, paragraph 14:

The Covenantholder shall accept his due proportion of the benefits from the sale of timber . . . and the net proceeds of sale of cuttings if any as aforesaid) in full satisfaction and discharge . . . and the Covenantholder shall have no further claim whatever on the Company.

Then 15:

The terms and conditions herein contained together with the Application Form signed by the applicant for the Covenants shall when such application has been accepted by the Company constitute the sole and exclusive evidence of the contract –

Now, your Honours will observe that there is no land interest offered in the 1980 prospectus.  Then if I could take your Honours very briefly to the special information which is at 249, the covenant holders are told “Established 54 years”, they are told in the right‑hand column timber proceeds in previous years, there have been returns of between 10 to 20 times.

HAYNE J:   This is in aid of what proposition, a proposition about the land being held on trust?

MR CRUTCHFIELD:   Yes, because notwithstanding there is no land interest offered – in the value of land I should say in the 1980 prospectus – the court found that the covenant holders had a beneficial interest in the land that is subject to this prospectus.  How, I ask rhetorically, could that be when there was no land interest offered under the 1980 prospectus.  They could only do that through this, we say, flawed, and I interpolate even if correct it is best if we all know and that is expressed by this Court, a flawed application of commercial necessity which honed in on or honed in on the subjective intentions of the investors and what a court assumes an investor would have thought 30 years after the event about – and, your Honours, the reason I am going to that is ‑ ‑ ‑

HAYNE J:   I thought you might put it rather more tendentiously and say that it was framed by reference to what the investor might have liked to have had.

MR CRUTCHFIELD:   Exactly.

HAYNE J:   But you put it a little more modestly.

MR CRUTCHFIELD:   Well, what we do say – we do say that as well.  There is a large element of going back for one’s hat here and if this decision stands – we did say below at both levels that in effect what the court is doing is rewriting the contractual arrangements that were entered into.

CRENNAN J:   You are seeking to support the dissenting judgment, I take it, of Justice Robson, who took the different view about the clarity of the terms of the deed and the tripartite agreement.

MR CRUTCHFIELD:   Yes, and we say what the court has found – the majority has found, and I want to go to it very briefly, is plainly at odds with what your Honour has said in separate judgments in Byrnes v Kendle.  You do not look at the subjective intention of the investors, and I will go to that in a moment.  The last thing I wanted to do with this prospectus is show your Honours the balance sheet because I am perhaps getting into an arm wrestle here that on our view of the world one does not need to get into, but even on this view of commercial necessity that is taken by the court, it is very difficult to see how one gets there.

If one goes to the balance sheet which is at 260 and 261, and the balance sheet is in the 1984 prospectus as well, here is a company – the Forest Company – running a business.  It has assets, it has liabilities, it is paying dividends, it has land in its balance sheets, it is charging that land on the faith of its balance sheet.

HAYNE J:   What are we to make of all this?  Is this some sort of admission against interest or something, is it?

MR CRUTCHFIELD:   No, it is how far, we say respectfully, the court below has gone wrong with this notion of “commercial necessity”.  None of these matters about the subjective expectations of the investors were matters of evidence.  In fact, it was not even – I do not think my friend would disagree – really our friend’s case.  They did not put their case based on commercial necessity.  This was a notion – perhaps I should not use the words “concocted by” but it really was concocted by the majority, and I want to go and show your Honours how that occurred in the judgment. 

If your Honours go first to AB53 because when one sees - the covenant holder is being told non‑assessable income, 10 to 20 times return.  In the 1984 prospectus the covenant holder is told returns of more than 20 times.  Views can differ.  One can equally speculate once we get into this area about what a person might think 30 years after the event, views can differ and think well, gee, this is an investor who was prepared to take the risk so I am going to make 20 times on my money and I am not going to pay tax.  So if I could take your Honours to the majority’s reasons at 53, paragraph 4, this is where the flaw, we submit, commences:

The applicants accepted that this was so, and that it was therefore necessary to discern the intention and expectation of the investor –

No, we did not say that and we say that is where the flaw is, and if your Honours could go please to paragraphs 35, AB62:

Investors knew that the investment returns would depend on the commercial success of the forestry operations.  They also knew that, in the event of such commercial success, the benefits would be held for them on trust. 

The next sentence:

No investor would have imagined – and the prospectus certainly did not suggest –

I interpolate, this was not a case of misleading and deceptive conduct –

that the investment returns could be put at risk by reason of any activity of the operating companies (less still of their holding company) outside the scope of the timber production enterprise.

Then to 37, or 36 we said really what we are submitting to this Court.

HAYNE J:   That is founded in a view of what prospectuses could or should or might show.  Are all of these documents to be read against a particular regulatory framework?

MR CRUTCHFIELD:   Yes, the 1964 South Australian Act which seems to be a mirror of the 1961 – it is the same legislation ‑ ‑ ‑

HAYNE J:   That is what, their prescribed interests?

MR CRUTCHFIELD:   They were not called that then.

HAYNE J:   What were they then?

MR CRUTCHFIELD:   They were called interests other than interests in shares or debentures. 

HAYNE J:   But it is basically what was the 1961 so‑called uniform Companies Act? 

MR CRUTCHFIELD:   Exactly.

HAYNE J:   Yes.

MR CRUTCHFIELD:   There was an administration trust.  There was a management company – all of this is irrelevant on the majority’s reasons and everyone has breached the companies legislation.

HAYNE J:   But were those things required by the ‑ ‑ ‑

MR CRUTCHFIELD:   Yes, you needed to have an approved deed, you need to have a trustee company which was Mr Lockhart’s client, and you needed to have a management company which was Forest Company, and then you had – there was nothing about whether or not ‑ ‑ ‑

CRENNAN J:   Because you are essentially running a managed investment scheme, a very early version.

MR CRUTCHFIELD:   Exactly, your Honour. 

HAYNE J:   Because I would have thought questions of construction of these instruments had to occur in light of the regulatory framework which generated the instruments and generated the – to the extent to which it did – generated the structure.

MR CRUTCHFIELD:   Precisely, with respect, and that is – we kept saying, we accepted that you cannot just look at the documents in 1964 because part of the context is the investor who is investing in 1980 and of course the context includes the prospectus, but we said you have to start with the documents and only then do you go to these other concepts whereas we submit that what the majority did, in effect, even though they paid, with respect, lip service to – they said they were approving Justice Sifris’ decision, but Justice Sifris found there was one express trust which sprang into existence in 1964.  That was the trust, the overarching trust, whereas the majority here seem to be saying there were multiple trusts that happened every time a prospectus is issued.  Could I go to the second sentence of paragraph 37 ‑ ‑ ‑

HAYNE J:   Those prospectuses would have been issued under the then current regulatory scheme of managed investments schemes, would they not?

MR CRUTCHFIELD:   No.

HAYNE J:   There was a grandfather ‑ ‑ ‑

MR CRUTCHFIELD:   There were transitional provisions, yes.  Could your Honours please look at the second sentence of 37 on AB62:

First, and critically, it overlooks the intentions and expectations of the investors.  The matter may be tested this way.  If a representative of the commercial interests of investors had been a participant in the drawing‑up of the scheme documents in 1964, there is every likelihood that provision would have been made – expressly – to ensure that investors were protected against the risk of insolvency –

One grave difficulty with that passage is there was a representative of the investors, the trustee, and under the 1961 companies legislation the trustee had obligations of care and diligence and to look after the interests of the investors.  The interests of the investors were protected through the lodging of the title deeds, the caveats, et cetera. 

You know what happened, your Honours, the company went broke and the majority has said the covenant holders, notwithstanding in the meantime the company has charged its assets to the ANZ because that is what is going to happen next, there has been an amended – proposed amended process, the ANZ as a security trustee, on the faith of the balance sheet security has been taken and they are going to be dragged in on a Barnes v Addy claim.  We submit, your Honours, that that is at odds with what your Honours said.  We referred to it in our outline.

HAYNE J:   I think we are familiar with Byrnes v Kendle.

MR CRUTCHFIELD:   Yes, if the Court pleases.

HAYNE J:   It may be entirely by the by, Mr Crutchfield, and I do not seek to delay either side by it but I do note with some interest the form in which Justice Sifris’ order was taken out.  It was suggested that the trustee company was “beneficially entitled” to a large amount of money.  That struck me as, at least in terms, a little odd but as I say, unless it is relevant, do not rise to the judicial bait.

MR CRUTCHFIELD:   It is only relevant because it shows – it is another manifestation of why our friends cannot be right because it is actually hard to articulate what the outcome is.  If the Court pleases.

HAYNE J:   Yes.  Yes, Mr Lockhart.

MR LOCKHART:   Your Honours, in both courts below, that is before the primary judge and the Court of Appeal, there was no disagreement about the principles to be applied to ascertain whether or not there was an intention to create a trust.  There was no disagreement about the matters to which the court may have regard, that is, the court may have regard and should have regard to the documents including the prospectuses, the trust deed, the tripartite agreement and the various covenants.

CRENNAN J:   Although that is true that there was no disagreement about the principles to be applied, as I understand part of Mr Crutchfield’s argument anyway is that the principles, particularly you might say in relation to the notion of “commercial necessity”, have been applied in, he would say, some egregiously incorrect way to the question of intention. 

MR LOCKHART:   The way in which the commercial necessity was dealt with by the majority is as follows.  What the Court of Appeal did, first of all it set out what the primary judge had found and that is set out in the majority’s reasons at paragraph 9.  It endorsed a summary of the reasoning of his Honour Justice Sifris and that particularly endorsed the findings which focused upon the particular provisions in all of these various documents referred to.  So paragraph 9 of the majority which is AB55, the majority states that:

We respectfully agree with this analysis –

and that is the analysis that is set out by his Honour Justice Sifris in considerable detail and is summarised in the majority’s reasons at paragraph 8 and that is with particular focus upon the various provisions found in the relevant documents.  So what the majority did, it agreed with that analysis and it then went on to refer to some matters which reinforced its conclusions.  So the first point we make is that the commercial necessity was but one of the myriad of indicia and factors that the majority relied upon.  In fact, it was only a reinforcing factor, so in that sense he was not decisive.

The second point we make about the commercial necessity is that there is no dispute, as we understand it, that commercial necessity is a relevant factor that may be taken into account.  It is referred to in terms in Trident as well as in Byrnes v Kendle.

HAYNE J:   A necessity in the sense of it is necessary to make these arrangements work?

MR LOCKHART:   Yes, and the approach ‑ ‑ ‑

HAYNE J:   Why is this necessary to make these arrangements work?  It is a question of how the risk is distributed, is it not, where the risks are?

MR LOCKHART:   Because my reference to what the majority saw as being the intent of the parties, particularly the investors, by reference to the prospectus and the other references in the documents, the necessary risk that need to be protected against was the risk that the assets in which they invested might not be there at the end of the day.  It is a long‑term investment, it is a 20 year plus investment, and as part of the hunt for the intention, one of the matters the Court of Appeal referred to – the majority referred to – is an intent that there be protection and security in respect of their investment. 

The Court of Appeal did not do that by reference to some speculation as to the subjective intent of the investors which is suggested.  The majority did this by reference to the tenor of the documentation, and that is apparent from paragraph 35 of the majority of application book 62.  Mr Crutchfield referred your Honours to paragraphs 33 to 35 and in particular 35 where there is a reference to the intention of the investors.  But the final sentence in paragraph 35 states:

The whole tenor of the documentation was to precisely the opposite effect.

What the majority was doing there was not gleaning this necessity or this intention or protection and security by reference to evidence that was not there.  It did this by reference to its analysis of the documentation. 

HAYNE J:   I can understand that analysis with reference to the proceeds generated by the Milling Company.  What is the high point of your argument based on the documents about proceeds of sale of land?  Where in the documents do I find the high point of your argument that those proceeds are held on trust?

MR LOCKHART:   Does your Honour refer to the proceeds of sale of land or sale of timber?

HAYNE J:   Land.

MR LOCKHART:   Land.  I will take your Honour to the high points in relation to land.

HAYNE J:   I was rather thinking in terms of singular rather than plural.

MR LOCKHART:   Can I take your Honours firstly to the prospectus?  Mr Crutchfield took you to the 1980 prospectus.  The parties proceeded on the basis of the 1984 prospectus because the 1984 prospectus picked up 1982 and 1983 planting years which specifically included the land interest and the reference to the 1984 prospectus being the prospectus upon which the parties operated is found in the dissenting judge’s decision, paragraph 91, application book 81, and in the majority’s decision, application book 55.

I am going to take your Honours to the 1984 prospectus, and relevantly it is the one which picked up the planting years where there could be a land interest if one was to subscribe to that.  On page application book 273, top right‑hand corner:

A Covenant

provides for you an interest in a Radiata Pine plantation entitling you to the net timber proceeds apportionable to your interest . . . also provide for you an interest in the value of the land.

We then turn - in the same document there are references on page 286 which is contained in the statutory information which formed part of the prospectus, and alongside line 20:

In respect of 1982, Planting and subsequent years, each one half hectare or one quarter hectare . . . will entitle the holder thereof to the value as determined –

and there is a reference there to a methodology as to how there is a determination of the value of the land in which one is investing.  In paragraph 15 on the same page in the right‑column, it is the price that the covenant holder pays includes a price by reference to the value of the land referable to the planting year.

The particular land which is referrable to the planting year is found in the prospectus, application book 284.  There is a reference there to the particular land that appertains to the particular planting years and relevantly for the 1982 and 1983 planting years that land is described in application book, page 284. 

The majority recognised there was a distinction between expressions such as “interest in land” which occasionally is used in documentation and “interest in the value of land” which is also used from time to time in the documentation.  They recognised that distinction, but they went on to say, correctly, that the various expressions were used interchangeably.  An example of where it is used in that fashion is on page 292, again in the 1984 prospectus, top of page 292:

The covenantholders interest in the freehold or perpetual lease land is secured during the covenant period by the caveat discussed under note 3.2. –

and then also on page 294 on the application form itself there is in bold type:

INCLUDES LAND INTEREST

and that is in respect of 1982 and 1983 plantation years.  The trust deed itself contains support for acceptance by the majority that there is beneficial interest in the land and in particular on application book, page 183 at the bottom of that page alongside the heading “Land Titles in Joint Names”, if your Honours turn back to 182, clause 20A which commences at about line 40:

The Trustee declares that it will hold the following assets in trust for the Covenantholders that is to say –

and then there is a list of those assets.  If one then goes down to (c) on page 184, “Titles to Planted Land”, which provides that:

All such Certificates of Title and Lessee’s copies of leases for any land the subject of such plantings as shall pursuant to Clause 2(d) hereof have been deposited in a Savings Bank –

deposit box, and there is a reference to how that occurs in clause 2(d):

and the Trustee will cause to be registered a Caveat or Caveats in respect of such lands prohibiting any dealings therewith except in the interests of the covenantsholders in such lands.

So what that is saying, it is not saying that there is a trust over the pieces of paper which represents the certificates of title or the leases.  That would not be the ordinary and natural reading.  What that is saying is the trustee will hold certain assets in trust including the lands.  Now, one then goes back to page 162 of the application book, also within the trust deed.  This is clause 2(d).

CRENNAN J:   Sorry, what page?

MR LOCKHART:   Page 162, your Honour:

That in order to secure due compliance by the Forest Company –

the following things are done, and then on page 163 at about the middle of the page, alongside line 32:

The Trustee shall cause a Caveat or Caveats to be registered in respect of such land prohibiting any dealings therewith except in the interests of the Covenantholders in such lands.

So we have there an express provision that the trustee will hold certain assets in trust including, we say, not the pieces of paper but the land.  Secondly, there is the ability to secure that interest by reference to a caveat, or I should say protect that interest by reference to the ability to lodge a caveat. 

Now, the dissenting judge, Justice Robson, referred to the absence of an ability to lodge a caveat as one of the arguments against the trust for which we contend but there is clearly an ability to lodge a caveat and the expectation was that the caveat would be lodged.

CRENNAN J:   He seemed to make a distinction between an interest in the value of the land versus an interest in the land.

MR LOCKHART:   There is that different phrase used in different parts of the documentation.

CRENNAN J:   That comes from the instruments.

MR LOCKHART:   It comes from the instruments, but the instruments themselves contain – and use interchangeable interest in value of land and interest in land.  The majority recognised there is that distinction and maybe that has some impact upon the construction but ultimately ‑ ‑ ‑

CRENNAN J:   Do you have anything to say about another matter which seemed to have influenced Justice Robson and that was that the covenant scheme had been promoted as one where the net timber proceeds paid to the covenant holders were not assessable for income tax purposes?

MR LOCKHART:   Yes.  The majority looked at this in some detail at application book page 70 and following and, with respect, we say that the majority’s analysis of that is absolutely spot on, that is, the particular references to the cases, that being the Clowes Case and the Milne Case.  The Milne Case which was unanimous and which concluded that in respect of that scheme in 1976, I think, was not assessable and the reasons upon which the statutory majority in Clowes and the unanimous decision in Milne was based were matters which referred particularly to the fact that the investor invested their money at the outset. 

They then passively sat back and waited for 20 years while the Forest Company, in a sense, goes about its business.  They then hope to receive an enlargement of their investment, not as opposed to a decrease in their investment, and then for those reasons essentially the court has concluded that the investors, covenant holders, bond holders, were not engaged in a profit‑making scheme or undertaking, and for that reason those courts decided that it was not assessable income when the moneys were ultimately received.  The majority in the Court of Appeal correctly said, even if one had the ‑ ‑ ‑

CRENNAN J:   The wider trust.

MR LOCKHART:    ‑ ‑ ‑a wider trust, that would not affect that outcome.  In fact, in the Milne Case, as opposed to the Clowes Case, there was an additional provision whereby the bond holders obtained a proprietary interest in the lot of the relevant land, and that did not concern the unanimous decision in Milne to the effect that the bond holders in that case were not engaged in a profit‑making undertaking or scheme.  So we say there the majority got that spot on.

The question of commercial necessity is one which firstly, there was no dispute that the principle was available; there was no dispute that one could look at all the relevant documents and all the various factors which both the trial judge and the majority had regard to.  It was not decisive by any means.  In fact, it was a matter raised by the majority as a matter which was reinforcing the conclusions reached by the trial judge who had looked at in some detail – in great detail the provisions of the various documentation which were also looked at by the majority.

In terms of did the Court of Appeal misunderstand the principle, we say no.  The principle to which they had regard was one of necessity.  They formed a view ‑ ‑ ‑

HAYNE J:   Necessity apparently, at least on one understanding of what their Honours said, informed by some imputation or inference about the subjective intentions that either particular investors or groups of investors might have had.  Why is that permissible?

MR LOCKHART:   It is permissible, your Honour, because they did that by regard to the intention but they discerned the intention in the sense that the manifestation of the intention and they did that by reference to the documentation, in particular the prospectus.

HAYNE J:   It is a method of framing the issue which is at least open to a misunderstanding, let alone a misapplication, I would think.

MR LOCKHART:   Minds might differ.  Obviously the minority judge took a different view on that question, although he did in so doing acknowledge that there was some force or some merit in the submission that the trust was there to protect against risks extrinsic to the timber operations, and that is in the dissenting judge’s decision at paragraphs 279 to 281, so even the dissenting judge had regard to that proposition. 

In our submission, the majority did not err in the way they approached the matter in either of the two respects put.  They formed their views as to the intention of the investors not by reference to speculation or their subjective intention but by reference to their intention as manifested and inferred by the majority from the documentation, and they make that clear in the paragraph to which I referred your Honours.  The majority expressly disavowed the relevance of subjective intentions and that is in paragraph 7 of the majority’s decision.

In relation to the second suggestion as to how they might have erred, that being that they misunderstood the content of commercial necessity, what we say in response to that is there is no suggestion of any misunderstanding of the content.  They considered it to be a matter of necessity.  Minds might differ as to that, although it is said the dissenting judge acknowledged the force of it, took a different view ultimately, but in any event, the majority did not decide the matter on that basis.  They decided the matter by reference to the documentation and the matters referred to by the primary judge, reinforced by their conclusion as to commercial necessity.

So there is no dispute that it is an available factor.  Minds might differ as to whether or not it was appropriate to be taken into account here, although we submit it was entirely appropriate by reference to the documentation and the nature of the investment which was a 20 year long‑term investment in the forestry plantations.  Can I turn briefly, your Honours, to some of the other references in the documentation which we say ‑ ‑ ‑

HAYNE J:   With a view to demonstrating what?

MR LOCKHART:   To demonstrate that the majority and the primary judge were correct when they formed the view that there were significant indicia reflective of trust and the intention that there be a trust created in the wider sense for which we contend, as opposed to the intention being reflected in the language of debt.  The matters are usefully summarised by his Honour Justice Sifris at AB14, 15, starting at paragraph 33.  Paragraph 33 his Honour first refers to the trust deed is:

the language of trusts rather than mere debt under contract.

The references there are references to phrases such as “retained”, references to language such as “allocated and apportioned” and references to where the money trail upon the sale of the timber commences, that is when Milling sells the timber, Milling then passes the moneys – it takes a chip for its own efforts, it then passes the balance across to Forest, Forest then takes 5 per cent, or thereabouts.  It then passes the balance of such proceeds as remain to AET for distribution of such moneys to the covenant holders.  That language is found throughout the trust deed.  It is found with particular clarity in the tripartite agreement at clauses ‑ ‑ ‑

CRENNAN J:   There were not express provisions for the maintenance of dedicated funds, were there, during this process of which you are speaking?

MR LOCKHART:   Your Honour is correct.  The point was taken in both courts below that there was no provision that the moneys be put in separate

bank accounts.  What we say to that is clause 8 of the tripartite agreement nevertheless provides that there shall be separate accounting in respect of each covenant holder’s interests, allocated by reference to each covenant year, and apportionment of allocation accordingly. 

We accept there was no express provision that the moneys be kept in a separate bank account.  We put it to the authorities where we say that is not necessary, but what we say one can discern from this as a very clear intention that the moneys were not able to be used by Milling Company or Forest Company for their own benefit but were to be preserved, even though it did not extend to say there must be a separate bank account.  I see the red light, your Honour.

HAYNE J:   Yes, thank you, Mr Lockhart.  Yes, Mr Crutchfield.

MR CRUTCHFIELD:   Your Honours, we do dispute the relevance of commercial necessity.  It was not the basis of our friend’s arguments below and we do say commercial necessity is irrelevant to this case.  Commercial necessity, we submit, only intervenes where an arrangement is unworkable.  The problem, we submit, with the majority’s judgment is they start with what the investors were told and commercial necessity and then they go to the documents to tick off whether or not there is anything in the documents inconsistent with their starting point. 

We submit that is an error and that the orthodox approach of Justice Robson at paragraphs 248 to 257 – if we go to it – where his Honour started with the documents and then went to look whether there was anything inconsistent from the context, inconsistent with the documents from the context, 248, his Honour is starting – 249, he is starting with the trust deed and on his Honour goes. 

He goes through the trust deed, he turns to the covenant and his Honour points out, while I am in this section, at 260 and 261, his Honour refers to the tax cases - it starts at 258 - and points out that Justice Dixon in Milne had held that the covenant holders’ rights were purely contractual and what Justice Robson has said, we submit correctly, was that the tax cases were relevant, not in the way that the majority dealt with them which was to go through the whole analysis and see what the tax outcome would have been if there was a beneficial interest in the land, but as to whether or not one would take the risk that the scheme was of the kind not of the majority Justice Dixon but of the kind of the minority judges in Clowse where the covenant holder did have a beneficial interest.

But this is, we submit, a conventional approach.  Then his Honour dealt with the value of the land at 272 to 276 on AB126, and we submit his Honour correctly pointed out that it is passing strange that the covenant holders have a beneficial interest in all of the land in the 1980 scheme when there is no land interest, so called, being offered, and correctly pointing out at 276, first sentence:

the law does not recognise an interest in the value of an item of property as distinct from an interest in the property being valued.

Your Honours, could I go back to the trust deed and show why we submit it is clear from the trust deed itself that the Forest Company was the beneficial owner of the land.  Your Honours need clause 2(d).

CRENNAN J:   Page?

MR CRUTCHFIELD:   Clause 2(d) on page 162.  These clauses are very odd, we submit, your Honours, if the Forest Company has no interest in the land.

HAYNE J:   Why?

MR CRUTCHFIELD:  

That in order to secure due compliance by the Forest Company with the terms and conditions hereof ‑ ‑ ‑

HAYNE J:   Yes, we can read it.  Why is it odd?

MR CRUTCHFIELD:   Well, look at (d)(i):

the Forest Company will not sell land of which it is the proprietor nor without the consent of the Trustee encumber such land ‑ ‑ ‑

HAYNE J:   Yes.

MR CRUTCHFIELD:   If it has no beneficial interest in the land, we submit that is an odd clause.

HAYNE J:   Why?

MR CRUTCHFIELD:   Because it has only got the residual interest whatever ‑ ‑ ‑

HAYNE J:   Exactly so.  Why not therefore bind it not to dispose of it?

MR CRUTCHFIELD:   Well, if it is a trust deed – if there is nothing in this trust deed, there is an express trust of particular things in clause 28. 

There is not an express trust of the land.  Why would there not be if our friends – if the majority was right?  Why is there not an express trust of the entirety of the land?  The provisions of the tripartite agreement that our friends went to about in answer to your Honour Justice Crennan’s question about no separate bank accounts, as I have already said, there were findings that Forest and Milling were free to use the money. 

The clauses that our friends rely upon do not advance their case that separate accounting was required under the Companies Act because the management company had an obligation to keep a register of the holders’ interests and identify the extent of the holding of each of those persons.  To see that there is no – that it is just an interest in the land, could your Honours go please to clause 27 of the trust deed.  This is the land interest provision which was offered in 1984 but not 1980 and one can see ‑ ‑ ‑

HAYNE J:   Page?

MR CRUTCHFIELD:   Application book 200.  It is an interest that is linked to the value of the land at a point in time.  It is not an interest in the land and the interest – it is a contractual right to receive the value of the land at a certain time not in any way linked to the sale of that land either.

HAYNE J:   Yes.  Well, I see your time has gone, Mr Crutchfield.

MR CRUTCHFIELD:   If the Court pleases.

HAYNE J:   There will be a grant of special leave in this matter.  How long do counsel estimate the case would take on appeal?

MR CRUTCHFIELD:   No more than a day.

MR LOCKHART:   We would agree with that, your Honour.

HAYNE J:   To get through those documents properly?

MR CRUTCHFIELD:   Yes, no more than a day.

HAYNE J:   Very well.  The Registrar will ‑ ‑ ‑

CRENNAN J:   A day plus is quite a cautious estimate, Mr Crutchfield?

MR CRUTCHFIELD:   A day plus, your Honour Justice Hayne.  If the Court pleases.

HAYNE J:   The Registrar will provide the parties with the timetable that is to be followed.  The provision of that timetable is only a matter of form.  The timetable is to be followed scrupulously. 

AT 11.10 AM THE MATTER WAS CONCLUDED