Korda v Australian Executor Trustees (SA) Ltd

Case [2015] HCA 6

HIGH COURT OF AUSTRALIA

FRENCH CJ,
HAYNE, KIEFEL, GAGELER AND KEANE JJ

MARK KORDA & ORS  APPELLANTS

AND

AUSTRALIAN EXECUTOR TRUSTEES (SA)
LIMITED  RESPONDENT

Korda v Australian Executor Trustees (SA) Limited

[2015] HCA 6

4 March 2015

M82/2014

ORDER

1.Appeal allowed with costs.

2.Set aside paragraphs 1 and 2 of the orders of the Court of Appeal of the Supreme Court of Victoria made on 10 April 2014 and, in their place, order that:

(a)the appeal to that Court is allowed;

(b)paragraphs 1, 2 and 3 of the orders of the Supreme Court of Victoria made on 1 March 2013 be set aside and, in their place, declare that:

(i) the respondent is not entitled to any of $33,999,998 payable to the fourth appellant pursuant to the Tree Sale Agreement, being the agreement dated 15 March 2012 to which the third appellant, the fourth appellant, the fifth appellant, and the respondent, amongst others, were parties; and

(ii)the respondent is not entitled to any of $53,356,000 payable to the third appellant under the Land Sale

Contracts, being two contracts dated 15 March 2012 to which the third appellant, amongst others, was a party; and

(c)the respondent pay the appellants' costs of the proceedings before the primary judge and the Court of Appeal.

On appeal from the Supreme Court of Victoria

Representation

P D Crutchfield QC with R G Craig for the appellants (instructed by Ashurst Australia)

J R J Lockhart SC with M I Borsky and I J M Ahmed for the respondent (instructed by Sparke Helmore)

Notice:  This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.

CATCHWORDS

Korda v Australian Executor Trustees (SA) Limited

Trusts – Express trust – Two companies, "the Forest Company" and "the Milling Company", operated timber plantation investment scheme – Forest Company sought investment in scheme – Forest Company entered into Trust Deed with Trustee Company as trustee for holders of interests Forest Company issued – Whether proceeds of the sale of standing timber and scheme land payable to Forest Company and Milling Company subject to express trust in favour of scheme investors.

Words and phrases – "express trust".

Companies Act 1962 (SA), s 80.
Companies (South Australia) Code, s 168.

FRENCH CJ.

Introduction

  1. The first and second appellants are the receivers and managers appointed pursuant to securities over two companies which had operated a timber plantation investment scheme for many decades.  Australian Executor Trustees (SA) Ltd ("AET"), the corporate trustee of the scheme, claimed on behalf of the investors that the proceeds of a sale of standing timber and scheme land which were payable to the companies were subject to an express trust in their hands in favour of the investors, and thus not available to the receivers and managers.  It succeeded in the Supreme Court of Victoria and declarations were made that it was beneficially entitled to the tree sale proceeds and a proportion of…

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AGLC
Korda v Australian Executor Trustees (SA) Ltd [2015] HCA 6
Case
[2015] HCA 6
Decision Date

CaseChat Overview and Summary

The High Court of Australia heard an appeal concerning a timber plantation investment scheme operated by two companies, the "Forest Company" and the "Milling Company". The dispute arose between Australian Executor Trustees (SA) Ltd ("AET"), acting as trustee, and the appellants, who were parties to agreements for the sale of standing timber and scheme land. AET contended that the proceeds from these sales were subject to an express trust in favour of the scheme investors, referred to as "Covenantholders".

The central legal issue before the High Court was whether the Forest Company and the Milling Company, by entering into a Trust Deed with AET as trustee for the holders of interests they issued, had created an express trust over the proceeds of the sale of standing timber and scheme land. This required the Court to determine if the intention to create such a trust was clear, and if the subject matter and beneficiaries were sufficiently certain, particularly in a commercial context where the interests of creditors might be affected.

The High Court reasoned that the established legal principle requires a clear intention to create a trust, with certainty as to the trust property and beneficiaries. The Court found that the language of the relevant documents did not clearly indicate an intention to create a trust of the broad scope contended for by AET. While the commercial objectives of the scheme were to provide investors with exposure to the forestry operations, this did not, in itself, demonstrate a joint intention to create an express trust that would shield investors from the financial fortunes of the operating companies. The Court distinguished the situation from cases where a trustee clearly holds property on behalf of others, noting that the receipt of investment funds by the Forest Company did not equate to holding property specifically for the benefit of Covenantholders in the manner required for an express trust.

Consequently, the High Court allowed the appeal, setting aside the orders of the Court of Appeal and the Supreme Court of Victoria. The Court declared that AET was not entitled to the proceeds of the tree sale agreement or the land sale contracts, and ordered that AET pay the appellants' costs.

Orders

Orders of the court

1. Appeal allowed with costs.

2. Set aside paragraphs 1 and 2 of the orders of the Court of Appeal of the Supreme Court of Victoria made on 10 April 2014 and, in their place, order that:

(a) the appeal to that Court is allowed;

(b) paragraphs 1, 2 and 3 of the orders of the Supreme Court of Victoria made on 1 March 2013 be set aside and, in their place, declare that:

(i) the respondent is not entitled to any of $33,999,998 payable to the fourth appellant pursuant to the Tree Sale Agreement, being the agreement dated 15 March 2012 to which the third appellant, the fourth appellant, the fifth appellant, and the respondent, amongst others, were parties; and

(ii) the respondent is not entitled to any of $53,356,000 payable to the third appellant under the Land Sale

Contracts, being two contracts dated 15 March 2012 to which the third appellant, amongst others, was a party; and

(c) the respondent pay the appellants' costs of the proceedings before the primary judge and the Court of Appeal.

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

FRENCH CJ (dissent) HAYNE AND KIEFEL JJ (dissent)
AET further submitted that the intention to create the trust was supported by the commercial objectives of the parties. It did not contend that the trust was a commercial necessity. A commercial purpose, not amounting to a "necessity", might be relevant to the existence of the requisite intention to create a trust. But that which is commercially desirable for one party is not, on that account, a commercial purpose of both. AET argued that the purpose of the Covenants was to allow an investment in a scheme in relation to forest plantations. That is indisputable. It further argued that the investment was marketed as long-term, conservative and non-speculative. That too is indisputable. Then it was said that the propounded trust would ensure that the investors were exposed only to an investment in the underlying forestry scheme, and not the financial fortunes of the Forest Company and the Milling Company or their subsequent acquirer. To say that is to say nothing about the intention of the parties. No doubt the creation of a trust would have been favoured by the Covenantholders if they had been asked about it. So too would the creation of a trust in favour of many investors in commercial undertakings. The advantages of a trust, which might have enhanced the desirability of the investment from the point of view of the Covenantholders, do not support an inference that the creation of the trust would have reflected the joint intention of promisors and promisees. AET's argument in that respect almost amounted to an invitation to the Court to imply a trust in order to reinforce marketing promises found in the Prospectus. That approach would conflate the ascertainment of an express trust with the imposition of a constructive trust. The invitation should not be accepted.Conclusion For the preceding reasons the primary judge and the Court of Appeal erred in finding that the express trust propounded by AET existed. The appeal must be allowed and orders made as proposed by Keane J. The critical facts giving rise to this appeal may be stated shortly. A company ("Forest Co") planted pine trees on land it owned or leased. When the trees were mature, they were felled and the logs were sold. To finance its operations, Forest Co issued what the relevant companies legislation first called "interests other than shares"[116], and at the times most immediately relevant to these proceedings called "prescribed interests"[117]. As the companies legislation required[118], Forest Co made a deed with a company (the respondent to this appeal, "the Trustee Co") as trustee for the holders of the interests Forest Co was to issue. The holders of those interests were called "Covenantholders". [116]Companies Act 1962 (SA), Pt IV Div V (ss 76‑89).[117]Companies (South Australia) Code, Pt IV Div 6 (ss 164‑177).[118]Companies Act 1962, s 78; Companies (South Australia) Code, s 166. The parties agree that the provisions of Ch 5C of the Corporations Act 2001 (Cth) are not engaged and that the interests which were issued are not affected by those provisions.The Trust Deed

Ratio Decidendi

Legal Principle Established

Established by:

The Covenant also made provision, by cl 8, for the security of Covenantholders which adopted the substance of the provisions of cll 2(d) and 20A of the Trust Deed.Textual considerationsPrinciples of construction In Kauter v Hilton[186], Dixon CJ, Williams and Fullagar JJ referred to: "the established rule that in order to constitute a trust the intention to do so must be clear and that it must also be clear what property is subject to the trust and reasonably certain who are the beneficiaries."[186](1953) 90 CLR 86 at 97; [1953] HCA 95. See also Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (In liq) (2000) 202 CLR 588 at 604 [29]. The need for clarity as to the intention to create a trust and its subject matter is of particular importance in a commercial context where acceptance of an assertion that assets are held in trust is apt to defeat the interests of creditors of the putative trustee. The traditional inclination of the courts is to protect creditors against the use of a straw company as a trading trustee[187].[187]Re The Exhall Coal Co Ltd (1866) 35 Beav 449 [55 ER 970]; Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367, 372; [1979] HCA 61. AET placed considerable reliance upon the following observations of Bell, Gageler and Keane JJ in Legal Services Board v Gillespie‑Jones[188]:"'[U]nless there is something in the circumstances of the case to indicate otherwise, a person who has "the custody and administration of property on behalf of others" or who "has received, as and for the beneficial property of another, something which he is to hold, apply or account for specifically for his benefit" is a trustee in the ordinary sense'[189] (footnotes omitted). A legal practitioner who receives money from a client to be held for and on behalf of the client or another person archetypally answers that description."[188](2013) 249 CLR 493 at 523‑524 [113]; [2013] HCA 35.[189]Registrar of the Accident Compensation Tribunal v Federal Commissioner of Taxation (1993) 178 CLR 145 at 165‑166; [1993] HCA 1, quoting Taylor v Davies [1920] AC 636 at 651 and Cohen v Cohen (1929) 42 CLR 91 at 100; [1929] HCA 15. See also Mann v Hulme (1961) 106 CLR 136 at 141; [1961] HCA 45. This passage identifies the nature of the inquiry which must occur in order to determine whether a person is a trustee; it does not suggest an affirmative answer to the critical questions in this case, namely whether the Forest Company or the Milling Company had "the custody and administration of property on behalf of" the Covenantholders, or had "received, as and for the beneficial property of [the Covenantholders], something which [they were] to hold, apply or account for specifically for [their] benefit". Indeed, the contrast between the receipt of moneys by a legal practitioner to be held specifically for the benefit of a client or a third party and the receipt of investment funds by the Forest Company tells against an affirmative answer. The language of the relevant documents is not to be strained to discover an intention to create a trust of the broad scope for which AET contends. In Byrnes v Kendle[190], Gummow and Hayne JJ noted the approval by Mason CJ and Dawson J in Bahr v Nicolay [No 2][191] of the proposition stated earlier by du Parcq LJ[192] that: "unless an intention to create a trust is clearly to be collected from the language used and the circumstances of the case, I think that the court ought not to be astute to discover indications of such an intention."[190](2011) 243 CLR 253 at 272 [49].[191](1988) 164 CLR 604 at 618; [1988] HCA 16.[192]In re Schebsman [1944] Ch 83 at 104."Interests" and "entitlements"