Korda v Australian Executor Trustees (SA) Ltd
[2014] VSCA 65
•10 April 2014
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2013 0033
| MARK KORDA and BRYAN WEBSTER and S E A S SAPFOR FORESTS PTY LTD and S E A S SAPFOR HARVESTING PTY LTD (ACN 007 511 211) and GUNNS LIMITED (ACN 009 478 148) | First Applicant |
| Second Applicant Third Applicant Fourth Applicant Fifth Applicant | |
| v | |
| AUSTRALIAN EXECUTOR TRUSTEES (SA) LIMITED (ACN 007 870 644) | |
| Respondent |
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| JUDGES: | MAXWELL P, OSBORN JA and ROBSON AJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 23 July 2013 |
| DATE OF JUDGMENT: | 10 April 2014 |
| MEDIUM NEUTRAL CITATION: | [2014] VSCA 65 |
| JUDGMENT APPEALED FROM: | [2013] VSC 7 (Sifris J) |
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EQUITY – Trusts – Investment scheme – Prospectus – Invitation to invest in timber plantations – Cultivation, milling and sale of timber to be undertaken by operating companies – Trust Deed – Trustee to hold proceeds of timber sales for investors – Liquidation of operating companies before sale proceeds paid to Trustee – Whether proceeds of sale impressed with trust upon receipt by operating companies – Whether intention to create trust of proceeds – Intention of parties to investment transaction – Commercial necessity – Consideration of surrounding circumstances and nature of transaction – Trust intended – Appeal dismissed.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicants | Mr P D Crutchfield SC with Mr R G Craig | Ashurst |
| For the Respondent | Mr J Lockhart SC with Mr M I Borsky | Sparke Helmore |
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MAXWELL P
OSBORN JA:
Summary
We have had the advantage of reading in draft the reasons for judgment of Robson AJA. His Honour has clearly identified the issues which arise on the appeal, and has comprehensively set out the content of the relevant documents and the respective arguments of the parties to the appeal. (In what follows, we use terms as defined in his Honour’s reasons.)
We have, however, reached a different conclusion from Robson AJA as to the disposition of the appeal. We respectfully agree with the trial judge’s conclusion that the relevant parties intended the proceeds from the harvesting of the timber (or, where relevant, from the sale of plantation lands) to be held on trust for the covenantholders upon receipt. We would therefore grant leave to appeal, but dismiss the appeal. Our reasons may be summarised as follows.
The Court is concerned with an investment scheme. It was investors who funded the commercial enterprise of timber growing and harvesting carried on by the Forest Company and the Milling Company. The intention which had to be ascertained was the intention of the parties to the typical investment contract, that being the contract made when an investor applied for — and Forest Company issued — a ‘covenant’ pursuant to a prospectus.[1]
[1]See the preamble to the Trust Deed: [45] below.
The applicants accepted that this was so, and that it was therefore necessary to discern the intention and expectation of the investor at the time of the making of the investment contract, with respect to the protection of his/her interest as such. Once this is appreciated, it becomes clear why the enquiry into intention cannot be confined, in the way the applicants sought to confine it, to the terms of the formal documents executed in March 1964 (the Trust Deed and the Tripartite Agreement).
Plainly enough, none of the relevant investors[2] played any part in the drafting of those documents. That circumstance demonstrates the fallacy in the contention advanced for the applicants, that if the parties to the 1964 documents had intended to create a trust of the kind found by the trial judge, they could easily have included express provisions to that effect.
[2]We are concerned with covenants purchased by investors in the 1980s.
It is not in doubt that the 1964 documents did not expressly create such a trust. But that is, necessarily, only the starting-point of the enquiry. As we have said, attention must be directed at the commercial setting in which investors purchased covenants in the 1980s. And the prospectuses show that the safety and security of the investment, and the nature of the risks involved, were recognised as being matters of critical importance to prospective investors.
As the applicants conceded early in the argument, the strictures which govern the task of contractual interpretation have no application here.[3] This Court said recently in Commissioner of State Revenue (Vic) v Snowy Hydro Limited:[4]
Courts will recognise the existence of a trust in a commercial setting, notwithstanding the absence of an express statement of intention to create a trust, when
it appears from the language of the parties, construed in its context, including the matrix of circumstances, that the parties so intended. ... In divining intention from the language which the parties have employed the courts may look to the nature of the transaction and the circumstances, including commercial necessity, in order to infer or impute intention.
Regard may be had to ‘what could fairly be inferred to be the interests and expectations of the two sides to the transaction in question’. Subjective intentions are irrelevant. With trusts as with contracts, the Court is concerned not with ‘the real intentions of the parties, but with the outward manifestation of those intentions’.
[3]Cf, eg, Western Export Services Inc v Jireh [2011] HCA 45.
[4][2012] VSCA 145, [83] (‘Snowy Hydro’) (citations omitted).
These were the principles which the trial judge applied in reaching his decision. So much is evident from the terms in which his Honour explained his conclusion, as follows:
The reasons why the Forest Company and the Milling Company did not hold a beneficial interest in the funds derived from land sales and the sale of timber despite their extensive contractual obligations and the lack of any requirement to hold the funds in a separate account are … as follows:
(a) The nature of the transaction and relationship between the parties is highly suggestive of a relationship of trustee and beneficiary. It goes beyond that of contractual parties such as lender and borrower. The funds received from the sale of land or timber (Stages 7-9) cannot properly be regarded as beneficially held by the Milling Company or the Forest Company. In the context of such relationship and the nature of the transaction the detailed obligations contained in the Relevant Documents are not inconsistent with a relationship of trustee and beneficiary. In fact they reinforce it.
…
(c) The language used in the Relevant Documents evidences an intention to protect funds derived from the sale of land and timber for the benefit of investors. Again, the detailed contractual provisions or lack of a requirement to hold the funds separately are not inconsistent with the existence of a trust. The entire function and purpose of the management company (the Forest Company) and by extension (the Tripartite Agreement) the Milling Company as indicated by the language, was to look after and manage a trust. The detailed provisions are directed to managing other people’s funds. The structure and nature of the obligations is all about trusts. The main document is a Trust Deed and the detailed obligations are contained in this document and the related Tripartite Agreement. These obligations are covenants and undertakings to act in the interests of identified others at all stages. As pointed out, all of the prerequisites of a trust are present and it is unlikely that the parties intended a trust only to arise at Stage 10. The matrix of circumstances suggests otherwise.[5]
[5]Australian Executor Trustees (SA) Ltd vKorda [2013] VSC 7, [88] (‘Reasons’) (emphasis added).
We respectfully agree with this analysis, which is reinforced by a number of matters highlighted during argument on the application for leave to appeal. We deal with those matters in turn.
What prospective investors were told
The investment scheme was structured on the basis of ‘planting years’. That is, each class of covenants offered to the public promised an investment return referable to a particular year in which the Forest Company had planted trees. An individual covenant related to a specified area of planting — for example, one hectare — and the promised investment return was the covenantholder’s pro rata share of the net proceeds attributable to the entire area planted with trees by the Forest Company in that planting year.
The 1984 prospectus[6] offered two types of covenant. The first would entitle the covenantholder to receive a pro rata share — determined by the area to which the covenant related — of the net proceeds of the sale of timber referable to the relevant planting year. The 1984 prospectus offered covenants of this type relating, respectively, to the 1977, 1978 and 1981 planting years.
[6]By agreement the 1984 prospectus was treated as the relevant prospectus for the purposes of the application.
The second type of covenant offered an additional interest in the value of the relevant land. That is, this type of covenant would entitle the holder not only to a pro rata share in the proceeds of sale of the timber but also to a pro rata share in the value of the land planted with trees in the relevant planting year. The prospectus offered covenants of this second type relating, respectively, to the 1982 and 1983 planting years.
The 1984 prospectus opened with the following statement:
A Covenant
provides for you an interest in a Radiata Pine plantation entitling you to the net timber proceeds apportionable to your interest in the particular planting year for which you apply. 1982 and subsequent covenants also provide for you an interest in the value of land (see Land Interest on page 4).
The prospective investor was thus invited to acquire ‘an interest … in a pine plantation’. That interest would ‘entitle’ the covenantholder to a proportionate share of the net timber proceeds and — in relation to 1982 and subsequent years — to an interest in the value of the land.
On the same page, the following appeared:
An independent consultant (appointed by the Trustee for The Covenantholders) annually determines the market price of Radiata Pine log and [the Milling Company] will purchase the timber at this market price, for its own milling operations. [The Milling Company] also arranges the sale of timber surplus to its own requirements, at market rates.
Timber Proceeds
The net timber proceeds less the 5 per cent remuneration to the [Forest] Company and other deductions authorised by the Trust Deed are divided amongst the Covenantholders in accordance with clause 4 of the Planting Covenant.
On the next page, under the heading ‘Special Information’, a box headed ‘Land Interest’ commenced:
To enable covenantholders to participate in the capital appreciation of the land on which the trees are planted, from 1982 the covenant provides a beneficial interest in the land value. Value of Land (sic) at time of planting …[7]
[7]Emphasis added.
On the same page, the prospectus stated:
Timber Proceeds
Net timber proceeds paid to Covenantholders from 1942 to 1984 total $15,826,967 of which $4,649,102 has been paid in the last five years. Distributions from some earlier plantings have to date shown the terms of more than 20 times the original Investment.
Under the heading ‘General Information’, the prospectus stated:
Land Leased from Victorian Government
[Forest] Company has been fortunate in receiving extensive grants of Leasehold Land from the Victorian Government under the Land Act 1958 (as amended) being in furtherance of the Victorian State Government’s desire to increase Softwood Plantations in that State. The conditions of the lease provide amongst other things that the Minister of Lands has powers to require such a standard of forest maintenance including application of fertilizer on leased land as he thinks proper.
This ensures a further safeguard for the benefit of the Covenantholder.[8]
[8]Emphasis in original.
Self-evidently, these were strong statements, about the nature of the investor’s ‘interest in a plantation’, the entitlements to which that interest gave rise, and the safeguards which existed. The terms of the covenants themselves, set out in full in the prospectus, were just as strong. Thus the covenant referable to the later planting years provided as follows:
1.Each Covenant entitles the holder hereof to the value … of the freehold land or land held under perpetual lease planted in respect of the Covenant and to 95 per cent … of the net proceeds from the timber apportionable to [the specified fraction] of the area planted by the Company with trees in the years stated in the Application signed by the Covenantholder.
The basis for determining the net proceeds of the timber sales was set out in cl 4 of the covenant, as follows:
The Covenantholder will receive his due proportion of the benefits obtained from the sale of the timber harvested by the Milling Company from the planting in respect whereof his Covenant is issued in accordance with the terms and conditions set out in the Covenant and determined in manner following, that is to say: All moneys received by the Milling Company from the sale of standing timber or timber felled, cut, milled and manufactured and sold pursuant to the Tripartite Agreement will be applied as follows: …
The clause then provided for a series of disbursements, as follows:
·recoupment to the Milling Company of its expenses of milling and selling the timber;
·payment of an amount for depreciation of plant and equipment; and
·‘immediate payment’ to the Forest Company of five per cent of the net balance of the proceeds of sale, to be retained by the company ‘as its commission for its services’.
Upon receiving the balance, the Forest Company (after deducting certain further specified expenses) would
pay the balance to the Trustee for the Covenantholders for distribution by the Trustee amongst the Covenantholders entitled thereto in accordance with their respective holdings.
The covenant included important guarantees to prospective investors that their interests would be protected. ‘In order to adequately secure its due compliance with the terms hereof’, the Forest Company undertook that until the timber planted in the relevant covenant year was ‘cut and milled and disposed of’, the company would not, without the consent of the Trustee, sell the land which it owned, or surrender or assign any relevant leasehold interest which it held. Further, the Forest Company undertook that it would not, without the consent of the Trustee:
·encumber the land which it owned;
·deal with any leased land ‘in a manner prejudicial to or detrimental to the interests of covenantholders’; or
·encumber the timber planted on the freehold or leasehold land.
The Forest Company further promised that, once it had been paid 75 per cent of the aggregate purchase price payable for covenants in respect of a planting year, it would deposit the certificates of title and the Lessee’s copy of any lease in a safe deposit in the joint names of the Forest Company and the Trustee. The Trustee would then:
register a Caveat in respect of such lands prohibiting any dealing therewith except in the interests of the Covenantholders in such lands.
In relation to the holder’s interest in the land itself, the covenant provided:
In addition to payment in respect of timber harvested the Covenantholder will receive his due proportion of the value of the freehold land and land held under perpetual lease contained in the Covenant as listed hereunder when the timber is clear felled or when the land ceases to be subject to the Covenant as a result of fire or for any other reason.
The purchase price of the covenant included a component for the value of the land.
Finally, the covenant provided as follows:
The Covenantholder shall accept his due proportion of the benefits from the sale of timber under the scheme laid down in the said Tripartite Agreement referred to above (and in the case of leased land compensation and the net proceeds of sale of cuttings if any as aforesaid) and of the value of the land in full satisfaction and discharge of all and singular the obligations of the Company, and the Covenantholder shall have no further claim whatever on the Company.
The prospectus also included an accountant’s report, which confirmed that the 1982 and 1983 covenants would give an investor a secured interest in the value of the land on which trees were planted in the relevant year. Like the ‘Special Information’ provided at the beginning of the prospectus,[9] this report used the language of ‘beneficial interest’:
To enable covenantholders to participate in the capital appreciation of the land on which the trees are planted, for 1982 the covenant provides for a beneficial interest in the land value:
At planting date a licensed valuation of the freehold and perpetual lease land, whichever is appropriate, is obtained, and this is included in the covenant price. Upon clear felling a further valuation is obtained, and the appreciation in the land value over the term of the covenant is the basis of the amount paid to the covenantholders.
The covenantholder’s interest in the freehold or perpetual lease land is secured during the covenant period by the caveat discussed … above.[10]
[9]See [15] above.
[10]Emphasis added.
As can be seen, the language of the prospectus treated ‘beneficial interest in the land value’ and ‘interest in the land’ as interchangeable concepts. The submission for the applicants was that there was an important distinction to be drawn between a contractual entitlement to a payment calculated by reference to the land value, and a beneficial interest in the land itself.
So much may be accepted. But what matters for present purposes is that the prospectus drew no such distinction. On the contrary, the repeated use of phrases such as ‘beneficial interest’ and ‘interest in the land’, and the emphasis on the interest being ‘secured during the covenant period’, was calculated to create the expectation that the investor would acquire an interest connected with, and hence as secure as, the land itself.
The prospectus concluded with a series of marketing statements. The first was in these terms:
Forestry … a growing investment
The general effect of an inflationary trend is to whittle away the value of your savings. To offset such a progressive reduction in the value of your savings, place some of them in an industry in which rising prices of forest products help counteract the fall in value.
Increased prices for forest products at the time of cutting will normally increase the percentage return to Covenantholders and protect your interest from the full effects of inflation.
Then, after a reference to ‘Tax Free Timber Proceeds’ (discussed below), there appeared a ‘Notice to Intending Buyers’. The Notice emphasised that the investment in a covenant should be seen as a long-term one and — hence — as safe and secure. It also assured the investor that the prospectus contained a comprehensive account of the relevant rights and obligations:
Notice to intending buyers
1.The Company wishes to make it quite clear that it does not desire persons to purchase Covenants as a speculation, with the idea of holding them for a while and then selling them at a profit.
2.The Covenants are not ordinarily negotiable securities, but are offered for sale to establish a provision for later life, or as an endowment for children or grandchildren at the maturity of the Covenants.
3.The Company from time to time has been able to introduce buyers for its clients who find themselves in financial difficulties and will continue this policy, but does not undertake to repurchase or resell the Covenants.
4.All the facts relating to these Covenants are referred to in this Prospectus, for the proposed Covenantholder to examine and make his or her judgement thereon.
5.The Company holds a Dealer’s Licence under the Securities Industry (South Australia) Code and is a recognised dealer in other jurisdictions where the Prospectus is issued. It also arranges for carefully selected people to act as its accredited Sales Consultants.
6.The Company’s Consultants are provided with an Identity Folder issued under seal, and, are required to be licensed as Dealers Representatives under the Securities Industry (South Australia) Code.[11]
[11]Emphasis added.
At the back of the prospectus were the covenant application forms. Under the heading of the application form for the later year covenants was a box containing the words ‘INCLUDES LAND INTEREST’ in large capital letters. Once again, the language was simple and unambiguous, representing that an investor who purchased a covenant would acquire a beneficial interest in land. The caveat and encumbrance provisions contained in the Trust Deed reinforced this view.
Commercial necessity
The prospectus — and the terms of the investment — were doubtless designed to maximise investor participation. To that end, the prospectus conveyed the clearest message that an investment in the scheme would be safe. As already noted, the purchase of the covenant would entitle the holder to an interest in the sale proceeds and (in the case of later year covenants) an interest in the value of the land. Nothing could happen to the land until all of the timber was milled and the proceeds distributed.
The applicants nevertheless submitted that there was:
no commercial necessity for inferring a trustee and beneficiary relationship. The evident commercial purpose of the Trust Deed and Tripartite Agreement was to provide a mechanism by which each Covenantholder’s timber proceeds once received on their behalf could be collectively held by [the Trustee] on trust and each Covenantholder’s right to performance of the covenant could be collectively enforced. However, the Covenantholders’ right to the net timber proceeds was enforceable against the Forest Company in covenant — ie in contract, ‘in full satisfaction and discharge of the obligations of the [Forest] Company.’
It is important to appreciate the full implications of this submission. Let it be supposed that, following the sale of timber harvested by the Milling Company, the ‘net proceeds’ of sale were received by the Forest Company, in accordance with the terms of the covenant. Let it further be supposed that, by the time the net proceeds were received, the Forest Company had gone into liquidation, in consequence of the failure of a quite separate commercial activity in which it had been engaged. In those circumstances, according to the applicants’ submission, covenantholders would be in the position of unsecured creditors, their claims in debt subordinated to the claims of secured creditors. This would be the result notwithstanding that — ex hypothesi — the timber operation in which the covenantholders had invested had been profitable in the year in question.
Commercial necessity is, of course, one of the circumstances which may be considered in deciding whether the parties intended to create a trust.[12] In our view, it was a matter of commercial necessity that the investments made by covenantholders not be at risk by reason of extraneous activities of the operating companies. Had there been any suggestion that such a risk existed, prospective investors would have been much less likely to invest.
[12]Snowy Hydro [2012] VSCA 145, [83].
In our view, the only risks to which the parties intended that the investors be exposed were risks intrinsic to the enterprise being funded by their investment moneys, that is, the enterprise of acquiring, preparing and planting land, tending and maintaining the timber, and finally felling, milling and selling it. The subscription moneys could, of course, only be used for the purposes of that enterprise.
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. No investor would have imagined — and the prospectus certainly did not suggest — 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. The whole tenor of the documentation was to precisely the opposite effect.
Inconsistent with express intention?
The applicants submitted that the trial judge’s conclusion was inconsistent with ‘the express intention of the parties’. Unsurprisingly, the inconsistency argument concentrated on the March 1964 decision of the parties to the Trust Deed that there would be an express trust only of the sale proceeds, and only once those proceeds were in the hands of the Trustee. That provision, it was said, should be regarded as having expressed — exhaustively — the parties’ intention with respect to the creation of a trustee-beneficiary relationship for the protection of investors. It would have been quite straightforward to provide expressly for the Forest Company and/or the Milling Company to be Trustee of the proceeds, if that had been intended. It must therefore be concluded that ‘the parties’ did not so intend.
We reject this submission. 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 on the part of one of the forestry companies. Had it been suggested that there was any such risk, it seems to us that the putative investor representative would undoubtedly have insisted on the additional protection.
Secondly — and this point follows from the first — it can safely be assumed that no such risk was in contemplation when the documents were drawn up. That is, the 1964 documents were drawn up on the basis of the reasonable commercial assumption that the scheme would be successful — as it had been for some decades — and that each planting year would, in due course, produce its own sale proceeds which (after deductions) would be held by the Trustee for the covenantholders.
What was evidently not a matter of subjective consideration — and hence not the subject of express provision — was what would happen to sale proceeds in the event that, for reasons not associated with timber production, one or other of the operating companies was not in a position to comply with its obligations to pass on the net proceeds to the Trustee. It was, in other words, a contingency which was not specifically in contemplation.
To the extent that there is any relevant inconsistency, it supports the judge’s conclusion. So strong were the assurances (express and implied) in the prospectus — that the investors would have a secure interest in, and entitlement to, the sale proceeds — that the parties to the investment contract must have intended those assurances to override any inconsistent provisions in the formal documents.
In the end, though, there is no material inconsistency. The existence of the express trust, and the protection thus given to the interests of the covenantholders, support the proposition that the scheme as a whole was intended to afford the same protection throughout. Put another way, it was a matter of necessary implication that nothing could occur in the operation of the scheme to prejudice that trust protection.
Much was made by the applicants of the fact that the Trust Deed and the Tripartite Agreement did not impose, on either the Forest Company or the Milling Company, obligations of the kind which would have been expected had those companies been intended to hold the sale proceeds on trust. It was said to be of particular significance that neither company was required to place the timber proceeds received by it into an account styled ‘trust account’. This was to be contrasted with the express obligation of the Trustee to that effect.
This point may be disposed of shortly. The provisions in question reflected the limited scope of the express trust created by the 1964 Trust Deed. That they went no further cannot prevent a conclusion, based on an examination of the whole of the circumstances, that the parties to the relevant 1984 transactions intended that there be broader trust protection. So far as they went, the machinery provisions of the 1964 documents, and the language used, were apt to ensure that the entitlements of the covenantholders were preserved.
The provisions of the Trust Deed and the Tripartite Agreement
Other than the limited scope of the express trust, there is nothing in the Trust Deed or the Tripartite Agreement which stands in the way of the conclusion reached by the trial judge. On the contrary, the provisions of both documents are consistent with the foregoing analysis of the intention of the parties.
Thus, the preamble to the Trust Deed stated:
[T]he Forest Company was formed for the purpose of (inter alia) acquiring lands and planting the same with pine trees and preserving the forest so planted until such time as the same should become marketable and for the purpose of acquiring the funds necessary for the carrying out of its purpose the Forest Company intends from time to time to issue prospectuses inviting the public to subscribe for and purchase the covenants referred to in such prospectuses on the terms and conditions set forth in any of such prospectuses and the covenants issued thereunder…[13]
The preamble to the Tripartite Agreement recorded that the Milling Company had been incorporated with the objects of felling, milling, manufacturing and marketing of grown timber and thinnings ‘the property of Covenant Holders of the Forest Company.’[14]
[13]Emphasis added.
[14]Emphasis added.
By the Trust Deed the Forest Company appointed the Trustee to act as trustee for the covenantholders.[15] Under the Deed, the Forest Company was obliged to:
[15]Clause 1.
(a) perform all of the obligations contained in the covenants;[16]
[16]Clause 2(a).
(b) allocate areas of land planted with trees in accordance with the covenants and provide plans showing such specific allocations to the Trustee;[17]
[17]Clause 2(b).
(c) provide a reserve against fire and other loss additional to the areas it ‘undertakes to plant with trees for the covenant holder’;[18] and
(d) make half-yearly payments into a maintenance fund.[19]
[18]Clause 2(c).
[19]Clause 2(e).
The terms of the Deed which imposed on the Forest Company the obligation to secure the interests of investors corresponded closely with the terms of the covenants, as follows:
[I]n order to secure due compliance by the Forest Company with the terms and conditions hereof the Forest Company undertakes that until the timber growing thereon is so cut and milled and disposed of and the proper proceeds thereof paid to the Trustee:
(i)the Forest Company will not sell land of which it is the proprietor nor without the consent of the Trustee encumber such land
(ii)the Forest Company will not surrender assign or encumber its interest in Leased Land or otherwise deal with such land in a manner prejudicial to or detrimental to the interests of Covenantholders without the consent of the Trustee
(iii)will comply with all Lessee’s covenants contained in any lease in which it is Lessee
(iv)the Forest Company will not without the consent of the Trustee encumber the timber planted thereon
(v)on or before the 31st day of May in each year the Forest Company will cause to be deposited in the Savings Bank of South Australia Head Office Safe Deposit or elsewhere as may be mutually agreed from time to time in the joint names of and deliverable only to the joint order of the Forest Company and the Trustee all Certificates of Title and Lessee’s copies of all leases free from encumbrances comprising land planted in any preceding planting year in respect of which the holders of Covenants for that planting year shall, by the 31st day of October immediately preceding the said 31st day of May, have paid to the Forest Company in aggregate sums on account of the purchase price for their Covenants equal to seventy five per centum (75%) of the total purchase price fixed for all the covenants issued or intended to be issued for that planting year. 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.[20]
[20]Clause 2(d) (emphasis added).
This security provision expressed the clearest intention that nothing could happen to the plantation lands which would prejudice the rights of the covenantholders to receive their entitlements. The caveat provision in sub-paragraph (v) reinforced the guarantee that — until the sale proceeds were safely in the hands of the Trustee — the only permissible dealing with the land would be a dealing ‘in the interests of the covenantholders’. In substance, if not in form, these provisions imposed trust obligations on the Forest Company with respect to its freehold and leasehold interests in the land, obligations expressly imposed for the benefit of covenantholders.
The Deed likewise imposed on the Forest Company a series of obligations which had to be performed ‘until the period of realisation of the produce of the forests so planted arrive[d]’.[21] Thus the company was required to maintain and supervise the land and the planted trees,[22] pay rates and taxes,[23] indemnify the Trustee and covenantholders against third party claims,[24] provide reports to the Trustee,[25] provide annual financial statements to the Trustee,[26] provide an annual report to the Trustee[27] and the covenantholders[28] and, if requested, provide to the Trustee all information which the Trustee might reasonably require relating to the condition and state of development of the trees on the land allocated to comply with the obligations of the Forest Company to the covenantholders.[29]
[21]Clause 3.
[22]Clause 3(a).
[23]Clause 3(b).
[24]Clause 3(c).
[25]Clause 3(ca).
[26]Clause 3(d).
[27]Clause 3(f).
[28]Clause 3(g).
[29]Clause 3(i).
Clause 12 of the Deed set out both the Forest Company’s core undertakings — to plant, tend and supervise the trees for a period of 25 years[30] — and the core rights of covenantholders, as follows:
Each Covenant in respect of which a Fully Paid Certificate has been issued will entitle the holder thereof to the net proceeds from the timber appropriate to either one acre in the case of a One Acre Covenant or to One Half of One Acre in the case of a Half Acre Covenant or to one Hectare in the case of a One Hectare Covenant or to one half of one hectare in the case of a Half Hectare Covenant or to one quarter of one Hectare in the case of a quarter Hectare Covenant planted by the Forest Company with trees as stated in the application signed by the applicant. The Covenantholder will receive his due proportion of the benefits obtained from the sale of timber harvested from the planting in respect whereof his Covenant is issued in accordance with the terms and conditions set out in the Covenant and within recited Tripartite Agreement (sic).[31]
[30]Clause 12(a).
[31]Clause 12(b) (emphasis added).
The right of a covenantholder with respect to the value of land utilised in the 1982 and 1983 years was defined by cl 27 of the Deed, as follows:
In respect of the 1982 and 1983 planting years each Covenant in respect of which a Fully Paid Certificate has been issued will entitle the holder thereof to the value as determined pursuant to clause 29 hereof (at the time when timber is clear felled or at such earlier time as the land ceases to be subject to the Covenant as a result of the timber being damaged by fire or for any other reason proportionate to the total land appropriated to the planting year) of the freehold land or land held under perpetual lease (hereinafter called ‘the land’) planted in respect of the Covenant and to the net proceeds from the timber in each case appropriate … The Covenantholder will receive his due proportion of the benefits obtained from the value of the land as so determined and the sale of timber harvested from the planting in respect whereof his Covenant is issued in accordance with the terms and conditions as set out in the Covenant and the within recited Tripartite Agreement.[32]
[32]Emphasis added.
Finally, the Deed contained an express assurance that the Trust would continue until all plantations had been clear felled and the benefits distributed to covenantholders.[33] This was a very important statement to investors that they would have trust protection until the investment returns were paid out in full.
[33]Clause 20B(c).
Specific inconsistencies relied on
The applicants rely on a number of specific provisions in the documentation which are said to be inconsistent ‘on their face’ with the imposition of fiduciary obligations upon the Forest Company and/or the Milling Company. On analysis, there is no such inconsistency. We deal with the provisions in turn:
(a) The Trust Deed provided for the Forest Company to make half-yearly payments into a Maintenance Fund, to be held on trust by the Trustee.[34] The Forest Company was entitled to be paid the interest on the moneys in that Fund and, subject to meeting all its obligations to the Trustee and the covenantholders, to repayment of those moneys by increments.[35] There is nothing about these entitlements which conflicts with the trust protection we have described. No such entitlement could arise unless and until the necessary funds had been transmitted to the Trustee by the Forest Company.
[34]Clauses 2(e), 4(a).
[35]Clauses 7, 4(b).
(b) Clause 13 of the Trust Deed empowered the Trustee, in the event of default by the Forest Company, to ‘appoint any person to take charge of and manage the business conducted by the Forest Company on the said land allocated to the said Covenants’. Once again, this provision is not inconsistent with the Forest Company having fiduciary obligations with respect to funds held by it representing the proceeds of forestry operations. Indeed, cl 13(b) specifically empowered a manager so appointed to ‘take possession and control of all moneys in Forest Company’s possession received in respect of the said Covenants’.
(c) The Trust Deed provided that the Forest Company ‘is not liable to be removed from the management of the Trust’.[36] This is said to be a ‘particularly incongruous fetter’ on the rights of covenantholders if the Forest Company were intended to act as a trustee. We disagree. The submission confuses the administrative functions of the Forest Company in managing the Trust with the substantive functions of the Company in carrying on the forestry business. As noted under the previous sub-paragraph, any default by the Company in discharging its substantive obligations (to the Trustee or to the covenantholders) rendered it liable to being replaced as manager of the business.
[36]Clause 20B(a).
(d) The covenant annexed to the Trust Deed provided that the covenantholder
shall accept his due proportion of the benefits from the sale of timber … and of the value of the land in full satisfaction and discharge of all and singular of the obligations of the company and the Covenantholder shall have no further claim whatever on the Company.
This provision is said to be a ‘fetter or limitation’ on the rights of the covenantholders, inconsistent with the conclusion that the covenantholders were intended to be beneficiaries. Once again, we disagree. There is no inconsistency between the conclusion that timber sale proceeds were trust property in the hands of the Forest Company and the unremarkable proposition that payment in full to a covenantholder would preclude a further claim against the Company in respect of the relevant covenant.
(e) Under cl 3(c) of the Trust Deed, the Forest Company agreed to:
Indemnify and keep indemnified the Trustee and the Covenantholders from and against all and all manner of claims demands actions proceedings in respect of the tending supervision protection and preservation of the said land and trees and in respect of all such rent rates taxes charges outgoings and impositions and further amounts aforesaid.
As can be seen, this is an indemnity with respect to liabilities and expenses incurred in the Forest Company’s conduct of the plantation operation. It is again an unremarkable provision and in no way contradicts the trust analysis.
(f) It is said that the restraints imposed on the Forest Company’s dealings with the land and trees, by cls 2(d)(i) and 2(d)(iv) of the Trust Deed and cl 6 of the covenant, would be otiose if the Forest Company were a trustee. Assuming that to be so, the inclusion of these provisions merely reflects the fact that the 1964 documents did not purport to impose trust obligations on the Forest Company. In the context of the broader enquiry, however, these provisions simply reinforce the conclusion that the parties to the investment transaction did intend to impose such obligations.
(g) It is also submitted that interest earned on moneys in the Timber Proceeds Accounts accretes to the benefit of covenantholders, whereas there is no obligation on the Milling Company or Forest Company to pay interest on the gross timber proceeds when held by them. This distinction may be accepted, but the Milling and Forest Companies are required to account to the Trustee on behalf of the covenantholders in respect of their beneficial shares in the proceeds of the timber sales. It is the characterisation of the arrangements as a whole which is critical.
The tax implications
In their written submission, the applicants contended that there were ‘tax reasons’ which explained what was said to be ‘the deliberate decision of the parties’ not to impose trust obligations on the Forest Company or the Milling Company. For reasons which follow, this submission must be rejected.
The 1984 prospectus contained the following statements:
The High Court of Australia, on two taxation appeals heard in Adelaide on 23 September, 1975 held that distributions made by the Company from time to time to Covenantholders in respect of timber proceeds are not assessable income of the Covenantholders under the Income Tax Assessment Act. This confirms a similar decision given by the High Court in 1954.
Tax Free Timber Proceeds
The Full High Court of Australia sitting in Adelaide on 23 September 1975 held that timber proceeds are not assessable income of the Covenantholders under the Income Tax Assessment Act.
These were references to the 1975 decision of the High Court in Milne v Commissioner of Taxation[37] and the 1954 decision in Clowes v Commissioner of Taxation.[38] According to the written submission:
The absence of a trustee and beneficiary relationship no doubt reduced the prospect that the Commissioner would be able to argue, as it had endeavoured to do in 1954, that the Covenantholders’ income stream was assessable on the basis that there was a common ‘profit-making undertaking or scheme’.
[37](1976) 133 CLR 526 (‘Milne’). Although the hearing took place in Adelaide on 19 September 1975, the decision on which the prospectus relied was not handed down until 11 February 1976.
[38](1954) 91 CLR 209 (‘Clowes’).
This aspect of the case featured prominently in oral argument. Senior counsel for the applicants began with it, pointing out that the decision in Milne had predated the 1984 prospectus by almost a decade. According to the submission, the scheme was structured so as to ensure that the investment return to a covenantholder not be assessable to tax under s 26(a) of the Income Tax Assessment Act 1936 (Vic) (the ‘1936 Act’). In answer to a question from the Court, however, counsel eschewed a submission that this tax benefit would have been lost if the constituent documents had expressly imposed trust obligations on Forest Company and Milling Company. It was sufficient, he contended, that such an enlarged trust would have created a risk that the returns to investors would have been assessable. The parties cannot therefore have intended to create such a trust.
This submission cannot be sustained. A review of the relevant High Court decisions demonstrates that the creation of the wider trust had no income tax implications whatsoever. We deal first with Clowes. The High Court in that case was considering the assessability, in the hands of an investor, of the proceeds of sale of plantation timber.
The taxpayer had entered into an agreement with the plantation company, which recited that he was ‘desirous of becoming possessed of a beneficial interest’ in the produce of a certain acreage of timberland, called a ‘lot’. The agreement provided for the taxpayer to pay the purchase price of a lot. As soon as all the lots in the plantation had been sold and the purchase moneys paid, the company would transfer the title to the land into the name of a trustee company to be held upon two trusts. The first trust was to compel the company to carry out obligations with respect to planting and maintaining the pine trees; the second was to hold the land as security for the performance by the company of its obligations, and to hold the produce of the land and the net proceeds of sale of the timber in trust for the company and the lot-holders.
The question of assessability of the investment returns fell to be decided under the provisions of s 26(a) of the 1936 Act, which provided that the assessable income of a taxpayer should include:
profit arising from the sale by the taxpayer of any property … or from the carrying on or carrying out of any profit-making undertaking or scheme.
Dixon CJ and Kitto J held that the income was not assessable, as the profit-making scheme was not carried out by the taxpayer-investor or on his behalf. Instead, the scheme was carried out by the company, for its own benefit.
Dixon CJ said:
From the taxpayer’s point of view he laid out a sum of money entitling him at the end of a protracted period of time to an uncertain return in a lump sum which he hoped might prove larger than his outlay though it might well prove smaller. In the event, when a period of fifteen to eighteen years had elapsed, he received back a sum equal to his outlay and an additional forty per cent. But the taxpayer did nothing but lay out his money on the faith of the contract and await the result. The company was in no sense his agent. The money which he paid in pursuance of the contracts became part of the general funds of the company. Its obligations to him were simply contractual. It made the contract for its own advantage and in performing it acted independently of the directions or control of any lot-holders, whose relationship to the company was simply that of persons providing it with money on special terms.[39]
And further:
When s 26(a) speaks of the carrying on or carrying out of a profit-making undertaking or scheme it means the carrying on or out by the taxpayer or on his behalf. The words ‘by the taxpayer’ occur only after the word ‘sale’ but they give the sense of the whole clause. It was aimed at bringing what might otherwise have been thought possibly to be capital profits within the conception of income. It was not concerned with the somewhat different matter of treating as the assessable income of a given taxpayer a receipt by him derived from someone else because that someone else had obtained it by a scheme of profit-making or by some other means that would justly give it in the latter’s hands the character of income. It is therefore necessary to find an undertaking or scheme carried on or carried out by or on behalf of the taxpayer. No doubt, so much is inferentially conceded when it is said that the lot-holders were parties to the one profit-making scheme. But the operation giving rise to the profit so described was the planting of pine trees, the cultivation of the plantation and the logging and disposal of timber. These appear to me to have been both in fact and in law the operations of the company conducted on its own behalf and not on behalf of the lot-holders. True it is that the company had contracted with the lot-holders to plant the trees, market the timber and pay over the stipulated portion of the proceeds. But these were contractual terms on which the money was raised by the company. From the taxpayer’s standpoint the only profit in contemplation was an increase in the amount he invested with the company when the money became repayable as a result of the operations of the company, operations which as part of the terms of the investment the company became bound to carry out.[40]
[39]Ibid 216–7.
[40]Ibid 217–8.
Kitto J said:
Upon payment to the company, the lot-holders’ money was gone, and it was not repayable in any circumstances. That a larger amount would some day be received was assuredly hoped, perhaps believed, but not promised. The chance of getting more was the recompense for the risk of getting less; and the inherent uncertainty as to the time of receipt and the amount of the more, if more there should prove to be, necessarily made all calculations based on interest rates irrelevant. The essence of the matter simply was that the company bound itself to follow, over an indefinite period of years, a course of action which it expected would yield substantial net proceeds, and, in consideration of an immediate payment by the appellant, it promised to pay him a proportion of those net proceeds if and when they should come in.
There was undoubtedly, a profit-making scheme, and it produced a profit. But the scheme was the company’s scheme, and the profit it produced arose to the company and not to the lot-holders.
…
… [A] profit to which s 26(a) applies, since it must be a profit arising to the taxpayer, must be a profit arising from the carrying on or carrying out by him or on his behalf of an undertaking or scheme, that is to say by him or on his behalf either alone or with others. The appellant’s profit cannot be said to have arisen to him from the carrying out by the company of its scheme. The entire net proceeds of marketing the timber constituted a profit which arose therefrom, but it arose to the company, and the payment of the £105 by the company to the appellant was simply the agreed application by the company of a proportionate part of that profit, so that the £30 profit arose to the appellant from his investment and not from the carrying out of the company’s scheme.[41]
[41]Ibid 223.
The scheme promoted by the 1984 prospectus had all of the characteristics identified in Clowes as leading to the conclusion that the investment return in that case was non-assessable. Specifically:
·the operation giving rise to profit was the planting of pine trees, the cultivation of the land and the logging and disposal of timber;
·these operations were conducted by the Forest Company on its own behalf, not on behalf of the investors;
·the profit on the timber operations was a profit which arose to the Forest Company, being the five per cent commission deducted before the net proceeds of sale were paid over to the Trustee;
·the only profit which the investors had in contemplation was an increase in the amount they invested with the Forest Company, when their share of the proceeds became payable;
·the Forest Company bound itself to investors to follow a course of action which, it expected, would yield substantial net proceeds; and
·in consideration of immediate payment by investors, the Forest Company promised that they would receive a proportion of those net proceeds if and when they were generated.
These characteristics are wholly unaffected by the existence of the enlarged trust which the judge in the present case found was intended by the parties. The recognition that the proceeds of sale (of timber or land) were held on trust from the moment of receipt by the Milling Company (in the case of the sale of timber), or by the Forest Company (in the case of the sale of land), would not affect the characterisation of the profit-making scheme as a scheme of the Forest Company itself and not a scheme of the investors. Indeed, so much seems to have been the view of the promoters of the scheme at the time. As we have pointed out, the scheme was promoted on the basis that the investor would acquire a beneficial interest in the land itself. This was not, evidently, seen as putting at risk in any way the non-assessability of the return on investment, a point emphasised in two separate places in the prospectus.
If there were any uncertainty in this regard, it was laid to rest by the other decision referred to in the prospectus, the decision in Milne.[42] The scheme there under consideration was very similar to that considered in Clowes,[43] except that under the terms of the relevant investment contract, each investor acquired a proprietary interest, as tenant in common with the other investors in the plantings of the relevant year, in one acre of freehold land in the planted area. The title to the entire area, however, remained vested in the company.
[42](1976) 133 CLR 526.
[43](1954) 91 CLR 209.
Barwick CJ (with whom Gibbs and Stephen JJ agreed) held that there was no participation by the investors in the company’s business. He said:
That business consisted in the selling … of its covenants, ie its obligations assumed towards the bondholders by the bonds and the trust deed. The bonds were sold at a price for a profit to the company. The profit it sought was quite unrelated to the gain the bondholders stood or hoped to make. In no relevant sense did the bondholders join in that profit scheme of the company.[44]
His Honour continued:
Whether or not an acquisition of an interest in land be regarded as involved in the purchase of a bond, it seems to me that the [investors] had no scheme or plan other than to participate in the result of the company’s covenanted activities on the land by way of capital increment to the amount invested in the bond. Of course, the bondholder hoped for a gain: but, in my opinion, he had no scheme of profit-making.[45]
[44]Milne (1976) 133 CLR 526, 534.
[45]Ibid 535.
The notice of contention
The respondent by notice of contention seeks to rely upon conduct of the Forest Company and the Milling Company, subsequent to the creation of the Trust, as confirming the existence and scope of the trust for which it contends. The conduct to which the respondent points is the past practice of the Forest and Milling Companies of treating the timber sale proceeds on the basis that they constituted trust monies and, in particular, the practice of accounting separately for proceeds and not allowing access to the moneys other than by the respondent.
Like the trial judge, we find it unnecessary to evaluate this evidence for the purposes of our conclusions.
ROBSON AJA:
Introduction
On 25 September 2012, voluntary administrators were appointed to Gunns Limited (‘Gunns’) and its subsidiaries, including SEAS Sapfor Forests Proprietary Limited (receivers and managers appointed) (administrators appointed) (‘the Forest Company’) and SEAS Sapfor Harvesting Proprietary Limited (receivers and managers appointed) (administrators appointed) (‘the Milling Company’).
Following the appointment of the administrators, on 25 September 2012 the applicants, Mark Korda and Bryan Webster, were appointed as receivers and managers of the Gunns companies including the Forest Company and the Milling Company.
The Forest Company was incorporated in 1926, and it described itself as one of the oldest and largest Radiata Pine plantation management companies in Australia. The Forest Company had been distributing proceeds from timber harvesting to investors since 1942.
From about 1964, the Forest Company promoted schemes to investors (called covenantholders) under which the covenantholders purchased a covenant that gave the covenantholders certain rights and interests.[46] The nature of the rights and interests the covenantholders acquired in the scheme – and, in particular, in the plantations and their produce – lies at the heart of the appeal.
[46] The learned trial judge concisely summarised the issues in this proceeding. In these reasons I gratefully make use of his summary.
The Covenants were offered by the Forest Company to investors through the issue of prospectuses from time to time. The prospectuses offered the opportunity to invest in the plantings for a particular year (for example, the 1982 planting year). The prospectuses contained details about the schemes, the application forms for the Covenant(s), and the terms of the covenant acquired by the covenantholders, along with other relevant information.
The Milling Company, a subsidiary of the Forest Company, was engaged to provide felling and milling services and also to market and sell the timber derived from the plantations. Under the schemes, the Forest Company and the Milling Company each had a defined role. Any proceeds received by the Milling Company from the sale of timber (subject to deductions for the Milling Company’s costs and expenses of harvesting and milling and its commission) was to be paid to the Forest Company. After making its own deductions for further costs and expenses, the Forest Company was required to pay the net proceeds to Australian Executor Trustees (SA) Ltd (the Trustee) (the plaintiff, and the respondent to the application for leave to appeal) for the benefit of covenantholders.
The Trustee is and has at all times been a trustee for the covenantholders. Under one particular scheme, the Trustee was appointed the trustee of the Southern Australia Perpetual Forests Trust (the SAPF Trust) under the terms of a trust deed entered into by the Trustee and the Forest Company on 6 March 1964 (the Trust Deed). On the same day, the Trustee entered into an agreement with the Forest Company and the Milling Company (the Tripartite Agreement).
In about 2008, the Forest Company and the Milling Company were taken over by Gunns Limited. After the takeover, each company encumbered its assets (by way of a fixed and floating charge) to lenders to the Gunns Group.[47] As mentioned earlier, in September 2012, the lenders appointed Messrs Korda and Webster as the receivers and managers of the companies in the Gunns Group, including the Forest Company and Milling Company. The receivers and managers assert that the lenders have an interest in the assets and undertaking of each company under their securities.
[47]ANZ Capel Court Limited as security trustee for the Gunns Financing Security Trust holds registered security interests over all or substantially all of the assets and undertaking of each of the Gunns companies including the Forest Company and the Milling Company.
Both parties agree that when the proceeds from the harvesting of the timber (or, where relevant, the sale of plantation lands) is handed to the Trustee under the terms of the SAPF Trust, those moneys are then held on trust for the covenantholders pursuant to the terms of the SAPF Trust.[48] The parties disagree, however, as to whether or not the proceeds from the sale of timber (or, where relevant, the sale of plantation lands) that are either in the hands of the Milling Company or the Forest Company before they are handed to the Trustee under the terms of the SAPF Trust are also held on trust for the covenantholders.[49]
[48]Emphasis added.
[49]Emphasis added.
The respondent contends that, subject to certain deductions that may be made for the benefit of the Forest Company and the Milling Company, the proceeds from the harvesting of the timber (or, where relevant, the sale of plantation lands) are held on trust for the covenantholders when received by either the Forest Company or the Milling Company before they are handed to the Trustee under the terms of the SAPF Trust.[50]
[50]Emphasis added.
The receivers and managers dispute this claim and contend that before the proceeds are passed over to the Trustee as trustee of the SAPF Trust the covenantholders have no proprietary interest in the proceeds of the sale of timber (or, where relevant, from the sale of plantation land). They contend that before passing to the Trustee, the proceeds are subject to the fixed and floating charge.[51]
[51]Emphasis added.
On 15 March 2012, the Forest Company, the Milling Company, and (amongst others) AET (the Trustee) entered into a Tree Sale Agreement for the sale of identified trees defined as the GT Trees (Tree Sale Agreement). Trees owned by the Forest Company formed part of the GT Trees. Under the Tree Sale Agreement, all remaining standing timber owned by the Forest Company was to be sold. The Tree Sale Agreement provided for the payment of a total of $33,999,998 to the Milling Company in its capacity as the Milling Company under the ‘Trust Documents’[52] (Tree Sale Proceeds).[53]
[52]The ‘Trust Documents’ were defined to include the Trust Deed, Tripartite Deed, Covenants and a Settlement Deed dated 14 October 1999: Tree Sale Agreement cl 17.
[53]Tree Sale Agreement sch 3.
Also on 15 March 2012, a number of entities including the Forest Company entered into separate contracts for the sale of identified land defined as the GT Land to Trust Company (Australia) Limited (Land Sale Contracts). The GT Land is situated in South Australia and Victoria. The Land Sale Contracts record that the total consideration payable to the Forest Company was $53,356,000 (Land Sale Proceeds).
The trial judge found that the matter was of some complexity and was finely balanced. Nevertheless, the trial judge found that the covenantholders did hold a beneficial interest in the balance of the proceeds from the harvest of the plantations and the sale of plantation land before the proceeds were handed to the Trustee under the terms of the SAPF Trust.[54]
[54](Emphasis added).
As a consequence, his Honour held and declared that at all material times the Trustee was beneficially entitled to the sum of $33,999,998 paid to the Milling Company pursuant to the Tree Sale Agreement (the Tree Sale Proceeds),[55] less expenses payable to the Forest Company in accordance with the Trust Deed and Tripartite Agreement. His Honour further held and declared that the Trustee was beneficially entitled to that portion of the Land Sale Proceeds[56] referable to the value of the land subject to the 1982 and 1983 planting year schemes,[57] as calculated in accordance with the Trust Deed. The 1982 and 1983 planting year schemes provided that the covenantholders were entitled to the value of the land to the subject of those schemes in addition to 95 per cent of the timber net proceeds.
[55]The Tree Sale Agreement was defined in the affidavit of Mr Webster of 11 November 2012.
[56]The Land Sale Contracts were defined in the affidavit of Mr Webster of 11 November 2012.
[57]And Supplementary Covenants as defined in cl 30 of the Trust Deed.
The applicants seek leave pursuant to s 17A(4)(b) of the Supreme Court Act1986 (Vic) to appeal from these orders. The applicants apply for the appeal to be heard instanter with the applicants’ application for leave to appeal.
The first ground on the draft notice of appeal identifies the essential issues that arise for resolution. The applicants contend that the learned trial judge:
(a) erred in holding that neither the Forest Company nor the Milling Company had any beneficial interest in the land or the trees and that accordingly they had no beneficial interest in the proceeds of sale.
(b) ought to have held that:
(i) the trees and land were owned beneficially by the Forest Company;
(ii) the Trust Deed and Tripartite Agreement both expressly contemplated payments from gross timber proceeds to which the Forest Company and the Milling Company were beneficially entitled;
(iii) the interest granted to the covenantholders was an income stream upon harvesting of the trees, defined as being the net proceeds; and
(iv) the Trust Deed and Tripartite Agreement did not grant the covenantholders any interest in the proceeds of the sale of land.
The proposed second ground of appeal is as follows:
The learned trial judge:
(a)erred in holding that the language used in the Trust Deed and Tripartite Agreement, when assessed in context and circumstances of the transaction, sufficiently indicated an intention to provide, at all stages, protection to the interests of the covenantholders beyond a ‘mere’ contractual obligation to account and that the ‘presumed intention’ of the parties was that the proceeds of the Land Sale Contracts and Tree Sale Contracts would not form part of the assets of either the Forest Company or the Milling Company.
(b)ought to have held that:
(i)a textual analysis of the Relevant Documents revealed no relevant intention that the Milling Company or the Forest Company would hold the proceeds of the Tree Sale Agreement and Land Sale Contracts on trust for covenantholders;
(ii)the absence of an express obligation in the Relevant Documents on the Forest Company and/or the Milling Company to keep the gross timber proceeds separate from the general funds of either of them led to the conclusion that no trust existed or ought to be imputed;
(iii)if it had been the parties’ intention, it would have been open to them to have expressly reposed the obligations of a trustee on the Forest Company and/or the Milling Company at the same time and in the same way as those obligations were in fact expressly conferred upon the respondent (plaintiff); and
(iv)the covenantholders’ rights to the net timber proceeds and value of the land were in covenant, in full satisfaction and discharge of the obligations of the Forest Company.
In substance, the applicants contend that the learned trial judge erred in finding that the covenantholders held any beneficial interest in either the plantation land or the trees or the proceeds of the harvest of the trees or the sale of the land prior to any payment being made by either the Forest Company or the Milling Company to the Trustee of the net proceeds from the sale of the harvest of the trees or the sale of the land.
The parties agree that the issues the Court has to address are limited to the issues that I have described. For the following reasons, I would grant leave to appeal and allow the appeal and set aside the orders and declarations below.
I would order and declare that:
(a) at all material times the Trustee was not beneficially entitled to the sum of $33,999,998 paid to the Milling Company pursuant to the Tree Sale Agreement (as defined in the affidavit of Mr Webster of 11 November 2012) less expenses payable to the Forest Company in accordance with the Trust Deed and Tripartite Agreement; and
(b) the Trustee was not beneficially entitled to that portion of the proceeds of the Land Sale Contracts (as defined in the affidavit of Mr Webster of 11 November 2012) referable to the value of the land subject to the 1982 and 1983 planting year schemes (and Supplementary Covenants as defined in cl 30 of the Trust Deed) as calculated in accordance with the Trust Deed.
The schemes
As indicated above, since approximately 1928 the Forest Company had been promoting schemes involving investors taking an interest in the growing and harvesting of Radiata Pine.
By the 1984 prospectus, the Forest Company promoted a scheme that offered investors Covenants in relation to the 1982 and 1983 planting years. The parties were content to base their arguments on the assumption that the 1984 prospectus was the relevant prospectus (or that its terms did not materially differ from the relevant prospectus) for the plantings that yielded the Tree Sale Proceeds, which were the subject of the first declaration made by the trial judge. The 1984 prospectus is clearly the relevant prospectus in respect of the second declaration, which expressly relates to the 1982 and 1983 planting years schemes.
Identifying the nature of the scheme promoted and organised by the Forest Company is central to the issues before the Court. All that the word ‘scheme’ requires is that there should be ‘some programme, or plan of action.’[58] From the applicants’ point of view, it is necessary to understand the tax incentive that the scheme promoted and the form the scheme needed to take to achieve the desired taxation status. The applicants contend that the scheme was promoted as avoiding s 26 (a) of the Income Tax Assessment Act 1936 (Cth). Under the then s 26(a) the assessable income of a taxpayer included profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme.
[58]Australian Softwood Forests Pty Ltd v AG (NSW) (1981) 148 CLR 121, 129 (Mason J, with whom Gibbs CJ and Stephen J agreed), citing Clowes v Federal Commissioner of Taxation (1954) 91 CLR 209, 225 (Kitto J). See also Mier v FN Management Pty Ltd [2006] 1 Qd R 339, [24] and [27] (Keane JA, with whom McMurdo P and Douglas J agreed); and Huntley v Timbercorp (2010) 187 FCR 151, 165 [54]–[56], (Rares J).
The applicants contend that the scheme involved the Forest Company providing land and newly planted Radiata Pine trees to the scheme, the investors contributing moneys to the scheme, the Forest Company providing the management and forestry services to bring the trees to maturity, the Milling Company harvesting, milling and selling the harvested trees. After the deduction of costs, expenses of the Forest Company and the Milling Company, and a five per cent commission for the Forest Company, the net proceeds from the harvest would be paid to a trustee to be held on trust pending distribution to the investors. Importantly, under the scheme, the applicants contend that the Forest Company and the Milling Company would not act as the agent of the investors (or trustee for the investors). Rather, they would only have contractual obligations to enable the investors to receive the net proceeds tax free.
The Trustee contends that the scheme differed significantly from the description put forward by the applicants, in that the scheme was structured so that the appropriated land and trees were beneficially owned by the covenantholders. Further, the Trustee contends that the proceeds generated by the harvesting, milling and sale of the harvested trees or sale of the appropriated land were beneficially owned by the covenantholders and would thus be held on trust for the covenantholders when received by the Milling Company, before any expenses and commissions were deducted.
The trial judge held that neither the Forest Company nor the Milling Company held any beneficial interest in the land or the trees, and it follows that they had and have no beneficial interest in the fruits or proceeds of sale.[59]
[59]Reasons, [87].
The Trustee contends that the covenantholders held the beneficial interest in the land upon which the tree were grown and that beneficial interest would continue until the covenantholders received the timber proceeds and, where applicable, the value of land that they were entitled to receive under the Covenants.
The prospectus
The 1984 prospectus was published by the Forest Company (Southern Australia Perpetual Forests Limited) (as the Forest Company was then named) and numbered No 125 and dated 31 October 1984. A copy was registered with the National Companies and Securities Commission. General information in the prospectus included that the Forest Company was established in 1928 and was said to be one of the oldest and largest of the Radiata Pine plantation management companies in Australia. The paid-up capital of the Forest Company and the Milling Company amounted to $3,145,796. The Forest Company controlled on its own or leased some 29,190 hectares of Radiata Pine plantations in south eastern South Australia and south western Victoria. The prospectus stated that the net timber proceeds paid to covenantholders from 1942 to 1984 totalled $15,826,967, of which $4,649,102 had been paid in the last five years.
Under the heading of ‘income tax’ the prospectus said that the:
High Court of Australia on two taxation appeals heard in Adelaide on 23 September 1975 held that distributions made by the Company from time to time to Covenantholders in respect of timber proceeds are not assessable income of the Covenantholders under the Income Tax Assessment Act. This confirms a similar decision given by The High Court in 1954.
After giving the details of the Forest Company, the Milling Company and the Trustee, the prospectus introduced the covenant saying:
A COVENANT provides for you an interest in a Radiata Pine plantation entitling you to the net timber proceeds apportionable to your interest in the particular planting year for which you apply. 1982 and subsequent covenants also provide for you an interest in the value of land (see land interest on page 4.).
On the same page, under the heading of ‘Timber proceeds’ the prospectus provides:
The net timber proceeds less the 5% remuneration to the [Forestry] Company and other deductions authorised by the Trust Deed are divided amongst the Covenantholders in accordance with Clause 4 of the Planting Covenant.
On the next page of the prospectus, under the heading ‘Special Information’ there is a box boldly headed ‘Land Interest’ which commences: ‘To enable covenantholders to participate in capital appreciation of the land on which the trees are planted, from 1982 the covenant provides a beneficial interest in the land value.’
The text in the box explains that the relevant land is valued at the time of planting and the total value of the land is then divided by the number of Covenants in the planting year and the land value per covenant is ascertained. A certificate of valuation is provided to the trustee and the value per covenant is included in the covenant pledge given to the covenantholders. When the trees are felled the land is to be revalued by an independent valuer. The value so ascertained is to be paid to the Trustee for distribution amongst covenantholders.
The 1984 prospectus contained three covenant application forms. The first offered an interest in the 1983 planting year for the price of $3,000 per Half Hectare covenant ‘if purchased for cash.’ In a prominent box at the top of the application form are the words ‘INCLUDES LAND INTEREST.’ An alternative offer was made on terms. The application form provided that the undersigned ‘hereby apply for … Half Hectare Covenant(s) in the planning specified in the schedule…’ on the terms specified in the prospectus.
The second covenant application form was in similar terms and also included the prominent box headed ‘INCLUDES LAND INTEREST.’ This application form related to the 1982 planting year. The purchase price was slightly higher at $3,100 per Half Hectare Covenant.
The third application form was headed ‘An opportunity to purchase older plantings.’ It offered Half Hectare Covenants in the 1977, 1978 and 1981 plantings. The purchase price for the each of these plantings was $2,400. The offer did not include an ‘interest in land.’
The covenants
As indicated in the application forms, the terms of the Covenants were stated to be in the prospectus. The terms of the Covenants were also annexed to the Trust Deed. The prospectus sets out under the heading of ‘Planting Covenant’ the covenantholders contract for planting years 1977, 1978 and 1981 (this is the relevant covenant for the third application form). The prospectus sets out separately the planting covenant for the covenantholders contract for planting years 1982 and 1983 (the covenant relevant to the first and second application forms).
Each covenant provided that the terms and conditions contained therein together with the application form signed by the applicant for Covenants should, when such application had been accepted by the Forest Company, constitute the sole and exclusive evidence of the contract between the Forest Company and such applicant.[60]
[60]Clause 14, 1984 prospectus.
Each covenant also provided that the covenant was issued subject to the provisions (by which the covenantholder agreed to be bound) of the Trust Deed between the Forest Company and the Trustee, and subject to the terms (by which the covenantholder agreed to be bound) of the Tripartite Agreement made between the Trustee, the Forest Company, and the Milling Company.
As mentioned, the terms of the Covenants were set out in the prospectus. The Trust Deed also annexed the terms of the Covenants.
The first form of covenant (dealing with the planting years 1977, 1979 and 1981) is not at issue before this Court. However, it is helpful to compare its structure and terms with those of the Covenants at issue in this proceeding. The first form of covenant commenced by stating that the covenant entitled the holder thereof to 95 per cent (subject to the compliance with the terms thereof and to the deduction of any costs or expenses which may be incurred by the Company and chargeable to the covenantholder pursuant to cl 4(a) thereof) of the net proceeds from the timber apportionable to that holder. For example, in the case of a One Acre Covenant, the covenantholder would be entitled to 95 per cent of the proceeds from one acre of the area planted by the Company with trees in the year stated in the application signed by the covenantholder.
Clause 4 provided that the covenant was issued subject to the provisions of the Trust Deed and the Tripartite Agreement. Clause 4 further provided that the covenantholder would receive his or her due proportion of the benefits obtained from the sale of timber harvested by the Milling Company from the planting in respect whereof his or her covenant was issued, in accordance with the terms and conditions set out in the Covenant. All moneys received by the Milling Company from the sale of standing timber or timber felled, cut, milled and manufactured and sold pursuant to the Tripartite Agreement were to be applied as thereafter provided. There was then set out recoupments and payments to be made to the Milling Company and the Forest Company, and the balance then remaining of such moneys was to be paid to the Forest Company in accordance with the terms of the Tripartite Agreement. The clause continued that the Forest Company, after deducting from the remaining balance of such moneys so received by it from the Milling Company certain expenses for labour and materials, was to pay the balance to the Trustee for the covenantholders for distribution by the Trustee amongst the covenantholders entitled thereto in accordance with their respective holdings.
The various deductions and payments that were authorised to be made from the sale proceeds included:
(a) in recouping the Milling Company certain expenses necessarily incurred in connection with the felling, cutting, milling, manufacture and selling of the trees;
(b) in providing an annual amount for depreciation of the Milling Company buildings;
(c) in paying the Milling Company 12 per cent per annum upon the issued and fully paid capital of the Milling Company; and
(d) in paying the Forest Company five per cent of the net balance of such moneys to be retained as its commission and in paying the balance of such moneys to the Forest Company in accordance with the Tripartite Agreement.
The counterargument is that the existence of the express trust once moneys were paid over to the Trustee, and the protection therefore intended to be given to the interests of the covenantholders, supports the proposition that the scheme as a whole was intended to afford the same protection throughout. This approach may derive support from what was said by Spigelman CJ in Salvo, as discussed and relied upon by the learned trial judge.[107]
[107]Reasons, [68].
There is some merit in the counterargument, but in my opinion, it seems an extraordinary omission on the part of the lawyers who drew the detailed and lengthy scheme documents; if it was intended that the covenantholders were to be protected at all stages by the land, trees, harvested trees and proceeds being held on trust, it would have been so stated, especially where an express trust is created in respect of the net sale proceeds once paid over to the Trustee. On my view, the omission to do so is a strong indicator of the intended nature and structure of the scheme.
An equally unlikely omission is the failure of the scheme documents simply to state that the Forest Company holds no beneficial interest in the trees and the land appropriated to the plantings until the trees have been harvested and the net proceeds and/or the increase in value has been paid by the Forest Company to the Trustee. This is particularly so where investors take up Covenants over time.
As mentioned earlier, there is no provision in the scheme documents that identifies a particular piece of land which holds any particular trees allocated to a covenantholder’s Covenant. On the contrary, the covenantholders’ rights are over a proportionate share of a much larger area of land. In those circumstances, where the covenantholders’ rights are held in common with other investors, what is the position before all the Covenants are sold? Do the covenantholders hold the beneficial title in common with the other investors and the Forest Company, and then just in common with the other investors once all the Covenants have been sold? If this was intended, then surely the drafters of the scheme would have said so.
Secondly, the covenant scheme was promoted as one where the net timber proceeds paid to the covenantholders was not assessable under the Income Tax Assessment Act 1936 (Cth). Previously in 1954, the Commissioner of Taxation had sought to assess the payment to investors of the net timber proceeds. In 1976, the High Court of Australia in Milne unanimously approved and followed the decision of Dixon CJ and Kitto J in Clowes, which had been decided in 1954 some ten years before the covenant scheme was commenced under the 1964 Trust Deed.
As discussed above, an important element of the decisions of Dixon CJ and Kitto J was that the lot-holders merely held contractual rights (before the timber sale proceeds were paid to the trustee) and that the company (fulfilling the same role as the Forest Company) was not acting as an agent for the lot-holders in conducting the enterprise.
If the land, timber and timber sale proceeds were held on trust for the covenantholders before the expenses of harvesting, milling and marketing the timber had been met from the timber sale proceeds, (as the respondent contends) the covenantholders ran a risk that any subsequent payment to them of the net timber proceeds may have been assessable under the Income Tax Assessment Act 1936 and liable to income tax. The Commissioner may have been able to argue that there was a common profit making undertaking or scheme between the covenantholders and Forest and/or Milling Companies. This is a considerable risk in terms of the reasoning of Webb J, and a potential risk in terms of the reasoning of Dixon CJ and Kitto J.
In Clowes, the investor was described as the lot-holder; in Milne, the investor was described as the bond holder; and in the case before us, the investor was called the covenantholder. It goes without saying that the tax-free characteristic of the fruits of the investment must have been a significant feature of the investment opportunity offered to investors. In my view, the intention to create only contractual rights to the timber sale proceeds (before being paid to the trustee) is emphasised by the description given to the investment being purchased as a Covenant, that is a contractual right.
Thirdly, the scheme referrable to the 1978, 1979 and 1981 planting years did not contain any provision for the covenantholders to receive the proceeds from the sale of the land or the value of the relevant land. The scheme referable to the 1982 and 1983 years did provide for the covenantholders to receive the value of the freehold land.
Nevertheless, on the respondent’s case in all schemes the covenantholders were the beneficial owners of the land.
The purchase moneys for the 1978, 1979 and 1981 schemes were not used to buy the land or pay for the planting of the trees the subject of those schemes. At the time the relevant Covenants were offered for sale, the land had already been acquired and planted by the Forest Company. Thus the intention to create a trust of the timber sale proceeds could not be readily inferred from the argument that the covenantholders’ moneys had been used to buy the land and plant the trees.
Fourthly, some significant arguments relied on by the respondent to support the creation of an express trust are not valid, or (in my opinion) suggest that the timber sale proceeds were not held on trust before being paid to the Trustee.
Much was made of the obligation of the Trustee to lodge a caveat over the plantation land. The obligations by the Forest Company in relation to dealing with the plantation lands were, however, in my opinion, inconsistent with the covenantholders having any proprietary interest in the plantation land.
The respondent’s case that the covenantholders were the beneficial owners of the land that was appropriated to the relevant year’s planting is not consistent with the essential differences between the 1978, 1979 and 1981 schemes (which did not include the purchase of the land value) and the 1982 and 1983 schemes (which did include the purchase of the land value after the land was cleared). The 1982 and 1983 schemes cost more to investors.
Counsel for the respondent sought to address this discrepancy. He contended that in the case of the 1978, 1979 and 1981 schemes, the covenantholders were the beneficial owners of the land until the timber was harvested. After the timber was harvested, the respondent contended that the beneficial interest in the land reverted to the Forest Company. In my opinion, the explanation is simpler than this construction. The covenantholders held no beneficial interest in the land, and the 1982 and 1983 scheme covenantholders were contractually entitled to the value of the land but not to a proprietary interest in the land.
The agreement of the Forest Company not to sell or encumber the plantation land and the promise to hold the title deeds to the plantation land in a safety deposit box in the joint names of the Forest Company and the Trustee suggest that all the property rights in the plantation lands were vested in the Forest Company. If the covenantholders had proprietary rights, then it would have been appropriate to say so and provide for the lodging of a caveat to protect those rights. The agreement by the Forest Company not to sell or to encumber the plantation land (enforced by removing the certificate of title from the exclusive possession of the Forest Company) suggests that, but for those promises, the Forest Company was free to encumber or sell the plantation lands as it saw fit.
The ‘belt and braces’ argument of the respondent suggests that these terms were included as a matter of caution. In my opinion, it is unlikely that the relevant documents were drafted on the basis that the Forest Company may unlawfully seek to sell or encumber land of which it was intended to be only the trustee. If the parties intended the covenantholders to have a proprietary right, all that was needed was to say so and lodge a caveat. A caveat may only be lodged to give notice and protect a proprietary interest of the caveator in the land. The fact that the covenant provided for the Trustee to lodge a caveat did not by itself create a caveatable interest.
The respondent points to the terms of the Covenants, which provide that the purchase of a covenant entitles the covenantholders to the net timber proceeds. In my opinion, that covenant is entirely consistent with the covenantholder acquiring only contractual entitlements and no proprietary interests. In Clowes, Dixon CJ referred to the lot-holders acquiring an acre of plantation land. His Honour said that the circumstances were that the ‘acre’ was not identified and the acre was merely a portion of a much larger area dedicated to the plantation year. So, the reference to an acre was a numerical reference rather than to a specific identifiable parcel of land. In my opinion, the same observation may be made under the schemes subject to the 1964 Trust Deed. The acre or area that the covenantholder is said to purchase does not refer to a particular identifiable acre or area but is rather a numerical reference that is used in calculating monetary contractual entitlements.
The respondent placed reliance on the invitation to investors to acquire an interest in land. The invitation made it clear that the interest was in the value of the land, and not in the land itself. There was no obligation on the Forest Company to sell the land when the timber was harvested and pay those proceeds to the covenantholder, but rather an obligation to value the land after the timber was harvested and pay the value to the covenantholder.
Further, the respondent’s case is that the land and trees were beneficially owned by the covenantholders under each of the schemes. In the 1982 and 1983 schemes, where the covenantholder did purchase a right to the value of the land, all the relevant documents addressed the value of the land and not the land itself.
In the 1977, 1978 and 1981 planting years, the covenantholders were not offered a ‘Land Interest.’ Nevertheless, the respondent argues that the covenantholders were the beneficial owners of the land until the timber was harvested
In my opinion, the schemes for the 1977, 1978 and 1981 planting years (when contrasted with the offers for the 1982 and 1983 planting years) do not suggest that the covenantholders obtain any beneficial interest in the land appropriated to those planting years.
As for the 1982 and 1983 schemes, 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. Value is a quantitative measure, not a description of an object or a legal right that could be the subject of a proprietary interest. In my opinion, the imprecise language used in the headings does not alter the meaning of the detailed and carefully drafted Covenants. The provision in the 1982 and 1983 schemes requiring the companies to pay the covenantholders the value of the land did not require the beneficial interest in the land to be vested in the covenantholders.
Words suggesting a trust
The respondent relies on several word such as ‘retained’, ‘applied’ and ‘apportioned’ which appear in the Tripartite Agreement and which the respondent says suggest that the timber sale proceeds were held in trust during the harvesting, milling and marketing stage of the production cycle. I accept the applicants’ submissions that these expressions are consistent with the existence of a trust, just as they are consistent with the timber sale proceeds not being held on trust.
Risks
The respondent referred to the commercial risks associated with the schemes. The respondent says that an investor could be presumed to have only assumed the risks associated with the timber growing and harvesting operations, but not the risk of the Forest Company or the Milling Company going into insolvency.
I consider that there is some force in the respondent’s argument that the only risks to which the parties intended the investors be exposed were risks intrinsic to the enterprise being funded by their investment moneys; the enterprise of acquiring, preparing and planting land, tending and maintaining the timber, and finally felling, milling and selling it. There was, however, no obligation on the Forest Company to use the covenantholders’ subscription moneys to acquire land and plant trees. These activities had already been carried out. Nothing was said to suggest that the investment moneys would be 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.
In the course of argument, it was accepted that these two categories of risk could be labelled ‘intrinsic’ and ‘extrinsic’ respectively. According to the respondent’s submission, the clear intention of the parties was that the investors be exposed to intrinsic risks and no other risks. Further, it was submitted the documents made clear that this was the common intention, although the documents did not say so expressly.
On one view, considerations of this kind may be sufficient by themselves to establish the learned trial judge’s conclusion that the investors’ interests were to be ‘protected at all stages’.[108] That means, of course, protected against risks other than the intrinsic risks associated with timber production.
[108]Reasons, [76].
Under cl 2(d)(i) of the Trust Deed, the Forest Company agreed not to sell land of which it is the proprietor nor to encumber such land without the consent of the Trustee. Such a provision might have been considered reasonable protection against ‘extrinsic risk.’
The position of the schemes subject to the 1964 Trust Deed can be contrasted with the more recent timber plantation schemes structured as managed investment schemes under the Corporations Act2001 (Cth). Under these schemes, such as those run by Timbercorp and Great Southern, the tax implications dictated a different scheme to the 1964 Trust Deed scheme, where steps were taken to have the Growers’ (the equivalent of the covenantholders’) financial contributions to the scheme treated as income tax allowable deductions. To achieve this, the Growers were given a proprietary interest in a specific area of land with specific trees planted on them, rather than merely a contractual right to a numerical proportion of the output from a much greater area. This was done so that the Grower could claim to be a grower and producer of timber, and thus be entitled to tax deductions as a grower and producer of trees and carrying on business as such.
The contrast with the schemes under the 1964 Trust Deed promoted by the Forest Company is stark. Under these schemes, no attempt was made to characterise the covenantholder as a grower or producer of timber.
Arguments in favour of a trust
After taking into account all the submissions of the respondent, I accept that there are aspects of the schemes that can be construed in favour of inferring an intention to create a trust of the timber sale proceeds and the land sale proceeds before being paid to the respondent.
The covenant application form for the 1977, 1978 and 1981 schemes indicated that the offer to covenantholders was to purchase older plantings. The concept of a purchase is consistent with the covenantholder acquiring an item of property. The form referred to the payment of the purchase price. The application forms for the 1982 and 1983 schemes also referred to payment of the purchase price, and that the purchase includes ‘land interest.’
The prospectus described a covenant as providing ‘an interest in a Radiata Pine plantation.’ The ‘Special Information’ in relation to the trees planted from 1982 was that the covenant provided a ‘beneficial interest in the land value.’ These interests were to be protected by a caveat lodged by the Trustee ‘prohibiting and dealing therewith except in the interests of the covenantholders in such lands.’[109]
[109]Covenants, [6] and [8].
The investigating accountant’s report expressly referred to the covenantholders’ interest in the freehold or perpetual lease being secured by caveat. It is notorious that caveats can only be lodged in relation to proprietary interests in land.
The introductory words of the covenant (for the 1982 and 1983 planting years) began expressly by providing that the covenant entitled the holder to the value of the freehold land and to 95 per cent of the net proceeds of the timber. The introductory words of the covenant applicable to the 1977, 1978 and 1981 plantings likewise began by providing that the covenant entitled the holder to 95 per cent of the net proceeds of the timber. This description of the scheme does not support the argument one way or the other.
There is some merit in the submission that it makes little commercial sense for the net timber proceeds to be transformed from being the beneficial moneys of the Milling Company or the Forest Company to trust moneys when passed by the Milling Company to the Trustee.
The Forest Company was identified as the manager of the Trust. As the Trustee was the manager of the express trust created by the Trust Deed, this suggests that there was another trust of which the Forest Company was the trustee; this supports the argument that the timber sale proceeds and the land sale proceeds were held on trust.
The interests and expectations of the parties are relevant. The covenantholders’ expectation was to receive the timber sale proceeds less the identified deductions to be made to the Milling Company and the commission payable to the Forest Company. The reference to commission may be said to be consistent with the moneys being those of the covenantholders.
The Tripartite Agreement expressly states that the produce of the timber harvest is the property of the covenantholders. This is obviously a strong argument in favour of the trust case.
There does not appear to be any provision for the Milling Company to purchase the timber. Rather, express provision was made for the Milling Company’s expenses to be deducted from the timber sale proceeds. Deducting expenses from the timber sale proceeds is not an exercise that normally would be conducted if the Milling Company had acquired the timber. The model of deducting defined expenses from a fund is consistent with the proceeds being the property of others and inconsistent with the proceeds belonging to the Milling Company. On the other hand, there are sound arguments for the Forest Company to be treated as the owner of the timber grown on its land.
This view that the proceeds were the property of others is reinforced by the language in the relevant documents that treated the timber sale proceeds as a fund (that is, an item of property) rather than a quantification of money.
The respondent produced a flow chart that identified ten steps in the flow of funds derived from timber and land sales. The trial judge set them out as follows:
(a) Stage 1 — the Forest Company issues prospectuses to the Covenantholder.
(b) Stage 2 — Covenantholder completes required form and pays money to the Forest Company for their investment (Tripartite Agreement clause 20D).
(c) Stage 3 — the Forest Company uses the Covenantholder’s money to purchase or lease land and plant trees (Trust Deed clauses 3(a), 12(a) and 24).
(d) Stage 4 — the Forest Company maintains the tree plantation for between 20 and 25 years (Trust Deed clauses 3(a), 12(a) and 24).
(e) Stage 5 — the Forest Company directs the Milling Company to harvest the trees. Milling Company harvests the trees (Tripartite Agreement clauses 2,3,6).
(f) Stage 6 — the Milling Company has the exclusive right to sell standing timber and pay the purchase price to the Forest Company (Tripartite Agreement clause 12).
(g) Stage 7 — Monies are received by the Milling Company from harvesting activities prior to September in any year. Milling Company then deducts 20% of the proceeds plus certain costs (Tripartite Agreement clause 9(a)).
(h) Stage 8 — the Milling Company pays balance of proceeds to the Forest Company in five tranches (April 15%, May 15%, June 15%, July 15%, August 40%) in the year following the 30 September date (Tripartite Agreement clause 9(e), 9(j)).
(i) Stage 9 — the Forest Company pays monies received from Milling Company to AET within 30 days of receipt from the Milling Company in the same five tranches and in the same proportions (Tripartite Agreement clause 10A, Trust Deed clause 12(d)).
(j) Stage 10— AET distributes the monies to Covenantholders (Trust Deed clause 12(e)). [110]
[110]Reasons, [17].
Stages 1–4 involved the planting of the trees and the purchase by investors of Covenants in respect of those trees.
Stages 5–7, involved the harvesting and sale of the produce. Again the language used at this stage suggests that a fund (that is, an item in property) was created rather than debits and credits in contractual accounts. The Trust Deed uses the expression ‘balance of the proceeds’ and ‘balance of moneys.’ The Tripartite Agreement refers to the ‘balance of the moneys’ being ‘allocated’ and ‘apportioned.’ There is no reference to a sum due (a contractual notion).
Stage 8 involves the payment by the Milling Company to the Forest Company of the balance then remaining of such moneys.
Stages 9–10 involve the payment by the Forest Company to the Trustee for distribution to the covenantholders ‘entitled thereto’ in the manner provided by the Trust Deed. The Tripartite Agreement, however, does refer to paying the balance to the Trustee which is consistent with a debt.
Taken together the stages may or may not fit together to suggest the creation of the Trust of which the Forest Company is said to be manager.
Conclusion
As mentioned above, I agree with the learned trial judge that the matter is not free from difficulty. In my opinion, however, the matters that I referred to as suggesting that the presumed intention of the parties was not to establish a trust outweigh those that suggest to the contrary.
Accordingly, after careful consideration I have, with respect, come to a contrary view to that of the learned trial judge, and I find that the timber sale proceeds and the land sale proceeds were not held on trust by either the Milling Company or the Forest Company before being paid to the Trustee as the net timber proceeds or the net land proceeds under the terms of the Trust Deed.
Accordingly, I would allow the applicants leave to appeal and order that the appeal be heard instanter and that the proposed notice of appeal stand as the notice of appeal.
I would uphold grounds 1 and 2 of the notice of appeal and order as follows:
1 That the appeal be allowed.
2 That paragraphs 1, 2 and 3 of the orders made by the Honourable Justice Sifris dated 1 March 2013 be set aside and that the following orders be made in lieu thereof:
(a) The respondent is not and at all material times was not beneficially entitled to the sum of $33,999,998 paid to the Milling Company pursuant to the Tree Sale Agreement (as defined in the affidavit of Mr Webster of 11 November 2012) less expenses payable to the Forest Company and the Milling Company in accordance with the Trust Deed dated 6 March 1964 and Tripartite Agreement dated 6 March 1964.
(b) The Trustee is not and at all material times was not beneficially entitled to any portion of the proceeds of the Land Sale Contracts (as defined in the affidavit of Mr Webster of 11 November 2012) referable to the value of the land subject to the 1982 planting year, 1983 planting year and Supplementary Covenants (as defined in cl 30 of the Trust Deed).
I would hear the parties on the question of costs.
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