Re Gunns Finance Limited (in liq) (recs and mgrs apptd); (No 2)

IN THE SUPREME COURT OF VICTORIA

NOT RESTRICTED

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL COURT

CORPORATIONS LIST

No. S CI 2013 2774

RE GUNNS FINANCE LIMITED (IN LIQUIDATION) (RECEIVERS & MANAGERS APPOINTED)
GUNNS FINANCE LIMITED (IN LIQUIDATION) (RECEIVERS & MANAGERS APPOINTED) (ACN 091 861 700)	First Plaintiff
MARK KORDA AND BRYAN WEBSTER in their capacity as joint and several Receivers and managers of GUNNS FINANCE LIMITED (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) (ACN 091 861 700)	Second Plaintiffs
v
WA BLUE GUM LIMITED (ACN 060 179 982)	First Defendant
MACQUARIE FORESTRY SERVICES PTY LTD (ACN 093 752 946)	Second Defendant
GUNNS PLANTATIONS LIMITED (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) (ACN 091 232 209)	Third Defendant
DANIEL MATHEW BRYANT, IAN MENZIES CARSON and CRAIG DAVID CROSBIE in their capacity as joint and several Liquidators of GUNNS PLANTATIONS LIMITED (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) (ACN 091 232 209)	Fourth Defendants

and

No. S CI 2013 3272

JOHN B SALMON	First Plaintiff
GUY DOBNER	Second Plaintiff
LINDSAY JOHN DOBSON	Third Plaintiff
v
WA BLUE GUM LIMITED (ACN 060 179 982)	First Defendant
GUNNS PLANTATIONS LIMITED (ACN 091 232 209) (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED)	Second Defendant

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JUDGE:	ROBSON J
WHERE HELD:	Melbourne
DATE OF HEARING:	1 July 2013
DATE OF JUDGMENT:	16 July 2013
CASE MAY BE CITED AS:	Re Gunns Finance Limited (in liq) (recs & mgrs apptd); and Re Gunns Plantations Limited (in liq) (recs & mgrs apptd) (No 2)
MEDIUM NEUTRAL CITATION:	[2013] VSC 365

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CORPORATIONS – Managed Investment Scheme – Forestry scheme – Appointment of new Responsible Entity – Responsible entity leases forestry lands from third party landowners and subleases to growers – Whether head leases are scheme property – Whether liability of outstanding accrued rents and ongoing rents becomes responsibility of new Responsible Entity – Whether responsible entity has right of indemnity over scheme property for rents due to third party landlords – Held: liabilities for outstanding accrued rents and ongoing rents would become liability of new responsible entity – Corporations Act 2001, s 9, s 601FS, s 601FT.

TRUSTEES - Managed Investment Scheme – Forestry scheme –Trustees right of indemnity – Whether trustee’s right of indemnity modified or abrogated by scheme constitution or s 601GA of Corporations Act 2001.

CONSUMER LAW – Misleading and deceptive conduct – Whether explanatory memorandum issued to growers by prospective new responsible entity misleading or deceptive – Misleading and deceptive conduct by omission – Significance of disclaimers – Held: explanatory memorandum misleading and deceptive s 18 Australian Consumer Law.

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APPEARANCES (No. S CI 2774 of 2013):	Counsel	Solicitors
For the Plaintiffs	P.E. Anastassiou SC with K.E. Foley	Ashurst
For the First and Second Defendants	G. T. Bigmore QC with S. Hopper and C. R. Brown	Johnson Winter & Slattery
For the Third and Fourth Defendants	J.G. Santamaria QC with G.J. Ahern	Arnold Bloch Leibler

APPEARANCES (No. S CI 3272 of 2013):	Counsel	Solicitors
For the Plaintiffs	M.A. Robins SC with C.J. Gunson	Foster Nicholson Jones
For the First Defendant	G. T. Bigmore QC with S. Hopper and C. R. Brown	Johnson Winter & Slattery
For the Second Defendant	J.G. Santamaria QC with G.J. Ahern	Arnold Bloch Leibler

TABLE OF CONTENTS

The proceedings.......................................................................................................................... 2
Introduction to 2774.................................................................................................................. 2
Background................................................................................................................................ 3
Current Status of Gunns Woodlot Leases................................................................................. 6
Communications to growers in respect of decision to sell trees................................................. 6
The involvement of Macquarie.................................................................................................. 7
Macquarie response to the liquidators Proposal........................................................................ 7
The Macquarie Proposal............................................................................................................ 8
The Resolutions and restructure proposal............................................................................... 11
The issues................................................................................................................................. 13
Introduction to 3272 (the Land Owners claim)...................................................................... 15
GPL argues application is premature...................................................................................... 16
Are the applications in 3272 justiciable or premature for decision?....................................... 16
The issues in 3272.................................................................................................................... 16
Land Owners’ contentions....................................................................................................... 17
WABG contentions.................................................................................................................. 18
GPL’s position......................................................................................................................... 18
The liquidators’ submissions on issue of prematurity............................................................. 18
Conclusion on prematurity...................................................................................................... 21
The arguments on 3272........................................................................................................... 22
The Land Owners’ submissions............................................................................................... 25
WABG response to the Land Owners’ submissions................................................................ 27
GPL’s submissions................................................................................................................... 29
The head leases form part of the scheme property for the purposes of s 601FS........................ 30
Are the head leases scheme property?...................................................................................... 33
The scheme property is held on trust....................................................................................... 38
A trustee’s right to indemnity................................................................................................. 38
Discussion on submissions of GPL, the Land Owners, and WABG....................................... 44
Section 601FS(2)(d) does not apply to obligations for rent..................................................... 45
Conclusion............................................................................................................................... 47
Relevance to 3272.................................................................................................................... 48
Declarations sought by Land Owners..................................................................................... 48
Misleading and deceptive conduct in 2744............................................................................. 49
The legal principles.................................................................................................................. 51
Omission may constitute misleading and deceptive conduct.................................................. 52
GPL and liquidators’ submissions........................................................................................... 55
The receivers’ submissions concerning the alleged misrepresentations concerning effect of s 601FS.................................................................................................................................................. 63
Macquarie/WABG response.................................................................................................... 66
Disclaimers.............................................................................................................................. 69
Discussion of claims concerning s 601FS................................................................................ 69
Conclusion............................................................................................................................... 73

HIS HONOUR:

The proceedings

There are two proceedings before the Court. The first, 2774 of 2013, is an application by Gunns Finance Limited (in liquidation) (receivers and managers appointed) (GFL), brought by its receivers and managers who are also the second plaintiff (the receivers). This application challenges a restructure proposal of six managed investment schemes being put forward by WA Blue Gum Limited (WABG) and Macquarie Forestry Services Pty Ltd (Macquarie), the first and second defendants in 2774 (for convenience I may where appropriate refer to these two parties as Macquarie/WABG). In 2774, Gunns Plantations Limited (in liquidation) (receivers and managers appointed) (GPL) and the liquidators, Messrs Bryant, Carson and Crosbie (the liquidators), are the third and fourth defendants.

The second proceeding, 3272 of 2013, is brought by Mr Salmon and several other land owners (the Land Owners) against WABG and GPL seeking a declaration, inter alia, that upon WABG becoming the responsible entity of any of the Woodlot schemes, the forestry fees owed to the farmer landowners shall be liabilities of WABG pursuant to s 601FS of the Corporations Act 2001 (the Act).

Introduction to 2774

In setting out the introduction to 2774, I have used portions of the background to 2774 from the plaintiffs’ written submissions, with which the Macquarie/WABG do not quibble.

By an originating process dated 31 May 2013, the plaintiffs seek declaratory relief in relation to various matters arising from meetings held on 28 May 2013 in relation to the proposed restructure of six managed investments schemes of which GPL is the current responsible entity.

At the meetings, members of the schemes passed four resolutions which purport to give effect to the proposed restructure. The restructure proposal is conditional upon the satisfaction or waiver of various conditions precedent. If the restructure goes ahead, WABG is to be the new responsible entity and Macquarie is to be the new manager of the schemes.

The receivers are the joint and several receivers and managers of Gunns Limited (Receivers and Managers Appointed) (In liquidation) (Gunns) and its wholly owned subsidiaries (the Gunns Companies), including GFL and GPL (in its own capacity but not as the responsible entity). The receivers were appointed by the security trustee for the Gunns Financing Security Trust, which holds a registered security interest over all or substantially all of the assets of the Gunns Companies, including GPL and GFL. GFL also holds a substantial interest as a grower in the schemes.

By their originating process, the plaintiffs seek declaratory relief in relation to various matters arising from the meetings, including that:

(a)the resolutions passed by members at the meetings were invalid because material made available to them prior to the meetings was in contravention of s 18 of the Australian Consumer Law (ACL);[1] and
(b)the conditionality of the resolutions rendered them ineffective and/or invalid for the purposes of Part 5C of the Corporations Act 2001 (Cth).
[1]Competition and Consumer Act 2010 (Cth), sch 2. The plaintiffs also rely on the proscriptions against misleading or deceptive conduct in s 1041H of the Corporations Act and s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth).

Background

On 25 September 2012, administrators were appointed to Gunns and each of its wholly owned subsidiaries (including GPL and GFL) pursuant to s 436A of the Corporations Act. The Gunns Group comprises 36 companies, including GPL. The receivers were appointed on the same day.

On 5 March 2013, the administrators became liquidators as a result of creditor resolutions under s 439C of the Act.

GPL is the responsible entity of a number of registered managed investment schemes:

(a) Gunns Plantations Woodlot Project 2000;

(b) Gunns Plantations Woodlot Project 2001;

(c) Gunns Plantations Woodlot Project 2002;

(d) Gunns Plantations Woodlot Project 2003;

(e) Gunns Plantations Woodlot Project 2004;

(f) Gunns Plantations Woodlot Project 2005;

(g) Gunns Plantations Limited Woodlot Project 2006;

(h) Gunns Plantations Limited Woodlot Project 2008; and

(i) Gunns Plantations Ltd Woodlot Project 2009,

(collectively, Gunns Woodlot Schemes). Investors in the schemes are known as “growers”.

Pursuant to a Facility Agreement dated 31 January 2001, a syndicate led by the Australia and New Zealand Bank provided credit facilities to the Gunns Group. The loan was secured by a charge over “all present and after-acquired property - no exceptions.”

Also on 25 September 2012, as a result of an event of default under the Facility Agreement, Messrs Mark Korda and Bryan Webster of Korda Mentha were appointed as receivers and managers to the Gunns Group (receivers) by ANZ Capel Court Limited in its capacity as security trustee for the Gunns Financing Security Trust pursuant to a security trust deed dated 29 May 2001. The security trustee holds a registered security interest over all or substantially all of the assets and undertakings of each of the Gunns Companies pursuant to two charges.

A number of growers borrowed money from GFL to fund their investment in the schemes. Those growers granted a mortgage of the whole of their interest in the relevant schemes to GFL. As a result of the failure of some of these growers to meet their loan commitments, GFL has enforced a number of mortgages and has thereby acquired further interests as a grower in the schemes. The receivers’ appointment includes those interests.

GFL now holds a greater overall interest in the schemes than any other individual grower. The receivers were not appointed to GPL in its capacity as the responsible entity of the schemes. Many of the leases for the land on which the schemes are operated are between Gunns Limited and GPL.

On 8 November 2012, the receivers wrote to the liquidators claiming various breaches of the Gunns Limited leases.

During the period of administration, the receivers were prevented from re-taking possession of the land the subject of the Gunns Limited leases pursuant to s 440B of the Act. When GPL was placed into liquidation on 4 March 2013, the risk that the receivers would take possession of the land resumed. Since that time the liquidators were in without prejudice discussions with the receivers in respect of the receiver lease default notices.

On or about 5 April 2013, the liquidators received an offer from the receivers whereby Gunns Limited agreed not to terminate the Gunns Limited leases subject to some conditions. On 5 April 2013, the liquidators accepted that offer. The agreement is known as that standstill agreement.

From about 15 October 2012 to 5 April 2013, the liquidators engaged in a campaign seeking expressions of interest to replace GPL as the responsible entity . On 12 November 2012, the liquidators received two confidential draft final proposals from Macquarie Bank Ltd and WABG.

From about 4 February 2013, the liquidators were in negotiations with Macquarie about its proposal.

On 26 March 2013, the liquidators received the last draft of the Macquarie proposal. The liquidators held serious concerns about Macquarie’s proposal. The liquidators did not consider a meeting of growers could be convened to consider the proposal.

Current Status of Gunns Woodlot Leases

From at least July 2012, many landowners have sent default notices to GPL in respect of unpaid rental amounts under the Gunns woodlot leases.

As of June 2013, over 1,500 default notices have been issued to GPL based on outstanding rent under the Gunns woodlot leases. The number of default notices is more than the number of leases as some landlords have issued multiple default notices in respect of the same lease. Based on these default notices, the liquidators calculate up to approximately $15 million in rent is currently outstanding (depending on whether the termination notices issued by landlords are valid and consequently whether rent has continued to accrue).

On the records available to the liquidators, they estimate that GPL’s ongoing rental obligations in respect of the Gunns woodlot schemes are accruing at approximately $1 million to $1.2 million per month (depending on whether the termination notices issued by landlords are valid and consequently whether rent has continued to accrue).

Communications to growers in respect of decision to sell trees

On 6 April 2013, the liquidators wrote to the growers informing them that they had determined that a sale of the trees was in their best interests and that the liquidators intended to apply to the Court for directions that they were justified in doing so.

On 14 April 2013, the liquidators wrote to growers to update them on why they considered that the sale of the trees was in their best interests. They addressed the following matters:

(a)economic returns were assessed as being less beneficial under the alternate responsible entity proposal;
(b)proposed amendments to constitutions may not be in the interests of GPL scheme growers;
(c)concerns existed in relation to the alternate responsible entity proposal timing and impact to the schemes;
(d)the ongoing risk of lease terminations under both an alternate responsible entity proposal versus the standstill agreement under a court approved sale process;
(e)concerns in respect of impacts on grower loans/finance; and
(f)concerns in respect of the uncertainty of the ongoing alternate responsible entity.

On 19 April 2013, the liquidators wrote to growers providing information on the most frequently asked questions that have been received in respect of the letters to growers.

The involvement of Macquarie

During 2012 and 2013, the liquidators sought to sell the plantations. Macquarie was an interested purchaser and as such was given access to information about the plantations. Macquarie decided it did not wish to pursue a purchase.

On or about 5 April 2013, Mr Peter Lucas, an executive director of Macquarie Group and a director of Macquarie received a letter from Daniel Bryant (one of the liquidators), informing him that the liquidators intended to seek Court orders to allow him to join with the receivers and attempt to sell the Gunns schemes’ trees together with the land that they stand on.

Macquarie response to the liquidators Proposal

The liquidators’ intention is to seek to sell all of the scheme assets on land owned by Gunns group companies in a joint marketing process with the receivers. Mr Lucas says that the apparent mechanism for determining the value of the Gunns Scheme assets is to request buyers to state which part of their overall purchase price should be attributed to the trees.

Mr Lucas says that it is not clear what practical alternatives will be available to the liquidators, particularly since, as Mr Lucas says, the schemes are unfunded. Given that it appears that the liquidators have no alternative but to sell the Gunns scheme assets, Mr Lucas believes that the sale process will be perceived in the market place as a forced sale or distressed sale which will likely result in any potential purchaser paying much less than market value for the Gunns scheme assets.

Mr Bryant states that he plans to amend the constitution of each Gunns scheme so that GPL has the express right to terminate, relinquish or surrender the various scheme documents. Mr Lucas says that Mr Bryant does not set out the basis on which growers will retain an interest in the proceeds (if any) of the sale process by which they may be paid. Mr Lucas says that there is therefore inadequate information in order to determine the likely outcome for the growers in relation to the liquidators’ proposal.

Mr Bryant says that the sale process is expected to be completed in 4 to 5 months. Mr Lucas says, however, that Mr Bryant does not state the expected timeframe for growers to be paid, if at all. Mr Lucas says that in previous situations, distributions to growers from a liquidation of agricultural scheme assets have taken many years to eventuate. Mr Lucas says that, for example, in the Willmott Forests liquidation, growers are still waiting for final distributions more than 25 months after the date the power of sale was approved, and based on the above, he holds serious concerns about the prospects for growers returns (if any) under the liquidators proposal.

The Macquarie Proposal

In April and May of 2013, Macquarie received various correspondence from growers or their advisers about correspondence received from the liquidators and receivers in April and May 2013.

The notices of meetings were issued on 29 April 2013. As well as the relevant notice, growers were provided with an explanatory memorandum concerning the restructure proposal. Growers were also directed to the Macquarie Bank website, which they were told contained additional information about the proposed restructure. The material on the Macquarie Bank website included an “investor cash flow calculator” (the Macquarie calculator) and a report by Industry Edge. The Industry Edge report, although not referred to by name, is the report described in the explanatory memoranda as an independent expert report which would comment on the reasonableness of certain estimates made by Macquarie and used in the Macquarie calculator.

When the notices of meeting were issued, growers were not provided with copies of the proposed amended constitutions for the schemes. The proposed amended constitutions were made available on the Macquarie Bank website on or about 21 May 2013.

Prior to the grower meetings, the growers were provided with material by the receivers and liquidators including:

·     Regular email correspondences setting out the receivers’ and/or liquidators’ opposition to the restructure proposal;
·     Letters from the liquidators to the growers setting out the alleged benefits of the Liquidator proposal relative to the restructure proposal which highlighted, inter alia, the allegedly materially lower fees that would be incurred by growers under the liquidators proposal;
·     Teleconferences held and call-centre facilities provided by the liquidator with growers in relation to the restructure proposal;
·     Letters from the receivers to those growers who are GFL borrowers advocating a “no vote”, including pre-populated “no vote” proxy forms sent to GFL borrowers; and
·     Correspondence from the receivers to those growers who are GFL borrowers to discourage a “yes vote” by purporting to ‘call-in’ loans for GFL borrowers in the event that the restructure proposal succeeded.

On 27 May 2013, in light of the content of the explanatory memoranda and the proposed amendments to the scheme constitutions, the plaintiffs sought an urgent interlocutory injunction to restrain the meetings, which were to be held the following day. The application was based on the plaintiffs’ contention that the material provided to members was misleading or deceptive or likely to mislead or deceive in contravention of s 18 of the ACL (and related provisions). The application was heard and determined by Pagone J that day. His Honour held that the plaintiffs had “a strong case that [the] information memorandum in its present form is false and misleading”.[2] However, his Honour considered that in view of the undertakings given by senior counsel for the defendants to the application, the balance of convenience favoured a refusal of the application.[3] Macquarie/WABG do not agree with Pagone J’s observation and say that his Honour’s remarks were made without the benefit of responsive material from the first and second defendants.
[2]Gunns Plantations Ltd v WA Blue Gum (Unreported, Supreme Court of Victoria, Pagone J, 27 May 2013) (Reasons of Pagone J), [21].
[3]Ibid, [22].

The undertaking given is of relevance to the present proceedings and was in the following form: “that the defendants would not hereafter contend that the resolutions [put to the meetings of growers the subject of the plaintiffs’ application] would be invalid, if it were held hereafter that the resolutions had been adopted upon material, found to be false and misleading, contrary to the provisions … upon which the plaintiffs rely.”[4] Accordingly, if I find that the material put to the growers was misleading or deceptive or likely to mislead or deceive in contravention of s 18 of the Australian Consumer Law or related provisions, the effect of the undertaking is that the Court should make a declaration that the resolutions were invalid.
[4]Ibid, [18].

After the hearing of the interlocutory injunction application, changes were made to the amending deeds which met some (but not all) of the allegations raised by the plaintiffs at the hearing of the interlocutory injunction application. The misleading or deceptive conduct claims raised by the plaintiffs in this proceeding are not confined to the matters agitated at the hearing of the interlocutory injunction application.

The Resolutions and restructure proposal

The four resolutions passed by members are set out in the notices of meeting. In broad terms, the four resolutions provide for the restructure in the following way: approval of the restructure proposal (resolution 1); approval of amendments to the scheme constitutions to implement the restructure (resolution 2); removal of the current responsible entity (resolution 3); and appointment of a new responsible entity (resolution 4). As stated above, under the restructure, WABG is to be the new responsible and Macquarie is to be the new manager of the schemes.

Each resolution is expressed to be “subject to … satisfaction or waiver of the conditions precedent referred to in section 6 of Part A of the explanatory memorandum accompanying the notice of meeting”.

Section 6 of Part A of the explanatory memorandum is styled “conditions precedent for the restructure proposal”. Before setting out the conditions precedent, it states that “the following are conditions precedent that need to be satisfied (or waived), before the new responsible entity will unconditionally consent to become the scheme’s new responsible entity and implement the restructure proposal.” Eight conditions precedent are thereafter described.

Growers were told that the restructure proposal aimed to “improve [their] investment return prospects”. This was to happen in three key stages. First, the restructure proposal aimed to “stabilize [the] scheme[s]” through appointing a new responsible entity and manager. Next, the manager would “test the market”. This step was explained to growers in the following way:

After ‘cleaning up’ the scheme assets to improve ‘saleability’, the manager will work with all relevant parties to try to source a cash bid for all of the assets in your scheme (cash offer), ideally this will be achieved in calendar year 2013.

Third, growers were told that if a credible cash offer were received, a second vote would be conducted to allow growers to choose whether to accept it or to continue the relevant scheme to harvest.

A central element of the restructure proposal was that it was said to give growers a choice. The manager would aim to source an attractive cash offer to enable growers to exit the schemes. However, if such an offer were not available, they had the option of continuing to harvest. Growers were told that this put them “in a far stronger commercial position” and “materially improves [their] prospects relative to what can be achieved by the liquidators”.

Critically, growers were told that the restructure proposal did “not envisage carrying forward all existing leases” held by the incumbent responsible entity , but instead “the continuing land area will reduce to approximately 14,000 hectares” (the continued area). By way of explanation, growers were told that “for a significant amount of the land” it was “not practical or (in some cases) advantageous to continue growing timber for harvest”. Only “economically attractive” leases would form the continued area of the schemes. Growers were told that, going forward, Macquarie would be responsible for paying the rent with respect to the “peppercorn leases” with Gunns or its associated entities that have been included as part of the continued area, but neither WABG nor Macquarie proposed to fund the “commercial-rate lease rental”.

Under the restructure proposal, growers were provided with two investment options. Under option A (contributory growers), growers will be required to make an upfront payment and annual contribution payments. Under option B (deferred growers), growers will not be required to make any cash payments but will have fees deferred and deducted from gross harvest or sale proceeds. It should be noted that the growers have now made their election between the two investment options (the percentage split between the two options for each scheme was published on the Macquarie Bank website).

The issues

The first ground of objection relates to Macquarie’s proposal to not take over any part of the property leased by GPL for the six schemes that is not subject to peppercorn rental. In other words, Macquarie propose not to take over any land leased by GPL for all six schemes which is subject to commercial rental obligations. The proposal provides that this area amounts to about ten per cent of the area of land leased for the scheme plantations. The land that is not excluded is defined as the continuing land.

Macquarie proposes that all growers will equally bear the consequence of excluding the plantations on this excluded land. That is, the entitlement of growers will not depend on whether or not their particular trees were on or not on the excluded land. Macquarie says that the result will be that each grower will participate in the return from 0.9 of a hectare for each hectare they would have previously participated in.

The plaintiffs contend that contrary to the representations in the proposal under s 601FS of the Act all leases held by GPL will novate to WABG as the new responsible entity. Further the plaintiffs contend that that the new responsible entity will be liable for past and future rental obligations on the excluded land or that there is a significant risk it will be liable. The plaintiffs say that the predictions made by Macquarie as to possible returns to the growers in the six schemes is calculated on the assumption that WABG will not be liable for these past and future rental obligations on the excluded land. The plaintiffs say that the proposal has not quantified this risk and the impact it would have on the viability of the proposal.

The plaintiffs accept that Macquarie has disclosed that there is a risk that if appointed responsible entity , WABG may be liable for past and future rent, but, as mentioned, Macquarie has not made any attempt to project the financial consequences if WABG is liable for past or future rental.

The plaintiffs contend that Macquarie engaged in misleading or deceptive conduct by omitting certain information from its explanatory memorandum. In opening argument, the omissions were particularised as follows:

(1)The growers were not told in any meaningful way of the substantial risks that liabilities for rent accrued and owing by the current responsible entity (GPL) would likely novate to the new responsible entity pursuant to the provisions of s 601FS of the Act;
(2)The growers were not told of the certitude that ongoing liabilities or obligations for rent and maintenance would become ongoing obligations of the new responsible entity .
(3)The growers were not told that the effect of the latter (that is to say, the novation of ongoing liabilities or obligations) would render the schemes cash flow negative after the first year of operations under the proposed new regime.
(4)The growers were not told of the magnitude of ongoing liabilities for rent and maintenance and thus could not have appreciated the material adverse impact those liabilities would have upon them.
(5)The growers were not told that the magnitude of those liabilities would necessarily result in the growers being required to contribute more to the funding of the schemes.
(6)The growers were not told in the explanatory material about the criticality of a certification known as FSC certification.

The plaintiffs’ written submissions particularise the alleged misleading and deceptive conducts in respect of this aspect as follows:

(1)Failure to accurately describe the effect of s 610FS of the Act.
(2)Misleading statements concerning s 601FS of the Act in context of rent arrears claims and ongoing rent liabilities.
(3)Failure to inform growers of the magnitude of potential claims for rent arrears
(4)Failure to inform growers of the magnitude of the schemes’ total outstanding liabilities and ongoing liabilities.

The plaintiffs further particularised their allegations filing an amended particulars of paragraph 1 of the plaintiffs’ originating process dated 31 May 2013. These further and better particulars also allege misleading and deceptive representations in the Industry Edge report and the Macquarie calculator. As mentioned above, the plaintiffs also seek a declaration that the conditionality of the resolutions rendered them ineffective and/or invalid for the purposes of Part 5C of the Act.

Introduction to 3272 (the Land Owners claim)

The plaintiffs’ (John Salmon, Guy Dobner and Lindsay Dobson) (the Land Owners) seek declarations are as follows:

(1)A declaration that upon WABG becoming the responsible entity of any of the woodlot schemes the rights, obligations and liabilities of GPL pursuant to the scheme in connection with the forestry grants by the plaintiffs in respect of those schemes shall become rights, obligations and liabilities of WABG pursuant to s 601FS of the Act.
(2)A declaration that upon WABG becoming the responsible entity of any of the woodlot schemes the arrears of forestry fees owed immediately prior to that time by GPL to the farmer grantors in connection with those schemes who are plaintiffs in this proceeding shall be liabilities of WABG pursuant to s 601FS of the Act.
(3)An order that pursuant to s 471B of the Act the plaintiffs be granted leave to proceed against the second defendant.

The Land Owners have each leased land to GPL that is used in the schemes and would be not be within the continued area under the Macquarie/WAGB proposal. The first defendant to the application is WABG, and the second defendant is GPL.

GPL argues application is premature

For reasons that I will examine below, GPL argues that the application by the Land Owners is premature and that I should decline to hear and decide the application.

If, however, I find that I should hear the application, the decision on the application may have some relevance to whether or not Macquarie/WABG engaged in misleading or deceptive conduct as alleged in 2774.

Accordingly, in my opinion, it is appropriate that I first resolve whether or not I should decide 3272, and if I do resolve to decide 3272, to give my decision in 3272 before moving on to decide 2774.

Are the applications in 3272 justiciable or premature for decision?

GPL concedes that the Court has jurisdiction to make the declarations sought by the Land Owners and that its discretion to do so has been enlivened but that the Court, in its discretion, should refuse to do so because of the absence of proper contradictors, both for the growers and for the landlord creditors. On the other hand, WABG and the Land Owners say that there are proper contradictors: WABG for the growers and the Land Owners for the landlord creditors. It is first necessary to briefly set out the issues that arise under the application in 3272.

The issues in 3272

The Land Owners seek a declaration on the application of s 601FS of the Act. It is convenient to set out s 601FS and s 601FT.

601FS Rights, obligations and liabilities of former responsible entity
(1)If the responsible entity of a registered scheme changes, the rights, obligations and liabilities of the former responsible entity in relation to the scheme become rights, obligations and liabilities of the new responsible entity.
(2)Despite subsection (1), the following rights and liabilities remain rights and liabilities of the former responsible entity:
(a)any right of the former responsible entity to be paid fees for the performance of its functions before it ceased to be the responsible entity; and
(b)any right of the former responsible entity to be indemnified for expenses it incurred before it ceased to be the responsible entity; and
(c)any right, obligation or liability that the former responsible entity had as a member of the scheme; and
(d)any liability for which the former responsible entity could not have been indemnified out of the scheme property if it had remained the scheme’s responsible entity.

601FT Effect of change of responsible entity on documents etc. to which former responsible entity is party
(1)If the responsible entity of a registered scheme changes, a document:
(a)to which the former responsible entity is a party, in which a reference is made to the former responsible entity, or under which the former responsible entity has acquired or incurred a right, obligation or liability, or might have acquired or incurred a right, obligation or liability if it had remained the responsible entity; and
(b)that is capable of having effect after the change;

has effect as if the new responsible entity (and not the former responsible entity) were a party to it, were referred to in it or had or might have acquired or incurred the right, obligation or liability under it.
(2)Subsection (1) does not apply to a right, obligation or liability that remains a right, obligation or liability of the former responsible entity because of subsection 601FS(2).

Land Owners’ contentions

Both the Land Owners and WABG agree that under s 601FS the forestry right deeds would novate to WABG if WABG accepts the appointment as new responsible entity under the resolutions and became the responsible entity . The Land Owners contend that the liabilities and obligations under the forestry right deeds would become the liabilities and obligations of WABG. In particular, the Land Owners contend that WABG would become liable for all accrued rentals and also liable for all future rentals payable under the forestry right deeds.

WABG contentions

WABG accepts that all the leases held by GPL as the responsible entity for land used in the schemes of which GPL is the responsible entity would novate to WABG. WABG disputes, however, that it would become liable for the accrued rent or for any future rental obligations under the leases that it would become a party to. WABG accepts that the lessors could terminate the leases if WABG failed to pay rent. WABG contends that the liability for accrued rent and for ongoing rent would remain with the former responsible entity, GPL, and does not novate to WABG.

WABG says that both GPL’s liability for accrued rent and its obligations or liability for ongoing rent were a “liability for which the former responsible entity could not have been indemnified out of the scheme property if it had remained the scheme’s responsible entity ” within the meaning of s 601FS(2)(d). In those circumstances, WABG contends that the liability of GPL for accrued rent and for ongoing rent would not become the liability of WABG under s 601FS(1) by reason of the carve-out in s 601FS(2)(d).

GPL’s position

GPL concedes that it has a conflict of interest. GPL says that in one capacity – as it is in liquidation – it should be solicitous of the welfare of the creditors of GPL. In another capacity – as the responsible entity – it should be solicitous of the welfare of the growers. GPL acknowledges that the interests of the creditors and the interests of the growers do not correspond; in fact, they are opposed to each other.

In those circumstances, GPL did not expressly submit that I should find one way or the other on the merits of the declarations sought. However, GPL raised matters that I should “weigh” in making my decision. As discussed below, these matters would support a finding in favour of the declarations sought by the Land Owners.

The liquidators’ submissions on issue of prematurity

The liquidators submit that the factors that a Court should be satisfied of before the discretion in favour of making a declaration were identified by Gibbs J in Forster v Jododex Australia Pty Ltd,[5] where his Honour addressed the power of the Supreme Court of New South Wales to make a declaration under s 10 of the Equity Act 1901 (NSW) (which was held to provide that in substance, a judge sitting in Equity in the Supreme Court to had similar wide powers to grant declaratory relief as that given to a judge in the High Court in England). Justice Gibbs said: [6]
[5](1972) 127 CLR 421 (Jododex).
[6]Ibid, 437-438 (citations omitted).

It is neither possible nor desirable to fetter the broad discretion given by s. 10 by laying down rules as to the manner of its exercise. It does, however, seem to me that the Scottish rules summarized by Lord Dunedin in Russian Commercial and Industrial Bank v British Bank for Foreign Trade Ltd, should in general be satisfied before the discretion is exercised in favour of making a declaration:
“The question must be a real and not a theoretical question; the person raising it must have a real interest to raise it; he must be able to secure a proper contradictor, that is to say, some one presently existing who has a true interest to oppose the declaration sought.”

Beyond that, however little guidance can be given. As Lord Radcliffe said in Ibeneweka v. Egbuna:
“After all, it is doubtful if there is more of principle involved than the undoubted truth that the power to grant a declaration should be exercised with a proper sense of responsibility and a full realisation that judicial pronouncements ought not to be issued unless there are circumstances that call for their making. Beyond that there is no legal restriction on the award of a declaration.”

GPL says that the requirement of a “proper” contradictor has not been satisfied in this case. GPL submits that it is not a true contradictor to speak for the growers as it has a clear conflict, as mentioned above. For a similar reason, GPL submits that the proceeding is premature.

As the Court is exercising federal jurisdiction under the Act, the Court must be satisfied that it has a “matter” before it to satisfy the constitutional requirement for the exercise of federal judicial powers.

The Court cannot answer theoretical or hypothetical questions.[7] In Australian Gaslight Co v ACCC (No 2),[8] French J canvassed in considerable detail the circumstances where a court exercising federal jurisdiction would have a “matter” before it sufficient to establish jurisdiction.[9]
[7]Eg, In Re Judiciary and Navigation Acts (1921) 29 CLR 257, and Ainsworth v Criminal Justice Commission (1992) 175 CLR 564, 582 (Mason CJ, Dawson, Toohey and Gaudron JJ).
[8][2003] ATPR 41-962.
[9]Ibid, [33]-[37].

Justice French said that ultimately “[w]hether or not there is a real controversy is a matter of judgment”.[10] The authorities that French J referred to indicate that considerable importance is placed on whether or not the dispute is attached to specific facts and that the dispute is not purely hypothetical.
[10]Ibid, [40].

GPL submits that in this matter that there is probably a sufficient issue to constitute a “matter” for the Court to exercise Federal jurisdiction and that the dispute raised by the Land Owners is a matter that this Court is entitled to rule upon.

In my opinion, the Court does have jurisdiction to grant the declarations sought by the Land Owners. Resolutions of growers removing GPL as the responsible entity and appointing WABG the responsible entity (although subject to conditions that have as yet not been waived or satisfied) have been passed by meetings of growers based upon representations by Macquarie/WABG that the new responsible entity , WABG, may not become liable for accrued rent and for ongoing rent to the lessors (including the Land Owners). As discussed above and below, these representations are a key part of the restructure proposal put to members by Macquarie/WABG.

In my opinion, the matters raised for decision are real matters in dispute between the Land Owners and Macquarie/WABG which affect the real interests of the Land Owners and Macquarie/WABG.

Nevertheless, GPL says that the Court, in its discretion, should decline to hear the matter in the absence of proper representation of the two parties that have an interest in the fate of the liabilities: the growers, and the creditors of the liquidators. GPL says that joining GPL to the proceeding was not sufficient as the liquidators of GPL have divided loyalties (as discussed above).

WABG rejects GPL’s contentions. WABG contrasted the facts in this case with those in BMI Ltd v Federated Clerks’ Union,[11] where Keely and Beaumont JJ held that the Court in the exercise of its discretion ought not to entertain the application which was before it, as it was generally undesirable that the Court should grant relief by way of discretionary relief in the absence of any contest on the question.[12] Their Honours held that no useful purpose could be served by making the declaration as the question was now academic.[13] Their Honours also referred to the fact that there was no contradictor.[14]
[11](1983) 76 FLR 141.
[12]Ibid, 153.
[13]Ibid, 154.
[14]Ibid, 154.

WABG contends that in this present case, however, WABG and the Land Owners are vigorous contradictors and the matter is not hypothetical, as it lies at the heart of the restructure proposal put forward by WABG/Macquarie. WABG says that the Court has had the utmost contest and the role of contradictors has been well and truly fulfilled. WABG says that it has a live interest, for if WABG waves conditionality (and assuming the receivers do not win), then WABG would be subject to a live claims from land owners. The Land Owners also referred to ACCC v MSY Technology Pty Ltd[15] and ACCC v Dataline.Net.AU Pty Ltd[16] in supported of their proposition that the Court should hear and determine the declarations sought.
[15](2012) 201 FCR 378.
[16](2006) 236 ALR 665.

Conclusion on prematurity

I accept that WABG has put the case that the growers would wish to have put. I also accept that the Land Owners have vigorously put the case that all head lessors (who have not come to an arrangement with Macquarie/WABG) would wish to be made.

In substance, the issue solely before me was whether or not there are proper contradictors. For the reasons expressed above, I am satisfied that there are.

Accordingly, I do not accept GPL’s submission that I should refuse to entertain the application for declarations.

The arguments on 3272

I have already outlined the position of the Land Owners and WABG.

Before turning to the Land Owners’ submissions, it is convenient to go to the constitution of a schemes. For the purpose of this application, the parties have accepted that the constitution of Gunns Plantations Woodlot Project 2003 is indicative of the six relevant schemes. Any differences between the schemes was said to be of no consequence.

The recitals of the constitution provide that:

A.This Constitution is intended to establish and govern a managed investment scheme to be known as the Gunns Plantations Woodlot Project 2003 to be administered for the benefit of Members.
B.The Responsible Entity proposes to invite applications to enter into a Lease Agreement and a Management Agreement in respect of the Project.
C.Pursuant to a Lease Agreement the Grower will be granted a lease of a Forestry Right from the Responsible Entity.
D.Pursuant to a Management Agreement the Responsible Entity will act as Manager of the Woodlot for the life of the Project.
E.The Responsible Entity has agreed to act as a responsible entity for the Project.
F.This Constitution is made with the intent that the Members shall be bound by and entitled to the benefit of this Constitution.

Under the definitions contained in the constitution, ‘Forestry Right’ means the rights granted to the responsible entity in respect of Land under clause 3 of the Forestry Right Deed.

The ‘Forestry Right Deed’ means the deed granting a Forestry Right to be entered into between the responsible entity and the Land Owner in the form contained in schedule 3 of the Constitution or in such other form as the responsible entity shall determine.

‘Land’ has the same meaning as in the Forestry Right Deed. ‘Land owner’ has the same meaning as in the Forestry Right Deed. ‘Lease Agreement’ means the deed comprising the lease agreement to be entered into between the responsible entity as lessor/sub‑landlord and the Member as lessee/sub‑tenant for the lease of a Forestry Right in respect of a Woodlot in the form contained in schedule 1, or in such other form as the responsible entity shall determine.

The constitution envisages the issue of a product disclosure statement by the manager in respect of the project.

The constitution provides for persons who wish to participate in the project to pay an application fee. The application fee is to be delivered to the responsible entity or the custodian.[17] The responsible entity is to place the fee in the application portion until the responsible entity releases the money in accordance with clause 8.
[17]GPL was designated a custodian and in future I will refer merely to GPL or the responsible entity.

Upon the parties executing the lease agreement and the management agreement the responsible entity is to release the application monies in payment of the woodlot establishment expenses.

The woodlot establishment expenses are the costs and expenses of performing the duties and obligations of the responsible entity under clause 4 of the management agreement.

Under clause 4 of the management agreement, the manager (which is the responsible entity) is to do all things necessary for the planting of seedlings on the grower’s woodlots. The woodlot establishment expenses do not include any rent payable by the responsible entity to head landlords.

Under the management agreement, the grower is to pay the responsible entity the establishment fee. Payment of the application fee constitutes full payment of the establishment fee. The establishment fee is paid in consideration of the establishment services. These are the fees for planting of the seedlings.

Provision is made for a planting fee for the planting services for planting the seedlings. The manager must use its best endeavours to complete the planting services before the earlier of:

(1) 12 months following the date on which
(A) the Application Fee is paid; or
(B) the Manager is first permitted under the Forestry Right Deed to access the land for the purposes of commencing to carry out the Planting Services,

which ever is the later.

(2) 30 June of the financial year immediately following the year in which the Application Fee is paid.

The planting fee means the fee of 1.25% payable by the grower to the manager. This fee is to be deducted from the wood sale proceeds. Provision is made for a baseline pruning fee. In essence, the grower is to pay for pruning services. The manager is also entitled to be paid sales commission from the wood wale proceeds of 2% of the wood sale proceeds.

In addition to the establishment fee the grower bears the following costs which are deducted from the grower’s wood sale proceeds:

(a) the planting fee of 1.25%;

(b) the maintenance fee of 2.25%;

(c) the rental fee of 6.5%;

(d) the sales commission of 2%.

This adds up to a total of 12%.

The grower may also request insurance, for which the grower is charged.

As mentioned, the grower is also required to enter into a forestry right lease deed (the lease agreement).

‘Forestry Right’ is defined to mean the rights granted to the lessor (ie GPL) in respect of the woodlot under clause 3 of the forestry right deed. Woodlot means each parcel of land of approximately 1 hectare.

Under clause 3 of the forestry right lease deed, GPL as the lessor grants to the grower and the grower takes from GPL as the lessor a lease of the forestry fight for the term. The lessor is entitled to a rental fee. As mentioned above, the rental fee payable to GPL as the lessor is deducted on behalf of the lessor from the wood sale proceeds and paid to the lessor in accordance with the constitution. The rental fee is 6.5% of the wood sale proceeds.

Under clause 24 of the constitution, provision is made for the responsible entity to receive by way of remuneration in relation to the project those fees in relation to the proper performance of its duties provided for in the constitution and any lease agreement and management agreement for its services in carrying on the business. These fees include the rental fee.

The Land Owners’ submissions

The Land Owners contend that under the constitution, GPL has the right to be indemnified out of scheme property for accrued liabilities of GPL to head lessors and for any continuing liabilities under forestry right deeds. Accordingly, under s 601FS(1) of the Act, if and when WABG becomes the responsible entity of the scheme the rights, obligations and liabilities of GPL will become the rights, obligations and liabilities of WABG.

The Land Owners submit that the forestry right deed entered into between GPL and the head lessors is essential to the operation of the 2003 Woodlot Project scheme.

There is no issue between the parties that the forestry right deed is an essential requirement of the project. The forestry rights granted to the growers by GPL as the responsible entity are the very same rights that GPL has obtained by the forestry right deed from the head lessors. Under clause 5 of the forestry right lease deed entered into between GPL and the grower, GPL must not breach the forestry right deed or do anything that may end the forestry right deed or the registration of the forestry right before the term has expired.

The next step in Land Owners’ argument is that clause 28.2 gives GPL a right of indemnity over scheme property for rent payable to the head lessors. Clause 28.2 of the constitution provides as follows:

28.2 Reimbursement
The responsible entity shall as part of its remuneration and in addition to the remuneration referred to in clause 24 be reimbursed for the following costs and expenses out of the relevant Section of the Wood Proceeds Portion in relation to the proper performance of its duties:
(a)any costs incurred by the Responsible Entity performing its duties and acting in accordance with this Constitution, the management agreement and lease agreement;
(b)any income tax … ; and
(c)fees payable to any regulatory authority.

It was agreed by the Land Owners and WABG that under clause 28.3 of the constitution the responsible entity was not entitled to be reimbursed for purely administrative or purely promotional expenses. The Land Owners say that the wood proceeds portion of the fund (referred to in clause 28.2) is scheme property. This is not disputed by WABG.

The Land Owners contend that the words of clause 28.2(a) (set out above) encompass the fees payable under the forestry right deed, in that it is a necessary cost and expense incurred by the responsible entity “performing its duties and acting in accordance with the constitution”.

The Land Owners contend that that without the underlying forestry lease deed, neither the management agreement nor the lease agreement would have any operative effect. In other words, maintenance of the forestry right deed is fundamental to the operation of the scheme. Under clause 13.4 of the constitution the responsible entity is obliged to manage the business, investments and affairs of the project and the arrangements that relate to the project.

The Land Owners contend that the head lessee (GPL) is required to pass on the forestry rights to the grower. The Land Owners say that there is nothing to manage without the head leases. Thus, the landowners say that for GPL to properly perform its functions and duties, it must comply with clause 5.1(a) of the forestry right deed.

The Land Owners also rely on clause 36 of the constitution, which provides as follows:

Responsible Entity indemnity
(a)If the Responsible Entity acts in accordance with this Constitution and its duties as a responsible entity, the Responsible Entity will be indemnified and reimbursed out of the fund in respect to those matters provided in clause 28.2.

WABG response to the Land Owners’ submissions

As mentioned above, there is no dispute between WABG and the Land Owners that – subject to s 601SF(2) under s 601SF(1) – the rights, obligations and liabilities of GPL in relation to the head leases become the rights, obligations and liabilities of the new responsible entity .

The Land Owners contend that s 601FS(2)(d) is not enlivened, as the liability of GPL for existing future rents to the landowners could have been indemnified out of the scheme property if it had remained the schemes’ responsible entity, by reason of the arguments that I have referred to above.

WABG disputes that and says that if it was intended that the responsible entity should be entitled to indemnify its self from the wood proceeds for the costs and expenses it incurs to the head lessors under the forestry rights deeds, clause 28.2 would have said so. The clause specifically refers to the management agreements and the lease agreements but makes no mention of the forestry right deeds. The maxim of interpretation expressio unius est exclusio alterius is relied upon – when a document expressly mentions specified items, whether persons, rights, duties, powers or things, items within the same general class not mentioned are excluded.

The constitution attaches three documents under which the responsible entity has duties: the forestry right deed, the management agreement, and the forestry right lease deed. WABG says that it is plain that the exclusion of the forestry right deed from clause 28.2 was intentional. WABG says that the constitutional right to reimbursement was not intended to include rents paid to the head lessors.

WABG contend that further weight to this construction is given by the fact that the scheme does call for a rental fee of 6.5% to be paid out of the wood proceeds, which, by implication, is compensation for any costs and expenses incurred by the GPL under the forestry lease deeds.

WABG says that under clause 28.2, the responsible entity is only entitled to be reimbursed for limited defined expenses.

WABG contends on the that there is no provision in the constitution that requires the responsible entity to enter into forestry Right deeds. Rather, the structure of the scheme is that GPL will have the forestry Rights deeds. WABG says there is no provision requiring it to procure the land.

WABG says the consequence of the construction put forward by the Land Owners is the uncommercial result that not only must the grower ultimately pay 12% of the harvest proceeds to the responsible entity , but also the growers must reimburse the responsible entity for whatever rents it incurs to the head lessors.

The forestry right deeds provide for the rentals to be paid quarterly. On the other hand, under the constitution the right of reimbursement is only out of the harvest proceeds. WABG submits that if there were a right of reimbursement for the quarterly rent payments under clause 28.2, it could only be exercised at the conclusion of the scheme from the harvest proceeds. WABG says that such an arrangement does not make commercial sense.

WABG refers to s 601GA(2) of the Act, which provides:

If the responsible entity is to have any rights to be paid fees out of scheme property, or to be indemnified out of scheme property for liabilities or expenses incurred in relation to the performance of its duties, those rights:
(a) must be specified in the scheme’s constitution; and
(b)must be available only in relation to the proper performance of those duties;

and any other agreement or arrangement has no effect to the extent that it purports to confer such a right.

WABG says that there is no room for implication in either clause 28 or clause 36 of the constitution of a right to reimbursement of necessary expenses not “specified” as required by s 601GA(2) of the Act.

GPL’s submissions

Before deciding on the merits between the arguments of WABG and the Land Owners, it is necessary to consider the matters raised by GPL.

Mr Santamaria QC and Mr Ahern for GPL raised certain issues for the court “to weigh … in the balance”, if it goes ahead to resolve the issues in s 3272. GPL recognised the conflict of interest it had and accordingly did not say what ought to occur on the merits of 3272.

The matters that the liquidators suggested that I should weigh can be summarised as follows:

(1)The head leases form part of the scheme property for the purposes of s 601FS of the Act.
(2)The scheme property is held on trust by the responsible entity .
(3)Under general law, a trustee has the right to indemnify itself out of trust property for all expenses reasonably and properly incurred in the execution of its powers and duties as trustee.
(4)The right of indemnity can be modified by statute but there is a presumption against alteration of common law doctrine.
(5)By application, s 601GA(2) of the Act does not seek to curtail or abolish the general right of indemnity.
(6)It may be an open question whether a trustee who has a right of indemnity at general law can agree by instrument to modify or vary that right.
(7)Under principles of construction of contracts, there is a presumption that the general law right to an indemnity should be construed as running parallel to or corresponding with a contractual right to indemnity rather than being modified or excluded.

Although GPL expressly refrains from drawing the inferences that might flow from these submissions, I believe they are as follows:

(1)The head leases form part of the scheme property for the purposes of s 601FS of the Act.
(2)That at general law, the responsible entity has a right of indemnity out of the scheme property for the rental owing and accruing on the head leases and such indemnity has not been excluded or abrogated by statute or any of the scheme documents.

The head leases form part of the scheme property for the purposes of s 601FS.

Mr Santamaria submits that Rares J in Huntley Management Ltd v Timbercorp Securities Ltd[18] held that the interests of the responsible entity in the head leases form part of the scheme property for the purposes of s 601FS, so that not just the sublease but also the head leases form part of the scheme property for the purposes of s 601FS. Subsequently, Mr Santamaria said that “the land comes into scheme property, as I understood what His Honour was saying, under s 601FS.”
[18](2010) 187 FCR 151 (Huntley).

In Huntley, Timbercorp had been the responsible entity of a primary production managed investment scheme much like the Gunns schemes. In the Timbercorp schemes, Timbercorp as the responsible entity had provided land for the growers to take an interest in as growers. Timbercorp had leased that land and under the leases Timbercorp had expressly provided that it was entering into the lease in its personal capacity (and by implication not as the responsible entity). Timbercorp was removed as the responsible entity by the procedures under the Act and Huntley was appointed the new responsible entity .

Huntley argued that the rights, obligations and liabilities that Timbercorp had in relation to the leases that it entered into in its personal capacity nevertheless became novated to Huntley under s 601FS. The issue for Rares J was whether or not the rights, obligations and liabilities that Timbercorp had under the leases were “in relation to the scheme” within the meaning of s 601FS. His Honour held that they were, and thus became the rights, obligations and liabilities of Huntley (subject to s 601FS(2)).

In doing so, Rares J had regard to the product disclosure statement and the object of the relevant transactions.

Justice Rares held that despite the fact that Timbercorp had entered into the head lease in its personal capacity, the head leases were nevertheless held as “scheme property.”[19] His Honour’s reasoning was twofold. First, his Honour found that under Timbercorp’s Australian Financial Services Licence, Timbercorp was required to ensure in relation to each scheme that:

… an instrument that confers the right, for the purpose of the scheme, to use the land on which any primary production will occur in the operation of the scheme, is lodged for registration under State or Territory land titles law, in the name of …
(d) the licensee, either:
(i) as trustee for the members; or
(ii)beneficially in the course of and in accordance with its duties as responsible entity …[20]

[19]Huntley, [61] and [64].

[20]As quoted in Huntley, [15].

His Honour explained the significance of this provision in finding that the head leases were scheme property as follows: [21]

And, the responsible entity had to protect the interests of the investors in the 2005 project and comply with its Australian financial services licence by lodging for registration in its name beneficially the leases of the land on which the mangoes would be grown under cl 9.4 of the constitution. That had the consequence that the leasehold interest was held as scheme property by whomever was the responsible entity. This follows from the licence condition that the leasehold be held by Timbercorp “beneficially in the course of and in accordance with its duties as responsible entity” coupled with Timbercorp’s obligations under cl 9.4, and power to lease under cl 11(l) of the constitution. The leasehold interest was property “in relation to the scheme”. The scheme could not operate without it.

[21]Huntley, [61] (emphasis added).

His Honour further dealt with the head leases being scheme property on the basis that the licence fee paid by the growers for use of the leased land exactly corresponded to the rental payable by Timbercorp to the head lessor. In this respect Rare J said: [22]

If Timbercorp were entitled to remain in its position as lessee or continue to enjoy rights that it held under the three investor agreements “in its personal capacity” after it had been replaced as the responsible entity of the 2005 project, the investors would be tied to it despite it no longer being in its control role in the scheme. Instead Timbercorp would occupy a personal position of critical importance to the scheme’s future operations free of its statutory and scheme duties as responsible entity and the investors would have to deal with and pay both it and a new responsible entity. It would create a commercially inconvenient result if the words “in its personal capacity” in cl 1.7 of the licence agreement entitled Timbercorp to retain its status of beneficial owner of the leaseholds and other rights once it had ceased to be the responsible entity: cf Zhu v Treasurer of NSW (2004) 218 CLR 530 at 559 [82] per Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ. Such a result was not contemplated in the product disclosure statement and serves no good purpose for the ongoing operation of the scheme. Indeed, Timbercorp would hold the benefit of the lease without being personally liable to pay any rent other than as a mere conduit of licence fees payable to it by the investors. Those licence fees were contributions to the scheme so that the leaseholds could be held in order that mangoes could be grown for sale. The leases were thus scheme property.

[22]Huntley, [64].

The reasoning applied by Rares J is not able to be directly applied to the Gunns’ schemes I am considering. First, the rental fee payable to the responsible entity is not necessarily identical to the rents paid to the head lessors. Secondly, the rental fee is only payable at the end of the scheme out of the harvest proceeds whereas the rents to the head lessors are paid on a regular basis through out the leases.

On the other hand, Rares J’s observations that the scheme could not operate without the head leases is equally applicable to these Gunns schemes. Secondly, under the Gunns schemes, harvest proceeds otherwise belonging to the growers were to be used to compensate the responsible entity for the rents payable to the head lessor. Thirdly, the first reason that Rares J relied on relating to the terms of Timbercorp’s Australian Financial Services Licence did not rely on tracing member’s moneys into the acquisition of the disputed leases. In other words, Rares J accepted that the property could be contributed by the responsible entity as part of the scheme.

Are the head leases scheme property?

Scheme property is defined in s 9 of the Act as:

scheme property of a registered scheme means:
(a)contributions of money or money’s worth to the scheme; and
(b)money that forms part of the scheme property under provisions of this Act or the ASIC Act; and
(c)money borrowed or raised by the responsible entity for the purposes of the scheme; and
(d)property acquired, directly or indirectly, with, or with the proceeds of, contributions or money referred to in paragraph (a), (b) or (c); and
(e)income and property derived, directly or indirectly, from contributions, money or property referred to in paragraph (a), (b), (c) or (d).
Note 1:Paragraph (a)—if what a member contributes to a scheme is rights over property, the rights in the property that the member retains do not form part of the scheme property.
Note 2:For provisions that are relevant to paragraph (b), see subsections 177(4), 1317HA(1A), 1317HB(3) and 1317HD(3) of this Act and subsection 93A(5) of the ASIC Act.

The responsible entity has certain duties in relation to scheme property including those provided in s 601FC of the Act:

601FC Duties of responsible entity
(1)In exercising its powers and carrying out its duties, the responsible entity of a registered scheme must:

….
(i)ensure that scheme property is:
(i)clearly identified as scheme property; and
(ii)held separately from property of the responsible entity and property of any other scheme; and

(j)ensure that the scheme property is valued at regular intervals appropriate to the nature of the property; and
(k)ensure that all payments out of the scheme property are made in accordance with the scheme’s constitution and this Act; and

….
(2)The responsible entity holds scheme property on trust for scheme members.

Note: Under subsection 601FB(2), the responsible entity may appoint an agent to hold scheme property separately from other property.
….

As indicated above, the definition of scheme property includes “contributions of money or money’s worth to the scheme.” The note to paragraph (a) of the definition states that if what a member contributes to a scheme is rights over property, the rights in the property that the member retains do not form part of the scheme property. It is implicit, therefore, that “money’s worth” may include rights over property. In my view, under the Gunns schemes, GPL contributes rights over leasehold land to the scheme. Secondly, no evidence was led before me about the terms of the Australian financial services licence held by GPL.

As explained, this contribution is an essential element of the scheme and without it the scheme would not exist. The contribution of the forest rights that GPL has obtained from the head lessors, which are then made available to the growers, lies at the heart of the scheme. The compensation to GPL for the contribution was to be a share of the wood sale proceeds. This is the very nature of a scheme, where participants contribute money or money’s worth and share the proceeds.

Although the responsible entity may not be characterised as a member of a managed investment scheme for all purposes under the Act unless it takes an interest as a grower, GPL was a participant in the scheme and was to share in its proceeds.

Under the Act, “scheme” is not defined. In Huntley, Rares J examined what was the nature of a scheme. His Honour said: [23]
[23]Huntley, [55]-[58].

As Keane JA pointed out in Mier v FN Management Pty Ltd [2006] 1 Qd R 339 at 350 [24] and [27] (McMurdo P and Douglas J agreeing) “scheme” is not defined in the Act. He said that, based on the definition of “managed investment scheme” in s 9, an essential feature of a scheme is that persons contribute money or money’s worth to a “program or plan of action” constituted by the scheme and this property will be pooled to produce benefits for those who made contributions. He had drawn on what Mason J had said (Gibbs CJ and Stephen J agreeing) in Australian Softwood Forests Pty Ltd v Attorney-General (NSW); Ex rel Corporate Affairs Commission (1981) 148 CLR 121 at 129 that “… all that the word “scheme” requires is that there should be ‘some programme or plan of action’ (Clowes v Federal Commissioner of Taxation (1954) 91 CLR 209 at 225)”.
Certainly, the concept of a managed investment scheme under the Act involves a program or plan of action directed at the achievement of a financially beneficial result for those who make contributions to it. And, under the Act, a responsible entity has a prime function of applying those contributions to the acquisition of property and its subsequent use with the purpose of achieving that result.
In addition, the parties to a contract can seek to identify the nature of their relationship or the capacity in which a party contracts. However, those characterisations are not determinative themselves, of the true nature of that relationship or capacity. The parties cannot deem their relationship, or the capacity in which a party contracts, to be something that it is not: Hollis v Vabu Pty Ltd (2001) 207 CLR 21 at 45 [58] per Gleeson CJ, Gaudron, Gummow, Kirby and Hayne JJ who approved what McKay J said in TNT Worldwide Express (No 2) Ltd v Cunningham [1993] 3 NZLR 681 at 699 namely:
“The proper classification of a contractual relationship must be determined by the rights and obligations which the contract creates, and not by the label the parties put on it.”

The substance and effect of the documents, construed in their context, is the critical determinant of the true nature of the parties’ relationship and the rights, obligations and liabilities it creates: cf Radaich v Smith (1959) 101 CLR 209 at 214 per McTiernan J, at 217 per Taylor J, at 220 per Menzies J, at 223 Windeyer J, Dixon CJ agreeing with the other Justices.

Under the Act, a managed investment scheme means a scheme that has certain defined features (and a time sharing scheme). Certain specified schemes are expressly excluded. Thus, it is apparent that a scheme may have more features than those included in the definition of a managed investment scheme. As mentioned above, all that the word “scheme” requires is that there should be some program or plan of action.[24] Using Woodlot Project 2003 as an example, the product disclosure statement was issued by GPL. The PDS says, however, that GPL is a wholly owned subsidiary of Gunns Limited (Gunns) and has been established (by Gunns) for the specific purpose of building a resource business for third parties. Under the scheme, GPL was to be the responsible entity and also the provider of the forestry rights that the growers were to be granted.
[24]Clowes v SCT (1954) 91 CLR 209, 225.

Under the scheme, GPL proposed to delegate all woodlot management obligations under the management agreement to its parent, Gunns. The PDS says that Gunns will be paid for the provision of those services from GPL’s entitlement to the maintenance fee from the net proceeds. The PDS says that as the parent company of GPL, Gunns has a vested interest in the outcome of the project. The PDS also says that Gunns will buy the growers’ wood at market price upon harvest.

Thus, it is plain that the scheme has been devised and promoted by Gunns and that Gunns will be providing resources to the scheme. Despite this, there is no contractual relationship between the growers and Gunns. On the other hand, Gunns is to provide an important role in the scheme and is a participant in the scheme. Likewise, an important aspect of the scheme is that GPL will lease forestry rights from third party landlords and sub-lease these rights to the growers.

The question arises: does the definition of scheme property require that “contributions of money or money’s worth to the scheme” be by a grower member of the scheme? The definition does not refer to a “managed investment scheme” but to a “scheme.” As discussed earlier, the Act contains no definition of a scheme. Clearly, GPL is a participant in the scheme. Further, it has made a contribution to the scheme of money’s worth by providing the forestry rights under the scheme whereby the growers do not have to pay a rental fee until the trees are harvested.

“Member” in relation to a managed investment scheme “means a person who holds an interest in the scheme”.

Under s 601FG of the Act, the responsible entity may hold and acquire an interest in the scheme. Section 601FG provides:

601FG Acquisition of interest in scheme by responsible entity
(1)The responsible entity of a registered scheme may acquire and hold an interest in the scheme, but it must only do so:
(a)for not less than the consideration that would be payable if the interest were acquired by another person; and
(b)subject to terms and conditions that would not disadvantage other members.

Note: If the responsible entity holds an interest in the scheme, it does so subject to section 253E (certain members cannot vote or be counted).
(2)A responsible entity who contravenes subsection (1), and any person who is involved in a responsible entity’s contravention of that subsection, contravenes this subsection.

Note 1: Section 79 defines involved.
Note 2: Subsection (2) is a civil penalty provision (see section 1317E).
(3)A person must not intentionally be involved in a responsible entity’s contravention of subsection (1).

In my opinion, GPL holds an interest in the scheme. It is to share the proceeds of the trees to the extent of 12%. In my opinion, it is a member of the scheme.

I heard no submissions on whether or not the rights under the forestry fight deeds were scheme property. Mr Bigmore QC did submit that the rights were not held on trust. I have also found no direct authority on whether or not the “moneys worth” may be contributed by a participant to the scheme who is not a grower member for the purpose of the Act.

If it can be established that for some reason GPL could not have been indemnified in respect of such rental liabilities, those liabilities would not transfer to the new responsible entity (s 601FS(2)(d)).

GPL says that because GPL has been the responsible entity of a woodlot scheme for which the provision of suitable land is a necessity, it must be strongly arguable that the liabilities it has incurred for rent (which has accrued but which has remained unpaid) are liabilities which were properly incurred by it and, thus, liabilities for which it is entitled to be indemnified.[60]
[60]See s 601FC(2).

As indicated above, this submission was elaborated upon by GPL in matter 3272.

GPL says that if that is correct, those liabilities will novate to any new responsible entity. The novation of those rental liabilities (particularly in respect of the third party leases on which a commercial rental is charged) will have an impact upon the viability and solvency of the schemes going forward. GPL says that the nature of the risks associated with such a novation of those liabilities, and the magnitude of that risk are matters which must be disclosed to growers if they are to make an informed assessment of the Macquarie proposal.

GPL contends that in regard to ongoing commercial rate rental obligations, by reason of the statutory novation of obligations under s 601FS(1), all obligations of the former responsible entity novate to the replacement responsible entity .

GPL says that with respect to ongoing rental obligations, Macquarie must explain to growers which commercial leases will transfer to the new responsible entity, and on what basis they do so. GPL says that fundamental to the Macquarie proposal is the strategy of getting rid of the third party leases and confining the schemes going forward to the peppercorn Gunns leases. However, that strategy requires the co-operation of the third party lessors.

GPL says that by reason of the statutory transfer under s 601FS(1), Macquarie itself has no power to determine unilaterally which third party leases will transfer to the new responsible entity, and which will not. Subject to what is said in the next paragraph, in the absence of consensual arrangements between Macquarie and the relevant landowners, all third party leases will transfer to the new responsible entity, and future rental will be payable by the new responsible entity under their existing commercial terms.

GPL contends that despite Macquarie’s strategy of getting rid of third party leases, the Macquarie proposal involves a risk that some or all of the third party leases will continue on their existing terms and will continue to affect the solvency of the schemes. Accordingly, GPL says that Macquarie must explain and provide material that will permit a grower to understand the nature of this risk, as well as to make a reasonable evaluation of its magnitude and, thus, its impact on the solvency of the schemes. Moreover, given that the Macquarie proposal has been presented on a comparative basis with the joint sale proposal, Macquarie must explain these matters clearly so as to permit a grower to make a reasonable comparison between the Macquarie proposal and the joint sale proposal.

GPL addresses the explanatory memorandum discussion of the joint sale proposal. GPL says that on page 8 of the explanatory memorandum, there is a heading ‘The alternative – Liquidators’ sale’. The explanatory memorandum states that:

(a)(beside the sidenote ‘Liquidators’ sale may be perceived as a forced sale’): “We believe potential buyers will perceive a Liquidators’ sale as a forced sale”;

(b)(beside that same sidenote) “In our view, the current market conditions are challenging. We believe that any forced sale process runs the risk of delivering a very poor outcome for growers”;

(c)(beside the sidenote ‘Risk of poor recovery’): “It is of course impossible to determine with any certainty the outcome of either our Restructure Proposal or the Liquidators’ Plan. We believe, however, that our Restructure Proposal is a better alternative to a forced sale”.

GPL says that the disclosure made in the explanatory memorandum to grower investors regarding the third party leases to which GPL is the lessee includes the following statements:

2.7 Continued Area and your interest following implementation of the Restructure Proposal [pages 18-19]
When the Scheme was established, the original responsible entity held leases with a number of different landlords over 15,629 hectares of planted area and each Woodlot represented approximately 1.0 hectare of forestry plantation.
The Restructure Proposal you are being asked to vote on in the Resolutions do not envisage carrying forward all existing leases. Instead, the continuing land area will reduce to approximately 14,000 hectares (the Continued Area). Therefore, each Woodlot (or interest) will reflect an entitlement to proceeds referable to approximately 0.90 hectares of forestry plantation.
If you currently have a lease agreement on land that has not been classified as part of the Continued Area, then:
the new responsible entity will, on your behalf under power of attorney, terminate the existing management agreement in respect of that land and replace it with the Forestry Management and Off-take Agreement covering the Continued Area (and other relevant agreements), and terminate the lease agreement in respect of that land; and
on and from the date the new responsible entity becomes the responsible entity (Appointment Date), you will hold Contributory Interests and/or Deferred Interests in the Scheme referable to your proportional interest in the Continued Area.

If you have a lease agreement that is classified as Continued Area, then:
your lease agreement in respect of that Woodlot will remain in force; and
the new responsible entity will, on your behalf under power of attorney, terminate your existing management agreement and replace it with the Forestry Management and Off-take Agreement covering the Continued Area (and other relevant agreements); and
on and from the Appointment Date, you will hold Contributory Interests or Deferred Interests in the Project referable to your proportional interest in the Continued Area.

Why has the Continued Area reduced? [page 18]
Unfortunately, for a significant amount of the land underlying your Scheme, the Manager and the New responsible entity believe it is not practical or (in some cases) advantageous to continue growing timber for harvest. In many cases, leases have been terminated or GPL may have breached its obligations due to non-payment of rent or failure to conduct statutory maintenance.
The Manager has assessed the leases and identified those for which remediating breaches (if any) is economically attractive. The Manager and the New responsible entity have identified these leases which they expect to carry across into your Scheme following the restructure. Furthermore, the Manager and the New responsible entity are only prepared to fund rent on peppercorn and/or deferred rent leases. These leases will form the Continued Area of your Scheme.

GPL submits that the above extracted text conveys the impression that Macquarie itself (having assessed the leases (if any)) can unilaterally determine which of the third party leases transfer across to the schemes following the restructure proposal and the terms upon which they transfer. GPL says that the extracts convey no sense of the risk that the accrued rental liabilities and future rental obligations with respect to third party leases may become liabilities and obligations of the new responsible entity .

2.14.1Rent [pages 23-24]

Under the Restructure Proposal, Macquarie as Manager will be responsible for paying rent with respect to the Peppercorn Leases with Gunns Limited (In Liquidation) (Receivers and Managers Appointed) (or its associated entities) that have been included as part of the Continued Area.
In addition, Macquarie has renegotiated the terms of the leases with FT (FT Leases) and theses will also form part of the Continued Area. The FT Leases have been renegotiated so that rent is payable on a deferred basis from Net Sale Proceeds. The rent attaching to the FT Leases is $90.00 per hectare per annum (indexed), capitalising at 5.0% per annum. An additional 5.0% of Net Sale Proceeds will be payable to FT under the FT Leases upon harvest.
Under the Restructure Proposal neither the New responsible entity nor the Manager propose funding commercial-rate lease rental. This will particularly impact third party landlords (Third Party Leases). These leases may not form part of your Scheme however it is possible that rights to the trees on those leases may still remain. The New responsible entity and the Manager may seek to reach commercial agreement with third party landlords on various matters in relation to the Third Party Leases. This may include compromising the rights that may otherwise be for the benefit of Growers. The final decision in relation to any potential commercial agreement will remain at the discretion of the New responsible entity who will act on the advice of the Manager. For these reasons, we have not included any positive contribution toward Grower returns from trees on the land under Third Party Leases in the cashflow calculator.
Based on the information that has been made available to the New responsible entity and the Manager, the Manager understands that the Continued Area will comprise approximately 11,000 hectares of Peppercorn Leases and approximately 3,000 hectares of FT Leases.

GPL says that this extract conveys the impression that Macquarie can unilaterally determine what third party leases (if any) transfer to the new responsible entity .

GPL says that (at p 26) the explanatory memorandum conveys the impression that Macquarie can unilaterally determine what third party leases (if any) transfer to the scheme and the terms upon which they transfer:

The New responsible entity may determine that it is not in the best interests of Members to defend or retain certain terminated leases and does not expect to apply for relief from forfeiture of those leases which have not been identified as Continued Area for the Scheme. For instance, the New responsible entity does not intend to defend purported terminations of those leases with landlords who are claiming significant amounts of unpaid rent with high ongoing rental obligations, all of which would be payable out of Scheme assets and which could negatively impact Member returns.

GPL says that the above extract suggests that claims by third party landlords could be made against the new responsible entity (and which would be met out of the scheme assets) but does not set out the basis upon which the new responsible entity could be liable for such claims nor the magnitude of any potential liabilities or obligations.

GPL refers to the explanatory memorandum (at p 27) dealing with the risk of additional liabilities:
Under the Corporations Act, if the responsible entity of a registered scheme changes, some of the rights, obligations and liabilities of the former responsible entity in relation to the Scheme may become rights, obligations and liabilities of the new responsible entity .
Under the Restructure Proposal, the New responsible entity will be indemnified for all liabilities it incurs in relation to the proper performance of its duties and such amounts will be reimbursable out of Scheme property. To the extent that insufficient funds are available, the New responsible entity may also seek Additional Contributions from investors to fund these liabilities.
These liabilities may include, but are not limited to:
Rental amounts, including damages, payable under lease arrangements, whether incurred prior to the New responsible entity being appointed or after;
Interest or other costs of borrowing for the Scheme;
Costs associated with court proceedings; and
All other reasonable expenses incurred by the New responsible entity in administering or protecting the assets of the Schemes.
It is not certain whether or not such liabilities will become liabilities of the New responsible entity . The New responsible entity expects to defend a number of these potential liabilities if claimed. In particular, the New responsible entity expects to defend claims over rent payable under lease arrangements that were entered into by GPL and claims by the Receivers and Managers of GPL for fees or costs they may seek to claim against Scheme assets whilst GPL was insolvent or arguably in breach of its obligations or duties. There is a risk that multiple claims on such liabilities could occur simultaneously.
A significant potential claim is for rent arrears and loss of bargain damages under certain leases. To the extent the New responsible entity becomes liable for any additional liabilities it will be entitled to seek recovery of those liabilities out of Scheme assets. If this occurs, the New responsible entity will be reimbursed for the payment of such liabilities plus interest, and prior to returns being paid to Members.”
GPL says that again, having conveyed the impression (in the extracts referred to above) that Macquarie can unilaterally determine which third party leases (if any) are to be transferred to the scheme and the terms upon which they are transferred, the above extract suggests that the new responsible entity may be liable for rental amounts under the third party leases, but does not set out the basis upon which the new responsible entity could potentially be liable nor the magnitude of that potential liability. To the extent that the above extract states that it is not certain whether or not such liabilities will become liabilities of the new responsible entity it does not explain why that is so.

GPL refers to Mr Lucas’ affidavit, where he says:

Macquarie does not intend to assume the Third Party leases in their current form or take on the liability under the Third Party Leases as part of the Restructure Proposal. From my review of the constitutions of the schemes, GPL does not have a right of indemnity in relation to the Third Party Leases and therefore Macquarie took the view that the liability under the Third Party Leases was not a liability which would novate to a new responsible entity (see Corporations Act s601FS(2)(d)).

GPL says that Macquarie’s view regarding the third party lease indemnity issue (or the basis underlying that view) has not been expressed in clear terms in the explanatory memorandum.

GPL submits that the Court does not need to decide the question of whether GPL relevantly has a right of indemnity in respect of the accrued rental liabilities in considering whether the disclosure made about the Macquarie proposal in the explanatory memorandum was misleading.

The receivers’ submissions concerning the alleged misrepresentations concerning effect of s 601FS

The receivers allege that it was misleading or deceptive for the explanatory memorandum to state (as it did at p 27) that “some of the rights, obligations and liabilities of the former responsible entity in relation to the Scheme may become rights, obligations and liabilities of the new responsible entity ”.

The receivers say that this is a representation as to a future matter, and the plaintiffs contend it is without reasonable grounds. In doing so, the plaintiffs rely on s 4(1) and (2) of the ACL.

The receivers say that this is a reference to s 601FS of the Act (although it is not an accurate statement of the effect of s 601FS).

The receivers say that the risks associated with s 601FS are important matters for growers. That this is so is recognized in the explanatory memorandum, which states that “[u]nder the Restructure Proposal, the New responsible entity will be indemnified for all liabilities it incurs in relation to the proper performance of its duties,” but where insufficient funds are available to reimburse the new responsible entity out of the scheme property, “the New responsible entity may also seek Additional Contributions from investors to fund these liabilities”.

The receivers say that for this reason, it is vital that the explanatory memoranda fully inform growers as to the likelihood of the new responsible entity’s liability for rent and the magnitude of the current and future liabilities to be visited upon the new responsible entity by s 601FS. The receivers say that the explanatory memorandum fails to do so.

The receivers say that the first way in which this part of the explanatory memorandum is misleading is by stating that “some” of the incumbent responsible entity ’s rights, obligations and liabilities “may” become rights, obligations and liabilities of the new responsible entity. The receivers says that this statement is not an accurate reflection of the terms and effect of s 601FS in relation to liabilities arising under current leases.

GPL says that an accurate statement of the position in relation to s 601FS for the purposes of the explanatory memorandum would be to state that “some” of the rights, obligations and liabilities of the former responsible entity in relation to the scheme, particularly rent payable under current leases, “will” (not “may”) become rights, obligations and liabilities of the new responsible entity .

The receivers say that the language of the explanatory memorandum understates the significance of s 601FS. The understatement of the effect of s 601FS is exposed by the inherent tension in the proposed restructure. On the one hand the promoters must be assumed to enlist s 601FS for the purpose of the new responsible entity acquiring the “peppercorn” leases. On the other hand, the explanatory memorandum treats the third party “commercial” leases as merely potential additional liabilities which “may” become liabilities of the new responsible entity . No explanation is given of the analytical basis for this distinction.

The receivers contend that the entire restructure proposal is premised on a flawed understanding of s 601FS. The restructure assumes that the incoming responsible entity and Manager can simply “carve out” obligations of the former responsible entity that it considers are impractical or disadvantageous, choosing to keep only the obligations it considers are “economically attractive”. The receivers say that this is not the case.

GPL refer to Barrett J’s observation in Investa,[61] where his Honour said that ss 601FS and 601FT were drafted so as to cause the new responsible entity to step into the shoes of its predecessor, and to effect an automatic statutory novation of all rights, obligations, liabilities, contracts and other documents to which the old responsible entity was a party. This analysis has been echoed in subsequent cases.[62] In his extra-curial paper, Insolvency of Managed Investment Schemes, Justice Rodney Barrett elaborated on the point, stating:[63]

When a new responsible entity takes office, it becomes, under s 601FS, the statutory inheritor of the rights, obligations and liabilities of the old responsible entity in relation to the scheme. The workings of that section were examined in both Investa Properties Ltd v Westpac Property Funds Management Ltd [(2001) 187 ALR 462)] and Syncap Management (Rural) Australia Ltd v Lyford (2004) 51 ACSR 223. In our postulated situation, the successor will come to owe the debts that brought the old responsible entity undone and to have the rights of recoupment that were insufficient to allow it to continue. Simple replacement of the responsible entity in liquidation therefore does not seem a practical possibility. The automatic vesting of the non-viable combination of liabilities and inadequate rights of recoupment must mean that, in the real world, there will never be a new responsible entity.

[61]Re Investa Properties Ltd (2001) 187 ALR 462, [11].

[62]See, eg, Huntley Management Limited v Timbercorp Securities Limited (2010) 187 FCR 151, [44] per Rares J; Australian Olive Holdings Pty ltd v Huntley Management Ltd (2010) 185 FCR 97, 117 [80]; Saker, in the matter of Great Southern Managers Australia Ltd (Receivers and Managers Appointed) (in liq) (2010) 190 FCR 501, [37] per McKerracher J.

[63]Justice R. I. Barrett, ‘Insolvency of Registered Managed Investment Schemes’ (Paper presented at Banking and Financial Services Law Association, Queenstown, New Zealand, July 2008), 11.

The receivers submit that s 601FS leaves no room for an incoming responsible entity to pick and choose those obligations, liabilities or relationships which it is prepared to take on. The receivers say that it was misleading to growers for the restructure proposal to suggest otherwise.

Macquarie/WABG response

Macquarie/WABG contend that s 601FS(2)(d) allows the estate in land to novate to WABG, while leaving the obligation or liability to pay rent vested in the GPL. They say that the former responsible entity did not have a right to be indemnified out of the scheme property for the rent payable under the Third Party Leases. To the contrary, the former responsible entity had a right to a percentage of the harvest proceeds, regardless of whether that percentage was sufficient to pay its expenses (see clauses 28.3(a) of the constitutions of the schemes; cf clause 28.2(a), which makes no reference to the third party leases, and clause 36(a)).

They say that if the former responsible entity’s percentage of the harvest proceeds is insufficient to cover the rent payable under the third party leases, it has no separate right of indemnity and such rent remains the responsible entity’s personal expense.

Macquarie/WABG agree that it is common ground that the third party leases are rights in relation to the schemes. They say that it is also clear from the Full Court of the Federal Court’s decision in Australian Olive Holdings Pty Ltd v Huntley Management Ltd that s 601FS(1) cannot be used to re-write the terms of the relevant bargain.[64] However, s 601FS(2)(d) does not seek to re-write the bargain. It merely re-allocates the existing rights, obligations and liabilities and turns what is now a bipartisan agreement into a tri-partisan agreement.
[64](2010) 185 FCR 97 (Australian Olive Holdings), [83]-[84].

Macquarie/WABG says that s 601FS does not distinguish between ‘obligations’ and ‘liabilities’ in any meaningful sense. To the contrary, the draftsman appears to use the words ‘liability’ and ‘obligation’ as synonyms:

(a) the opening text of s 601FS(2) refers to ‘rights and liabilities’;

(b) sub-section (2)(c) refers to ‘right, obligation or liability’;

(c) sub-section 601FT(2), which adopts s 601FS(2), refers to ‘right, obligation or liability‘.

Macquarie/WABG says that the evident purpose of s 601FS(2)(d) is to quarantine liabilities (and obligations) that are incurred by the responsible entity alone and that do not create a lien over the scheme property. One obvious statutory purpose of this provision is to protect the incoming responsible entity (and, hence, the members seeking to reconstruct the schemes) from personal liability for the consequences of breach of trust or malfeasance by the outgoing responsible entity .

However Macquarie/WABG says that it is clear from the analysis undertaken by the Full Court in Australian Olive Holdings that s 601FS(2)(d) has a significantly wider reach,[65] providing a defence to any liability to which there is no right of indemnity from scheme property.
[65]Ibid.

Macquarie/WABG says that Parliament chose to use only the word ‘liability’ in sub-s 601FS(2)(d), whereas sub-section (2) applies to ‘rights and liabilities’.

Moreover, sub-s 601FS(2) provides exceptions to the operation of s 601FS(1). Sub-section (1) novates the rights, obligations and liabilities, and sub-s (2) (especially sub-s (2)(d)) then creates a defence to the operation of that section. However, by limiting the operation of sub-s (2)(d) defence to ‘liabilities’, Parliament has expressly confined the scope of the defence.

Macquarie/WABG says that this is consistent with the stated purposes of the Chapter 5C amendments. The Law Reform Commission Report No 65, entitled Collective Investments: Other People’s Money, states that:

2.4      The principal aim of the Review is to ensure adequate and effective protection for investors. …
2.7      Protection against institutional risk. … the law should ensure that the scheme’s assets are isolated from the collapse of the scheme’s operator. …
11.17   The ultimate expression of dissatisfaction by investors in a collective investment scheme is to remove the scheme operator. …

Similarly, in his extra-curial paper Barrett J stated that:[66]

The case I have not considered is that where the responsible entity has separate and independent activities that cause it to become insolvent, even though the scheme or trust remains on a financially healthy footing. That is not really a case of insolvency central to the collective investment and a simple replacement of the responsible entity under the statutory provisions should be feasible.

[66]Justice R. I. Barrett, ‘Insolvency of Registered Managed Investment Schemes’ (Paper presented at Banking and Financial Services Law Association, Queenstown, New Zealand, July 2008).

Macquarie/WABG says that it is clear that liabilities completely separate from the scheme cannot novate under s 601FS(1). It is also clear that s 601FS(1) is drafted in wide terms. However, there must be a dividing line between those liabilities which are assigned to the scheme members (via their new responsible entity ) and those which are not. Subsection 601FS(2)(d) provides one of the markers for that line and, in this case, liability for rent falls on GPL’s side of that line.

Macquarie/WABG says that third, there is no real prejudice to the landowners in this case. They can prove in GPL’s liquidation for their arrears of rent and terminate their leases if they so desire. If WABG wishes to revive the leases and use them for the benefit of the schemes, it is entitled to seek relief from forfeiture of those leases. In seeking relief from forfeiture, the new responsible entity would be obliged to pay the arrears considered by the Court to be just and equitable and to undertake to pay rent and comply with the leases or forestry rights going forward.

Importantly, the fundamentals of the bargain remain the same for the landowners. They have a right to prove in the liquidation for their rent, the right to terminate for non-payment of rent and prove for their loss of bargain damages (along with the windfall gain of the trees), and the right to be paid their arrears before relief from forfeiture can be granted.

Macquarie/WABG says that the allegations concerning s 601FS are irrelevant if WABG’s construction of the operation of s 601FS(2)(d) is accepted in proceeding 3272.

In any event, the position is arguable and Macquarie/WABG’s disclosure of the risk of novation was adequate.

Macquarie/WABG disclosed:

(a) the operation of the section;

(b) that some leases may novate;

(c) that Macquarie/WABG would negotiate with the land owners;

(d) the risk that some rental liabilities would be paid by Macquarie/WABG and recovered from the harvest proceeds;

(e) the risk that Macquarie/WABG may request a voluntary contribution from the growers; and

(f) the risk that the schemes would need to be wound up if the liabilities could not be paid.

In that context, the quantum of the maximum potential liabilities is meaningless, particularly when the schemes would also gain the value of the trees on the novated land. In any event, the liquidators have a power to disclaim the forestry rights and a duty to act in the best interests of the growers (ss 568 and 601FD(1)(c)).

Disclaimers

Macquarie/WABG say that the disclaimers made contemporaneously with the alleged misleading and deceptive conduct (such is the case here) are relevant when considering whether there has been any misleading and deceptive conduct.[67]
[67]See Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, [29].

Discussion of claims concerning s 601FS

As mentioned earlier, the receivers’ allegations of misleading and deceptive conduct concerning s 601FS and the explanatory memorandum are as follows:

1It was misleading or deceptive for the explanatory memorandum to state (as it did at p 27) that “some of the rights, obligations and liabilities of the former responsible entity in relation to the Scheme may become rights, obligations and liabilities of the new responsible entity ”.
2It was a misrepresentation by omission for WABG and Macquarie not to advise Growers: (1) that there was a substantial risk that liabilities for accrued rent would novate to WABG under s 601FS; and (2) of the quantum of the liabilities with respect to accrued rent that would novate to WABG in the event that s 601FS had that effect.
3It was a misrepresentation by omission for WABG and Macquarie not to advise Growers in the explanatory memorandum that the effect of s 601FS and/or s 601FT is to novate ongoing rent obligations to the new responsible entity .
4It was a misrepresentation by omission for WABG and Macquarie not to advise Growers of the quantum of the scheme’s ongoing liabilities.

In my opinion, each of the alleged particulars of misleading and deceptive conduct in paragraphs 1, 2, and 4 are made out.

In my opinion, the explanatory memorandum conveyed a false impression to growers and was thus misleading or deceptive or likely to mislead or deceive. In substance, the explanatory memorandum represented that the Macquarie proposal was better than the joint proposal of the receivers and the liquidators. Macquarie said that the joint proposal would be viewed by buyers as a ‘forced sale.’ The Macquarie proposal was better as it would (subject to certain risks) put the growers in a better bargaining position, as any offer to sell would not be viewed as a forced sale. This would be achieved by restructuring the schemes so that the burden of ongoing rent for the third party leases would be avoided (as well as liability for the outstanding rent on the third party leases). The schemes’ going forward would be viable and seen to be viable. This would put the growers in a much stronger bargaining position when dealing with buyers, as opposed to the joint sale proposal (which would be viewed as a forced sale). The new responsible entity would not be saddled with obligations for commercial rent to third parties, but only peppercorn rent.

I find that the explanatory memorandum conveyed a false impression of what would happen and was thus misleading or deceptive or likely to mislead or deceive. It said that:

(a) “the continuing land area will reduce to approximately 14,000 hectares (the Continued Area).

(b) “If you currently have a lease agreement on land that has not been classified as part of the Continued Area then the new responsible entity will … terminate the existing management agreement in respect of that land …” (my emphasis)

Further instances of representation of what “will” happen are set out in GPL’s submissions, above, in quoting section 2.7 of the explanatory memorandum. Those representations created the false impression about what “will” happen upon the appointment of the new responsible entity. It falsely represented that the responsible entity could choose not to take over the commercial rent leases. It falsely represented that the land under which the growers held their forestry rights would be divided into two parts, a continued area and a non-continued area and that the growers’ rights under their forestry right deeds would be adjusted accordingly.

First and foremost, it is settled law that all the leases (both peppercorn and commercial rent leases) would novate to the new responsible entity. The new responsible entity had no right to pick and choose which leases it would and would not become the lessee of. The explanatory memorandum was misleading or deceptive or likely to mislead or deceive in failing to inform the growers that all the leases held by GPL, including the commercial leases, would novate to the new responsible entity and the new responsible entity would become and enjoy all the rights that GPL held under the leases.

Secondly, the representation that the new responsible entity was only prepared to fund rent on the peppercorn leases (and, by implication, not the commercial leases) created the false impression that the responsible entity had some say or choice in the matter. Rather, whether the new responsible entity would be exempt from liability for the ongoing rent for the leases it would be a party to by force of the Act depended upon an untested legal argument that would lead to the odd result that although the new responsible entity would be the tenant and entitled to all the rights that the previous responsible entity had, it would not be obliged to pay rent for the enjoyment of those rights.

That false impression was compounded by the failure of the explanatory memorandum to clearly explain the effect of Division 3 of Part 5C of the Act. The introductory paragraph to the topic of additional liabilities was misleading and deceptive to growers. It said that under the Corporations Act, if the responsible entity changes, some of the rights, obligations and liabilities of the former responsible entity in relation to the scheme may become rights, obligations and liabilities of the new responsible entity. This is not so. Under the Corporations Act, if the responsible entity of a registered scheme changes, the rights, obligations and liabilities of the former responsible entity become the rights, obligations and liabilities of the new responsible entity (subject to the exceptions in s 601FS(2)). The statement is misleading as only some rights and liabilities are excluded, but not obligations.

More importantly, the wrong impression is given of the Act. The description does not tell the growers that – relevantly – it is only liabilities for which the responsible entity could not have been indemnified out of the scheme property if it had remained the schemes responsible entity which do not become the liabilities of the new responsible entity .

I accept that although that the risk of the new responsible entity being found liable to pay rent under lease arrangement (whether incurred prior to the new responsible entity being appointed or after) was expressly set out under the heading of risk of additional liabilities. I accept that there were numerous disclaimers for the risks involved in the proposal. But in my opinion, general disclaimers do not dispel the misleading and deceptive impression conveyed by the totality of the document. In my opinion, in the context of the document those general disclaimers do not dispel the earlier specific false representations to which I have referred.

Mr Bryant deposes that between $11m to $12.4m in rent payable by GPL to the landlords is currently outstanding, and rent is accruing for the relevant schemes at approximately $1m to $1.2m per month.

The risk in relation to rent (both accrued and ongoing) went to the heart of Macquarie’s proposal. In my opinion, the omission from the explanatory memorandum of the nature and quantum of those risks and what effect the risk eventuating would have on growers and the proposal constituted (in the context of the explanatory memorandum) misleading or deceptive conduct or conduct likely to mislead or deceive growers. In each case, the risk was substantial and the failure to inform growers constituted misleading or deceptive conduct or conduct likely to mislead or deceive growers.

For the new responsible entity to avoid liability for the rents on leases it was assuming involved a substantial risk, as the courts had already found that the leases novated to the new responsible entity. The argument that s 601FS(2)(d) would allow the new responsible entity to avoid liability for the leases it would take over was untested and involved a significant risk. I find that the failure of the explanatory memorandum to so inform growers was misleading or deceptive or likely to mislead or deceive growers.

In my opinion, the proposal creates the false impression to growers that the Macquarie proposal was a viable method for the schemes to continue unburdened by the outstanding rent obligations to the third party landlords and the ongoing rental obligations to those landlords, subject to possible risks. Rather, the proposal was certain to be challenged by the land owners and its success relied on untested legal propositions that, if upheld by the courts, would have led to the odd result that WABG would be entitled to the rights under the leases but not the obligation to pay rents, and that it could abandon these leases at its will and without any cost to it.

Conclusion

In the circumstances, where I have found that the explanatory memorandum was misleading or deceptive or likely to mislead or deceive, I will refrain from addressing the several other allegations of misleading and deceptive conduct that goes to the Industry Edge report and the Macquarie calculator. I also refrain from addressing the issue of whether an appointment of a new responsible entity may be made subject to conditions.

Normally, I would address these issues, but as I have been asked to decide this proceeding urgently I consider that the best course is to deliver my reasons on the s 601FS issue and reserve my decision on the other grounds, subject to any submissions the parties may wish to make.

Consistently with the undertaking given to Pagone J, I propose to order and declare that the resolutions were invalid and of no effect.

[2013] VSC 365

16 July 2013