Timbercorp Finance Pty Ltd (in liq) v De Vries
[2021] VSC 37
•5 February 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2015 00167
| TIMBERCORP FINANCE PTY LTD (IN LIQUIDATION) (ACN 054 581 190) | Plaintiff/Defendant by Counterclaim |
| v | |
| ANTONY DE VRIES and RIAD TAYEH | Defendants/Plaintiffs by Counterclaim |
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JUDGE: | RIORDAN J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 9, 10 and 25 November 2020 |
DATE OF JUDGMENT: | 5 February 2021 |
CASE MAY BE CITED AS: | Timbercorp Finance Pty Ltd (in liq) v De Vries |
MEDIUM NEUTRAL CITATION: | [2021] VSC 37 |
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CONTRACT – Whether terms were incorporated into loan agreements by reference – Whether loan money was advanced in accordance with the loan agreements by journal entries – Whether an agreement that an advance could be made by way of journal entries should be inferred – Whether journal entries merely notional.
CORPORATIONS – Managed investment scheme – Whether responsible entity borrowed money within the meaning of s 601GA(3) of the Corporations Act 2001 (Cth) – Burden of proving contravention by the responsible entity.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P H Solomon QC with Dr C O Parkinson, Mr J W G Grant and Mr J Claridge | Mills Oakley |
| For the Defendants | Mr G Moffatt | Somerset Ryckmans |
HIS HONOUR:
By originating process filed 20 May 2015, the plaintiff (‘Timbercorp Finance’)[1] seeks judgment against the defendants for the principal and interest outstanding under the following loan agreements:
[1]In various extracted quotations in this judgment, Timbercorp Finance is referred to as ‘TFPL’.
Project
Loan No
Date
Type
Loan amount
2006 Almond Early Project
A06/17320
March 2006
Initial
$101,475
2006 Almond Early Project
A06/19422
October 2006
Stage
$27,000
2006 Almond Early Project
L0027119
October 2008
Stage
$37,804.15
2006 Avocado Early Project
AV06/17826
May 2006
Initial
$252,450
2006 Avocado Early Project
AV06/19424
October 2006
Stage
$100,000
2006 Avocado Early Project
L0027117
October 2008
Stage
$116,564.39
2007 Almond Project, 2007 Olive Project and 2007 Avocado and Fruit Project
L0021881
June 2007
Initial
$331,290
2007 Almond Project, 2007 Olive Project and 2007 Avocado and Fruit Project
L0022975
October 2007
Stage
$127,620
2007 Almond Project, 2007 Olive Project and 2007 Avocado and Fruit Project
L0027118
October 2008
Stage
$132,445
The defendants were investors (referred to as ‘Growers’) in certain managed investment schemes, and borrowers under each of the loan agreements referred to in paragraph 1 above, which included two types of finance packages being:
(a)loans financing a Grower’s liabilities to Timbercorp Securities Ltd (‘Timbercorp Securities’)[2] for initial application fees payable in relation to a scheme (‘Initial Loans’); and
(b)loans financing a Grower’s liabilities to Timbercorp Securities for management or operational costs and licence fees or rental payable on a Grower’s investments (‘Stage Loans’).
[2]In various extracted quotations in this judgment, Timbercorp Securities is referred to as ‘TSL’.
The loans were all taken out for the purpose of financing the costs relating to an agribusiness investment enterprise operated by the Timbercorp group of companies (‘the Timbercorp Group’). The history of these investments has been summarised in several judgments of this Court and, for present purposes, I only need to adopt the succinct general background provided by Kennedy J in Timbercorp Finance Pty Ltd (in liq) v Tomes:[3]
[3][2019] VSC 519, [9]-[16] (‘Tomes’).
The Timbercorp Group operated an agribusiness investment enterprise. Timbercorp Limited (TL) is the parent entity of the Timbercorp Group and was a publicly listed company on the Australian Securities Exchange.
The Timbercorp Group’s primary business activity was the establishment, development, marketing and management of primary industry-based projects, the acquisition of land, water rights and infrastructure and the provision of finance to investors in projects. The Timbercorp Group invested more than $2 billion in agribusiness projects in respect of 18,500 investors since 1992.
Timbercorp Finance was established to provide finance to investors to participate in [managed investment schemes (MIS)].
As at April 2009, the Timbercorp Group operated 33 MIS. Timbercorp Securities Pty Ltd (TSL), a wholly owned subsidiary of TL, was the responsible entity for each of the MIS and held an Australian Financial Services Licence.
On 23 April 2009, administrators were appointed to TL, TSL as well as Timbercorp Finance. On 29 June 2009, the creditors of TL, TSL and Timbercorp Finance resolved to wind up the companies, and the administrators were appointed liquidators. Mr Korda was one of those liquidators.
Related litigation
Following the issue of a group proceeding by investors (which was unsuccessful both at trial[4] and on appeal[5]), Timbercorp Finance pursued a large number of recovery proceedings against defaulting borrowers, including the current proceeding. After further litigation, it was decided that the defendants were not estopped from relying upon defences that had not been raised in the group proceeding.[6]
In 2016, a trial of four ‘test cases’ was heard by Judd J which included the matter of Collins and White, which will be referred to below. The defences raised in the test proceedings were unsuccessful both at trial[7] and in respect of two matters that were ultimately prosecuted and adjudicated on appeal.[8]
Since February 2018, the Court has managed 295 ongoing recovery matters.
[4]Woodcroft-Brown v Timbercorp Securities Ltd(in liq) (2011) 253 FLR 240.
[5]Woodcroft-Brown v Timbercorp Securities Ltd(in liq) (2013) 96 ACSR 307.
[6]Timbercorp Finance Pty Ltd (in liq) v Collins [2015] VSC 461; Timbercorp Finance Pty Ltd (in liq) v Collins; Timbercorp Finance Pty Ltd (in liq) v Tomes [2016] VSCA 128; Timbercorp Finance Pty Ltd (in liq) v Collins; Timbercorp Finance Pty Ltd (in liq) v Tomes (2016) 259 CLR 212.
[7]Timbercorp Finance Pty Ltd v Collins (2016) 119 ACSR 478.
[8]White v Timbercorp Finance Pty Ltd (in liq); Collins v Timbercorp Finance Pty Ltd (in liq) (2017) 123 ACSR 284 (‘Collins and White’). An application for special leave was refused by the High Court.
As at this day, there are 93 ongoing proceedings yet to be resolved.
The pleadings
The relevant pleadings on which the trial proceeded were as follows:
(a) statement of claim dated 17 December 2019;
(b)amended defence to statement of claim and counterclaim dated 12 November 2020; and
(c) amended defence to counterclaim and reply dated 27 October 2020.
The loan agreements
It was agreed by both parties that the determination of liability with respect to Loan No A06/17320 would apply with respect to all Initial Loans, and the determination of liability with respect to Loan No A06/19422 would apply with respect to all Stage Loans. I will therefore deal specifically with those two loans.
Loan No A06/17320
By Application and Power of Attorney Form signed 23 March 2006, the defendants applied to Timbercorp Securities for 15 Almondlots at a price of $112,500, being $7,500 per Almondlot. The application stated that a payment of $11,275 was enclosed and the balance of $101,475 was subject to finance.
By Loan Application Form dated 23 March 2006 and headed ‘2006 Timbercorp Projects Finance Package – Loan Application Form’ (‘the Initial Loan Application Form’), the defendants applied to Timbercorp Finance to lend them the balance of $101,475 due to Timbercorp Securities for the purchase of the 15 Almondlots. The Initial Loan Application Form included the following relevant provisions:
(a) On page 1, under the heading ‘Application Check’:
Before completing and signing this application form, all parties should carefully read this application form and the Timbercorp Projects Loan Explanation and Loan Terms provided with this application form (‘Explanation’) and seek independent legal and financial advice.
Unless the context requires otherwise, or the relevant word is defined in this application form, words printed ‘like this’ in this application form and some other key terms are defined in the Timbercorp Projects Loan Explanation and Loan Terms (‘Loan Terms’) document (see page 8 of the Explanation). In the Loan Terms, a reference to the ‘application form’ is a reference to this application form.
…
All applications for finance are subject to approval by Timbercorp Finance.[9]
[9]Emphasis added in bold.
(b)On page 1, under the headings ‘Section Details’ and ‘Sections 16, 17 and 18 - Signatures’:
This, together with the Direct Debit Form, is the only place that you are required to sign. The formal legal documents will be signed on your behalf by attorneys (whom you will have authorised to do so in Section 11 of the application form) once your application has been approved.
(c)In section 6, under the heading ‘Project and Loan Details’, the required loan amount was recorded as $101,475 for a term of 10 years.
(d)In section 7, under the heading ‘Special Conditions’, it was noted in handwriting as follows:
10 year Principal & Interest loan @ 10.5% interest rate (adviser commission rebate) as discussed with Tim Bolger.
(e) In section 12, under the heading ‘Power of Attorney’:
This section of the application form comprises a deed made on the day specified at the end of this application form, by each person and company that signs the form. A reference to you in this section 11 includes each guarantor.
Who and how you appoint
1.You appoint Timbercorp Finance Pty Ltd (ABN 88 054 581 190), each of our Directors and Secretaries, and each of our employees whose job title includes the word ‘manager’ separately as your attorneys.
2.You agree to formally approve anything an attorney does under this Power of Attorney. You declare that this power of attorney is given for valuable consideration and agree that you may not revoke our appointment.
The powers you give us
3. An attorney may, in your name:
(a)execute an agreement comprising the provisions and details completed consistently with this application form, and do everything we need to deliver it to us; …
(f)In section 13, under the heading ‘What Completing and Signing this Form Achieves’, it provided that the completion and signing of the form encompassed various things, including:
· You apply to us for a Timbercorp Finance Loan
…
· You and each guarantor (if any) appoint certain people to do specified things on your behalf, and in your name, under the Power of Attorney in section 12 if your application is accepted; …
(g)In section 14, under the heading ‘Important Acknowledgments’, it was relevantly acknowledged as follows:
By signing this document you and each guarantor (if any) acknowledges and confirms the following (a reference to ‘you’ in this section 14 includes each guarantor):
·you have read and understand each prospectus/product disclosure statement (including the relevant Product Ruling) and the Explanation (including the Loan Terms)[10] …
(h)In section 16, each of the defendants executed the document in the presence of a witness, Ms Baiada.
(i) On page 9, each of the defendants executed a direct debit form.
[10]Emphasis added in bold.
Timbercorp Finance also prepared a document entitled ‘2006 Timbercorp Projects Finance Package – Loan Explanation and Loan Terms’ (‘the Initial Loan Explanation Document’), which consisted of nine pages under the following headings:
(a) Loan Explanation;
(b) Calculation of Instalments;
(c) Loan Terms; and
(d) Provisions.
Under the heading ‘Loan Explanation’:
(a) On page 1, it stated that:
This document explains the basis on which you can apply to borrow money to invest in Timbercorp Projects.
(b)On page 2, under the sub-heading ‘What documents record the loan and the security’, it stated that:
The loan terms at the back of this document will be incorporated into a Loan Agreement if we accept your application. The Loan Terms include the assignment and the guarantee and indemnity. In the application form you and each guarantor (if any) authorise us to:
· complete the details, based on the information in, or provided with, the application form; and
· sign the Loan Agreement as attorney for each of you.
The details and the Loan Terms will form the Loan Agreement which is signed by us as lender and as attorney for you and each guarantor (if any).[11]
[11]Emphasis added in bold.
Under the heading ‘Loan Terms’ there was a pro forma document in which details of the loan, including the name of the borrower, the loan amount, the loan term, the lower interest rate, the amount of instalments and date of the loan agreement were blank. However, the higher interest rate was printed as 13.2% per annum and it was noted that:
This is a pro forma Document. Timbercorp Finance will complete the actual details for a particular applicant in accordance with a power of attorney granted by the applicant in the Loan Application.
Under the heading ‘Provisions’, various terms of the loan were set out. Under the sub-heading ‘Higher interest charges’, it stated that:
We may charge interest at the higher interest rate on any other amount, which is not paid on time.
By letter dated 24 April 2006 to the defendants, Timbercorp Finance confirmed that the defendants’ application for finance had been accepted. It attached a document headed ‘Loan Terms’ in which, unlike the pro forma document referred to in paragraph 11 above, the details of the loan, including the name of the borrower, the loan amount, the loan term, the lower interest rate, the amount of instalments and date of the loan agreement were completed. As with the pro forma document, the higher interest rate was printed as 13.2% per annum.
On 24 April 2006, Mr Mark Hamilton Pryn executed the ‘Loan Terms’ document:
(a) on behalf of Timbercorp Finance; and
(b)‘as attorney for the borrower in the borrower’s personal capacity’ noting his ‘Attorney title’ as ‘Company Secretary’.
By ‘Confirmation Notice/Tax Invoice’ dated 24 April 2006, Timbercorp Securities confirmed that the date of acquisition of each of the lots was 24 April 2006 and that the management costs of $112,500 had been paid.
Journal entries
The evidence of Timbercorp Finance’s expert, Mr Stone, was that the advancing of the loan by Timbercorp Finance, and the discharge of the debt payable by the defendants to Timbercorp Securities, were effected by a series of journal entries dated 24 April 2006. For each Initial Loan, Timbercorp Limited (‘Timbercorp Ltd’)[12] transferred a sum of money, which was equivalent to the amount owed by the Grower under the Initial Loan, to Trust Company of Australia Limited (‘Trust Company’),[13] who received the money on behalf of Timbercorp Securities (‘Trust Co payment’). Mr Stone described the recording of the journal entries as follows:
[12]In various extracted quotations in this judgment, Timbercorp Ltd is referred to as ‘TL’.
[13]Pursuant to various custody agreements, Trust Company was appointed by Timbercorp Securities as custodian to receive and hold moneys paid by applicants in order to acquire interests under the scheme: see Collins and White (2017) 123 ACSR 284, 293 [30]-[31].
As TL was the entity with the operating bank account, in the Timbercorp Group:
(a)there was not at any time any actual ‘money’ payment (i.e. by way of cash, cheque or an electronic funds transfer) by TFPL to TSL;
(b)instead, the payment by TFPL to TSL discharging a Grower’s liability (or liabilities) to TSL was recorded by way of journal entries in the general ledgers of TSL and TFPL which show:
(i) a discharge of the Grower’s liability (or liabilities) to TSL;
(ii)a liability owed by the Grower to TFPL equal to the amount of the Grower’s discharged liability to TSL; and
(iii)a liability owed by TFPL to TSL equal to the amount of the Grower’s discharged liability to TSL; and
(c)where a loan was an Initial Loan, TL transferred ‘money’ to a Trust Co trust account on behalf of TSL, with an intercompany loan recorded in TSL and TL’s general ledgers as owing by TSL to TL for the amount of that transfer.
…
The transactions described at [the previous paragraph] above were recorded in the Timbercorp Group’s Great Plains general ledgers such that (heavily summarised, excluding GST and as elaborated below), if a Grower owed TSL $100, and took out a loan from TFPL for 90% of that liability, then, as a result of the relevant journal entries, the position between each of the Timbercorp Group entities and the Grower would be recorded in the general ledger as follows:
(a) TSL would record revenue of $100;
(b) the Grower would be recorded as:
(i) having paid $10 to TSL as a deposit from the Grower (Deposit);
(ii) owing $90 to TFPL (as an asset of TFPL) (Balance Liability);
(iii) having no residual liability to TSL;
(c)TFPL would be recorded as owing TSL $90 (which would be reflected as a liability in TFPL’s general ledger and an asset in TSL’s general ledger); and
(d)funds would be transferred by TL to the relevant Trust Co trust account on behalf of TSL, with TSL owing TL for the amount of funds transferred.
The same steps would occur for Stage Loans except that the step set out [in the immediately preceding sub-paragraph (d)] did not occur. That is, no transfer of funds would occur in the case of Stage Loans.
Loan No A06/19422
By Loan Application Form dated 12 October 2006 and headed ‘Timbercorp 2006 On-going Finance Package - Loan Application Form’ (‘the Stage Loan Application Form’), the defendants applied for a loan amount of $27,000, being the total project payments due of $30,000 less a deposit of $3,000. It was otherwise relevantly identical to the Initial Loan Application Form.
Timbercorp Finance also prepared a document entitled ‘Timbercorp 2006 On-Going Finance Package – Loan Explanation and Loan Terms’ (‘the Stage Loan Explanation Document’). It was relevantly identical to the Initial Loan Explanation Document, except that under the heading ‘Provisions’, clause 1 referred to the ‘payment of the balance of your invoice for your lots’ rather than ‘the balance of your application money for lots’.
By letter dated 27 October 2006 to the defendants, Timbercorp Finance confirmed that the defendants’ application for finance had been accepted. It attached a document headed ‘Loan Terms’ in which the details of the loan, including the name of the borrower, the loan amount, the loan term, the lower interest rate, the amount of instalments and date of the loan agreement were completed. As with the pro forma document provided with the Initial Loan Application Form, referred to in paragraphs 11 and 13 above, the higher interest rate was printed as 13.2% per annum.
Issues for determination
The parties agreed that the issues raised by the proceeding were as follows:
TERMS OF THE AGREED LOAN
1.Did each of the defendants’ offers to borrow from the plaintiff include a term that the ‘higher interest rate’ as defined is 13.20% per annum?
2.If no to question 1, did the defendants ratify each loan agreement that included a term that the ‘higher interest rate’ as defined is 13.20% per annum?
3.If no to question 2, was each loan agreement executed on the defendants’ behalf by a person authorised to do so by the loan application?
4.If yes to question 3, was each loan agreement executed on the defendants’ behalf completed consistently with the loan application?
INITIAL LOANS - ILLEGALITY
5.Did any step identified by Mr Stone in relation to the initial loans involve TSL borrowing or raising money for the purposes of the relevant schemes, within the meaning of s 601GA(3) of the Corporations Act 2001 (Cth)?
6.If yes to any step, do the scheme constitutions give TSL power to effect such step(s)?
7.If no to question 6, are the impugned step(s) of the transaction illegal and of no effect?
8.If no to question 6, was TFPL involved in TSL’s contravention of s 601GA(3)?
9.If yes to questions 7 and 8, are the loan agreements for initial loans unenforceable on the ground of illegality in the performance of those agreements?
STAGE LOANS - NOTIONAL
10.Are the journal entries in respect to the Stage Loans merely notional in the sense that they were unaccompanied by any actual transfer of funds such that there was not performance within the meaning of clause 1 of the Loan Agreements in respect to the Stage Loans and they are therefore unenforceable for failure of consideration?
Authorities
The issues raised in this proceeding have been considered in the following previous decisions of this Court.
The Collins proceedings
In Timbercorp Finance Pty Ltd v Collins,[14] Judd J determined four recovery proceedings filed by Timbercorp Finance as test cases.
[14](2016) 119 ACSR 478 (‘Collins’).
Relevantly, Timbercorp Finance had used the same system of journal entries for recording the Initial Loans and associated transactions as described by Mr Stone in this proceeding.[15]
[15]See paragraph 16 above.
The defendants in Collins contended that the journal entry, which recorded an increase in Timbercorp Finance’s liability to Timbercorp Securities, did not record a ‘payment’ of the Grower’s loan amount to Timbercorp Securities in its capacity as responsible entity under chapter 5C of the Corporations Act 2001 (Cth) (‘the Act’).[16] In particular, the defendants argued that there was no evidence of an underlying agreement to support the use of journal entries as establishing such a payment.[17]
[16]Collins (2016) 119 ACSR 478, 539 [274].
[17]Ibid 544 [295].
Judd J held that it was necessary for Timbercorp Finance to prove an agreement with Timbercorp Securities that the advance could be made by way of journal entries under the loan agreement (‘journal entry agreement’), and that the advance had in fact been made under the loan agreement.[18] He found that Timbercorp Finance had satisfied that evidentiary burden,[19] and that a journal entry agreement should be inferred, for the following reasons:
[18]Ibid 546 [306].
[19]Ibid 544 [295].
(a) The inference of a journal entry agreement was supported by the following:
(a)The Timbercorp group carried on business as a group of wholly owned subsidiaries under Timbercorp Ltd.
(b) There were common directorships and officeholders.
(c) The Group prepared and filed consolidated accounts.
(d)The Group maintained only one central operating account, into which all funds were paid and out of which all expenses were paid.
(e)The Group maintained ledgers for the operating entities, Timbercorp Securities and the plaintiff, which contained journal entries recording transactions, in dollar amounts, without underlying cash transfers.
(f)The accounts of the Group were regularly audited and published. The defendants points to no qualification or criticism by an auditor or a regulator of the way in which the Group maintained its accounts.[20]
(b)The books of account recorded the discharge of the defendants’ loan obligations.[21]
(c)The movement of money in bankable form satisfied the commercial interest of the defendants in having real value paid to the manager in satisfaction of the management fee obligations.[22]
(d)The defendants derived full value for their loan obligation because the effect of the journal entries was to discharge each defendant’s anterior obligation.[23]
[20]Ibid 545 [298].
[21]Ibid 546 [306].
[22]Ibid.
[23]Ibid.
The appeal from Judd J’s decision was dismissed by the Court of Appeal.[24] The Court upheld Judd J’s finding that the relevant journal entry did constitute ‘payment’ to Timbercorp Securities of the balance of the Grower’s application money within the meaning of clause 1 of the loan agreement.[25]
[24]Collins and White (2017) 123 ACSR 284.
[25]Ibid 328 [162].
The Court’s conclusion depended solely upon the existence of a journal entry agreement.[26] As there was no express agreement, the Court had regard to the whole context and concluded that, for the purposes of inferring a journal entry agreement, the following features were critical:
[26]Ibid 324 [153].
(a)Timbercorp Finance and Timbercorp Securities were wholly owned subsidiaries of Timbercorp Ltd and had the same directors.[27]
[27]Ibid 323 [147].
(b)The Timbercorp Group had only one operating bank account, which was in the name of Timbercorp Ltd.[28]
[28]Ibid.
(c)The financial accounts of Timbercorp Finance and Timbercorp Securities were the subject of directors’ declarations that they gave a true and fair view of the company’s financial position and, in particular:
(i)complied with accounting standards;
(ii)gave a true and fair view of the financial position and performance of the company and the consolidated entity; and
(iii)were, in the opinion of the directors, in accordance with the Act.[29]
(d)The financial accounts were the subject of an independent audit report substantially to the same effect.[30]
(e)Corresponding declarations and reports were made in respect of Timbercorp Ltd.[31]
[29]Ibid.
[30]Ibid.
[31]Ibid.
In these circumstances, the Court observed that:
Absent some special feature, an agreement that intercompany transactions may be evidenced by journal entry must be inferred in this case. Any contrary conclusion defies commercial sense.[32]
[32]Ibid.
The Court also rejected the appellants’ argument that the fact that Timbercorp Ltd’s bank account was used to transfer an amount equivalent to the balance of the application money to Trust Company could not be reconciled with the existence of an inferred journal entry agreement.[33] The Court rejected that submission because:
(a)the fact that the transaction involved Timbercorp Ltd’s bank account only reflected the fact that it was the only company in the Timbercorp Group with an operating bank account; and
(b)‘[i]n any event … contractual intent giving rise to the inferred agreement between Timbercorp Finance and Timbercorp Securities had already crystallised by the time that that transaction took place’.[34]
[33]Ibid [148].
[34]Ibid.
With respect to the proposition that, if the journal entries were notional, there would have been no payment that complied with clause 1, the Court said:
If the journal entries were simply notional, there might not have been performance under cl 1 of the Loan Agreement; that circumstance would tell against inferring the necessary agreement. But the journal entries were not simply notional. They were accompanied by payment by Timbercorp Finance to the custodian (by Timbercorp Ltd on behalf of Timbercorp Finance). … [I]n Equuscorp, the High Court spoke of debts that ‘were created and satisfied at all points in the chain’ and that, ‘of most particular relevance to the present matters, in accordance with its obligations under the written loan agreements, Rural Finance had applied the money it lent in payment of the application moneys due from the respondents for the units being bought’.[35]
[35]Ibid 325 [155] (emphasis omitted) (citations omitted).
The Tomes proceeding
In Tomes, Kennedy J considered the enforceability of loan agreements in substantially the same form and effected in the same manner as the agreements the subject of this proceeding.[36] Relevantly, her Honour considered:
(a)whether the ‘Loan Explanation’ and ‘Loan Terms’ were incorporated as terms of the loan agreement; and
(b)whether the journal entries in relation to a Stage Loan were only ‘notional’.
[36][2019] VSC 519. Counsel and solicitors who appeared for the defendants in this proceeding also appeared on the first two days of trial for the defendant in Tomes, but then withdrew.
Kennedy J found that the defendant was taken to have intended to make an offer to borrow on terms, as provided in the Loan Explanation and Loan Terms, for the following reasons:
(a)She was satisfied that the defendant had been provided with the Loan Explanation and Loan Terms prior to the execution because the defendant had signed the loan application which:
(i)referred to the documents being provided with the application form; and
(ii) acknowledged that he had ‘read and understood’ the documents.[37]
(b)Even if the defendant had not read the documents, given the circumstances set out in the previous sub-paragraph, ‘a reasonable person would have concluded that Mr Tomes intended to contract in accordance with the terms as set out in the Loan Explanation and Loan Terms’.[38]
[37]Ibid [88]–[90] (emphasis omitted).
[38]Ibid [93], applying the principles in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, 185 [57], 183-4 [53]-[54], 187 [63] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ).
With respect to the submission that the journal entries with respect to the Stage Loans were ‘notional’, Kennedy J noted that the evidence relating to the journal entries:
(a)generally established that the payment had been made, subject to whether an agreement could be inferred;[39] and
(b)was ‘virtually identical to that considered by the Court of Appeal’ in Collins and White.[40]
[39]Tomes [2019] VSC 519, [137].
[40]Ibid [138].
Kennedy J concluded that there was a journal entry agreement between Timbercorp Finance and Timbercorp Securities on the basis that the features identified by Judd J in Collins, referred to in paragraph 25 above, and the features identified by the Court of Appeal in Collins and White, referred to in paragraph 27 above, were all present in the proceeding before her.[41] Further, the relevant audited scheme accounts recorded receipt of payment from Growers and treated Timbercorp Finance’s payment to Timbercorp Securities as legally effective.[42]
[41]Ibid [140]-[141], [145].
[42]Ibid [142].
Her Honour rejected the defendant’s submission that a journal entry agreement ought not be inferred because the Stage Loans were not associated with a transfer of funds to Trust Company,[43] for the following reasons:
(a)The factors referred to in the previous paragraph overwhelmingly supported the inference of a journal entry agreement and any conflicting conclusion would be contrary to commercial sense.[44]
(b)It was unlikely that Timbercorp Finance and Timbercorp Securities had reached an agreement that journal entries were effective for an Initial Loan but not for a Stage Loan.[45]
(c)The contractual intent which gave rise to the journal entry agreement had crystallised by the time of the Trust Co payment (as the Court of Appeal had highlighted).[46]
(d)There was nothing in the reasoning of the Court of Appeal which suggested that a Trust Co payment was determinative of whether or not the journal entries were ‘notional’.[47]
[43]Ibid [134]-[135], [144].
[44]Ibid [145].
[45]Ibid [146].
[46]Ibid [147].
[47]Ibid [148].
Consideration
Question 1 - Did each of the defendants’ offers to borrow from Timbercorp Finance include a term that the ‘higher interest rate’ (as defined) is 13.2% per annum?
The defendants submitted that the higher interest rate of 13.2% per annum was not a term of the loan agreements as it was not included in the the Initial Loan Application Form or the Stage Loan Application Form.
Under the heading ‘Loan Terms’, the Initial Loan Explanation Document and the Stage Loan Explanation Document (together, ‘the Explanation Documents’) each included a higher interest rate of 13.2% per annum in its printed terms and, under the heading ‘Provisions’, it expressly stated:
We may charge interest at the higher interest rate on any other amount, which is not paid on time.
Accordingly, the answer to the above question depends on whether the Explanation Documents were incorporated by reference into the loan agreements.
In Tomes, in relevantly indistinguishable circumstances, Kennedy J concluded that the Loan Terms and Loan Explanation had been incorporated into the loan agreement by reference, for the following reasons:
(a)She identified the test of contractual incorporation as being whether a reasonable person would have concluded that the parties intended to contract in accordance with the terms as set out in the Loan Explanation and Loan Terms.[48]
(b) The signed loan application form had:
(i)referred to the fact that the Loan Explanation and Loan Terms had been provided with the loan application form; and
(ii)acknowledged that the Loan Explanation and Loan Terms had been read and understood by the applicant.
[48]Ibid [93]. In the case before me, counsel for the defendants accepted that her Honour had identified the correct test.
The defendants in the case before me submitted that her Honour was wrong. I disagree. In my opinion, her Honour’s conclusion was plainly correct and the indistinguishable circumstances of this case require that I also conclude that the Explanation Documents were incorporated into the loan agreements constituted respectively by:
(a)the defendants’ offer in the Initial Loan Application Form and Timbercorp Finance’s acceptance by letter dated 24 April 2006 (‘the Initial Loan Agreement’); and
(b)the defendants’ offer in the Stage Loan Application Form and Timbercorp Finance’s acceptance by letter dated 27 October 2006 (‘the Stage Loan Agreement’).
This is not a case where the term sought to be included, being a higher interest rate, is so onerous or unusual that the law may impose an obligation to take special steps to draw it to a contracting party’s attention.[49] A higher interest rate, which is payable on the borrower’s default, is a common term in loan agreements.
[49]See, eg, Maxitherm Boilers Pty Ltd v Pacific Dunlop Insurances Pte Ltd [1998] 4 VR 559, 569 (Buchanan JA, with whom Ormiston and Callaway JJA agreed); Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, 184 [54] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ).
Accordingly, the answer to question 1 is ‘yes’, and it is not necessary to consider questions 2 to 4.
Question 5 - Did any step identified by Mr Stone in relation to the Initial Loans involve Timbercorp Securities borrowing or raising money for the purposes of the relevant schemes, within the meaning of s 601GA(3) of the Corporations Act 2001 (Cth)?
Defendants’ submissions
Section 601GA(3) of the Act provides as follows:
If the responsible entity is to have any powers to borrow or raise money for the purposes of the scheme:
(a) those powers must be specified in the scheme’s constitution; and
(b)any other agreement or arrangement has no effect to the extent that it purports to confer such a power.
The defendants contended that Timbercorp Securities had borrowed money from Timbercorp Ltd to effect the Trust Co payment in contravention of s 601GA(3) of the Act. The defendants relied upon the following:
(a)Mr Stone’s evidence was that, as part of the Trust Co payment, ‘funds would be transferred by TL to the relevant Trust Co trust account on behalf of TSL, with TSL owing TL for the amount of funds transferred’.[50]
(b)The evidence of the journal entries, contained in Mr Stone’s witness statement, recorded Timbercorp Securities’ indebtedness to Timbercorp Ltd in respect of the Trust Co payment.
(c)By letter dated 13 March 2015 to the defendants’ solicitors, the plaintiff’s solicitors stated:
As is apparent from the aide, in order to advance funds to settle the initial application funds or invoices pursuant to its obligations under the Loan Agreements, Timbercorp Finance borrowed funds from TSL, which in turn borrowed funds from Timbercorp Limited (In Liquidation) (TL).
[50]Emphasis added.
In summary, the defendants submitted that in order to make the Trust Co payment, pursuant to its obligations under the Initial Loan Agreement, Timbercorp Finance borrowed funds from Timbercorp Securities, which in turn borrowed funds from Timbercorp Ltd.
Conclusion
As the evidence of Mr Stone establishes, the offsetting entry for the Trust Co payment in the general ledger account in the books of Timbercorp Ltd, was a debit (being a positive entry for Timbercorp Ltd) in the loan account between Timbercorp Ltd and Timbercorp Securities.
However, at the time of the Trust Co payment, for each of the Initial Loans, Timbercorp Ltd was substantially indebted to Timbercorp Securities. In summary, the financial records show that the opening and closing monthly balances in the general ledger account, in each of the months in which a Trust Co payment was made, were as follows:
Date of Trust Co payment
Loan No
Project
Opening monthly balance
Closing monthly balance
May 2006 A06/17320 2006 Almond Early Project $205,390,575 $192,900,000 June 2006 AV06/17826 2006 Avocado Early Project $192,869,414 $217,900,000 June 2007 L0021881 2007 Almond Project, 2007 Olive Project and 2007 Avocado and Fruit Project $218,500,709 $258,300,000
I accept the evidence of Mr Stone that given the size of the opening balance, even if all of the credits identified for the relevant month had occurred before any debits, there would still not have been any net indebtedness by Timbercorp Securities to Timbercorp Ltd at any time during any of the relevant months.
The payment by Timbercorp Ltd to Trust Company for the benefit of Timbercorp Securities, which only had the effect of reducing the amount owed by Timbercorp Ltd to Timbercorp Securities, could not constitute borrowing or a loan by Timbercorp Securities in any sense, much less for the purposes of s 601GA(3) of the Act.
In oral submissions, counsel for the defendants did not contest this proposition but rather contended, for the first time, that the Court could not be satisfied that the amount shown as owing to Timbercorp Securities on the Timbercorp Ltd loan account was owing to Timbercorp Securities in its capacity as a responsible entity. I reject this submission for the following reasons:
(a)No notice was given of this contention at any time prior to final submissions, either in pleading or by puttage to Timbercorp Finance’s witnesses.
(b)The fact that the relevant debits and credits arising from the Trust Co payment were recorded on the same trial balance summary for Timbercorp Securities is not consistent with the dealings relating to Timbercorp Securities being transacted in different capacities.
(c) There was no evidence that:
(i)Timbercorp Securities acted in a capacity other than as a responsible entity; or
(ii)the entries in the trial balance summary for Timbercorp Securities, which recorded the indebtedness of Timbercorp Ltd to Timbercorp Securities, were other than in Timbercorp Securities’ capacity as a responsible entity.
(d)The defence of illegality based on an alleged breach of s 601GA(3) of the Act was pleaded by the defendants, and they bore the onus of proving the elements, including the relevant borrowing.[51] They failed to satisfy that onus.
[51]Currie v Dempsey [1967] 2 NSWR 532, 539 (Walsh JA), quoted with approval in Australian Winch & Haulage Co Pty Ltd v Collins [2013] NSWCA 327, [76] (Sackville AJA with whom Emmett and Leeming JJA agreed) and cited in Charter Hall Real Estate Management Services (NSW) Pty Ltd v New South Wales [2020] NSWCA 26, [73] (White JA with whom McFarlan JA and Simpson AJA agreed).
Accordingly, the answer to question 5 is ‘no’, and it is not necessary to answer questions 6 to 9.
Question 10 - Are the journal entries with respect to the Stage Loans merely notional?
The defendants submitted as follows:
(a)The journal entries relating to the Stage Loans were ‘notional’ in the sense that they were unaccompanied by any actual transfer of funds, such that there was no performance within the meaning of clause 1 of the loan agreements with respect to the Stage Loans. Therefore, they are unenforceable for failure of consideration.
(b)The present case was distinguishable from Collins and White because, in that case, the fact that there had been a Trust Co payment was a determinative element of the Court of Appeal’s finding of a journal entry agreement. Such a payment was not present with respect to the Stage Loans.
(c)Accordingly, the journal entries did not constitute a payment under clause 1 of the loan agreements.
This proposition was rejected by Kennedy J in Tomes,[52] for the reasons summarised in paragraphs 33 to 35 above. I agree with her Honour’s analysis and therefore, I reach the same conclusion for the same reasons.
[52][2019] VSC 519, [145]-[148].
Accordingly, the answer to the question 10 is ‘no’.
In Tomes, this argument with respect to the absence of any Trust Co payment was only relevant to Stage Loans.[53] However, before me the defendants contended that the argument should also apply to the Initial Loans because, in the statement of claim, the pleading of the Initial Loans did not include a reference to the Trust Co payment.
[53]Ibid.
By way of example, in paragraph 10 of their statement of claim, Timbercorp Finance pleaded payment of the amount advanced under Loan A06/17320 as follows:
The Plaintiff paid the A06/17320 Loan Amount to TSL (or as it directed) as payment of the balance of the application money for the Defendants’ lots and the loan application fee, by:
(a) the following:
(i)a debit entry of $332,283.45 (which included the A06/17320 Loan Amount) on 26 April 2006 to an account in the general ledger of the Plaintiff named ‘Loan Control Account’ and numbered 51-1221, by way of a journal voucher numbered 355224 entered into the Great Plains accounting software maintained by the Plaintiff and TSL;
(ii)a credit entry of $332,283.45 (which included the A06/17320 Loan Amount) on 26 April 2006 to an account in the general ledger of the Plaintiff named ‘Loan – Timbercorp Securities Limited’ and numbered 51-1208, by way of the same journal voucher;
(iii)a debit entry of $332,283.45 (which included the A06/17320 Loan Amount on 26 April 2006 to an account in the general ledger of TSL named ‘Loan – Timbercorp Finance Pty Ltd’ and numbered 12-1200, by way of the same journal voucher;
(iv)a credit entry of $332,283.45 (which included the A06/17320 Loan Amount) on 26 April 2006 to an account in the general ledger of the Plaintiff named ‘Suspense New Loans Advanced’ and numbered 12-7234, by way of the same journal voucher;
(v)TSL recording in its ‘Timbercorp Information Management System’ on 24 April 2006, the settlement of the Defendants’ balance liabilities to TSL (following payment of their deposit) recorded in invoices 1286962 and 1286970 issued 1 December 2005,
and thereby loaned it to the Defendants in accordance with the terms of Loan Agreement A06/17320.
By their amended defence to statement of claim and counterclaim, in response to paragraph 10, the defendants:
(b)deny that there was any agreement between TSL and the Plaintiff, whether express or to be inferred, that payment could be made by journal entries; [and]
(c)say that if the book entries referred to in paragraph 10 of the Statement of Claim represent the payment of the balance of the application money for the defendants’ lots, they are notional only and do not reflect any actual payment of application money from the Plaintiff to the custodian.
By its amended defence to counterclaim and reply, Timbercorp Finance denied this plea.
Given my finding that the Trust Co payment was not determinative in deciding whether there was a journal entry agreement, this argument does not arise. However, I would have rejected this argument for the following reasons:
(a) The purposes of pleadings are to:
(i) give fair notice to other parties about the case they must meet; and
(ii) determine what evidence is relevant at trial.[54]
(b)However, if the parties fairly embrace issues at trial, the Court should determine the real controversy between the parties based on the evidence as presented at trial.[55] A court should be mindful that ‘observance of the rules of pleading is intended to facilitate the fair determination of the real issues in dispute between the parties, and is not an end in itself’.[56]
(c)Mr Stone’s evidence with respect to the Trust Co payment was filed and served on or about 5 October 2020, more than a month before the commencement of trial. There was no objection to the admission of the evidence about the Trust Co payment.
(d) Counsel for the defendants did not contend that:
(i)that the defendants were not aware of the purpose of this evidence or its significance given the findings of the Court of Appeal in Collins and White and Kennedy J in Tomes; or
(ii)that the defendants were taken by surprise or that they suffered prejudice by reason of the absence of any specific plea of reliance on the Trust Co payment with respect to the Initial Loans.
[54]Brighton Australia Pty Ltd v Multiplex Constructions Pty Ltd (2018) 56 VR 557, 578 [50] (Riordan J), citing Downer Connect Pty Ltd v McConnell Dowell Constructors (Aust) Pty Ltd [2008] VSC 77, [1]–[2] (Harper J).
[55]Banque Commerciale SA (en liqn) v Akhil Holdings Ltd (1990) 169 CLR 279, 296-7 (Dawson J).
[56]Bauer Consumer Media Ltd v Evergreen Television Pty Ltd (2019) 367 ALR 393, 455 [250] (Burley J), citing Banque Commerciale SA (en liqn) v Akhil Holdings Ltd (1990) 169 CLR 279, 286-7 (Mason CJ and Gaudron J).
In the circumstances, I consider that it would have been appropriate to determine the real issues in dispute between the parties and to permit Timbercorp Finance to rely on its evidence with respect to the Trust Co payment.
Further, the most that could be said is that the Trust Co payment should have been particularised as one of the facts from which Timbercorp Finance would allege that the journal entry agreement should be inferred. Nothing further needs to be said on this question because the determinative feature is that the defendants were not prejudiced by any alleged deficiency in Timbercorp Finance’s pleading.
Orders
I propose to enter judgment for Timbercorp Finance in respect of each of the loan agreements referred to in paragraph 1 above, and I will hear the parties on the questions of the principal sums outstanding, interest and costs.
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