Timbercorp Finance Pty Ltd v Collins
[2016] VSC 776
•15 December 2016
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
BETWEEN: S CI 2014 02972
| TIMBERCORP FINANCE PTY LTD (IN LIQUIDATION) (ACN 054 581 190) | Plaintiff |
| v | |
| DOUGLAS JAMES COLLINS & ORS | Defendants |
-AND-
BETWEEN: S ECI 2014 00419
| TIMBERCORP FINANCE PTY LTD (IN LIQUIDATION) (ACN 054 581 190) | Plaintiff |
| v | |
| PETER JOHN WHITE & ANOR | Defendants |
-AND-
BETWEEN: S ECI 2014 03482
| TIMBERCORP FINANCE PTY LTD (IN LIQUIDATION) (ACN 054 581 190) | Plaintiff |
| v | |
| PETER JEFFREY GRUYTERS | Defendant |
-AND-
BETWEEN: S ECI 2014 00425
| TIMBERCORP FINANCE PTY LTD (IN LIQUIDATION) (ACN 054 581 190) | Plaintiff |
| v | |
| MORAG LOWE | Defendant |
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JUDGE: | JUDD J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 8, 9, 10, 11, 15, 16, 17, 18, 22, 23 August 2016 | |
DATE OF JUDGMENT: | 15 December 2016 | |
CASE MAY BE CITED AS: | Timbercorp Finance Pty Ltd v Collins & Ors | |
MEDIUM NEUTRAL CITATION: | [2016] VSC 776 | First revision: 24 January 2017 |
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CORPORATIONS – Managed Investment Scheme – Recovery of Scheme loans – Defences – Test cases – Application Money – Management Fees – Responsible entity as trustee – Duties of responsible entity – Authority to pay Management Fees – Scheme Constitutions – Construction of loan agreement – Whether a loan made – Loan evidenced by journal entries – Corporations Act 2001 (Cth) s 601FC(1).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr D J Batt, one of Her Majesty’s Counsel with Mr C O Parkinson and Ms H A Tiplady | Mills Oakley Lawyers |
| For the Defendants Collins and White | Mr M D Wyles, one of Her Majesty’s Counsel with Ms F L Shand and Mr D J Fahey | M + K Lawyers |
| For Timbercorp Securities Ltd | Dr O Bigos | Arnold Bloch Leibler |
| For the Defendants Gruyters and Lowe | Mr D J Farrands with Mr R Kruse | Slater & Gordon |
HIS HONOUR:
Introduction and background
This was a trial of four proceedings, given the status of ‘test cases’, representing issues raised by defendants to recovery proceedings commenced by Timbercorp Finance Pty Ltd (in liquidation). The plaintiff had commenced more than 1,500 recovery proceedings. In each proceeding the plaintiff claimed the unpaid balance of a loan, with interest and costs. M+K Lawyers represent approximately 350 defendants, and Slater & Gordon Ltd represent approximately 200 defendants. Most of the Slater & Gordon defendants have executed a deed poll binding them to the outcome. The object of the trials was to determine the merits of common defences, falling into two broad categories, filed by defendants represented by the two firms.
The plaintiff and each firm agreed to put forward two proceedings in which Slater & Gordon represent defendants, and two proceedings in which M+K represent defendants, as representative of the issues raised across all defences involving growers who applied for a loan or loans to finance their investment in one or more of three Timbercorp schemes. The schemes are the 2007 Almond Project, the 2008 Olive Project, and a 2007/2008 Single Payment Timberlot Project. I will refer to these projects as the Almond Project, Olive Project and Timberlot Project.
Within each project there were investment options, depending on the timing of the investment. Growers who invested in the Timberlot Project between 5 December 2006 and 30 June 2007, were known as the ‘pre-30 June growers’, while those who invested after 30 June 2007, but before 30 June 2008, were known as the ‘post-30 June growers’. For the Almond Project, there were ‘Early Growers’, who invested after 27 November 2006, but before 15 June 2007; and ‘post-30 June growers’ who invested before 15 June 2008. The Olive Project opened on 26 February 2008 and closed on 15 June 2008. The description of the relevant Olive Project is sometimes qualified by the descriptor, ‘Early’.
The defendant in the first of the M+K proceedings is Peter John White[1] and in the second proceeding, the defendants are Douglas James Collins and Janet Ann Collins.[2] Their defences represent a discrete category of issues for determination. The Slater & Gordon defendants are Peter Jeffrey Gruyters,[3] and Morag Lowe.[4] Their defences represent a case which is fundamentally inconsistent with the defences filed by the M+K defendants.
[1]S ECI 2014 000419.
[2]S CI 2014 02972.
[3]S CI 2014 03482.
[4]S ECI 2014 00425.
The circumstances in which so many recovery proceedings were commenced over a relatively short period of time by the plaintiff, and in which it became appropriate to conduct a trial of four test cases, requires some explanation.
The plaintiff was a member of the Timbercorp group of companies established in 1992. At the time administrators were appointed in 2009, the group comprised Timbercorp Ltd, the parent company, and a number of wholly owned subsidiaries, including the plaintiff and Timbercorp Securities Ltd.[5]
[5]The third defendant in proceeding S CI 2014 02972 and the second defendant in proceeding S ECI 2014 00419.
The Timbercorp group’s primary business activity was the establishment, development, marketing and management of primary industry-based managed investment scheme. The business involved the acquisition of land, water rights and infrastructure, and the provision of finance to investors. Between 1992 and 2009, the Timbercorp group invested more than $2 billion in agribusiness projects on behalf of around 18,500 growers. Most investors borrowed moneys from the plaintiff to finance their investments, including the defendants. Some invested in multiple projects and had multiple loans, while others had multiple loans in respect of a single project.
By way of example, of 1,334 growers investing in the Almond Project (Early), 1,053 financed their investment through the plaintiff. Of the 163 growers who invested in the Post-30 June Almond Project, 153 entered into loan agreements with the plaintiff. Product Rulings made by the Australian Taxation Office allowed interest charges under loans by the plaintiff as a deductible expense. The rulings expressly stated that they did not apply to other methods of financing. The plaintiff offered to lend investors up to 90 per cent of all fees payable, apart from those to be recovered from harvest.
The circumstances in which investments were made, their context and purpose, will be discussed below. This was a dispute, in each group of proceedings, concerning the construction of certain provisions of the management and loan agreements. An important feature of each investment was the creation of an immediate deduction against income, for 100 per cent of the amount paid in Management Fees, and if financed through the plaintiff, the interest. Scheme documents transparently promoted the tax benefit, supported by binding Product Rulings made by the Australian Taxation Office, which were used to promote sales. Thus, a deduction of 100 per cent of Management Fees could be obtained with an immediately outlay of only 10 per cent of the deductible amount. It was little wonder that business for the Group flourished towards the end of each financial year.
When the administrators were appointed, the Timbercorp group operated 33 managed investment schemes. Mr White and Ms Lowe invested in the Timberlot Project (Post-30 June). All defendants invested in the Olive Project. Only Mr Gruyters invested in the ‘Early’ Almond Project, and Mr White also invested in the Post-30 June Almond Project.
Timbercorp Securities had a dual role in the group. On the one hand it acted as responsible entity for all Timbercorp schemes offered from 2001. In April 2004, it replaced Timbercorp as responsible entity of the schemes registered before 2001. It also undertook the role of project manager, carrying on business for profit on its own account. As responsible entity it was subject to the requirements of the Corporations Act 2001 (Cth).[6]
[6]Part 5C.2.
On 23 April 2009, Mark Anthony Korda, Leanne Chesser, Mark Francis Xavier Mentha, Craig Peter Shephard and Cliff Stuart Rocke, all partners of KordaMentha, were appointed administrators of Timbercorp and 40 of its wholly owned subsidiaries. On 29 June 2009, the creditors of the group resolved to wind up the companies, and the administrators were appointed liquidators. At the time the group collapsed, the plaintiff had a loan book comprising over 14,500 outstanding loans, to over 7,500 borrowers, totalling $478 million.
Following the appointment of administrators, borrowers under more than 8,000 Timbercorp loan agreements failed to meet their loan repayment obligations. In June 2009, the plaintiff commenced recovery proceedings against 20 defaulting borrowers. The initiation of further recovery proceedings were deferred when, on 27 October 2009, Alan Rodney Woodcroft-Brown commenced a group proceeding or ‘class action’ under Part 4A of the Supreme Court Act 1986 against Timbercorp Securities and three directors, Gary William Liddell, Robert James Hance and Sholom Charles Rabinowicz. The plaintiff was the fifth defendant. The recovery proceedings, commenced prior to the commencement of the class action, were ‘put on hold’ pending the outcome of the class action.
The trial of the class action commenced on 23 May 2011 and concluded on 7 July 2011. Judgment was delivered on 1 September 2011.[7] The plaintiffs appealed unsuccessfully to the Court of Appeal,[8] and their application for special leave to appeal to the High Court was refused. Following the conclusion of the appeal process in the class action, the plaintiff revived existing recovery proceedings and initiated a large number of new actions against defaulting borrowers.
[7][2011] VSC 427.
[8][2013] VSCA 284.
The relief sought against the plaintiff, as a defendant in the class action, included declarations that it was involved in numerous contraventions of the Corporations Act and, importantly, a declaration that the plaintiff ‘and Group Members’ were not liable to repay any loans. The allegation that the plaintiff was involved in contraventions was similar to the allegations now made by the defendants in support of their allegations of ‘knowing assistance’. While the impugned conduct, on which the lead plaintiffs relied in the class action was different, concerning failure to disclose material risks, the relief sought was substantially the same.
Having failed to have the loan agreements declared void or unenforceable in the class action, some growers sought to resist liability by raising new defences. There was the occasional counterclaim and third party claim. The four test cases represent two categories of defences, which stand apart as inherently inconsistent. The plaintiff alleged that the loan payment was evidenced by journal entries. The M+K defendants contended that journal entries recording an advance, which purport to record the discharge of the borrower’s liability to Timbercorp Securities, were insufficient to satisfy the contractual obligation imposed upon the plaintiff. They alleged that upon a proper construction of the terms of each loan agreement, the loan to be made by the plaintiff, and paid to Timbercorp Securities, was required to be made in a ‘bankable form’ and not by journal entries. Even if the loan amount could be advanced by journal entry, it must be on account of Application Money to be held on trust for the investor until applied to Management Fees. They also contended that payment by journal entry would require evidence of an agreement between the participating entities and the person liable to repay the loan.
By way of contrast, the Slater & Gordon defendants (Gruyters and Lowe) relied on the fact that a valid loan had been made, by a payment to Timbercorp Securities on account of Application Money. They alleged that the loan amount, together with the deposit, was held by Timbercorp Securities on trust to pay Management Fees. They alleged that Timbercorp Securities breached its duty as trustee when applying Application Money to Management Fees in the first year, because the fees had not been incurred, were excessive or were uncommercial.
Both groups sought to differentiate Application Money from Management Fees and other scheme related costs. The manner in which the distinction was deployed was artificial. The distinction was used by all defendants to mask a confected defence. Scheme documents contemplated that Application Money would, upon acceptance of the investor’s application, be immediately converted into a payment of Management Fees and other scheme related costs. There was only one amount to be paid by the investor on application, which represented the amount due for Management Fees and other scheme related costs. Scheme documents made it plain that only the Management Fee (and other scheme related costs) and not the Application Money, was tax deductible. Immediate payment of the whole of the Management Fee was of the essence to the scheme.
The starting point for the Gruyters and Lowe defences was their allegation that the Application Money was to be held on trust until release pursuant to the terms of each scheme constitution. The plaintiff conceded as much, although it confined its concession to a trust arising under s 601FC(2) of the Corporations Act. Thus, the central question before the Court, in the Gruyters and Lowe proceeding, was whether Timbercorp Securities, as responsible entity, was authorised to release the whole of the Application Money in payment of Management Fees for the first year of the scheme. Put simply, Mr Gruyters and Ms Lowe contended that the Application Money was released in breach of trust, because the amounts paid were not referrable to the performance by Timbercorp Securities of its management obligations under the relevant management agreements, or were excessive. They characterised the conduct of Timbercorp Securities in paying the Management Fees as dishonest.
The questions for determination in this proceeding might, quite plainly, have been formulated as common questions in the class action, because they reflected a common position shared by a large group of investors. Had that been done, it would not have been necessary to set aside these test cases for trial, years after the conclusion of the class action. As common questions in the class action, the answers would have been binding upon members of the group. The decision in these test cases will be binding only upon the parties to them.[9] One observation, arising from the events that have occurred, is the unsuitability of ‘defensive’ claims proceeding as class actions.
[9]The extent to which forcible undertakings, or agreement to rely only on particular defences will, in effect, make these decisions binding on other defendants is yet to be seen.
Before proceeding to consider the issues raised by the two categories of defence, some further context and background is required, which bears upon various estoppels raised by the plaintiff in the White and Collins proceedings.
On 4 June 2009, the liquidators of Timbercorp Securities filed an originating motion in this Court seeking directions under s 447D of the Corporations Act that they were justified in applying to wind up the Almond and Olive Projects. Almond and Olive Project assets, including scheme assets, were eventually sold.
The liquidators brought a further proceeding to determine competing claims to the sale proceeds. In those proceedings, David Butterfield was appointed representative defendant for the growers, pursuant to r 16.01(2) of the Supreme Court (General Civil Procedure) Rules.[10]
[10]Proceeding No S CI 2009 10699.
In relation to the Almond Project proceeds of sale, Davies J found that the growers held an interest in the land under sub-lease agreement, but had no entitlement to the proceeds of sale. Mr Butterfield appealed, but not on the finding as to the growers’ interest. The appeal was settled by agreement,[11] and an amount set aside for distribution to the growers.
[11]BOSI Security Services Limited v Australia and New Zealand Banking Group Limited [2011] VSC 255.
The liquidators commenced a similar proceeding in relation to the proceeds from the sale of Olive Project assets.[12] Mr Butterfield also became the representative defendant for the growers in that proceeding. The proceeding was settled by agreement, and an amount set aside for distribution to growers. Both agreements required court approval under r 16.01(4) of the Rules of Court.
[12]Proceeding No S CI 2010 1534.
On 12 December 2012, I approved the terms of both agreements, which bound all growers in the Almond and Olive Projects to the agreement.
Distributions were declared by Timbercorp Securities in respect of Mr White and Mr Gruyters under the Almond Project compromise agreement, and to each of the defendants under the Olive Project compromise agreement. On 11 February 2013, Mr Gruyters and Mr White were each credited with $1,056.32.
Distributions under the Olive Project compromise were also made on 11 February 2013, in the sum of $683.98 to Mr and Mrs Collins; $462.15 to Mr Gruyters; $1,663.74 to Ms Lowe; and $1,386.45 to Mr White.
The plaintiff asserted a security interest over each distribution amount. On 15 February 2013, the liquidators wrote to each defendant, or their solicitors, enclosing a direction to pay the distribution amounts in reduction of the outstanding balance of each respective loan account. No defendant has provided such a direction.
By its reply to the defences filed in the test cases, and other related proceedings, the plaintiff raised a plea of estoppel in the following terms:
The defendant is precluded from raising the pleaded defences by reason that [he, she or it] was a group member, within the meaning of Part 4A of the Supreme Court Act 1986 (Vic), in proceeding S CI 9807 of 2009.
The proceeding so described was the class action. As a consequence, a separate question was set down for trial under r 47.04 of the Rules of Court, namely:
Are the defendants precluded from raising any and if so what defences pleaded by them in this proceeding by reason of their participation as group members within the meaning of Part 4A of the Supreme Court Act 1986 (Vic) in proceeding S CI 9807 of 2009?
The trial of the separate question, framed in the Collins proceeding and another proceeding, in which John Charles Tomes was a defendant, was argued before Robson J on 29 and 30 April and 4 May 2015. Judgment was delivered on 2 September 2015.[13] The preliminary question was answered as follows:
The defendants are not precluded from raising any of the defences pleaded to the claims of Timbercorp Finance in the proceeding.
[13][2015] VSC 461.
The plaintiff appealed unsuccessfully to the Court of Appeal.[14] Special leave was granted to appeal to the High Court, and the appeals heard on 1 September 2016. The appeals were dismissed on 9 November 2016.[15]
[14][2016] VSCA 128.
[15][2016] HCA 44.
One aspect of an early iteration of the defence in the Collins proceeding was the allegation that by reason of the failure of the loan, the defendants did not acquire any interest in the Olive Project. By their rejoinder, filed 31 March 2015, the Collins defendants expressly denied that they had acquired an interest in the Olive Project, and denied that they were group members in the class action. They introduced the novel concept of a counter-estoppel, to preclude the plaintiff from raising the estoppel in its reply. They did so on the basis of a contention that the plaintiff had incorrectly represented that a loan had been made, when it had not.
At the conclusion of the trial of these test cases, the Collins and White defendants disavowed any such contention, and argued that their status as growers was immaterial to the efficacy of their defence. The Collins defendants’ rejoinder was amended at trial. They expressly rejected having alleged that they had not been issued with grovelots. They went on,
Whether or not Timbercorp Securities issued Mr & Mrs Collins lots in the 2008 Olive Project or whether Mr & Mrs Collins obtained, or held, lots in the 2008 Olive Project, is not relevant to the question of whether Timbercorp Finance performed clause 1 of the loan agreement.
As their counsel aptly acknowledged, they were ‘dancing on a pinhead’.
The issues for trial in the White and Collins proceedings were sufficiently aligned to require a consideration of the facts in only one proceeding. Their counsel deployed the White proceeding as the vehicle to advance the common defences. The same economy was employed by the Gruyters and Lowe defendants, although there were some factual differences, most notably a Timberlot investment by Ms Lowe.
The four test cases, White, Collins, Gruyters and Lowe, were tried together. The trial commenced on 8 August 2016.
Evidence – an overview
Evidence given at the trial was evidence in each proceeding. The court book, in its original form, comprised 33 lever arch volumes containing more than 20,000 pages of material. It is no longer the practice in the Commercial Court to tender the whole of the court book, which often contains material that is not evidence, duplicates and documents that are not ultimately relied upon by any party at trial. The parties prepared a schedule describing each document tendered as evidence, identified by description and page number in the court book. The list, comprising documents from the court book tendered in evidence, became exhibit J. Witness statements and affidavits were given separate exhibit numbers.
The evidence pertaining to the issues for determination was substantially documentary. It comprised scheme and related documents, and financial records. The plaintiff called four witnesses of fact and one expert. Mr Gruyters and Ms Lowe did not cross-examine any of the plaintiff’s witnesses. They gave evidence by short affidavits and were not cross-examined. The defendants in the White and Collins proceedings called an expert, Dawna Wright. Ms Wright was a chartered accountant with forensic experience. She was asked, among other questions, to explain the entries recorded in a journal voucher 504786, which the plaintiff alleged was evidence of the loan made under Mr White’s loan agreement. She was asked whether the journal entries evidenced a ‘payment’ by the plaintiff to Timbercorp Securities, which included a loan amount advanced on behalf of Mr White. The plaintiff called a responding expert, Brendan Halligan, a chartered accountant and forensic expert, to express his opinion as to whether the entries in the journal voucher (504786) recorded a payment by the plaintiff to Timbercorp Securities in discharge of Mr White’s liability, and to comment on Ms Wright’s analysis. Mr Halligan concluded that there had been a ‘payment’. A joint report, dated 15 August 2016, was prepared by the experts, limiting the issues between them.
The plaintiff called evidence from Sol Charles Rabinowicz who, on 1 July 2008, was appointed chief executive officer of the Timbercorp group. He had commenced employment with the group in 1996 as legal and corporate counsel. He had been a director of the plaintiff, Timbercorp Securities, and other Timbercorp group companies. Mr Rabinowicz adopted substantial parts of an earlier witness statement, filed in the class action. His evidence traversed the corporate structure of the group, its business, internal administration and the schemes. Some of his evidence was directed to meet allegations concerning the conditions required for the release of funds to the scheme manager under the scheme constitutions. The defendants abandoned that part of their case during the trial. The evidence of Mr Rabinowicz provided important background about the Timbercorp group and its business. It was not controversial.
Mr Rabinowicz was cross-examined on behalf of the defendants in the White and Collins proceedings to establish that, as far as he was aware, the Product Rulings, made by the Australian Taxation Office, and Timbercorp Compliance Plans accurately reflected the intended flow of funds. Those defendants sought to draw a distinction, through the evidence of Mr Rabinowicz and Mr Hance, between the flow of funds reflected in the journal entries, on which the plaintiff relied, and the flow of funds described in Compliance Plans and Product Rulings.
The next witness for the plaintiff was Mr Hance, the former chairman of the Timbercorp group. He gave evidence of the establishment of the group, its business model and schemes. He had been a director of the plaintiff and Timbercorp Securities, along with John Vaughan, Gary Liddell and Mr Rabinowicz. Mark Pryn had been the company secretary. The significance of the evidence given by Mr Hance, apart from non-controversial background, was in his response to the defendants’ allegations of non-compliance with the requirements for payments to the scheme manager under the constitutions. Those allegations were later abandoned. He also gave evidence of the securitisation of the loan book to generate funds. He said that up to 90 per cent of funds invested by growers had been borrowed from the plaintiff. Loans, once made, were provided as security to the ANZ Bank to raise cash. Mr Hance was cross-examined on behalf of the White and Collins defendants, to draw the distinction between the flow of funds described in the Compliance Plans and Product Rulings, when compared with the transactions recorded in the journal entry.
The third witness for the plaintiff, Darren Simon Lipton, commenced employment with Timbercorp in April 2000 and continued in full-time employment until December 2009. He was a director of a number of scheme entities which had acquired and provided land for the schemes. His evidence was, for the most part, directed to allegations of non-compliance with the requirements under the constitutions for payments to the scheme manager. He also gave some evidence in relation to the allegations by Mr Gruyters and Ms Lowe concerning scheme budgets and costs. He was not cross-examined.
The next witness for the plaintiff was Owain Rhys Stone, a partner of KordaMentha. He had practised as a forensic accountant for 30 years. He was previously the regional head of fraud investigation and dispute services for Ernst & Young. Prior to that, he worked for Arthur Andersen in Melbourne, Singapore and London. He assisted the liquidators of the Timbercorp group and was familiar with the books and records of the group, including the plaintiff, Timbercorp Securities and Timbercorp.
Mr Stone gave detailed and well-structured evidence concerning the loan transactions, the subject of these proceedings. He had examined the books of account of the group relating to 34 growers in respect of 80 loans, as a sample from which he described how the loan transactions were effected and recorded in the books of account. His overview made it possible for the Court to understand the nature of the transactions and the scope of the issues between the parties which concerned the making and accounting for the relevant loans. His evidence assisted in exposing the critical issue for determination in the White and Collins proceedings.
Mr Stone’s evidence became contentious because the White and Collins defendants rejected the notion that a loan might be advanced by means other than the transfer of money in bankable form. Mr Stone was careful to qualify what he meant by a ‘payment’, which he defined as a ‘transfer of value’ in the discharge of a liability. He said that the parent company, Timbercorp, was the only entity in the group with an operating bank account. There were no actual money payments, by cash, cheque or electronic transfers, between the plaintiff and Timbercorp Securities. Loan advances were recorded by journal entry. Journal entries also recorded the discharge of the investor liability to Timbercorp Securities; the creation of a liability, for the loan amount, owed by the investor to the plaintiff, and a corresponding liability owed by the plaintiff to Timbercorp Securities.
Mr Stone described the accounting system utilised by the Timbercorp group. The group utilised an accounting package known as ‘Great Plains’, within which each member of the group had an identifying number. That accounting package was utilised to record transactions between group members. There was a separate accounting system, known as the Timbercorp Information Management System (TIMS), to record, amongst other things, investor loan and receipting transactions, and related details. These transactions were recorded in journal vouchers within the Great Plains system, sometimes in batches recorded in a single voucher.
It should be remembered that the integrity of the loan transaction was not in issue in the Gruyters and Lowe proceeding, although Mr Stone detailed his findings in relation to those loans. Of particular interest were his observations in relation to Mr White, whose loan transaction, for the purpose of the White and Collins proceeding, provided the evidentiary framework.
The plaintiff also called Mark Anthony Korda, one of the liquidators of the plaintiff and the Timbercorp group more generally. He gave evidence of the external administration of the Timbercorp group and ultimately its liquidation. He gave evidence, in the form of a chronology, of each defendants financial dealings with the Timbercorp group, the loan documents and outstanding amounts. His evidence provided the formal proof of the loan agreements, demands and unpaid balances. That evidence was not challenged.
Mr Korda also gave some evidence about expenditure on the various schemes relevant to issues raised in the Gruyters and Lowe proceeding. While his evidence was largely formal and uncontroversial, he was cross-examined at some length on behalf of the White and Collins defendants, about amendments to the plaintiff’s statement of claim made in June 2016. The defendants claimed to have been taken by surprise about the way in which the loans were made. Mr Korda gave evidence of distributions made following the sale of scheme property, the sale process and the various court proceedings in which the sales and distributions had been approved. He accepted that Application Money should not be characterised as a ‘trade receivable’. The significance of that concession, according to the defendants, was that the trade receivable in the books of account of Timbercorp Securities, relating to Mr White, must have been raised in relation to the unpaid invoice for Management Fees, not Application Money.
I propose to deal with the Gruyters and Lowe proceedings first, and then move on to White and Collins.
GRUYTERS & LOWE PROCEEDINGS
The Gruyters proceeding was commenced on 8 July 2014 to recover the outstanding balances under five loan agreements:
(a)Loan No L0021392. The claim is for $81,955.47, with interest accruing at $29.64 per day from 1 April 2014. The loan was alleged to have been procured to fund the initial investment in the Almond Project (Early).
(b)Loan No L0023844. The claim is for $23,209.78, with interest accruing at $8.39 per day from 1 April 2014. The loan was alleged to have been procured to fund stage 2 costs, including Management Fees and rent due on 31 October 2007, in relation to the Almond Project (Early).
(c)Loan No L0027351. The claim is for $25,646.14, with interest accruing at $9.27 per day from 1 April 2014. The loan was alleged to have been procured to fund stage 3 costs, including Management Fees and rent due on 31 October 2008 in relation to the Almond Project (Early).
(d)Loan No L0026020. The claim is for $45,154.64, with interest accruing at $16.33 per day from 1 April 2014. The loan was alleged to have been procured to fund the initial investment in the Olive Project.
(e)Loan No L0027350. The claim is for $13,787.36, with interest accruing at $4.99 per day from 1 April 2014. The loan was alleged to have been procured to fund stage 2 costs, including management and licence fees due on 31 October 2008 in relation to the Olive Project.
Mr Gruyters invested in two managed investment schemes operated by Timbercorp Securities — the Almond Project (Early), and the Olive Project.
Gruyters — first loan
On about 31 May 2007, Mr Gruyters completed an application form for eight almondlots in the Almond Project. The application fee payable for each almondlot was $7,000. Mr Gruyters paid a deposit of $5,850 and applied to the plaintiff for a loan to cover the balance which, including a $250 loan application fee, was $50,400. The loan period was 10 years.
On about 7 June 2007, Mr Gruyters was advised by the plaintiff that his loan application was accepted. He received a ‘Timbercorp Almondlot Statement’ confirming his subscription amount and the number of almondlots allotted to him. He also received a ‘Confirmation Notice/Tax Invoice’ for management costs of $7,000 per almondlot. Both documents were dated 7 June 2007.
The Almond Project Product Disclosure Statement informed applicants that Application Money covered the Management Fee. The initial Management Fee of $7,000 per lot, was disclosed in the Confirmation Notice/Tax Invoice. The relevant Product Ruling identified the initial fee of $7,000 as a deductible amount. Clause 11 of the Management Agreement imposed on the grower an obligation to pay the fee, which was expressed in an amount net of GST.
Assuming Mr Gruyters had read the Product Disclosure Statement, there could not have been any uncertainty as to what the Application Money was intended to cover. The anticipated tax deduction of $7,000 per lot was dependent upon his Application Money becoming transformed into the tax deductible Management Fee. The deductibility of the expense, for income tax purposes, depended on payment of the Management Fee in full before the end of the financial year.
On 13 July 2007, Mr Gruyters was provided with a document ‘Tax Summary Information’, to assist in the preparation of his income tax return for the financial year ended 30 June 2007. Reference was made, there and elsewhere, to Product Ruling PR2006/145. He was advised that he had incurred deductible expenses in respect of management costs of $56,000 and interest in the sum of $14.15. Mr Gruyters claimed those amounts as deductible expenses for that year, and continued to claim Management Fees, rent and interest expenses in subsequent years.
On 31 July 2007, Mr Gruyters commenced to pay monthly instalments in repayment of the first loan.
Unlike the White and Collins defences, Mr Gruyters accepted that, pursuant to his loan agreement with the plaintiff, the loan was advanced in discharge of the balance of his liability to pay the Application Money. The preparation, timing and delivery of various invoices, or sequence of journal entries within the book of the Timbercorp group, were not in contention.
Gruyters — second loan
In addition to the initial Management Fees of $7,000 per almondlot, there were additional annual Management Fees and rent of $2,000 per almondlot. The first such payment was due on 31 October 2007, for the 2008 financial year. An identical sum was payable on 31 October 2008 for the 2009 financial year. Thereafter, for the duration of the project, smaller rental amounts were payable, and the Management Fee deferred, to be recovered by Timbercorp Securities from the proceeds of sale of almonds.
Mr Gruyters was invoiced for the management costs and rent, for the 2008 financial year, on 1 October 2007. He paid a deposit of $1,600 and applied for a second loan from the plaintiff to pay the balance of $14,500. His loan application was accepted. On 30 November 2007 he commenced to pay monthly instalments in repayment of the loan.
Gruyters — third loan
Mr Gruyters applied for and obtained a third loan from the plaintiff to meet his obligation for Management Fees and rent due on 31 October 2008. He paid a deposit of $1,600 and borrowed the balance, which included a $100 loan application fee. The loan amount was $14,500. The loan was for a period of eight years. Mr Gruyters commenced to pay monthly instalments on 28 November 2008.
Gruyters — fourth loan
In late May or early June 2008, Mr Gruyters decided to invest in the Olive Project. On 11 June 2008, he completed an application form by which he applied for five Grovelots. The application fee for each Grovelot was $5,700. Thus, the total cost was $28,500. He paid a deposit of $2,850 and applied to the plaintiff for a loan to pay the balance. His application was accepted. He commenced to pay instalments on 31 July 2008.
Gruyters — fifth loan
In addition to the Management Fee payable for each grovelot in the Olive Project for the first year, which was equal to the application fee, there were licence and Management Fees payable on 31 October 2009 and 31 October 2010, in the sum of $1,650 per Grovelot. Thereafter, for the duration of the project, annual fees were deferred, to be recovered as a percentage of harvest proceeds.
On 1 October 2008, Mr Gruyters received an invoice from Timbercorp Securities for $8,250 in relation to management and licence fees. He paid a deposit of $825, and applied to the plaintiff for a loan to pay the balance, including a loan application fee. His application for the fifth loan was made at the same time as the third application for an Almond Project loan. The plaintiff accepted the applications. Mr Gruyters commenced making monthly instalment payments in respect of that loan on 28 November 2008.
Following is a schedule of Mr Gruyters’ total loan repayments:
(a)Loan L0021392 (Almond Project – initial loan) $15,479.92
(b)Loan L0023844 (Almond Project – second loan) $4,144.09
(c)Loan L0027351 (Almond Project – third loan) $1,308.66
(d)Loan L0026020 (Olive Project – initial loan) $3,807.21 and
(e)Loan L0027350 (Olive Project – second loan) $710.78
Mr Gruyters ceased making loan repayments in June 2009. By 1 July 2009 he was in default under each of the loan agreements.
The Lowe proceeding was commenced on 6 November 2014 to recover the outstanding balance due under three loan agreements:
(a)Loan No L0026664. The plaintiff’s claim is for $648,638.06. The loan was procured to fund an investment in the Timberlot Project. Interest is claimed at $234.58 per day from 1 April 2014.
(b)Loan No L0026036. The plaintiff’s claim is for $170,575.09. The loan was procured to fund an investment in the Olive Project. Interest is claimed at $61.69 per day from 1 April 2014.
(c)Loan No L0027409. The plaintiff’s claim is for $50,756.94. The loan was procured to fund stage 2 costs incurred as a grower in the Olive Project, including management costs and rent. Interest is claimed at $18.36 per day from 1 April 2014.
Lowe — first loan
On about 11 June 2008, Ms Lowe completed an application to invest in the Timberlot Project and the Olive Project. She applied for 130 Timberlots and 18 Grovelots. The Application Money for each Timberlot was $3,080 per lot. The total amount was $400,400. She paid a deposit of $40,400 and applied for a loan to fund the balance of $360,360. The period of the loan was eight years. On about 30 June 2008, Ms Lowe received notification from Timbercorp thanking her for her application and advising that her application had been accepted. She received a ‘Confirmation Notice/Tax Invoice’. The invoice was for ‘plantation establishment’ and referred to a Product Ruling. Under the Product Ruling, prepayment of establishment costs was tax deductible. Between 29 August 2008 and 29 May 2009, Ms Lowe paid instalments amounting to $59,106.19.
Lowe — second loan
At around the same time as Ms Lowe applied for Timberlots, she applied for 18 Grovelots in the Olive Project, at a cost of $5,700 per lot. The total amount payable as Application Money was $102,600. Ms Lowe paid a deposit of $10,260 and applied for a loan to fund the balance of $92,340. She completed a loan application form, and on 14 June was advised that her investment application and loan application had been accepted. She received a ‘Confirmation Notice/Tax Invoice’ in the sum of $102,600 for Management Fees. The notice made reference to a Product Ruling.
Lowe — third loan
On 1 October 2008, Ms Lowe received an invoice from Timbercorp Securities for payment of $29,700 for management costs and licence fees in relation to her Grovelots. She paid a deposit of $2,970 and applied for a loan to fund the balance of $26,730. She completed a loan application form, and on 29 October 2008 was informed that the application had been accepted.
Between 29 August 2008 and 29 May 2009, Ms Lowe paid instalments and interest on the second loan in the sum of $13,143.46; and in respect of the third loan, instalments and interest of $2,412.16.
The case for Mr Gruyters and Ms Lowe was advanced on their behalf without differentiating between individual fact circumstances, although there were some material differences between scheme documents. Thus, it is convenient to consider the issues jointly, while identifying differences as and when they arise.
The facts alleged in the statements of claim were, notwithstanding numerous bare denials by the defendants, not disputed at trial. They accepted that their obligation to pay the Application Money for each scheme was discharged by payment of a deposit and the loan amounts. They contended that Timbercorp Securities received and held such money on trust, and breached that trust. The defendants alleged that the breach of trust by Timbercorp Securities was dishonest, and the plaintiff knowingly assisted the breach. They claim to be entitled, as against the plaintiff, to equitable compensation and a right to set off that compensation against the claims pursuant to s 553C of the Corporations Act. The defendants also sought to recover loan instalments paid by them on the ground that the plaintiff would be unjustly enriched if it were permitted to retain those payments. Further, they sought relief under s 12GM of the Australian Securities and Investments Commission Act 2001 (Cth), on the ground that the conduct of the plaintiff was unconscionable, in contravention of s 12CB of the ASIC Act or the unwritten law.
By its amended reply, the plaintiff alleged in the Gruyters proceeding:
1.The defendant is precluded from raising the pleaded defences by reason that he was a group member, within the meaning of Part IVA of the Supreme Court Act 1986 (Vic), in proceeding SCI 9807 of 2009.
Particulars
The preclusion arises as a matter of law.
2.As to paragraphs 127 and 182, the alleged set off did not accrue within six years before the commencement of this action and is barred by s 21 of the Limitations of Actions Act 1958 (Vic.)
An identical estoppel allegation was made in the Lowe proceeding, but no reliance was placed on a limitation period.
The preclusion allegation, pleaded in each of the four test cases, was finally resolved against the plaintiff in the High Court.[16] Following the judgment in the High Court, the plaintiff notified the Court that it no longer relied upon the preclusion allegation made in paragraph 1 of its replies. Mr Gruyters and Ms Lowe had contended, however, that they were not members of the group for the purpose of the group proceeding. That contention was based upon a claim that they were beneficiaries under a trust or trusts, of which Timbercorp Securities and the plaintiff were trustees, and thus excluded from group membership by reason of the definition of ‘Group Member’ in the opt out Notices which expressly excluded the beneficiaries of such a trust.
[16][2015] VSC 461; [2016] VSCA 128; [2016] HCA 44.
Group members were defined in the class action statement of claim to exclude, from those who ‘acquired and/or held an interest’ in a scheme between 6 February 2007 and 23 April 2009, persons who:
(c) are not:
(i) defendants in the proceeding;
(ii) parents, siblings, spouse or children of defendants;
(iii)bodies corporate of which a defendant was an officer or majority shareholder (defendant’s company) at any time during the relevant period; or
(iv)beneficiaries of any trust, the trustee of which is or at any time during the relevant period was a defendant or defendant’s company.
Thus, if the defendants in this proceeding are excluded by reason of the statutory trust created under s 601FC(2) of the Corporations Act, or any other trust for which the defendants in this proceeding contend, all scheme members would have been excluded.
Mr Gruyters’ response to the limitations of actions plea was to allege concealment of wrongdoing by Timbercorp Securities and the plaintiff, and that the breach of trust was dishonest.
The starting point for the defences was the contention that the Application Money was to be held on trust until released pursuant to the terms of the scheme Constitutions. The plaintiff conceded as much, although confined its concession to the obligation imposed under s 601FC(2) of the Corporations Act, which provides:
The responsible entity holds scheme property on trust for scheme members.
Timbercorp Securities was the responsible entity. It was common ground that Application Money was, prior to conversion into Management Fees, scheme property.
The defendants embarked upon an elaborate submission in support of the existence of a trust obligation. Those submissions were largely unnecessary because of the concession made by the plaintiff. The concession, while inevitable, was qualified. The plaintiff did not accept, as the defendants had contended, that cl 4.2 of the relevant scheme constitution established the trust. The defendants submitted that ‘the statutory requirement that scheme property be held on trust is given effect in cl 4.2 of each Constitution’, which provided:
Special Trust Account
Any amounts paid by any Applicant in accordance with clauses 6.3 and 6.4 must be accounted for by the Responsible Entity in a special trust account and such amounts must be placed in one or more bank accounts kept solely for the purpose of depositing Application Moneys in relation to the Project.
By reason of its heading, ‘Bare Trust’, and its subject matter, cl 4 as a whole appears to cater for minimum subscription requirements. Clause 4.2 contains machinery provisions for accounting and management of amounts paid by applicants until the minimum subscription is reached. Clause 4.1 reinforces the ‘machinery’ character of cl 4. It provides:
Bare Trust
Until the Minimum Subscription is reached, or waived by the Responsible Entity, the Responsible Entity must hold all Application Moneys as a bare trustee for the Applicant.
In the previous cases there were no minimum subscriptions. The ‘bare trust’ provisions were never engaged. In my opinion, the trust created under cl 4.1 was intended to protect Application Money until a minimum subscription level was achieved. Section 601FC(1) requires that scheme property be held separately from other property, and clearly identified as such. The terms of the applicable trust are found in the statutory provisions, which creates a layer of fiduciary protection for investors.[17]
[17]Wellington Capital Ltd v Australian Securities and Investments Commission (2014) 254 CLR (‘Wellington Capital’).
Insofar as cl 4, upon its proper construction, is not confined to the management of minimum subscription requirements, but has a more general application, it remains a machinery provision under which Application Money must be ‘accounted for’. Application Money was paid with each application. Clause 4 contemplated a possibility that an application might be accepted even though all Application Money had not been paid — for example, an investor may be permitted to pay by instalment [cl 6.4] or a loan might be approved but not advanced [cl 6.5]. Clause 6.5 only required an agreement to lend for the application to be capable of acceptance. Once an application had been accepted, the applicant became a ‘Participant Grower’ [cl 8.1] bound by the Constitution [cl 8.6] and liable to pay Management Fees under the relevant management agreement [cls 8.7 and 9.3]. Thus, the extent to which cl 4.2 might be engaged, as the source of a trust relationship would be transient, may never extend to the full amount of the Application Money.
The existence of the trust in relation to scheme property, imposed on the plaintiff under s 601FC(1) and (2), prescribed certain duties and obligations. The section required the responsible entity to act honestly, exercise reasonable care and diligence, act in the best interest of members and clearly identify scheme property. There were other obligations. The duties and responsibilities of the responsible entity were those of a fiduciary.
A complicating factor in the present case was that Timbercorp Securities was permitted to wear two hats. It was responsible entity, bound by the duties imposed under s 601FC, but entitled to manage the projects, on its own account, for profit. The dual role was contemplated by the legislation. Those framing the legislation had sought to avoid the need for a separate management entity, in addition to the responsible entity.[18] Once it is accepted that the transaction and scheme documents were designed to convert Application Money (scheme property) into Management Fees (the manager’s money received in its own right) to be paid forthwith, and certainly before the end of the financial year in which each application was made, the duration of any trust obligation attaching to the Application Money must be brief.
[18]Wellington Capital, [14].
In Wellington Capital,[19] the High Court had occasion to consider the interface between a scheme constitution and statutory limitations on the power of a responsible entity. When analysing the statutory framework, the court observed:
[19]Wellington Capital, [12]–[14] (citations omitted).
12Of significance in the reasoning of the Full Court was s 601FC(2), which provides that “[t]he responsible entity holds scheme property on trust for scheme members”. It underpinned the starting point in the Full Court’s reasoning that provisions of the Scheme Constitution conferring wide powers on the responsible entity to deal with Scheme Property must be approached “through the prism of trust law”. However, the extent to which general principles of the law relating to trusts apply to a responsible entity’s functions under a scheme constitution depends upon the purpose of the statutory trust, other provisions of the Corporations Act and the terms of the scheme constitution.
13The trust relationship which is imposed by s 601FC(2) expressly attaches to a responsible entity by reason of its office. No occasion arises for imposition of a trust by operation of the general law. The trust imposed does not arise from gratuitous transfer of assets by a settlor to a trustee, to be held on behalf of beneficiaries, who may become transferees. Save for its imposed statutory character, it bears a resemblance to trusts created as incidents of business transactions, sometimes described as “commercial trusts”. Lord Browne-Wilkinson said of such trusts that:
“it is important, if the trust is not to be rendered commercially useless, to distinguish between the basic principles of trust law and those specialist rules developed in relation to traditional trusts which are applicable only to such trusts and the rationale of which has no application to trusts of quite a different kind.”
The same caution applies in relation to public unit trusts, which may operate under principles of both contract and trust law. To the extent that the relationship between the responsible entity and the members is governed by contract, the content of the powers and duties of the responsible entity will be determined by reference to the contract and its statutory setting. This Court has said of the use of trust concepts in revenue statutes:
“the degree to which a revenue statute adopts or qualifies or supplants the general understanding of terms with a particular application in property law will be a matter of statutory construction.”
What is true for revenue statutes is true for statutes generally and, in particular, for the use of the term “trust” in s 601FC(2).
14Section 601FC(2) reflects, albeit in truncated form, a recommended draft provision set out in the joint report of the Australian Law Reform Commission and the Companies and Securities Advisory Committee in 1993. The provision was proposed in part as a protective set-off against the decision not to recommend that the appointment of a custodian of scheme property, separate from the manager, be mandatory. The protection of the trust relationship was to be maintained even in the case in which the responsible entity decided to appoint a custodian:
“Where an operator engages a custodian to hold the legal title to scheme assets, the operator should hold on trust for the investors the equitable interest arising under that arrangement.”
The report proposed that “because of the nature of the activity undertaken, this trust relationship should exist in all collective investment schemes, even those based on contract”. The purpose of s 601FC(2) is indicated by that aspect of its ancestry and by its place in the statutory scheme. It creates a layer of fiduciary protection for scheme members in addition to the express duties and protections otherwise created by the Corporations Act and the minimum statutory requirements of a scheme constitution.
The defendants drew attention to and relied upon the following passage from the judgment of the majority:[20]
However, as shown earlier in these Reasons, a responsible entity’s powers in relation to the disposition of scheme property are determined by the terms of the scheme constitution in light of such enhancements or constraints as are provided by statute and, subject to statute, the general law relating to trusts to the extent that it is applicable.
[20][2014] HCA 43, 309 [32].
The defendants sought to augment the statutory trust by contending that the Application Money was held by Timbercorp Securities, as responsible entity, subject to a Quistclose trust.[21] They submitted that to acknowledge the existence of a statutory trust, by reason of the operation of s 601FC(2) of the Corporations Act, did not conclude the enquiry. It was not quite clear how the application of such a doctrine assisted them, unless to qualify an express power under the constitution, authorising a release of trust property.
[21]Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567.
Scheme documents, such as the constitutions and Management Agreements, provide express obligations and powers in relation to Application Money and Management Fees. A statutory trust was established by s 601FC(1) of the Corporations Act, coupled with explicit obligations imposed on the responsible entity. In my opinion, there was no occasion for the implication of a purpose trust. In any event, a paramount purpose of scheme documents was to ensure that Application Money was, upon acceptance of an application, promptly converted into a tax deductible payment of Management Fees. That purpose was achieved in each case.
The plaintiff relied on paragraph (k), which provided that the responsible entity must:
ensure that all payments out of the scheme property are made in accordance with the scheme’s constitution and this Act …
It contended that the relevant enquiry was whether the payment out of the scheme property was authorised under each respective constitution.
The defendants’ case rested on confining the authority of the responsible entity to pay only for work described in cl 5.2 of the Management Agreement. The Almondlot Management Agreement imposed on Timbercorp Securities (as manager) certain obligations. Under cl 4.1, each Participant Grower engaged Timbercorp Securities to manage and administer the project, to manage, direct and conduct project operations on behalf of the Participant Grower, and to perform Orchard Services. Clause 4.4 provided:
Performance Obligations
(a)Subject to this Agreement, Timbercorp Securities must use reasonable endeavours to perform all its functions, exercise its powers under this Agreement and conduct the Project Operations:
(i) in a commercially reasonable manner;
(ii) honestly;
(iii)generally in accordance with Best Horticultural Practices which is generally recognised and adopted in Australia and is known and acceptable to Timbercorp Securities and suitable for use on the Orchard; and
(iv)in the best interests of all the Participant Growers and not in the interests of Timbercorp Securities if those interests are not the same as those of the Participant Growers.
(b)The phrase “commercially reasonable manner” means, in any particular circumstances, a manner which Timbercorp Securities honestly believes is commercially reasonable in those circumstances (having regard where appropriate to the fact that Timbercorp Securities has to meet the costs of conducting the Project Operations out of the fees paid to it). Subject to paragraph 4.4(a)(iv), the phrase does not require Timbercorp Securities to have regard to the interests of any person other than itself.
Clause 5 provided for Orchard Management. After requiring Timbercorp Securities to cultivate and manage the orchard in accordance with the Management Plan and Best Horticultural Practices, as defined, cl 5.2 prescribed services to be performed for the period ending 30 June 2007. These were as follows:
Without limiting the generality of clause 5.1, Timbercorp Securities will carry out the following services in the period ending 30 June 2007. Timbercorp Securities may determine the most appropriate time to carry out the services provided that the services must be completed on or before 30 June 2007:
Infrastructure Management Services
These services commence from the later of the Commencement Date and completion of the Pre-Planting Capital Works on the Participating Grower’s Almondlots and will be carried out until 30 June 2007:
(a)undertake a comprehensive internal quality assurance audit in respect of the Pre-Planting Capital Works carried out by the Land Owner under clause 2.1 of the Sub-leases, including but not limited to all irrigation infrastructure, valves, pumps, moisture monitoring equipment;
(b)keep the following in good repair and condition:
(i)any access road or roads within the Orchard, all waterways, dams, irrigation and pumping equipment within the Orchard, as necessary;
(ii)all fences, fire-breaks and other improvements within the Orchard, as necessary;
(iii)all farm equipment, plant and equipment, tractors, vehicles, protective gear and other things used to perform the services described in this clause 5.2;
(c)as permitted by law, control or eradicate rabbits and other vermin which have caused or may cause damage to the Orchard by fumigating and poisoning and complying with the provisions of all relevant statutes, regulations and by-laws (and all amendments) and any other statutes, rules, regulations and by-laws relating to or affecting the Almondlots or the Participant Grower;
(d)to the extent that any fertilisers, nutrients and other chemicals are used, keep proper and accurate records of all fertilisers, nutrients and other chemicals applied to the Orchard and store the chemicals in accordance with all legal requirements;
(e)use and apply appropriate soil management techniques and undertake or procure the carrying out of drainage works to reduce soil erosion, maintain soil quality and carry out or procure the carrying out of drainage work and other works to control salinity levels; and
(f)carry out any other activity that may be required to generally maintain the Orchard in accordance with Best Horticultural Practices or in respect of the provision of the services listed in paragraphs (a)–(e) above including:
(i)training of staff in use of equipment, infrastructure and performance of duties;
In my opinion, there is evidence to support the plaintiff’s contention that, within the Timbercorp group, the plaintiff and Timbercorp Securities conducted their relationship on the basis that the financed portion of a grower’s indebtedness for Application Money and Management Fees (and related grower costs) would be satisfied by an increase in the loan account between Timbercorp Securities and the plaintiff for the corresponding amount, relieving the defendants of their indebtedness to Timbercorp Securities and replacing that liability with a debt due to the plaintiff. That was the method by which those entities chose to make the loan. There was no requirement that the defendants agree to that arrangement. The defendants were not disadvantaged. In fact, the internal transactions between Timbercorp Securities and the plaintiff had the very outcome the defendants had sought when making their loan applications — to replace their liability to Timbercorp Securities with a liability to the plaintiff, repayable by instalments. The requirement for a ‘payment’ was satisfied by that transaction.
The internal transactions, between the group members, reflected in journal entries, was a convenient mechanism to record the changing financial position as new applicants subscribed for lots, Management Fees and other costs were paid, and expenses incurred in relation to the operation of the schemes. Those activities were audited and reported.
Nothing turned on the capacity in which Timbercorp Securities was credited with the loan amounts for the defendants. By the time that transaction took place, the obligation had changed, or was about to change, from an obligation to pay the balance of Application Money, into an obligation to pay the balance of Management Fees in precisely the same amount. When the cash was transferred to and from Trust Company and the central account, it followed the journal entries. The conversion of Application Money into Management Fees was authorised under each Constitution as payments made on behalf of Participating Growers to discharge their liability for Management Fees and related scheme costs.
While it is true that journal entries are not, of themselves, transactions, they record transactions. They constitute evidence of a transaction. The authenticity of the journal entries was not challenged. The journal entries were sufficient for the experts engaged by the plaintiff and defendants to reach the conclusion that a receivable due for Mr White was replaced by a receivable due to Timbercorp Securities from the plaintiff, and that Timbercorp Securities transferred the receivable from Mr White to the plaintiff.
Further evidence of the efficacy of transactions by journal entries, including advances, is found in the audited accounts of each scheme for the relevant period. Grower ‘subscription money’ is recorded by reference to the number of Grovelots, Almondlots and Timberlots. The accuracy of the accounts was not challenged. They include the ‘subscription money’ paid by the defendants as deposits and the loan amount for the balance.
It was necessary for the plaintiff to establish that the advance had been made under the loan agreement. The plaintiff has satisfied the evidentiary burden, through its books of account, which included the journal entries, the invoices and banking records. The commercial interest of the defendants, in having real value paid to the manager in satisfaction of their Management Fee obligations, was satisfied by the movement of money in bankable form to and from the Trust Company. The books of account of the plaintiff and Timbercorp Securities recorded the discharge of the defendants’ anterior obligation. The defendants derived full value for their loan obligation. I find that in each case the plaintiff made a payment of the balance of the defendants’ obligation to pay Application Money to Timbercorp Securities, by increasing its loan account with Timbercorp Securities, which in turn had the effect of discharging each defendants’ anterior obligation.
Plaintiff’s reply
The defendants’ responses to the estoppels raised by the plaintiff in its replies was to contend that Mr White was not made aware of the ‘book entries case’ until June 2016.
The estoppels raised by the plaintiff were advanced on the assumption that it had not make a payment in accordance with the terms of the loan agreement. The defendants contended that the only analysis to be undertaken by the Court was whether a ‘payment’ had been made to Timbercorp Securities in its capacity as responsible entity, on account of the balance of Application Money. By his defence to the counterclaim by Timbercorp Securities,[71] Mr White sought to isolate his participation in the various schemes by contending that, whether he became a Participant Grower, owned Almondlots, Grovelots or Timberlots, claimed deductions, paid loan instalments, was bound by various court proceedings, or received or became entitled to a dividend on the winding up of the schemes, should be disregarded in favour of the narrow focus upon the simple question of whether a ‘payment’ had been made in the manner and for the purpose for which the defendants contended.
[71]There were corresponding allegations in the defence of Mr and Mrs Collins to the counterclaim by Timbercorp Securities, and the rejoinder of Mr and Mrs Collins to the plaintiff’s reply.
To approach the issues in this proceeding by disregarding the defendants’ participation in schemes, would be artificial and uncommercial. A purpose of the scheme, reflected in the documents, was to provide investors, such as Mr White and Mr and Mrs Collins, with a tax deduction for Management Fees and other scheme related costs paid prior to a prescribed date. It was an essential part of the scheme that Application Money be converted into such payments prior to those dates. Scheme constitutions required the conversion to be made promptly.[72] The plaintiff contended that it would be unjust if the defendants had acquired and enjoyed the intended benefits — the acquisition of Grovelots, Almondlots or Timberlots, and a tax deduction for the amount of the Management Fees, on the basis that such fees had been paid — and at the same time be relieved of the price.
[72]Clause 9.3 Almondlot Constitution.
The defendants contracted with the plaintiff to discharge the balance of their liability to Timbercorp Securities. They became Participant Growers and acquired lots. They commenced to repay loans. Until pursued for repayment of the loan, they did not raise any question about their status as Participant Growers or entitlement to a distribution upon the winding up of the schemes.
Using the plaintiff’s amended reply in the White proceeding as a vehicle to determine the various estoppel and related allegations, the plaintiff alleged that Mr White authorised it to satisfy the balance of his liability to Timbercorp Securities for fees on terms contained in the loan agreement. Mr White did not contend that Management Fees and other scheme related costs had not been paid. Quite plainly, Management Fees were paid, reflected in journal entries and the transfer of money from Trust Company on the instruction of Timbercorp Securities. Journal entries recorded the conversion of Mr White’s liability to Timbercorp Securities into a debt due by him to the plaintiff. Thus, Timbercorp Securities gave up its rights against Mr White in return for an increased loan amount due from the plaintiff.
The plaintiff alleged that Mr White ratified the loan payment by servicing his loan obligation. He had been invoiced for Management Fees, paid a deposit and completed a loan application. Mr White received notification that his loan application had been accepted, Management Fees paid and lots allocated to him. He also instructed his accountant to prepare an income tax return in which Management Fees and other related costs were claimed as a tax deduction. If the defendants are found to be correct in their contention that performance by the plaintiff under the loan agreement is to be ascertained on the narrow basis that there was no payment of the balance of Mr White’s obligation to Timbercorp Securities for Application Money, I find that by accepting a discharge of the balance of his liability to Timbercorp Securities for Management Fees and other scheme related costs, Mr White derived a benefit equal to the loan amount. Mr White treated that benefit as a loan from the plaintiff and, acting on that basis, claimed a full tax deduction and paid instalments. By his conduct, he ratified any irregularity in the payment of the loan amount.
Next, the plaintiff alleged that it was unconscionable for Mr White to retain the benefit of the payment that was made without paying a reasonable sum in return. The basis for the unconscionability claim depended on the same conduct as the allegations of authority and ratification. It was unnecessary to reconfigure those allegations, and the facts on which they depend, into a vague claim of unconscionability.
The plaintiff alleged that Mr White is precluded from alleging that the plaintiff’s payment of the loan amount was not a payment under the loan agreement, or did not discharge his liability to Timbercorp Securities under each relevant Management Agreement. The plaintiff alleged that for Mr White to so contend was an abuse of process, because he was bound by the outcome of other proceedings conducted in this Court[73] as a grower in the Timberlot Project, having been allotted Timberlots and derived a benefit from a distribution approved by the Court following the winding up of the schemes. While ‘growers’ were represented through the participation of the Timbercorp Growers Group, which represented some of the growers who had invested in forestry schemes, no representative order had been made under r 16 of the Supreme Court (General Civil Procedure) Rules 2005, by which he might have been bound to a decision or approved compromise. There was no evidence that Mr White participated in the Timberlot apportionment proceeding, as a member of the ‘growers group’ or otherwise. In my view, it would not be an abuse of process, in this proceeding, for him to maintain a different position based on his involvement in the Timberlot Project. Mr White has, however, conducted himself on the basis that he was a Participant Grower. It is too late to resile from that position, which has been acted upon by Timbercorp Securities, the plaintiff and their liquidators. It would be unjust to permit Mr White to now avoid his obligation to the plaintiff as part of the price to be paid for the benefits he has already received as a Participant Grower.
[73]Re Timbercorp Securities Limited (in liq) [2009] VSC 608.
Mr White also invested in Almondlots and Grovelots. Having become a Participant Grower, he was (as were all other scheme members) bound by an order made under r 16, and thus precluded by issue estoppel, from contending that they did not hold lots in the schemes wound up with the aid of such an order. In relation to the Almond Project, Mr White was bound by the decision of this Court approving a compromise in relation to the distribution of proceeds from the sale of almond scheme assets.[74] In relation to the Olive Project, Mr White is bound by approval of the compromise in relation to the sale of olive scheme assets.[75] The defendants’ participation in the schemes, as Participant Growers, bound by an order based upon their participation, would make it manifestly unjust to the plaintiff if they could avoid their loan obligations merely because the loan funds had been applied in reduction of a liability to pay Management Fees rather than Application Money, or because it was not paid in bankable funds to Timbercorp Securities.
[74][2012] VSC 590.
[75][2012] VSC 590.
The estoppel, preclusion and abuse of process allegations in the Collins proceeding were, in all material respects the same, although they related only to the Olive Project. They relied on the same or near identical facts, with the same consequence.
The plaintiff advanced a number of further estoppels based upon common mistake. These allegations were predicated on the defendants having not obtained lots under a scheme. The defendants no longer so contend, and it is unnecessary to deal with these estoppel allegations.
Claim against Timbercorp Securities
The plaintiff’s claim against Timbercorp Securities was a contingent claim based upon the assumption that the plaintiff failed to establish its claim, because the loan amount had not been paid in a bankable form to Timbercorp Securities in its capacity as responsible entity in discharge of the defendants’ obligation to pay Application Money. For the purpose of the claim, the plaintiff alleged against Timbercorp Securities that it was reasonably foreseeable, in relation to each project, that if it did not receive and hold the loan amount as payment of the balance of the Application Money, in its capacity as responsible entity, or did not apply the payment and discharge of the defendants’ liability for Management Fees and other scheme related expenses in accordance with the relevant scheme constitution, the defendant might deny the making of a loan. The plaintiff alleged a corresponding duty of care and breach. It alleged that if the defendant was not liable to repay the loan, the plaintiff had suffered loss and damage by reason of the breach of duty.
Timbercorp Securities responded to the plaintiff’s contingent allegations with a defence and counterclaim. In substance, it alleged an abuse of process and estoppel against the defendants based upon their membership of a group within the meaning of Part IVA of the Supreme Court Act 1986 in the class action. It also relied upon the same or similar facts and circumstances as the plaintiff when making similar allegations against the defendants.
By its counterclaim, Timbercorp Securities sought a declaration that the defendants were precluded from denying, on the basis of the matters alleged in paragraph 76C of their defences, that the balance of Application Money was paid on their behalf to Timbercorp Securities for the Timberlots, Almondlots and Grovelots, and that as a consequence, they each became a Participant Grower in the projects. Paragraph 76C of the defendants’ defence alleged that insofar as there had been a payment of Management Fees and other scheme related costs, such payment was not, and could not properly be construed as, a payment on behalf of the defendants of the balance of the Application Money payable to TSL in its capacity as responsible entity.
Insofar as it may be necessary to so find, I am persuaded that the defendants conducted themselves as Participant Growers, with lots, acknowledging an indebtedness to the plaintiff under their loan agreements until the schemes failed. They accepted the discharge of their liability to Timbercorp Securities for Management Fees, and took the benefits. They accepted a corresponding obligation to the plaintiff to repay a debt, on terms set out in their loan agreements. Thus, even if it be found that the payment from the plaintiff was not a payment of the balance of the Application Money, the defendants remain liable for the amount of the plaintiff’s claim.
Conclusion
The plaintiff is entitled to judgment against each defendant, in each proceeding, for the unpaid balance of each loan as alleged, together with interest.
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