White v Timbercorp Finance Pty Ltd (in liq)
[2017] VSCA 361
•8 December 2017
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2017 0033
| PETER JOHN WHITE | Applicant |
| v | |
| TIMBERCORP FINANCE PTY LTD (IN LIQUIDATION) (ACN 054 581 190) | First Respondent |
| and | |
| TIMBERCORP SECURITIES LIMITED (IN LIQUIDATION) (ACN 092 311 469) | Second Respondent |
S APCI 2017 0035
| DOUGLAS JAMES COLLINS | First Applicant |
| and | |
| JANET ANN COLLINS | Second Applicant |
| v | |
| TIMBERCORP FINANCE PTY LTD (IN LIQUIDATION) (ACN 054 581 190) | First Respondent |
| and | |
| TIMBERCORP SECURITIES LIMITED (IN LIQUIDATION) (ACN 092 311 469) | Second Respondent |
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| JUDGES: | FERGUSON CJ, SANTAMARIA and McLEISH JJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 14 September 2017 |
| DATE OF JUDGMENT: | 8 December 2017 |
| MEDIUM NEUTRAL CITATION: | [2017] VSCA 361 |
| JUDGMENT APPEALED FROM: | (2016) 119 ACSR 478; [2016] VSC 776 (Judd J) |
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CORPORATIONS – Managed investment schemes – Acquisition of scheme interests – Where investors paid deposits and borrowed loan amount under loan agreements with financier to fund balance of application moneys – Where financier agreed to lend loan amount by paying it to responsible entity on behalf of investors – Where journal entries in books of financier and responsible entity purported to make payment of loan amount – Where both companies in liquidation – Where financier commenced recovery proceedings against defaulting investors under loan agreements – Corporations Act 2001 (Cth) ch 5C.
CONTRACT – Construction of loan agreement – Loan agreements between company and investors – Where company agreed to lend loan amount by paying it to another company – Where journal entries in books of both companies purported to make payment of loan amount – Whether payment under loan agreement may be made by journal entry – Whether payment by journal entry supported by evidence – Whether payment must have been made to other company in its capacity as responsible entity of managed investment schemes – Effect of scheme constitutions and taxation product rulings – Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 and Re York Street Mezzanine Pty Ltd (2007) 162 FCR 358 applied – Rocky Castle Finance Pty Ltd v Taylor (2014) 118 SASR 349 distinguished.
CONTRACT – Formation – Whether inferred agreement exists between companies permitting payment to be made by journal entry – Where companies in same corporate group with common directors and single operating bank account – Where financial statements of companies subject to annual directors’ declarations and independent audit report – P’Auer AG v Polybuild Technologies International Pty Ltd [2015] VSCA 42 and Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 applied.
UNJUST ENRICHMENT – Whether unjust for investors to avoid loan obligations to financier – Where investors had no knowledge of loan and scheme implementation – Where trial judge found that investors claimed tax deductions – Whether investors precluded from denying payment of application moneys by subsequent conduct – Whether requisite knowledge amounting to ratification – Whether analogy to agency law apposite – NMFM Property Pty Ltd v Citibank Ltd (No 10) (2000) 107 FCR 270 discussed.
COSTS – Where defendant joined to proceeding by plaintiff in response to allegations made by other defendants at trial – Where other defendants unsuccessful and ordered to pay costs of successful defendant – Whether costs order in favour of successful defendant should stand.
WORDS AND PHRASES – ‘payment’ – ‘consideration’ – ‘application money’ – ‘in its capacity as responsible entity’ – ‘journal entry’ – ‘book entry’ – ‘discharge of liability’ – ‘inferred agreement’ – ‘ratification’.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicant in S APCI 2017 0033 and the Applicants in S APCI 2017 0035 | Mr M D Wyles QC with Mr D J Fahey | Macpherson Kelley Lawyers |
| For the First Respondent in each proceeding | Mr P H Solomon QC with Dr C O Parkinson | Mills Oakley |
| For the Second Respondent in each proceeding | Dr O Bigos | Arnold Bloch Leibler |
FERGUSON CJ
SANTAMARIA JA
McLEISH JA:
Introduction
The applicants were investors in three managed investment schemes registered under ch 5C of the Corporations Act 2001 (Cth) (‘the Act’). The applicants had sought to borrow money from Timbercorp Finance Pty Ltd (‘Timbercorp Finance’) in order to acquire interests in the schemes. In doing so, they entered into a loan agreement with Timbercorp Finance to be satisfied by Timbercorp Finance making payment to Timbercorp Securities Ltd (‘Timbercorp Securities’), which was the responsible entity of each scheme. Timbercorp Finance purported to make payment to Timbercorp Securities by the making of journal entries in each company’s books of account.
In April 2009, administrators were appointed to Timbercorp Ltd and 40 of its wholly-owned subsidiaries, including Timbercorp Finance and Timbercorp Securities. In June 2009, the creditors of the Timbercorp Group resolved to wind up the companies, and the administrators were appointed liquidators. Following the appointment of administrators, borrowers under more than 8,000 Timbercorp Finance loan agreements failed to meet their loan repayment obligations. Timbercorp Finance commenced recovery proceedings against 20 defaulting borrowers. In each proceeding, Timbercorp Finance claimed the unpaid balance of a loan with interest and costs.
On 27 October 2009, investors in the managed investment schemes commenced a group proceeding under pt 4A of the Supreme Court Act 1986 against Timbercorp Securities, three of its directors and Timbercorp Finance. The applicants were group members in the group proceeding. The group proceeding had the effect of ‘pausing’ the recovery proceedings and deferring the initiation of further recovery proceedings pending the outcome of the group proceeding.
The group proceeding was unsuccessful both at trial[1] and on appeal.[2] Subsequently, Timbercorp Finance revived extant recovery proceedings and brought a large number of new recovery proceedings against defaulting borrowers, including the present applicants. The applicants resisted those proceedings and, in doing so, relied upon several defences that had not been raised in the group proceeding. Timbercorp Finance contended that it was not open to the applicants to rely upon those defences in so far as those defences could have been run during the group proceeding. Eventually, it was decided that the applicants were not estopped from relying upon those defences in the recovery proceedings.[3]
[1]Woodcroft-Brown v Timbercorp Securities Ltd (2011) 253 FLR 240 (Judd J).
[2]Woodcroft-Brown v Timbercorp Securities Ltd (2013) 96 ACSR 307.
[3]Timbercorp Finance Pty Ltd (In Liq) v Collins [2015] VSC 461 (Robson J); Timbercorp Finance Pty Ltd v Collins and Tomes [2016] VSCA 128; Timbercorp Finance Pty Ltd (in liq) v Collins (2016) 259 CLR 212.
At the trial of the present proceedings, the applicants contended, in simple terms, that the relevant loan agreement between themselves and Timbercorp Finance required Timbercorp Finance to make a payment of money to Timbercorp Securities and that the making of journal entries in the books of account of those companies did not amount to performance of the loan agreement as it did not involve the payment of money. They further contended that, even if payment under the loan agreement could be made by journal entry, the journal entries in question were not effective as there had been no agreement between Timbercorp Finance and Timbercorp Securities that Timbercorp Finance could make a payment to Timbercorp Securities by way of journal entry in fulfilment of Timbercorp Finance’s obligations under the loan agreement. Further, the applicants contended that Timbercorp Finance had failed to prove the existence of any such journal entries.
The trial judge rejected each of the defences and entered judgment in favour of Timbercorp Finance.[4] In particular, the trial judge held that, in making journal entries in its accounts whereby it purported to debit its accounts and credit those of Timbercorp Securities, Timbercorp Finance had made payment to Timbercorp Securities on behalf of the applicants pursuant to the loan agreement between Timbercorp Finance and the applicants. In the event, the applicants were liable for the unpaid balance of each loan as alleged, together with interest.[5] The applicants now seek leave to appeal from that judgment.
[4]Timbercorp Finance Pty Ltd v Collins (2016) 119 ACSR 478 (‘Reasons’).
[5]The Court also ordered, relevantly, that the applicants pay the costs of Timbercorp Securities. By way of background, Timbercorp Finance had joined Timbercorp Securities as a defendant in the current proceedings and made a contingent claim against it in response to allegations made by the applicants that Timbercorp Securities had applied application moneys in breach of certain pre-conditions to their proper appropriation. At the end of the trial, the applicants abandoned those allegations against Timbercorp Securities, which entitled Timbercorp Securities to judgment on the contingent claim. This formed the basis of the costs order in its favour. In the present applications for leave to appeal, Timbercorp Securities contended that, even if the appeals were allowed, the costs orders made in its favour should not be disturbed. This issue is addressed at [176]–[183] below.
For the reasons that follow, the applications for leave to appeal should be granted, but the appeals must be dismissed.[6]
[6]Consistent with the manner in which the trial was run, the applicants in both proceedings rely upon substantially the same proposed grounds of appeal and submissions. The case of Mr Peter White has been taken as typical of the case for Mr Douglas James Collins and Ms Janet Ann Collins. Except where it is necessary to do so, these reasons do not draw a distinction between the applicants in both proceedings.
Factual background
Timbercorp Finance and Timbercorp Securities were wholly-owned subsidiaries of Timbercorp Ltd. The primary business activity of the Timbercorp Group was the establishment, development, marketing, and management of primary industry-based managed investment schemes. The business involved the acquisition of land, water rights and infrastructure and the provision of finance to investors (also known as ‘growers’). Between 1992 and 2009, the Timbercorp group invested more than $2 billion in agribusiness schemes on behalf of around 18,500 growers. Most investors, including the applicants, borrowed moneys from Timbercorp Finance to finance their application money, being the money to be paid in order to acquire an interest in a scheme. Some invested in multiple schemes and had multiple loans; others had multiple loans in respect of a single scheme.
Timbercorp Securities was the responsible entity for the three managed investment schemes that are relevant to these proceedings: the 2007/2008 Single Payment Timberlot Project (‘the Timberlot Scheme’); the 2007 Almond Project (‘the Almond Scheme’); and the 2008 Olive Project (‘the Olive Scheme’). The documentary framework for each of the three schemes included: (a) a product disclosure statement (‘PDS’); (b) a constitution; (c) a management agreement; (d) a custody agreement; (e) lease or licence agreements; (e) an Australian Taxation Office (‘ATO’) Product Ruling; and (f) a compliance plan.
The only company in the Timbercorp Group that had an operating bank account was the holding company, Timbercorp Ltd.
The process of acquiring lots in the schemes
This section of the reasons will be devoted to explaining the process by which a prospective investor (‘a scheme applicant’) could acquire an interest (known as a ‘lot’) in a scheme and the powers of the responsible entity, Timbercorp Securities, in relation to dealing with application money. It will be necessary to set out relevant provisions of the Act and, in particular, ch 5C. Reference will also be made to parts of the constitutions, PDSs, loan explanation and loan terms and a Request for Product Ruling by Timbercorp Securities to the ATO dated 1 August 2006.
Chapter 5C
The schemes within the Timbercorp Group were registered under ch 5C of the Act. Chapter 5C is entitled ‘Managed investment schemes’. The term ‘managed investment scheme’ is defined in s 9 of the Act as follows:
‘managed investment scheme’ means:
(a) a scheme that has the following features:
(i)people contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not);
(ii)any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders);
(iii)the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); or
(b) a time-sharing scheme …
We pause here to make two observations. First, one of the fundamental features of a scheme under ch 5C is that it involves a person contributing ‘money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme’. The word ‘consideration’ is not defined anywhere in the Act. However, s 601GA (entitled ‘Contents of the constitution’) sets out certain matters which a scheme constitution must specify or for which adequate provision must be made. Section 601GA(1)(a), in particular, provides that a scheme constitution ‘must make adequate provision for the consideration that is to be paid to acquire an interest in the scheme’. It is necessary, therefore, to turn to the provisions of the scheme constitution to identify the ‘consideration’. The relevant provisions of the constitutions of the schemes in question will be considered below.
Secondly, another fundamental feature of a scheme under ch 5C is that any ‘contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property’ for scheme members. The concept of ‘pooling’ contributions is not elaborated anywhere in ch 5C. Yet, it is clear that contributions ‘are to be pooled, or used in a common enterprise’. There are a number of authorities that shed light on the meaning of this phrase.[7] For present purposes, it will suffice to note that ch 5C does not set out exhaustively the powers of a responsible entity in relation to dealing with contributions. Section 601GA(1)(a), however, provides that a scheme constitution ‘must make adequate provision for the powers of the responsible entity in relation to making investments of, or otherwise dealing with, scheme property’ (emphasis added). ‘Scheme property’ is defined in s 9 to mean, among other things, ‘contributions of money or money’s worth to the scheme’. Plainly, scheme property includes application money, which is paid by a scheme applicant in order to acquire an interest in a scheme. Accordingly, in order to ascertain the powers of the responsible entity vis-à-vis the scheme property, it is necessary again to turn to the provisions of the scheme constitution.
[7]The authorities are usefully set out in LexisNexis, Ford, Austin and Ramsay’s Principles of Corporations Law [22.490.15].
The constitutions
The constitutions of the schemes in question, in so far as they relate to how a scheme applicant was to acquire an interest in a scheme, did not differ from one another in any material respect.
In order to apply for a lot in a particular scheme, a scheme applicant first completed a Timbercorp Multichoice lot application form in which the applicant specified the number of lots for each of the schemes of which he or she sought to become a member (‘lot application form’). Clause 5 of the constitution was entitled ‘Application Procedure’. Relevantly, cl 5.3 read as follows:
How to Apply
Every Applicant must deliver the following to the Responsible Entity or to the duly authorised lawful agents of the Responsible Entity at the place set out in the PDS or any other place or places as the Responsible Entity may from time to time determine:
(a)an Application for Timberlots, incorporating an offer to become a Grower under this Deed, being in the form attached to the PDS, and signed or executed by the Applicant;
(b)a Power of Attorney, being in the form attached to the PDS, signed or executed by the Applicant, appointing the Responsible Entity to be the Applicant's attorney and, on the Applicant’s behalf as the case may require, to execute the Grower Agreements and any other documents which are ancillary or related to the Grower Agreements, or contemplated by the provisions of the Grower Agreements; and
(c)… a cheque for the Application Moneys for each Timberlot being the amount set out in the First Schedule.
The amount of the deposit payable by a scheme applicant for each lot in a scheme was set out in the ‘First Schedule’ of the scheme constitution. In the case of the Timberlot Scheme, the required deposit was $3,080. In the case of the Almond Scheme, the required deposit was $9,000. In the case of the Olive Scheme, the required deposit was $5,700.
Broadly speaking, in order to acquire an interest in a scheme, the scheme applicant had to agree to pay the application money in respect of each specified lot. Clause 5.4(a) of each constitution allowed a scheme applicant to pay the application money in full or by instalments. Clause 5.5 made provision for the acceptance of a scheme applicant’s application on condition that a person — in the present case, Timbercorp Finance — had agreed to lend that amount to the scheme applicant. Clause 6.1 provided that Timbercorp Securities could in its absolute discretion give notice in writing to any scheme applicant to the effect that its application had been refused. Each of these provisions, in relevant part, read as follows:
5.4 Payment in Full or by Instalments
(a) Subject to clauses 5.5 and 6.1 and subject to the Responsible Entity electing to make available to Applicants a facility to pay the Application Moneys by instalments, at the option of any Applicant, the Application Moneys for each Timberlot may be payable in full at the time of application or may be payable by instalments. If the Applicant elects to pay the Application Moneys by instalments, the Applicant must pay at the time of delivering of the Application the amount shown in the application as the ‘DEPOSIT’, and the balance of the Application Moneys must be paid by the Applicant (or Grower, if that Applicant has become a Grower[8] in accordance with the provisions of this Deed), to the Responsible Entity by the date specified in the Application (if any) and if no such date is specified, by such date as the Responsible Entity may, in its absolute discretion, determine, provided that in its absolute discretion, the Responsible Entity may extend that date to such later day as the Responsible Entity determines.
…
5.5 Condition as to Finance
If an amount is shown in an Application against the words ‘Amount subject to finance’ (if those words appear in the Application), the Application will only be accepted by the Responsible Entity on condition that a person (which person may include the Responsible Entity) has agreed to lend that amount to the Applicant. The Responsible Entity does not warrant, undertake, covenant or agree that such finance will be provided or procured.
[8]In the case of the Timberlot Scheme constitution, ‘Grower’ or ‘Participant Grower’ is defined, relevantly, as ‘each several person … who becomes a party to this Deed (as a Grower) as a result of either (a) the allotment of Timberlots pursuant to an Application in the PDS whether to a Pre 30 June Grower or a Post 30 June Grower; or (b) a transmission, transfer, mortgage, assignment or other disposal … and who remains registered under this Deed as the holder for the time being of any Timberlots; and the expression ‘all Growers’ means all persons who have so become a party to this Deed as a Grower and remain the registered holder for the time being of the relevant Timberlots.’
…
6.1 Refusal of Application
The Responsible Entity may in its absolute discretion give notice in writing to any Applicant to the effect that its Application has been refused.
In the present case, the payment of the application money comprised: (a) a deposit; and (b) the balance of the application money.[9] The deposit was paid upon completion of the lot application form, and provision was made for the amount of the balance of the application money to be lent to the scheme applicant.[10] If the scheme applicant wished to borrow such an amount, he or she applied to Timbercorp Finance by completing a loan application form.
[9]Where an investor chose to invest in several schemes, the deposit amount would be the sum of the individual deposit amounts in respect of each scheme.
[10]The application form provided that the payment of the balance of the application money was the ‘Amount subject to finance’.
Once the scheme applicant had completed his or her lot application form and the loan application form, it appears to have been the practice of Timbercorp Securities to issue to the scheme applicant a document entitled ‘Confirmation Notice/Tax Invoice’ confirming acceptance of the scheme applicant’s application for lots in the relevant schemes and the date of the acquisition of each lot for which the scheme applicant applied. In the present case, the applicants had received such a document.
Clause 4.2 of the constitution referred to a special trust account to be maintained by Timbercorp Securities. It read as follows:
Special Trust Account
Any amounts paid by any Applicant in accordance with clauses 5.3 and 5.4 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 PDS.
Clause 4.3 authorised Timbercorp Securities to pool any amounts paid by any scheme applicant with any amounts paid by any other scheme applicant.
Clause 9.3 provided for the release or refund of the application money, as the case may be. Relevantly, cl 9.3 read as follows:
(a) Release of Application Moneys
In relation to each Application which is either expressed to be not subject to finance or (if subject to finance) is unconditional because finance has been approved, the Responsible Entity must within 2 Business Days of the Responsible Entity being satisfied of the matters specified in clause 9.2,[11] release the Application Moneys and apply it in payment of the fees payable under the Sub-lease and the Management Agreement provided that where a deposit has been paid … the balance of the Application Moneys must be paid to the Responsible Entity …
[11]The equivalent clause in the Timberlot Scheme constitution is cl 8.2. In respect of the Olive Scheme constitution, cl 9.2, by way of example, provides: ‘Before the release of moneys referred to in clause 9.3, the Responsible Entity must be reasonably satisfied that: (a) the Licence Agreements and Grovelot Management Agreement are in the form required by this Deed and have been duly entered into by all parties; (b) Timbercorp Securities has the capacity to grant the Licence Agreements; (c) all necessary condition precedents to the grant of the Licence Agreements and entry into the Licence Agreements and Grovelot Management Agreement have been, or will be, satisfied; (d) all necessary consents to the grant of the Licence Agreements and entry into the Licence Agreements and Grovelot Management Agreement have been, or will be, obtained; (e) the Land the subject of the Licence Agreements is not subject to any encumbrance or restriction which detrimentally affects the interests of the Applicant; (f) any other matter required to be attended to, which is necessary for the creation of the Licence Agreements and the effective vesting in the Participant Grower of its Licence Agreements and Grovelot Management Agreement, whether by reason of this Deed or otherwise, has been, or will be, attended to; and (g) there are no outstanding material breaches of any of the provisions of this Deed which are detrimental to the interests of the Participant Growers whose Application Moneys is to be released pursuant to clause 9.3.’
(b) Refund of Application Moneys
Where the Responsible Entity does not issue a Timberlot to an Applicant within the time required by the Corporations Act, the Responsible Entity must refund to the Applicant the relevant Application Money paid with any interest earned in relation to that Application Money …[12]
[12]The equivalent clause in the Timberlot Scheme constitution is cl 8.3. According to the relevant PDS, the application amount paid by the scheme applicant covered the management fee (and, in some cases, rent) payable to Timbercorp Securities from the date that the investor’s application is accepted until the following 30 June.
For the purpose of understanding a submission advanced by the applicants, which will be summarised below, it is also necessary to consider certain aspects of the PDS for each scheme, the loan explanation and loan terms to which the applicants agreed to be bound and Requests for Product Ruling made by Timbercorp Securities to the ATO.
The product disclosure statements
The PDS for each scheme contained, among other documents, a lot application form. Part 1 of the lot application form in respect of the Almond Scheme provides, in relevant part, as follows:
YOUR ALMONDLOTS AND PAYMENT DETAILS
•Unless otherwise agreed by us, you must apply for a minimum of two Almondlots.
•If you are accepted into the Project as an Early Grower on or before 15 June 2007, your Application Moneys per Almondlot are $7,000 (which includes $636.36 GST).
•If you are accepted into the Project as a Post 30 June Grower between 1 July 2007 and 15 June 2008 while the Offer Period remains open, your Application Moneys per Almondlot are $9,000 (which includes $818.18 GST).
•If you fill in the item ‘Amount subject to finance’, your application will only be accepted on receipt of the whole of the Application Moneys in relation to the Almondlots. We do not warrant or undertake that finance will be provided or procured.
METHOD OF PAYMENT
(a)You may pay by cheque made payable to ‘Timbercorp - 2007 Projects; and crossed ‘Not Negotiable’; or
(b)alternatively, you may pay by credit card by completing your credit card details in the space provided …[13]
[13]The same information is contained, mutatis mutandis, in the PDSs for the other schemes.
It is to be observed that the PDS and, in particular, the lot application form above provide that the application of a scheme applicant who fills in the item ‘Amount subject to finance’ will only be accepted ‘on receipt of the whole of the Application Moneys in relation to the Almondlots’.
Loan explanation and loan terms
After a scheme applicant had completed his or her loan application form and Timbercorp Finance decided that the scheme applicant could successfully obtain finance for the balance of the scheme applicant’s application money, it also appears to have been the practice of Timbercorp Finance to send a letter to the scheme applicant confirming that his or her application for finance had been accepted and attaching loan terms which had been executed by Timbercorp Finance (‘the Loan Agreement’), including on behalf of the scheme applicant under power of attorney. Again, in the present case, the applicants had received such a document.
For present purposes, the critical clause of each Loan Agreement is cl 1, which reads as follows:
1. What we lend and when
We agree to lend you the loan amount by paying it to Timbercorp Securities Limited AFSL 235653 (or as it directs) as payment of the balance of your application money for lots and the loan application fee as described in the application form. However, we only have to lend you the loan amount if:
(a)we have received all documents (including securities) and information we require, in a form satisfactory to us; and
(b)neither you nor a guarantor is in default under this agreement or a security.
The ‘loan amount’ under the Loan Agreement in respect of Mr White was stipulated to be $205,756. The ‘loan application fee’ was defined as ‘a fee of $250 comprising part of the loan amount’. ‘Lot’ was defined, relevantly, as ‘each almondlot … timberlot [or] grovelot (as the case may be) allotted, or to be allotted, to you under a PDS in respect of the projects’.
The custody agreements
Timbercorp Securities entered into various custody agreements with Trust Company of Australia Limited (‘Trust Company’ or ‘the custodian’).[14]
[14]The constitutions make no provision for the custody agreements. Reference to the custody agreements is made in the Request for Product Ruling by Timbercorp Securities: ‘The Applicant will engage an approved trustee company to act as custodian under the Project. It will be responsible to: (a) receive all subscription moneys and apply those moneys in payment of Licence Fee and management fees under the agreements; and (b) if requested by the Applicant, enter into the Licence and Grovelot Management Agreement as attorney for each several Grower.’
It is unnecessary to set out the provisions of the custody agreements, save to say that, under those agreements, Trust Company was appointed by Timbercorp Securities as custodian to receive and hold application moneys — namely, the moneys paid by scheme applicants in order to acquire interests in lots under the scheme — and to release those moneys on Timbercorp Securities’ instructions.[15]
[15]In the relevant PDS for the Almond Scheme, by way of example, the role of the custodian is described as follows: ‘Timbercorp Securities appoints Trust Company as custodian to receive and hold the Scheme Assets and all income accruing in respect of them and any document of title to them in safe custody. “Scheme Assets” is defined as Application Moneys, until they are expended, and Proceeds, until they are distributed, in accordance with the proper instructions of Timbercorp Securities.’
Request for Product Ruling
In its Request for Product Ruling to the ATO dated 1 August 2006 in relation to the Timberlot Scheme,[16] Timbercorp Securities described the flow of funds between investors, Timbercorp Securities and other companies in receipt of the funds in two situations: (a) where the investor does not borrow any funds; and (b) where the investor borrows funds from Timbercorp Finance. It did so in the following terms:
[16]Corresponding Requests for Product Ruling were in evidence and contained substantially the same information in respect of the schemes to which they applied.
A description of the arrangement follows for a Pre 30 June Grower:
(a) A Pre 30 June Grower who applies for Timberlots either:
(i)pays the application moneys of $3,080 per Timberlot to the Custodian; or
(ii)pays a deposit of $308 (10% of the GST inclusive application moneys - rounded down to the nearest dollar) to the Custodian and applies to Timbercorp Finance to lend him or her the balance.
(b)If the borrower applies to borrow money, Timbercorp Finance may, if the loan application is approved, advance the moneys (out of its own funds and before any Timberlots are allotted) by paying them direct to the Custodian.
(c)On receipt of the full application moneys, [Timbercorp Securities] accepts the application and allots Timberlots to the Pre 30 June Grower. The Custodian then applies the application moneys by paying out the initial application fees in accordance with the agreements.
…
A further diagram representing the inter-relationship between the relevant Timbercorp entities and participants in the Project is also enclosed [Enclosure 23].
It is to be observed that, in both situations, the Request for Product Ruling provided that investors were to pay their application money direct to the custodian and that, upon receipt of the full application money, Timbercorp Securities would accept the application and allot Timberlots to the investor. The custodian would then apply the application money by paying out management fees in accordance with the applicable management agreement.
The Request for Product Ruling depicted the above arrangement in a diagram entitled ‘2007/2008 Timbercorp (Single Payment) Timberlot Project Enclosure 22 - Pre 30 June Grower Borrowings from Timbercorp Finance Pty Ltd’, which appears as follows:
2007/2008 Timbercorp (Single Payment)
Timberlot Project
Enclosure 22 — Pre 30 June Grower
Borrowings from Timbercorp Finance Pty Ltd
$308 $2,772
Trust Company of Australia Limited
(Custodian)
After Timberlots are allocated $3,080
and agreements are entered into
Timbercorp Securities Limited
(Project Manager
ATO
Notes
1.The sum of $3,080 per Timberlot is represented by a physical flow of funds ie by bank cheque or by telegraphic transfer of funds from Timbercorp Finance Pty Ltd into the applications account held by Permanent Trustee Company Limited.
2. The loan of $2,772 is repaid over the term of the loan.
3. Similar flow of funds occur for Post 30 June Growers.
The Request for Product Ruling and, in particular, the above diagram appear to contemplate that, where an investor chooses to borrow from Timbercorp Finance, Timbercorp Finance will make a payment direct to the custodian. As it transpired, Timbercorp Finance did not itself have a bank account that would permit it to make any payment by cheque or telegraphic transfer. The only company in the Timbercorp Group with an operating bank account was Timbercorp Ltd. In the event, Timbercorp Ltd made payments to the custodian on behalf of other companies in the Timbercorp Group, including Timbercorp Finance. Evidence was given that Timbercorp Ltd used its bank account with the ANZ Bank to remit to the custodian an amount equivalent to the balance of the application money and then debited its intercompany account with Timbercorp Finance. This circumstance gave rise to part of the cross-examination of officers within the Timbercorp Group, which is set out below, and to submissions that were made in this Court.
Application by Mr White for lots
On or about 2 June 2008, Mr White applied to Timbercorp Securities for:
(a)
23 timberlots in the Timberlot Scheme as a post-30 June Grower, at a
total cost of $70,840 in accordance with the terms of the PDS for the Timberlot Scheme;
(b)
eight almondlots in the Almond Scheme as a post-30 June Grower, at a cost
of $72,000 in accordance with the terms of the PDS for the Almond Scheme; and
(c)
15 olive grovelots in the Olive Scheme, at a cost of $85,500 in
accordance with the terms of the PDS for the Olive Scheme.
Along with his lot application, on 2 June 2008, Mr White paid a deposit of $22,834 to Timbercorp Securities for the lots for which he applied. The deposit was the sum of the deposits required for each of the schemes of which he sought to become a member: (a) $7,200 for the Almond Scheme; (b) $8,550 for the Olive Scheme; and (c) $7,084 for the Timberlot Scheme. The lot application form specified the balances of $63,756 for the Timberlot Scheme, $64,800 for the Almond Scheme and $76,950 for the Olive Scheme (a total sum of $205,506) to be ‘subject to finance’.
Application by Mr White for finance of balance of application money
As recounted above, Timbercorp Finance provided loans to investors in the schemes to fund the balance of the investors’ application moneys, that balance being the application moneys due from the investors less the deposits that had been paid.
On or about 2 June 2008, Mr White applied to Timbercorp Finance for a loan of $205,756. This amount represented the sum of the balance of the application money due to Timbercorp Securities for the lots for which he had applied under the schemes ($205,506) and a $250 loan application fee payable to Timbercorp Finance. Mr White also provided Timbercorp Finance with a power of attorney for the purpose of executing the Loan Agreement.
On 13 June 2008, Timbercorp Securities issued Mr White a ‘Confirmation Notice/Tax Invoice’ for $228,340, confirming acceptance of his application.[17]
[17]See [20] above.
On 13 June 2008, Timbercorp Ltd sent a letter to Trust Company that enclosed Mr White’s application to Timbercorp Securities for lots dated 2 June 2008, made reference to Mr White’s application for eight almondlots in the Almond Scheme and 15 grovelots in the Olive Scheme and stated that ‘A Timbercorp Finance Pty Ltd cheque of $141,750.04 will be forwarded in due course’. The sum of $141,750.04 was the sum of the balance of Mr White’s application moneys in respect of the Almond Scheme and the Olive Scheme. A letter to the same effect in respect of the Timberlot Scheme was sent to Trust Company on 30 June 2008.[18]
[18]See [50] below.
The relevant journal entries
On 13 and 14 June 2008, a number of journal entries were recorded in the general ledgers of Timbercorp Securities and Timbercorp Finance. The purported effect of these journal entries was that: (a) Mr White’s liability to Timbercorp Securities was discharged by entries that reflected a transfer of funds from Timbercorp Finance to Timbercorp Securities; and (b) Mr White’s indebtedness to Timbercorp Securities was replaced by an indebtedness to Timbercorp Finance.
Before setting out the relevant journal entries, it is convenient at this point to describe the accounting system used by the Timbercorp Group. At trial, Timbercorp Finance relied on a witness statement of Owain Rhys Stone dated 1 July 2016. Mr Stone is a partner of KordaMentha with over 30 years’ experience in forensic accounting projects. In his witness statement, Mr Stone described the Timbercorp Group accounting system as follows:
The main accounting package used by the Timbercorp Group was Great Plains. The transactions for each company within the Timbercorp Group were identified by different company numbers. For example, all transactions to [Timbercorp Ltd] used the company number ‘11’, those for [Timbercorp Securities] used the company number ‘12’, and those for [Timbercorp Finance] used ‘51’ …
Timbercorp Information Management System (TIMS) was a system (separate from the Great Plains package) that recorded, among other things, individual loan and receipting transactions and details pertaining thereto. The same transactions were recorded in journal vouchers in the Great Plains system; sometimes with batches of transactions being recorded in a single voucher.
In Timbercorp Ltd’s books of account, journal entry (no. 504452) dated 13 June 2008 recorded the following entries in the Timbercorp Securities Great Plains general ledger:
(d) a debit entry to a Timbercorp Securities account named ‘Suspense New Loans Advanced’ in the sum of $205,506; and
(e) a credit entry to a Timbercorp Securities account named ‘New Sales Control’ in the sum of $205,506.[19]
[19]The general ledger also includes journal voucher 504451 dated 13 June 2008. At trial, two experts gave evidence that this amount, which relates to Mr White, represents the loan application fee payable to Timbercorp Finance. See [73] below.
In Timbercorp Ltd’s books of account, journal entry (no. 504786) dated 14 June 2008 recorded the following in:
(f) the Timbercorp Finance Great Plains general ledger:
(i) a debit (increase) entry in a Timbercorp Finance account named ‘Loan Control Account’ in the sum of $4,473,412.00; and
(ii) a credit entry (increase) in a Timbercorp Finance account named ‘Loan – Timbercorp Securities Ltd’ account (a liability to Timbercorp Securities) in the sum of $4,473,412.00,
(g) the Timbercorp Securities Great Plains general ledger:
(i) a debit entry (increase) in a Timbercorp Securities account named ‘Loan – Timbercorp Finance Pty Ltd’ (a receivable due from Timbercorp Finance) in the sum of $4,473,412.00; and
(ii) a credit entry (decrease) in a Timbercorp Securities account named ‘Suspense – New Loans Advanced’ in the sum of $4,473,412.00.
We will refer to this journal entry as ‘the 14 June 2008 journal entry’.
Transfers of application moneys to the custodian
On 18 June 2008, Timbercorp Ltd transferred $5,498,398.74 from its operating account to Trust Company’s ‘application account’. This transfer purported to include the balance of Mr White’s application money, along with the balance of application moneys for other applicants, for the Almond Scheme. That same day, Timbercorp Securities wrote to Trust Company stating, ‘We advise that Timbercorp Finance Pty Ltd has instructed ANZ Bank to telegraphically transfer $5,498,398.74 into your almond application account … being finance for investors as set out in the attached schedule’ and directed Trust Company to electronically transfer $6,300,000.00 to ‘our Timbercorp Ltd account at ANZ’. Trust Company thereupon transferred the sum of $6,300,000 back to Timbercorp Ltd’s operating account. Timbercorp Ltd recorded the transfers of funds in its books of account.
On 19 June 2008, Timbercorp Ltd transferred $16,516,865.98 from its operating account to Trust Company’s ‘application account’. This transfer purported to include the balance of Mr White’s application money, along with the balance of application moneys for other applicants, for the Olive Scheme. That same day, Timbercorp Securities wrote to Trust Company stating, ‘We advise that Timbercorp Finance Pty Ltd has instructed ANZ Bank to telegraphically transfer $16,516,865.98 into your application account … being finance for investors as set out in the schedule’ and directed Trust Company to electronically transfer $18,741,600.00 to ‘our Timbercorp Ltd account at ANZ’. Trust Company thereupon transferred the sum of $18,741,600 back to Timbercorp Ltd’s operating account. Timbercorp Ltd recorded the transfers of funds in its books of account.
On 25 June 2008, Timbercorp Ltd transferred $10,056,080.88 from its operating account to Trust Company’s ‘application account’. This transfer purported to include the deposit and balance of Mr White’s application money, along with the deposits and balance of application moneys for other applicants, for the Timberlot Scheme. That same day, Timbercorp Securities wrote to Trust Company stating, ‘We advise that Timbercorp Finance Pty Ltd has instructed ANZ Bank to telegraphically transfer $10,191,720.00 into your application account … being application deposits and finance for investors as set out in the schedule’ and directed Trust Company to electronically transfer $10,191,720.00 to ‘our Timbercorp Ltd account at ANZ’. Trust Company thereupon transferred the sum of $10,191,720 back to Timbercorp Ltd’s operating account. Timbercorp Ltd recorded the transfers of funds in its books of account.
The loan account
On or about 30 June 2008, Timbercorp Finance sent a letter to Mr White confirming that his application for finance had been accepted. It attached the Loan Agreement, which had been executed by Timbercorp Finance on 30 June 2008. The loan account in respect of Mr White was designated ‘Loan No 0025841’.
On 30 June 2008, Timbercorp sent a letter to Trust Company that enclosed Mr White’s application to Timbercorp Securities dated 2 June 2008, made reference to Mr White’s application for 23 timberlots in the Timberlot Scheme and recorded that ‘A Timbercorp Finance Pty Ltd cheque of $63,755.96 will be forwarded in due course’. The amount of $63,755.96 was the same amount as the balance of Mr White’s application money in respect of the Timberlot Scheme.[20] No such cheque was forwarded. Timbercorp Finance did not have a cheque account or any other bank account. Instead, the telegraphic transfers described above had already taken place.
[20]This Court did not receive a copy of any letters of this kind that made reference to lots in the Almond Scheme or the Olive Scheme.
Insolvency of Timbercorp Group
On 23 April 2009, Mr Mark Korda and Ms Leanne Chesser were appointed as the administrators of Timbercorp Ltd and Timbercorp Securities, and Mr Mark Korda and Mr Craig Shepard were appointed as the administrators of Timbercorp Finance. On 29 June 2009, the creditors of the Timbercorp Group resolved to wind up the companies, and the administrators became joint and several liquidators.
The insolvency of the Timbercorp Group set in train the defaults of borrowers under more than 8,000 loan agreements and the ensuing litigation described above.
The proceedings below
In his reasons, the trial judge referred to the various pleadings that the parties served before trial. It is unnecessary to review these pleadings other than to explain the circumstances in which Timbercorp Securities became a party to the present proceeding and how each of the parties finally put its case.
On 4 November 2014, Timbercorp Finance commenced a proceeding against Mr White to recover $371,097.58 as the balance due under a loan from Timbercorp Finance to assist Mr White to fund his investments in the Timberlot Scheme, the Almond Scheme and the Olive Scheme. Interest is claimed at $134.21 per day from 1 April 2014.
On 22 December 2014, Mr White filed his first defence. In summary, he alleged that, by reason of various ‘relevant facts’, no loan had been made to him because Timbercorp Finance had not paid anything to Timbercorp Securities from the funds drawn down from Timbercorp Ltd’s account with the ANZ Bank. In the alternative, and based on the same facts, Mr White alleged that Timbercorp Finance had made neither an advance or loan to him within the terms of the Loan Agreement nor a payment for his benefit. Mr White further alleged a duty of care owed to him by Timbercorp Finance to protect him against the failure of Timbercorp Securities to hold and retain the loan amount until such time as valid sub-leases or licences had been granted or timberlots established. He alleged that the loan amount had not been deployed for the various schemes and was not available to repay him.
On 20 November 2015, Timbercorp Finance delivered an amended statement of claim in which it joined Timbercorp Securities as second defendant to meet the ‘no loan’ defence, based upon the alleged failure by Timbercorp Securities to satisfy itself that the necessary preconditions for use of Mr White’s application money were in place. In other words, if Timbercorp Securities had deployed the application money in breach of the preconditions for release under cl 9.3 of the constitution, and Mr White was thereby relieved of his obligation to repay his loan, Timbercorp Finance had suffered loss and damage.[21]
[21]For cl 9.3 see [23] above.
On 11 December 2015, Timbercorp Securities delivered its defence, in which it alleged compliance, sufficient compliance or a common assumption of compliance with the various provisions of the constitution.
At the same time, Timbercorp Finance filed a reply in which it alleged that Mr White was precluded by the group proceeding from advancing the various defences in his defence.
On 17 June 2016, Mr White filed a defence to the amended statement of claim.[22] In part, that pleading responded to the contingent claims made by Timbercorp Finance against Timbercorp Securities. It also elaborated the ‘no loan’ defence that had been adumbrated in the earlier defence. It alleged that: (a) Timbercorp Finance had not made a payment in accordance with the terms of the Loan Agreement because it was Timbercorp Ltd, not Timbercorp Finance, that made the transfer to the relevant Trust Company account; (b) Mr White’s money was not used for the acquisition of lots in a scheme, but was used by Timbercorp ‘in the course of the conduct of its business’; (c) the preconditions required under the constitution for the release of the application money under cl 9.3 of the constitution had not been satisfied;[23] (d) by reason of the failure to satisfy those preconditions, the group structure, the common knowledge of group companies including Timbercorp Finance, and the purpose of the loan (to pay ‘for lots and the loan application fee as described in the application form’), there was no payment in accordance with the terms of the Loan Agreement; (e) if Timbercorp Finance had made a payment or payments pursuant to the Loan Agreement, those payments ‘were made at a time when the Loan Agreement was not extant’;[24] (f) Mr White did not have allotted to him any almondlots, grovelots or timberlots because there was no valid sub-lease or because such sub-leases as there were failed to comply with the requirements of the relevant constitution; (g) due to the absence of valid sub-leases, and the terms of the relevant Product Rulings issued by the ATO in relation to the schemes, Timbercorp Finance had not made a payment for the benefit of Mr White; and (h) as a consequence, Timbercorp Finance had not made a loan to Mr White.
[22]On 22 December 2014, Mr White had filed an amended defence.
[23]In summary, the defence alleged that Timbercorp Securities had no right to apply application moneys to the relevant schemes because certain preconditions to the valid exercise of power under the scheme constitutions allegedly did not exist and, thus, Timbercorp Securities was in breach of its duties and responsibilities under the scheme documents. This allegation was later abandoned.
[24]This allegation appeared to depend upon the date of the Loan Agreement, which seemed to post-date the release of funds.
Further amended statement of claim: the journal entry case
On 22 June 2016, Timbercorp Finance further amended its statement of claim.[25] In paragraph 10 of its further amended statement of claim, Timbercorp Finance alleged:
[25]On 29 August 2016, it delivered a second further amended statement of claim.
The Plaintiff paid the L0025841 Loan Amount to TSL (or as it directed) as payment of the balance for the First Defendant’s lots and his loan application fee, by:
(a) the following:
(i)a debit entry of $4,473,412 (which included the L0025841 Loan Amount) on 14 June 2008 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 504786 entered in the Great Plains accounting software maintained by the Plaintiff and TSL;
(ii)a credit entry of $4,473,412 (which included the L0025841 Loan Amount) on 14 June 2008 to an account in the general ledger of the Plaintiff named ‘Loan — Timbercorp Securities Ltd’ and numbered 51-1208, by way of the same journal voucher;
(iii)a debit entry of $4,473,412 (which included the L0025841 Loan Amount) on 14 June 2008 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 $4,473,412 (which included the L0025841 Loan Amount) on 14 June 2008 to an account in the general ledger of TSL 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 13 June 2008, the settlement of the First Defendant’s balance liabilities to TSL (following payment of his deposit) recorded in invoices 2256378 … issued 13 June 2008; or
(b)on or about 19, 20 and 25 June 2008, the L0025841 Loan Amount [was] paid to Trust Company of Australia Limited as custodian and agent for TSL; or
(c) both (a) and (b)and thereby loaned it to the First Defendant in accordance with the terms of the Loan Agreement L0025841.[26]
[26]Evidently, Timbercorp Finance deleted sub-paras (b) and (c) in the second further statement of claim.
Amended reply: the ratification point
At the same time, Timbercorp Finance delivered an amended reply, responding to the ‘no loan’ allegations in the amended defence dated 17 June 2016. Timbercorp Finance alleged that Mr White had authorised it to satisfy his liability to Timbercorp Securities for application money and that it had satisfied Mr White’s liability to Timbercorp Securities by making the payment recorded by the journal entries alleged in paragraph 10 of the further amended statement of claim. Alternatively, Timbercorp Finance alleged that Mr White had acted on the basis that Timbercorp Finance had discharged his liability to Timbercorp Securities, and thus ratified the transaction, making him liable to Timbercorp Finance under the Loan Agreement.
Timbercorp Finance pleaded its ratification case as follows:
…
(c)further or alternatively … the First Defendant ratified the Plaintiff’s satisfaction of the First Defendant’s liability to TSL for fees payable by him to it, in the amount of $63,755.96, on the terms contained in Loan Agreement L0025841; and
Particulars
The First Defendant’s ratification of the Plaintiff’s satisfaction of the First Defendant’s liability to TSL for fees payable, in the amount of $63,755.96, on the terms contained in Loan Agreement L0025841, is implied by the following matters:
(a)Receipt by the First Defendant of a letter from Robert Hance on behalf of the Plaintiff to the First Defendant dated 30 June 2008 stating that the First Defendant’s application for finance to invest in the 2008 Timbercorp Multichoice had been accepted on the terms attached to the letter, and that payments upon those terms were thereafter due and owing on the last business day of each month.
The letter is in writing and a copy is available for inspection at the offices of the Plaintiff’s solicitors.
(b)Between 31 July 2008 and 30 April 2009, the First Defendant paid instalments to the Plaintiff due and owing under Loan Agreement L0025841.
(c)The First Defendant instructed his accountant to claim tax deductions in the amount of $61 for interest paid to the Plaintiff due and owing under Loan Agreement L0025841.
(d)The First Defendant instructed his accountant to claim tax deductions in the amount of $64,400 for fees paid to TSL, in circumstances where part of those deductions was premised upon the Plaintiff having discharged the First Defendant’s liability to TSL under the 2007/2008 Timbercorp (Single Payment) Timberlot Project Management Agreement [Post 30 June Growers] (Timberlot Management Agreement).
The First Defendant’s tax deductions are recorded in the document titled ‘Income Tax Return 2008 - Peter John White’, a copy of which is available from the offices of the Plaintiff’s solicitors.
(d)in the premises, the First Defendant became and remains liable to the Plaintiff for the payment of $63,755.96, on the terms contained in Loan Agreement L0025841.[27]
[27]The pleading in respect of Mr and Mrs Collins, whose loan account was designated ‘Loan No 0026087’, is substantially the same. In its amended reply, Timbercorp Finance also responded to the ‘no loan’ defence (which was to be abandoned at trial) and also said that, given the benefits obtained by Mr White, it would be unconscionable for him to retain the benefit of the moneys advanced without paying a reasonable sum in return.
On 13 July 2016, Mr White delivered a further amended defence to the further amended statement of claim dated 22 June 2016. Mr White alleged that: (a) Timbercorp Finance had not made any loan to him; (b) Timbercorp Finance had not made any payment to Timbercorp Securities for his benefit; and (c) if a payment had been made to Timbercorp Securities, it was not in payment of the balance of Mr White’s application money.
On 31 August 2016, Timbercorp Securities served its defence and counterclaim to the further amended statement of claim.
Pleadings after commencement of trial
After the trial commenced, there were further amendments to the various pleadings. In the event, Timbercorp Finance narrowed its case to rely upon the transactions recorded in journal entries to evidence the advance under the Loan Agreement.
During the trial, Mr White abandoned any reliance upon the absence of preconditions for the release of application moneys. By his further amended defence filed on 30 August 2016, after the conclusion of evidence, he deleted those paragraphs in which he had alleged his ‘no loan’ defence.
In the event, Mr White focussed upon the entries recorded in journal voucher 504786, alleging that the entries ‘do not and cannot constitute the payment required’ under the terms of the Loan Agreement. The basis of that allegation, as pleaded, was that journal voucher 504786 ‘records a present obligation by [Timbercorp Finance] to make a payment to [Timbercorp Securities] at a future date’.
Mr White further alleged that, even if there had been a payment, the payment could not properly be construed as a payment of the balance of application money on behalf of Mr White to Timbercorp Securities in its capacity as responsible entity. He further alleged that the journal entries could not, of themselves, constitute a payment in the absence of an agreement between the respective companies to that effect. The trial judge explained what he took to be the contentions now being advanced by the applicants as follows:
as a matter of construction, cl 1 of the loan agreement required the advance to be made in bankable form, but if [Timbercorp Finance] was permitted to rely on the efficacy of journal entries to support a payment between related entities, it was necessary for [Timbercorp Finance] to allege an agreement between the entities to the effect that such transactions, or the particular transactions, may be validly effected by journal entry rather than the transfer of bankable funds. [The applicants] complained that no such agreement had been pleaded by Timbercorp Finance, and insofar as [Timbercorp Finance] relied upon the inference of an agreement, any such inference ought to be rejected. Accordingly, [the applicants] alleged, the journal entries did not constitute evidence of the transactions which they purported to record.[28]
[28]Reasons 524 [203].
The expert evidence and the joint experts report
As mentioned above, at trial, Timbercorp Finance relied upon a witness statement of Mr Stone dated 1 July 2016. Mr White relied upon a witness statement of Dawna Wright dated 6 July 2017. Ms Wright is also an experienced forensic accountant. Subsequently, Timbercorp Finance relied upon a witness statement of Brendan Halligan dated 1 August 2016.
On 3 August 2016, the trial judge ordered Ms Wright and Mr Halligan to confer and to provide to the Court and the parties a joint report. The Court directed the experts to give their opinion on whether the journal entries contained in journal voucher 504786, taking into account whatever matters that Mr Halligan and Ms White consider relevant, recorded a payment by Timbercorp Finance to Timbercorp Securities on account of discharging Mr White’s liabilities to Timbercorp Securities.
On 15 August 2016, Ms Wright and Mr Halligan prepared their joint report.
Evidence on the journal entries
Journal vouchers 504451 and 504452
In their joint report, the experts agreed that the figure of $205,506 ‘is equal to the balance of the amount due by Mr White for invoice 2256378’. They agreed that that balance arose when Mr White paid the deposit of $22,834.[29] When Mr White paid $22,834, the amount that he owed to Timbercorp Securities was reduced from $228,340 to $205,506.
[29]The experts said that the payments totalling $22,834 are recorded by journal entries 505116 to 505118. Evidence of those journal entries was not before the Court. In the Reasons, the trial judge said (at 528 [226]): ‘Mr Stone explained that on 13 June 2008 the deposit money paid by Mr White was allocated to the three schemes in which he invested. Journal voucher 505116 allocated $7,084.14 to the “Timberlot application trust account”; journal voucher 505117 allocated $8,550.02 to the “new sales application account – olives”; and journal voucher 505118 allocated $7,199.94 to the “new sales application account – almonds”. In each case there was a corresponding credit entry in each relevant “new sales control account”’.
The Great Plains general ledger includes journal voucher 504451 dated 13 June 2008. The experts agreed that that journal voucher is for $250 and relates to Mr White. Mr Halligan said that ‘[t]he effect of journal entry 504451 is to take the receivable of $250 due from Mr White and “park” it temporarily in a suspense account pending some further accounting’.
The Great Plains general ledger includes journal voucher 504452 dated 13 June 2008.[30] The experts agreed that:
the first part of journal entry 504452 is an increase (i.e. a debit) of $205,506 in a suspense account and the second part is a reduction (i.e. a credit) of the same amount in the receivable from Mr White. The figure of $205,506 is equal to the balance of the amount due by Mr White for invoice 2256378 (i.e. $228,340 less the payments totalling $22,834 that are recorded by journal entries 505116 to 505118). The experts agree that journal entry 504452 appears to take the receivable of $205,506 due from Mr White and ‘park’ it temporarily in a suspense account pending some further accounting.
[30]See [44] above.
As Timbercorp Ltd was the only company in the Timbercorp Group that maintained an operating bank account, the accounts of the Timbercorp Group did not record actual ‘money’ payment (in the sense of cash, cheque or electronic funds transfer) from Timbercorp Finance to Timbercorp Securities. Instead, the payment from Timbercorp Finance to Timbercorp Securities on account of discharging an investor’s liability to Timbercorp Securities was recorded by way of journal entries in the general ledgers of Timbercorp Finance and Timbercorp Securities. Those entries showed: (a) a discharge of the investor’s liability to Timbercorp Securities; (b) a liability owed by the investor to Timbercorp Finance equal to the amount of the investor’s discharged liability to Timbercorp Securities; and (c) a liability owed by Timbercorp Finance to Timbercorp Securities equal to the amount of the investor’s discharged liability to Timbercorp Securities.
In his witness statement, Mr Stone said that these transactions were recorded in the Timbercorp Group’s Great Plains general ledgers. In the event that an investor owed Timbercorp Securities $100, and took out a loan from Timbercorp Finance for 90 per cent of that liability, then, as a result of the relevant journal entries, the position is that:
(h) Timbercorp Securities would record revenue of $100;
(i) the investor would be recorded as:
(i) having paid $10 to Timbercorp Securities as a deposit from the investor;
(ii) owing $90 to Timbercorp Finance (as an asset of Timbercorp Finance); and
(iii) having no residual liability to Timbercorp Securities;
(j) Timbercorp Finance would be recorded as owing Timbercorp Securities $90 (which would be reflected as a liability in Timbercorp Finance’s general ledger and an asset in Timbercorp Securities’ general ledger); and
(k) funds would be transferred by Timbercorp Ltd to the relevant Trust Company trust account on behalf of Timbercorp Securities, with Timbercorp Securities owing Timbercorp Ltd for the amount of funds transferred.
In other words, (1) Timbercorp Securities would record revenue amounting to the whole of the application money; (2) the investor would be recorded as having no residual liability to Timbercorp Securities; (3) Timbercorp Finance would be recorded as owing Timbercorp Securities the amount equivalent to the amount of the investor’s discharged liability to Timbercorp Securities, which amount would be reflected as a liability in Timbercorp Finance’s general ledger and an asset in Timbercorp Securities’ general ledger; (4) Timbercorp Ltd would transfer funds to the custodian on behalf of Timbercorp Securities; and (5) Timbercorp Securities would be recorded as owing Timbercorp Ltd the amount of the funds transferred to the custodian.
Journal voucher 504786
In their joint report, the experts gave evidence as to the meaning of what was contained in journal voucher 504786.[31] They dealt with it, first, from the perspective of Timbercorp Securities and, then, from that of Timbercorp Finance. As was to be expected, their opinions expressed from the perspective of Timbercorp Securities were reflected in their opinions expressed from the perspective of Timbercorp Finance.
[31]See [45] above.
The experts agreed that the effect of journal voucher 504786 was that: (a) Timbercorp Finance had discharged the liability of Mr White to Timbercorp Securities; and (b) Timbercorp Finance had assumed a corresponding liability to Timbercorp Securities.
However, the experts were not agreed on whether journal voucher 504786 was evidence that Timbercorp Finance had made a payment to Timbercorp Securities. Mr Halligan said:
In Halligan’s opinion, Timbercorp Finance’s journal entry 504786 relevantly records that a payment of $205,756 has been made to Timbercorp Securities (i.e. a resource embodying future economic benefits of that amount, being a bundle of legal rights under a loan agreement, has been given to Timbercorp Securities), on behalf of Mr White and that Mr White is now indebted to Timbercorp Finance for that amount.
In Mr Halligan’s opinion, Timbercorp Securities and Timbercorp Finance’s journal entries 504786:
(a)record a payment by Timbercorp Finance to Timbercorp Securities of $205,756 on account of discharging Mr White’s liability to Timbercorp Securities;
(b)that was effected by Timbercorp Finance recording an increase in a loan payable to Timbercorp Securities of $205,756 and by Timbercorp Securities recording a loan receivable from Timbercorp Finance of the same amount.
On the contrary, Ms Wright said:
(a)Even though Timbercorp Securities may have discharged Mr White’s liability, Timbercorp Finance has not yet made a payment. Timbercorp Securities has transferred the receivable from Mr White to Timbercorp Finance, and Timbercorp Finance has recorded the corresponding obligation to Timbercorp Securities.
(b)The recording of a loan payable to Timbercorp Securities in the accounts of Timbercorp Finance does not represent a ‘payment’ by Timbercorp Finance. A loan payable represents an obligation for Timbercorp Finance to pay Timbercorp Securities at some point in the future in the amount of Mr White’s loan and Application Fee.
(c)A payment from Timbercorp Finance to Timbercorp Securities will be made when the liability from Timbercorp Finance to Timbercorp Securities is extinguished.
(d)Timbercorp Finance journal entry 504786 records that a right to a future benefit of $205,756 has been given to Timbercorp Securities on behalf of Mr White and that Mr White is now indebted to Timbercorp Finance for that amount. This opinion is different to that stated by Mr Halligan below as he states that journal entry 504786 records a benefit of $205,756 has been given to Timbercorp Securities.
(e)Timbercorp Finance journal entry 504786 did not record a reduction in a loan receivable from Timbercorp Securities; accordingly, a payment by Timbercorp Finance to Timbercorp Securities was not effected by recording a reduction in a loan receivable from Timbercorp Securities (even if it was a reduction in a loan receivable Ms Wright would not consider this a payment).
(f)If Mr White’s liability to Timbercorp Securities is considered discharged, it is because of being replaced with a liability from Timbercorp Finance to Timbercorp Securities. Although the replacement of one obligation with another may settle Mr White’s obligation to Timbercorp Securities, it does not constitute a ‘payment’ from Timbercorp Finance to Timbercorp Securities. The recording of the obligation from Timbercorp Finance to Timbercorp Securities, whilst it may discharge Mr White’s liability, represents an obligation of Timbercorp Finance for a future payment to Timbercorp Securities.
For the reasons set out above, Ms Wright is of the opinion that there has not been a payment from Timbercorp Finance to Timbercorp Securities on account of discharging Mr White’s liability to Timbercorp Securities.
At trial, Mr Stone gave evidence with respect to the identification of the journal entries recording Mr White’s payment of a deposit to Timbercorp Securities and his loan from Timbercorp Finance. Having examined the Great Plains general ledger and confirmed its contents in the Timbercorp Information Management System, Mr Stone said:
(e)Only one journal voucher was listed. Journal voucher 504786, dated 14 June 2008, made the following entries:
(i) in the TSL Great Plains general ledger:
(A)a debit entry of $4,473,412 (including the Loan L0025841 amount of $205,756) in the TSL Loan Owed by TFPL Account, with account number 12-1200;
(B)a credit entry of $4,473,412 in the TSL Loan Suspense Account, with account number 12-7234;
(ii)in the TFPL Great Plains general ledger:
(A)a debit entry of $4,473,412 in the TFPL Grower Loan Account with account number 51-1221; and
(B)a credit entry of $4,473,412 in the TFPL Loan Owed to TSL Account, with account number 51-1208.
(f) …
The actual voucher (journal voucher 504786) was as follows:
| Transaction Entry Zoom | ─ | ⧈ | x | ||||||
| Journal Entry | 504,786 | Audit Trail Code | GLTRN00048743 | ||||||
| Transaction Date | 14/062008 | Batch ID | IBSGJ | ||||||
| Source Document | GJ | Reference | Batch 21884 | ||||||
| Currency ID | ÷ | ||||||||
| Account | Debit | Credit | » | ||||||
| Distribution Reference | Exchange Rate | « | |||||||
| 12 – 1200-ZZZZ - ZZ | $4,473,412.00 | $0.00 | |||||||
| Batch 21884 | 0.0000000 | ||||||||
| 12 – 7234-ZZZZ - ZZ | $0.00 | $4,473,412.00 | |||||||
| Batch 21888 | 0.0000000 | ||||||||
| 51 – 1208-ZZZZ - ZZ | $0.00 | $45,473.412.00 | |||||||
| Batch 21884 | 0.0000000 | ||||||||
| 51 – 1221-ZZZZ - ZZ | $4,473,412.00 | $0.00 | |||||||
| Batch 21884 | 0.0000000 | ||||||||
| Total | $8,946.824.00 | $8,946,824.00 | |||||||
| Difference | $0.00 | ||||||||
| |||||||||
| |||||||||
In the Timbercorp Securities ledger, there was a debit entry in the Timbercorp Finance account and a credit entry in a loan suspense account in the Timbercorp Finance general ledger. There was a debit entry in the grower loan account and a credit entry in the loan to the Timbercorp Securities account.
At trial, the experts agreed that the batch of growers to which that journal voucher related included Mr White. As a matter of accounting, the effect of the entry was to reduce to nil the amount in the books of Timbercorp Securities owing to it by Mr White.
The reasons of the trial judge
Before the trial judge, Mr White had contended that the objective purpose of the loan was to provide him with finance for the sole purpose of him investing in three managed investment schemes of which Timbercorp Securities was the responsible entity.[32] He contended that cl 1 of the Loan Agreement should be construed against the legislative framework found in ch 5C of the Act, which involved a pooling of contributions.[33] As a consequence, he said, Timbercorp Securities was not entitled to pool the balance of his application money with contributions made in respect of other schemes. Furthermore, as the application money had not been paid in full to Timbercorp Securities in its capacity as responsible entity, in bankable form, it could not be dealt with as contemplated in the Product Rulings, compliance plans, or as required under the scheme constitutions.[34] The failure of Timbercorp Finance to make a ‘payment’ meant that it had never made a loan to or on behalf of Mr White.
[32]Reasons 533 [250].
[33]Ibid 533–4 [251]–[252].
[34]Ibid 535 [254]–[255].
The trial judge held that the flow of funds between Trust Company and the operating account of Timbercorp Ltd amounted to substantive compliance with the transaction as contemplated in the Product Rulings.[35] He was not persuaded that cl 1 of the Loan Agreement required that the loan amount be paid in bankable form in discharge of the balance of Mr White’s liability for application money. The critical step was the discharge of each investor’s liability for management fees to be accompanied by a payment in cash — real money in bankable form — and this occurred.
[35]Ibid 538 [265].
Timbercorp Finance had relied upon the entries in journal voucher 504786 as evidence of the payment of the loan amount.[36] It said that these entries had the effect of discharging Mr White’s liability for the balance of his application money. For his part, Mr White contended that the journal entry merely recorded a promise by Timbercorp Finance to make a payment to Timbercorp Securities in the future and did not show that the payment was in fact ever made.[37]
[36]Ibid 539 [274].
[37]Ibid 539–40 [275].
Whilst accepting that the journal entries, of themselves, were not transactions, the trial judge held that they constituted evidence of a transaction.[38] In both cases, he found that Timbercorp Finance had made a payment of the balance of the obligations of both Mr White and Mr and Mrs Collins to pay the application money to Timbercorp Securities, by increasing its loan account with Timbercorp Securities, which, in turn, had the effect of discharging each of Mr White and Mr and Mrs Collins’ anterior obligations to make the payment to Timbercorp Securities.
[38]Ibid 546 [306].
The trial judge accepted the argument that Mr White had ratified the Loan Agreement by servicing his loan obligation.[39] The trial judge noted that Mr White had been notified that: (a) his loan application had been accepted; (b) management fees had been paid to Timbercorp Securities; and (c) lots had been allocated to him. Mr White also had his accountant prepare an income tax return in which management fees and other related costs were claimed as a deduction. The trial judge held that, by his conduct, Mr White had ratified any irregularity in the payment of the loan account. He said:
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 …[40]
[39]Ibid 547–8 [312].
[40]Ibid 548 [312].
However, the trial judge held that it was too late for Mr White to resile from the position that he had been a ‘Participant Grower’ in each of the Timberlot Scheme, the Almond Scheme and the Olive Scheme.[41] His status as a Participant Grower had been acted upon by Timbercorp Securities, Timbercorp Finance and their liquidators.[42] The trial judge continued:
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.[43]
[41]Ibid 548 [314]. In respect of the Almond Scheme, the trial judge found (at [315]) that Mr White was bound by a decision of the Court approving a compromise in relation to the distribution of the proceeds from the sale of almond scheme assets (citing Re Timbercorp Securities Ltd [2012] VSC 590). He made the same finding in respect of the Olive Scheme.
[42]Reasons 548 [314].
[43]Ibid.
Further, the trial judge said that, by reason of Mr White’s participation in litigation arising from the collapse of the Timbercorp Group, he was bound by a representative order which precluded him by issue estoppel from contending that he did not hold lots in the schemes wound up with the aid of such an order.[44] He concluded that the applicants’ participation in the schemes, as Participant Growers, bound by an order based upon their participation, would make it manifestly unjust to Timbercorp Finance 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 they were not paid in bankable funds to Timbercorp Securities.[45]
[44]See fn 41 above.
[45]Reasons 548–9 [315].
In the event, the trial judge entered judgment in favour of Timbercorp Finance against each of Mr White and Mr and Mrs Collins for the unpaid balance of each loan, together with interest.
Proposed grounds of appeal
The applicants seek leave to appeal on the following two grounds:
(a)the primary judge erred in finding that by Timbercorp Finance making the 14 June 2008 Journal Entry it had made a payment to Timbercorp Securities of the balance of Mr White’s application money; and
(b)the primary judge erred in finding that it would be unjust if Mr White were not precluded from avoiding his loan obligations.[46]
[46]It became clear during the hearing of the present application that the proposed grounds of appeal were highly compressed and unsatisfactory in that they gave little, if any, indication of what the applicants intended to argue. The burden of the applicants’ case was disclosed in written submissions, to an extent. Prior to the hearing, the Registrar of the Court of Appeal wrote to the applicants asking that they provide a short outline of the argument that they proposed to advance at the hearing. In the event, senior counsel for the applicants made his oral submissions by reference to the propositions contained in the applicants’ short outline.
Overview of the applicants’ contentions
The written and oral submissions of the applicants and Timbercorp Finance were, for the most part, confined to the first proposed ground of appeal — namely, whether the trial judge had erred in finding that the 14 June 2008 journal entry (no. 504786) amounted to a payment to Timbercorp Securities of the balance of Mr White’s application money pursuant to the Loan Agreement.
As is plain, the outcome of the first proposed ground of appeal hinges on the proper construction of cl 1 of the Loan Agreement. The contentions of the applicants in respect of the proper construction of cl 1 embraced several dimensions. Those contentions may be summarised as follows:
(l) payment of the balance of the application money under cl 1 had to be made to Timbercorp Securities in its capacity as responsible entity of the relevant schemes such that it could comply with the provisions of ch 5C;
(m) such payment also had to be made in bankable form and could not be effected by journal entry as Timbercorp Securities had to hold the application money on trust in accordance with its obligations under ch 5C;
(n) the ‘loan amount’ paid by Timbercorp Finance to Timbercorp Securities under cl 1 had to possess the character of ‘application money’ at the time of payment; and
(o) even if ‘payment’ under cl 1 could be made by journal entry, there was no evidence of any agreement between Timbercorp Finance and Timbercorp Securities that allowed Timbercorp Finance to effect such payment by way of journal entry.
In relation to the second proposed ground of appeal, the applicants contended that Timbercorp Finance, not ever having made a payment on Mr White’s behalf, sought to enrich itself unjustly by having Mr White pay to its liquidators both the amount that Timbercorp Finance did not pay, plus interest.
The applicants’ contentions in detail
As a starting point, the applicants drew attention to the fact that the present case was a debt recovery proceeding. Thus, it said, the onus was on Timbercorp Finance to prove that the applicants were indebted to it. In order to do so, Timbercorp Finance had to establish that it had complied with cl 1 of the Loan Agreement. The critical words in that clause were ‘by paying [the loan amount] to Timbercorp Securities Limited AFSL 235653’ and ‘as payment of the balance of your application moneys for lots’. The clause had to be read in its context, which included ch 5C of the Act; the relevant scheme constitutions; the PDSs, which included the individual loan applications; and the Product Rulings.[47] The applicants argued that the payment had to be effected in such a manner as to permit Timbercorp Securities, as the responsible entity of the schemes, to comply with the provisions of ch 5C, which requires the application money to be pooled with the application moneys of other investors, held in trust until the decision to proceed with the schemes had been made, and remitted to the custodian. In essence, the applicants urged that, on a proper construction of cl 1, the loan was to be effected by paying the balance of the application money to Timbercorp Securities in its capacity as responsible entity.
[47]At various times the applicants also referred to the Requests for Product Ruling.
Counsel:And you will see, if I take you first to point 3, right at the bottom of the page?
Rabinowicz: Yes.
Counsel:That the Tax Office was told that this applied equally to post-30 June growers?
Rabinowicz: Yes.
Counsel:And they were the people who made application to Timbercorp Securities for interests in schemes after 1 July 2007; that’s correct?
Rabinowicz: Yes.
Counsel:It says that – this is dealing with timberlots in note 1 – the sum of 3,080 per lot is represented by a physical flow of funds; do you see that?
Rabinowicz: Yes.
Counsel:By bank cheque or telegraphic transfer of funds from Timbercorp Finance into the applications account held by Permanent Trustee Co Ltd; that’s correct?
Rabinowicz: Yes.
Counsel: And that was the process that was adopted?
Rabinowicz: Yes.
…
Counsel:And Mr Meltzer has made that declaration at 2492; do you see that?
Rabinowicz: Yes.
Counsel:I take it that you are familiar with obtaining these tax rulings?
Rabinowicz: Generally familiar, yes.
Counsel:And without taking you to the tax ruling did you understand that the tax ruling that issued in response to this particular application made it clear that the procedures which had been explained to the Tax Office had to be adhered to for that tax ruling to apply?
Rabinowicz: I can’t recall whether it was substantially adhered to. But I think it was substantially adhered to.
Counsel:To the best of your knowledge, was the process of a telegraphic transfer of funds from Timbercorp Finance into the applications account ever abandoned?
Rabinowicz: No.
During his cross-examination, Mr Hance was similarly taken to the diagram extracted at [34] above. The transcript reads as follows:
Counsel:Could I please ask you to turn to page 2385. You should have a diagram there that’s headed ‘2007/2008 Timbercorp (single payment)’?
Hance:Yes.
Counsel:If you go not quite to the bottom of the page but towards the bottom you will find a point 3 that says, ‘Similar flow of funds occurred for post 30 June growers’?
Hance:Yes.
Counsel:So this in note 1 refers to the example of $3,080 per timberlot?
Hance:Yes.
Counsel:And it shows the physical flow of funds that would come from the grower borrower to the Trust Company would be $308?
Hance:Yes.
Counsel:And Timbercorp Finance, $2,772?
Hance:Yes.
Counsel:Then the timberlots would be allocated?
Hance:Yes.
Counsel:And then the 3,080 would then be paid out to Timbercorp Securities Limited as the project manager?
Hance:Yes.
Counsel:And it would pay GST to the ATO?
Hance:Right.
Counsel:One of the debates we are having in this matter, Mr Hance, if you are wondering why you are here, is about the funds going from Timbercorp Finance to Timbercorp Securities?
Hance:Right.
Counsel:Do you understand that?
Hance:I understand that.
Counsel:What this tells the Tax Office in note 1 is that there will be a bank cheque or telegraphic transfer of funds from Timbercorp Finance into the applications account?
Hance:Yes.
Counsel:Is that what happened?
Hance:To be honest, I don’t know. That was what was – that’s what used to happen back in the days of prospectuses. But this all got beyond me, I must say, at my stage and I wasn’t close to it and it was done by computers and what have you, all of which was agreed to by the auditors. They could follow the flow of these funds. But I didn’t have any – I wasn’t on hands with this. Certainly in the old days this is exactly what happened, single cheques drawn, going to the trustee, coming back to the manager.
Counsel:Yes. Just taking you back to 2007 and 2008?
Hance:Yes.
Counsel:Were the people close to it then, was that Mr Murray?
Hance:Sorry?
Counsel: Mr Murray, the chief financial officer?
Hance: John Murray, yes.
Counsel:And can you recall did anybody ever say to you, ‘We are no longer paying cheques or transferring money’?
Hance:I understood it was all done by transfer, but that was just my understanding of it.
Counsel:So when you say ‘by transfer’, by transfer of funds from one account to another account?
Hance:No, I don’t know that. It was – money was moved around by transfer.
Counsel:But real money?
Hance:Certainly – well, as I would understand it real money. The money was genuine money.
Counsel:So can I put this to you. From your point of view you didn’t have any doubt that going to Trust Company, if we look at this diagram, going to the custodian was a total amount of money of $3,080?
Hance:Well, I understand it from this diagram, and the auditors always signed off on the fact that we were adhering to what we were supposed to and the money was going to the places it should have been going to.
Counsel:From your point of view as a director you could be satisfied that there was $3,080 going to Trust Company of Australia?
Hance:Yes, either that or it might have been done in bulk. It might have been a whole lot of it.
Counsel: Sure, yes?
Hance:Yes.
Counsel: A whole lot of 3,080s?
Hance: A whole lot of 3,080s, yes.
We reject the contention that the inferring of the necessary agreement cannot be reconciled with the evidence of Mr Rabinowicz and Mr Hance. As the extracts from the transcript show, the evidence did not address the issue whether an agreement could be inferred that payment between Timbercorp Finance and Timbercorp Securities could be by journal entry. It is true that: (a) the Requests for Product Ruling contain a description of the ‘flow of funds’ between an investor and Timbercorp Securities, which is illustrated by a diagram;[109] and (b) a note to the diagram reads: ‘The sum of $3,080 per Timberlot is represented by a physical flow of funds i.e. by bank cheque or telegraphic transfer of funds from Timbercorp Finance Pty Ltd into the application account held by Permanent Trustee Company Limited’. However, none of that is inconsistent with the postulated agreement. In the event, there was a telegraphic transfer of moneys to and from the custodian. The ANZ Bank made the transfers at the direction of Timbercorp Ltd, acting on behalf of its subsidiaries.
[109]See [34] above.
In so far as the contentions of the applicants are concerned, the evidence given in cross-examination is of practically no weight. At no stage were the witnesses warned of the use to which the applicants proposed to put their answers. Each of the witnesses can be understood as agreeing that the application moneys were ‘real moneys’ and that they were transferred to the custodian. The witnesses were not asked to address the existence, much less the significance, of the fact that payments were being made within the group by journal entry. The distinctions between ‘cheques or telegraphic transfer’ and ‘book entries’ and between ‘actual payment of money’ and ‘book entry’[110] were plainly absent from the minds of the witnesses when they gave their evidence.
[110]In one of the footnotes to their submissions, the applicants said: ‘See also other drawdown notices and bank statements that reveal that the practice was real money transfer, not journal entry’ (emphasis added). The applicants then referred to three notices in which the custodian is informed that Timbercorp Finance has instructed the ANZ Bank to transfer telegraphically application moneys to the custodian. In each case, the notice is on a Timbercorp Ltd letterhead and continues with a direction that, as per the custody agreement between the custodian and Timbercorp Securities, the custodian is to telegraphically transfer or ‘electronically’ transfer a dollar sum ‘to our Timbercorp Ltd account at ANZ Bank’, and the account number is given. The drawdown notices show that the only Timbercorp Group participant in an actual telegraphic transfer or electronic transfer was Timbercorp Ltd, not Timbercorp Finance or Timbercorp Securities.
In our opinion, the trial judge made no error in finding that the 14 June 2008 entry constituted ‘payment’ to Timbercorp Securities ‘of the balance of [Mr White’s] application money for lots and the loan application fee as described in the application form’ within the meaning of cl 1 of the Loan Agreement.
The first proposed ground of appeal must fail.
Unjust enrichment and ratification
By their second proposed ground of appeal, the applicants contended that the trial judge erred in finding that it would be unjust if they were not precluded from avoiding their loan obligations. They submitted, in short, that it would be unjust for them to have to pay Timbercorp Finance moneys with which it did not part. The conclusions that we have already reached apply to this argument with equal force. By the journal entries, Timbercorp Finance did part with the relevant moneys.
Moreover, Timbercorp Finance also contended that, in the event that it failed on the construction of cl 1 of the Loan Agreement and that it had not established that Mr White was liable under that clause, properly construed, Mr White had nonetheless ratified the loan payment by servicing his loan obligations.
In addressing the question of ratification, the trial judge said:
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.[111]
[111]Reasons 547–8 [312].
Timbercorp Finance submitted that this finding is a further answer to the applicants’ case about the mode of payment. It will be recalled that this argument goes not to the fact of payment but to the questions whether the balance of the application money had to be paid ‘as application money’ to Timbercorp Securities, and in its capacity as ‘responsible entity’
In response to Timbercorp Finance’s ratification argument, Mr White pointed to the fact that he had no knowledge as to how the loans and the schemes were implemented. He said that there was no evidence that he had obtained any tax benefit. Finally, he said that he could not have ratified or induced Timbercorp Finance’s conduct in any way or caused it to labour under a mistaken assumption. He said that the trial judge ‘ought properly to have found that there was no evidence of Mr White having caused any detriment to Timbercorp Finance’. On the assumption that Timbercorp Finance had not made any relevant payment, he said, it would be unjust to require him to pay Timbercorp Finance any money.
Timbercorp Finance relied in this context upon NMFM Property Pty Ltd v Citibank Ltd (No 10).[112] In that case, Lindgren J outlined three essential elements of ratification of an agent’s tortious conduct: ‘first, the act must have been done on behalf of the ratifier; secondly, the principal must have had sufficient knowledge of the act; thirdly, the principal’s act of ratification must have been of an appropriate kind.’[113] As to the second element, the ratifier must have had ‘full knowledge of all the essential facts’.[114] The extent of the requisite knowledge depends upon the circumstances of the case and should be enough for one to decide whether to adopt the unauthorised act.[115]
[112](2000) 107 FCR 270.
[113]Ibid 542 [1199].
[114]Eastern Construction Co Ltd v National Trust Co Ltd [1914] AC 197, 213; Taylor v Smith (1926) 38 CLR 48, 59 (Higgins J).
[115]Leybourne v Permanent Custodians Ltd [2010] NSWCA 78 [134] (Giles and Tobias JJA and Sackville AJA).
The analysis applicable to the tortious acts of an agent is arguably not apposite to the present case. The judge did not approach the case by determining whether the applicants were bound by acts done by Timbercorp Finance as their agent. In effect, his finding was that, even if Timbercorp Finance had departed from the Loan Agreement in the manner in which it paid Timbercorp Securities, the applicants had nonetheless ratified that departure and thereby affirmed the Loan Agreement. They did that by accepting the loans in discharge of their obligations to Timbercorp Securities and thereafter making payments and claiming deductions in respect of their loans.
Given the conclusion that we have reached on the first proposed ground of appeal, it is strictly unnecessary to decide the second proposed ground of appeal. Nonetheless, we would make two points with respect to this ground.
First, the challenge to the finding that Mr White had obtained a tax benefit from the schemes should be rejected. Mr White had instructed his accountant to prepare an income tax return in which management fees and other scheme related amounts which he had owed Timbercorp Securities were claimed as a deduction.[116] Mr White treated that benefit as a loan from Timbercorp Finance and thereby claimed a full tax deduction and paid instalments.[117] These findings are not the subject of any proposed ground of appeal. They have not been seriously impeached.[118]
[116]Reasons 548 [312].
[117]Ibid.
[118]During oral argument, senior counsel for the applicants said that Mr White ‘had not put in a return and that evidence was never controverted. So that never became an issue in the trial as to whether or not Mr White had a benefit or did not have a benefit’. However, as set out above, the trial judge found that Mr White had instructed his accountant to prepare a tax return and that he claimed payments ‘as a tax deduction’ (Reasons 548 [312]).
Secondly, even on the analysis based on agency law, the applicants’ submissions should be rejected. In our opinion, the mode of payment under cl 1 of the Loan Agreement was not an essential fact of which Mr White had to have full knowledge before he could be said to have ratified the payment thereunder. The payment itself was legally effective to discharge Mr White’s liability to Timbercorp Securities and, as the trial judge found, to confer the promised tax deductions. That Mr White had no knowledge of the way in which the relevant schemes operated, and the flow of funds between the companies involved in the schemes, is not to the point.
The correct analysis, as is implicit in the reasons of the trial judge,[119] is that the essential fact of which Mr White had to have full knowledge before he could be said to have ratified the payment under cl 1 was that he had acquired an interest in the schemes, giving rise to a claim for tax deductions. It will be recalled that, once Mr White completed his lot application form and loan application form, Timbercorp Securities issued to him a document entitled ‘Confirmation Notice/Tax Invoice’ confirming acceptance of his application for lots in the relevant schemes and the date of the acquisition of each lot for which he had applied.[120] The requisite knowledge in these circumstances arose upon Mr White’s receipt from Timbercorp Securities of the Confirmation Notice/Tax Invoice, which permitted the claim for tax deductions in relation to Timbercorp Finance’s payment to Timbercorp Securities on Mr White’s behalf. It follows that, by his conduct, Mr White ratified any irregularity in the manner in which the loan amount under cl 1 was paid.
[119]Reasons 547–8 [312].
[120]See [20], [40] above.
The second proposed ground of appeal must fail.
Costs orders in favour of Timbercorp Securities
On 28 February 2017, the trial judge delivered a separate judgment on the question of costs.[121]
[121]Timbercorp Finance Pty Ltd v Collins (No 2) [2017] VSC 65 (‘Costs reasons’).
On 7 March 2017, the trial judge made final orders in each proceeding. Paragraph 4 of the orders provided that the applicant (or, in the case of the Collins proceeding, the applicants) pay Timbercorp Securities’ costs of and incidental to the proceeding, including reserved costs, on a standard basis.[122]
[122]The trial judge acceded to an application by Timbercorp Securities that, in each proceeding, the unsuccessful party pay its costs of defending the claim made by Timbercorp Finance ‘through a Bullock or Sanderson order’, which are references to the cases of Bullock v The London General Omnibus Company [1907] 1 KB 264 and Sanderson v Blyth Theatre Co [1903] 2 KB 533.
By their applications for leave to appeal, the applicants sought to set aside the orders that they pay Timbercorp Securities’ costs. Timbercorp Securities appeared at the hearing before this Court. It contended that, even if the appeals were allowed, the costs orders made in its favour should not be disturbed.
Given that the appeals will be dismissed, the orders that the applicants pay Timbercorp Securities’ costs will stand.
Even if the appeals had been allowed, no order should be made setting aside the order that the applicants pay Timbercorp Securities’ costs. At trial, the applicants challenged the enforceability of the Loan Agreements on the basis that Timbercorp Securities had no right to apply application moneys to the relevant schemes because certain preconditions to the valid exercise of power under the scheme constitutions allegedly did not exist and, thus, Timbercorp Securities was in breach of its duties and responsibilities under the scheme documents.[123] In the event, Timbercorp Finance made a contingent claim against Timbercorp Securities, thereby joining it as a defendant in both proceedings. By the end of the trial, the applicants had abandoned those defences but pressed certain allegations in their amended defences against Timbercorp Securities, necessitating its continued participation in the proceedings.[124] Timbercorp Securities contended that it was entitled to be represented at trial for so long as it remained a party with unresolved issues between it and one or more other parties. We agree.
[123]See especially Reasons 517–24 [172]–[205].
[124]Costs reasons [25]–[26].
On the question of Timbercorp Securities’ costs, the trial judge concluded:
Timbercorp Securities was joined by the plaintiff in response to the defendants’ allegations that it had applied Application Money in breach of certain preconditions. Once those allegations were abandoned, as they were at the end of the trial, and reflected in formal amendments made to the pleadings following the conclusion of submissions, the contingent case against Timbercorp Securities fell away, and it is entitled to an order that the proceeding as against it, brought by the plaintiff, be dismissed. With the abandonment by the defendants of their allegations of breach by Timbercorp Securities, the basis for its counterclaim also fell away, and the counterclaim ought to be dismissed. Timbercorp Securities was reasonably joined by the plaintiff, and its counterclaim reasonably advanced. It is entitled to its costs of the counterclaim. The appropriate order is that the defendants must pay Timbercorp Securities’ costs of and incidental to the proceeding, including reserve costs, such costs to include its defence and counterclaim. The costs of Timbercorp Securities are to be paid on the standard basis.[125]
[125]Ibid [29].
At the hearing of the applications for leave to appeal, the applicants did not advance any basis for setting aside the costs orders made in favour of Timbercorp Securities. Further, the substance of their applications did not seek to impeach those costs orders.
The orders that the applicants pay Timbercorp Securities’ costs will stand.
Conclusion
In the result, both applications for leave to appeal should be granted. The appeals must be dismissed.
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