Woodcroft-Brown v Timbercorp Securities Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2011 0176

ALLEN RODNEY WOODCROFT-BROWN	Appellant
ALLEN RODNEY WOODCROFT-BROWN	v
TIMBERCORP SECURITIES LIMITED (ACN 092 311 469) (IN LIQUIDATION)	First Respondent
	and
GARY WILLIAM LIDDELL	Second Respondent
and
ROBERT JAMES HANCE	Third Respondent
and
SOL CHARLES RABINOWICZ	Fourth Respondent
and
TIMBERCORP FINANCE LIMITED (ACN 054 581 190) (IN LIQUIDATION)	Fifth Respondent

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JUDGES	WARREN CJ, BUCHANAN JA and MACAULAY AJA
WHERE HELD	MELBOURNE
DATE OF HEARING	3 – 6 June 2013
DATE OF JUDGMENT	10 October 2013
MEDIUM NEUTRAL CITATION	[2013] VSCA 284
JUDGMENT APPEALED FROM	Woodcroft-Brown v Timbercorp Securities Ltd & Ors [2011] VSC 427

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CORPORATIONS – Appeal – Managed investment scheme – Product disclosure statement – Disclosure of prescribed information by Responsible Entity – Meaning of ‘significant risk’ – Whether a risk ceases to be a ‘significant risk’ if it is capable of being managed – Whether risks that are being managed are required to be disclosed – Whether information contained in Annual Reports and ASX announcements required to be included in the product disclosure statement – Whether directors had knowledge of information about a ‘significant risk’ – Whether non-disclosures relied upon – Appeal dismissed – ss 674, 675, 1013C, 1013D, 1013E, 1013F, 1022B of the Corporations Act 2001 (Cth).

MISLEADING AND DECEPTIVE CONDUCT – claims under s 1041H(1) of the Corporations Act 2001 (Cth) – Considerations relevant to assessing whether representations misleading and deceptive – Whether representations relied upon – Appeal dismissed.

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Appearances:	Counsel	Solicitors
For the Appellant	Mr J W K Burnside QC with Mr C H Truong	Macpherson + Kelley
For the First Respondent	Mr P D Crutchfield SC with Dr O Bigos	Arnold Bloch Leibler
For the Second to Fourth Respondents	Mr J Delany SC with Mr A J McClelland	Brian Ward & Partners
For the Fifth Respondent	Mr A Archibald QC with Mr H N G Austin and Dr C O Parkinson	Herbert Smith Freehills

Introduction

Background to the collapse of the Timbercorp Group

Trial and judgment

The non-disclosure case
The misrepresentation case
False or misleading statements
Reliance and causation

Shift in the appellant’s case

Case on appeal

The evidence concerning the Lehman collapse
The support by the bankers
Equity raisings
Source of inflows
The securitisation process
Cash flows
Matters in the public domain

Grounds of appeal

Ground 1
Ground 2
Ground 3
Ground 4
Ground 5
Ground 6
Ground 7
Ground 8
Ground 9
Ground 12
Ground 13
Ground 14

Summary

THE COURT:

Introduction

Timbercorp Securities Ltd, a member of the Timbercorp Group, operated and was the Responsible Entity for horticultural and forestry managed investment schemes (‘MISs’). Timbercorp Finance Pty Ltd (another member of the Group) would lend money to investors so that they could invest in the MISs.

In 2009 the Timbercorp Group collapsed and went into liquidation. At the time of collapse there were 33 registered MISs and three unregistered private scheme offers. As a result of the collapse, the majority of MISs could not be carried out to completion, meaning the investments were of limited or no value. Following the collapse, liquidators also commenced recovery actions against investors who had borrowed money from Timbercorp Finance. Timbercorp Finance has outstanding loans to over 14 500 investors, totalling $477.8 million.

The appellant, Mr Woodcroft-Brown, commenced proceedings on his own behalf and on behalf of persons who, at any time during the period between 6 February 2007 and 23 April 2009, acquired or held an interest in a MIS of which Timbercorp Securities was the Responsible Entity. At a later stage, the trial judge ordered that the trial include a case advanced on behalf of ‘early investors’ who acquired or held investments prior to 6 February 2007. Evidence on breach, causation and reliance on behalf of these early investors was led from Mr Van Hoff, a group member who invested in MISs before and after 6 February 2007 and financed the majority of his investments with money borrowed from Timbercorp Finance. The proceeding was conducted as a group proceeding under Part 4A of the Supreme Court Act 1986 (Vic).

The appellant argued that had certain matters been disclosed, he would not have invested in the MISs or borrowed money from Timbercorp Finance. The evidence of Mr Van Hoff was led in support of a corresponding claim on behalf of the early investors. The appellant sought declaratory relief, damages and/or compensatory orders, including an order that the appellant and the group members were not liable for repayment of the loans from Timbercorp Finance.

The defendants to the proceeding were Timbercorp Securities, Timbercorp Finance and the three persons who, at the relevant times, were directors of Timbercorp Securities, Timbercorp Finance and Timbercorp Ltd (the holding company of the Timbercorp Group) (‘the Directors’).

At trial, the appellant argued that Timbercorp Securities failed to disclose in its Product Disclosure Statements (‘PDSs’) information about significant risks, or risks that might have had a material influence on the decision to invest, in breach of its disclosure obligations under the Corporations Act 2001 (Cth) (‘Corporations Act’). The appellant also argued that the PDSs given to investors contained false or misleading statements.

In addition, the appellant argued that the declarations made by the Directors in two scheme financial reports were false or misleading and in breach of the Corporations Act, Australian Securities and Investments Commission Act 2001 (Cth) (‘ASIC Act’) and the Fair Trading Act 1999 (Vic) (‘FTA’).

The 2^nd – 4^th respondents denied these allegations. They also claimed, by notice of contention, to have taken reasonable steps to ensure that the PDSs would not be defective, which is a defence under s1022B(7) of the Corporations Act.

The trial judge found, inter alia, that the respondents were not required to disclose the risks identified by the appellant, that there had been no misleading or deceptive conduct and, in any case, that there had been no relevant reliance by the appellant, or Mr Van Hoff, on the alleged non-disclosures or representations. The trial judge also made several adverse findings about the way the appellant conducted his case.

The appellant now appeals against the decision and orders of the trial judge. The appellant seeks that some of the common questions be answered in the group members’ favour and other questions and matters be remitted. The respondents have also filed notices of contention.

Background to the collapse of the Timbercorp Group

Beginning in 1992, the Timbercorp Group (‘the Group’) operated a number of horticultural and forestry MISs. It invested in excess of $2 billion on behalf of about 18 500 investors. Using a combination of debt and equity, the Group would acquire and develop land into plantations and orchards to generate a long term revenue stream from management fees and licence fees and would sell interests in the project to investors. The land and its developments would then be sold either into a property trust where the Group would retain some of the equity in the asset, or it would be sold to a third party buyer, usually on a sale and leaseback arrangement.

The Group also generated profit by lending finance to investors, usually up to 90 per cent of their investment. The Group would also raise funds by securitising its loan book and using the loans as security for finance bonds and bank facilities.

To fund the infrastructure and working capital of the projects, the Group would sell assets, raise equity, securitise loans and arrange debt facilities. During the relevant period the Group had finance facilities with the Commonwealth Bank, ANZ, HBOS and Westpac.

The Agreed Summary states that:

During the relevant period, the Group’s financiers entered into or renegotiated facilities, extended repayment dates, increased facility amounts and, when necessary, modified covenants to avoid a breach. Facilities were extended within their term or as the end of the term approached.
During the relevant period, Timbercorp made presentations to its bankers and kept its banks informed of relevant developments, including the tax announcement and the cancellation of asset purchases following the collapse of Lehman Brothers.

The first sign of trouble for the Group was identified as being a tax announcement made on 6 February 2007. That announcement was to the effect that a draft Taxation Ruling was being prepared which would mean that investors in non-forestry MISs would no longer be able to claim upfront deductions for contributions to the MISs (‘the tax announcement’). Six weeks later the ATO announced that the contributions would remain tax deductible to the end of the 2007/2008 financial year.

The Group responded to the tax announcement by commencing a legal test case against the ATO.

Following the tax announcement the Group engaged Goldman Sachs JBWere to undertake a strategic review. That review was provided to the Group on 30 March 2007. The key findings were set out in the judgment of the trial judge.[1] The report indicated on current form that the Group’s earnings would be ‘broadly negative for three years.’[2] During this period the Group conducted a strategic planning workshop and in June 2007 the Group prepared a confidential internal strategic plan entitled ‘Grow to 2012’. The main objective of that plan was to align the Group’s profit and cash flow so as to enable the Group to pay its dividends. The Group also commenced negotiations with Macquarie Bank about a possible acquisition of the Timbercorp Group by the Bank, which ultimately did not occur.
[1]Woodcroft-Brown v Timbercorp Securities Ltd & Ors [2011] VSC 427 (‘Reasons’).
[2]Reasons [469].

On 12 November 2007 the Group obtained a report from its auditors, Deloitte Touche Tohmatsu. The report noted the impact of the tax announcement and that the Group, on the most conservative scenario, would continue to be profitable though at lower levels after 30 June 2008. The Group also commenced negotiations with third parties, Munchmeyer Petersen Capital AG in relation to the sale and leaseback of certain properties (Boort and Carina) and Harvard Management Company in relation to forestry assets.

On 15 September 2008 Lehman Brothers collapsed in the United States, leading to the effective closure of global markets. The next day Munchmeyer terminated negotiations to acquire the Boort and Carina properties. Sometime after, Harvard also ended negotiations in relation to the forestry assets. The trial judge identified the collapse of Lehman Brothers as the reason why the deals did not proceed.[3] On 27 November 2008, the Group hired Goldman Sachs JBWere to undertake a process to sell assets.
[3]Reasons [16], [49].

In November 2008, in a report to the Audit, Risk and Compliance Committee (‘ARCC’), the auditors expressed reservations about the business as a ‘going concern’, referring to a working capital deficiency of $82.8 million.

On 30 December 2008 Timbercorp Ltd issued its Annual Report. The trial judge described the Annual Report as presenting an ‘apparently healthy position’.[4] The Annual Report contains a declaration by the Directors

to the effect that there were reasonable grounds to believe that the company would be able to pay its debts as and when they became due and payable, and that in the directors’ opinion, the financial statements and notes complied with accounting standards, and gave a true and fair view of the financial position and performance of the company and of the consolidated entity.[5]

[4]Reasons [5].

[5]Reasons [15].

The Annual Report also contained an independent audit report from Deloitte. The audit report expressed the opinion that the financial report was in accordance with the Corporations Act but also said:

Without qualifying our opinion, we draw your attention to Note 1 in the financial report which indicates that the consolidated entity, in the absence of waivers, would have breached certain bank covenants at balance date. The consolidated entity has, subsequent to year end, obtained waivers for the breach of covenants as at 30 September 2008 and varied future covenants and terms. This includes an undertaking to sell selected assets and apply a portion of the proceeds to reduce debt. These factors, along with other mitigating factors being relied on by management to address these issues, are as set forth in Note 1 ‘Going Concern’. In the event that the mitigating factors as disclosed in Note 1 do not eventuate as management anticipate, there exists a material uncertainty about the company’s and consolidated entity’s ability to continue as going concerns and whether they will realise assets and extinguish their liabilities in the normal course of business and at the amounts stated in the financial report.[6]

[6]Reasons [19].

In their annual directors statement, the Directors noted that the Group would have been in breach but for waivers of certain covenants by its bankers. The Directors also prepared their reports on the basis that the Group would continue as a going concern, citing a number of factors. ‘The directors noted that should the proposed asset sales not proceed as planned, or only proceed in part, they were confident of the continued support of the Group’s bankers, subject to agreement on alternative acceptable plans.’[7]
[7]Reasons [18].

The Group managed to maintain bank support until April 2009, when it collapsed and entered into voluntary administration. Administrators were appointed on 23 April 2009 and creditors resolved to wind up the Group on 29 June 2009.

Trial and judgment

The trial was conducted over 24 days. The trial dealt with common questions and only looked at individual loss, reliance and causation in relation to the appellant and Mr Van Hoff. Evidence was given by various lay witnesses including the appellant, Mr Van Hoff and various Timbercorp directors.

The parties also called forensic accounting witnesses. Mr Dicks, a partner in PPB Advisory, gave evidence as an expert forensic accountant for the plaintiff, Mr Hill, of McGrathNicol Forensic, gave evidence on behalf of the Directors and Mr Honey, chartered accountant, gave evidence on behalf of Timbercorp Finance. After preparing independent reports, the experts prepared and filed a joint report. The trial judge found that the evidence of these experts was ‘crucial’.[8]
[8]The trial judge’s findings in relation to the joint report are the subject of grounds 10 and 11 of the appeal and are discussed below at [186].

The trial judge delivered extensive reasons rejecting the appellant’s claims and then proceeded to hear argument regarding the answers to the common questions and costs. Those matters were dealt with in the trial judge’s further reasons.[9] The judge then made orders dismissing the claims of the appellant and Mr Van Hoff and regarding costs.
[9]Woodcroft-Brown v Timbercorp Securities Ltd & Ors (No 2) [2011] VSC 526.

There were, in effect, two threads to the appellant’s case before the trial judge. One was a non-disclosure case. The other was a misrepresentation case.

The non-disclosure case

Turning to the non-disclosure case, it was necessary for the appellant to establish that there was an obligation to disclose certain matters under either s 1013D or s 1013E of the Corporations Act. These sections provide:

Sect 1013D Product Disclosure Statement content – main requirements
(1) … a Product Disclosure Statement must include the following statements, and such of the following information as a person would reasonably require for the purpose of making a decision, as a retail client, whether to acquire the financial product:
…
(c) information about any significant risks associated with holding the product …

Sect 1013E General obligation to include other information that might influence a decision to acquire
… a Product Disclosure Statement must also contain any other information that might reasonably be expected to have a material influence on the decision of a reasonable person, as a retail client, whether to acquire the product.

Thus, s 1013D is concerned with information about any significant risk. Section 1013E is concerned with information that might reasonably be expected to have a material influence on the decision to acquire the product. Once the appellant satisfied the requirements of either s 1013D or s 1013E, there was a second step, the obligations arising by virtue of s 1013C(2) of the Corporations Act. It provides:

(2) The information required by sections 1013D and 1013E need only be included in the Product Disclosure Statement to the extent to which it is actually known to:
(a)       the responsible person; and
(b)       in the case of a sale Statement—the issuer of the financial   product; and
(c)       any person named in the Statement as an underwriter of the                issue or sale of the financial product; and
(d)       any person:
(i) named in the Statement as a financial services licensee  providing services in relation to the issue or sale of the  financial product; and
(ii) who participated in any way in the preparation of the   Statement; and

(e)        any person who has given a consent referred to in section   1013K in relation to a statement included in the Statement; and
(f)       any person named in the Statement with their consent as   having performed a particular professional or advisory   function; and
(g)       if any of the above persons is a body corporate—any director                 of that body corporate.

The effect of that section is to qualify the disclosure required under ss 1013D and 1013E by not requiring disclosure under those sections to the extent the information concerned is not known by the disclosing party. As the respondents put it, the section provides that information need only be included under s 1013D or s 1013E to the extent to which it is actually known to the responsible person, here Timbercorp Securities, or to any director of Timbercorp Securities.

A further step was meeting the requirements of s 1013F(1) of the Corporations Act. This section provides:
(1) Despite anything in section 1013D or 1013E, information, or a statement containing information, is not required to be included in a Product Disclosure Statement if it would not be reasonable for a person considering, as a retail client, whether to acquire the product to expect to find the information in the Statement.
Hence, s 1013F(1) provides that information is not required to be included in the PDS unless it is reasonable for the individual to expect the information to be included in the statement. As the respondent put it, the task of the appellant was to show that the matters upon which he sought to rely fell outside s 1013F(1).

The risks which the appellant submitted ought to have been disclosed pursuant to these sections were referred to as the ‘structural risk’ and the ‘adverse matters’. The appellant argued that information about the structural risk ought to have been included in each PDS issued after April 2000 and information about the adverse matters ought to have been disclosed as and when they occurred.

The structural risk was pleaded as a risk that the Group might fail because of insufficient cash, with a consequential risk to the viability of the schemes managed by Timbercorp Securities.[10] At trial, the appellant alleged that the factors upon which the cash flow of the Group depended included:

·A failure by other project members to make project contributions to Timbercorp Securities or to repay loans to Timbercorp Finance;

·The capacity of the Timbercorp Group to obtain and/or service external funding; and
·The availability to the Timbercorp Group of securitisation of loans.[11]

[10]Reasons [24]. The trial judge also referred to this as a ‘cash flow risk’ [58], a ‘performance risk’ [50], and at [52]-[53] as one kind of institution risk per Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) FCAFC 147.

[11]Statement of claim paras [75F]-[75R].

The adverse matters were matters alleged to have put the business of the Group at a heightened risk of failure. The two adverse matters principally relied upon were the tax announcement and the global financial crisis (‘GFC’) and its resulting impact on the availability of credit. Other adverse matters were the near insolvency of the Group in 2008 and the breach of the Group’s loan covenants.

These matters were considered by the trial judge:

The plaintiff’s formulation of the financial structure risk, as pleaded, turns upon the ability of the Timbercorp Group to manage its cash. The risk, as formulated by the plaintiff, requiring disclosure, was the grower’s exposure to risks associated with the ability of Timbercorp to maintain a sufficient cash flow to enable Timbercorp Securities to meet scheme costs and expenses. That is an element of the performance risk or institution risk. I have found that information about the performance risk was disclosed in the Product Disclosure Statements employed by the Group throughout the Relevant Period. I am not persuaded that the information about that risk as formulated by the plaintiff was required to be disclosed by Timbercorp Securities, whether as a significant risk, under s 1013E or pursuant to its continuing disclosure obligation. Further, information about the financial circumstances of the Group, bearing upon its ability to maintain a sufficient cash flow, was generally available. That information was not required to be included within Product Disclosure Statements or otherwise provided to potential or existing investors by reason of a statutory obligation imposed on Timbercorp Securities.
Putting those findings to one side for the moment, the cash flow risk as pleaded was said to be susceptible to grower defaults, the capacity of the Group to obtain and service external funding and its ability to securitise loans. The evidence demonstrated that, even during the more difficult financial period in 2008, grower defaults did not expose the Group to any material risk. Ultimately, the cash flow risk, such at it was, faded to insignificance or did not rise to the level of a material risk for so long as the Group maintained its relationship with its bankers who were providing the majority of its capital requirements. The experts agreed on that issue. The evidence demonstrated that bank support continued and indeed increased throughout 2008. It was not until the end of that year and early 2009 that the willingness of Timbercorp’s bankers to continue to provide support became uncertain because fundamental assumptions for their continue support could no longer be reasonably met.
The defendants submitted that disclosure of the tax announcement as an event was not required, but if it was, the event was widely disclosed, in the media, on the Timbercorp website, in ASX releases and in subsequent product disclosure statements. What was not disclosed, in terms, was the information concerning the alleged effect of the tax announcement on Timbercorp’s cash flows, revenues and profits and the risk that posed to the ability of Timbercorp Securities to manage the projects through to completion. The evidence demonstrated that while the tax announcement may have had a negative impact on the Timbercorp share price, and on forecast performance in the short term, the actual impact did not threaten the ability of Timbercorp Securities to continue to discharges its contractual responsibilities to scheme investors. Furthermore, the nature and extent of the impact on the business of the Group was the subject of reports made to the ASX and the Annual Reports of the Group. In my opinion, Timbercorp Securities was not required to disclose the generalised information of the kind suggested by the plaintiff so as to qualify its disclosure of the performance risk. That information was not in relation to a significant risk to the ability of Timbercorp Securities to discharge its contractual obligations to scheme investors. It was not information that would be reasonably required by a retail client for the purpose of making an investment decision. It was not information that might reasonably be expected to have a material influence on the decision of a reasonable retail client to invest. Because of financial information about the Group available on its website, Annual Reports, ASX announcements and the material prepared by analysts, the information the plaintiff would have had provided to potential and existing investors was not required because of the operation of s 1013F. Finally, the evidence did not support the contention that the directors had actual knowledge of a risk posed by the tax announcement to scheme investors.[12]

[12]Reasons [550]-[552].

The point being that a company may issue a statement in light of a tax announcement which may affect, for example, the share price. However, it is irrelevant when it comes to the question of the ability of the company to meet its commitments. Ultimately, his Honour found that the appellant failed to satisfy or displace the operative effect of s 1013C(2) of the Corporations Act given the absence of actual knowledge by the corporation or its directors. This was due to the way in which the appellant pleaded its case.

His Honour made findings of fact. In order to succeed, the appellant needed to demonstrate these findings were not open.

In relation to the arguments concerning the pleaded risk, his Honour’s reasoning was as follows. First, the risk as pleaded was not one that it could be said per s 1013D that a retail client would reasonably require information about for the purpose of making a decision to acquire the product.[13]
[13]Reasons [71], [74].

Secondly, the risk as pleaded was not a ‘significant risk’ because the Group had strong cash flows and was not at risk of collapse so long as the Group maintained its relationship with its bankers, which it did until early 2009.[14] His Honour found that the opinion expressed in the joint expert report by the forensic accounting experts provided a complete answer to the risk as pleaded.[15] It said:

All the experts agree that as long as the group’s bankers continued to support the group’s operations there was no significant risk that the group would not have had the financial capacity to manage any of the schemes through to their contemplated completion.

[14]Reasons [34], [36]-[37], [48], [51], [62], [246], [550]-[551].

[15]Reasons [36]-[37].

His Honour found that, as long as its bankers supported the Group, there was no real threat to its cash flow. Therefore any structural risk based on the Group’s cash flow and particularised threats to its cash flow did not amount to a real threat.

Thirdly, information about the risk as pleaded was not of a kind that it would be reasonable for a person considering whether to acquire the product to expect to find in a PDS for the purposes of s 1013F, because that information was generally available.[16]
[16]Reasons [72], [190]-[191], [269]-[271], [550], [552]-[554].

Fourthly, insofar as the risk as pleaded encapsulated the risk ‘that a contracting party might fail to discharge all of its contractual obligations due to financial incapacity’,[17] that was a risk which it would be reasonable for a person, including a retail client, considering whether to acquire an interest in a scheme to expect to find information about in the PDS for the purposes of s 1013F. Thus his Honour was persuaded that information about that risk was required to be disclosed in PDSs as a significant risk under s 1013D(1)(c).[18]
[17]Reasons [53].
[18]Reasons [54], [108].

However, his Honour also found that risk was disclosed.

Fifthly, the evidence did not support a finding that any of the respondents had actual knowledge of the risk that the Group’s bankers may withdraw their support until after the collapse of the Lehman Brothers and the failure of the anticipated asset sale transactions with Munchmeyer and Harvard.[19]
[19]Reasons [48], [51], [555]-[560].

In relation to information about the adverse matters, the trial judge held that Timbercorp Securities was not required to disclosed this information for several reasons.

First, the adverse matters had no independent status as risks. The only way they might require disclosure was as events which, if left unchecked or unmanaged, might crystallise the pleaded risk into reality.[20]
[20]Reasons [61].

Secondly, even if each adverse matter were properly characterised as a risk pursuant to s 1013D(1), it could not be said that information about them was information that a retail client would reasonably require.[21] Nor could the tax announcement or the GFC be information that might reasonably be expected to have a material influence on the decision of a reasonable retail client to invest for the purposes of s 1013E.[22] Further in relation to the GFC, it posed no discernable risk and there was no actual knowledge of that risk until after the collapse of Lehman Brothers. Furthermore, information about the GFC and its impact was generally available for the purposes of s 1013F.[23]
[21]Reasons [71].
[22]Reasons [552] (in relation to the tax announcement), [553]-[554] (in relation to the GFC).
[23]Reasons [69], [553]-[555].

Thirdly, insofar as it was required, information about the adverse matters was disclosed.[24]
[24]See para [44].

Fourthly, the adverse matters were successfully managed. Disclosure of events that may be or have been successfully managed is not necessary because the real risk has not yet ‘crystallised’.[25] Requiring that such information be disclosed would be unrealistic and oppressive.[26] Furthermore, for the purposes of s 1013F, information about the existence and impact of an event that can be reasonably managed, even if it might cause a catastrophic consequence if left unmanaged, is not information of a kind that would be reasonable to find in a PDS.[27]
[25]Reasons [48].
[26]Reasons [74].
[27]Reasons [72].

Fifthly, the Directors did not have actual knowledge that the adverse matters posed a risk that Timbercorp Securities would be unable to fulfil its contractual obligations until the Director’s realised bank support became equivocal.[28]
[28]Reasons [560].

Sixthly, the continuous disclosure obligations did not require that information about the adverse matters be disclosed. None of the adverse matters caused material changes to the pleaded risk or constituted a significant event that affected the pleaded risk, but rather were events of the type management deals with day to day and were addressed.[29] It is not until management realises it cannot successfully manage these events to avert the risk ‘crystallising’ that the continuing disclosure obligations are engaged.[30]
[29]Reasons [68], [182].
[30]Reasons [69].

As the trial progressed, the appellant developed the proposition that due to its business model, ‘the Timbercorp Group was critically dependent on its ability to maintain and increase its borrowings’[31] and that this dependency was a significant risk that should have been disclosed. The respondents took issue with the way in which the appellant sought to develop this proposition during the trial and submitted that it signalled a shift in the appellant’s case that went beyond its pleaded case. The trial judge held that the appellant had sought to pursue a case that went beyond that articulated in his pleadings (‘the unpleaded case’) and quite properly held that he should not be permitted to do so. Significantly, there is no ground of appeal contesting the conclusion of the trial judge in that respect. This is discussed further below at [71].
[31]Reasons [27].

The trial judge held that the appellant’s non-disclosure case, as pleaded, failed. His Honour held that Timbercorp Securities was not required to provide information on the structural risk or adverse matters to potential or existing investors.[32]
[32]Reasons [41], [47].

The trial judge also went on to find that even on the appellant’s unpleaded case, he did not succeed.[33] His Honour found that the evidence before him did not reveal any unique or particular fragility in the Timbercorp business model.[34] His Honour also found that no evidence was expressly directed to proving or answering the unpleaded case and in particular the expert witnesses ‘were not asked to express a view as to whether the business model was fragile, unusual or inherently risky.’[35] His Honour also concluded that information about the Group’s business model was generally available and therefore it would not be reasonable to find said information in the PDSs, per s 1013F.[36]
[33]Reasons [39].
[34]Reasons [39]-[40], [256]-[257], [308]-[400].
[35]Reasons [40]; see also [38]-[40], [78]-[79], [218], [236]-[257], [308], [332].
[36]Reasons [269]-[271].

Moreover, the PDSs issued during the relevant period disclosed information about the unpleaded risk, insofar as it was required.[37]
[37]Reasons [56]-[57], [59].

The misrepresentation case

Section 1022A of the Corporations Act defines a disclosure document or statement (which includes a PDS) as ‘defective’ if, inter alia, it contains a misleading or deceptive statement. Section 1022B(7) provides a defence if a person took reasonable steps to ensure that a disclosure document or statement would not be defective.

The appellant also relied on s 12DA of the ASIC Act which provides:

Section 12DA Misleading or deceptive conduct
(1) A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.
(1A) Conduct:
(a) that contravenes:
(i) section 670A of the Corporations Act (misleading or deceptive takeover document); or
(ii) section 728 of the Corporations Act (misleading or deceptive fundraising document); or

(b) in relation to a disclosure document or statement within the meaning of section 953A of the Corporations Act; or
(c) in relation to a disclosure document or statement within the meaning of section 1022A of the Corporations Act;

does not contravene subsection (1). For this purpose, conduct contravenes the provision even if the conduct does not constitute an offence, or does not lead to any liability, because of the availability of a defence.

The appellant also relied on s 9 of the FTA, which provides:

Section 9 Misleading or deceptive conduct
(1) A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

The appellant alleged that the Timbercorp Group had made two types of false or misleading representations. The first was that the Group was, financially, sufficiently strong that investors would reasonably expect the MISs to be managed for the foreseeable future and that the principal risks associated with the relevant MISs were fully disclosed. The second was that scheme contributions equalled or exceeded the cost of establishing and managing a scheme, in that investors’ payments would be ‘quarantined’ and applied only to their relevant MIS and MIS contributions would be sufficient to fund the relevant MIS (‘the financial representations’).

The trial judge found that the representations as to the Group’s strength were too vague and uncertain to be actionable and that there were reasonable grounds for that confidence in any case.[38] His Honour held the mere occurrence of the adverse matters did not make the representations false or misleading because the adverse matters were able to be successfully managed.[39]
[38]Reasons [42], [196]-[200].
[39]Reasons [73].

As to the representations about scheme contributions, his Honour held that they were not made, that they were in fact inconsistent with the PDSs and other generally available information and were inconsistent with the claimed reliance on the strength of the Group by the appellant.[40]
[40]Reasons [45], [201]-[205].

His Honour held:

The plaintiff also alleged that the Product Disclosure Statements prepared for schemes sold during the Relevant Period, were misleading or deceptive because they contained financial representations to the effect that the Timbercorp Group was sufficiently strong that investors could reasonably expect that Timbercorp Securities would continue to manage each scheme throughout its term, and that the principal risks associated with each relevant scheme were fully disclosed. The alleged representation, to the effect that Timbercorp was strong, lacked content. The coupling of the expectation of investors was an attempt to qualify the representation by reference to durability – its ability to survive for the duration of the schemes. It was pleaded as a representation about how things would be in the future. That called upon the defendants to justify their expressions of strength and durability. In my opinion they established reasonable grounds for their expressions of confidence and the Group’s viability and strength.
As for the alleged representation, to the effect that the principal risks associated with the schemes were fully disclosed, an investor was entitled to assume that the Responsible Entity had complied with its disclosure obligations.
The plaintiff alleged that the financial representations were false or misleading in that from around February 2007 the financial circumstances of the Group were not such that investors could reasonably expect that Timbercorp Securities would be able to manage each relevant scheme throughout its intended term, and that Timbercorp Securities failed to disclose the adverse matters after they occurred, as a substantial risk in connection with each relevant scheme. The first part of the allegation was not supported by the evidence; and I have found that Timbercorp Securities was not required to disclose the information about the adverse matters as formulated by the plaintiff.
The misleading or deceptive conduct case also relied on scheme contributions representations, alleged to have been made by Timbercorp Securities and Timbercorp Finance, to the effect that fees paid by investors equalled or exceeded the true cost of establishment and ongoing management of each scheme, and that their contributions would only be applied to fund the costs of the particular scheme in respect of which they were paid. These allegations were intended to reflect a contention that, as the plaintiff understood the operation of the schemes, payments made by investors would be quarantined from exposure to the fortunes of other schemes, or more particularly, the Group as a whole. The plaintiff complained that his payments were pooled with payments made by investors in other schemes and treated by Timbercorp Securities as its own funds. This allegation was inconsistent with the information contained in the relevant Product Disclosure Statements. It was also inconsistent with an important limb of the plaintiff’s case – his claimed reliance on the strength of the Group.[41]

[41]Reasons [42]-[45].

The trial judge rejected the appellant’s allegations concerning financial representations. In effect, his Honour held that, if the representations were made, they were not misleading because they were supported by reasonable grounds. Significantly, there is no appeal against this finding.

False or misleading statements

The appellant argued that Timbercorp Securities and the Directors made statements in March and September 2008 that were misleading or deceptive. The impugned statements were alleged to be to the effect that there had been no circumstances that had significantly affected, or may have significantly affected, the operations of the relevant MISs, the results of those operations or the state of affairs of the schemes in future financial years. The appellant also argued in the alternative that Timbercorp Finance was liable under the three Acts because the contravening conduct was engaged in on its behalf or because it was knowingly concerned in the contraventions.

The trial judge found that the appellant’s case failed on causation and reliance.[42] We also observe that the provisions relied on in relation to misleading conduct did not operate in relation to the disclosure obligations in the PDSs per ss 1041H(3) and 1041K(2) of the Corporations Act and s 12DA(1A)(c) of the ASIC Act.
[42]Reasons [592], [652].

Reliance and causation

In order to make out both the non-disclosure and the misrepresentation case, it was necessary for the appellant to establish that there was reliance placed upon the non-disclosures and the misleading conduct so as to cause entry into the investment product and, therefore, subsequently to cause loss. His Honour did not believe the evidence advanced by the appellant or by Mr Van Hoff on this issue.[43]
[43]See para [230]-[231], [234].

Of course, the trial judge had the benefit of observing the witnesses first hand and reaching his own conclusions. It is a difficult burden for an appellant to persuade an appellate court to interfere with findings as to credit.

Given the way the matters were disposed of, his Honour did not consider any defences available to the respondents under s 1022B(7) or ss 1317S and 1318 of the Corporations Act or any third party or proportionate liability claim.

Shift in the appellant’s case

An issue both at trial and on appeal was whether the appellant’s case had shifted during the course of the trial so that the appellant pursued a case that went beyond his pleading. The shift concerned the identification of the risks the appellant alleged should have been disclosed. The risks as pleaded are to be found in paras [75A]-[75H] of the Statement of Claim and are supplemented by the further and better particulars provided on 8 April 2011, which set out the information the appellant alleges Timbercorp Securities was required to disclose in relation to these risks. The trial judge found that during the course of the trial, the appellant had materially shifted his conception of the relevant risk and in doing so departed from his pleaded case.

The shift in the appellant’s case at trial was first articulated with the presentation of a document titled ‘plaintiff’s case in a nutshell’ (‘Nutshell document’) on 10 June 2011, after the trial had been running for approximately three weeks. By this time, the Directors and all but two of the lay witnesses had given evidence and the experts had prepared their joint report. It appears that the Nutshell document was prepared in response to a request from the trial judge that the appellant articulate with some precision the allegations that were the focus of his case. At the time this document was presented to the trial judge, objection was raised by the respondents on the basis that some of the allegations in this document went beyond the pleadings and particulars provided and raised a case they had not come prepared to meet. In particular, the respondents objected to para 21 of that document, which states:

In the circumstances, Timbercorp should have disclosed that the group was critically dependent on its ability to increase its short term borrowings, its ability to continue to raise equity and to sell capital assets in a timely manner. It should have disclosed that if capital or debt markets tightened, there was a real risk that the Timbercorp Group would fail, and the project investments would likely fail with it. That should have been supported by information about the increasing levels of short term debt and the risk that the debt could not be refinanced or replaced.

The articulation of this case was further developed in the Outline of the Plaintiff’s Closing Submissions dated 2 July 2011. In his outline, the appellant formulated 10 key propositions. Proposition 3 is of particular relevance and reflects very closely a paragraph set out above from the Nutshell document. It states:

At all time during the relevant period, the Timbercorp Group knew that scheme investors were exposed to risks associated with the Timbercorp Group failing during the currency of project terms and in particular that the Timbercorp Group was critically dependent on its ability to maintain and increase its borrowings, its ability to continue to raise equity and to sell capital assets in a timely manner and that if capital or debt markets tighten there was a real prospect that the Timbercorp Group would be at risk, and the grower investments with it.

The trial judge found that the plaintiff, when preparing his case for trial, did not set out to prove that the Directors had this knowledge, and found the risk as articulated in this proposition was different from the risk as pleaded. His Honour held:

The structural risk articulated in those paragraphs [[75A]-[75H]] was more aptly described as a cash flow risk. While the description is unimportant, the nature and components of the risk were completely different. The pleaded structural risk was concerned with the exposure of scheme members to the ability of the Timbercorp Group to maintain its cash flow, should members of other schemes fail to make scheme contributions, or because the Group might not be able to obtain or service external debt, or because it could not access funds by securitising investor loans. The financing risk, advanced at trial, was no longer concerned with cash flow from the identified sources. The structural risk had been converted into one concerning anterior matters - the Group’s dependency on new capital, in the form of debt and equity. That dependency, the plaintiff argued, made the Group susceptible to adverse changes in the capital markets, such as occurred with the Global Financial Crisis. That was a business model risk which the plaintiff argued made the Group so vulnerable to market forces that it required disclosure in every Product Disclosure Statement.
…
The difficulty for the plaintiff in changing course was that the defendants, and in particular the directors, had fashioned and presented their evidence to establish that they were not aware of any structural risk or other risks as formulated by the plaintiff until late December 2008, when continuing bank support became uncertain. Actual knowledge was an important issue in the case. The disclosure obligation was predicated on actual knowledge of particular risks and information about them. Much of the lay-evidence was directed to establishing that the board had successfully managed risks as they arose, including the events described as adverse matters, and had successfully negotiated banking facilities, and managed cash flow. The evidence was not directed to an analysis of the business model, and the resulting risk enunciated by the plaintiff in Key Proposition (3).[44]

[44]Reasons [28],[38].

The trial also found that the appellant changed the way in which he relied on the adverse matters in that, rather than focusing on their importance as stand alone risks, they achieved their materiality from the financing risk. His Honour held:

The adverse matters were transformed from the status of isolated events, that the plaintiff alleged ought to have been disclosed, into freestanding risks and then back to events that exacerbated or heightened the financing risk, increasing the possibility of the Group’s failure. It was that increased risk of failure, according to the plaintiff, that required disclosure of the impact of the adverse events on the Timbercorp Group.[45]

[45]Reasons [30].

The trial judge formed the view that the reformulation of the appellant’s case was an attempt to ‘sidestep’ the opinions found in the joint experts’ report which his Honour held was ‘a complete answer to the structural risk case as pleaded.’[46] It was agreed by the experts that as long as the Group’s bankers continued to support the Group’s operations there was no significant risk that the Group would not have had the financial capacity to manage any of the schemes through to their contemplated completion. His Honour held that the ‘lack of materiality of investor defaults and the willingness of the banks to increase their level of support for the Group until the end of 2008 had the effect of eroding the content of the structural risk as pleaded and particularised by the plaintiff.’[47]
[46]Reasons [37].
[47]Reasons [246].

His Honour held that the appellant should be confined to his case as pleaded, both because the expert reports and the joint report were directed to the case as pleaded and because of the way in which the respondents had fashioned and presented their evidence in response to that case.[48]
[48]Reasons [38]-[39].

The trial judge concluded:

In my opinion, the change in the plaintiff’s formulation of the structural risk, transforming the cash flow risk as pleaded into the financing risk or the fragile business model risk, involved a material change in his case. The defendants rightly complained about the change. While the evidence that was given by the experts and lay-witnesses, including the reliance evidence given by the plaintiff and Mr Van Hoff, might be said to be generally relevant to the new case, it was not directed at addressing the financing risk case and its components. The change that was made by the plaintiff to his case, at trial was perhaps understandable, but it is not permissible. No application to amend was made. Had an application been made it would almost certainly have been refused, given the stage of the trial, the nature of the case and the fact that the defendants had already prepared their evidence to address the components of the cash flow risk, not the financing risk or fragile business model risk.
In any event, the plaintiff’s case based upon the financing risk or fragile business model risk was no more persuasive than his case based upon the financial structure risk, although for different reasons.[49]

[49]Reasons [256]-[257].

Although the appellant did not appeal against the trial judge’s finding that he changed his case at trial, he denied that he did so. On appeal, the appellant submitted that the perceived shift in his case was not a shift in substance but rather emerged as a consequence of the trial judge’s use of different tags to describe the various risks. He submitted that the risks identified in paras [75A]-[75F] of his pleading were characterised in a number of different ways by his Honour, variously as the structural risk; the financing risk; the fragile business model risk; the cashflow risk; the performance risk; and the institution risk. The appellant submitted that it is immaterial, when looking at the risks associated with the Group failing to maintain sufficient cash flow to operate the schemes, whether the cash that is required comes from internal funding structures, external debt, capital markets, contributions from investors or somewhere else.

He submitted that although the tags used by the trial judge were a convenient way of describing different aspects of the pleaded risks and allowed his Honour to express the complex risks in a simple form, they did not capture the risks identified by the plaintiff in their totality. The appellant submitted that whilst the tags created the impression that the risks in the pleading were distinct and separate, this was an effect of the terminology and did not reflect the substance of the risks as pleaded. The appellant submitted that it was the use of these tags that led his Honour to erroneously perceive a shift in the substance of the plaintiff’s case and that in perceiving such a shift, his Honour ‘mistook the map for the territory’.

In our view, his Honour did not fall into error in this way and was correct to find that the appellant materially shifted his case during trial. Whilst it may be said that the shift to the unpleaded case was not a profound departure from the pleaded case, the shift was significant enough that the evidence led by both the plaintiff and defendants was insufficient to meet it. The experts did not consider, and were not called on to consider, what would be likely to happen to the Group if capital or debt markets tightened. Questions regarding the risks involved in having different complex debt instruments with no single funder; the mismatch between the length of a project’s life and the terms of its finance; and the absence of a permanent long-term funding solution and the consequent ongoing need to re-finance, were not included in the list of questions the parties agreed the experts should consider. Nor was there evidence directed to the appellant’s reliance upon representations or non-disclosures in relation to the effects on the Group if capital markets tightened. Even if the trial judge found it was open to the appellant to pursue this unpleaded case, it would not have succeeded at trial because it was not supported by, or consistent with, sufficient evidence.

So much having occurred, in the submissions before this Court the appellant purported to urge the very case that was not pleaded at trial and which the trial judge rejected. Furthermore, the appellant faces an inherent difficulty. As explained by the trial judge[50] even if the appellant was permitted to advance the unpleaded case it was not supported by the evidence at trial. Thus, it would be wholly inappropriate and unacceptable for this Court to contemplate that case on the appeal.
[50]Reasons [39].

We consider that ground 5[51], which focuses on the management of the alleged external financing risk, squarely raises the unpleaded case which his Honour, correctly in our view, found was foreclosed.
[51]This ground is set out at para [158].

In addition to pursuing its unpleaded case on appeal, the appellant’s case shifted during the appeal. At the hearing of the appeal, the appellant advanced submissions that were not reflected in his grounds of appeal and which did not reflect the case advanced before the trial judge. The most significant of these was the way in which it was said the appellant and Mr Van Hoff acted in reliance on the PDSs.

Whereas at trial the focus of the appellant’s submission was on the impression produced by his and Mr Van Hoff’s reading of the PDSs and on the role of the non-disclosures and representations complained of in their decision-making process, on appeal, the reliance was said to be indirect in that the appellant and Mr Van Hoff relied on the advice of their financial advisers. This shift appears to be in response to findings of the trial judge that the appellant and Mr Van Hoff did not read the PDSs in any detail, or at all.[52] On appeal, the appellant urged this Court to draw the inference that because the advisers were professionals, their recommendations to the appellant Mr Van Hoff to invest would have been actuated by their reading and consideration of the non-disclosures and representations complained of in the PDSs. This submission fell into the difficulty common to much of the appellant’s unpleaded case in that there was no evidence led below as to the extent to which the advisers relied on the representations and non-disclosures in making the recommendations to their clients.
[52]See Reasons [608]-[612] (in relation to the plaintiff), [640]-[643] (in relation to Mr Van Hoff).

In our view, the appellant should be held to his pleaded case on appeal. We draw support for this conclusion from the observations of Austin J in ASIC v Rich.[53] In that case, his Honour set out a number of propositions in relation to the significance of pleadings and particulars which emphasised their fundamental role in defining the scope of evidence to be lead in support of the material facts alleged and in ensuring that the opposing party has the opportunity of meeting the case against them. Significantly, his Honour observed that when litigation is large and complex, with serious consequences for the defendants if the plaintiff succeeds and the parties are required to incur very substantial costs, the imperative to hold the plaintiff to its pleaded case is strengthened.[54] In our view, this is such a case.
[53](2009) 236 FLR 1 [158]–[169].
[54]Ibid [162], [163].

Case on appeal

The appellant has 14 grounds of his appeal, although ground 3 was not pressed at the hearing. All of the respondents have issued notices of contention with six common grounds of contention. The first respondent has an additional ground of contention.

Broadly, the appellant takes issue with the trial judge’s conclusions as set out above. The appellant submitted that the trial judge misconstrued the meaning of ‘significant risk’ in s 1013D and misapplied s 1013F and the joint experts’ report and should have held that the risks associated with external financing should have been disclosed under s 1013D or 1013E and that the adverse matters required disclosure under s 1013E. The appellant submitted that the trial judge erred in finding that the disclosure that was made was sufficient, and erred in finding that the Directors had no actual knowledge of the risks until after the collapse of Lehman Brothers. The appellant also submitted that the trial judge’s analysis of the alleged misrepresentations failed to take into account an ordinary and reasonable reader. Finally, the appellant submitted the trial judge erred in finding there was no reliance on the non-disclosures or representations complained of by the appellant or Mr Van Hoff.

The respondents contended that the trial judge should have found that the evidence required the conclusion that there was no significant, or alternatively no discernible, risk that Timbercorp Securities would be unable to perform its management functions during the period throughout which scheme members were exposed to the risk that they may lose the total value of their investment. The respondents also contended that information concerning the pleaded risk, tax announcement and the GFC was information that it would not be reasonable to expect to find in a PDS by reason of s 1013F. The first respondent additionally contended that, having regard to the legislative framework a responsible entity is not required to disclose in a PDS information about risks associated with the responsible entity’s financial position.

The Directors also identify as an issue on appeal the extent to which the grounds of appeal fall within the appellant’s pleaded case.

Before turning to the grounds of appeal, it is relevant to set out some of the evidence as to events which were significant in the appellant’s case.

The evidence concerning the Lehman collapse

The trial judge concluded that prior to Lehman Brothers’ collapse there was no discernable risk that Timbercorp Securities would be unable to perform its management functions.[55] The first and fifth respondents, by their notices of contention, submitted that the period during which the failure of Timbercorp Securities to perform its management functions exposed each investor to the risk of a total loss of their investment was five years. The appellant submitted that the period of exposure was the life of each scheme, that is, around 20 years for horticultural schemes and around 10 years for forestry schemes. His Honour found it unnecessary to decide this issue. In our view, the conclusion that there was no discernable risk prior to Lehman Brothers’ collapse was open on the evidence for both the five year period after the issue of each scheme and the life of each scheme.
[55]Reasons [557].

The Directors led detailed evidence about the periods when each scheme was dependent upon the Group tantamount to the effect that horticultural schemes were designed to be dependent for a period of four to six years and forestry schemes were designed to be dependent for around 10 years. Evidence was led that the Group’s strategy was to sell and lease back its scheme land holdings after developing the asset either into a trust partly owned by the Group or to a third party within four years.[56] Furthermore, evidence was led as to the timing for which the Group would have funded most of the capital expenditure for each of the schemes offered to investors after 7 February 2007 and by which each scheme was forecast to be generating significant crop proceeds.
[56]Reasons [338].

This evidence was principally provided by Mr Rabinowicz, CEO of Timbercorp and a director of various companies in the Group, and was not challenged.

Thus, the Group’s business model was to create valuable capital intensive assets with a long term income stream and then to sell those assets within the period of three to five years. For each horticultural scheme, after five years the consequences of failing were intended to reduce to virtually nothing. For each forestry scheme, from about five years, the consequences of failure were intended to reduce gradually until harvest. The appellant submitted that the proper test would be that a risk of total loss of the investment must be disclosed unless the chance of the risk materialising was negligible.

The trial judge considered the position as at September 2007:

On 15 November 2007, the Group released its audited results. The Group’s annuity income was $243 million, its EBIT $156 million, and NPAT $66 million. Although the Group reported a negative operating cash flow of $45 million, that did not have regard to cash from securitisation. The Group also announced a dividend of 4c, a further strong indicator of its own assessment of its financial strength.[57]

[57]Reasons [375].

His Honour focussed on the announcement by the Group of a dividend. Putting that fact in perspective, the Group, if struggling with cash, might contemplate not providing a dividend to shareholders. However, the Group declared and paid cash.

Considering then the position as at 2008, his Honour dealt with these matters:

Timbercorp reported an increase in total Group revenues, to a record $494.4 million, led by sustained growth in annuity income. New sales of agribusiness managed investment schemes had made a significant contribution to profit. Annuity income comprised fees and rental income generated from payments made by investors in managed investment schemes, and entitlements from maturing schemes.
Timbercorp reported that annuity income had increased 32.1% over the previous year to $321.5 million, and that the contribution to EBIT had increased to $72.6 million. While some one-off negative provisions were mentioned, net assets had increased from $75.8 million to $595.6 million, while net overall debt had increased $71.9 million.
Timbercorp announced a net profit for the financial year ended 30 September 2008 of $44.6 million. The Group had 22,000 hectares of horticultural land, and 98,000 hectares of forestry plantations, under management.
The 2008 Annual Report announced that annuity income was expected to increase to more than $360 million in the following year, and then to more than $400 million in 2010. New business sales were claimed to have been strong in 2008, with three project offerings attracting $119 million in new investment. Timbercorp’s almond project had sold out, the forestry project was over subscribed, and Timbercorp had achieved its highest ever sales for an olive project. The report noted, however, that the total new business revenues, and related EBIT contribution, was down 16.3% and 12.7% respectively, due mainly to reduced horticultural project offerings in 2008.[58]

[58]Reasons [7]-[10].

Thus, when looked at overall, the financial position of the operation was seen to be strong and profitable. Importantly, as at 30 September 2008, there was no indication of any risk by reason of financial circumstances to the Group’s capacity to discharge its obligations in relation to the management of the projects.

The support by the bankers

It is relevant to consider the support afforded by the bankers of the Group at the relevant period. His Honour addressed these matters:

Assuming an equivalence between the concept of significance risk employed by the experts, and the statutory requirement for the disclosure of significant risks in Product Disclosure Statements, the opinion expressed by the experts provided a complete answer to the plaintiff’s structural risk case as pleaded. Furthermore, the evidence did not support the proposition that there was actual knowledge on the part of the relevant entities or their directors, of that structural risk. It was not until the last quarter of the 2008 calendar year, following the collapse of Lehman Brothers and after the proposed sale of forestry assets to Harvard Management Company failed to proceed, that banker support wavered. Even then, banker support continued into the new year, with the banks providing Timbercorp with an opportunity to dispose of assets.[59]

[59]Reasons [48].

Later, his Honour observed:

The lack of materiality of investor defaults and the willingness of the banks to increase their level of support for the Group until the end of 2008, had the effect of eroding the content of the structural risk as pleaded and particularised by the plaintiff.[60]

[60]Reasons [246].

It is apparent then, at the end of 2008, that the bankers for the Group were prepared to increase support. As late as November 2008, the CBA agreed to vary loan covenants and extend expiry dates into 2009.[61] The evidence before the trial judge revealed that the facilities were added to or increased over time. His Honour found there was no sign of the Group having difficulty in securing from capital markets the requisite funding for its activities.
[61]Reasons [541]; the Court was also provided with a tabulation of the facilities held by Timbercorp over time. This document reveals an increase in existing facilities: the CBA Forestry up to $52 million dollars, the Securitization Program limit up to $125 million.

One of the significant financiers for the Group was ANZ. Evidence was led from Mr Lightfoot, Director, Research and Analysis at ANZ during the 2007-2008 period, who in that role prepared credit applications and reviews in relation to ANZ’s institutional banking customers which included Timbercorp Finance and other companies in the Group. An annual review was conducted by the ANZ Bank just after the tax announcement. Mr Lightfoot observed that the review coincided with a request by the Goup that ANZ participate in a new three year syndicated loan facility with significant increases. Mr Lightfoot considered that whilst the government’s announcement of its intentions in relation to non-forestry schemes would have a ‘reasonably material effect on new sales of such schemes’ he said he had ‘no heightened concerns at this time about Timbercorp’s credit quality’. Mr Lightfoot further observed that the ‘customers’ underlying projects remained sound and well managed.

Mr Lightfoot also gave evidence that there was a substantial review conducted in the middle of 2008. His evidence was:

The recommendation was that the customer’s underlying credit position remained sound. No adjustment was required to the internal credit rating. The credit committee resolved to adjust the credit rating down one notch and to carry out another full grade risk review on receipt of the full year audited accounts in November 2008.

Hence, in late November 2008, after the Lehman collapse, ANZ undertook the full review of the Group that had been foreshadowed. Mr Lightfoot gave evidence that at that time:

I still took the view that Timbercorp’s high quality assets which were still generating fees suggested that ANZ should continue to support the customer, although I accepted that it was very difficult to assess the probability of the necessary asset sales to third parties proceeding to execution in the then current market.

The credit review was carried out and the credit committee resolved to approve the refinancing even at that stage of November 2008.

There was agreement among the expert witnesses to the effect that, as long as the Group’s bankers continued to support its operations, there was no significant risk that the Group would not have had the financial capacity to manage any of the schemes through to their contemplated completion.

The trial judge noted that the experts’ report (at para [7.2.1]) provided a complete answer because, whilst the bank support evaporated eventually after the Lehman collapse, before that time, there was no reason to conclude that it would not be continued on an indefinite basis. In light of that, the experts’ opinion was that there was no significant risk that the Group would not have had the financial capacity to manage any of the schemes through to their contemplated completion, that is, for the full term.

Equity raisings

At the relevant time the Group had little difficulty in raising equity. His Honour observed:

The board may have anticipated a potential problem with the sale of the Boort and Carina properties. It took steps to explore a capital raising in December 2007. On 26 July 2007, the board had resolved that the Group should investigate a hybrid capital raising to provide funds for future development and for liquidity purposes to safeguard the company in the event that a planned asset sale or other capital management activity is delayed or is unable to be completed on acceptable terms. Eventually Timbercorp resolved to issue ordinary shares and raised $56.4 million from institutional investors in December 2007. It seemed to have little difficulty raising the equity.[62]

[62]Reasons [367].

Source of inflows

There was then the matter of asset sales, they being part of the ordinary program of the Group for realisation and release of capital expended upon the schemes. Two properties were identified for sale being the Boort (an olive development) and Carina (an almond development) properties. His Honour held:

On 17 April 2008, shortly after securing bank facility extensions, including the CBA facility linked to the Boort property until 8 March 2010, the Group deferred the sale of the Boort and Carina properties to December 2008. A Corporate Development Report dated 17 April 2008 explained that, although the Group had funding from CBA for the transaction, the unit price was depressed. As the Group was unwilling to pay a higher rent, the transaction simply did not stack up. CBA had already advanced funds against the asset, and so funding for the acquisition of the asset by the Primary Infrastructure Fund could simply be viewed as a change of borrower.[63]

[63]Reasons [379].

Thus, there was no urgency or imperative for the Group to sell the properties. It was a proposed sale that did not proceed and was deferred.

In early 2008, the Group began to investigate the prospect of selling its forestry land. At one point an interested party expressed interest and, if the transaction had proceeded, it would have yielded a cash release of $225 million.[64] His Honour noted that the experts agreed that the Lehman collapse was a significant event in that it affected asset sales and credit markets.[65] His Honour also observed that the Boort and Carina properties had been the subject of German interest.[66] While the transactions were not followed through, it is apparent that they were on the edge of proceeding when the Lehman collapse occurred.[67] The prospective purchasers’ funding dried up and neither transaction proceeded. However, up to the Lehman collapse, all the indicators were that asset realisation would have occurred in the ordinary course.
[64]Reasons [381].
[65]Reasons [383].
[66]Reasons [520].
[67]Reasons [525].

The securitisation process

It was relevant in the assessment of the Group’s funding position to consider funding available through the securitisation process. In submissions, the appellant focussed on the circumstance that Timbercorp Finance funded 90 per cent of grower investments itself. Thus, it was submitted, as business grew the requirements of Timbercorp for its own funding also grew. However, Timbercorp had a securitisation facility in place with the ANZ Bank. Through that facility Timbercorp was able to securitise the grower finance which it provided and receive recoupment to the extent of 75 per cent of the outlays under the securitisation facility.[68] Thus, the net effect was that the funding was laid off through the securitisation process. The Group did not have to fund 90 per cent of the investments made by growers over time.
[68]Reasons [338]. Evidence in this regard was given by Mr Hance.

Cash flows

Mr Rabinowicz noted in his evidence that in the report in years ended 30 June 2000, 2006, 2007 and 2008 Timbercorp’s operating cash flow was negative. Mr Rabinowicz also noted the evidence of Mr Dicks that from 2006 to 2008 Timbercorp generated cash deficiencies of $88 million from its operations. Mr Dicks said this occurred primarily because of the increase in net grower loans by Timbercorp Finance. Nevertheless, Mr Rabinowicz, whilst accepting that the analysis of Mr Dicks was correct, said that the statements ‘failed to match the reality of the business in terms of what cash was available to Timbercorp’. Mr Rabinowicz also observed that Mr Dicks’ analysis excluded the cash Timbercorp received from loans securitisation and borrowings. He noted that the cash was available and used in the ongoing funding of Timbercorp’s business.

The evidence of Mr Rabinowicz was important in this respect. He said:

When Timbercorp Group’s business activities are properly understood, financing cash inflows from TFL’s securitization and borrowings should not be viewed any differently from operating cash flows from new scheme sales and annual receipts of rent, license fees and management fees. That is so because the ordinary business of the Timbercorp Group was to develop MISs and to offer loans to investors to invest in those MISs, which loans were funded either by securitization or by other third party borrowings. In this way the Timbercorp Group was in effect factoring its grower loans to turn its operating revenues into cash.

In consequence the $88 million operating cash deficiencies for the Timbercorp Group from 2006 to 2008 should be viewed in conjunction with TFL’s securitization and borrowings financing cash inflow for the same period which totalled approximately $114 million. Doing so gives total positive cash inflows of approximately $26 million for the period.

Thus, there was a positive cash flow rather than a negative one as suggested by the appellant.

It is also relevant to consider what were termed ‘grower defaults’. The trial judge found that grower defaults did not impair the cash flow:

A further matter relied upon by Mr Dicks to support his opinion that, at 30 September 2008, the Group were showing signs of financial difficulty was
An 83% and 68% increase in the provision for doubtful debts in 2007 and 2008 respectively.

Under cross-examination Mr Dicks had his attention directed to an internal memorandum from the Chief Financial Officer to the Chief Executive Officer dated 16 July 2008 which contained an analysis of loan arrears. In January 2007 the loan amount in arrears represented 2.12% of the total loan book, rising slightly throughout the first half of 2007, then levelling at around 2% until the end of that year; rising to 2.61% in April and May, and then settling to 2.51% in June 2008. Mr Dicks agreed that the change in loan arrears was not material. He had expressed his opinion about the increase in the provision for doubtful debts by analysing the dollar amount in arrears without comparison to the overall loan book in order to assess materiality from a balance sheet perspective.
Other factors relied upon by Mr Dicks in expressing his opinion as to when the Group began to show signs of financial difficulty were:
(f)Total borrowings increased by 39% from $671 million in FY06 to $936 million in FY08. The most significant increase occurred in FY07, where borrowings increased by 29% to $864 million.
(g)The group was reliant on its bankers to continue to support the group through increased borrowings. There was evidence of covenant breaches as early as September 2007, which were waived by the banks.
(h)The group was highly geared (60% debt to capital ratio) during the period FY06 to FY08, compared to the industry average of 36%.
(i)With the exception of 31 March 2008, the group had a working capital ratio deficiency for each six month period from 31 March 2007 to September 2008. A further concern to Mr Dicks was the significant difference between TFPL’s current assets and its current liabilities in both 2007 and 2008.
(j)To prevent potential breaches of covenants, the group requested various amendments to bank covenants during the period September 2007 to September 2008. In particular, the group was nearing breaches of interest cover ratios in FY07, and then breaching the interest cover ratio covenant in FY08 before this covenant was revised to a lower threshold.

The evidence disclosed that in late September 2007 one of the Group’s lead bankers, HBOS, was informed that while the Group believed that it would comply with shareholder funds, gearing and interest cover covenants, it was likely to slightly exceed its leverage ratio covenant. The directors recognised a risk of non-compliance and notified to the bank. Notwithstanding the possible breach, the bank increased its level of support for the Group. In 2008 there was another occasion on which breaches of loan covenants were contemplated, arising out of the consequence to the Group from the anticipated sale of its forestry assets to Harvard Management Company. The risk of breach was recognised and the directors sought waivers from its bankers in relation to interest cover ratios and leverage ratios. They recognised that the sale would crystallise a loss based upon a difference between the book value of the assets and sale price. Mr Dicks seemed unaware of the background circumstances to the anticipated breaches. He said that he did not have the relevant material at his disposal and had been under time pressure; yet he was willing to express opinions as to the significance of the breaches or anticipated breaches to the balance sheet as events demonstrating financial difficulty.
The lack of materiality of investor defaults and the willingness of the banks to increase their level of support for the Group until the end of 2008, had the effect of eroding the content of the structural risk as pleaded and particularised by the plaintiff.[69]

[69]Reasons [243]-[246].

Matters in the public domain

The fifth respondent drew the attention of the Court to documents in the public domain. Whilst acknowledging that this material was largely on the periphery of the appeal it was said to nevertheless complete the picture. We were taken by the parties to the 2007 Annual Report for Timbercorp Ltd. There the Deputy Chief Executive Officer stated:

Timbercorp has consistently sought to improve the sustainability of the company through diversify business and revenue streams over a number of years. Diversifying from forestry investments to include horticulture and reducing the reliance on annual new sales revenue to recurrent annuity style revenues are prominent examples. This strategy of diversification has proven beneficial for Timbercorp. This was evidenced by a full year net profit of $65.7 million, which demonstrated considerable resilience in the year that presented many challenges both regulatory and environmental.[70]

Mr Rabinowicz was specifically cross examined about his email where he used the expression ‘it’s bad’. He said:

What I was proposing to do was to explain to them what the announcement meant to the business and what we were doing about it and if you are asking me what I meant by ‘it’s bad’, it was a reference to the fact it was immediate, that there was a very short period not allowing for transition.[116]

[116]Trial Transcript, 551.

Mr Hance gave evidence that the tax announcement was not a shock ‘in the sense this was something we thought would never happen, it was a shock it happened that day.’[117]
[117]Trial Transcript, 771.

The evidence of both Mr Rabinowicz and Mr Hance was extensive on this entire topic.

His Honour did not conclude that the Directors actually knew of any risk that required disclosure. Indeed, there was a lot of information to suggest that no one else appreciated the risk the appellant alleged including auditors, bankers, market analysts and rating agencies. In one sense, the appellant’s case was substantially argued with the benefit of hindsight. We do not consider the ground is made out. Furthermore, if it were necessary, we would regard the Directors as having a good defence under s 1022B(7) as was submitted in the 2^nd – 4^th respondents’ notice of contention. However, given the findings above, it is not necessary to decide the point, nor to decide the other issues raised by that notice.

There are three additional observations to make with respect to the Directors and their evidence. First, the ‘Nutshell document’ which was the encapsulation of the fragile business model case was produced after the Directors had given evidence and, also, after the experts’ reports had been prepared. Secondly, there was no criticism in his Honour’s reasons either of the conduct of the Directors or of the evidence which they gave. To the contrary, the trial judge found that the Directors performed their duties in good faith and with a genuine desire to comply with their statutory obligations.[118] Thirdly, it was never put to Messrs Hance, Rabinowicz or anyone else in senior management that the Directors had caused the PDSs to be defective or that these processes were inadequate, insufficient or defective in ensuring that reasonable steps were taken to ensure that the PDS complied with the statute. These matters were covered extensively in the evidence, in particular that of Mr Hance.
[118]Reasons [427].

Ground 13

Ground 13 of the appeal is as follows:

In his analysis of whether the "financial representations" and "project contributions representations" were misleading or deceptive, His Honour erred by failing to consider the effect of each PDS on an ordinary and reasonable reader.

It will be recalled that the ‘financial representations’ were that the financial position of the Group was sufficiently strong so that they could be reasonably expected to manage the schemes through to their completion and that all principal scheme risks had been disclosed. The ‘project contributions representations’ were that scheme contributions would only be applied to fund each recent scheme and would be sufficient to fund each scheme by meeting or exceeding the cost of establishing and maintaining the scheme.

Counsel for the appellant submitted that whether the representations were misleading or deceptive depended upon the effect of the representations upon the persons to whom the representations were addressed, not upon the mental state of the person making the representations. The section of the public at which the representations were aimed were said to be members of the investing public. Counsel also submitted that the combination of what was said and what was left unsaid might be misleading or deceptive.[119]
[119]See Fraser v NRMA (1995) 55 FCR 452, 467.

In our opinion, whether the financial representations were misleading or deceptive did depend at least in part upon the mental state of the maker of the representations, for the representations would ordinarily be understood as statements of opinion. Such statements are not apt to mislead if the opinion is genuinely and reasonably held by the maker of the statements. Whether the representations were statements of opinion depended on how they were apt to be understood by ordinary and reasonable investors to whom the representations were addressed, but once they were so characterised, their tendency to mislead or deceive did depend upon the mental state of the makers of the representations. [120] Further, the obligation to disclose risks to the schemes depended upon actual knowledge of the risks. The respondents met the allegations with detailed evidence of their management of the business risks, in particular the ability of the respondents to manage the events that occurred in and after 2007 such as the taxation announcement and the credit crisis, and the state of mind of the Directors as to the financial health of the Group and its future prospects. It was entirely appropriate for the trial judge to have regard to this evidence in order to determine whether the alleged representations were misleading or deceptive.
[120]ASIC v Fortescue Metals Group Ltd (2011) 190 FCR 364 [112], [113] (Keane CJ).

Similarly, we think that the project contribution representations did require an examination of the state of mind of the representors. The representations concerned events to occur in the future. In general terms such representations made without reasonable grounds are taken to be misleading or deceptive.[121] In the present case the representations were misleading or deceptive if there was no intention on the part of the Group that the funds subscribed to each scheme would be quarantined. The representations also arguably implied that there was in place a regime that quarantined the funds subscribed to each scheme. Accordingly, the representations could be seen to require analysis of both the intentions of the scheme organisers and the system in place for dealing with monies subscribed by investors.
[121]See Corporations Act s 769(1); FTA s 4.

The trial judge said that the representation as to the continuing strength of the Group ‘lacked content’ and that the respondents had established reasonable grounds for their expressions of confidence in the Group’s viability and strength. In our opinion, his Honour’s conclusions were correct. Further, it is apparent that his Honour did not simply analyse the representations from the standpoint of the respondents, but examined their likely effect upon the class of investors to whom the PDSs were addressed.

The alleged representations as to the financial strength of the Group were extremely vague and general. The ability of the Group to manage the schemes through to their completion, or at least until each scheme became self supporting in the sense that its income exceeded its outgoings, depended principally upon the Group retaining the support of its bankers to supply the Group’s capital needs. The experts retained by the appellant and the respondents agreed that so long as the bankers continued to support the operations of the Group, there was no significant risk that the Group would not have the financial capacity to manage the schemes through to their completion.

The evidence established that the Directors were not aware of the risks formulated by the appellant until late December 2008, when the continued support of the Group’s bankers became uncertain. The appellant did not allege that the financial information supplied by the respondents was inaccurate or misleading, rather that the representations as to the financial strength of the Group became misleading or deceptive when the adverse matters occurred. The trial judge found, however, that the respondents reasonably believed in the capacity of the Group to successfully manage the impact of the adverse events.

As to the project contribution representations, the trial judge held that the alleged representations were inconsistent with the information contained in the product disclosure statements and were inconsistent with the financial representation as to the financial strength of the Group. The PDSs disclosed that one or more of the companies in the Group would be responsible for undertaking capital works and that the contributions made by investors were to defray operating expenses in order to be tax deductible.

The appellant sought to employ the concept of tax deductibility to found the project contribution representations, asserting that it was difficult to see how an investor could expect a tax deduction in respect of payments which were not tied to the scheme in which the investment was made. The PDSs, however, made clear that payments by investors were made to Timbercorp, which in turn discharged obligations with respect to each scheme. The tax deductible payment was the payment made to Timbercorp.

Counsel for the appellant submitted that the trial judge erred in that he failed to consider the impression which the PDSs would have had upon a relatively unsophisticated investor. We do not consider that his Honour’s reasons disclose that he unduly elevated the understanding and experience of the investors.

In any event, the criticism is to be viewed in light of the fact that the only two investors to give evidence were both knowledgeable and sophisticated. The appellant was a qualified engineer and a successful businessman and engaged primarily in property development by means of a number of companies. The appellant was familiar with the share market and was computer literate. He understood balance sheets and profit and loss statements. Mr Van Hoff was the sole shareholder and director of a company that conducted a transport business. Mr Van Hoff had been in the business for some 22 years. He had a portfolio of shares and a self managed superannuation fund.

We are unable to see how the assertion that his Honour failed to consider the effect of the project contribution representations upon ordinary investors or, as the appellant styled them, ‘relatively unsophisticated investors’, could undermine his Honour’s findings or lead to the conclusion that they were erroneous or without foundation. The claim failed for reasons which did not turn upon the perceptiveness, sophistication or knowledge of the investors.

Given these findings, it is unnecessary to consider the fifth respondent’s notice of contention in relation to this ground.

Ground 14

Ground 14 of the appeal is as follows:

His Honour erred in finding that there was no relevant reliance by the Plaintiff or Mr Van Hoff on the alleged non-disclosures by concluding that:
(a)the sole driver for their decision to invest was the tax-effective nature of the projects and that they were indifferent to the content of documents; and
(b)there was a necessary inconsistency between reliance on the strength of the group, and the assumption that projects were quarantined one from another.

In order to recover damages pursuant to s 1022B(2)(c) or s 1041I(1) for breach of s 1022A or s 1041H, a plaintiff ‘must establish that he relied on the misleading or deceptive conduct, or the false or misleading statement or that he would have acted differently if the material omission had been disclosed’,[122] in other words, the vice aimed at by the legislation ‘is not issuing misleading prospectuses, but misleading investors by issuing misleading prospectuses.’[123]
[122]Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235 [142] (Handley AJA).
[123]Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) 73 NSWLR 653, 664 (Giles JA).

The case advanced by the appellant required him to establish that the alleged representations constituted a decisive consideration in the decision to invest in the Timbercorp scheme. As Gaudron J said in Kenny & Good v MGICA:[124]

When a person claims to have taken, or refrained from taking, a particular course of action in reliance upon another's representation, the critical question, assuming the representation is one that might reasonably be relied upon, is whether, but for that representation, he or she would have taken that action. In that context, ‘but for’ does not signify a sine qua non or causative factor which, although necessary, is not sufficient to produce the result in question. Rather, it signifies the decisive consideration or one of the decisive considerations for taking the course of action in question.

[124](1999) 199 CLR 413, 425.

The appellant and Mr Van Hoff were the only investors to give evidence. Their witness statements recorded that they read the PDSs and stated their reliance on the representations in terms which were virtually identical and which echoed the allegations in the statement of claim. Unsurprisingly, the trial judge said that he placed little reliance on this formulaic evidence.

In the course of his cross-examination, the appellant said that on 14 June 2007 a financial adviser came to his house with documents relating to three investment schemes. The appellant was concerned to reduce his liability to tax on a profit of about $500,000. The appellant estimated that the meeting lasted from one and a half to two hours. He conceded that he had limited opportunity to read the PDS. The transcript recorded the following cross-examination:

An hour and a quarter’s meeting is not really adequate time, is it, to digest the PDS? – Well, not to drill down into it in great detail.
There were also other investments that Mr Larkin was recommending, was there not? – There was.
So he was also recommending, if you go back to the statement of advice of page 3, the FEA Plantations Project 2007? – Yes.
And he was also recommending the Gunns Plantations Project 2007? – Yes.
And each of those had PDS associated with them? – Yes.
So just to give me some form of idea, the volume of material that he was bringing to this meeting late on 15 June which was about an hour and a quarter was several hundreds of pages of material? – Yes.

The witness said that he would not have sat down and read every word of the PDS. He said, ‘I would have skimmed through them, reading them, understanding the gist, picking out important items in them and they very much appeared to be similar type of documents’.

The trial judge said:

I am not persuaded that the plaintiff read any of the Product Disclosure Statements in any detail. He simply did not have the time to do so. He had a loan application form to complete and there were discussions. All of this is consistent with the proposition that the plaintiff acted on the recommendation of [the financial adviser], motivated by his anxious desire to obtain a tax deduction, after selecting the offering that required urgent attention that evening. The actual content of the product disclosure statement or the absence of information, was not what induced the plaintiff to invest in the project or actuated him in any meaningful way. It was a matter of selecting a project to provide him with the required tax-relief. I have no doubt that the financing option – 12 month free interest – was an inducement.[125]

[125]Reasons [592].

In May 2008, the appellant became aware that he faced a tax liability of about $1 million. At a meeting, which lasted some two hours, the plaintiff and his financial adviser discussed five investment schemes. The trial judge said:

The evidence given by the plaintiff about his attention to the detail contained in the statements, and his having read them at all, does not persuade me that his review of the 2007 Almond scheme documents or the 2008 scheme documents was more than a perfunctory glance, if that.[126]

Accordingly, said his Honour, ‘I do not accept the plaintiff’s evidence of reliance’.

[126]Reasons [609].

The witness statement of Mr Van Hoff, like that of the plaintiff, was a repetition of the pleaded case and was stigmatised by the trial judge as ‘generalised, formulaic and unhelpful’. In cross-examination, Mr Van Hoff admitted that he did not read each product disclosure statement carefully or completely. He said:

I read part of [the product disclosure statements], but I’ve not read the whole of 40-50 pages of it because, look, who reads a product disclosure statement fully like that? … I can’t remember going through any specific part of it but, I read a little of it …

The trial judge concluded that Mr Van Hoff was not induced to invest by the product disclosure statements. He said:

I am not satisfied that Mr Van Hoff read any of the Project Disclosure Statements in any detail. He may have glanced at some parts, but he was willing to invest without a careful consideration of the documents. That undermines his evidence insofar as he relied on the content of the documents or the absence of the information contained in them. He did not look to the Product Disclosure Statements as a source of information to assist him in his decision to invest in Timbercorp schemes. He chose the schemes on the basis of advice from his accountant and, perhaps Mr Weaver, in search of tax-relief.[127]

[127]Reasons [652].

Counsel for the appellant submitted that there was no inconsistency between investing with a view to obtaining a tax-deduction and investing to obtaining income. He submitted that it makes no sense to throw away money in order to obtain a tax deduction. Tax costs a taxpayer his marginal rate of tax; a failed investment costs the entire amount outlaid. While it may be accepted that the appellant and Mr Van Hoff were not indifferent to whether their investments would be profitable, it does not follow that their hope of profit was derived from any representation made by the respondents. Counsel next submitted that the information in the alleged representations was important to an investor who wanted to obtain a return on his investment and thus it was to be inferred that the representations were relied upon by the plaintiff and Mr Van Hoff. We consider the inference advanced by the appellant could not survive the effect of the evidence given by the witnesses.

In our opinion, it has not been demonstrated that the trial judge erred in finding that the representations alleged by the appellant did not induce the appellant and Mr Van Hoff to invest in the Timbercorp schemes. The fact that the appellant and Mr Van Hoff were anxious to obtain tax deductions was relevant to the question of reliance. It is, we think, evident that his Honour did not reach his conclusion as to the issue of reliance simply because he thought that the investors wished to obtain tax deductions. The trial judge examined the evidence given in chief and in cross-examination carefully and at some length. Findings as to credit played an important role in the determination of the issue of reliance. There are certain constraints attending this Court’s review of findings of that kind. In order to overturn his Honour’s findings, it must be demonstrated that there are incontrovertible or uncontested facts at odds with the judge’s findings[128] or that the evidence taken as a whole was such as to render the findings glaringly and improbable or that there has been some misuse of the advantage of seeing the witnesses possessed by the trial judge.[129] No error of that kind has been established.
[128]Fox v Percy (2003) 214 CLR 118, 128, 139, 165-6; Devries v Australian National Railways Commission (1999) 160 ALR 588; Warren v Coombes (1979) 142 CLR 531, 551.
[129]Whisprun Pty Ltd v Dixon (2003) 200 ALR 447, 472.

Both the appellant and Mr Van Hoff retained financial advisers who identified schemes providing taxation deductions, advised the investors and arranged meetings at which documents were signed and monies were contributed by the investors. The appellant and Mr Van Hoff said they relied on the advice they were given by their advisers.

Faced with the difficulties posed by the investors’ evidence-in-chief parroting the pleadings and the revealing answers given by them in cross-examination, counsel for the appellant fell back on the argument that, although the financial advisers did not give evidence, it was to be assumed that they had carefully read the PDSs issued by the Group, relied upon the representations in the statements set out in the statement of claim and relayed the beliefs that they so formed to the appellant and Mr Van Hoff, who were induced by that advice to invest in each scheme. We decline to make the series of assumptions advanced by the appellant. In the absence of evidence, the steps taken by the advisers to acquire information about the various schemes they were promoting and their mental processes lie in the realms of speculation.

The complaint in paragraph 14(b) of the grounds of appeal is that the trial judge erred in finding that there was no reliance by the appellant as there was a necessary inconsistency between reliance on the strength of the Group and the assumption that each scheme was quarantined one from another. Again, this consideration does not appear to have dictated the judge’s conclusion that there was no reliance, but rather operated as one of a number of considerations, not the least of them being the effect of the investor’s evidence taken as a whole. In any event, in our opinion, the propositions which emerged from the evidence are in conflict. If the schemes were structured so that each was self-supporting, the financial strength or weakness of the administrator of the schemes was beside the point.

Summary

In summary, the appellant failed to demonstrate that the factual conclusions the trial judge made upon the application of correct legal test were not open to his Honour to find. The appellant is not able to overcome the factual finding about the Directors’ actual knowledge of risk and, further, the finding that neither of the plaintiff witnesses actually relied on the PDSs in any event. Thus, the appellant argued that the Directors ought to have known even if they did not and that the investors’ advisors would have read the PDSs and thus were susceptible to the omissions or the misrepresentations whilst no evidence from advisors was called. The appellant faced great difficulty.

Finally, we note that the first respondent submitted that the kind of information about risk of which s 1013D of the Corporations Act is concerned with is information about risk associated with the holding of the product and not the financing risk of the responsible entity.[130] It was submitted that those risks are addressed in other parts of the Corporations Act and by different disclosure regimes. It was further said that the specific disclosure obligations in s 1013D need to be read in that context. The trial judge held that performance risk, the risk that a person might fail to discharge his contractual obligations due to financial incapacity, ought be disclosed in the PDS.[131] In light of our conclusion it is not necessary to decide the point.
[130]This point was raised in the first respondent’s notice of contention.
[131]Reasons [54].

It follows that none of the grounds succeed. We dismiss the appeal.

[2013] VSCA 284

10 October 2013