Woodcroft-Brown v Timbercorp Securities Ltd
[2011] VSC 427
•1 September 2011
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
No. S C1 2009 9807
BETWEEN:
| ALLEN RODNEY WOODCROFT-BROWN | Plaintiff |
| v | |
| TIMBERCORP SECURITIES LIMITED (ACN 092 311 469) - and – TIMBERCORP LIMITED (ACN 055 185 067) (IN LIQUIDATION) & ORS | Defendants Third Parties |
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JUDGE: | JUDD J | |
WHERE HELD: | Melbourne | |
DATES OF HEARING: | 23-26, 30 May, 1, 2, 6-9, 14-16, 20, 22, 23, 27, 28, 29 June, 5-7 July | |
DATE OF JUDGMENT: | 1 September 2011 | |
CASE MAY BE CITED AS: | Woodcroft-Brown v Timbercorp Securities Ltd & Ors | |
MEDIUM NEUTRAL CITATION: | [2011] VSC 427 | 1st Revision 17/10/2011 |
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Corporations – Managed investment scheme – Product disclosure statement – Disclosure of prescribed information by Responsible Entity – Significant risk – Performance risk – Continuing disclosure obligations – ss 1013C, 1013D, 1013E, 1013F, 1017B and Part 6CA of the Corporations Act 2001 (Cth)
Practice and procedure – Group proceeding under Part4A of the Supreme Court Act 1986 (Vic)
Misleading and deceptive conduct – Availability of claims under s 1041H(1) of the Corporations Act 2001 (Cth); s 12DA(1) of the Australian Securities and Investments Commission Act 2001 (Cth); and s 9 of the Fair Trading Act 1999 (Vic)
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J W K Burnside QC with Mr P G Crennan and Mr C H Truong | Macpherson + Kelley |
| For Timbercorp Securities Ltd | Mr P D Crutchfield SC with Dr O Bigos | Arnold Bloch Leibler |
| For the Second, Third and Fourth Defendants | Mr J Delany SC with Mr A J McClelland | Brian Ward & Partners |
| For Timbercorp Finance Pty Ltd | Mr J B R Beach QC with Mr H N G Austin and Dr C O Parkinson | Freehills |
| For the Second and Third Third Parties | Mr C M Caleo SC with Mr R A Heath | Norton Rose |
HIS HONOUR:
INTRODUCTION AND SUMMARY
The Timbercorp Group was established in 1992 by Robert James Hance, the third defendant, and David Muir. They incorporated Timbercorp Eucalypts Ltd, an unlisted public company, which later became known as Timbercorp Ltd. At the same time, the fifth defendant, Timbercorp Finance Pty Ltd, was incorporated as a subsidiary, for the purpose of providing finance to investor growers. Between 1992 and its collapse in 2009, the Group had invested more than $2 billion in agribusiness projects on behalf of about 18,500 investors. The projects were horticultural and forestry managed investment schemes. One investor was the plaintiff, Alan Rodney Woodcroft-Brown, who invested in the 2007 Almond project, the 2008 Olive project and the 2007/2008 Timberlot Project. Francis Jeremy Van Hoff invested in the 2005 (Single Payment) Timberlot Project, the 2006 Almond project, the 2006 Avocado project, the 2007 Almond project and the 2008 Olive project.
The first defendant, Timbercorp Securities Ltd, was incorporated on 4 April 2000. It replaced Timbercorp as the operator of the existing schemes, and became the Responsible Entity of each new scheme. At the time the Group collapsed, Timbercorp Securities managed 33 registered managed investment schemes, and three unregistered private offer schemes.
On 23 April 2009, Mark Anthony Korda, Mark Francis Xavier Mentha, Leanne Kylie Chesser, Craig Peter Sheppard and Clifford Stewart Rocke, all partners of the firm Korda Mentha, were appointed administrators of the Group companies. At a meeting on 29 June 2009, the creditors resolved to wind up the companies, and the administrators became joint and several liquidators. At the time the Group collapsed, the Timbercorp Finance loan book had outstanding loans to over 14,500 investors totalling $477.8 million. The liquidators have commenced or threatened proceedings against borrowers to recover the loans. One purpose of this proceeding is an attempt by borrowers to avoid their loan obligations.
This proceeding, commenced by Mr Woodcroft-Brown as the lead plaintiff, is a group proceeding pursuant to Part 4A of the Supreme Court Act 1986 (Vic). It was commenced by the plaintiff on his own behalf and on behalf of persons who, at any time during the period between 6 February 2007 and 23 April 2009, defined in the plaintiff’s statement of claim as the Relevant Period, acquired or held an interest in a managed investment scheme of which Timbercorp Securities was the Responsible Entity. There are two categories of schemes with which the proceeding is concerned. The Recent Schemes are those to which the plaintiff, Mr Van Hoff and other Recent Investors, subscribed during the Relevant Period. The Early Schemes are those in which investments pre-dated the Relevant Period. Mr Van Hoff was a Recent Investor and an Early Investor, having invested in three Early Schemes and two Recent Schemes.
The background to the proceeding is arresting for a number of reasons. Foremost, is the apparently healthy position presented by Timbercorp in its 2008 Annual Report, published a little over three months before the appointment of the administrators.
On 30 December 2008, Timbercorp lodged with the Australian Securities and Investments Commission (ASIC) its annual audited full year accounts, annual audit review, and annual directors’ statement. Its Annual Report was published at about the same time. Timbercorp described itself as a leading Australian Agribusiness Company, managing high quality large-scale forestry and horticulture assets. It claimed to be a major participant in domestic and export markets for almonds, olive oil, citrus, table grapes, mangoes, avocadoes and glasshouse tomatoes, as well as Australia’s wood fibre export industry, through its eucalypt plantation projects.
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.
The Annual Report noted that net debt had increased in order to finance further increases in the growing loan book and meet increased borrowing and finance charges, which had increased from $63.6 million to $81.9 million. Timbercorp attributed the current level of debt to the capital intensity of developing managed investment scheme projects over the past decade. Its total current borrowings exceeded $567 million and non-current borrowings exceeded $367 million.
Timbercorp reported that it had an active plan to reduce debt in 2009. It proposed to sell and lease back its forestry land portfolio to substantially repay debt and fund its capital commitments for 2009 and 2010.
Timbercorp also announced a new strategic direction. It advised that its board directors was well advanced in a major strategic review of the company, which was designed to build on a strong base. An objective was to reduce capital intensity and debt, while maximising annuity income. Timbercorp advised that it had appointed Goldman Sachs JBWere (Goldman Sachs) to assist in the implementation of a strategy plan to facilitate asset sales and to assess how best to fund its growth options. It stated that while the global economic environment remained difficult, the agribusiness sector was characterised by sound fundamentals and a generally positive outlook. There was demand for food and fibre, and the supply of land and water used to produce it remained strong and should continue to grow.
At the time the 2008 Annual Report was prepared and published, Sholom Charles (Sol) Rabinowicz was a director and the Chief Executive Officer of Timbercorp. He is the fourth defendant. Mr Hance, also a director, held the position of Chief Executive Officer prior to Mr Rabinowicz. The second defendant, Gary William Liddell, was a director and chairman of the Audit, Risk and Compliance Committee. (ARCC)
The 2008 Annual Report contained a declaration by the directors, over the signature of Mr Rabinowicz, 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.
The financial reports had been prepared on the basis that and the Group was a going concern, which assumed continuity of normal business activities and the realisation of assets in the settlement of liabilities in the ordinary course of business. The auditors had expressed some reservation about the business as a going concern in a report to the ARCC in November 2008, identifying a working capital deficiency of $82.8 million. By that time Lehman Brothers had collapsed in the United States and there had been an effective closure of global capital markets. Significant and substantial asset sales, planned by Timbercorp to take place in late 2008, had fallen through as a consequence. Those sales were an underlying assumption for continuing bank support. The Group depended on support from its bankers.
In their report the directors noted that, but for waivers by its bankers of certain covenants, Timbercorp would have been in breach. Timbercorp had restructured its borrowing arrangements so as to obtain waivers of the covenants as at 30 September 2008, and to vary future covenants and terms.
The directors also expressed a belief that the going concern basis for the preparation of the accounts was appropriate after consideration of a number of factors, including the appointment of an investment bank to assist in the sale and lease back of forestry land and selected horticultural assets. They noted that cash flow forecasts indicated that the Group was able to pay its debts as and when they fell due, although an asset sales and a debt reduction program was assumed. The directors noted that should the proposed asset sales not proceed as planned, or only proceeded in part, they were confident of the continued support of Timbercorp’s bankers, subject to agreement on alternative acceptable plans.
The Annual Report contained an independent audit report from the Group’s external auditors, Deloitte Touche Tohmatsu, Chartered Accountants, dated 24 December 2008. The report contained a paragraph entitled Material uncertainty regarding continuation as a going concern. The auditors, none the less, expressed the following opinion:
(a)the financial report of Timbercorp Limited is in accordance with the Corporations Act, including:
(i)giving a true and fair view of the company and consolidated entity’s financial position as at 30 September 2008 and of their performance for the year ended on that date; and
(ii)complying with Australia Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and
(b)the financial report also complies with International Financial Reporting Standards as disclosed in Note 1.
But they went on to add:
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.[1]
[1]Emphasis added.
Another unusual feature of the case was the fact that the plaintiff did not allege that the directors were dishonest, or incompetent. He did, of course, allege and rely upon their involvement in alleged breaches by Timbercorp Securities of its duty to inform potential and existing investors about risks associated with the operation of the schemes. The plaintiff did not overtly contend that the business had been mismanaged, that the accounts were inaccurate or that the directors’ declarations in the Group financial reports were false. The plaintiff did, however, allege that declarations made by the directors in March and September 2008, in scheme financial reports, were false or misleading because of certain events that had occurred in and after February 2007, described as the adverse matters.
Importantly, the plaintiff did not contend that the auditor’s declaration was false or misleading or that the directors knew or believed that it was false or misleading. With one faintly pressed exception, the plaintiff did not contend that the directors had mislead Timbercorp bankers or the auditors.
A further unusual feature of the case was the way in which the plaintiff’s case developed. In his attempt to cover every possible combination or permutation of fact and law, attributing principal liability to Timbercorp Securities and accessorial liability to Timbercorp Finance and the directors, the plaintiff constructed an elaborate and sometimes illusive web of allegations. The complexity was compounded by the failure of the statement of claim to record a coherent narrative and the extensive and often confusing use of cross referencing.
By reference to his statement of claim, the plaintiff advanced more than a dozen principal claims, before accessorial liability was brought to account. Having regard to the way in which the plaintiff advanced his case at trial, it had the potential to be made relatively straightforward, although with a material change to which the defendants took exception. Unfortunately, any potential for simplification was not realised, because the plaintiff expressly refused to abandon any element of his pleaded case. The change to his case, explained below, did not result in an application to amend the statement of claim. The plaintiff maintained that his case at trial fell within his existing pleading.
Put simply, the plaintiff’s case as pleaded was that the Responsible Entity, Timbercorp Securities, had failed to disclose information about risks it was required to disclose in compliance with its statutory obligations. The plaintiff argued that the Group business model involved risks associated with its financial structure that should have been disclosed to existing and potential scheme investors, because the risks were significant or might have had a material influence on a decision to invest in a scheme. This was described as a structural risk; 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.
The plaintiff argued at trial that on and after 6 February 2007, events occurred that put the business of the Group at further or heightened risk of failure. Those events included an announcement by a Commonwealth government Minister on 6 February 2007, of a proposal by the Australian Taxation Office to change its position on the deductibility of up-front fees paid by investors. This event became known as the tax announcement. It was the first so-called adverse matter. The second such matter was the tightening of global credit markets, which the plaintiff said commenced in the second half of 2007. This was sometimes referred to as the Global Financial Crisis. There were other events, although the two mentioned are by far the most important.
The plaintiff argued that had he been informed of the structural risk or any of the adverse matters he would not have invested in the schemes and would not have borrowed from Timbercorp Finance to do so. The relief claimed by the plaintiff includes an order that he and Group members are not liable for repayment of their loans from Timbercorp Finance.
At trial, the plaintiff formulated 10 Key Propositions. These were:
(1)The Timbercorp Group operated as a single interdependent and interconnected business of marketing, financing and management of forestry and horticulture projects in which the different legal entities were involved in a common pursuit.
(2)Before and throughout the relevant period [6 February 2007 to 23 April 2009] the Timbercorp Group promoted itself to potential investors in Timbercorp schemes as a leading agribusiness manager, and as financially strong and reliable, with a sound business model enabling it to manage each of the schemes throughout their project terms.[2]
(3)At all times 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 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.
[2]Some projects were for terms of up to 20 years.
Proposition (3) encapsulated what the plaintiff described as the financing risk or the fragile business model risk. He submitted that Key Proposition (3) was a reflection of the allegations made in paragraph 75A to 75H of his statement of claim. It was not. The structural risk articulated in those paragraphs 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 Key Propositions continued:
(4)During the relevant period the Timbercorp Group knew that each of the adverse matters occurred and that they further increased the possibility that the Timbercorp Group would fail during the currency of the project terms and thus the possibility of grower investments failing during the project terms.
Proposition (4) relied on the adverse matters which the plaintiff submitted were pleaded in paragraphs 12D, 12E and 13 to 15A of his statement of claim.
As mentioned, the first adverse matter was the tax announcement by the Australian government on 6 February 2007, to the effect that the Australian Taxation Office would no longer allow the deduction of upfront fees paid by investors in non-forestry managed investment schemes. The second adverse matter was a substantial deterioration in credit and financial markets worldwide that commenced in late 2007. A third adverse matter was said to be the near insolvency of the Group in early 2008.
The adverse matters, or events, had played a prominent part in the plaintiff’s initial formulation of his case. It will be observed from the subsequent analysis that the status of the adverse matters changed with the passage of time. 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. The Key Propositions continued:
(5)The defendants did not disclose to the investors in any product disclosure document or otherwise during the relevant period:
(a)the existence of the financing risk; and
(b)the occurrence of the adverse matters.[3]
(6)The financing risk and the occurrence of each of the adverse matters:
(a)was material to any decision by a person, including the plaintiff and Mr Van Hoff, to invest in a recent scheme; and
(b)constituted a significant risk, characteristic or feature associated with holding an interest in a recent scheme, and the Timbercorp Group had legal obligations to disclose them.[4]
[3]The plaintiff submitted that this proposition captured the allegations in paragraphs 12P and 75K of his statement of claim.
[4]The plaintiff submitted that this proposition captured the allegations in paragraphs 12A to 12O and 75G to 75J of his statement of claim.
Key Proposition (6), as formulated, invoked disclosure obligations in s 1013D(1)(c) and (f), s 1013E, and the continuing disclosure obligations in s 1017B or Chapter 6CA of the Act. The Key Propositions continued:
(7)The failure to disclose was a breach by each of the defendants of the legal obligations to investors including the plaintiff and Mr Van Hoff, and was misleading and deceptive conduct by each of them in contravention of statute. In particular, the defendants’ failure to disclose:
(a)rendered each PDS defective within the meaning of the Corporations Act;
(b)meant that each of the defendants is a liable person in respect of the defective PDS under the Corporations Act; and
(c)was in all the relevant circumstances misleading or deceptive.[5]
[5]The plaintiff submitted that this proposition captured the allegations in paragraphs 12Q, 12T, 29, 30C, 36A, 36C, 36E, 60, 61, 75K, 75L and 75O of his statement of claim.
The plaintiff’s case for misleading or deceptive conduct, as formulated in Key Proposition (7), confined the conduct to a failure to disclose the financing risk and adverse matters in Product Disclosure Statements required to be given to each person to whom an offer to invest is made. The Key Propositions continued:
(8)The extent that the failure of TSL to disclose:
(a)the existence of the financing risk; or
(b)the occurrence of an adverse matter
was a breach by TSL of its legal obligations to investors, or constituted misleading and deceptive conduct by TSL in contravention of statute, each of the directors and TFL was a person involved in the breach or contravention.[6]
[6]The plaintiff submitted that this proposition captured the allegations in paragraphs 12U, 12W, 31, 34, 62, 75L(b) and 75Pof his statement of claim.
(9)By their conduct in promoting the schemes in the relevant period, the defendants misrepresented:
(a)The financial circumstances of the Timbercorp Group and its principal risks associated with each scheme;[7]
(b)The sufficiency of the scheme contributions paid by scheme members and how they would be applied;[8] and
(c)The state of affairs of operations of the schemes.[9]
(10)The failure to disclose the financing risk and the adverse matters, and the making of the financial misrepresentations caused Woodcroft-Brown and Van Hoff some loss or damage.
[7]The plaintiff submitted that this proposition captured the allegations in paragraphs 39 to 46D of his statement of claim.
[8]The plaintiff submitted that this proposition captured the allegations in paragraphs 47 and 55D of his statement of claim.
[9]The plaintiff submitted that this proposition captured the allegations in paragraphs 63 to 70B of his statement of claim.
The plaintiff’s reformulation of his case may be explicable, although no explanation was given. Perhaps none was considered necessary, because the plaintiff maintained the position that no material change in his case had occurred.
The evidence prepared for trial by the defendants, and even the evidence of the plaintiff’s expert forensic accountant, Mr Dicks, could not have been lost on the plaintiff. The plaintiff’s cash flow risk case, grafted into his pleading in February 2011, was confronted by evidence that the banks had continued to support the Group until well after the last Product Disclosure Statement was issued, and all adverse matters had occurred.
The plaintiff’s overall case thesis, evident in his pleading, involved the concept that the fortunes of the schemes were necessarily linked to the viability of the Timbercorp Group. If the Group failed, Timbercorp Securities could no longer perform its obligations in relation to scheme management. Factors that might be prejudicial to the survival of the Group were, therefore, prejudicial to the survival of the schemes. It is in that sense, as Timbercorp Finance submitted, that the risk to the schemes of the failure of the Group was binary, in that Timbercorp Securities either could or could not perform its obligations. It also submitted that a reasonable investor would only be concerned about the financial capacity to manage the scheme until such time as the scheme’s survival did not depend on the existence of the Group.
At the commencement of the trial, the plaintiff’s structural risk case, as pleaded, was firmly rooted in the cash flow risk. The evidence given by the financial experts engaged by the plaintiff, the directors and Timbercorp Finance on this topic was crucial. Joe Dicks, a partner in PPB Advisory, was a forensic accounting expert engaged on behalf of the plaintiff. Michael Hill of McGrathNicol Forensic, gave evidence on behalf of the directors and Barry Honey, chartered accountant, gave evidence on behalf of Timbercorp Finance. Having prepared independent reports, the experts were directed to prepare a joint report identifying matters of agreement and disagreement. One matter of agreement was stated thus:
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.
The joint opinion was a complete answer to the structural risk case as pleaded. In my view, the plaintiff’s new financing risk sought to sidestep this conclusion, and much of the lay and expert evidence prepared on both sides, and in particular the case prepared by the defendants to meet the plaintiff’s pleaded case. Instead of identifying risks associated with the Group’s ability to maintain its cash flow, the plaintiff identified a new theoretical risk, that the fragile business model made the Group’s capital management particularly sensitive to market conditions.
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).
The plaintiff should, in my opinion, be confined to his case as pleaded, augmented by particulars delivered in April 2011. The evidence, including the plaintiffs own evidence, was not directed to establish or meet a case based on Timbercorp’s critical dependency on capital and debt markets and its particular susceptibility to the occurrence of adverse conditions in those markets. But even if the plaintiff were permitted to advance such a case, it was not supported by the evidence.
Business models vary. Some will be more robust than others. Such evidence as there was concerning the nature of Timbercorp’s business model did not reveal any unique or particular fragility. The experts were not asked to express a view as to whether the business model was fragile, unusual or inherently risky. While Mr Hance and Mr Rabinowicz were asked questions in cross-examination about the business model, their evidence did not analyse, explain or set out to justify the model in a context where the allegation made by the plaintiff was that it was particularly susceptibility to a downturn in capital markets.
In his pleaded case, the plaintiff alleged that the Product Disclosure Statements that were prepared by Timbercorp Securities, in purported compliance with its statutory obligations, were defective within the meaning of s 1022A(1) of the Act, because they did not disclose the structural risk and the adverse matters. In my view, Timbercorp Securities was not required to provide that information to potential or existing investors, and the adverse matters did not make the information contained in the Product Disclosure Statements misleading or deceptive.
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 plaintiffs case – his claimed reliance on the strength of the Group.
The plaintiff further alleged that the failure of Timbercorp Securities to disclose to existing and potential investors the adverse matters when they occurred was misleading or deceptive conduct by silence. He claimed to have a reasonable expectation that such matters would have been disclosed because of the statutory obligations of disclosure and the content of each Product Disclosure Statement. In much the same way, the plaintiff alleged that declarations made by the directors of Timbercorp Securities, in financial reports for the half years ended 31 December 2007 and 30 June 2008, to the effect that there was no significant change in the state of affairs of the schemes, were misleading or deceptive because the adverse matters had not been disclosed. The plaintiff claimed that he relied on the financial representations, the scheme cost representations, Timbercorp’s silence and the director’s declarations, and was induced thereby, to invest in the schemes and borrow from Timbercorp Finance. He also claimed that had he been properly informed, he would have stopped making loan repayments.
Unlike the earlier causation chain based upon the breach of statutory duty of disclosure, and defective Product Disclosure Statements, the plaintiff alleged that one consequence of the misleading or deceptive conduct by silence was that, as a member of the schemes, he refrained from seeking to pass a resolution to terminate any of them, or to pursue the appointment of a replacement Responsible Entity. These proposed remedial actions were not advanced at trial.
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.
All experts agreed that the collapse of Lehman Brothers, in the United States, on 15 September 2008 was a significant event in that it affected asset sales and credit markets. In its Financial Stability Review for March 2009, the Reserve Bank of Australia stated:
The collapse of Lehman Brothers in September precipitated a period of extreme uncertainty about the health of the global financial system, and the increase in risk aversion led to the virtual closure of global capital markets. Despite their ongoing good performance, the Australian banks were not immune from these developments, with investors becoming reluctant to buy long-term bank debt and some depositors also showing signs of nervousness. In response to this extraordinary environment, and following moves by the Irish Government in late September, many governments announced that they would strengthen their deposit protection arrangements and provide guarantees of banks’ wholesale debt. In line with these developments, the Australian Government also moved to reassure depositors and investors in October by announcing guarantee arrangements for deposits and wholesale funding. These arrangements have been successful in sustaining depositor confidence and in ensuring that Australian banks have continued access to capital market funding.
The feature of the structural risk, upon which the plaintiff relied to impose an obligation of disclosure, was the threat to scheme members because Timbercorp Securities might be unable to discharge its management obligations. That risk may be properly characterised as a performance risk – a risk that Timbercorp Securities would be unable to perform its contractual obligations to manage the projects. The identification of, and the provision of information about, such a risk should be distinguished from the happening of events that, if unchecked or unmanaged, might convert the risk into reality. It was only at trial that the plaintiff drew any such distinction, by alleging that the adverse matters heightened the risk of collapse. Nonetheless, in his pleaded case and at trial, the plaintiff persisted in his characterisation of the adverse matters as having the status of significant risks requiring disclosure by Timbercorp Securities.
According to the plaintiff’s case as pleaded, the structural risk existed because of the dependency of the Group on cash flow and particularised threats to the cash flow. For so long as the banks supported the Group, there was no real threat to its cash flow. The banks continued to support the Group until its collapse. I am not satisfied by the evidence that the directors knew that there was a real risk that bank support might be withdrawn until after the collapse of Lehman Brothers, and the consequential failure of the anticipated asset sale transactions.
The structural risk, whether as defined in the statement of claim or at trial, is in the nature of the institution risk, mentioned in Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd.[10] That risk was recognised and dealt with by the legislative regime, introduced in 1998, to regulate managed investment schemes. It is one reason why the Responsible Entity and scheme manager must now be a public company and hold an Australian Financial Services Licence (AFSL). The reporting obligations imposed on public companies, and the conditions attaching to the licence held by Timbercorp Securities, reflect a regulatory attempt to mitigate the institution risk.
[10](2009) FC AFC 147.
In my view, the performance risk, or the institution risk, is a significant risk and information about it is required to be disclosed in a Product Disclosure Statement. It might be argued that it would not be reasonable for a person considering whether to acquire an interest in a scheme to expect to find information about that risk in the Statement.[11] That is because the nature of the risk – being a risk that a contracting party might fail to discharge all of its contractual obligations due to financial incapacity – might be regarded as a risk that goes without saying. It is an everyday risk of commercial transactions. It is well-understood and accepted by business people. A question is, however, whether it ought to be disclosed to a retail client.
[11]Section 1013F.
The attention given to the disclosure of risks by the regulatory regime is intended to protect investors, including a retail client. Notwithstanding the commonly understood nature of the performance risk, its recognition by the regulatory regime and the consequential requirement for the preparation and publication of accounts by a Responsible Entity as a public company, I am persuaded that information about the performance risk was required to be disclosed in Product Disclosure Statements as a significant risk under s 1013D(1)(c). Put another way, information about that risk is required to be included in a Product Disclosure Statement even though it would not be reasonable for a commercially sophisticated investor, considering whether to acquire the product, to expect to find the information in the Statement. The regulatory regime was designed to protect retail clients who may include relatively unsophisticated investors. Even though the plaintiff and Mr Van Hoff were commercially experienced and sophisticated investors, they are properly characterised as retail clients.
The case proceeded, however, on the basis that the risks as formulated by the plaintiff were required to be disclosed. While inextricably linked to the performance risk, the formulations by the plaintiff incorporated events or circumstances that, if left unmanaged, might have caused that risk to materialise. It was to those risk formulations that the defendants directed their evidence and submissions, including their contention that those risks were not significant risks requiring disclosure in the Product Disclosure Statements.
In my opinion, the Product Disclosure Statements issued or employed during the Relevant Period included information about the performance risk. The reference to the ability of Timbercorp Securities, to meet its obligations under the various agreements, seems to have first emerged as a separate note in the Risk Analysis part of each Product Disclosure Statement in 2006.
The relevant Product Disclosure Statements specifically identified the performance risk, generally in the following terms:
Anything that affects our ability to meet our obligations under the Almond Lot Management Agreement and the Sub-leases, and the ability of the Land Owner to meet its obligations under the Sub-lease, could also constitute a risk to Growers.
The formulation by the plaintiff of the structural risk, whether identified as the cash flow risk or fragile business model risk or financing risk, and the adverse matters, all depended upon the effect of events and circumstances on the ability of Timbercorp Securities to perform its obligations under the various agreements. While the performance risk was disclosed, the Statements did not contain the substance of the information which the plaintiff contended ought to have been disclosed. Even though the tax announcement, for example, was expressly disclosed in Product Disclosure Statements issued after February 2007, its impact, according to the plaintiff’s thesis, was not.
The Product Disclosure Statements also contained information about the financial position of the Group. There was a statement in the 2007 Almond project Product Disclosure Statement, to the effect that Timbercorp Securities was a subsidiary of a publicly listed company with net assets of $440 million. That statement drew a direct link between the financial strength of the Group and the capacity of Timbercorp Securities to discharge its obligations.
At trial, the adverse matters only really achieved a status as events that heightened the financing risk. Even with the advent of the cash flow risk in February 2011, the significance of the adverse matters, as standalone events or consequences requiring disclosure, had diminished. They were elevated into risks by the plaintiffs particulars delivered in April. Whether analysed as standalone events, or as risks, or as events which escalated a structural risk, they did not require disclosure in the form alleged by the plaintiff, whether in a Product Disclosure Statement or otherwise, to potential or existing investors in managed investment schemes promoted and operated by Timbercorp Securities.
There are a number of reasons why that is so. First, the adverse matters, as pleaded, were events that, if left unchecked or unmanaged, might crystallise the performance risk into a reality. They had no independent status as risks. Second, information about the performance risk was disclosed. Third, the adverse matters, as events requiring management, were in fact managed. To require disclosure of each such event, as the plaintiff would have it, without regard to the capacity of the board to manage the event, and without regard to the fact that it was successfully managed, is to divorce reality and common sense from the disclosure obligation. If, for example, an event occurred which threatened the very existence of the business, but the board had the opportunity and ability to manage the risk, and successfully did so, the threat to the Group would be averted. The performance risk would, of course, remain unchanged. But its crystallisation into a catastrophe for the schemes had been avoided. It is, after all, a fundamental role of corporate management to manage events which may impact adversely on the business.
Fourth, the evidence revealed that the board of Timbercorp Securities, and of the Group, successfully managed such of the adverse matters as occurred, so as to avoid crystallisation of the performance risk, until after the collapse of Lehman Brothers. With the failure of the anticipated asset sales, the board could no longer count on continuing bank support. Asset sales were an assumption underlying bank funding, even if they were not a condition imposed by the banks. That realisation took hold, at the very latest, after it became apparent that there were no satisfactory offers for the assets in early 2009. An appreciation by the board that a fundamental assumption of bank support had failed would, in my view, be a material change in circumstances that might affect scheme investments. That obligation arose as part of a continuing disclosure obligation. It is a separate question as to whether such disclosure, if made, would have had any material impact on the plaintiff’s position.
The plaintiff submitted that the fact that a risk may be capable of being managed, or had been successfully managed, so as to avoid a potentially catastrophic consequence, was beside the point. If the risk existed and was significant, or was material to a decision to invest, it must be disclosed, the plaintiff submitted. It must be kept firmly in mind that the scope of the analysis of the disclosure obligations in this proceeding is confined to the obligations of Timbercorp Securities, as the Responsible Entity of managed investment schemes, to inform investors of prescribed information. This case does not concern the continuing disclosure obligations of Timbercorp, although the defendants relied upon the disclosure of information in Annual Reports on its website and to the ASX.
The Act prescribes what must be included within a Product Disclosure Statement and what need not. It also establishes a complex regime for continuing disclosure. The mere fact that there emerges a risk to the viability of the Group will not necessarily translate into an obligation imposed on a Responsible Entity to inform scheme investors of that risk, or of information about it, or convert a failure to disclose such information into misleading or deceptive conduct.
The information concerned with the tax announcement event, the Global Financial Crisis and the near insolvency event, as formulated by the plaintiff in his particulars, was not in the nature of a risk capable of isolation from the performance risk. But was the tax announcement a material change to a matter or a significant event that affects a matter? For the word matter, one might read, performance risk. There is no doubt that events might occur in the course of running the business of the Group which might make a material change to the performance risk or be properly characterised as a significant event that affected the performance risk.
In my view the inability of the Group to sell assets following the collapse of Lehman Brothers was an event that made a material change to the performance risk. There was a point at which the board could no longer be reasonably confident of maintaining bank support. The question is, however, were the adverse matters or events of such a character? Alternatively, if the interests held by the investors were ED securities, was the information about those events such that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of the interest; and was the information generally available?
Putting to one side the questions as to whether the events were disclosed or whether the information about them was generally available, I am of the opinion that the adverse matters, as events, and their impact on the Group, did not require disclosure. That is because they were events of the kind that management is required to grapple with on a day-to-day basis. The range of such events confronting businesses is difficult to define. It will depend on the nature of the business, the business model and many other factors. Such events might include the loss of key employees, customers or suppliers; currency and interest rate changes; product and raw material price changes; for primary production industries, drought and flood; the risks of fire, regulatory change, industrial accident and patent challenges. The list could go on.
Having identified a risk that such an event might occur, and that it would adversely affect a business if left unchecked, directors typically plan management strategies to address such risks. That is what the Timbercorp directors in fact did. Such events may be managed through conventional well understood avenues, or lesser well understood mechanisms. For example, they may decide to effect insurance, hedge currencies, reduce debt, raise capital, sell assets, or formulate new marketing or production strategies. Not surprisingly, this approach was recognised in the Timbercorp risk management process, implemented in early 2005, and apparently applied on a regular basis by management.
In my opinion, it was not until management realised that an event may not be capable of successful management to avoid the crystallisation of the performance risk, that Timbercorp Securities was under an obligation to inform investors in the schemes pursuant to its continuing disclosure obligation. I am satisfied, insofar as it is relevant, that the plaintiff and Mr Van Hoff were either aware of the adverse matters as events, or that the information about them was generally available.
The plaintiff’s reliance on Timbercorp’s risk management plan, and the SWOT analysis undertaken periodically, misunderstood the significance of the process as a management tool. He pointed to the risk but ignored the purpose of the process, which was to enable management to anticipate risks and plan to manage them if they arose.
The fifth reason why the information about the structural risk and adverse matters did not require disclosure, assuming for present purposes that each adverse matters was properly characterised as a risk, characteristic or feature for the purpose of s 1013D(1) (and in my opinion they are not), are the prefatory words. They make it clear that only such of the information about significant risks or significant characteristics and features as a person would reasonably require for the purpose of making a decision to acquire the product must be provided in the Product Disclosure Statement. In my opinion, it cannot be said that the information as formulated by the plaintiff about the structural risk and the adverse matters, insofar as the event occurred, was information that a retail client would reasonably require.
Sixth, the limiting effect of s 1013F leads to the same conclusion. 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 would, I think, be of such a kind that it would not be reasonable for a person considering whether to acquire the product to expect to find the information in the Statement.
There is no doubt that the capacity of the manager to deliver on its obligation might have a material influence on a decision to invest. This was recognised by Timbercorp Securities and no doubt the reason why it disclosed the performance risk, and presented the Group as financially strong and experienced. It is worth remembering that there was no suggestion that the financial information provided was inaccurate or misleading, until the happening of the adverse matters or events. The plaintiff argued that the representations of strength and experience became misleading or deceptive following the adverse matters. But once it is accepted that the adverse matters should not be divorced from the capacity of the Group to successfully manage their impact, the happening of the events did not make any such representations misleading or deceptive.
Seventh, the plaintiff’s formulation of the information incorporating the adverse matters, and linking them to the performance risk, was vague and incomplete. If it was necessary to identify an event that, if left unchecked, might have a material adverse impact on the business, it would also be necessary to explain what, if anything was being done to manage the event. To impose such an obligation on a Responsible Entity concerned with its disclosure obligations to potential and existing scheme investors, would be unrealistic and oppressive. Such an obligation is not imposed by the Act. Such information would not reasonably be required, even by retail investors, to inform them about an investment decision. It would not constitute a significant risk to their investment or information that might reasonably be expected to have a material influence on the decision making process of a reasonable retail client considering whether to invest in a scheme managed by a member of the Group. The plaintiff’s formulation of the information required to be disclosed confused and conflated an event that might occur in the course of managing a business, albeit important and even threatening, with the performance risk.
I have also found that the cases advanced by the plaintiff and Mr Van Hoff, to the effect that had they been properly informed they would not have invested at all; or if properly informed after having invested, they would have taken certain steps to reduce their loss, lacked credibility.
The witness statements of the plaintiff and Mr Van Hoff on this topic contained formulaic incantations reminiscent of the pleadings. Their evidence strained to diminish the importance of the tax benefit derived by them in favour of more laudable long term investment objectives. Their evidence in that regard was implausible.
I am not persuaded that they relied upon the content of a Product Disclosure Statement or the absence of information in such a Statement as is alleged when making their investments and continuing to repay their loans and when paying fees to Timbercorp. In my view, the information contained in the Product Disclosure Statements was quite incidental to their investment decisions.
PLAINTIFF’S CASE
At the trial the defendants complained of a substantial shift in the plaintiff’s case. They argued that the plaintiff had departed from his pleaded case in material respects, and that they had prepared their case based upon the pleadings. The defendants submitted that the evidence on both sides had been directed to the pleaded case, which was a materially different case to that ultimately advanced by the plaintiff. Timbercorp Finance described the plaintiff’s case as elusive. The directors argued that the plaintiff was advancing an unpleaded case that was vague and embarrassing.
The directors went so far as to argue that the plaintiff’s case, as pleaded, did not disclose a cause of action. All defendants submitted that the plaintiff should not be permitted to advance a new case at trial. The plaintiff made no application to amend, but submitted that while his case had been refined, it fell within the scope of his pleading.
The contest between the parties concerning the extent to which, if at all, the plaintiff’s case had undergone a material change, and whether that case could now be advanced, requires close analysis for at least four reasons. First, to decide whether the plaintiff was in fact advancing a new case or whether it fell within the existing pleading. The plaintiff’s case as pleaded had undergone significant amendment prior to trial. In February 2011 the plaintiff had introduced a new structural risk that he said should have been disclosed to potential and existing scheme investors from 2000 onward. The structural risk articulated by the plaintiff had the potential to explain the significance of the adverse matters, and give them a material consequence.
Second, the plaintiff pleaded that the financial structure of the Group meant that it was dependent on cash flow that was susceptible to certain specified adverse influences. At trial, the plaintiff submitted that the Group employed a fragile business model which meant that when each adverse matter occurred, its impact was more significant than might otherwise have been the case. The new structural risk was called the financing risk. The character and components of the structural risk had changed.
Third, the case was pleaded in a scatter gun approach to litigation. It was complex, involving numerous separate claims for primary and accessorial liability. Every conceivable combination or permutation of statutory duty and remedy was explored. The plaintiff’s case was not concisely stated until trial. That is often the case, and in some circumstances may be justified. In this case, the complexity tended to mask a mercurial case. Had the plaintiff been required to narrow and confine his case at a much earlier stage, much of the complexity could have been avoided. While the case became capable of refinement and simplification, the plaintiff refused to abandon any aspect of his pleaded case. Fourth, an analysis of the development of the plaintiff’s case provides a useful vehicle to outline the statutory framework on which the plaintiff relied, and to identify the issues.
The plaintiff’s case changed substantially in February 2011. Some of the changes were understandable attempts by the plaintiff to grapple with factual and conceptual challenges. Prior to February 2011, the plaintiff’s case was relatively straightforward, although his attempts to give meaning to the adverse matters were elusive. He sought to attribute to each of them a character of a risk when in truth they were events.
The early case centred around events and circumstances described as adverse matters which, the plaintiff alleged, constituted or created significant risks that were required to be disclosed. The initial cause of action pleaded by the plaintiff involved an allegation that Product Disclosure Statements prepared by Timbercorp Securities were defective within the meaning of s 1022A(1) of the Act, because the adverse matters had not been disclosed in the documents. The plaintiff alleged that each of the adverse matters was information about a significant risk associated with an investment within the meaning of s 1013B(1)(c) of the Act, and that it might reasonably have been expected to have a material influence on the decision of a reasonable person, as a retail client, to acquire the product within the meaning of s 1013E of the Act. The plaintiff further alleged that there was an ongoing disclosure obligation of any material change to a matter or significant event that affects a matter, being a matter that would have been required to be specified in a Product Disclosure Statement for the financial product prepared on the day before the change or event occurs.[12]
[12]Section 1017B(1A)(a).
The defendants argued that the ongoing disclosure obligation under s 1017B did not apply because at the time of the investments made by the plaintiff and Mr Van Hoff, each of the interests offered by Timbercorp Securities was characterised as an ED security, as defined in s 111AFA of the Act. Accordingly, the continuing disclosure obligation was regulated under the provisions in Chapter 6CA of the Act, and in particular ss 674-677. In order to meet that case, the plaintiff eventually advanced an alternative claim, alleging that each adverse matter was known to the defendants, not generally available as that expression is explained in s 676 of the Act, and was information required to be lodged with ASIC under s 675 of the Act.
Disclosure obligations - overview
It is convenient at this stage to refer in more detail to some of the statutory requirements for disclosure in a Product Disclosure Statement. It was common ground that Timbercorp Securities was obliged to give a Product Disclosure Statement with any invitation to invest in a scheme.
There were very few issues between the parties concerning the components of the statutory regime regulating the disclosure obligations of a Responsible Entity and questions of statutory construction. It was common ground that a Product Disclosure Statement must disclose information about any significant risks associated with holding a product.[13] Unfortunately, the concept of significant risk dominated much of the argument and to some extent became a distraction. The plaintiff and defendants devoted a good deal of their submissions to an analysis of the expression, significant risk.
[13]Section 1013D(1)(c).
It was the plaintiff’s case after the February amendments, that the structural risk and each of the adverse matters constituted significant risks that Timbercorp Securities was legally obliged to disclose. The plaintiff submitted that a significant risk requiring disclosure was a risk to which a reasonable investor would be likely to attach significance. He argued that the relevant question should be framed as to whether an investor’s decision might reasonably be influenced by the information.
The difference between the parties on this issue did not so much concern the characterisation of what were significant risks, as a theoretical concept, but the practical application of the disclosure obligation in the present case. Other issues of statutory construction concerned the application of s 1013E; which the plaintiff submitted provided a separate obligation of disclosure; and the extent to which the financial product offered for sale in conjunction with each Product Disclosure Statement was an ED security.
When the plaintiff and Mr Van Hoff were offered the opportunity to invest in a Timbercorp managed investment scheme, Timbercorp Securities, as the issuer of the financial product, and any financial advisor (such as Mr Larkin in the case of the plaintiff, and Mr Weaver in the case of Mr Van Hoff) were required to give their potential customer or client, at or before making the offer, a Product Disclosure Statement.[14] A person could not be bound by a legal obligation to acquire a product before receiving a Product Disclosure Statement.[15]
[14]Section 1012C(3).
[15]Section 1012C(4).
A Product Disclosure Statement must contain up to date information at the time it is given.[16] In the present case, supplementary Statements were prepared in respect of a number of schemes, although not so as to make disclosure of the particular matters which the plaintiff alleged ought to have been disclosed.
[16]Section 1012J.
The plaintiff argued that the structural risk ought to have been included in each Product Disclosure Statement after April 2000. The plaintiff also argued that each of the adverse matters ought to have been disclosed as and when they occurred, although the form of disclosure was less clear. There was a point at which the plaintiff submitted that the disclosure ought to have been included in a Product Disclosure Statement, or a supplementary Statement. He did not, however, abandon the proposition that some other form of communication might have been required if, for example, the disclosure obligation arose under the continuing obligation in s 1017B of the Act.
Section 1013C prescribes the information and statements that must be included in a compliant Product Disclosure Statement. There are two important qualifications. Section 1013C(2) only requires information to be included to the extent to which it is actually known to the person who is required to prepare a Product Disclosure Statement (Timbercorp Securities) and the other persons described, including directors of a body corporate. Thus, the question of what was known to the directors of Timbercorp Securities from time to time was an important issue. Another qualification was that the information included in a Product Disclosure Statement must be worded and presented in a clear, concise and effective manner.[17] There were other qualifications.
[17]Section 1013C(3).
The main requirements of a Product Disclosure Statement are set out in s 1013D, in which the prefatory words import the actual knowledge qualification from s 1013C(2), and make reference to s 1013F, which is a general limitation on the extent to which information is required to be included. Section 1013D(1) provides:
(1)Subject to this section, subsection 1013C(2) and sections 1013F and 1013FA, 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:[18]
[18]Emphasis added.
The prefatory words bookend the requirements by the use of the words, 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, and by reference to the limiting provision in s 1013F, which excludes information 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.
Section 1013F(2) provides a list of matters to be taken into account in considering whether or not particular information should be included. The list is not exhaustive. The sub-section provides:
(2)In considering whether it would not be reasonable for a person considering, as a retail client, whether to acquire the product to expect to find particular information in the Statement, the matters that may be taken into account include, but are not limited to:
(a) the nature of the product (including its risk profile); and
(b)the extent to which the product is well understood by the kinds of person who commonly acquire products of that kind as retail clients; and
(c)the kinds of things such persons may reasonably be expected to know; and
(d)if the product is an ED security that is not a continuously quoted security—the effect of the following provisions:
(i) Chapter 2M as it applies to disclosing entities;
(ii) sections 674 and 675; and
(e)the way in which the product is promoted, sold or distributed; and
(f)any other matters specified in the regulations.
Of the main requirements for a Product Disclosure Statement, set out in s 1013D(1), particular attention was directed to the following:
(c)information about any significant risks associated with holding the product; and
(f)information about any other significant characteristics or features of the product or of the rights, terms, conditions and obligations attaching to the product; and
(j)if the product issuer (in the case of an issue Statement) or the seller (in the case of a sale Statement) makes other information relating to the product available to holders or prospective holders of the product, or to people more generally—a statement of how that information may be accessed; and
The Act does not contain a definition of significant risk. That is understandable because the identification and nature of risks as significant will vary from product to product. The plaintiff’s characterisation of significant risk was a risk to which a reasonable investor would be likely to attach significance. The plaintiff submitted that the question should be framed as to whether an investor’s decision might reasonably influenced by the information. He submitted that such an approach was consistent with Timbercorp’s own definition of materiality in its due diligence planning documents. As a generalisation, I am inclined to agree with the plaintiff’s formulation, so far as it goes, because of the relationship between what an investor would reasonably require, or not reasonably expect as the case may be, and the particular categories of information required to be included in the Product Disclosure Statements. The plaintiff’s definition was not, however, very helpful, when it came to identifying what particular information was required to be disclosed in a given case, and in relation to what risks. The legislative framework is a little more complex, requiring a multifaceted analysis.
Timbercorp Finance submitted that in order to define a risk, it was necessary to put an event in context in terms of its potential consequences associated with holding the product. If it be accepted that a risk, for the purpose of the disclosure obligation, was more than an event, and was necessarily focussed upon a potential consequence of the event, the evaluation of a risk was to be assessed by the probability of occurrence multiplied by the magnitude of consequence. Framed in this way, the analysis resembled the risk assessment process undertaken by Timbercorp’s management using the risk matrix.
Timbercorp Finance submitted that the term risk, as used in s 1013D(1)(c), necessarily implied something other than a theoretical or fanciful risk. It argued that the probability of occurrence and the magnitude of consequence must have a commercial reality. It also argued that merely to demonstrate the existence of a real risk was not enough. Section 1013D(1)(c) required a significant risk. In other words, what must be shown was that the risk had a sizeable probability of occurring and consequence. Timbercorp Finance argued that these elements took the risk out of the realm of the theoretical or fanciful, or normal or ordinary.
There is much to be said for the approaches adopted by the plaintiff and the defendants. Plainly, the risks required to be disclosed must be real in the sense that there is a probability of occurrence and a consequence that is measurably significant. On the other hand, the bookends to the disclosure obligation, found in the prefatory words of s 1013D(1), require a consideration of the decision-making process by a retail client to acquire the financial product. Thus, the degree of probability of occurrence and the level of possible consequence are to be adjusted by reference to what a person would reasonably require to make a decision, and what would not be reasonable for such a person to expect to find in the Product Disclosure Statement.
The plaintiff submitted that s 1013E imposed an additional obligation of disclosure. Section 1013E provides:
1013E General obligation to include other information that might influence a decision to acquire
Subject to subsection 1013C(2) and sections 1013F and 1013FA, 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.
The defendants submitted that s 1013E had no work to do in relation to the disclosure of risks. That was dealt with specifically under s 1013D(1).
The plaintiff also invoked the ongoing disclosure obligation in s 1017B. He alleged that the adverse matters involved a material change to a matter or a significant event that affected a matter which involved a changed significant risk. The pleading did not explain what a changed significant risk was in the circumstances, but, by reference to his particulars dated 8 April 2011, the plaintiff defined what he alleged was required to be disclosed.
The defendants submitted that s 1017B had no operation because, by the time of the investments by the plaintiff and Mr Van Hoff, each product was an ED security. The perceived utility of that submission to the defendants was their ability to rely upon the generally available information exception in s 675(2), to argue that even if Timbercorp Securities was aware of the information alleged by the plaintiff to require disclosure, it was generally available.
The plaintiff argued that the ED security provisions had no application to exclude the operation of s 1017B, because at the time the Product Disclosure Statements were prepared the product was not an ED security, even though it may have changed character once the required number of investors had joined in the scheme. While the concept of a change of character at some point after a product is first issued, may be arresting, s 111AFA(1) seems to contemplate that very circumstance. If the defendants are correct in their analysis, a transformation occurred when the hundredth investor acquired an interest. By way of contrast, s 111AF(1)(c) and (d) seem to contemplate an issue of securities resulting in 100 or more holders who have held the securities at all times since the issue of the securities. Thus, a single issue to 100 or more persons.
While the plaintiff’s case was primarily directed at establishing a failure to disclose information in Product Disclosure Statements, he did not confine himself to that form of disclosure. The ongoing disclosure obligation under s 1017B required notification as soon as practicable after the occurrence of an adverse event following his acquisition of an interest in one of the schemes. The obligation, according to the plaintiff, was to provide information when the event occurred.
Disclosure obligations - detailed analysis
I am satisfied, that, on any view of the disclosure obligation imposed upon Timbercorp Securities in its preparation of Product Disclosure Statements, it was required to disclose information about the institution risk or the performance risk. That is, the risk to the schemes occasioned by the possible failure of Timbercorp Securities to perform its contractual obligations. In my view information about the institution risk or performance risk was disclosed. A question arises, however, whether more information was required about that risk, and whether the events, described by the plaintiff as adverse matters were required to be disclosed in a Product Disclosure Statement or by some other means because of a continuing disclosure obligation. Helpfully, the plaintiff formulated what he said ought to have been disclosed. I am not persuaded that Timbercorp Securities was required to disclose that information in a Product Disclosure Statement, a supplementary Product Disclosure Statement or by any other means to potential or existing investors in the managed investment schemes it operated.
The plaintiff and the defendants devoted a good deal of attention to the statutory regime requiring disclosure, and in particular the requirement in s 1013D(1)(c) to include within a Product Disclosure Statement, information about any significant risks associated with the holding of the product. Ultimately, the differences between the parties as to the meaning of significant risk were immaterial to the outcome. Even accepting the meaning of those words advanced by the plaintiff, the requirement did not extend to providing the information which the plaintiff alleged should have been provided.
A Product Disclosure Statement is defective, pursuant to s 1022A(1), if it contains a misleading or deceptive statement or if it omits material required by s 1013C. In his pleaded case, the plaintiff alleged a breach by Timbercorp Securities of its obligation to give priority to member’s interests as required by s 601FC(1)(c), and a breach by the directors of an alleged duty under s 601FD to inform members of matters known to them that would reasonably be expected to materially affect the Group. These matters included Timbercorp’s cash flow revenue and profits, the solvency of the Group, its capacity to operate the schemes and its ability to continue to do so to completion. These are, of course, matters that might have a bearing upon the realisation of the performance risk, if left unmanaged. The plaintiff also alleged a breach by the directors of a duty to avoid a conflict of interest of the kind alleged against Timbercorp Securities.
The obligations that the plaintiff sought to impose upon Timbercorp Securities and the directors by reference to ss 601FC and 601FD are to be construed in a context where the Responsible Entity is required to be a public company with an AFSL, and is also to act as scheme manager. That regime, for better or worse, creates the institution risk or the performance risk, and inherent conflicts, which the regulatory regime then sets about to manage.
One important element of the regulatory regime is a detailed scheme requiring disclosure of prescribed information to be included within a Product Disclosure Statement and on a continuing basis. There are exclusions and exemptions from disclosure. In my opinion it would be wholly inappropriate to graft onto the obligation to give priority to the interests of members or the duties of officers of the Responsible Entity, obligations of disclosure not required by the specific provisions of the Act. Dealing with that topic. In any event, the plaintiff did not seem to rely upon those causes of action in his final submissions.
Section 1013C(1)(a) provides that a Product Disclosure Statement must include the statements and information required by s 1013D and the information required by s 1013E, as well as other information required by the other provisions of the Subdivision. A Product Disclosure Statement may also include other information or refer to other information set out in another document.
Section 1013D provides that, subject to ss 1013D, 1013C(2), 1013F and 1013FA, a Product Disclosure Statement must include such of the specified categories of information as a person would reasonably require for the purpose of making a decision, as a retail client, whether to acquire the financial product. Specific categories of information are listed in paragraphs (a) to (l). The important categories are those mentioned above – s 1013D(1)(c), (f) and (j)
Section 1013E provides that, subject to ss 1013C(2), 1013F and 1013FA, 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 retail client whether to acquire the product.
The plaintiff submitted that s 1013E created an alternative obligation under which Timbercorp Securities was obliged to disclose the risks identified by him. The defendants submitted that s 1013D(1)(b) and (c) complement each other, making reference to the benefits and risks of holding the product, and that s 1013E was a general obligation to include any other information that might influence a decision to acquire the product. They submitted that the spheres of operation of each of s 1013D(1)(c) and s 1013E were mutually exclusive, because s 1013E provides that a Product Disclosure Statement must also contain any other information. The defendants argued that the structure of Div 2 of Part 7.9 was such that risk disclosure was the exclusive territory of s 1013D which, in that sense, covered the field.
The defendants submitted that s 1013E must, as a matter of interpretation, be concerned with the types of information other than those the subject of directed disclosure under s 1013D and not specifically required by s 1013D. Alternatively, they argued that, if the sections were not mutually exclusive, the focus must be on whether a risk was a material risk, which in context was not likely to make a meaningful difference to the analysis. Thus, both s 1013D(1)(c) and s 1013E provide for a standard that is objective and based upon what a reasonable retail client would require for the purpose of making a decision to acquire the product.
[84]Ibid, [258].
His Honour rejected[85] the argument that the applicant had relied on any representations as to the use of the investors’ funds in relation to the source of payment for the term bonds, and held that any loss which the applicant claimed to have suffered was not caused by or did not flow from the conduct of any of the respondents. While each case will necessarily turn on its own facts, the present case gives off a familiar echo. I do not accept the plaintiff’s evidence of reliance.
[85]Ibid, [265].
There was a striking internal inconsistency in the plaintiff’s evidence. While asserting that he believed each scheme was a stand-alone scheme, he claimed that the financial strength and support of the Group to the schemes was an influential matter in his mind. If the schemes were stand alone, why was the strength of the Group a matter of any consequence?
As to his belief that the schemes were stand alone, the following revealing exchange occurred:
You also knew even in relation to operating expenditures the group was funding those, did you not, from the mere fact that some of these schemes had deferred management fee structures? --- The assumption that I drew from that, this was a very good company with sufficient cash flow and income of other sources to run their business. I didn't get into their model of what dollar was going where and how. I simply looked at is it reasonable, $500 for a 2500 square metre lot with 250 trees, is that reasonable? That's the only information I was given that I could draw anything off.
You are a sophisticated businessman and by the sound of it you would appreciate that all of deferred management fees would indicate the group was funding operating expenses until such time as there was harvesting and proceeds and those deferred management fees could be paid out of harvest proceeds? --- It obviously suited their model to do that.
But you knew that that was part of the actuality of their model? --- There was an indication they were funding a portion of the process.
For the Timberlot single payment scheme where you only ever paid an amount up front the group was funding any operating expenses right through until the, say, the 12 year mark before there would be the first harvest from the Timberlot, you knew that? --- I knew that, yes.
This exchange would seem to indicate that the plaintiff understood that the Group was financially responsible for the continued maintenance of the schemes although he was relatively indifferent to the financial strength and structure of the Group.
In respect of the tax announcement the plaintiff accepted that after he had invested in the 2007 Almond project, he had read an Adviser Edge report in respect of the project, given to him by Mr Larkin. The report referred to the announcement and said that any resulting material change may affect profit growth, ‘although strong annuity style income would mitigate this over the short term.’ He said that disclosure of that material was ‘not particularly troubling’ because he did not see that as something affecting his investment. Thus, he flip-flopped between reliance on the corporate strength when it suited and reliance on an assumption that his investment was ring fenced or quarantined when it suited.
It is clear enough from his dealings in the financial markets that the plaintiff was aware of the Global Financial Crisis. To the extent that he was actually interested in the financial circumstances of the Group, the plaintiff was well equipped to obtain relevant information from publicly available sources, and did so on numerous occasions.
The plaintiff said that he became aware of the bank covenant issue in December 2008, but nothing changed in his conduct as a result. His witness statement revealed that he knew of the potential for breach just before Christmas 2008, when he downloaded a report from the Timbercorp website which referred to this issue.
The plaintiff raised, as a course open to him had he been fully informed as he said he should have been, that he would have stopped making payments to Group companies. It is not clear how this was open to him, in the face of his otherwise valid contractual obligations. Putting that problem to one side, it cannot be concluded that he would have stopped making payments. On the one hand, he asserted that had he known that the company was on the brink of collapse in late 2008, he would have stopped making payments. But in his witness statement he said that he knew of the possible breach of bank covenants in December 2008, and yet he continued to make payments.
He said that when he became aware of a breach of loan covenants, his first impression was to stop making further payments to Timbercorp. The plaintiff said that the only reason he did not stop making payments was that Mr Larkin told him that everything was fine and he was not aware of any other options.
In his witness statement, the plaintiff did not identify any particular statement or representation made by any of the defendants, apart from his assumption or understanding of the financial strength of the Group; concluding that had he known the Group was inherently risky and that the funds he had invested were not necessarily being used for his specific projects, he would never have invested in the first place. In relation to the adverse matters, his evidence turned for the most part on his awareness of the related event. For example, in relation to the tax announcement, he said that had he been told that the announcement had impacted Timbercorp financially he would not have gone ahead with any of his investments. He was, however, aware of the tax announcement by the time of his 2008 investment. He was also aware of the possible impact on the profitability of the Group from the Advisor Edge report.
In relation to the substantial deterioration in credit and financial markets, said to have commenced in late 2007, the plaintiff said that Timbercorp never told him about the effect of the Global Financial Crisis on the Group. He said that if he had known about the effect of the Global Financial Crisis on Timbercorp he would not have made any new investments after that point, and would have stopped making any further payments to Timbercorp. As with much of his evidence on reliance, it was formulaic and without substance. It did not even descend to the degree of particularity, found in his particulars, when formulating the risks associated with the adverse matters. During his evidence in chief he disavowed one thread of his reliance evidence, in which he had proposed to assert that, had he been informed of his rights and been made aware of the impact of the Global Financial Crisis on Timbercorp, he would have taken steps to wind up the project.
In relation to the near insolvency adverse matter, he said that he was never made aware that Timbercorp was near insolvency (whatever that meant), but had he been so informed he would not have invested in the 2008 projects and would have stopped making payments in relation to existing projects.
The plaintiff’s evidence in relation to the so-called financial representations was equally formulaic. He concluded his brief evidence with the assertion that, had he known that the Timbercorp Group was not sufficiently strong that investors could reasonably expect that Timbercorp could continue to manage each of the recent schemes throughout its term or that the principal risks associated with each of the recent projects were not fully disclosed in the relevant Product Disclosure Statement, he would not have invested in any of the projects in which he had invested in the first place. Quite frankly, this formulaic evidence does not make sense.
The plaintiff’s evidence in relation to the scheme contribution representations, the financial reports representations and the representations by silence was similarly formulaic and perfunctory. There was no attempt to place the alleged failure to provide a particular piece of information, that might possibly resonate in relation to his particular position, into a context where he could credibly contend that he would have acted in a causally relevant way had he been so informed. The generality of his approach to this part of his evidence undermined his credibility as a whole.
In his oral evidence, the plaintiff said that he would not and could not have done anything by way of an attempt to wind up his schemes. His answers were generally to the effect that the reality of it was once I had given my money in, there was nothing I could do or any of the other investors could do, that was it and that if he had known that as at 1 December 2008, the Group was in financial difficulty and at a real risk of being placed into liquidation or administration, there was nothing I could have done.
He explained how his statement came to be amended as follows:
with hindsight there was nothing I could have done, there was nothing any of the investors could have done and that was why I had asked Macpherson & Kelley, I really need to change that because there was nothing I could have done. I couldn't have taken steps, I couldn't have got enough growers together. When growers were got together they didn't want to wind it up because of all the uncertainties around the project. There was nothing I as an individual could have done.
The plaintiff voted against the winding up of the 2007 Almond project at the grower meeting held on 31 July 2009, through a proxy given to Chris Garnaut, a financial services advisor.
Mr Van Hoff
The witness statement of Mr Van Hoff, in relation to reliance and causation issues, suffered from many of the same defects as the witness statement of the plaintiff. Having adopted his witness statement as his evidence in chief, it was soon left behind under cross-examination, save for his attempt to diminish the significance of tax deductions as a factor actuating his investments. When it came to his evidence of reliance, it too was repetitive of the formulations found in the statement of claim, and unhelpful.
Mr Van Hoff specifically addressed the financial structure allegations and the adverse matters. Of course the components of the structural risk had changed during the course of the trial. This meant that his evidence no longer aligned with the plaintiff’s new case. In relation to the financial structure of the Timbercorp Group, Mr Van Hoff said:
I was not aware of the financial structure of Timbercorp or the way it was run. If I was aware of these matters, I would not have invested in the first place.
The generality of that proposition is breathtaking. What aspect of the financial structure concerned him? Had he not read the Product Disclosure Statements? If it was some particular risk to his investment that concerned him, he did not say so.
He continued:
If there was the slightest inclination of danger, I would not have invested in Timbercorp. If I had become aware of the way that Timbercorp was structured and the risks associated with such a structure after I had invested, I would have sought advice from Marguglio, my financial planner and legal advisers, as to an exit strategy so that I could cut my losses and exit the Projects. Any chance that I had to get out, I would have taken advice from Marguglio on the most feasible way of doing so and would have cut losses and exited. If I knew there were risks at the outset to my Timbercorp investments because of the financial structure of Timbercorp, I wouldn’t want to have any money in Timbercorp at all. This would have meant that I would never have invested in any new Projects and sought advice as to how to cut my losses at that point and get out of the Projects in which I had already invested.
In relation to the tax announcement Mr Van Hoff said that he was aware of the change that occurred, and contacted Mr Marguglio who told him not to worry because it won’t affect your projects. He went on:
If I had been told by anyone at Timbercorp as to how this had impacted on the Timbercorp Group as a whole, I would not have put anymore money into Timbercorp at all. It is as simple as that. I would never have invested in any of the projects that I invested in after 2007 …
Again, the generality of the assertion makes the evidence of little value. He did not address any particular aspect of the impact of the tax announcement on Timbercorp.
In relation to the second adverse matter, the deterioration in credit and financial markets in late 2007, Mr Van Hoff said that he was generally aware of the financial crisis that hit markets worldwide, although he could not recall any discussions with any Timbercorp representatives about the issue and was certainly never told by anyone at Timbercorp as to how this had specifically impacted them. He went on:
If I had been told about the impact the global financial crisis had had on Timbercorp, I would have spoken to Marguglio and my legal advisors and made a judgment to exit the projects.
In relation to the alleged near insolvency in early 2008, the alleged breach of loan covenants in September 2008 and the going concern issue arising under the 2008 Annual Report, Mr Van Hoff said that he was never told or notified of any of these matters by Timbercorp. He went on:
In fact, Timbercorp had happily taken my fees and payments towards the Projects after this time to pay for supposed plantings and administrative costs without saying anything about their financial difficulties.
If I had known about any of these matters, again I would never have invested in any new matters and for those projects that I already held, I would have sought advice from Marguglio and my legal advisors with a view to ceasing payments and trying to terminate and/or wind up each Project …
As a general proposition, if I was aware of any of the matters above, I would never have invested in Timbercorp. As far as I am concerned, if the company is already lost, why would I put money into it? It makes no sense to do so … Even a rumbling or a sniff of any problem would have meant that I looked elsewhere for investment opportunities.
In short, any negative rumblings about Timbercorp would have caused me not to invest in Timbercorp in the first place. If I had found out about each adverse matter after I had already invested, I would have sought professional advice and taken whatever steps I could to get out of the Projects…
In relation to the alleged financial representations, Mr Van Hoff said that when he read each Product Disclosure Statement, he gained the impression that Timbercorp was a strong and viable company and would be able to see the projects through to completion. He said he believed that all significant risks in relation to each Recent Project had been identified and disclosed in the Product Disclosure Statement. He continued:
Had I known that,
(a)the financial circumstances of the Timbercorp Group were not sufficiently strong that investors could reasonably expect that Timbercorp would continue to manage each of the Recent Projects throughout its term; and
(b)The principal risks associated with each of the Recent Projects were not fully disclosed in the relevant PDS,
I would not have invested in the Recent Projects.
This evidence in relation to the financial representations, like the evidence of the plaintiff, carried little weight. It was so infected by the plaintiff’s case thesis that it fell victim to a repetition of the pleading, as if evidence of his personal position. His evidence in relation to the scheme contribution representations, the statements made in the scheme financial reports in March and September 2008 and the representations by silence fall into the same category, and suffer from the same defects. The evidence was generalised, formulaic and unhelpful.
The defendants submitted the following in relation to the evidence of Mr Van Hoff:
(a)he did not read the entirety of the project PDSs prior to signing his application to invest and the loan application for the loans and, at most, looked at a small part of them - they were irrelevant to his decision to invest, in that:
(i)he was content to be, and in fact was, provided with the PDSs for the first time immediately before signing his applications to invest and take out loans;
(ii)his primary interest was in the tax deductions he wanted to achieve from the investment, as he had a large amount of other income-producing investments; and
(iii)he simply went along with what his accountant and financial adviser recommended without any meaningful independent thought;
(b)he had a similar attitude to other documents he received about his Timbercorp investments, in that:
(i)he simply sent them off to his accountant and otherwise paid them little or no attention;
(ii)he did not appear to have read or understood matters dealt with in the PDSs concerning the absence of financial projections and the ability to call meetings to wind up the schemes and the acknowledgments and disclaimers in the loan applications;
(c)any erroneous understanding he obtained about the structure of the projects could not be traced back to any of the material generated by the Timbercorp entities identified in any pleaded claim prior to or subsequent to each of his investments;
(d)in fact, each PDS contained relevant warnings and he had access to other information which would have disclosed to him in substance what he complains was not disclosed to him, in that each PDS contained warnings concerning the possible effect of grower defaults and identification of the risk that anything that affects TSL’s ability to meet its obligations under the scheme documents, and the ability of the land-owning Group entity to meet its obligations under the relevant sub-lease, could also constitute a risk to Growers ;
(e)he would not have been deterred had the PDSs included the types of warnings it is alleged should have been included in the PDSs, in that:
(i)his evidence showed he simply did not read the documents he received;
(ii)he was generally content to invest in whatever was recommended to him by his accountant and financial adviser.
Mr Van Hoff admitted that he did not read each Product Disclosure Statement carefully and completely. When asked about an interview he gave to the Australian Financial Review prior to 17 November 2009, the following exchange took place:
Did you tell [the reporter] that you had scrutinised carefully each one of the product disclosure statements for your investments in Timbercorp? --- When you say scrutinised carefully, I've read through a little bit of it with the help of my financial planner, as well as the guy from Timbercorp.
Let's be clear about this. Is it the case that each time you received a product disclosure statement for each of your investments in Timbercorp, you had a look at a little bit of it, is that right? --- I sat with the guy from Timbercorp, there was a business development manager who came in from Timbercorp, him, the guy from Garrisons was Scott Weaver and Marguglio and they were sitting there and they will explain to me the product disclosure statement before we sign it.
I'm asking you about your actual reading of each of the product disclosure statements? --- I didn't read the whole product disclosure statement it's about 40 pages or 50 pages so I don't go through every single bit of it.
How long would you have spent just on average reading any particular one of these product disclosure statements, you personally sitting down and reading it? --- I would sit at the management meeting with those three, go through the product disclosure statement and I will sign it and give it over to them.
Is it the situation that you didn't read it all for yourself, the product disclosure statement? --- I read part of it, sir, but I've not read the whole 40-50 pages of it because, look, who reads a product disclosure statement fully like that?[86]
This evidence is to be contrasted with his witness statement, in which he stated, ‘I read each of the PDS’s that I received.’
[86]Emphasis added.
The cross-examination of Mr Van Hoff continued:
Which parts did you concentrate on then when you did your own reading? --- Okay, I just asked them what the financial position of the company and how strong the company is and the main thing is, is how safe is my investment.
Anything else that you would focus on in terms of your reading of the PDS? --- I would ask for advice from the three of them.
I'm not asking you for what advise you were seeking from them, I'm just asking you what parts of the product disclosure statements you actually focussed on in terms of your reading? --- Like I said to you, the financial part of it, if they can meet their bills, if they can make their payments, if they are viable, if it's a viable company and is our investment safe with this company and that's all I asked them, you know.
So apart from that part of the product disclosure statement you didn't read any part of the other parts of the product disclosure statements? --- I can't remember going through any specific part of it but I read a little bit of it and I signed the product disclosure statement.
Just to be clear then, is it the position that you were given a product disclosure statement at the time that you had a meeting with Weaver and Marguglio, you talked about it and then signed the application form at the same meeting for that particular investment? --- Yes, that's correct.
In relation to the 2005 Timber project Product Disclosure Statement, it would seem that he gave attention to only that part dealing with the financial position of the Group, and the application sections which he says had been filled in for him:
Apart from that section I'm just showing you, the application section and apart from the earlier section I was showing you about the financial position of the Timbercorp Group, was there any other section that you glanced at before signing your application? --- Well, not really.
Mr Van Hoff explained his general practice when making investments in new projects from 2005 until 2008. He said that he would meet with his accountant, Sam Marguglio, Scott Weaver and Daniel Iurada, a Timbercorp business investment manager, and discuss a proposed investments and go through the paperwork. It seemed that Mr Iurada brought the application forms already filled out.
The Australian Financial Review article recounts that Mr Van Hoff had said he had taken ‘independent financial advice’. Initially, Mr Van Hoff agreed that he had said that to the reporter. When pressed on the issue, he sought to draw Mr Iurada into the frame as having provided him with advice, along with Messrs Marguglio and Weaver. When pressed further about the issue and whether he had told the reporter that he had received independent financial advice, Mr Van Hoff replied that he could not remember whether he had said that to her. The defendants submitted that Van Hoff’s attempt to implicate Mr Iurada (a Timbercorp employee) as having provided advice to him should be rejected. In my view Mr Van Hoff’s evidence to that effect was unsatisfactory, and insofar as it is relevant, I am not persuaded that he was given any particular advice by Mr Iurada.
Mr Van Hoff gave the following further explanation of his practice when making investments:
And you would put an application in for an investment at the same time as the meeting where you are first shown a PDS? --- Well, see, the thing is, we discussed it, what we are going to invest in. Then they will see what we require and they would fill in that PDS, it had all the application at the back of it, so Daniel or Scott Weaver will fill it in and he will bring it to the meeting and he will go through it and then I will sign the PDS at the back of it.
But when you see the PDS for the first time, that is at the meeting where a PDS is presented with all the application material filled in for you? --- Yes.
Is it the case that sometimes you wouldn't meet with Weaver at all about filling in the application form for a PDS, you would just meet with Marguglio and just deal with him, just one-on-one with him? --- For Timbercorp?
Yes? --- No.
If you would just go to paragraph 10 and this may be an imperfection in your statement, you will see there you refer to, ‘I received some documents from Marguglio’, whereas paragraph 8 says that Weaver provides them to you; is that an error in paragraph 10 or is that something that would happen from time to time, that sometimes Weaver would provide you with the PDS or sometimes Marguglio would provide you with the PDS? --- No, it should have been Marguglio and Weaver, I suppose. Yes, that could be a mistake or, you know, but - - -
Or is it the position that when you first invested in Timbercorp you had Mr Weaver present with Mr Marguglio but after you had done your first investment in Timbercorp - - -? --- Yes.
You didn't need to meet with Weaver any more, it was something that you and Sam Marguglio could do around a table? --- Weaver used to handle all the Timbercorp stuff so I didn't - sometimes I will meet with Weaver by himself.
Mr Van Hoff said that Mr Marguglio looked after his financial affairs on an ongoing basis, all year round, and that he had been in a professional relationship with him for close to 20 years. Mr Marguglio provided tax advice for personal and business purposes. Mr Van Hoff was unclear as to the precise status of Mr Weaver. Although he had Mr Weaver’s card recording a different business name, Mr Van Hoff thought that Mr Weaver was part of Mr Marguglio’s firm or a representative of Timbercorp. It seems that Mr Marguglio referred Mr Van Hoff to Mr Weaver when the issue of tax effective investments arose.
Mr Van Hoff said of Mr Weaver that ‘he will pick the best one for me’, referring to schemes. Mr Van Hoff was asked bout his relationship with Mr Weaver:
He explained to you he was referring you to Scott Weaver as a person who could identify for you tax effective investments to deal with your 30 June tax problem? --- Not necessarily. It was not the tax problem that we were talking about, we were talking about doing this for an investment so that we could - what I wanted to do was to, in our retirement, to get some sort of an income stream so it was for that reason, that is what he said, that's how Timbercorp came up in the first place.
Timbercorp came up in your conversations with Sam Marguglio because they were offering tax effective investments? --- That's one of the reasons it was attractive to us but that was not the reason why we took it, sir.
The explanation given by Mr Van Hoff in his witness statement, of his three reasons for investing in Timbercorp schemes, and their order of significance, was identical to that given by the plaintiff. Seeking tax deductions was ranked third, behind ‘the long-term returns being forecasted by Timbercorp’ which ‘guaranteed that [he] would have an income in the future’ and the fact that Timbercorp seemed to him to be a ‘very strong and viable company’. Mr Van Hoff accepted that immediately prior to his first investment in a Timbercorp scheme in 2005, he held a fairly extensive portfolio of international and local equities. However, he denied that he was motivated to invest in Timbercorp schemes predominantly for a tax purpose. He asserted that the main reason was to receive an income stream as a grower in 15 or 20 years time. At the time of his investment in June 2005, Mr Van Hoff already held an investment a Great Southern scheme. He said he ‘left Great Southern and came to Timbercorp’ because Mr Weaver said it was a better product with a better return.
Mr Van Hoff said that he was told to ‘diversify into something different to have an income stream at a later stage when I decide to retire.’ As with the plaintiff, Mr Van Hoff appeared to have been actuated by what was advised by his accountant and the financial advisors.
Mr Van Hoff conceded that he had signed a declaration contained in the 2007 Almond project application, to the effect that he had read the whole of the Product Disclosure Statement, whereas in fact he had not done so:
You see there clause 1: ‘How to apply. Before completing and signing this application form you should read the whole of this PDS’? --- Yes.
So you ignored that direction? --- Yes. How many people read a full PDS, sir, even an insurance PDS?
If you go a few pages on, under the heading, ‘Declarations’ this is page 4489, you see the heading, ‘Declarations’? --- Yes.
‘By signing the application form you make the following declarations: that you have read the PDS’? --- Yes.
You agree you signed the application form? --- Yes.
And you made that declaration, that you had read the PDS? --- Well, not entirely.
And that declaration turned out to be false, didn't it? --- Well, if you say so because I didn't read the entire PDS.
Mr Van Hoff gave similar evidence about his reading of the loan applications. He admitted that he should have read the loan acknowledgments before signing them, but did not do so. He then became quite adamant about what he would have done had he looked at those parts prior to signing:
The next dot point: ‘Timbercorp Finance expressly disclaims any responsibility for the PDS’, you appreciated that at the time, didn't you? --- The first time I saw that was when I was with my lawyers, with the lawyers before we came here.
Okay? --- And I've never seen that one before because if I saw that paragraph, I probably would never have taken this.
So you are saying at the time you entered into the loan for this 2005 project you didn't appreciate that you were making any of the acknowledgements set out in this clause? --- Absolutely, especially that clause there. It just says it didn't - makes no representations regarding the truth and accuracy of the contents of either of them. So what's that saying, nothing in this is true?
The middle column just to pick up an example, the last dot point? --- I wouldn't have read any of these, I can tell you.
If you had read it you would have taken some advice on it from Mr Marguglio, would you? --- Well, from one of them.
Just going to the next page 0020, so you signed this application form with Scott Weaver present, did you? --- Yes. That's what it says.
So you had the opportunity to review this application form if you had wanted to? --- Well, we - - -
Before signing it? --- Of course. No-one forced me to sign it.
And if you were unsure about its contents, you could have asked either Mr Weaver or Mr Marguglio about it? --- Absolutely.
I am not satisfied that Mr Van Hoff read any of the Product 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 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.
What asked about reports he received from Timbercorp, he said:
Well, all I can say is that I've seen is the ones we get - whatever we get in the mail and whatever I had in the file. If I get a report, I just - I send it to Marguglio and ask them if they require the report or I put it back in the file.
When he received grower reports and newsletters, Mr Van Hoff sent them to his accountant. He relied on the advice of his accountant.
HIS HONOUR: Do you remember being informed of or receiving information to that effect from Timbercorp? --- Your Honour, when I used to receive these documents, I used to send it to BMK Partners and I would put something and I will ask them, ‘Is there anything I need to do about this, is there any specific information in this that affects us?’
Are you saying you didn't read any of this material? --- Some of these documents come in - I didn't read the entire - if I get an annual report or a grower report, I don't read the whole thing, Your Honour.
Winding up
One question to be decided in this stage of the trial is to identify the schemes that conferred a right on members to convene a meeting for the purpose of passing a special resolution to terminate the scheme. Section 601NB of Act provides:
Winding up at direction of members
If members of a registered scheme want the scheme to be wound up, they may take action under Division 1 of Part 2G.4 for the calling of a members' meeting to consider and vote on an extraordinary resolution directing the responsible entity to wind up the scheme.
For a meeting to be convened, more than one grower’s support was needed. A responsible entity is only obliged to call such a meeting if requested by members with at least 5% of votes that may be cast on the resolution, or by at least 100 members entitled to vote on the resolution. It is theoretically possible for a single grower to apply to the court to convene a meeting. A meeting once called would require a resolution by 75% of voters approval. The evidence does not support a finding that such a resolution would probably have been sought, let alone passed prior to the appointment of the administrators.
In May 2009, the Timbercorp Growers Group was formed, immediately after the second meetings of creditors. Prior to 1 June 2009, the Timbercorp Growers Group sought funds from financial advisers to defend any application to wind up the almond schemes. When the liquidators brought their proceeding to wind up of the almond and olive schemes, it met with resistance from the Timbercorp Growers Group. The proceeding was adjourned to enable grower meetings to take place. Growers in the almond and olive schemes voted on whether their schemes should be wound up at meetings convened by order of Robson J.
The Almond meeting on 31 July 2009 involved seven almond projects. Resolution 1 put to members in each almond project was a resolution that the Scheme continue and not be wound up. The Timbercorp Growers Group explanatory statement advocated a vote in favour of the resolution. The Liquidators had posted legal advice of a Queen’s Counsel, casting doubt on the legal efficacy of the resolutions. The Growers Group responded by posting a notice on its website that growers should ignore the advice. The meeting voted overwhelmingly in favour of the schemes continuing and not being wound up.
In BOSI Security Services Ltd v Australia and New Zealand Banking Group Ltd,[87] Davies J described the course of events as follows:
The liquidators decided that the only option available to them was to wind up the Almond Projects formally and in mid July 2009 the Court heard the winding up applications. A growers’ group, the Timbercorp Growers Group (‘TGG’), opposed the applications and sought the appointment of a temporary RE for the Almond Projects. TGG’s opposition was partly based on the concern that the winding up may immediately extinguish growers’ rights, which the growers wanted to avoid. The Court adjourned the winding up applications by consent to enable meetings of the growers in each Almond Project to consider various resolutions directed at enabling the Almond Projects to continue in a restructured form. These meetings were held on 31 July 2009, but no specific recapitalisation proposal was able to be put before the meetings, and the meetings were adjourned to a date to be fixed. No further occasion arose for the meetings to resume because no restructure proposal could be formulated before the Almond Assets were sold and the growers’ rights extinguished.
[87][2011] VSC 255, [16].
The Olive meeting, held on 17 August 2009, involved seven Olive projects. The notice of meeting had put forward resolutions which were effectively identical to those at the Almond meeting. Macpherson & Kelley, in their circular to growers dated 13 August 2009, advocated a vote for the continuation of the schemes. The meeting voted overwhelmingly in favour of the schemes continuing and not being wound up, except for one scheme in which there had not been a quorum.
In relation to the Forestry schemes, including the 2005 and 2007/2008 Timberlot projects, there was no evidence that any grower ever formally raised winding up as an option. An asset sale process ultimately received a favourable vote at a grower meeting on 7 August 2009.
In relation to the 2006 Avocado project, a scheme in which Mr Van Hoff had an interest, the grower meeting was held on 12 October 2009. There was a resolution to replace the Responsible Entity. Winding up did not seem to have been contemplated.
The proposition that ASIC may have taken some action was not pressed at trial. No evidence was advanced to support that contention.
OTHER MATTERS
Any question concerning relief from liability under s 1318 of the Act seems hypothetical. No relevant contravention as pleaded has been established. It might be argued that there would be some utility in such a finding at this stage of the proceeding, if only to answer a common question in the group proceeding. I very much doubt that there would be any such utility. In any event, a proper assessment of the factors to be taken into account could not properly be made in the absence of a finding of contravention and the consequences.
While the parties have largely reached agreement on the form of the common questions, they seem overly complex. Some are not necessary to answer. I propose to give further consideration to the common questions that arise in the proceeding and will answer those questions in light of the foregoing findings and reasons. The parties will have a further opportunity to consider and make submissions on that matter.
I do not propose to make any finding on proportionate liability, in the absence of a finding of liability. To do so would be entirely unnecessary. The same may be said for a finding at this time as to whether Timbercorp Finance might be liable for any conduct or breach of duty by Timbercorp Securities. Those are complex legal issues which depend upon clear and precise findings about the nature of the conduct and breach.
I will hear the parties on the question of costs and final orders at a convenient time.
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CERTIFICATE
I certify that this and the 244 preceding pages are a true copy of the reasons for Judgment of Judd J of the Supreme Court of Victoria delivered on 1 September 2011.
DATED this first day of September 2011.
Associate to Justice Judd
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