The aftermath of Timbercorp
Article by Cam Truong
Woodcroft-Brown v Timbercorp Securities Limited (in liq) & Ors (first instance, on appeal and special leave application)  VSC 427;  VSCA 284;  HCA Trans 85
A short excursion into the aftermath of the Timbercorp Group collapse that included an unsuccessful grower class action and appeal, and currently hundreds of proceedings being pursued against and resisted by, individual growers. Looming test cases.
- The Timbercorp Group (the Group) was one of many forestry and horticultural managed investment scheme operators which collapsed in 2009, following the global financial crisis. The Group, through Timbercorp Finance Pty Ltd (TFL), also entered into loan arrangements with investors to pay for grower investments and ongoing costs.
- At the time the Group collapsed in April 2009, the TFL loan book totalled $477.8 million covering over 14,500 investors.
- Shortly after the Group collapsed, TFL issued a number of individual proceedings against investors alleging breach of loan agreements. These were stayed pending the outcome of a class action issued by investors against the Group.
- The Plaintiff and other investors alleged that Timbercorp Securities Limited (TSL) failed to disclose certain risks and adverse events in each relevant product disclosure statement (PDS) prior to their investment which had the consequence that PDSs were defective and TSL engaged in misleading or deceptive conduct. Although it was not necessary determine at the initial stage, it was also alleged that because of this conduct, any loans entered into with TFL should also be set aside.
- This is the first known Australian case to analyse sections 1013C, 1013D and 1013E of the Corporations Act 2001 concerning disclosure of risks and material influences in a product disclosure statement.
ISSUES IN THE CLASS ACTION
- The primary issue was whether each relevant PDS issued by TSL was defective in failing to disclose, inter alia that:
- investors were exposed to the risks (associated with the Timbercorp Group failing to maintain sufficient cash flows to meet the costs and expenses of all the plantation schemes;
- a negative impact on Timbercorp’s cash flows from a Commonwealth government tax announcement removing deductibility for horticultural schemes, which could affect the Group’s cash flows; and
- deterioration in credit and financial markets worldwide materially affected the Group’s ability to source capital and credit and sell assets, which affect the Group’s ability to manage schemes through to completion.
DECISION AT FIRST INSTANCE
- Judd J undertook a careful analysis of the relevant statutory provisions, noting that both sections 1013D and 1013E had scope to operate. His Honour emphasises, in relation s.1013D, that “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 … 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”.
- Judd J ultimately found that TSL was not required to provide information concerning these matters, for a number of overlapping reasons.
- First, the risk that the Group might not be able to perform its contractual obligations which his Honour described as “the performance risk” or “the institution risk” was required to be and was in fact, disclosed to growers.
- Second, the second and third pleaded matters were not risks but were in truth events which, if left unchecked or unmanaged, might crystallise the institution risk;
- Third, each pleaded matter was not information that a retail client would reasonably require about for the purpose of making a decision to acquire the product and that information was generally available.
- Fourth, the Group had strong cash flows and was not at risk of collapse so long as its bankers continued to support its operations, which they did until early 2009.
- Fifth, the Group was successfully managing the cash flow risks.
- Sixth, there was no knowledge within the Group that their bankers might withdraw support before late 2008 when the Lehman Brothers collapsed.
- In any event, Judd J dismissed the individual relance and causation claims of Woodcroft-Brown and another investor, Mr Van Hoff.
UNSUCCESSFUL APPEAL TO THE COURT OF APPEAL AND SPECIAL LEAVE APPLICATION
- On, appeal, the Court of Appeal found no error in Judd J’s construction of, or application of sections 1013D or 1013E and related provisions, and dismissed the appeal.
- The Court of Appeal also made observations concerning the construction of sections 1013D noting that the expression “significant risk” involves both probability and consequence which includes an inability to manage a risk. According to the Court of Appeal, it was open to the trial judge to find that the failure to have cash to operate the schemes or even the institutional risk of failure was significant to prospective investors in terms of a combination of probability and consequence.
- The Court of Appeal concluded that the appellant was not able to overcome the factual finding about the lack of directors’ actual knowledge of risk.
- Special leave to appeal to the High Court was refused, principally because the construction adopted by the Court of Appeal was not attended with sufficient doubt.
SIGNIFICANCE OF THE DECISION AND APPEAL
- The Woodcroft-Brown decisions provide the only judicial guidance so far on the meaning and construction of sections 1013C, 1013D and 1013E of the Corporations Act and what is required to be disclosed in a PDS to retail investors.
ONGOING TIMBERCORP LITIGATION AND RECOVERY OF THE LOAN BOOK
- Rather than resolve all or most disputes concerning the Timbercorp Group, the conclusion of the class action in 2014 has resulted in a flurry of further litigation.
- Since late 2014, partly because of concerns about time limits, the liquidator of TFL has taken steps to recover the outstanding loan book by issuing hundreds of individual proceedings against growers for alleged breaches of loan agreements.
- Growers are either settling their claims with the liquidator or defending the claims.
- Of the defended claims, there are a number of current law firms defending growers with a myriad of legal positions and arguments involved.
- All the individual proceedings are still being case managed by Judd J who is attempting to efficiently progress the proceeding – through issuing default scheme directions covering proceedings not otherwise subject to consent orders.
- Test cases and legal argument has also been foreshadowed on issues such as:
- whether defendants are precluded from raising any, and if so, what defences pleaded by them by reason of their participation in the class action;
- whether TFL in fact loaned or advanced money to growers;
- whether there certain implied terms and obligations by TFL requiring funds to be directed to specific schemes.
A number of other issues have also been pleaded, including the validity of powers of attorney relied on by TFL as part of the loan documents and whether there was any agency relationship between TFL and Holt Norman, one of the financial advisers involved in recommending investments in Timbercorp.
 Ibid at 
 Ibid at 
 Ibid ,  – , , , . The actual disclosure in PDSs was to the effect that “anything that affects our ability to perform our obligations under the [management agreement and the sub-leases” and the ability of the Land Owner to meets its obligations under the [sub-lease] could also constitute a risk to Growers”.
 Ibid 
 Ibid , , , , [190- ,  – , ,  – 
 Ibid ,  – , , , , ,  – 
 Ibid , , 
 Ibid , , - . It was necessary under s.1013C that directors of TFL had actual knowledge of the matters required to be disclosed.
 Ibid  – 
 Woodcroft-Brown v Timbercorp Securities Ltd (2013) 96 ACSR 307
 Ibid  – ,  – , , 
 Ibid 
 Ibid 
 Woodcroft-Brown v Timbercorp Securities Ltd  HCA Trans 95 (11 April 2014)