Timbercorp loses appeal
Investors live on to fight another day.
Timbercorp Finance Pty Ltd v Collins and Tomes
Court of Appeal – Victoria
1 June 2016
Since 2009, the Timbercorp companies have been engaged in a running battle with their investors.
In the 2000s a number of investors turned to agricultural investments. These investments did not promise a significant return but they did have the advantage of being tax deductible.
Typically investors seeking to reduce their taxable income would make an agricultural investment, take the deduction and then wait 12, 15 or 17 years for the investment to bear fruit, literally. If the crop grew, was harvested and made it to market, then investors stood to break even or make a slight loss.
Some may disagree with this analysis but this is my experience with such investments. At best, it represented a tax deferral scheme.
The Timbercorp group of companies were predominant in agricultural investments. Timbercorp Finance lent money to approved investors to enable them to make agricultural investments in Timbercorp Securities.
In June 2008, Mr and Mrs Collins borrowed $51,300 from Timbercorp Finance to invest in Olive Early Project.
Earlier in May 2008, Mr Tomes borrowed$994,410 and later $247,545 to invest in Almond Post June Project and Olive Early Project.
In April 2009, administrators were appointed to the Timbercorp group of companies and in June 2009, creditors resolved to wind up the companies. At that time Timbercorp Finance had 14,500 loans outstanding to over 7,500 investors totalling $477.8 million.
At this same time, law firm Macpherson +. Kelley (MK) were telling investors that they had a legal strategy that would permit borrowers to hold onto their money. ie not pay their loans. The strategy challenged the veracity of disclosures made by Timbercorp to prospective investors.
In June 2009, Timbercorp Finance began proceedings against defaulting borrowers. MK threatened injunction proceedings if Timbercorp Finance pressed their claims. They foreshadowed a group proceeding (class action).
In October 2009, the group proceeding was commenced. The proceeding alleged various breaches of the Corporation Act and sought damages together with declarations that the group members were not liable to repay their loans.
The Collinses and Tomes signed up with MK in 2009.
In October 2010, the Supreme Court directed MK to issue an opt out notice to relevant Timbercorp investors/debtors. If investors such as the Collinses and Tomes did not opt out they would be bound by any determination or outcome of the group proceeding. They were informed that if the group proceeding failed that would not be able to bring the same claims in another proceeding.
The Collinses and Tomes did not opt out.
In 2011, the group proceeding was heard and determined. The proceeding was dismissed. The common questions posed by the proceeding were answered in favour of Timbercorp and against the interests of the investors.
The investors appealed but their appeal was dismissed.
Timbercorp Finance then recommenced its proceedings and commenced new proceedings to recover the outstanding loans (the recovery proceedings).
In the recovery proceedings the Collinses and Tomes and others alleged that the money they borrowed was not paid to Timbercorp Security but utilised generally by the group. This meant the loan agreements were repudiated by Timbercorp.
Tomes alleged representations made personally to him by Timbercorp representatives at the time he entered into the loans. He was led to believe that his indebtedness was limited to the value of his security.
The investor allegations were materially different in the recovery proceedings to the matters alleged by investors in the group proceeding.
It is a long established principle of law that litigation that has been concluded stays concluded and the parties cannot reagitate the same or similar issues in new proceedings. This is often referred to as the doctrine of estoppel.
In its recovery proceedings, Timbercorp sought a ruling that the investors could not raise their defences because those matters or matters sufficiently connected to them had already been determined in the group proceeding. In other words the investors were estopped from raising their personal defences.
The initial ruling on this issue went in favour of the investors. Timbercorp appealed to the Victorian Court of Appeal. Timbercorp hoped to deliver a “knockout” blow and clear the path for the quick recovery of the outstanding loans.
Section 33Q of the Supreme Court Act provides that in a group proceeding, a court may answer “remaining questions” being questions that are not common to the group.
Timbercorp submitted that by not opting out or asking for the personal defences to be addressed as (remaining) questions in the group proceeding, investors were estopped from raising these defences in the recovery proceedings. Timbercorp asserted that the investors were precluded from raising their defences as those defences were so connected with the subject matter of the group proceeding as to make it unreasonable for the defences not to have been made or raised in the group proceeding.
Last week the Court of Appeal in a joint decision, disagreed with Timbercorp and dismissed their appeal. The court found that investors were not prevented from raising personal and new defences in the recovery proceedings.
It was observed that a group member in a group proceeding has no opportunity to exercise any control over the way the plaintiff conducts the proceeding. They cannot even influence what evidence is adduced.
It was not unreasonable for investors not to raise their personal defences in the group proceeding. Such defences may not have been allowed by the managing judge because of the inconvenience created by having so many different issues determined in the same proceeding.
The opt out notices did not warn investors that they would be prevented from fully defending any recovery proceedings if they chose not to opt out.
Timbercorp had to meet the allegations made by individual investors at some stage. They were not unduly prejudiced by having to address them in the recovery proceedings.
The defences in the recovery proceedings were sufficiently different and distinct so as not to create a danger of inconsistent determinations.
The court adopted a practical approach.
If investors were estopped from raising their personal defences then future group proceedings would be bogged down with hundreds of issues that were not common to all parties. If the managing judge did not allow the group proceeding to be inundated with personal defences then a large number of litigants may opt out.
This is not a desirable outcome because the courts would face multiple individual proceedings over the same issues.
Some balance was necessary.
The circumstances of this case were unusual. The group proceeding did not resolve all issues between the parties. This was known from the outset. If Timbercorp were successful they would pursue their outstanding loans in further proceedings. There was always a risk that the recovery proceedings may throw up new issues as investors resisted Timbercorp’s claims.
In all other litigation it is important that parties fully articulate their position because rarely are you given a second chance before the courts.
This decision is inconsistent with the decisions made in the Great Southern case. An appeal to the High Court should clarify the law in this area.
The writer does not know if Timbercorp will seek leave to appeal to the High Court. However, given the prospect of several hundred recovery proceedings I suspect a trip to the High Court may prove irresistible.