In this case, the High Court held that the proceeds of the sale of timber and land under a timber plantation scheme were not held on trust for investors by the scheme operators, with the result that they were available to secured creditors of the scheme in priority to the investors.  In particular, the High Court found that a trust will not arise without clear intention by the parties, and a court will not infer a trust simply because it thinks it is an appropriate means of protecting or creating an interest.  When establishing a managed investment scheme, parties should take care that any intention to create a trust is clearly and expressly stated in the scheme documents.

SEAS Sapfor Forests Pty Limited (Forest Company) developed timber plantation schemes and SEAS Sapfor Harvesting Pty Limited (Milling Company) provided felling and milling services and also marketed and sold the timber.  The Forest Company entered into a trust deed (Trust Deed) with Australian Executor Trustees (SA) Limited (AET) pursuant to which AET would act as trustee for the investors in the scheme.  The Forest Company, the Milling Company and AET also entered into a tripartite deed (Tripartite Deed) pursuant to which the Milling Company would pay the proceeds of selling timber to the Forest Company, the Forest Company would pay those proceeds (and other proceeds from the sale of plantation land) to AET and AET would hold those proceeds on trust for the investors.

Investors in the Scheme also purchased covenants under various prospectuses which conferred the right to the scheme timber and the value of the land.  However, neither the Trust Deed nor the Tripartite Deed expressly providing that the Forest Company or the Milling Company were to be trustees for the investors.

The key question before the High Court was whether the Milling Company and the Forest Company also held the proceeds on trust for the investors before they were paid to AET, or whether AET merely had a contractual right to the proceeds (in which case, the secured creditors of the Forest Company and the Milling Company would take priority over AET as an unsecured creditor).

The High Court declared that AET was not entitled to any of the proceeds from the sale of timber or land, and held that:

  • the question of whether an express trust arises must also be answered by reference to intention of the parties at the time they entered into the transaction;
  • such intention may be express or inferred from the commercial context and dealings between the parties; and
  • there was no express statement in the scheme documents that the Forest Company and the Milling Company were trustees for the investors and a trust should not be inferred simply because a court thinks it is an appropriate means of protecting or creating an interest.

The High Court was also persuaded by the following factors:

  • there was no requirement for the Forest Company or the Milling Company to hold the proceeds of the scheme in a separate account;
  • it was difficult for AET to identify the precise nature and subject matter of the alleged trust;
  • the Trust Deed explicitly created a trust in favour of the investors and so the absence of such wording in the Tripartite Deed was significant;
  • to find a trust may have jeopardised the tax benefits of the scheme and may also have put the investors at risk of having to indemnify the Forest Company and the Milling Company for costs and expenses properly incurred; and
  • the historical legislative framework applicable to the scheme (the old ‘prescribed interest’ regime) did not require the existence of an imputed trust and an ‘interest’ was broadly defined and not limited to property rights.

The High Court also found that while the investors may have favoured the creation of a trust, it was not a “commercial necessity” to protect the investors’ interests.