Listed on the Australian Stock Exchange in 1996, the Timbercorp Group was a leading Australian agribusiness company that managed a number of forestry and horticulture assets. It was particularly active in the marketing, financing and management of investments in soft commodities such as almonds, olive oil, citrus, table grapes, mangoes, avocados and glasshouse tomatoes, as well as wood fibre. Before it was placed into voluntary administration on April 23 2009 and liquidation on June 29 2009, approximately 18,500 people had invested over A$2 billion in assets managed by Timbercorp through its wholly owned subsidiaries Timbercorp Securities Limited (in liq) and Timbercorp Finance Pty Ltd.
On October 28 2009, pursuant to Part 4A of the Supreme Court Act 1986 (Victoria), Mr Woodcroft-Brown commenced group proceedings on behalf of investors that at any time between February 6 2007 and April 23 2009 held an interest in a managed investment scheme of which Timbercorp Securities was the responsible entity. Listing Timbercorp Securities, its former directors and Timbercorp Finance as the defendants, the amended group statement of claim pleaded that:
Timbercorp Securities and Timbercorp Finance had breached the statutory duty owed to scheme members under Section 601FC of the Corporations Act 2001 (Cth);
Timbercorp Securities and Timbercorp Finance had failed to disclose, in the product disclosure statement or otherwise as required under Sections 1013C, 1013D, 1013E and 1017B of the Corporations Act, the following information which would have been material to any person's decision to invest in a scheme:
the risk that scheme member investments would be exposed if Timbercorp's cash flow failed as a consequence of other scheme members defaulting or Timbercorp being unable to access funding through external debt or the securitisation of investor loans (structural risk); and
the removal of tax deductibility for non-forestry agricultural scheme application fees, the tightening of credit markets during the onset of the global financial crisis and various issues concerning the weak financial position of Timbercorp, each of which exacerbated structural risk;
The non-disclosures by Timbercorp Securities and Timbercorp Finance constituted misleading and deceptive conduct pursuant to Section 1041H of the Corporations Act, Section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) and Section 9 of the Fair Trading Act 1999 (Vic); and
The former directors of Timbercorp Securities are also liable under Sections 601FC, 1022B and 1041I of the Corporations Act.
On behalf of the group, Woodcroft-Brown sought damages for the loss of investment in the relevant schemes and avoidance of repayment of loans which financed scheme investments that were entered into with Timbercorp Finance under the relevant remedy provisions of the Corporations Act, the Australian Securities and Investments Commission Act and the Fair Trading Act.
Justice Judd of the Victoria Supreme Court ultimately found in favour of the defendants.
Product disclosure statement and continuous disclosure
The judge found that Timbercorp Securities was required to disclose information about the risk to the schemes occasioned by the failure of Timbercorp Securities to perform its contractual obligations under Section 1013D(1)(c) of the Corporations Act, as it would be reasonable for such information to be expected by retail investors pursuant to Section 1013F(1). This held notwithstanding that it would be unreasonable for a commercially sophisticated investor to expect to find the information in the product disclosure statement. Woodcroft-Brown was unable to convince the judge that structural risk needed to be disclosed separately. The judge found that it fell under performance risk, as it turned upon the ability of Timbercorp to manage its cash.
Despite evidence suggesting that the removal of tax deductibility for non-forestry agricultural scheme application fees would have a negative impact on the Timbercorp share price, the judge found that it would not have affected the ability of Timbercorp Securities to discharge its contractual obligations to scheme members. This was primarily because its impact on performance risk could be managed by Timbercorp. Considering also that the information was generally available within the meaning of Section 675 of the Corporations Act, the judge found that it would not be reasonably required by a retail investor for the purpose of making an investment decision. A similar conclusion was reached for the tightening of credit markets during the onset of the global financial crisis.
Further, the judge noted that the experts agreed that structural risk "faded to insignificance or did not rise to the level of material risk for so long as [Timbercorp] maintained its relationship with its bankers". As Timbercorp's bankers increased their support until the end of 2008 - beyond the last product disclosure statement issued by Timbercorp - structural risk did not fall within the general obligation to include other information that might influence a decision to acquire an interest in a management information system of which Timbercorp Securities was the responsible entity.
As interests in the schemes were found to be 'enhanced disclosure securities' as defined in Section 111AFA of the Corporations Act, the continuous disclosure obligations were regulated not by Section 1017B(1A) as pleaded, but rather by Part 6CA as advanced as an alternative claim. Nevertheless, information that is generally available need not be disclosed under either continuous disclosure regime.
The judge also stressed the need for reliance to be demonstrated in proceedings for misleading and deceptive conduct. He cited with approval the decision of Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd on reliance in respect to the predecessor to Section 1022A of the Corporations Act, as well as the decision of Gardner v Agricultural and Rural Finance on reliance in respect to 'tax-driven scheme[s]'. Woodcroft-Brown could not overcome the difficulty of demonstrating reliance where tax effectiveness is a priority.
This is the first reported case on enhanced disclosure securities under Section 1013F of the Corporations Act. Effectively, it means that information which is relevant to the issuer of a product disclosure statement and which is generally available need not be included in a product disclosure statement.
In proceedings for misleading and deceptive conduct, many focus on the emphasis placed on establishing individual reliance on the primary market through offer documents in Woodcroft-Brown v Timbercorp Securities Limited (in liq), and conclude that the same emphasis would necessarily be placed on establishing reliance on the secondary market through continuing disclosures. This decision does not resolve the issue of whether reliance must be demonstrated. Having recently reviewed the academic literature, counsel for Timbercorp Finance agreed, concluding that this question remains "open-ended". However, it does flag the difficulty that investors face in demonstrating reliance in tax-driven schemes for misleading and deceptive conduct on the primary market.